ck0001261788-20211231
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Statement
of Additional Information
April 30,
2022 |
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| Miller
Opportunity Trust |
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| Class
A |
LGOAX |
| Class
C |
LMOPX |
| Class
FI |
LMOFX |
| Class
R |
LMORX |
| Class
I |
LMNOX |
| Class
IS |
MVISX |
Miller
Value Funds
c/o
U.S. Bancorp Fund Services, LLC
P.O.
Box 701
Milwaukee,
Wisconsin 53201-0701
1-888-593-5110
A
series of
Trust
for Advised Portfolios
This
Statement of Additional Information (the “SAI”) is not a prospectus and it
should be read in conjunction with the Prospectus dated April 30, 2022, as may
be revised, for the Miller Opportunity Trust (the “Fund”), a series of Trust for
Advised Portfolios (the “Trust”). Miller Value Partners, LLC (the “Adviser”) is
the Fund’s investment adviser. The Fund’s financial statements for the fiscal
year ended December 31, 2021 are incorporated into this SAI by reference to the
Fund’s annual
report
to shareholders. A copy of the Prospectus and the Fund’s annual report may be
obtained by contacting the Miller Value Funds at the address or telephone number
above or by visiting the Miller Value Funds’ website at
www.millervaluefunds.com.
Table
of Contents
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The
Trust |
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Investment
Objective and Policies |
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Investment
Strategies and Risks |
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Portfolio
Turnover |
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Portfolio
Holdings Policy |
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Trustees
and Executive Officers |
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The
Fund’s Investment Adviser |
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Execution
of Portfolio Transactions |
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Additional
Purchase, Redemption, Exchange, and Conversion Information |
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Determination
of Share Price |
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Tax
Information |
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Anti-Money
Laundering Program |
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Financial
Statements |
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Appendix
A Description of Securities Ratings |
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Appendix
B Proxy Voting Policy |
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The
Trust
Trust
for Advised Portfolios is a Delaware statutory trust organized under the laws of
the State of Delaware on August 28, 2003, and is registered with the
U.S. Securities and Exchange Commission (the “SEC”) as an open-end management
investment company. Between March 5, 2013 and January 1, 2014, the Trust was
named “Ziegler Capital Management Investment Trust.” Between August 1, 2011 and
March 4, 2013, the Trust was named “Ziegler Lotsoff Capital Management
Investment Trust.” Prior to August 1, 2011, the Trust was named “Lotsoff Capital
Management Investment Trust.”
This
SAI relates only to the Miller Opportunity Trust. The Fund is a series of the
Trust.
The
Miller Opportunity Trust is a successor to the Legg Mason Opportunity Trust (the
“Predecessor Fund”), a series of Legg Mason Investment Trust, a Maryland
statutory trust. Prior to April 30, 2012, when the Fund was redomiciled as a
series of Legg Mason Investment Trust, the Fund was a series of Legg Mason
Investment Trust, Inc. which was an open-end management investment company
established as a Maryland corporation. For the period from October 5, 2009
through May 10, 2013, the Fund was known as Legg Mason Capital Management
Investment Trust.
The
Trust’s Agreement and Declaration of Trust (the “Declaration of Trust”) permits
the Trust’s Board of Trustees (the “Board” or the “Trustees”) to issue an
unlimited number of full and fractional shares of beneficial interest, no par
value per share, which may be issued in any number of series. The Trust consists
of various series that represent separate investment portfolios. The Board may
from time to time issue other series, the assets and liabilities of which will
be separate and distinct from any other series.
Registration
with the SEC does not involve supervision of the management or policies of the
Fund. The Prospectus, SAI, shareholder reports, and other information about the
Fund are available free of charge on the EDGAR database on the SEC website at
www.sec.gov. Copies of such information may be obtained from the SEC upon
payment of the prescribed fee by electronic request at the following e-mail
address: publicinfo@sec.gov.
The
discussion below supplements information contained in the Fund’s Prospectus as
to the investment policies and risks of the Fund.
Investment
Objective and Policies
The
following information supplements the information concerning the Fund’s
investment objective, policies and limitations found in the Prospectus.
The
Fund’s investment objective is to seek long-term growth of capital. This
investment objective is non-fundamental and may be changed by the Board without
shareholder approval upon 60 days’ prior written notice to shareholders.
Investment
Restrictions
The
Trust (on behalf of the Fund) has adopted the following restrictions as
fundamental policies, which may not be changed without the affirmative vote of
the holders of a “majority of a Fund’s outstanding voting securities” as defined
in the Investment Company Act of 1940, as amended (the “1940 Act”). Under the
1940 Act, the “vote of the holders of a majority of the outstanding voting
securities” means the vote of the holders of the lesser of (i) 67% of the
shares of a Fund represented at a meeting at which the holders of more than 50%
of its outstanding shares are represented or (ii) more than 50% of the
outstanding shares of a Fund.
The
Fund’s fundamental policies are as follows:
1.Borrowing:
The Fund may not borrow money, except (1) in an amount not exceeding 33 1/3% of
the Fund’s total assets (including the amount borrowed) less liabilities (other
than borrowings) or (2) by entering into reverse repurchase agreements or dollar
rolls;
2.Underwriting:
The Fund may not engage in the business of underwriting the securities of other
issuers, except as permitted by the 1940 Act, and the rules and regulations
promulgated thereunder, as such statute, rules, and regulations are amended from
time to time or are interpreted from time to time by the SEC or SEC staff or to
the extent that the Fund may be permitted to do so by exemptive order or other
relief from the SEC or SEC staff (collectively, “1940 Act Laws, Interpretations
and Exemptions”). This restriction does not prevent the Fund from engaging in
transactions involving the acquisition, disposition or resale of portfolio
securities, regardless of whether the Fund may be considered to be an
underwriter under the Securities Act of 1933, as amended (the “1933
Act”);
3.Loans:
The Fund may not lend money or other assets, except to the extent permitted by
the 1940 Act Laws, Interpretations and Exemptions. This restriction does not
prevent the Fund from purchasing debt obligations in pursuit of its investment
program, or for defensive or cash management purposes, entering into repurchase
agreements, loaning its portfolio securities to Financial Intermediaries,
institutions or institutional investors, or investing in loans, including
assignments and participation interests;
4.Senior
Securities: The Fund may not issue senior securities, except as permitted under
the 1940 Act Laws, Interpretations and Exemptions;
5.Real
Estate: The 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 the Fund from investing in issuers that invest, deal, or otherwise
engage in transactions in or hold real estate or interests therein, investing in
instruments that are secured by real estate or interests therein, or exercising
rights under agreements relating to such securities, including the right to
enforce security interests;
6.Commodities:
The 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 the Fund from engaging in transactions involving foreign currency,
futures contracts and options, forward contracts, swaps, caps, floors, collars,
securities purchased or sold on a forward-commitment or delayed-delivery basis
or other similar financial instruments, or investing in securities or other
instruments that are secured by physical commodities;
7.Concentration:
The Fund may not make any investment if, as a result, the Fund’s investments
will be concentrated (as that term may be defined or interpreted by the 1940 Act
Laws, Interpretations and Exemptions) in any one industry. This restriction does
not limit the Fund’s investment in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities and repurchase agreements with
respect thereto, or tax exempt municipal securities issued by governments or
their political sub divisions, excluding private activities, municipal debt
securities whose principal and interest payments are derived principally from
the assets and revenues of a of a non-governmental entity; and
8.Diversification:
The Fund is a diversified company under the 1940 Act.
With
respect to the fundamental policy relating to issuing senior securities set
forth in (4) above, “senior securities” are defined as Fund obligations that
have a priority over the Fund’s shares with respect to the payment of dividends
or the distribution of Fund assets. As discussed below in the “Senior
Securities” section, the 1940 Act prohibits the Fund from issuing senior
securities except that the Fund may borrow money in amounts of up to one-third
of the Fund’s total assets from banks for any purpose. The Fund may also borrow
up to 5% of the Fund’s total assets from banks or other lenders for temporary
purposes, and these borrowings are not considered senior securities. The
issuance of senior securities by the Fund can increase the speculative character
of the Fund’s outstanding shares through leveraging. Leveraging of the Fund’s
portfolio through the issuance of senior securities magnifies the potential for
gain or loss on monies, because even though the Fund’s net assets remain the
same, the total risk to investors is increased to the extent of the Fund’s gross
assets. In addition, the SEC staff has said it will not raise senior security
concerns with respect to the obligations created by certain derivatives and
other instruments if the Fund segregates assets sufficient to cover those
obligations or otherwise offsets them. The policy in (4) above will be
interpreted not to prevent collateral arrangements with respect to swaps,
options, forward or futures contracts or other derivatives, or the posting of
initial or variation margin. The Fund will monitor the level of borrowing in its
portfolio and will make necessary adjustments to maintain the required asset
coverage on an ongoing basis.
Although
not a part of the Fund’s fundamental investment limitation on concentration, it
is the current position of the SEC staff that a fund’s investments are
concentrated in an industry when 25% or more of the fund’s total assets are
invested in issuers whose principal business is in that industry.
With
respect to the fundamental policy relating to diversification set forth in (8)
above, to be a diversified company under the 1940 Act means that the Fund
may not purchase securities of an issuer (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if, with
respect to 75% of its total assets, (a) more than 5% of its total assets
would be invested in securities of that issuer or (b) it would hold more
than 10% of the outstanding voting securities of that issuer. With respect to
the remaining 25% of its total assets, the Fund can invest more than 5% of its
assets in one issuer.
The
foregoing fundamental investment limitations may be changed only by “the vote of
a majority of the outstanding voting securities” of the Fund, a term defined in
the 1940 Act to mean the vote (a) of 67% or more of the voting securities
present at a meeting, if the holders of more than 50% of the outstanding voting
securities of the Fund are present, or (b) of more than 50% of the outstanding
voting securities of the Fund, whichever is less.
Unless
otherwise stated, the Fund’s investment policies and limitations are
non-fundamental and may be changed by the Board without shareholder approval.
The following are some of the non-fundamental investment limitations that the
Fund currently observes:
1.Borrowing:
The Fund may not borrow money for investment purposes except from banks in an
amount not exceeding 10% of the Fund’s net assets. The Fund may not borrow money
from a non-bank except for temporary borrowings, including borrowings to
facilitate shareholder redemptions, in an amount not exceeding 5% of the Fund’s
total assets. Temporary borrowings are not considered to be for investment
purposes and are separate from the Fund’s 10% limitation. Compliance with the
10% limit applicable to borrowing for investment purposes is measured as of the
time of the borrowing. Borrowing is subject to compliance with 1940 Act
percentage limitations applicable to all borrowing.
2.Margin
Purchases: The Fund may not buy securities on “margin,” except for short-term
credits necessary for clearance of portfolio transactions and except that the
Fund may make margin deposits in connection with the use of futures contracts,
options, forward contracts, swaps, caps, floors, collars, and other financial
instruments; nothing in this limitation is intended to limit the extent to which
the Fund may utilize bank borrowings for investment purposes.
Except
as otherwise stated, if a fundamental or non-fundamental percentage limitation
set forth in the Prospectus or this SAI is complied with at the time an
investment is made, a later increase or decrease in percentage resulting from a
change in the relevant parameters will not be considered to be outside the
limitation, unless otherwise noted above. An investment will be deemed to have
been made at the time the Fund enters into a binding commitment to complete the
investment.
Investment
Strategies and Risks
Diversification
The
is currently classified as a diversified fund under the 1940 Act. This
means that the Fund may not purchase securities of an issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, with respect to 75% of its total assets, (a) more
than 5% of the Fund’s total assets would be invested in securities of that
issuer or (b) the Fund would hold more than 10% of the outstanding voting
securities of that issuer. With respect to the remaining 25% of its total
assets, the Fund can invest more than 5% of its assets in one issuer. Under the
1940 Act, the Fund cannot change its classification from diversified to
non-diversified without shareholder approval.
Percentage
Limitations
Whenever
an investment policy or limitation states a maximum percentage of the Fund’s
assets that may be invested in any security or other asset, or sets forth a
policy regarding quality standards, such standard or percentage limitation will
be determined immediately after and as a result of the Fund’s acquisition or
sale of such security or other asset. Accordingly, any subsequent change in
values, net assets or other circumstances will not be considered in determining
whether an investment complies with the Fund’s investment policies and
limitations. In addition, if a bankruptcy or other extraordinary event occurs
concerning a particular investment by the Fund, the Fund may receive stock, real
estate or other investments that the Fund would not, or could not buy. If this
happens the Fund would sell such investments as soon as practicable while trying
to maximize the return to its shareholders.
The
Fund may employ several investment strategies, each of which is subject to
certain risks, as discussed below:
Illiquid
Investments and Restricted Securities
The
Fund may not acquire an illiquid investment if, immediately after the
acquisition, the Fund would have invested more than 15% of its net assets in
illiquid investments. An illiquid investment is any investment that the Fund
reasonably expects cannot be sold or disposed of in current market conditions in
seven calendar days or less without the sale or disposition significantly
changing the market value of the investment. If illiquid investments exceed 15%
of the Fund’s net assets, certain remedial actions will be taken as required by
Rule 22e-4 under the 1940 Act and the Fund’s policies and procedures.
Restricted
securities are securities subject to legal or contractual restrictions on their
resale, such as private placements. Such restrictions might prevent the sale of
restricted securities at a time when the sale would otherwise be desirable.
Under SEC regulations, certain restricted securities acquired through private
placements can be traded freely among qualified purchasers. While restricted
securities are generally classified as illiquid, the SEC has stated that an
investment company’s board of directors, or its investment adviser acting under
authority delegated by the board, may determine that a security eligible for
trading under this rule is “liquid.” The Fund intends to rely on this rule, to
the extent appropriate, to deem specific securities acquired through private
placement as “liquid.” The Board has delegated to the Adviser, pursuant to
guidelines established by the Board, the responsibility for determining whether
a particular security eligible for trading
under
this rule is “liquid.” Investing in these restricted securities could have the
effect of increasing the Fund’s illiquidity if qualified purchasers become, for
a time, uninterested in buying these securities.
Restricted
securities may be sold only (1) pursuant to SEC Rule 144A or another exemption,
(2) in privately negotiated transactions or (3) in public offerings with respect
to which a registration statement is in effect under the Securities Act of 1933,
as amended. Rule 144A securities, although not registered in the U.S., may be
sold to qualified institutional buyers in accordance with Rule 144A under the
Securities Act of 1933, as amended. As noted above, the Adviser, acting pursuant
to guidelines established by the Board, may determine that some Rule 144A
securities are liquid. Where registration is required, the Fund may be obligated
to pay all or part of the registration expenses and a considerable period may
elapse between the time of the decision to sell and the time the Fund may be
permitted to sell a restricted security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than prevailed when it decided to
sell.
Illiquid
investments may be difficult to value, and the Fund may have difficulty
disposing of such investments promptly. The Fund does not consider non-U.S.
securities to be restricted if they can be freely sold in the principal markets
in which they are traded, even if they are not registered for sale in the U.S.
Senior
Securities
The
1940 Act prohibits the issuance of senior securities by a registered open-end
fund with one exception. The Fund may borrow from banks provided that
immediately after any such borrowing there is an asset coverage of at least 300%
for all borrowings of the Fund. The Fund’s non-bank borrowings for temporary
purposes only, in an amount not exceeding 5% of the value of the total assets of
the Fund at the time the borrowing is made, are not deemed to be an issuance of
a senior security. To limit the risks attendant to borrowing, the 1940 Act
requires the Fund to maintain an “asset coverage” of at least 300% of the amount
of its borrowings, provided that in the event that the Fund’s asset coverage
falls below 300%, the Fund is required to reduce the amount of its borrowings so
that it meets the 300% asset coverage threshold within three days (not including
Sundays and holidays).
The
Fund may utilize various investment techniques that may give rise to an
obligation of the Fund to make a future payment. The SEC has stated it would not
raise senior security concerns with regard to certain such investments, provided
the Fund complies with SEC guidance regarding segregation of assets or cover for
these investment techniques. Such investment techniques include, among other
things, when-issued securities, futures and forward contracts, short options
positions and repurchase agreements.
Equity
Investments
The
Fund may invest in all types of equity securities. Equity securities include
exchange-traded and over-the-counter (OTC) common and preferred stocks, warrants
and rights, securities convertible into common stocks, and securities of other
investment companies and of real estate investment trusts (“REITs”). Equity
securities fluctuate in price based on changes in a company’s financial
condition and overall market and economic conditions. The value of a particular
security may decline due to factors that affect a particular industry or
industries, such as an increase in production costs, competitive conditions or
labor shortages; or due to general market conditions, such as real or perceived
adverse economic conditions, changes in the general outlook for corporate
earnings, changes in interest or currency rates or generally adverse investor
sentiment. The value of an equity security can be more volatile than the market
as a whole and can perform differently from the value of the market as a whole.
The value of a company’s equity securities may deteriorate because of a variety
of factors, including disappointing earnings reports by the issuer, unsuccessful
products or services, loss of major customers, major litigation against the
issuer or changes in government regulations affecting the issuer or the
competitive environment.
Foreign
Securities
The
Fund may invest in the securities of foreign issuers, foreign currencies and
securities of U.S. issuers with substantial foreign operations (collectively,
“foreign investments”). Foreign investments present certain risks, including
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments and the possible
imposition of currency exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or other regulatory practices and
requirements comparable to those applicable to domestic issuers. These risks are
intensified when investing in countries with developing economies and securities
markets, also known as “emerging markets.” Moreover, securities of many foreign
issuers may be less liquid and their prices more volatile than those of
comparable domestic issuers and transactions in securities of foreign issuers
may be subject to less efficient settlement practices, including extended
clearance and settlement periods. In addition,
with
respect to certain foreign countries, there is the possibility of expropriation,
confiscatory taxation, withholding taxes and limitations on the use or removal
of funds or other assets.
The
costs associated with investment in the securities of foreign issuers, including
withholding taxes, brokerage commissions and custodial fees, may be higher than
those associated with investment in domestic issuers. In addition, foreign
investment transactions may be subject to difficulties associated with the
settlement of such transactions. Delays in settlement could result in temporary
periods when assets of the Fund are uninvested and no return can be earned
thereon. The inability of the Fund to make intended investments due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result in losses to the Fund due to subsequent declines in value
of the portfolio security or, if the Fund has entered into a contract to sell
the security, could result in liability to the purchaser. Some emerging markets
have different settlement and clearance procedures. In certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Since
the Fund may invest in securities denominated in currencies other than the U.S.
dollar and since the Fund may hold foreign currencies, it may be affected
favorably or unfavorably by exchange control regulations or changes in exchange
rates between such currencies and the U.S. dollar. Changes in the currency
exchange rates may influence the value of the Fund’s shares, and may also affect
the value of dividends and interest earned by the Fund and gains and losses
realized by the Fund. Exchange rates are determined by the forces of supply and
demand in the foreign exchange markets. These forces are affected by the
international balance of payments, other economic and financial conditions,
government intervention, speculation and other factors.
Many
emerging market countries have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had, and may continue to have, very
negative effects on the economies and securities markets of certain emerging
markets. Economies in emerging markets generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be affected
adversely by economic conditions, trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade.
Because
of the high levels of foreign-denominated debt owed by many emerging market
countries, fluctuating exchange rates can significantly affect the debt service
obligations of those countries. This could, in turn, affect local interest
rates, profit margins and exports, which are a major source of foreign exchange
earnings. Although it might be theoretically possible to hedge for anticipated
income and gains, the ongoing and indeterminate nature of the foregoing risks
(and the costs associated with hedging transactions) makes it virtually
impossible to hedge effectively against such risks.
To
the extent an emerging market country faces a liquidity crisis with respect to
its foreign exchange reserves, it may increase restrictions on the outflow of
any foreign exchange. Repatriation is ultimately dependent on the ability of the
Fund to liquidate its investments and convert the local currency proceeds
obtained from such liquidation into U.S. dollars. Where this conversion must be
done through official channels (usually the central bank or certain authorized
commercial banks), the ability to obtain U.S. dollars is dependent on the
availability of such U.S. dollars through those channels, and if available, upon
the willingness of those channels to allocate those U.S. dollars to the Fund. In
such a case, the Fund’s ability to obtain U.S. dollars may be adversely affected
by any increased restrictions imposed on the outflow of foreign exchange. If the
Fund is unable to repatriate any amounts due to exchange controls, it may be
required to accept an obligation payable at some future date by the central bank
or other governmental entity of the jurisdiction involved. If such conversion
can legally be done outside official channels, either directly or indirectly,
the Fund’s ability to obtain U.S. dollars may not be affected as much by any
increased restrictions except to the extent of the price which may be required
to be paid for the U.S. dollars.
Many
emerging market countries have little experience with the corporate form of
business organization and may not have well-developed corporation and business
laws or concepts of fiduciary duty in the business context.
The
securities markets of emerging markets are substantially smaller, less
developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the United States and
other major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such markets;
enforcement of existing regulations has been extremely limited. Investing in the
securities of companies in emerging markets may entail special risks relating to
the potential political and economic instability and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment, convertibility of currencies into U.S. dollars and on repatriation
of capital invested. In the event of such expropriation, nationalization or
other confiscation by any country, the Fund could lose its entire investment in
any such country.
The
risk also exists that an emergency situation may arise in one or more emerging
markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for the Fund’s portfolio securities in such
markets may not be readily available.
Economic,
Political and Social Factors.
Certain non-U.S. countries, including emerging markets, may be subject to a
greater degree of economic, political and social instability. Such instability
may result from, among other things: (i) authoritarian governments or military
involvement in political and economic decision making; (ii) popular unrest
associated with demands for improved economic, political and social conditions;
(iii) internal insurgencies; (iv) hostile relations with neighboring countries;
and (v) ethnic, religious and racial disaffection and conflict. Such economic,
political and social instability could significantly disrupt the financial
markets in such countries and the ability of the issuers in such countries to
repay their obligations. In addition, it may be difficult for the Fund to pursue
claims against a foreign issuer in the courts of a foreign country. Investing in
emerging market countries also involves the risk of expropriation,
nationalization, confiscation of assets and property or the imposition of
restrictions on foreign investments and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation in any
emerging market country, the Fund could lose its entire investment in that
country. Certain emerging market countries restrict or control foreign
investment in their securities markets to varying degrees. These restrictions
may limit the Fund’s investment in those markets and may increase the expenses
of the Fund. In addition, the repatriation of both investment income and capital
from certain markets in the region is subject to restrictions such as the need
for certain governmental consents. Even where there is no outright restriction
on repatriation of capital, the mechanics of repatriation may affect certain
aspects of the Fund’s operation. Economies in individual non-U.S. countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rates of inflation, currency valuation, capital
reinvestment, resource self-sufficiency and balance of payments positions. Many
non-U.S. countries have experienced substantial, and in some cases extremely
high, rates of inflation for many years. Inflation and rapid fluctuations in
inflation rates have had, and may continue to have, very negative effects on the
economies and securities markets of certain emerging countries. Economies in
emerging countries generally are dependent heavily upon international trade and,
accordingly, have been and may continue to be affected adversely by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures imposed or negotiated by the countries with which
they trade. These economies also have been, and may continue to be, affected
adversely and significantly by economic conditions in the countries with which
they trade. Whether or not the Fund invests in securities of issuers located in
or with significant exposure to countries experiencing economic, financial and
other difficulties, the value and liquidity of the Fund’s investments may be
negatively affected by the conditions in the countries experiencing the
difficulties.
Europe—Recent
Events.
In January 2020 the United Kingdom left the European Union (“Brexit”),
highlighting political divisions within the United Kingdom and between the
United Kingdom and European Union. As a consequence of Brexit, there has been
uncertainty in both United Kingdom and European markets and the broader world
economy. Markets, specifically in the United Kingdom and European Union, may be
impacted, leading to increased volatility, lower liquidity, and slower economic
growth that could potentially have an adverse effect on the value of the Fund’s
investments.
Foreign
Currency Exposure
The
Fund may invest in securities of foreign issuers which are denominated in
foreign currencies and may temporarily hold uninvested cash in bank deposits in
foreign currencies. Accordingly, the strength or weakness of the U.S. dollar
against such foreign currencies may impact the Fund’s investment performance.
The rate of exchange between the U.S. dollar and other currencies is determined
by several factors, including the supply and demand for particular currencies,
central bank efforts to support particular currencies, government intervention,
speculation, the relative movement of interest rates, the pace of business
activity in other countries and the United States, speculation and other
economic and financial conditions affecting the world economy. The Fund may also
be affected favorably or unfavorably by exchange control regulations.
A
decline in the value of any particular currency against the U.S. dollar will
cause a decline in the U.S. dollar value of the Fund’s holdings of securities
and cash denominated in such currency and, therefore, will cause an overall
decline in the Fund’s net asset value (“NAV”) and any net investment income and
capital gains derived from such securities to be distributed in U.S. dollars to
shareholders of the Fund. Moreover, if the value of the foreign currencies in
which the Fund receives its income falls relative to the U.S. dollar between
receipt of the income and its conversion to U.S. dollars, the Fund may be
required to liquidate securities in order to make distributions if it has
insufficient cash in U.S. dollars to meet distribution requirements.
Fluctuations
in currency exchange rates may affect the performance of emerging market issuers
in which the Fund invests without regard to the effect such fluctuations have on
income received or gains realized by the Fund. Given the level of
foreign-denominated debt owed by many emerging market countries, fluctuating
exchange rates significantly affect the
debt
service obligations of those countries. This could, in turn, affect local
interest rates, profit margins and exports which are a major source of foreign
exchange earnings. Although it might be theoretically possible to hedge for
anticipated income and gains, the ongoing and indeterminate nature of the
foregoing risk (and the costs associated with hedging transactions) makes it
virtually impossible to hedge effectively against such risks.
Debt
Securities
The
Fund may invest in the debt securities of governmental or corporate issuers.
Corporate debt securities may pay fixed or variable rates of interest, or
interest at a rate contingent upon some other factor, such as the price of some
commodity. These securities may be convertible into preferred or common equity,
or may be bought as part of a unit containing common stock.
The
prices of debt securities fluctuate in response to perceptions of the issuer’s
creditworthiness and also tend to vary inversely with market interest rates. The
value of such securities is likely to decline in times of rising interest rates.
Conversely, when rates fall, the value of these investments is likely to rise.
The longer the time to maturity the greater are such variations. Shorter
maturity portfolios generally will not generate as high a level of total return
as longer maturity portfolios (assuming that long-term interest rates are higher
than short-term, which is commonly the case).
Many
fixed income securities, especially those issued at high interest rates, provide
that the issuer may repay them early. Issuers often exercise this right when
interest rates are low. Accordingly, holders of callable securities may not
benefit fully from the increase in value that other fixed income securities
experience when rates decline. Furthermore, the Fund reinvests the proceeds of
the payoff at current yields, which are lower than those paid by the security
that was paid off.
Certain
securities pay interest at variable or floating rates. Variable rate securities
reset at specified intervals, while floating rate securities reset whenever
there is a change in a specified index rate. In most cases, these reset
provisions reduce the effect of market interest rates on the value of the
security. However, some securities do not track the underlying index directly,
but reset based on formulas that can produce an effect similar to leveraging;
others may provide for interest payments that vary inversely with market rates.
The market prices of these securities may fluctuate significantly when interest
rates change.
The
Fund may purchase debt securities from the issuers or may purchase participation
interests in pools of these obligations from banks or other financial
institutions. Variable and floating rate obligations usually carry demand
features that permit the Fund to sell the obligations back to the issuers or to
financial intermediaries at par value plus accrued interest upon short notice at
any time or prior to specific dates. The inability of the issuer or financial
intermediary (banks, brokers, dealers, insurance companies, investment advisers,
financial consultants or advisers, mutual fund supermarkets and other financial
intermediaries) (each called a “Financial Intermediary”) to repurchase an
obligation on demand could affect the liquidity of the Fund’s portfolio.
Frequently, obligations with demand features are secured by letters of credit or
comparable guarantees. Floating and variable rate obligations which do not carry
unconditional demand features that can be exercised within seven days or less
are deemed illiquid unless the Board determines otherwise. The Fund’s investment
in illiquid floating and variable rate obligations would be limited to the
extent that it is not permitted to invest more than 15% of the value of its net
assets in illiquid investments.
Fixed
income securities are also subject to credit risk, i.e.,
the risk that an issuer of securities will be unable to pay principal and
interest when due, or that the value of the security will suffer because
investors believe the issuer is less able to pay. This is broadly gauged by the
credit ratings of the securities in which the Fund invests. However, ratings are
only the opinions of the agencies issuing them and are not absolute guarantees
as to quality. The Fund may also invest without limit in unrated securities.
Generally,
debt securities rated below BBB by Standard & Poor’s, a division of The
McGraw-Hill Companies, Inc. (“S&P”) or Fitch Ratings (“Fitch”), below Baa by
Moody’s Investors Service, Inc. (“Moody’s”), and unrated securities of
comparable quality, are considered below investment grade, but offer a higher
current yield than that provided by higher grade issues, but also involve higher
risks. S&P, Moody’s and Fitch are collectively recognized by the Adviser as
Nationally Recognized Statistical Rating Organizations (“NRSRO”). Such
securities are commonly referred to as “junk bonds.” Changes in economic
conditions or developments regarding the individual issuer are more likely to
cause price volatility and weaken the capacity of such issuers to make principal
and interest payments than is the case for issuers of higher grade debt
securities. Debt securities rated C by Moody’s, S&P or Fitch are bonds on
which no interest is being paid and that can be regarded as having extremely
poor prospects of ever attaining any real investment standing. However, debt
securities, regardless of their ratings, generally have a higher priority in the
issuer’s capital structure than do equity securities. The ratings of S&P,
Moody’s and Fitch represent the opinions of those agencies. Such ratings are
relative and subjective, and are not absolute standards of quality. Unrated debt
securities are not necessarily of lower quality than rated securities, but
they
may not be attractive to as many buyers. A description of the ratings assigned
to corporate debt obligations by Moody’s, S&P and Fitch is included in
Appendix A to this SAI.
The
Adviser considers bonds to be below investment grade if they are rated below
Baa/BBB by all three NRSROs, or unrated securities determined by the adviser to
be of comparable quality. The adviser will consider a security’s quality and
credit rating when determining whether such security is an appropriate
investment. Subject to its investment objective, policies and applicable law,
the Fund may purchase a security with the lowest rating.
In
addition to ratings assigned to individual bond issues, the Adviser will analyze
interest rate trends and developments that may affect individual issuers,
including factors such as liquidity, profitability and asset quality. The yields
on bonds and other debt securities in which the Fund invests are dependent on a
variety of factors, including general money market conditions, general
conditions in the bond market, the financial conditions of the issuer, the size
of the offering, the maturity of the obligation and its rating. There may be a
wide variation in the quality of bonds, both within a particular classification
and between classifications. A bond issuer’s obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of bond holders or other creditors of an issuer; litigation or other
conditions may also adversely affect the power or ability of bond issuers to
meet their obligations for the payment of principal and interest. Regardless of
rating levels, all debt securities considered for purchase (whether rated or
unrated) are analyzed by the Adviser to determine, to the extent possible, that
the planned investment is sound.
If
an investment grade security purchased by the Fund is subsequently given a
rating below investment grade, the Adviser will consider that fact in
determining whether to retain that security in the Fund’s portfolio, but is not
required to dispose of it.
Risks
of lower-rated securities.
A lower-rated debt security may be callable, i.e.,
subject to redemption at the option of the issuer at a price established in the
security’s governing instrument. If a debt security held by the Fund is called
for redemption, the Fund will be required to permit the issuer to redeem the
security or sell it to a third party. Either of these actions could have an
adverse effect on the Fund’s ability to achieve its investment objective
because, for example, the Fund may be able to reinvest the proceeds only in
securities with lower yields or may receive a price upon sale that is lower than
it would have received in the absence of the redemption. If the 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 the Fund’s
investment portfolio and increasing the exposure of the Fund to the risks of
lower-rated securities.
At
certain times in the past, the prices of many lower-rated securities declined,
indicating concerns that issuers of such securities might experience financial
difficulties. At those times, the yields on lower-rated securities rose
dramatically, reflecting the risk that holders of such securities could lose a
substantial portion of their value as a result of the issuers’ financial
restructuring or default. There can be no assurance that such declines will not
recur.
The
market for lower-rated securities may be thinner and less active than that for
higher-rated securities, which can adversely affect the prices at which these
securities can be sold, and may make it difficult for the Fund to obtain market
quotations daily. If market quotations are not available, these securities will
be valued by a method that the Board believes accurately reflects fair value.
Judgment may play a greater role in valuing lower-rated debt securities than is
the case with respect to securities for which a broader range of dealer
quotations and last-sale information is available. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may also
decrease the values and liquidity of lower-rated securities, especially in a
thinly traded market.
Although
the prices of lower-rated bonds are generally less sensitive to interest rate
changes than are higher-rated bonds, the prices of lower-rated bonds may be more
sensitive to adverse economic changes and developments regarding the individual
issuer. 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 the 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 lower-rated 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. Lower-rated
securities are especially affected by adverse changes in the industries in which
the issuers are engaged and by changes in the financial condition of the
issuers. Highly leveraged issuers may also experience financial stress during
periods of rising interest rates. In addition, the secondary market for
lower-rated 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, the Fund could find it more difficult to sell these securities
without adversely affecting the market price, or may be able to sell the
securities only at prices lower than if such securities were widely
traded.
When-Issued
Securities
The
Fund may enter into commitments to purchase securities on a when-issued basis.
When the Fund purchases securities on a when-issued basis, it assumes the risks
of ownership at the time of the purchase, not at the time of receipt. However,
the Fund does not have to pay for the obligations until they are delivered to
it, and no interest accrues to the Fund until they are delivered. Use of this
practice could have a leveraging effect on the Fund.
When
the Fund commits to purchase a when-issued security, it will segregate cash or
appropriate liquid securities, in an amount at least equal in value to the
Fund’s commitments to purchase when-issued securities.
The
Fund may sell the securities underlying a when-issued purchase, which may result
in capital gains or losses.
Preferred
Stock
The
Fund may invest in preferred stock. Preferred stock pays dividends at a
specified rate and generally has preference over common stock in the payment of
dividends and the liquidation of the issuer’s assets, but is junior to the debt
securities of the issuer in those same respects. Unlike interest payments on
debt securities, dividends on preferred stock are generally payable at the
discretion of the issuer’s board of directors. Shareholders of preferred stock
may suffer a loss of value if dividends are not paid. The market prices of
preferred stocks are subject to changes in interest rates and are more sensitive
to changes in the issuer’s creditworthiness than are the prices of debt
securities. Under normal circumstances, preferred stock does not carry voting
rights.
Warrants
and Rights
The
Fund may purchase warrants and rights. Warrants or rights may be acquired
separately, or as part of a unit or attached to securities at the time of
purchase, and may be deemed to be with or without value. Warrants and rights may
be considered speculative in that they have no voting rights, pay no dividends,
and have no rights with respect to the assets of the corporation issuing them.
Warrants and rights basically are options to purchase equity securities at a
specific price valid for a specific period of time. They do not represent
ownership of the securities, but only the right to buy them. Warrants and rights
differ from call options in that warrants are issued by the issuer of the
security which may be purchased on their exercise, whereas call options may be
written or issued by anyone. Rights are similar to warrants but typically are
issued by a company to existing holders of its stock and provide those holders
the right to purchase additional shares of stock at a later date. Rights also
normally have a shorter duration than warrants. The prices of warrants and
rights do not necessarily move parallel to the prices of the underlying
securities. If the market price of the underlying security does not exceed the
exercise price of the warrant or right plus the cost thereof before the
expiration date, the Fund could sustain losses on transactions in warrants that
would require the Fund to forgo a portion or all of the benefits of advantageous
change in the market price of the underlying security. Warrants may be purchased
with values that vary depending on the change in value of one or more specified
indexes (“index warrants”). Index warrants are generally issued by banks or
other financial institutions and give the holder the right, at any time during
the term of the warrant, to receive upon exercise of the warrant a cash payment
from the issuer based on the value of the underlying index at the time of the
exercise. The market for warrants or rights may be very limited and it may be
difficult to sell them promptly at an acceptable price.
Convertible
Securities
A
convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion or exchange, convertible securities ordinarily
provide a stream of income with generally higher yields than those of common
stocks of the same or similar issuers, but lower than the yield of
non-convertible debt. Convertible securities are usually subordinated to
comparable-tier nonconvertible securities, but rank senior to common stock in a
corporation’s capital structure.
The
value of a convertible security is a function of (1) its yield in comparison
with the yields of other securities of comparable maturity and quality that do
not have a conversion privilege and (2) its worth, at market value, if converted
or exchanged into the underlying common stock. The price of a convertible
security often reflects variations in the price of the underlying common stock
in a way that nonconvertible debt does not. A convertible security may be
subject to redemption at the option of the issuer at a price established in the
convertible security’s governing instrument, which may be less than the ultimate
conversion or exchange value. If a convertible security held by the Fund is
called for redemption, the Fund will be required to (1) permit the issuer to
redeem the security (2) convert it into the underlying common stock or (3) sell
it to a third party.
Many
convertible securities are rated below investment grade or, if unrated, are
considered of comparable quality by the Adviser. Moody’s describes securities
rated “Ba” as having speculative elements and subject to substantial credit
risk.
If
a convertible security held by the Fund is called for redemption, the Fund will
be required to convert or exchange it into the underlying common stock, sell it
to a third party or permit the issuer to redeem the security. Any of these
actions could have an adverse effect on the Fund’s ability to achieve its
objective.
Asset-Backed
Securities (“ABS”) and Mortgage-Related and Mortgage-Backed Securities
(“MBS”)
The
Fund may purchase asset-backed, mortgage-related and MBS. MBS, including
collateralized mortgage obligations (“CMOs”) and certain stripped MBS, represent
a participation in, or are secured by, mortgage loans. ABS are structured like
MBS, but instead of mortgage loans or interests in mortgage loans, the
underlying assets may include such items as motor vehicle installment sales or
installment loan contracts, leases of various types of real and personal
property, receivables from credit card agreements, company receivables or other
assets. The cash flow generated by the underlying assets is applied to make
required payments on the securities and to pay related administrative expenses.
The amount of residual cash flow resulting from a particular issue of
asset-backed or MBS depends on, among other things, the characteristics of the
underlying assets, the coupon rates on the securities, prevailing interest
rates, the amount of administrative expenses, and the actual prepayment
experience on the underlying assets. The Fund may invest in any such instruments
or variations as may be developed, to the extent consistent with its investment
objectives and policies and applicable regulatory requirements. In general, the
collateral supporting ABS is of a shorter maturity than mortgage loans and is
likely to experience substantial prepayments.
Mortgage-backed
securities have yield and maturity characteristics corresponding to the
underlying assets. Unlike traditional debt securities, which may pay a fixed
rate of interest until maturity, when the entire principal amount comes due,
payments on certain mortgage-backed securities include both interest and a
partial repayment of principal. Besides the scheduled repayment of principal,
repayments of principal may result from the voluntary prepayment, refinancing or
foreclosure of the underlying mortgage loans. If property owners make
unscheduled prepayments of their mortgage loans, these prepayments will result
in early payment of the applicable mortgage-backed securities. In that event,
the Fund may be unable to invest the proceeds from the early payment of the
mortgage-backed securities in an investment that provides as high a yield as the
MBS. Consequently, early payment associated with MBS may cause these securities
to experience significantly greater price and yield volatility than that
experienced by traditional fixed-income securities. The occurrence of mortgage
prepayments is affected by factors including the level of interest rates,
general economic conditions, the location and age of the mortgage and other
social and demographic conditions. During periods of falling interest rates, the
rate of mortgage prepayments tends to increase, thereby tending to decrease the
life of MBS. During periods of rising interest rates, the rate of mortgage
prepayments usually decreases, thereby tending to increase the life of MBS. If
the life of a mortgage-backed security is inaccurately predicted, the Fund may
not be able to realize the expected rate of return.
Adjustable
rate mortgage securities (“ARMs”), like traditional MBS, are interests in pools
of mortgage loans that provide investors with payments consisting of both
principal and interest as mortgage loans in the underlying mortgage pool are
paid off by the borrowers. Unlike fixed-rate MBS, ARMs are collateralized by or
represent interests in mortgage loans with variable rates of interest. These
interest rates are reset at periodic intervals, usually by reference to an
interest rate index or market interest rate. Although the rate adjustment
feature may act as a buffer to reduce sharp changes in the value of adjustable
rate securities, these securities are still subject to changes in value based
on, among other things, changes in market interest rates or changes in the
issuer’s creditworthiness. Because the interest rates are reset only
periodically, changes in the interest rate on ARMs may lag changes in prevailing
market interest rates. Also, some ARMs (or the underlying mortgages) are subject
to caps or floors that limit the maximum change in the interest rate during a
specified period or over the life of the security. As a result, changes in the
interest rate on an ARM may not fully reflect changes in prevailing market
interest rates during certain periods.
The
Fund may also invest in hybrid ARMs, whose underlying mortgages combine
fixed-rate and adjustable rate features.
Mortgage-backed
and ABS are less effective than other types of securities as a means of locking
in attractive long-term interest rates. One reason is the need to reinvest
prepayments of principal; another is the possibility of significant unscheduled
prepayments resulting from declines in interest rates. These prepayments would
have to be reinvested at lower rates. The automatic interest rate adjustment
feature of mortgages underlying ARMs likewise reduces the ability to lock-in
attractive rates. As a result, mortgage-backed and ABS may have less potential
for capital appreciation during periods of declining interest rates than other
securities of comparable maturities, although they may have a similar risk of
decline in market value during periods of rising interest rates. Prepayments may
also significantly shorten the effective maturities of these securities,
especially during periods of declining interest rates. Conversely, during
periods of rising interest rates, a reduction in prepayments may increase the
effective maturities of these securities, subjecting them to a
greater
risk of decline in market value in response to rising interest rates than
traditional debt securities, and, therefore, potentially increasing the
volatility of the Fund.
At
times, some mortgage-backed and ABS will have higher than market interest rates
and therefore will be purchased at a premium above their par value. Prepayments
may cause losses on securities purchased at a premium.
CMOs
may be issued by a U.S. Government agency or instrumentality or by a private
issuer. Although payment of the principal of, and interest on, the underlying
collateral securing privately issued CMOs may be guaranteed by the U.S.
Government or its agencies or instrumentalities, these CMOs represent
obligations solely of the private issuer and are not insured or guaranteed by
the U.S. Government, its agencies or instrumentalities or any other person or
entity.
Prepayments
could cause early retirement of CMOs. CMOs are designed to reduce the risk of
prepayment for certain investors by issuing multiple classes of securities, each
having different maturities, interest rates and payment schedules, and with the
principal and interest on the underlying mortgages allocated among the several
classes in various ways. Payment of interest or principal on some classes or
series of CMOs may be subject to contingencies or some classes or series may
bear some or all of the risk of default on the underlying mortgages. CMOs of
different classes or series are generally retired in sequence as the underlying
mortgage loans in the mortgage pool are repaid. If enough mortgages are repaid
ahead of schedule, the classes or series of a CMO with the earliest maturities
generally will be retired prior to their maturities. Thus, the early retirement
of particular classes or series of a CMO would have the same effect as the
prepayment of mortgages underlying other MBS. Conversely, slower than
anticipated prepayments can extend the effective maturities of CMOs, subjecting
them to a greater risk of decline in market value in response to rising interest
rates than traditional debt securities, and, therefore, potentially increasing
their volatility.
Subprime
mortgage loans, which typically are made to less creditworthy borrowers, have a
higher risk of default than conventional mortgage loans. Therefore, MBS backed
by subprime mortgage loans may suffer significantly greater declines in value
due to defaults or the increased risk of default.
The
risks associated with other ABS (including in particular the risks of issuer
default and of early prepayment) are generally similar to those described for
CMOs. In addition, because ABS generally do not have the benefit of a security
interest in the underlying assets comparable to a mortgage, ABS present certain
additional risks that are not present with MBS. The ability of an issuer of ABS
to enforce its security interest in the underlying assets may be limited. For
example, revolving credit receivables are generally unsecured and the debtors on
such receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give debtors the right to set-off certain
amounts owed, thereby reducing the balance due. Automobile receivables generally
are secured, but by automobiles, rather than by real property.
ABS
may be collateralized by the fees earned by service providers. The values of ABS
may be substantially dependent on the servicing of the underlying asset and are
therefore subject to risks associated with the negligence or malfeasance by
their servicers and to the credit risk of their servicers. In certain
circumstances, the mishandling of related documentation may also affect the
rights of the security holders in and to the underlying collateral. The
insolvency of entities that generate receivables or that utilize the assets may
result in added costs and delays in addition to losses associated with a decline
in the value of the underlying assets. For the purposes of each Fund’s
concentration policy, ABS (a) do not represent interests in any particular
“industry”; and (b) will be classified in a consistent manner deemed reasonable
by the Fund.
Loans
Loans
are negotiated and underwritten by a bank or syndicate of banks and other
institutional investors. The Fund may acquire an interest in loans through the
primary market by acting as one of a group of lenders of a loan. The primary
risk in an investment in loans is that the borrower may be unable to meet its
interest and/or principal payment obligations. The occurrence of such a default
with regard to a loan in which the Fund had invested would have an adverse
effect on the Fund’s NAV. In addition, a sudden and significant increase in
market interest rates may cause a decline in the value of these investments and
in the Fund’s NAV. Other factors, such as rating downgrades, credit
deterioration, or large downward movement in stock prices, a disparity in supply
and demand of certain securities or market conditions that reduce liquidity
could reduce the value of loans, impairing the Fund’s NAV. Loans in which the
Fund may invest may be collateralized or uncollateralized and senior or
subordinate. Investments in uncollateralized and/or subordinate loans entail a
greater risk of nonpayment than do investments in loans which hold a more senior
position in the borrower’s capital structure or that are secured with
collateral.
In
the case of collateralized senior loans, however, there is no assurance that
sale of the collateral would raise enough cash to satisfy the borrower’s payment
obligation or that the collateral can or will be liquidated. As a result, the
Fund might not receive payments to which it is entitled and thereby may
experience a decline in the value of its investment and its
NAV.
In the event of bankruptcy, liquidation may not occur and the court may not give
lenders the full benefit of their senior positions. If the terms of a senior
loan do not require the borrower to pledge additional collateral, the Fund will
be exposed to the risk that the value of the collateral will not at all times
equal or exceed the amount of the borrower’s obligations under the senior loans.
To the extent that a senior loan is collateralized by stock in the borrower or
its subsidiaries, such stock may lose all of its value in the event of
bankruptcy of the borrower.
The
Fund may also acquire an interest in loans by purchasing participations
(“Participations”) in and/or assignments (“Assignments”) of portions of loans
from third parties. By purchasing a Participation, the Fund acquires some or all
of the interest of a bank or other lending institution in a loan to a borrower.
Participations typically will result in the Fund’s having a contractual
relationship only with the lender and not the borrower. The Fund will have the
right to receive payments or principal, interest and any fees to which it is
entitled only from the lender selling the Participation and only upon receipt by
the lender of the payments from the borrower. In connection with purchasing
Participations, the Fund generally will have no right to enforce compliance by
the borrower with the terms of the loan agreement relating to the loan, nor any
rights of set-off against the borrower, and the Fund may not directly benefit
from any collateral supporting the loan in which it has purchased the
Participation. As a result, the Fund will assume the credit risk of both the
borrower and the lender that is selling the Participation.
When
the Fund purchases Assignments from lenders, the Fund will acquire direct rights
against the borrower on the loan. However, since Assignments are arranged
through private negotiations between potential assignees and assignors, the
rights and obligations acquired by the Fund as the purchaser of an Assignment
may differ from, and be more limited than, those held by the lender from which
the Fund is purchasing the Assignments.
Certain
of the Participations or Assignments acquired by the Fund may involve unfunded
commitments of the lenders or revolving credit facilities under which a borrower
may from time to time borrow and repay amounts up to the maximum amount of the
facility. In such cases, the Fund would have an obligation to advance its
portion of such additional borrowings upon the terms specified in the loan
documentation.
The
Fund may acquire loans of borrowers that are experiencing, or are more likely to
experience, financial difficulty, including loans of borrowers that have filed
for bankruptcy protection. Although loans in which the Fund will invest
generally will be secured by specific collateral, there can be no assurance that
liquidation of such collateral would satisfy the borrower’s obligation in the
event of nonpayment of scheduled interest or principal, or that such collateral
could be readily liquidated. In the event of bankruptcy of a borrower, the Fund
could experience delays or limitations with respect to its ability to realize
the benefits of the collateral securing a senior loan.
In
addition, the Fund may have difficulty disposing of its investments in loans.
The liquidity of such securities is limited and the Fund anticipates that such
securities could be sold only to a limited number of institutional investors.
The lack of a liquid secondary market could have an adverse impact on the value
of such securities and on the Fund’s ability to dispose of particular loans or
Assignments or Participations when necessary to meet the Fund’s liquidity needs
or in response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
loans also may make it more difficult for the Fund to assign a value to those
securities for purposes of valuing the Fund’s investments and calculating its
NAV.
Structured
Notes and Related Instruments
“Structured”
notes and other related instruments are privately negotiated debt obligations
where the principal and/or interest is determined by reference to the
performance of a benchmark asset, market or interest rate (an “embedded index”),
such as selected securities, an index of securities or specified interest rates,
or the differential performance of two assets or markets, such as indexes
reflecting bonds. Structured instruments may be issued by corporations,
including banks, as well as by governmental agencies and frequently are
assembled in the form of medium-term notes, but a variety of forms is available
and may be used in particular circumstances. The terms of such structured
instruments normally provide that their principal and/or interest payments are
to be adjusted upwards or downwards (but ordinarily not below zero) to reflect
changes in the embedded index while the instruments are outstanding. As a
result, the interest and/or principal payments that may be made on a structured
product may vary widely, depending on a variety of factors, including the
volatility of the embedded index and the effect of changes in the embedded index
on principal and/or interest payments. The rate of return on structured notes
may be determined by applying a multiplier to the performance or differential
performance of the referenced index(es) or other asset(s). Application of a
multiplier involves leverage that will serve to magnify the potential for gain
and the risk of loss. Investment in indexed securities and structured notes
involves certain risks, including the credit risk of the issuer and the normal
risks of price changes in response to changes in interest rates. Further, in the
case of certain indexed securities or structured notes, a decline in the
reference instrument may cause the interest rate to be reduced to zero, and any
further declines in the reference instrument may then reduce the
principal
amount payable on maturity. Finally, these securities may be less liquid than
other types of securities, and may be more volatile than their underlying
reference instruments.
Stripped
Securities
The
Fund may invest in stripped securities. Stripped securities are created by
separating bonds into their principal and interest components (commonly referred
to as “IOs” and “POs”) and selling each piece separately. Stripped securities
are more volatile than other fixed income securities in their response to
changes in market interest rates. The value of some stripped securities moves in
the same direction as interest rates, further increasing their volatility.
Zero
Coupon Bonds
Corporate
debt securities and municipal obligations include so-called “zero coupon” bonds.
Zero coupon bonds are issued at a significant discount from their principal
amount in lieu of paying interest periodically. The value of these types of
bonds is subject to greater fluctuation in response to changes in market
interest rates than bonds which make regular payments of interest. These types
of bonds allow an issuer to avoid the need to generate cash to meet current
interest payments. Accordingly, such bonds may involve greater credit risks than
bonds which make regular payments of interest. Even though these type of bonds
do not pay current interest in cash, the Fund is required to accrue interest
income on such investments and may be required to distribute that income at
least annually to shareholders. Thus, the Fund could be required at times to
liquidate other investments in order to satisfy its dividend requirements.
Securities
of Other Investment Companies
The
Fund may invest in the securities of other investment companies, including
open-end mutual funds, closed-end funds (including, business development
companies), unit investment trusts, private investment companies and offshore
investment companies. An investment in an investment company involves risks
similar to those of investing directly in the investment company’s portfolio
securities, including the risk that the value of the portfolio securities may
fluctuate in accordance with changes in the financial condition of their
issuers, the value of stocks and other securities generally, and other market
factors.
In
addition, investing in the securities of other investment companies involves
certain other risks, costs and expenses for the Fund. If the Fund invests in
another investment company, the Fund will indirectly bear its proportionate
share of the advisory fees and other operating expenses of such investment
company, which are in addition to the advisory fees and other operational
expenses incurred by the Fund. In addition, the Fund could incur a sales charge
in connection with purchasing an investment company security or a redemption fee
upon the redemption of such security. An investment in the shares of a
closed-end investment company, including a business development company, may
also involve the payment of a substantial premium over, while sales of such
shares may be made at a substantial discount from, the NAV (“NAV”) of the Fund’s
assets. Business development companies 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.
The
Fund may also invest in the securities of private investment companies,
including “hedge funds” and “private equity funds,” subject to the Fund’s
non-fundamental policy prohibiting it from purchasing or otherwise acquiring
such securities if, as a result, more than 15% of its net assets would be
invested in securities that are illiquid. As with investments in other
investment companies, if the Fund invests in a private investment company, the
Fund will be charged its proportionate share of the advisory fees including
incentive compensation and other operating expenses of such company. These fees,
which can be substantial, would be in addition to the advisory fees and other
operating expenses incurred by the Fund. In addition, private investment
companies are not registered with the SEC and may not be registered with any
other regulatory authority. Accordingly, they are not subject to certain
regulatory requirements and oversight to which registered issuers are subject.
There may be very little public information available about their investments
and performance. Moreover, because sales of shares of private investment
companies are generally restricted to certain qualified purchasers, such shares
may be illiquid and it could be difficult for the Fund to sell its shares at an
advantageous price and time. Finally, because shares of private investment
companies are not publicly traded, a fair value for the Fund’s investment in
these companies typically will have to be determined under policies approved by
the Board.
Section
12(d)(1)(A) of the 1940 Act normally prohibits a fund from purchasing (1) more
than 3% of the total outstanding voting stock of another fund; (2) securities of
another fund having an aggregate value in excess of 5% of the value of the
acquiring fund; and (3) securities of the other fund and all other funds having
an aggregate value in excess of 10% of the value of the total assets of the
acquiring fund. Subject to certain conditions, there are exceptions to these
limitations provided by the 1940 Act and the rules thereunder as well as by
exemptive relief granted by the SEC.
The
Fund will invest in the securities of other investment companies, including
private investment companies, when, in the Adviser’s judgment, the potential
benefits of the investment justify the expense and risk of investing in such
investment companies.
Securities
of Exchange-Traded Funds (“ETFs”)
The
Fund may invest in the securities of ETFs. ETFs are ownership interests in
investment companies, unit investment trusts, depositary receipts and other
pooled investment vehicles that are traded on an exchange and that hold a
portfolio of securities or other financial instruments (the “Underlying
Assets”). The Underlying Assets are typically selected to correspond to the
securities that comprise a particular broad based sector or international index,
or to provide exposure to a particular industry sector or asset class. “Short
ETFs” seek a return similar to the inverse, or a multiple of the inverse, of a
reference index. Short ETFs carry additional risks because their Underlying
Assets may include a variety of financial instruments, including futures and
options on futures, options on securities and securities indexes, swap
agreements and forward contracts, and may engage in short sales. An ETF’s losses
on short sales are potentially unlimited; however, the Fund’s risk would be
limited to the amount it invested in the ETF.
Unlike
shares of typical mutual funds or unit investment trusts, shares of ETFs are
designed to be traded throughout the trading day, bought and sold based on
market prices rather than NAV. Shares can trade at either a premium or discount
to NAV. The portfolios held by ETFs are publicly disclosed on each trading day
and an approximation of actual NAV is disseminated throughout the trading day.
Because of this transparency, the trading prices of ETFs tend to closely track
the actual NAV of the Underlying Assets and the Fund will generally gain or lose
value depending on the performance of the Underlying Assets. In the future, as
new products become available, the Fund may invest in ETFs that do not have this
same level of transparency and, therefore, may be more likely to trade at a
larger discount or premium to actual NAVs. Gains or losses on the Fund’s
investment in ETFs will ultimately depend on the purchase and sale price of the
ETF. An active trading market for an ETF’s shares may not develop or be
maintained and trading of an ETF’s shares may be halted if the listing
exchange’s officials deem such action appropriate, the shares are delisted from
the exchange or the activation of market-wide “circuit breakers” (which are tied
to large decreases in stock prices) halts stock trading generally.
An
investment in an ETF involves risks similar to investing directly in the
Underlying Assets, including the risk that the value of the Underlying Assets
may fluctuate in accordance with changes in the financial condition of their
issuers, the value of securities and other financial instruments generally, and
other market factors.
The
performance of an ETF will be reduced by transaction and other expenses,
including fees paid by the ETF to service providers. Investors in ETFs are
eligible to receive their portion of income, if any, accumulated on the
securities held in the portfolio, less fees and expenses of the ETF.
If
an ETF is a registered investment company (as defined in the 1940 Act), the
limitations applicable to the Fund’s ability to purchase securities issued by
other investment companies will apply.
Real
Estate Investment Trusts (“REITs”)
The
Fund may invest in REITs. REITs pool investors’ funds for investment primarily
in income producing real estate or real estate related loans or interests. An
entity qualifying as a REIT under the Internal Revenue Code of 1986, as amended
(the “Code”) generally is not subject to U.S. federal income tax on net income
and gains it distributes to its shareholders if it complies with several
requirements relating to its organization, ownership, assets and income and a
requirement that it generally distribute to its shareholders at least 90% of its
taxable income (other than net capital gain) for each taxable year. REITs can
generally be classified as equity REITs, mortgage REITs and hybrid REITs. Equity
REITs, which invest the majority of their assets directly in real property,
derive their income primarily from rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs,
which invest the majority of their assets in real estate mortgages, derive their
income primarily from interest payments. Hybrid REITs combine the
characteristics of both equity REITs and mortgage REITs.
While
the Fund will not invest in real estate directly, to the extent it invests in
equity or hybrid REITs it may be subject to risks similar to those associated
with the direct ownership of real estate. These risks include declines in the
value of real estate, risks related to general and local economic conditions,
dependency on management skill, heavy cash flow dependency, possible lack of
availability of mortgage funds, overbuilding, extended vacancies of properties,
increased competition, increases in property taxes and operating expenses,
changes in zoning laws, losses due to costs resulting from the clean-up of
environmental problems, liability to third parties for damages resulting from
environmental problems, casualty or condemnation losses, limitations on rents,
changes in neighborhood values and in the appeal of properties to tenants and
changes in interest rates.
REITs
(especially mortgage REITs) are subject to interest rate risk. Rising interest
rates may cause REIT investors to demand a higher annual yield, which may, in
turn, cause a decline in the market price of the equity securities issued by a
REIT. Rising interest rates also generally increase the costs of obtaining
financing, which could cause the value of the Fund’s REIT investments to
decline. During periods when interest rates are declining, mortgages are often
refinanced. Refinancing may reduce the yield on investments in mortgage REITs.
In addition, since REITs depend on payment under their mortgage loans and leases
to generate cash to make distributions to their shareholders, investments in
REITs may be adversely affected by defaults on such mortgage loans or leases.
In
addition to these risks, REITs may be affected by changes in the value of the
underlying property owned by the trusts or by the quality of any credit they
extend. Further, REITs are dependent upon management skills and generally may
not be diversified. REITs are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. In addition, REITs could possibly
fail to maintain their exemptions from registration under the 1940 Act and REITs
could possibly fail to qualify for the favorable U.S. federal income tax
treatment generally available to REITs under the Code. The above factors may
also adversely affect a borrower’s or a lessee’s ability to meet its obligations
to the REIT. In the event of a default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting its investments. In addition to the
foregoing risks, certain “special purpose” REITs in which the Fund invests may
invest their assets in specific real estate sectors, such as hotels, nursing
homes or warehouses, and are therefore subject to the risks associated with
adverse developments in any such sectors.
It
is not uncommon for REITs, after the end of their taxable years, to change the
characterization of the net income and gains they have distributed during the
preceding year. If this happens, the Fund could be required to issue revised
notices to its shareholders changing the character of the Fund’s distributions.
The
Fund may invest wholly or partially in REITs by investing in ETFs that invest in
REITs.
Short
Sales
A
short sale is effected when it is believed that the price of a particular
security will decline, and involves the sale of a security which the Fund does
not own in the hope of purchasing the same security at a later date at a lower
price. There can be no assurance that the Fund will be able to close out a short
position (i.e.,
purchase the same security) at any particular time or at an acceptable or
advantageous price. To make delivery to the buyer, the Fund must borrow the
security from a broker/dealer through which the short sale is executed, and the
broker/dealer delivers the security, on behalf of the Fund, to the buyer. The
broker/dealer is entitled to retain the proceeds from the short sale until the
Fund delivers to such broker/dealer the security sold short. In addition, the
Fund is required to pay to the broker/dealer the amount of any dividends or
interest paid on shares sold short.
The
Fund may also enter into a short position through a short derivative position
using a futures contract or swap agreement. Using this investment technique
subjects the Fund to the same risks and cover requirements as short sales.
The
Fund must segregate an amount of cash or liquid securities with its custodian
equal to the difference between the current market value of the securities sold
short and any cash or liquid securities deposited as collateral with the broker
in connection with the short sale (not including the proceeds of the short
sale). To the extent that the liquid securities segregated by its custodian or
deposited as collateral with the broker are subject to gains or loss, while the
securities sold short are also being subject to the possibility of gain or loss,
leverage is created. The liquid securities utilized by the Fund in this respect
will normally be comprised of portfolio securities that are subject to gains or
losses and, accordingly, when the Fund executes short sales leverage will
normally be created.
The
Fund is said to have a short position in the securities sold until it delivers
to the broker/dealer the securities sold, at which time the Fund receives the
proceeds of the sale. The Fund will normally close out a short position by
purchasing on the open market and delivering to the broker/dealer an equal
amount of the securities sold short.
The
Fund will realize a gain if the price of a security declines between the date of
the short sale and the date on which the Fund purchases a security to replace
the borrowed security. On the other hand, the Fund will incur a loss if the
price of the security increases between those dates. The amount of any gain will
be decreased and the amount of any loss increased by any premium or interest
that the Fund may be required to pay in connection with a short sale. It should
be noted that possible losses from short sales differ from those that could
arise from a cash investment in a security in that losses from a short sale may
be limitless, while the losses from a cash investment in a security cannot
exceed the total amount of the investment in the security.
There
is also a risk that a borrowed security will need to be returned to the
broker/dealer on short notice. If the request for the return of a security
occurs at a time when other short sellers of the security are receiving similar
requests, a “short squeeze” can occur, meaning that the Fund might be compelled,
at the most disadvantageous time, to replace the
borrowed
security with a security purchased on the open market, possibly at prices
significantly in excess of the proceeds received earlier.
The
Fund may also hold short positions “against the box,” meaning that at all times
when a short position is open the Fund owns an equal amount of such securities
or securities convertible into or exchangeable, without payment of further
consideration, for securities of the same issue as, and in an amount equal to,
the securities sold short. Short positions “against the box” result in a
“constructive sale” and require the Fund to recognize any gain unless an
exception to the constructive sale rule applies.
The
Fund’s ability to engage in short sales may be impaired by temporary
prohibitions on short selling that may be imposed by domestic and/or foreign
government regulators.
Financial
Instruments
General.
The Fund may utilize options, futures contracts (sometimes referred to as
“futures”), options on futures contracts, forward contracts, swaps, caps,
floors, collars, indexed securities, various mortgage-related obligations,
structured or synthetic financial instruments and other derivative instruments
(collectively, “Financial Instruments”). The Fund may use Financial Instruments
for any purpose, including as a substitute for other investments, to attempt to
enhance its portfolio’s return or yield and to alter the investment
characteristics of its portfolio (including to attempt to mitigate risk of loss
in some fashion, or “hedge”). Except as otherwise provided in the Prospectus,
this SAI or by applicable law, the Fund may purchase and sell any type of
Financial Instrument. The Fund may choose not to make use of derivatives for a
variety of reasons, and no assurance can be given that any derivatives strategy
employed will be successful.
The
U.S. government is in the process of adopting and implementing regulations
governing derivatives markets, including mandatory clearing of certain
derivatives, margin and reporting requirements. The ultimate impact of the
regulations remains unclear. Additional regulation of derivatives may make them
more costly, may limit their availability, may disrupt markets or may otherwise
adversely affect their value or performance.
The
use of Financial Instruments may be limited by applicable law and any applicable
regulations of the SEC, the Commodity Futures Trading Commission (the “CFTC”),
or the exchanges on which some Financial Instruments may be traded. (Note,
however, that some Financial Instruments that the Fund may use may not be listed
on any exchange and may not be regulated by the SEC or the CFTC.) In addition,
the Fund’s ability to use Financial Instruments may be limited by tax
considerations.
In
addition to the instruments and strategies discussed in this section, the
Adviser may discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These opportunities may
become available as the Adviser develops new techniques, as regulatory
authorities change the types of permitted transactions and as new Financial
Instruments or other techniques are developed. The Adviser may utilize these
opportunities and techniques to the extent that they are consistent with the
Fund’s investment objective and permitted by its investment limitations and
applicable regulatory authorities. These opportunities and techniques may
involve risks different from or in addition to those summarized herein.
This
discussion is not intended to limit the Fund’s investment flexibility, unless
such a limitation is expressly stated, and therefore will be construed by the
Fund as broadly as possible. Statements concerning what the Fund may do are not
intended to limit any other activity. Also, as with any investment or investment
technique, even when the Prospectus or this discussion indicates that the Fund
may engage in an activity, it may not actually do so for a variety of reasons,
including cost considerations.
Summary
of Certain Risks.
The use of Financial Instruments involves special considerations and risks,
certain of which are summarized below, and may result in losses to the Fund. In
general, the use of Financial Instruments may increase the volatility of the
Fund and may involve a small investment of cash relative to the magnitude of the
risk or exposure assumed. Even a small investment in derivatives may magnify or
otherwise increase investment losses to the Fund. As noted above, there can be
no assurance that any derivatives strategy will succeed.
•Financial
Instruments are subject to the risk that the market value of the derivative
itself or the market value of underlying instruments will change in a way
adverse to the Fund’s interest. Many Financial Instruments are complex, and
successful use of them depends in part upon the Adviser’s ability to forecast
correctly future market trends and other financial or economic factors or the
value of the underlying security, index, interest rate or, currency or other
instrument or measure. Even if the Adviser’s forecasts are correct, other
factors may cause distortions or dislocations in the markets that result in
unsuccessful transactions. Financial Instruments may behave in unexpected ways,
especially in abnormal or volatile market conditions.
•The
Fund may be required to maintain assets as “cover,” maintain segregated
accounts, post collateral or make margin payments when it takes positions in
Financial Instruments. Assets that are segregated or used as cover, margin or
collateral may be required to be in the form of cash or liquid securities, and
typically may not be sold while the position in the Financial Instrument is open
unless they are replaced with other appropriate assets. If markets move against
the Fund’s position, the Fund may be required to maintain or post additional
assets and may have to dispose of existing investments to obtain assets
acceptable as collateral or margin. This may prevent it from pursuing its
investment objective. Assets that are segregated or used as cover, margin or
collateral typically are invested, and these investments are subject to risk and
may result in losses to the Fund. These losses may be substantial, and may be in
addition to losses incurred by using the Financial Instrument in question. If
the Fund is unable to close out its positions, it may be required to continue to
maintain such assets or accounts or make such payments until the positions
expire or mature, and the Fund will continue to be subject to investment risk on
the assets. In addition, the Fund may not be able to recover the full amount of
its margin from an intermediary if that intermediary were to experience
financial difficulty. Segregation, cover, margin and collateral requirements may
impair the Fund’s ability to sell a portfolio security or make an investment at
a time when it would otherwise be favorable to do so, or require the Fund to
sell a portfolio security or close out a derivatives position at a
disadvantageous time or price.
•The
Fund’s ability to close out or unwind a position in a Financial Instrument prior
to expiration or maturity depends on the existence of a liquid market or, in the
absence of such a market, the ability and willingness of the other party to the
transaction (the “counterparty”) to enter into a transaction closing out the
position. If there is no market or the Fund is not successful in its
negotiations, the Fund may not be able to sell or unwind the derivative position
at a particular time or at an anticipated price. This may also be the case if
the counterparty to the Financial Instrument becomes insolvent. The Fund may be
required to make delivery of portfolio securities or other assets underlying a
Financial Instrument in order to close out a position or to sell portfolio
securities or assets at a disadvantageous time or price in order to obtain cash
to close out the position. While the position remains open, the Fund continues
to be subject to investment risk on the Financial Instrument. The Fund may or
may not be able to take other actions or enter into other transactions,
including hedging transactions, to limit or reduce its exposure to the Financial
Instrument.
•Certain
Financial Instruments transactions may have a leveraging effect on the Fund, and
adverse changes in the value of the underlying security, index, interest rate,
currency or other instrument or measure can result in losses substantially
greater than the amount invested in the Financial Instrument itself. When the
Fund engages in transactions that have a leveraging effect, the value of the
Fund is likely to be more volatile and all other risks also are likely to be
compounded. This is because leverage generally magnifies the effect of any
increase or decrease in the value of an asset and creates investment risk with
respect to a larger pool of assets than the Fund would otherwise have. Certain
Financial Instruments have the potential for unlimited loss, regardless of the
size of the initial investment.
•Many
Financial Instruments may be difficult to value, which may result in increased
payment requirements to counterparties or a loss of value to the
Fund.
•Liquidity
risk exists when a particular Financial Instrument is difficult to purchase or
sell. If a derivative transaction is particularly large or if the relevant
market is illiquid, the Fund may be unable to initiate a transaction or
liquidate a position at an advantageous time or price. Certain Financial
Instruments, including certain over-the-counter (“OTC”) options and swaps, may
be considered illiquid and therefore subject to the Fund’s limitation on
illiquid investments.
•In
a hedging transaction there may be imperfect correlation, or even no
correlation, between the identity, price or price movements of a Financial
Instrument and the identity, price or price movements of the investments being
hedged. This lack of correlation may cause the hedge to be unsuccessful and may
result in the Fund incurring substantial losses and/or not achieving anticipated
gains. Even if the strategy works as intended, the Fund might have been in a
better position had it not attempted to hedge at all.
•Financial
Instruments used for non-hedging purposes may result in losses which would not
be offset by increases in the value of portfolio holdings or declines in the
cost of securities or other assets to be acquired. In the event that the Fund
uses a Financial Instrument as an alternative to purchasing or selling other
investments or in order to obtain desired exposure to an index or market, the
Fund will be exposed to the same risks as are incurred in purchasing or selling
the other investments directly, as well as the risks of the transaction
itself.
•Certain
Financial Instruments involve the risk of loss resulting from the insolvency or
bankruptcy of the counterparty or the failure by the counterparty to make
required payments or otherwise comply with the terms of the contract. In the
event of default by a counterparty, the Fund may have contractual remedies
pursuant to the agreements related to the transaction, which may be limited by
applicable law in the case of the counterparty’s bankruptcy.
•Financial
Instruments involve operational risk. There may be incomplete or erroneous
documentation or inadequate collateral or margin, or transactions may fail to
settle. For Financial Instruments not guaranteed by an exchange or
clearinghouse, the Fund may have only contractual remedies in the event of a
counterparty default, and there may be delays, costs or disagreements as to the
meaning of contractual terms and litigation in enforcing those
remedies.
•Certain
Financial Instruments transactions, including certain options, swaps, forward
contracts, and certain options on foreign currencies, are entered into directly
by the counterparties or through financial institutions acting as market makers
(OTC derivatives), rather than being traded on exchanges or in markets
registered with the CFTC or the SEC. Many of the protections afforded to
exchange participants will not be available to participants in OTC derivatives
transactions. For example, OTC derivatives transactions are not subject to the
guarantee of an exchange, and only OTC derivatives that are either required to
be cleared or submitted voluntarily for clearing to a clearinghouse will enjoy
the protections that central clearing provides against default by the original
counterparty to the trade. In an OTC derivatives transaction that is not
cleared, the Fund bears the risk of default by its counterparty. In a cleared
derivatives transaction, the Fund is instead exposed to the risk of default of
the clearinghouse and the risk of default of the broker through which it has
entered into the transaction. Information available on counterparty
creditworthiness may be incomplete or outdated, thus reducing the ability to
anticipate counterparty defaults.
•Financial
Instruments transactions conducted outside the United States may not be
conducted in the same manner as those entered into on U.S. exchanges, and may be
subject to different margin, exercise, settlement or expiration procedures. Many
of the risks of OTC derivatives transactions are also applicable to Financial
Instruments used outside the United States. Financial Instruments used outside
the United States also are subject to the risks affecting foreign securities,
currencies and other instruments.
•Financial
Instruments involving currency are subject to additional risks. Currency related
transactions may be negatively affected by government exchange controls,
blockages, and manipulations. Exchange rates may be influenced by factors
extrinsic to a country’s economy. Also, there is no systematic reporting of last
sale information with respect to foreign currencies. As a result, the
information on which trading in currency derivatives is based may not be as
complete as, and may be delayed beyond, comparable data for other transactions.
•Use
of Financial Instruments involves transaction costs, which may be significant.
Use of Financial Instruments also may increase the amount of taxable income to
shareholders.
Financial
Instruments and Hedging.
The Fund may use Financial Instruments for hedging purposes. Hedging strategies
can be broadly categorized as “short hedges” and “long hedges.” A short hedge is
a purchase or sale of a Financial Instrument intended partially or fully to
offset potential declines in the value of one or more investments held in the
Fund’s portfolio. Thus, in a short hedge the Fund takes a position in a
Financial Instrument whose price is expected to move in the opposite direction
of the price of the investment being hedged.
Conversely,
a long hedge is a purchase or sale of a Financial Instrument intended partially
or fully to offset potential increases in the acquisition cost of one or more
investments that the Fund intends to acquire. Thus, in a long hedge, the Fund
takes a position in a Financial Instrument whose price is expected to move in
the same direction as the price of the prospective investment being hedged. A
long hedge is sometimes referred to as an anticipatory hedge. In an anticipatory
hedge transaction, the Fund does not own a corresponding security and,
therefore, the transaction does not relate to a security the Fund owns. Rather,
it relates to a security that the Fund intends to acquire. If the Fund does not
complete the hedge by purchasing the security it anticipated purchasing, the
effect on the Fund’s portfolio is the same as if the transaction were entered
into for speculative purposes.
Financial
Instruments on securities generally are used to attempt to hedge against price
movements in one or more particular securities positions that the Fund owns or
intends to acquire. Financial Instruments on indices, in contrast, generally are
used to attempt to hedge against price movements in market sectors in which the
Fund has invested or expects to invest. Financial Instruments on debt securities
may be used to hedge either individual securities or broad debt market sectors.
Special
Risks.
The use of Financial Instruments involves special considerations and risks,
certain of which are described below. In general, these techniques may increase
the volatility of the Fund and may involve a small investment of cash relative
to the magnitude of the risk assumed. Risks pertaining to particular Financial
Instruments are described in the sections that follow.
1)Successful
use of most Financial Instruments depends upon the Adviser’s ability to predict
movements of the overall securities, currency and interest rate markets, which
requires different skills than predicting changes in the prices of individual
securities. There can be no assurance that any particular strategy will succeed,
and use of Financial Instruments could result in a loss, regardless of whether
the intent was to reduce risk or increase return.
2)When
Financial Instruments are used for hedging purposes, there might be an imperfect
correlation, or even no correlation, between price movements of a Financial
Instrument and price movements of the investments being hedged. For example, if
the value of a Financial Instrument used in a short hedge increased by less than
the decline in value of the hedged investment, the hedge would not be fully
successful. Such a lack of correlation might occur due to factors unrelated to
the value of the investments being hedged, such as speculative or other
pressures on the markets in which Financial Instruments are traded. The
effectiveness of hedges using Financial Instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the securities or other assets being hedged.
Because
there are a limited number of types of exchange-traded Financial Instruments, it
is likely that the standardized contracts available will not match the Fund’s
current or anticipated investments exactly. The Fund may invest in Financial
Instruments based on securities with different issuers, maturities or other
characteristics from the securities in which it typically invests, which
involves a risk that the position in Financial Instruments will not track the
performance of the Fund’s other investments.
Prices
of Financial Instruments can also diverge from the prices of their underlying
instruments, even if the underlying instruments match the Fund’s investments
well. Prices of Financial Instruments are affected by such factors as current
and anticipated short-term interest rates, changes in volatility of the
underlying instrument and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the markets for Financial
Instruments and the securities markets, from structural differences in how
Financial Instruments and securities are traded, or from the imposition of daily
price fluctuation limits or trading halts. The Fund may purchase or sell
Financial Instruments with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in the Fund’s positions in
Financial Instruments are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
3)If
successful, the above-discussed hedging strategies can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if the
Fund entered into a short hedge because its adviser projected a decline in the
price of a security in the Fund’s portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the Financial Instrument. Moreover, if the
price of the Financial Instrument declined by more than the increase in the
price of the security, the Fund could suffer a loss. In either such case, the
Fund would have been in a better position had it not attempted to hedge at all.
4)As
described below, the Fund might be required to maintain segregated assets as
“cover,” or make margin payments when it takes positions in Financial
Instruments involving obligations to third parties (i.e.,
Financial Instruments other than purchased options). If the Fund were unable to
close out its positions in such Financial Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair the Fund’s ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time.
5)The
Fund’s ability to close out a position in a Financial Instrument prior to
expiration or maturity depends on the existence of a liquid secondary market or,
in the absence of such a market, the ability and willingness of the other party
to the transaction (the “counterparty”) to enter into a transaction closing out
the position. Therefore, there is no assurance that any position can be closed
out at a time and price that is favorable to the Fund.
Cover.
Transactions using Financial Instruments, other than purchased options, expose
the Fund to an obligation to another party. The Fund will not enter into any
such transactions unless it owns either (1) an offsetting (“covering”) position
in securities, currencies or other options, futures contracts or forward
contracts, or (2) cash and liquid assets held in a segregated account, or
designated on the Fund’s books as segregated for this purpose, with a value,
marked-to-market
daily,
sufficient to cover its potential obligations to the extent not covered as
provided in (1) above. The Fund will comply with SEC guidelines regarding cover
for these instruments and will, if the guidelines so require, segregate cash or
liquid assets in the prescribed amount as determined daily.
Assets
used as cover cannot be sold while the position in the corresponding Financial
Instrument is open, unless they are replaced with other appropriate assets. As a
result, the commitment of a large portion of the Fund’s assets for cover or
segregation could impede portfolio management or the Fund’s ability to meet
redemption requests or other current obligations.
Options
A
call option gives the purchaser the right to buy, and obligates the writer to
sell, the underlying investment at the agreed-upon price during the option
period. A put option gives the purchaser the right to sell, and obligates the
writer to buy, the underlying investment at the agreed-upon price during the
option period. Purchasers of options pay an amount, known as a premium, to the
option writer in exchange for the right under the option contract.
The
purchase of call options can serve as a long hedge, and the purchase of put
options can serve as a short hedge. Writing put or call options can enable the
Fund to enhance income or yield by reason of the premiums paid by the purchasers
of such options. However, the Fund may also suffer a loss as the result of
writing options. For example, if the market price of the security underlying a
put option declines to less than the exercise price of the option, minus the
premium received, the Fund would suffer a loss.
Writing
call options can serve as a limited short hedge, because declines in the value
of the hedged investment would be offset to the extent of the premium received
for writing the option. However, if the security or currency appreciates to a
price higher than the exercise price of the call option, it can be expected that
the option will be exercised and the Fund will be obligated to sell the security
or currency at less than its market value. If the call option is an OTC option,
the securities or other assets used as cover may be considered illiquid.
Writing
put options can serve as a limited long hedge because increases in the value of
the hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security or currency depreciates to a price
lower than the exercise price of the put option, it can be expected that the put
option will be exercised and the Fund will be obligated to purchase the security
or currency at more than its market value. If the put option is an OTC option,
the securities or other assets used as cover may be considered illiquid.
The
value of an option position will reflect, among other things, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, the historical price volatility of the underlying investment and
general market conditions. The exercise price of the options may be below, equal
to or above the current market value of the underlying security or other
instrument. Options that expire unexercised have no value, and the Fund will
realize a loss in the amount of the premium paid and any transaction costs.
The
Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
A
type of put that the Fund may purchase is an “optional delivery standby
commitment,” which is entered into by parties selling debt securities to the
Fund. An optional delivery standby commitment gives the Fund the right to sell
the security back to the seller on specified terms. This right is provided as an
inducement to purchase the security.
The
Fund may purchase and write covered straddles on securities, currencies or bond
indices. A long straddle is a combination of a call and a put option purchased
on the same security, index or currency where the exercise price of the put is
less than or equal to the exercise price of the call. The Fund would enter into
a long straddle when its adviser believes that it is likely that interest rates
or currency exchange rates will be more volatile during the term of the options
than the option pricing implies. A short straddle is a combination of a call and
a put written on the same security, index or currency where the exercise price
of the put is less than or equal to the exercise price of the call. In a covered
short straddle, the same issue of security or currency is considered cover for
both the put and the call that the Fund has written. The Fund would enter into a
short straddle when the Adviser believes that it is unlikely that interest rates
or currency exchange rates will be as volatile during the term of the options as
the option pricing implies. In such cases, the Fund will segregate cash and/or
appropriate liquid securities equivalent in value to the amount, if any, by
which the put is “in-the-money,” that is, the amount by which the exercise price
of the put exceeds the current market value of the underlying security.
Straddles involving currencies are subject to the same risks as other foreign
currency options.
Risks
of Options on Securities.
Options offer large amounts of leverage, which will result in the Fund’s NAV
being more sensitive to changes in the value of the related instrument. The Fund
may purchase or write both exchange-traded and OTC options. Exchange-traded
options in the United States are issued by a clearing organization affiliated
with the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC options
are contracts between the Fund and its counterparty (usually a securities dealer
or a bank) with no clearing organization guarantee. Thus, when the Fund
purchases an OTC option, it relies on the counterparty from whom it purchased
the option to make or take delivery of the underlying investment upon exercise
of the option. Failure by the counterparty to do so would result in the loss of
any premium paid by the Fund as well as the loss of any expected benefit of the
transaction.
The
Fund’s ability to establish and close out positions in exchange-listed options
depends on the existence of a liquid market. However, there can be no assurance
that such a market will exist at any particular time. Closing transactions can
be made for OTC options only by negotiating directly with the counterparty, or
by a transaction in the secondary market if any such market exists. There can be
no assurance that the Fund will in fact be able to close out an OTC option
position at a favorable price prior to expiration. In the event of insolvency of
the counterparty, the Fund might be unable to close out an OTC option position
at any time prior to its expiration, if at all.
If
the Fund were unable to effect a closing transaction for an option it had
purchased, due to the absence of a secondary market, the imposition of price
limits or otherwise, it would have to exercise the option to realize any profit.
The inability to enter into a closing transaction for a covered call option
written by the Fund could leave the Fund unable to prevent material losses
because the Fund would be unable to sell the investment used as cover for the
written option until the option expires or is exercised.
OTC
Options.
Unlike exchange-traded options, which are standardized with respect to the
underlying instrument, expiration date, contract size and strike price, the
terms of OTC options (options not traded on exchanges) generally are established
through negotiation with the other party to the option contract. While this type
of arrangement allows the Fund great flexibility to tailor the option to its
needs, OTC options generally involve greater risk than exchange-traded options,
which are guaranteed by the clearing organization of the exchanges where they
are traded. Assets used as cover for OTC options may be considered illiquid as
described under “Illiquid Investments and Restricted Securities.”
European-style
options are only exercisable immediately prior to their expiration. This is in
contrast to American-style options, which are exercisable at any time prior to
the expiration date of the option.
Options
on Indices.
Puts and calls on indices are similar to puts and calls on securities or futures
contracts except that all settlements are in cash and gain or loss depends on
changes in the index in question rather than on price movements in individual
securities or futures contracts. When the Fund writes a call on an index, it
receives a premium and agrees that, prior to the expiration date, the purchaser
of the call, upon exercise of the call, will receive from the Fund an amount of
cash if the closing level of the index upon which the call is based is greater
than the exercise price of the call. The amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
call times a specified multiple (“multiplier”), which determines the total
dollar value for each point of such difference. When the Fund buys a call on an
index, it pays a premium and has the same rights as to such call as are
indicated above. When the Fund buys a put on an index, it pays a premium and has
the right, prior to the expiration date, to require the seller of the put, upon
the Fund’s exercise of the put, to deliver to the Fund an amount of cash if the
closing level of the index upon which the put is based is less than the exercise
price of the put, which amount of cash is determined by the multiplier, as
described above for calls. When the Fund writes a put on an index, it receives a
premium and the purchaser of the put has the right, prior to the expiration
date, to require the Fund to deliver to it an amount of cash equal to the
difference between the closing level of the index and exercise price times the
multiplier if the closing level is less than the exercise price.
Risks
of Options on Indices.
The risks of investment in options on indices may be greater than options on
securities. Because index options are settled in cash, when the Fund writes a
call on an index it cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. The Fund can
offset some of the risk of writing a call index option by holding a diversified
portfolio of securities similar to those on which the underlying index is based.
However, the Fund cannot, as a practical matter, acquire and hold a portfolio
containing exactly the same securities as underlie the index and, as a result,
bears a risk that the value of the securities held will vary from the value of
the index.
Even
if the Fund could assemble a portfolio that exactly reproduced the composition
of the underlying index, it still would not be fully covered from a risk
standpoint because of the “timing risk” inherent in writing index options. When
an index option is exercised, the amount of cash that the holder is entitled to
receive is determined by the difference between the exercise price and the
closing index level on the date when the option is exercised. As with other
kinds of options, the Fund as the call writer will not learn that the Fund has
been assigned until the next business day at the earliest. The time
lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as common stock, because
there the writer’s obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns the
underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call holds securities that exactly match the composition of the underlying
index, it will not be able to satisfy its assignment obligations by delivering
those securities against payment of the exercise price. Instead, it will be
required to pay cash in an amount based on the closing index value on the
exercise date. By the time it learns that it has been assigned, the index may
have declined, with a corresponding decline in the value of its portfolio. This
“timing risk” is an inherent limitation on the ability of index call writers to
cover their risk exposure by holding securities positions.
If
the Fund has purchased an index option and exercises it before the closing index
value for that day is available, it runs the risk that the level of the
underlying index may subsequently change. If such a change causes the exercised
option to fall out-of-the-money, the Fund will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
Futures
Contracts and Options on Futures Contracts
A
financial futures contract sale creates an obligation by the seller to deliver
the type of Financial Instrument called for in the contract in a specified
delivery month for a stated price. A financial futures contract purchase creates
an obligation by the purchaser to take delivery of the type of Financial
Instrument called for in the contract in a specified delivery month at a stated
price. Options on futures give the purchaser the right to assume a position in a
futures contract at the specified option exercise price at any time during the
period of the option. The purchase of futures or call options on futures can
serve as a long hedge, and the sale of futures or the purchase of put options on
futures can serve as a short hedge. Writing call options on futures contracts
can serve as a limited short hedge, using a strategy similar to that used for
writing call options on securities or indices. Similarly, writing put options on
futures contracts can serve as a limited long hedge. Futures contracts and
options on futures contracts can also be purchased and sold to attempt to
enhance income or yield.
In
addition, futures strategies can be used to manage the average duration of the
Fund’s fixed income portfolio. If the Adviser wishes to shorten the average
duration of the Fund’s fixed income portfolio, the Fund may sell a debt futures
contract or a call option thereon, or purchase a put option on that futures
contract. If the Adviser wishes to lengthen the average duration of the Fund’s
fixed income portfolio, the Fund may buy a debt futures contract or a call
option thereon, or sell a put option thereon.
No
price is paid upon entering into a futures contract. Instead, at the inception
of a futures contract the Fund is required to deposit “initial margin” in an
amount generally equal to 10% or less of the contract value. Margin must also be
deposited when writing a call or put option on a futures contract, in accordance
with applicable exchange rules. Unlike margin in securities transactions,
initial margin on futures contracts does not represent a borrowing, but rather
is in the nature of a performance bond or good-faith deposit that is returned to
the Fund at the termination of the transaction if all contractual obligations
have been satisfied. Under certain circumstances, such as periods of high
volatility, the Fund may be required by an exchange to increase the level of its
initial margin payment, and initial margin requirements might be increased
generally in the future by regulatory action. Because of the low margin deposits
required, futures trading involves an extremely high degree of leverage; as a
result, a relatively small price movement in a futures contract may result in
immediate and substantial loss, or gain, to the investor.
Initial
margin with respect to a futures or option on futures contract is the amount of
assets that must be deposited by the Fund with, or for the benefit of, a futures
commission merchant to initiate the Fund’s futures or option positions. Initial
margin is the margin deposit made by the Fund when it enters into a futures or
option contract; it is intended to assure performance of the contract by the
Fund. If the value of the Fund’s account declines by a specified amount, the
Fund will receive a margin call and be required to post assets sufficient to
restore the equity in the account to the initial margin level. This is sometimes
referred to as “variation margin.” Subsequent “variation margin” payments are
made to and from the futures commission merchant as the value of the account
varies, a process known as “marking-to-market.” Variation margin does not
involve borrowing, but rather represents a settlement of the Fund’s obligations
to or from a futures commission merchant. When the Fund purchases an option on a
futures contract, the premium paid plus transaction costs is all that is at
risk. However, there may be circumstances when the purchase of an option on a
futures contract would result in a loss to the Fund when the use of a futures
contract would not, such as when there is no movement in the value of the
securities or currencies being hedged. In contrast, when the Fund purchases or
sells a futures contract or writes a call or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers
and sellers of futures contracts and options on futures can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, an instrument identical to the instrument
purchased or sold. Positions in futures and options on futures may be closed
only on an exchange or board of trade that provides a secondary market. However,
there can be no assurance that a liquid secondary market will exist for a
particular contract at a particular time. In such event, it may not be possible
to close a futures contract or options position.
Under
certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a futures contract or an option on a futures contract
can vary from the previous day’s settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If
the Fund were unable to liquidate a futures contract or an option on a futures
position due to the absence of a liquid secondary market, the imposition of
price limits or otherwise, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to segregate cash or securities
(or designate these assets on its books as segregated).
Risks
of Futures Contracts and Options Thereon.
Successful use of futures contracts and related options depends upon the ability
of the Adviser to assess movements in the direction of overall securities and
interest rates, which requires different skills and techniques than assessing
the value of individual securities. Moreover, futures contracts relate not to
the current price level of the underlying instrument, but to the anticipated
price level at some point in the future; trading of stock index futures may not
reflect the trading of the securities that are used to formulate the index or
even actual fluctuations in the index itself. There is, in addition, the risk
that movements in the price of the futures contract will not correlate with the
movements in the prices of the securities being hedged. Price distortions in the
marketplace, such as resulting from increased participation by speculators in
the futures market, may also impair the correlation between movements in the
prices of futures contracts and movements in the prices of the hedged
securities. If the price of the futures contract moves less than the price of
securities that are the subject of the hedge, the hedge will not be fully
effective; but if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage may be partially offset by losses on the
futures position.
Options
have a limited life and thus can be disposed of only within a specific time
period. Positions in futures contracts may be closed out only on an exchange or
board of trade that provides a secondary market for such futures contracts.
Although the Fund intends to purchase and sell futures only on exchanges or
boards of trade where there appears to be a liquid secondary market, there is no
assurance that such a market will exist for any particular contract at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, the Fund would continue
to be required to make variation margin payments.
Purchasers
of options on futures contracts pay a premium in cash at the time of purchase
which, in the event of adverse price movements, could be lost. Sellers of
options on futures contracts must post initial margin and are subject to
additional margin calls that could be substantial in the event of adverse price
movements. Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage; as a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, or
gain, to the investor.
The
exchanges may impose limits on the amount by which the price of a futures
contract or related option is permitted to change in a single day. If the price
of a contract moves to the limit for several consecutive days, the Fund may be
unable during that time to close its position in that contract and may have to
continue making payments of variation margin. The Fund may also be unable to
dispose of securities or other instruments being used as “cover” during such a
period.
Index
Futures.
The Fund may invest in index futures to attempt to increase its return or to
attempt to hedge its investments. When index futures are used for hedging
purposes, the risk of imperfect correlation between movements in the price of
index futures and movements in the price of the securities that are the subject
of the hedge increases as the composition of the Fund’s portfolio diverges from
the securities included in the applicable index. The price of the index futures
may move more than or less than the price of the securities being hedged. If the
price of the index futures moves less than the price of the securities that are
the subject of the hedge, the hedge will not be fully effective but, if the
price of the securities being hedged has moved in an unfavorable direction, the
Fund would be in a better position than if it had not hedged at all. If the
price of the securities being hedged has moved in a favorable direction, this
advantage will be partially offset by the futures contract. If the price of the
futures contract moves more than the price of the securities, the Fund will
experience either a loss or a gain on the futures contract that will not be
completely offset by movements in the price of the securities that are the
subject of the hedge. To compensate for the imperfect correlation of movements
in the price of
the
securities being hedged and movements in the price of the index futures, the
Fund may buy or sell index futures in a greater dollar amount than the dollar
amount of the securities being hedged if the historical volatility of the prices
of such securities being hedged is more than the historical volatility of the
prices of the securities included in the index. It is also possible that, where
the Fund has sold index futures contracts to hedge against decline in the
market, the overall market may advance and the value of the particular
securities held in the Fund’s portfolio may decline. If this occurred, the Fund
would lose money on the futures contract and also experience a decline in value
of its portfolio securities. However, while this could occur for a very brief
period or to a very small degree, over time the value of a diversified portfolio
of securities will tend to move in the same direction as the market indices on
which the futures contracts are based.
Where
index futures are purchased to hedge against a possible increase in the price of
securities before the Fund is able to invest in them in an orderly fashion, it
is possible that the market may decline instead. If the Fund then concludes not
to invest in them at that time because of concern as to possible further market
decline or for other reasons, it will realize a loss on the futures contract
that is not offset by a reduction in the price of the securities it had
anticipated purchasing.
Additional
Risks of Financial Instruments Traded on Foreign Exchanges
Financial
Instruments may be traded on foreign exchanges. Such transactions may not be
regulated as effectively as similar transactions in the United States, may not
involve a clearing mechanism and related guarantees and are subject to the risk
of governmental actions affecting trading in, or the price of, foreign
securities. The value of such positions also could be adversely affected by (1)
other complex foreign political, legal and economic factors, (2) lesser
availability than in the United States of data on which to make trading
decisions, (3) delays in the Fund’s ability to act upon economic events
occurring in foreign markets during non-business hours in the United States, (4)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States and (5) lesser trading volume.
Commodity
Exchange Act
The
Adviser, on behalf of the Fund, has claimed an exclusion, granted to operators
of registered investment companies like the Fund, from registration as a
“commodity pool operator” with respect to the Fund under the Commodity Exchange
Act (the “CEA”), and, therefore, are not subject to registration or regulation
with respect to the Fund under the CEA. As a result, the Fund is limited in its
ability to trade instruments subject to the CFTC’s jurisdiction, including
commodity futures (which include futures on broad-based securities indexes,
interest rate futures and currency futures), options on commodity futures,
certain swaps or other investments (whether directly or indirectly through
investments in other investment vehicles).
Under
this exclusion, the Fund must satisfy one of the following two trading
limitations whenever it enters into a new commodity trading position: (1) the
aggregate initial margin and premiums required to establish the Fund’s positions
in CFTC-regulated instruments may not exceed 5% of the liquidation value of the
Fund’s portfolio (after accounting for unrealized profits and unrealized losses
on any such investments); or (2) the aggregate net notional value of such
instruments, determined at the time the most recent position was established,
may not exceed 100% of the liquidation value of the Fund’s portfolio (after
accounting for unrealized profits and unrealized losses on any such positions).
The Fund would not be required to consider its exposure to such instruments if
they were held for “bona fide hedging” purposes, as such term is defined in the
rules of the CFTC. In addition to meeting one of the foregoing trading
limitations, the Fund may not market itself as a commodity pool or otherwise as
a vehicle for trading in the markets for CFTC-regulated instruments.
Repurchase
Agreements
When
cash is temporarily available, or for temporary defensive purposes, the Fund may
invest without limit in repurchase agreements and money market instruments,
including high-quality short-term debt securities. A repurchase agreement is an
agreement under which either U.S. Government obligations or other high-quality
liquid debt securities are acquired from a securities dealer or bank subject to
resale at an agreed-upon price and date. The securities are held for the Fund by
a custodian bank as collateral until resold and will be supplemented by
additional collateral if necessary to maintain a total value equal to or in
excess of the value of the repurchase agreement. The Fund bears a risk of loss
if the other party to a repurchase agreement defaults on its obligations and the
Fund is delayed or prevented from exercising its rights to dispose of the
collateral securities, which may decline in value in the interim. The Fund will
enter into repurchase agreements only with financial institutions determined by
the Adviser to present minimal risk of default during the term of the agreement.
Repurchase
agreements are usually for a term of one week or less but may be for longer
periods. Repurchase agreements maturing in more than seven days may be
considered illiquid.
Repurchase
agreements maturing in more than seven days are considered to be illiquid.
Cryptocurrency
Investments
Cryptocurrencies
(also referred to as “virtual currencies” and “digital currencies”) are digital
assets designed to act as a medium of exchange. Although cryptocurrency is an
emerging asset class, there are thousands of cryptocurrencies, the most
well-known of which is bitcoin. The Fund may seek investment exposure to bitcoin
indirectly through investing up to 15% of its net assets in Grayscale Bitcoin
Trust (“GBTC”), a privately offered investment vehicle that invests in bitcoin.
Except for its investment in GBTC, the Fund will not invest, directly or
indirectly, in cryptocurrencies.
In
addition to the general risks of investing in other investment vehicles, the
value of the Fund’s indirect investments in cryptocurrency is subject to
fluctuations in the value of the cryptocurrency, which can be highly volatile.
The value of cryptocurrencies is determined by the supply and demand for
cryptocurrency in the global market for the trading of cryptocurrency, which
consists primarily of transactions on electronic exchanges. The price of bitcoin
could drop precipitously (including to zero) for a variety of reasons including
but not limited to regulatory changes, a crisis of confidence in the bitcoin
network or a change in user preference to competing cryptocurrencies. The Fund’s
exposure to cryptocurrency can result in substantial losses to the
Fund.
Cryptocurrency
facilitates decentralized, peer-to-peer financial exchange and value storage
that is used like money, without the oversight of a central authority or banks.
The value of cryptocurrency is not backed by any government, corporation, or
other identified body. Similar to fiat currencies (i.e., a currency that is
backed by a central bank or a national, supra-national or quasi-national
organization), cryptocurrencies are susceptible to theft, loss and destruction.
Accordingly, the bitcoin held by GBTC (and the Fund’s indirect exposure to such
holdings) is also susceptible to these risks.
Cryptocurrencies
trade on exchanges, which are largely unregulated and may therefore be more
exposed to fraud and failure than established, regulated exchanges for
securities, derivatives and other currencies. These exchanges can cease
operating temporarily or even permanently, resulting in the potential loss of
users’ cryptocurrency or other market disruptions. Cryptocurrency exchanges may
be more exposed to the risk of market manipulation than exchanges for more
traditional assets. Cryptocurrency exchanges that are regulated typically must
comply with minimum net worth, cybersecurity, and anti-money laundering
requirements, but are not typically required to protect customers or their
markets to the same extent that regulated securities exchanges or futures
exchanges are required to do so. Furthermore, many cryptocurrency exchanges lack
certain safeguards established by more traditional exchanges to enhance the
stability of trading on the exchange, such as measures designed to prevent
sudden drops in value of items traded on the exchange (i.e., “flash crashes”).
As a result, the prices of cryptocurrencies on exchanges may be subject to
larger and more frequent sudden declines than assets traded on more traditional
exchanges.
Shares
of GBTC have historically traded, and may continue to trade, at a significant
premium or discount to net asset value. If GBTC were to cease to trade at a
premium to its NAV, the value of the Fund’s investment in GBTC could decrease,
even if the value of GBTC’s underlying holdings in bitcoin does not decrease. In
addition, the Fund’s investment in GBTC will be subject to the operating
expenses associated with GBTC. If GBTC incurs expenses in U.S. dollars, GBTC
would be required to sell bitcoins to pay these expenses. The sale of GBTC’s
bitcoins to pay expenses in U.S. dollars at a time of low bitcoin prices could
adversely affect the value of an investment in the Fund.
Factors
affecting the further development of cryptocurrency include, but are not limited
to, continued worldwide growth or possible cessation or reversal in the adoption
and use of cryptocurrency and other digital assets; government and
quasi-government regulation or restrictions on or regulation of access to and
operation of digital asset networks; changes in consumer demographics and public
preferences; maintenance and development of open-source software protocol;
availability and popularity of other forms or methods of buying and selling
goods and services; the use of the networks supporting digital assets, such as
those for developing smart contracts and distributed applications; general
economic conditions and the regulatory environment relating to digital assets;
negative consumer or public perception; and general risks tied to the use of
information technologies, including cyber risks. A hack or failure of one
cryptocurrency may lead to a loss in confidence in, and thus decreased usage or
and or value of, other cryptocurrencies.
Currently,
there is relatively limited use of cryptocurrency in the retail and commercial
marketplace, which contributes to price volatility. A lack of expansion by
cryptocurrencies into retail and commercial markets, or a contraction of such
use, may result in increased volatility or a reduction in the value of
cryptocurrencies, either of which could adversely impact the Fund’s investment.
In addition, to the extent market participants develop a preference for one
cryptocurrency over another, the value of the less preferred cryptocurrency
would likely be adversely affected.
The
Fund’s exposure to cryptocurrency may change over time and, accordingly, such
exposure may not be represented in the Fund’s portfolio at any given time. Many
significant aspects of the tax treatment of investments in cryptocurrency are
uncertain, and a direct or indirect investment in cryptocurrency may produce
non-qualifying income. Cryptocurrency is a
new
technological innovation with a limited history; it is a highly speculative
asset and future regulatory actions or policies may limit, perhaps to a
materially adverse extent, the value of the Fund’s indirect investment in
cryptocurrency and the ability to exchange a cryptocurrency or utilize it for
payments.
Leverage
In
accordance with its fundamental and non-fundamental policies, the Fund may
employ “leverage” by borrowing money and using it to purchase additional
securities. Leverage increases both investment opportunity and investment risk.
If the investment gains on the securities purchased with borrowed money exceed
the interest and other costs of borrowing, the NAV of the Fund’s shares will
rise faster than would otherwise be the case. On the other hand, if the
investment gains fail to cover the cost of borrowings, or if there are losses,
the NAV of the Fund’s shares will decrease faster than would otherwise be the
case. To reduce its borrowing, the Fund might be required to sell securities at
a disadvantageous time. The Fund will incur interest expense on any money
borrowed, and the Fund may therefore have little or no investment income during
periods of substantial borrowings. The Fund will leverage its assets when, in
the Adviser’s judgment, the potential benefits of the borrowing outweigh the
risk and expense of the borrowing.
Redemption
Risk
Investments
by Other Funds and by Other Significant Investors.
Certain
investment companies may invest in the Fund and may at times have substantial
investments in the Fund. Other investors also may at times have substantial
investments in the Fund. From time to time, the Fund may experience relatively
large redemptions or investments due to transactions in Fund shares by the Fund
or other significant investor. The effects of these transactions could adversely
affect the Fund’s performance. In the event of such redemptions or investments,
the Fund could be required to sell securities or to invest cash at a time when
it is not advantageous to do so. Such transactions may increase brokerage and/or
other transaction costs of the Fund. A large redemption could cause the Fund’s
expenses to increase and could result in the Fund becoming too small to be
economically viable. Redemptions of Fund shares could also accelerate the
realization of taxable capital gains in the Fund if sales of securities result
in capital gains. The impact of these transactions is likely to be greater when
the Fund or other significant investor purchases, redeems, or owns a substantial
portion of the Fund’s shares.
The
Fund may experience periods of heavy redemptions that could cause the Fund to
liquidate its assets at inopportune times or at a loss or depressed value,
particularly during periods of declining or illiquid markets. Redemption risk is
greater to the extent that the Fund has investors with large shareholdings,
short investment horizons, or unpredictable cash flow needs. In addition,
redemption risk is heightened during periods of overall market turmoil. The
redemption by one or more large shareholders of their holdings in the Fund could
hurt performance and/or cause the remaining shareholders in the Fund to lose
money. Further, if one decision maker has control of Fund shares owned by
separate Fund shareholders, redemptions by these shareholders may further
increase the Fund’s redemption risk. If the Fund is forced to liquidate its
assets under unfavorable conditions or at inopportune times, the value of your
investment could decline.
Cyber-Security
Risk
Investment
companies, such as the Fund, and its service providers may be subject to
operational and information security risks resulting from cyber-attacks.
Cyber-attacks include, among other behaviors, stealing or corrupting data
maintained online or digitally, denial of service attacks on websites, the
unauthorized release of confidential information or various other forms of cyber
security breaches. Cyber-attacks affecting the Fund or the Adviser, custodian,
transfer agent, intermediaries and other third-party service providers may
adversely impact the Fund. For instance, cyber-attacks may interfere with the
processing of shareholder transactions, impact the Fund’s ability to calculate
its net asset value, cause the release of private shareholder information or
confidential company information, impede trading, subject the Fund to regulatory
fines or financial losses, and cause reputational damage. The Fund may also
incur additional costs for cyber security risk management purposes. Similar
types of cyber security risks are also present for issuers of securities in
which the Fund invests, which could result in material adverse consequences for
such issuers, and may cause the Fund’s investment in such portfolio companies to
lose value.
Subject
to prior disclosure to shareholders, the Board may, in the future, authorize the
Fund to invest in securities other than those listed here and in the Prospectus,
provided that such investment would be consistent with the Fund’s investment
objective and that it would not violate any fundamental investment policies or
restrictions applicable to the Fund.
Portfolio
Turnover
Portfolio
securities may be sold without regard to the length of time they have been held
when, in the opinion of the Adviser, investment considerations warrant such
action. The portfolio turnover rate is calculated by dividing (1) the
lesser of purchases or sales of portfolio securities for the fiscal year by
(2) the monthly average of the value of portfolio securities owned during
the fiscal year. A 100% turnover rate would occur if all the securities in the
Fund’s portfolio, with the exception of securities whose maturities at the time
of acquisition were one year or less, were sold and either repurchased or
replaced within one year. A high rate of portfolio turnover (100% or more)
generally leads to higher transaction costs and generally reflects a greater
number of taxable transactions. High portfolio turnover may result in larger
amounts of short-term capital gains which, when distributed to shareholders, are
generally taxed at ordinary income tax rates.
For
the fiscal years ended December 31, the Fund’s portfolio turnover rates
were as follows:
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Year |
Portfolio Turnover Rate |
| 2021 |
55% |
| 2020 |
64% |
Portfolio
Holdings Policy
The
Fund maintains portfolio holdings disclosure policies that govern the timing and
circumstances of disclosure to shareholders and third parties of information
regarding the portfolio investments held by the Fund. These portfolio holdings
disclosure policies have been approved by the Board. Disclosure of the Fund’s
complete holdings is required to be made quarterly within 60 days of the end of
each fiscal quarter in the annual report and semi-annual report to Fund
shareholders and in the quarterly holdings report as an exhibit to its reports
on Form N-PORT. These reports are available, free of charge, on the EDGAR
database on the SEC’s website at www.sec.gov.
Pursuant
to the Trust’s portfolio holdings disclosure policies, non-public information
about the Fund’s portfolio holdings generally is not distributed to any person,
unless by explicit agreement or by virtue of their respective duties to the
Fund, such persons are subject to a duty to maintain the confidentiality of the
information disclosed and have a duty not to trade on non-public information.
Examples of disclosure by the Trust include instances in which:
•The
disclosure is required pursuant to a regulatory request, court order or is
legally required in the context of other legal proceedings;
•The
disclosure is made to a mutual fund rating and/or ranking organization, or
person performing similar functions;
•The
disclosure is made to internal parties involved in the investment process,
administration, operation or custody of the Fund, including, but not limited to
the Fund’s administrator, U.S. Bancorp Fund Services, LLC doing business as U.S.
Bank Global Fund Services (“Global Fund Services”) and the Trust’s Board,
attorneys, auditors or independent registered public accounting
firm;
•The
disclosure is made: (a) in connection with a quarterly, semi-annual or annual
report that is available to the public; or (b) relates to information that is
otherwise available to the public; or
•The
disclosure is made with the prior written approval of either the Trust’s Chief
Compliance Officer or his or her designee.
Certain
of the persons listed above receive information about the Fund’s portfolio
holdings on an ongoing basis without lag as part of the normal investment
activities of the Fund. The Fund believes that these third parties have
legitimate objectives in requesting such portfolio holdings information and
operate in the best interest of the Fund’s shareholders. These persons include
internal parties involved in the investment process, administration, operation
or custody of the Fund, specifically: Global Fund Services; the Trust’s Board;
and the Trust’s attorneys and independent registered public accounting firm
(currently, Morgan, Lewis & Bockius LLP and BBD, LLP, respectively), all of
which typically receive such information after it is generated. In no event
shall the Adviser, its affiliates or employees, the Fund, or any other party
receive any direct or indirect compensation in connection with the disclosure of
information about the Fund’s holdings.
Portfolio
holdings information posted on the Fund’s website may be separately provided to
any person, after it is first published on the Fund’s website.
Shareholders
can access the Fund’s website at www.millervaluefunds.com for
additional information about the Fund, including, without limitation, the
periodic disclosure of its portfolio holdings.
Any
disclosures to additional parties not described above is made with the prior
written approval of either the Trust’s Chief Compliance Officer or his or her
designee, pursuant to the Trust’s Policy on Disclosure of Portfolio
Holdings.
The
Chief Compliance Officer or designated officer of the Trust will approve the
furnishing of non-public portfolio holdings to a third party only if they
consider the furnishing of such information to be in the best interest of the
Fund and its shareholders and if no material conflict of interest exists
regarding such disclosure between shareholders interest and those of the
Adviser, Quasar Distributors, LLC, or any affiliated person of the Fund. No
consideration may be received by the Fund, the Adviser, any affiliate of the
Adviser or their employees in connection with the disclosure of portfolio
holdings information. The Board receives and reviews annually a list of the
persons who receive non-public portfolio holdings information and the purpose
for which it is furnished.
Trustees
and Executive Officers
The
overall management of the Trust’s business and affairs is invested with its
Board. The Board approves all significant agreements between the Trust and
persons or companies furnishing services to it, including the agreements with
the Adviser, Administrator, Custodian and Transfer Agent, each of which is
discussed in greater detail in this SAI. The day-to-day operations of the Trust
are delegated to its officers, subject to each Fund’s investment objective,
strategies and policies and to the general supervision of the Board. The
Trustees and officers of the Trust, their ages, birth dates, and positions with
the Trust, terms of office with the Trust and length of time served, their
business addresses and principal occupations during the past five years and
other directorships held are set forth in the table below.
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Name,
Address
and Age |
Position(s)
Held with Trust |
Term
of Office(1)
and Length of Time Served |
Principal
Occupation(s)
During Past 5 Years |
Number
of Portfolios in Fund Complex(2)
Overseen by Trustee |
Other
Directorships(3)
Held During Past 5 Years
by Trustee |
|
Non-Interested
Trustees(4) |
John
C. Chrystal
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1958
|
Trustee |
Since
2011 |
Retired. |
2 |
The
Bancorp, Inc. (2013 to 2021);
Regatta
Loan Management LLC (2015 to present);
Insurance
Acquisition Corp II (2020 to present) |
Harry
E. Resis
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1945 |
Trustee |
Since
2012 |
Private
investor. Previously served as Director of US Fixed Income for Henderson
Global Investors. |
2 |
None |
Brian
S. Ferrie
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1958 |
Trustee |
Since
2020 |
Chief
Compliance Officer, Treasurer, The Jensen Quality Growth Fund (2004 to
2020); Treasurer, Jensen Investment Management (2003 to 2020). |
2 |
None |
Wan-Chong
Kung
615 E. Michigan Street
Milwaukee, WI 53202
Year of birth:
1960 |
Trustee |
Since
2020 |
Senior
Fund Manager, Nuveen Asset Management (FAF Advisors/First American Funds)
(2011 to 2019). |
2 |
Federal
Home Loan Bank of Des Moines (February 2022 to present) |
|
Interested
Trustee(5) |
Christopher
E. Kashmerick
615 E. Michigan Street
Milwaukee, WI 53202
Year
of birth: 1974 |
Trustee,
Chairman, President and Principal Executive Officer |
Trustee
since 2018; Chairman since 2018; President and Principal Executive Officer
since 2014 |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (2011 to
present) |
2 |
None |
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| Name,
Address and Age |
Position(s)
Held with Trust |
Term
of Office(1)
and
Length of Time Served |
Principal
Occupation(s)
During Past 5 Years |
| Officers |
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Steven
J. Jensen
615
E. Michigan Street
Milwaukee,
WI 53202
Year
of birth: 1957 |
Vice
President, Chief Compliance Officer and AML Officer |
Since
2014 |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (2011 to
present). |
|
Russell
B. Simon
615
E. Michigan Street
Milwaukee,
WI 53202
Year
of birth:1980 |
Treasurer
and Principal Financial Officer |
Since
2014 |
Vice
President, U.S. Bancorp Fund Services, LLC (2011 to present). |
Scott
A. Resnick
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth:1983 |
Secretary |
Since
2019 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (2018 to
present);
Associate, Legal & Compliance, PIMCO (2012 to
2018). |
(1)Each
Trustee serves an indefinite term; however, under the terms of the Board’s
retirement policy, a Trustee shall retire at the end of the calendar year in
which he or she reaches the age of 75 (this policy does not apply to any Trustee
serving at the time the policy was adopted). Each officer serves an indefinite
term until the election of a successor.
(2)The
Trust is comprised of numerous series managed by unaffiliated investment
advisers. The term “Fund Complex” applies to Miller Opportunity Trust and Miller
Income Fund (offered in a separate Prospectus and SAI), (together the “Miller
Value Funds”). The Miller Value Funds do not hold themselves out as related to
any other series within the Trust for purposes of investment and investor
services, nor do they share the same investment advisor with any other
series.
(3)“Other
Directorships Held” includes only directorships of companies required to
register or file reports with the SEC under the
Securities Exchange Act of 1934 (that is, “public
companies”) or other investment companies registered under the 1940
Act.
(4)The
Trustees of the Trust who are not “interested persons” of the Trust as defined
under the 1940 Act (“Independent
Trustees”).
(5)Mr.
Kashmerick is deemed to be an “interested person” of the Trust as defined by the
1940 Act. Mr. Kashmerick is an interested Trustee of the Trust by virtue of the
fact that he is an interested person of U.S. Bancorp Fund Services, LLC, the
Fund’s administrator, fund accountant, and transfer agent.
Additional
Information Concerning Our Board of Trustees
Board
Leadership Structure
The
Board has general oversight responsibility with respect to the operation of the
Trust and the Fund. The Board has engaged the Adviser to manage the Fund and is
responsible for overseeing the Adviser and other service providers to the Trust
and the Fund in accordance with the provisions of the 1940 Act and other
applicable laws. The Board has established an Audit Committee to assist the
Board in performing its oversight responsibilities.
The
Trust does not have a lead independent trustee. The Chairman of the Board is an
“interested person” of the Trust as defined by the 1940 Act. The Trust has
determined that its leadership structure is appropriate in light of, among other
factors, the asset size and nature of the Trust, the arrangements for the
conduct of the Trust’s operations, the number of Trustees, and the
responsibilities of the Board.
Board
Oversight of Risk
Through
its direct oversight role, and indirectly through the Audit Committee, and
officers of the Fund and service providers, the Board performs a risk oversight
function for the Fund. To effectively perform its risk oversight function, the
Board, among other things, performs the following activities: receives and
reviews reports related to the performance and operations of the Fund; reviews
and approves, as applicable, the compliance policies and procedures of the Fund;
approves the Fund’s principal investment policies; adopts policies and
procedures designed to deter market timing; meets with representatives of
various service providers, including the Adviser, to review and discuss the
activities of the Fund and to provide direction with respect thereto; and
appoints a chief compliance officer of the Fund who oversees the implementation
and testing of the Fund’s compliance program and reports to the Board regarding
compliance matters for the Fund and its service providers.
The
Trust has an Audit Committee, which plays a significant role in the risk
oversight of the Fund as it meets annually with the auditors of the Fund. The
Board also meets quarterly with the Fund’s chief compliance
officer.
Not
all risks that may affect the Fund can be identified nor can controls be
developed to eliminate or mitigate their occurrence or effects. It may not be
practical or cost effective to eliminate or mitigate certain risks, the
processes and controls employed to address certain risks may be limited in their
effectiveness, and some risks are simply beyond the reasonable control of the
Adviser or other service providers. Moreover, it is necessary to bear certain
risks (such as investment-related risks) to achieve the Fund’s goals. As a
result of the foregoing and other factors, the Fund’s ability to manage risk is
subject to substantial limitations.
Trust
Committees
The
Trust has three standing committees: the Audit Committee, which also serves as
the Qualified Legal Compliance Committee (“QLCC”), the Governance and Nominating
Committee (the “Nominating Committee”), and the Valuation Committee.
The
Audit Committee, comprised entirely of the Independent Trustees, is chaired by
Mr. Chrystal. The primary functions of the Audit Committee are to select the
independent registered public accounting firm to be retained to perform the
annual audit of the Fund, to review the results of the audit, to review the
Fund’s internal controls, to approve in advance all permissible non-audit
services performed by the independent auditors and to review certain other
matters relating to the Fund’s independent registered public accounting firm and
financial records. In its role as the QLCC, its function is to receive reports
from an attorney retained by the Trust of evidence of a material violation by
the Trust or by any officer, director, employee or agent of the
Trust. During the fiscal year ended December 31, 2021, the Audit Committee
met two times in regard to the Fund.
The
Nominating Committee, comprised entirely of the Independent Trustees, is
responsible for seeking and reviewing candidates for consideration as nominees
for Trustees and meets only as necessary. The Nominating Committee will
consider nominees nominated by shareholders. Recommendations by
shareholders for consideration by the Nominating Committee should be sent to the
President of the Trust in writing together with the appropriate biographical
information concerning each such proposed Nominee, and such recommendation must
comply with the notice provisions set forth in the Trust By-Laws. In
general, to comply with such procedures, such nominations, together with all
required biographical information, must be delivered to and received by the
President of the Trust at the principal executive offices of the Trust not later
than 120 days and no more than 150 days prior to the shareholder meeting at
which any such nominee would be voted on. During the fiscal year ended
December 31, 2021, the Nominating Committee did not meet in regard to the
Fund.
The
Board has delegated day-to-day valuation matters to a Valuation Committee that
is comprised of the Trust’s President, Treasurer and Assistant Treasurers and is
overseen by the Trustees. The function of the Valuation Committee is to
review each adviser’s valuation of securities held by any series of the Trust
for which current and reliable market quotations are not readily
available. Such securities are valued at their respective fair values as
determined in good faith by each adviser, and the Valuation Committee gathers
and reviews Fair Valuation Forms that are completed by an adviser to support its
determinations, and which are subsequently reviewed and ratified by the
Board. During the fiscal year ended December 31, 2021, the Valuation
Committee met twelve times in regard to the Fund.
Board
Oversight of Risk Management
As
part of its oversight function, the Board receives and reviews various risk
management reports and assessments and discusses these matters with appropriate
management and other personnel. Because risk management is a broad concept
comprised of many elements (such as, for example, investment risk, issuer and
counterparty risk, compliance risk, operational risks, business continuity
risks, etc.) the oversight of different types of risks is handled in different
ways. For example, the Audit Committee meets regularly with the Chief Compliance
Officer to discuss compliance and operational risks. The Audit Committee also
meets with the Treasurer and the Trust’s independent public accounting firm to
discuss, among other things, the internal control structure of the Trust’s
financial reporting function. The full Board receives reports from the Adviser
and portfolio managers as to investment risks as well as other risks that may be
also discussed in Audit Committee.
Information
about Each Trustee’s Qualification, Experience, Attributes or
Skills
In
addition to the information provided in the table above, below is certain
additional information concerning each particular Trustee and certain of their
Trustee Attributes. The information provided below, and in the table above, is
not all-inclusive. Many Trustee attributes involve intangible elements, such as
intelligence, integrity, work ethic, the ability to work together, the ability
to communicate effectively, the ability to exercise judgment, the ability to ask
incisive questions, and commitment to shareholder interests. In conducting its
annual self-assessment, the Board has determined that the Trustees have the
appropriate attributes and experience to continue to serve effectively as
Trustees of the Trust.
John
C. Chrystal’s experience as a partner of an investment management firm and his
experience as a partner of a consulting firm advising financial institutions,
have provided him with an extensive knowledge of the highly regulated financial
services industry, which knowledge he brings to the Board in a relatable,
effective way.
Harry
E. Resis’ background in fixed income securities analysis, with an emphasis on
high yield securities, provides him with a practical knowledge of the underlying
markets and strategies used by series in the Trust that will be useful to the
Board in their analysis and oversight of the series.
Brian
S. Ferrie’s experience in finance and compliance in the mutual fund
industry gives him a strong understanding of the regulatory requirements of
operating a mutual fund. He also understands the complex nature of the financial
requirements, both from a regulatory and operational perspective, of managing a
mutual fund. Mr. Ferrie’s background and experience provide a unique perspective
to the Board.
Wan-Chong
Kung’s experience managing fixed income mutual funds, with specific experience
in commodities provides a diverse point-of-view for the Board. Ms. Kung also has
unique experience in education as she advises student-managed bond and equity
funds.
Christopher
E. Kashmerick has substantial mutual fund operations and shareholder servicing
experience through his position as Senior Vice President of U.S. Bancorp Fund
Services, LLC, and he brings more than 20 years of mutual fund and investment
management experience, which makes him a valuable resource to the Board as they
contemplate various fund and shareholder servicing needs.
Each
of the Trustees takes a conservative and thoughtful approach to addressing
issues facing the Fund. The combination of skills and attributes discussed above
led to the conclusion that each of Messrs. Chrystal, Resis, Ferrie, Kashmerick
and Ms. Kung should serve as a trustee.
Trustee
Ownership of Fund Shares and Other Interests
As
of December 31, 2021, Mr. Ferrie beneficially owned shares of certain series of
the Trust as follows, and no other Trustee
owned shares of any series of the Trust:
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| Trustee |
Dollar
Range of Shares Owned in the Miller Opportunity Trust |
Aggregate
Dollar Range of Shares of Series of the Trust |
| Brian
S. Ferrie |
Over
$100,000 |
Over
$100,000 |
As
of December 31, 2021, neither the Independent Trustees nor members of their
immediate family, own securities beneficially or of record in the Adviser, the
Distributor, as defined below, or an affiliate of the Adviser or Distributor.
Accordingly, neither the Independent Trustees nor members of their immediate
family, have direct or indirect interest, the value of which exceeds $120,000,
in the Adviser, the Distributor or any of their affiliates. In addition, during
the two most recently completed calendar years, neither the Independent Trustees
nor members of their immediate families have conducted any transactions (or
series of transactions) in which the amount involved exceeds $120,000 and to
which the Adviser, the Distributor or any affiliate thereof was a
party.
Compensation
Set
forth below is the compensation received by the Independent Trustees from the
Fund for the fiscal year ended December 31, 2021. The Independent Trustees
receive an annual retainer of $56,000 per year and a per meeting fee of $1,000
for each regular and special meeting of the Board of Trustees attended The
Trustees also receive reimbursement from the Trust for expenses incurred in
connection with attendance at meetings. The Trust has no pension or retirement
plan. No other entity affiliated with the Trust pays any compensation to the
Trustees.
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Aggregate
Compensation from the Fund |
Pension
or Retirement Benefits Accrued as Part of Fund Expenses |
Annual
Benefits Upon Retirement |
Total
Compensation from Fund Complex Paid to Trustees(1) |
| Name
of Independent Trustee |
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|
| John
C. Chrystal |
$3,536 |
None |
None |
$7,071 |
|
Albert
J. DiUlio, S.J. (2) |
$1,716 |
None |
None |
$3,431 |
| Harry
E. Resis |
$3,536 |
None |
None |
$7,071 |
| Brian
S. Ferrie |
$3,536 |
None |
None |
$7,071 |
| Wan-Chong
Kung |
$3,536 |
None |
None |
$7,071 |
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Aggregate
Compensation from the Fund |
Pension
or Retirement Benefits Accrued as Part of Fund Expenses |
Annual
Benefits Upon Retirement |
Total
Compensation from Fund Complex Paid to Trustees(1) |
| Name
of Interested Trustee |
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| Christopher
E. Kashmerick |
$0 |
None |
None |
$0 |
(1)There
are currently multiple portfolios comprising the Trust. The term “Fund Complex”
applies only to the Miller Value Funds. For the fiscal year ended December 31,
2020, aggregate Independent Trustees’ fees paid by the Trust were in the amount
of $270,000.
(2)Albert
J. DiUlio, S.J. retired from the Board of Trustees as of the close of business
on May 19, 2021.
General
Trust Information
The
Declaration of Trust permits the Trustees to issue an unlimited number of full
and fractional shares of beneficial interest and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in the Fund. Each share represents an interest
in the Fund proportionately equal to the interest of each other share. Upon the
Fund’s liquidation, all shareholders would share pro rata in the net assets of
the Fund available for distribution to shareholders.
With
respect to the Fund, the Trust may offer more than one class of shares. The
Trust reserves the right to create and issue additional series or classes. Each
share of a series or class represents an equal proportionate interest in that
series or class with each other share of that series or class. Currently, the
Miller Opportunity Trust offers six share classes, Class A, Class C, Class FI,
Class R, Class I, and Class IS shares.
The
Trust is not required to hold annual meetings of shareholders but will hold
special meetings of shareholders of a series or class when, in the judgment of
the Trustees, it is necessary or desirable to submit matters for a shareholder
vote. Shareholders have, under certain circumstances, the right to communicate
with other shareholders in connection with requesting a meeting of shareholders
for the purpose of removing one or more Trustees. Shareholders also have, in
certain circumstances, the right to remove one or more Trustees without a
meeting. No material amendment may be made to the Declaration of Trust without
the affirmative vote of the holders of a majority of the outstanding shares of
each portfolio affected by the amendment. The Declaration of Trust provides
that, at any meeting of shareholders of the Trust or of any series or class, a
Shareholder Servicing Agent may vote any shares as to which such Shareholder
Servicing Agent is the agent of record and which are not represented in person
or by proxy at the meeting, proportionately in accordance with the votes cast by
holders of all shares of that portfolio otherwise represented at the meeting in
person or by proxy as to which such Shareholder Servicing Agent is the agent of
record. Any shares so voted by a Shareholder Servicing Agent will be deemed
represented at the meeting for purposes of quorum requirements. Any series or
class may be terminated (i) upon the merger or consolidation with, or the
sale or disposition of all or substantially all of its assets to, another
entity, if approved by the vote of the holders of two thirds of its outstanding
shares, except that if the Board recommends such merger, consolidation or sale
or disposition of assets, the approval by vote of the holders of a majority of
the series’ or class’ outstanding shares will be sufficient, or (ii) by the
vote of the holders of a majority of its outstanding shares, or (iii) by
the Board by written notice to the series’ or class’ shareholders. Unless each
series and class is so terminated, the Trust will continue
indefinitely.
The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The
Declaration of Trust does not require the issuance of stock certificates. If
stock certificates are issued, they must be returned by the registered owners
prior to the transfer or redemption of shares represented by such
certificates.
Rule
18f-2 under the 1940 Act provides that as to any investment company which has
two or more series outstanding and as to any matter required to be submitted to
shareholder vote, such matter is not deemed to have been effectively acted upon
unless approved by the holders of a “majority” (as defined in the Rule) of the
voting securities of each series affected by the matter. Such separate voting
requirements do not apply to the election of Trustees or the ratification of the
selection of accountants. The Rule contains special provisions for cases in
which an advisory contract is approved by one or more, but not all, series. A
change in investment policy may go into effect as to one or more series whose
holders so approve the change even though the required vote is not obtained as
to the holders of other affected series.
Codes
of Ethics
The
Trust and the Adviser have each adopted separate Codes of Ethics under
Rule 17j‑1 of the 1940 Act. These Codes permit, subject to certain
conditions, access persons of the Adviser to invest in securities that may be
purchased or held by the Fund.
Proxy
Voting Policies and Procedures
The
Board has adopted Proxy Voting Policies and Procedures (the “Policies”) on
behalf of the Trust which delegate the responsibility for voting proxies to the
Adviser, subject to the Board’s continuing oversight. The Policies require that
the Adviser vote proxies received in a manner consistent with the best interests
of the Fund and its shareholders. The Policies also require the Adviser to
present to the Board, at least annually, the Adviser’s Policies and a record of
each proxy voted by the Adviser on behalf of the Fund, including a report on the
resolution of all proxies identified by the Adviser as involving a conflict of
interest.
A
copy of the Adviser’s policies and procedures used to determine how to vote
proxies related to portfolio securities can be found in Appendix
B.
The
Trust is required to file a Form N-PX, with the Fund’s complete proxy voting
record for the 12 months ended June 30, no later than August 31 of each year.
The Fund’s proxy voting record will be available without charge, upon request,
by calling toll-free 1-888-593-5110 and on the SEC’s website at
www.sec.gov.
Control
Persons, Principal Shareholders, and Management Ownership
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of the Fund. A control person is one who owns
beneficially or through controlled companies more than 25% of the voting
securities of a company or acknowledges the existence of control. Shareholders
with a controlling interest could affect the outcome of voting or the direction
of management of the Fund.
The
Trustees and officers of the Trust as a group did not own more than 1% of any
class of the Fund’s outstanding shares.
As
of April 1, 2022, the following shareholders were considered to be either a
control person or principal shareholder of the Fund.
Class
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
MORGAN
STANLEY SMITH BARNEY LLC
SPECIAL CUSTODY ACCT FOR THE
EXCLUSIVE
BENEFIT OF CUSTOMERS OF MSSB
1300 THAMES ST FL 6
BALTIMORE MD
21231-3496 |
N/A |
N/A |
47.04% |
Record |
CHARLES
SCHWAB & CO INC
SPECIAL CUSTODY A/C FBO CUSTOMERS
ATTN MUTUAL
FUNDS
211 MAIN ST
SAN FRANCISCO CA 94105-1905 |
N/A |
N/A |
13.68% |
Record |
Class
C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
MORGAN
STANLEY & CO INC
ATTN MUTUAL FUNDS OPERATIONS
HARBORSIDE
FINANCIAL CENTER
PLAZA TWO 2ND FLOOR
JERSEY CITY NJ 07311 |
N/A |
N/A |
21.21% |
Record |
CHARLES
SCHWAB & CO INC
SPECIAL CUSTODY A/C FBO CUSTOMERS
ATTN MUTUAL
FUNDS
211 MAIN ST
SAN FRANCISCO CA 94105-1905 |
N/A |
N/A |
20.07% |
Record |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
WELLS
FARGO CLEARING SERVICES LLC
SPECIAL CUSTODY ACCT FOR THE
EXCLUSIVE
BENEFIT OF CUSTOMER
2801 MARKET STREET
SAINT LOUIS MO
63103-2523 |
N/A |
N/A |
10.57% |
Record |
TD
AMERITRADE
FOR THE EXCLUSIVE BENEFIT OF OUR CLIENTS
PO BOX
2226
OMAHA NE 68103-2226 |
N/A |
N/A |
7.25% |
Record |
RBC
CAPITAL MARKETS LLC
MUTUAL FUND OMNIBUS PROCESSING
OMNIBUS
ATTN
MUTUAL FUND OPS MANAGER
60 S 6TH ST # P08
MINNEAPOLIS MN
55402-4413 |
N/A |
N/A |
5.98% |
Record |
Class
FI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
NATIONAL
FINANCIAL SERVICES LLC
FOR THE EXCLUSIVE BENEFIT OF OUR
CUSTOMERS
ATTN MUTUAL FUND DEPT 4TH FL
499 WASHINGTON BLVD
JERSEY
CITY NJ 07310-1995 |
N/A |
N/A |
25.03% |
Record |
CHARLES
SCHWAB & CO INC
SPECIAL CUSTODY A/C FBO CUSTOMERS
ATTN MUTUAL
FUNDS
211 MAIN ST
SAN FRANCISCO CA 94105-1905 |
N/A |
N/A |
21.80% |
Record |
MAC
& CO A/C 694972
ATTN MUTUAL FUND OPS
500 GRANT STREET
ROOM
151-1010
PITTSBURGH PA 15219-2502 |
N/A |
N/A |
17.80% |
Record |
TD
AMERITRADE
FOR THE EXCLUSIVE BENEFIT OF OUR CLIENTS
PO BOX
2226
OMAHA NE 68103-2226 |
N/A |
N/A |
13.15% |
Record |
VANGUARD
BROKERAGE SERVICES
100 VANGUARD BLVD
MALVERN PA 19355-2331 |
N/A
|
N/A
|
12.64% |
Record |
Class
R
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
MORGAN
STANLEY SMITH BARNEY LLC
FOR THE EXCLUSIVE BENEFIT OF
ITS
CUSTOMERS
1 NEW YORK PLZ FL 12
NEW YORK NY
10004-1901 |
N/A
|
N/A
|
29.58% |
Record |
ASCENSUS
TRUST COMPANY FBO
PUBLIC OPINION STRATEGIES PROFIT SH
P O BOX
10758
FARGO ND 58106-0758 |
N/A |
N/A |
27.73% |
Record |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
MG
TRUST COMPANY CUST
FBO KUCHLER POLK SCHELL WEINER & RICHES
717
17TH STREET
SUITE 1300
DENVER CO 80202-3304 |
N/A |
N/A |
20.39% |
Record |
PENTEGRA
TRUST COMPANY AS CUSTODIAN
FBO ALLEGANY COUNTY BOE TSA
C/O PENTEGRA
RETIREMENT SERVICES
2 ENTERPRISE DR STE 408
SHELTON CT
06484-4657 |
N/A
|
N/A
|
6.95% |
Record |
Class
I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
MORGAN
STANLEY SMITH BARNEY LLC
SPECIAL CUSTODY ACCT FOR THE
EXCLUSIVE
BENEFIT OF CUSTOMERS
OF MSSB
1300 THAMES ST FL 6
BALTIMORE MD
21231-3496 |
N/A |
N/A |
32.51% |
Record |
CHARLES
SCHWAB & CO INC
SPECIAL CUSTODY A/C FBO CUSTOMERS
ATTN MUTUAL
FUNDS
211 MAIN ST
SAN FRANCISCO CA 94105-1905 |
N/A |
N/A |
12.07% |
Record |
MERRILL
LYNCH PIERCE FENNER & SMITH
FOR THE SOLE BENEFIT OF
ITS
CUSTOMERS
4800 DEER LAKE DR E
JACKSONVILLE FL
32246-6484 |
N/A |
N/A |
10.27% |
Record |
UBS
WM USA
0O0 11011 6100
SPEC CDY A/C EBOC UBSFSI
1000 HARBOR
BLVD
WEEHAWKEN NJ 07086-6761 |
N/A
|
N/A
|
7.58% |
Record |
NATIONAL
FINANCIAL SERVICES LLC
FOR THE EXCLUSIVE BENEFIT OF OUR
CUSTOMERS
ATTN MUTUAL FUNDS DEPT 4TH FL
499 WASHINGTON
BLVD
JERSEY CITY NJ 07310-1995 |
N/A |
N/A |
6.33% |
Record |
PERSHING
LLC
1 PERSHING PLZ
JERSEY CITY NJ 07399-0001 |
N/A |
N/A |
6.17% |
Record |
RAYMOND
JAMES
OMNIBUS FOR MUTUAL FUNDS
HOUSE ACCT FIRM 92500015
ATTN
COURTNEY WALLER
880 CARILLON PKWY
ST PETERSBURG FL
33716-1100 |
N/A
|
N/A
|
5.79% |
Record |
Class
IS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
PERSHING
LLC
1 PERSHING PLZ
JERSEY CITY NJ 07399-0001 |
N/A |
N/A |
68.25% |
Record |
WILLIAM
H MILLER III LIVING TRUST
WILLIAM H MILLER III TR
U/A
04/17/2017
201 BEACHSIDE DR
VERO BEACH FL 32963-9574 |
N/A |
N/A |
16.70% |
Record |
JP
MORGAN SECURITIES LLC
1 METROTECH CTR N FL 3
BROOKLYN NY
11201-3873 |
N/A |
N/A |
15.05% |
Record |
The
Fund’s Investment Adviser
Miller
Value Partners, LLC, located at One South Street, Suite 2550, Baltimore,
Maryland 21202, acts as investment adviser to the Fund pursuant to an investment
advisory agreement (the “Advisory Agreement”) with the Trust. Bill Miller owns
more than 25% of the Adviser and is therefore a control person of the Adviser.
In
consideration of the services to be provided by the Adviser pursuant to the
Advisory Agreement, the Adviser is entitled to receive from the Fund an
investment advisory fee computed daily and payable monthly, based on the
following fee schedule: 1.00% of assets up to and including $100 million; 0.75%
of assets on the next $2.5 billion; 0.70% on the next $2.5 billion; 0.675% on
the next $2.5 billion; and 0.65% on amounts over $7.6 billion.
After
its initial two year term, the Advisory Agreement continues in effect for
successive annual periods so long as such continuation is specifically approved
at least annually by the vote of (1) the Board (or a majority of the
outstanding shares of the Fund), and (2) a majority of the Trustees who are
not interested persons of any party to the Advisory Agreement, in each case,
cast in person at a meeting called for the purpose of voting on such approval.
The Advisory Agreement may be terminated at any time, without penalty, by either
party to the Advisory Agreement upon a 60-day written notice and is
automatically terminated in the event of its “assignment,” as defined in the
1940 Act.
In
addition to the management fees payable to the Adviser, the Fund is responsible
for their own operating expenses, including: fees and expenses incurred in
connection with the issuance, registration and transfer of its shares; brokerage
and commission expenses; all expenses of transfer, receipt, safekeeping,
servicing and accounting for the cash, securities and other property of the
Trust for the benefit of the Fund including all fees and expenses of its
custodian and accounting services agent; interest charges on any borrowings;
costs and expenses of pricing and calculating its daily NAV per share and of
maintaining its books of account required under the 1940 Act; taxes, if any; a
pro rata portion of expenditures in connection with meetings of the Fund’s
shareholders and the Trust’s Board that are properly payable by the Fund;
salaries and expenses of officers and fees and expenses of members of the Board
or members of any advisory board or committee who are not members of, affiliated
with or interested persons of the Adviser or Administrator; insurance premiums
on property or personnel of the Fund which inure to their benefit, including
liability and fidelity bond insurance; the cost of preparing and printing
reports, proxy statements, prospectuses and the statement of additional
information of the Fund or other communications for distribution to existing
shareholders; legal counsel, auditing and accounting fees; trade association
membership dues (including membership dues in the Investment Company Institute
allocable to the Fund); fees and expenses (including legal fees) of registering
and maintaining registration of its shares for sale under federal and applicable
state and foreign securities laws; all expenses of maintaining shareholder
accounts, including all charges for transfer, shareholder recordkeeping,
dividend disbursing, redemption, and other agents for the benefit of the Fund,
if any; and all other charges and costs of its operation plus any extraordinary
and non-recurring expenses, except as otherwise prescribed in the Advisory
Agreement.
Though
the Fund is responsible for its own operating expenses, the Adviser has
contractually agreed to waive a portion or all of the management fees payable to
it by the Fund and/or to pay the Fund’s operating expenses to the extent
necessary to limit the Fund’s aggregate annual operating expenses other than
front-end or contingent deferred loads, taxes, interest expense, brokerage
commissions, acquired fund fees and expenses, expenses incurred in connection
with any merger or reorganization, portfolio transaction expenses, dividends
paid on short sales, extraordinary expenses such as litigation, Rule 12b-1 fees,
intermediary servicing fees, or any other class-specific expenses to the limits
set forth in the Annual Fund Operating Expenses table of the Prospectus. Any
such waivers made by the Adviser in its management fees or payment of expenses
which are the Fund’s obligation may be subject to recoupment by the Adviser from
the Fund, if so requested
by
the Adviser, if the aggregate amount actually paid by the Fund toward the
operating expenses in a fiscal year (taking into account the recoupment) does
not exceed the current applicable limitation on the Fund’s expenses or, if
lower, the limitation in effect at the time of the waiver and/or reimbursement.
The Adviser is permitted to recoup only for management fee waivers and expense
payments made in the previous three year period. Any such recoupment is also
contingent upon the Board’s subsequent review and ratification of the recouped
amounts. Such recoupment may not be paid prior to the Fund’s payment of current
ordinary operating expenses.
For
the fiscal years ended December 31, the Fund paid management fees to the
Adviser
as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
Gross Management
Fees |
Management Fees
Waived/Expense
Reimbursements |
Management Fees
Recouped |
Net Management Fees
(After Waivers/Expense
Reimbursements) |
| 2021 |
$19,659,417 |
$0 |
$161,238 |
$19,820,655 |
| 2020 |
$12,221,941 |
($77,684) |
$0 |
$12,144,257 |
| 2019 |
$11,674,748 |
($150,225) |
$0 |
$11,524,523 |
Portfolio
Managers
The
tables below identify the portfolio managers, the number of accounts for which
each portfolio manager has day-to-day management responsibilities and the total
assets in such accounts, within each of the following categories: registered
investment companies, other pooled investment vehicles, other accounts and, if
applicable, the number of accounts and total assets in the accounts where fees
are based on performance.
Bill
Miller
As
of December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Type
of Account |
Number of
Accounts
Managed |
Total
Assets
Managed |
Number
of
Accounts
Managed for
which
Advisory Fee
is Performance-
Based |
Assets Managed
for which
Advisory Fee is
Performance-
Based |
| Registered
Investment Companies |
1 |
$257,232,747 |
N/A |
N/A |
| Other
pooled investment vehicles |
N/A |
N/A |
N/A |
N/A |
| Other
accounts |
N/A |
N/A |
N/A |
N/A |
Samantha
McLemore
As
of December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Type
of Account |
Number of
Accounts
Managed |
Total
Assets
Managed |
Number
of
Accounts
Managed for
which
Advisory Fee
is Performance-
Based |
Assets Managed
for which
Advisory Fee is
Performance-
Based |
| Registered
Investment Companies |
N/A |
N/A |
N/A |
N/A |
| Other
pooled investment vehicles |
2 |
$341,459,419 |
2 |
$235,765,384 |
| Other
accounts |
4 |
$370,774,638 |
N/A |
N/A |
The
fee schedule for the Fund does not contain the same breakpoints that apply to
certain of the other accounts managed by the portfolio managers; therefore, the
effective fee paid by the Fund may be higher than the effective fee paid by the
other accounts described above.
In
the opinion of the Adviser for the Fund, the portfolio managers’ simultaneous
management of the Fund and the accounts included in the tables above does not
create any material conflicts of interests.
The
portfolio managers have day-to-day management responsibility for other accounts.
Ms. McLemore also serves as portfolio manager for a private fund and an
additional account managed by Patient Capital Management, LLC (“Patient Capital
Management”), an affiliate of the Adviser that was founded by Ms. McLemore and
Mr. Miller in 2020. Ms. McLemore is the majority owner and sole managing member
of Patient Capital Management. The management of multiple accounts by the
portfolio managers may create the potential for conflicts to arise. For example,
the portfolio managers make investment decisions for each account based on the
investment guidelines, cash flows and other factors that the portfolio managers
believe are applicable to that account. Consequently, the portfolio managers may
purchase (or sell) the same security for multiple accounts at different times.
The portfolio managers may also manage accounts whose style, objectives and
policies differ from those of the Fund. Trading activity appropriate for one
account managed by the portfolio managers may have adverse consequences for
another account managed by the portfolio managers. For example, if a portfolio
manager were to cause an account to sell a significant position in a security,
that sale could cause the market price of the security to decrease, while other
accounts, including the Fund, continue to maintain a position in the security. A
potential conflict may also arise since the portfolio managers are responsible
for accounts that have different advisory fees – the difference in the fees may
create an incentive for a portfolio manager to favor one account over another,
for example, in terms of access to investment opportunities of limited
availability. This potential conflict may be heightened where an account is
subject to a performance-based fee. As noted above, Ms. McLemore serves as
portfolio manager for a private fund managed by Patient Capital Management. This
private fund is structured to pay a performance fee to an entity affiliated with
Patient Capital Management when the fund outperforms its index. Both Ms.
McLemore and Mr. Miller have ownership interests in Patient Capital Management
and the affiliated entity that may receive a performance fee. This performance
fee structure has the potential to create a conflict of interests. The portfolio
managers’ personal investing may also give rise to potential conflicts of
interest. The Adviser has adopted brokerage, trade allocation, personal
investing and other policies and procedures that it believes are reasonably
designed to address the potential conflicts of interest described above. These
policies and procedures also govern the trading and other activities of the
Adviser’s affiliate Patient Capital Management. For example, the Adviser and
Patient Capital Management typically combine contemporaneously placed client
orders to buy or sell the same security in an effort to obtain best execution or
to negotiate a more favorable commission rate. In addition, if contemporaneously
placed orders to buy or sell a security for multiple accounts at approximately
the same time are executed at different prices or commissions, the transactions
will generally be allocated to each account at the average execution price and
commission. In circumstances where an order is not completely filled, each
account will normally receive a pro-rated portion of the securities based upon
its level of participation in the order. In circumstances where a portfolio
manager is making a decision to acquire an investment in an initial public
offering, the investment must be allocated to participating clients on a pro
rata basis (based upon account size) unless otherwise approved by the Chief
Compliance Officer or a delegate. Employees of the Adviser may from time to time
buy or sell securities for their own accounts that are also purchased and/or
sold for the Fund or other clients. This has the potential to create a conflict
of interest between employees of the Adviser and clients. In order to address
this potential conflict of interest, the Adviser’s Code of Ethics establishes
policies and procedures relating to trading by employees. The Code of Ethics is
based on the principle that employees owe a fiduciary duty to clients and must
avoid activities, interests and relationships that might interfere with making
decisions in the best interests of any client. Among other things, the Code of
Ethics generally requires employees to receive pre-clearance for any securities
transaction in which they have or acquire a beneficial interest.
Portfolio
Managers Compensation
Bill
Miller is Chairman and Chief Investment Officer of the Adviser. Mr. Miller
is also the primary owner of the Adviser. He receives a fixed salary; however
his primary compensation comes from his ownership interest in the Adviser as he
is entitled to a portion of its profits. Mr. Miller is also eligible to receive
from the Adviser employee benefits, including, but not limited to, health care
and other insurance benefits, participation in a 401(k) program, and
participation in other deferred compensation plans. Mr. Miller is also a
minority owner of Patient Capital Management, LLC, an affiliate of the Adviser
that manages a private fund and an additional account. Through this ownership
interest, Mr. Miller is entitled to a portion of the management fees and
performance fees that may be paid by the private fund and other accounts.
As
of December 31, 2021, Mr. Miller beneficially owned shares of the Fund with a
value in excess of $1,000,000.
Samantha
McLemore serves as a portfolio manager for the Adviser and is paid a fixed base
salary and a discretionary bonus. Bonus compensation is reviewed annually and is
determined by a number of factors, including the total value of the assets she
manages and the net revenues associated wth those assets, the annual performance
of Ms. McLemore’s accounts relative to the S&P 500 Composite Stock Index
(with dividends reinvested), her performance over various other time periods,
her contribution to the Adviser’s research process, the profitability of the
Adviser and Ms. McLemore’s contribution to profitability, and trends in industry
compensation levels and practices. Ms. McLemore is eligible to receive from the
Adviser employee benefits, including, but not limited to, health care and other
insurance benefits, participation in
a
401(k) program, and participation in other deferred compensation plans. Ms.
McLemore is also the majority owner and sole managing member of Patient Capital
Management, LLC, an affiliate of the Adviser that manages a private fund and an
additional account. Through this ownership interest, Ms. McLemore is entitled to
a portion of the management fees and performance fees that may be paid by the
private fund and other accounts.
As
of December 31, 2021, Ms. McLemore beneficially owned shares of the Fund with a
value in excess of $1,000,000.
Other
Service Providers
Fund
Administrator, Transfer Agent and Fund Accountant
Pursuant
to an administration agreement (the “Administration Agreement”), U.S. Bancorp
Fund Services, LLC (doing business as U.S. Bank Global Fund Services) (“the
Administrator” or “Global Fund Services”), 615 East Michigan Street, Milwaukee,
Wisconsin 53202, acts as the administrator to the Fund. Global Fund Services
provides certain services to the Fund including, among other responsibilities,
coordinating the negotiation of contracts and fees with, and the monitoring of
performance and billing of, the Fund’s independent contractors and agents;
preparation for signature by an officer of the Trust of all documents required
to be filed for compliance by the Trust and the Fund with applicable laws and
regulations, excluding those of the securities laws of various states; arranging
for the computation of performance data, including NAV per share and yield;
responding to shareholder inquiries; and arranging for the maintenance of books
and records of the Fund, and providing, at its own expense, office facilities,
equipment and personnel necessary to carry out its duties. In this capacity,
Global Fund Services does not have any responsibility or authority for the
management of the Fund, the determination of investment policy, or for any
matter pertaining to the distribution of Fund shares.
Pursuant
to the Administration Agreement, as compensation for its fund administration,
portfolio compliance and fund accounting services, Global Fund Services receives
from the Fund, a fee based on the Fund’s current average daily net assets.
Pursuant to the Administration Agreement, Global Fund Services will receive a
portion of fees from the Fund as part of a bundled-fee agreement for services
performed as Administrator and Fund Accountant and separately as the transfer
agent and dividend disbursing agent (the “Transfer Agent”). Additionally, Global
Fund Services provides Chief Compliance Officer services to the Trust under a
separate agreement. The cost for the Chief Compliance Officer’s services is
charged to the Fund and approved by the Board annually.
For
the fiscal years shown below, the Fund paid the following administration fees to
Global Fund Services pursuant to its Administration Agreement.
|
|
|
|
|
|
|
Administration
Fees |
| Fiscal
year ended December 31, 2021 |
$1,267,368 |
|
| Fiscal
year ended December 31, 2020 |
$839,797 |
|
| Fiscal
year ended December 31, 2019 |
$809,232 |
|
Custodian
Pursuant
to a Custody Agreement between the Trust and U.S. Bank National Association,
located at 1555 North RiverCenter Drive, Suite 302, Milwaukee, Wisconsin 53212
(the “Custodian”), the Custodian serves as the custodian of the Fund’s assets,
holds the Fund’s portfolio securities in safekeeping, and keeps all necessary
records and documents relating to its duties. The Custodian is compensated with
an asset-based fee plus transaction fees and is reimbursed for out-of-pocket
expenses.
The
Custodian and Administrator do not participate in decisions relating to the
purchase and sale of securities by the Fund. The Administrator, Transfer Agent,
and Custodian are affiliated entities under the common control of U.S. Bancorp.
The Custodian and its affiliates may participate in revenue sharing arrangements
with the service providers of mutual funds in which the Fund may
invest.
Distribution
Agreement
The
Trust has entered into a distribution agreement with Quasar Distributors, LLC, a
wholly-owned broker-dealer subsidiary of Foreside Financial Group, LLC, located
at 111 E. Kilbourn Avenue, Suite 2200, Milwaukee, Wisconsin 53202, (“Quasar” or
the “Distributor”) pursuant to which the Distributor acts as the Fund’s
distributor, provides certain administration services and promotes and arranges
for the sale of Fund shares. The offering of the Fund’s shares is continuous.
The Distributor is a registered broker-dealer and member of FINRA.
The
distribution agreement has an initial term of up to two years and will continue
in effect only if such continuance is specifically approved at least annually by
the Board or by vote of a majority of the Fund’s outstanding voting securities
and, in either case, by a majority of the Trustees who are not parties to the
distribution agreement or “interested persons” (as defined in the 1940 Act) of
any such party. The Distribution Agreement is terminable without penalty by the
Trust on behalf of the Fund’s on 60 days’ written notice when authorized either
by a majority vote of the Fund’s shareholders or by vote of a majority of the
Board, including a majority of the Trustees who are not “interested persons” (as
defined in the 1940 Act) of the Trust, or by the Distributor on 60 days’ written
notice, and will automatically terminate in the event of its “assignment” (as
defined in the 1940 Act).
Initial
Sales Charges
The
aggregate dollar amounts of initial sales charges on Class A shares
received and retained by the Distributor were as follows:
|
|
|
|
|
|
|
|
|
Class
A Shares
For the fiscal year ended December 31 |
Aggregate
Commissions |
Amounts
Retained by
Distributor |
| 2021 |
$697,988 |
$0 |
| 2020
|
$441,993 |
$0 |
| 2019
|
$244,306 |
$0 |
Contingent
Deferred Sales Charges
The
aggregate dollar amounts of contingent deferred sales charges on Class A
and Class C shares received and retained by the Distributor were as follows:
|
|
|
|
|
|
|
|
|
Class
A Shares
For the fiscal year ended December 31 |
Aggregate
Commissions |
Amounts
Retained by
Distributor |
| 2021 |
$0 |
$0 |
| 2020
|
$8,706 |
$8,706 |
| 2019
|
$0 |
$0 |
|
|
|
|
|
|
|
|
|
Class
C Shares
For the fiscal year ended December 31 |
Aggregate
Commissions |
Amounts
Retained by
Distributor |
| 2021 |
$2,903 |
$2,903 |
| 2020
|
$4,008 |
$4,008 |
| 2019
|
$13,769 |
$0 |
Independent
Registered Public Accounting Firm
BBD,
LLP, 1835 Market Street, 3rd
Floor, Philadelphia, Pennsylvania 19103, serves as the independent registered
public accounting firm to the Fund.
Legal
Counsel
Morgan,
Lewis & Bockius LLP, 1111 Pennsylvania Avenue NW, Washington, DC 20004,
serves as legal counsel to the Trust.
Execution
of Portfolio Transactions
Pursuant
to the Advisory Agreement, the Adviser determines which securities are to be
purchased and sold by the Fund and which broker-dealers are eligible to execute
the Fund’s portfolio transactions. Purchases and sales of securities in the
over-the-counter (“OTC”) market will generally be executed directly with a
“market-maker” unless, in the opinion of the Adviser, a better price and
execution can otherwise be obtained by using a broker for the
transaction.
Purchases
of portfolio securities for the Fund also may be made directly from issuers or
from underwriters. Where possible, purchase and sale transactions will be
effected through dealers (including banks) which specialize in the types of
securities which the Fund will be holding, unless better executions are
available elsewhere. Dealers and underwriters usually act as principal for their
own accounts. Purchases from underwriters will include a concession paid by the
issuer to
the
underwriter and purchases from dealers will include the spread between the bid
and the asked price. If the execution and price offered by more than one dealer
or underwriter are comparable, the order may be allocated to a dealer or
underwriter that has provided research or other services as discussed
below.
In
placing portfolio transactions, the Adviser will seek best execution. The full
range and quality of services available will be considered in making these
determinations, such as the size of the order, the difficulty of execution, the
operational facilities of the firm involved, the firm’s risk in positioning a
block of securities and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
given to those broker-dealers which furnish or supply research and statistical
information to the Adviser that it may lawfully and appropriately use in its
investment advisory capacities, as well as provide other services in addition to
execution services. The Adviser considers such information, which is in addition
to and not in lieu of the services required to be performed by it under its
Agreement with the Fund, to be useful in varying degrees, but of indeterminable
value. Portfolio transactions may be placed with broker-dealers who sell shares
of the Fund subject to rules adopted by the Financial Industry Regulatory
Authority, Inc. (“FINRA”) and the SEC.
While
it is the Fund’s general policy to first seek to obtain the most favorable price
and execution available in selecting a broker-dealer to execute portfolio
transactions for the Fund, in accordance with Section 28(e) under the Securities
and Exchange Act of 1934, when it is determined that more than one broker can
deliver best execution, weight is also given to the ability of a broker-dealer
to furnish brokerage and research services to the Fund or to the Adviser, even
if the specific services are not directly useful to the Fund and may be useful
to the Adviser in advising other clients. In negotiating commissions with a
broker or evaluating the spread to be paid to a dealer, the Fund may therefore
pay a higher commission or spread than would be the case if no weight were given
to the furnishing of these supplemental services, provided that the amount of
such commission or spread has been determined in good faith by the Adviser to be
reasonable in relation to the value of the brokerage and/or research services
provided by such broker-dealer.
Investment
decisions for the Fund are made independently from those of other client
accounts or mutual funds managed or advised by the Adviser. Nevertheless, it is
possible that at times identical securities will be acceptable for both the Fund
and one or more of such client accounts or mutual funds. In such event, the
position of the Fund and such client account(s) or mutual funds in the same
issuer may vary and the length of time that each may choose to hold its
investment in the same issuer may likewise vary. However, to the extent any of
these client accounts or mutual funds seek to acquire the same security as the
Fund at the same time, the Fund may not be able to acquire as large a portion of
such security as it desires, or it may have to pay a higher price or obtain a
lower yield for such security. Similarly, the Fund may not be able to obtain as
high a price for, or as large an execution of, an order to sell any particular
security at the same time. If one or more of such client accounts or mutual
funds simultaneously purchases or sells the same security that the Fund is
purchasing or selling, each day’s transactions in such security will be
allocated between the Fund and all such client accounts or mutual funds in a
manner deemed equitable by the Adviser, taking into account the respective sizes
of the accounts and the amount of cash available for investment, the investment
objective of the account, and the ease with which a client’s appropriate amount
can be bought, as well as the liquidity and volatility of the account and the
urgency involved in making an investment decision for the client. It is
recognized that in some cases this system could have a detrimental effect on the
price or value of the security insofar as the Fund is concerned. In other cases,
however, it is believed that the ability of the Fund to participate in volume
transactions may produce better executions for the Fund.
For
the fiscal years ended December 31, the Fund paid the following brokerage
commissions:
|
|
|
|
|
|
|
|
|
|
Year |
|
Brokerage Commissions Paid |
| 2021 |
|
$3,659,810 |
| 2020 |
|
$2,641,203 |
| 2019 |
|
$2,026,412 |
For
the fiscal year ended December 31, 2021, the Fund directed brokerage
transactions to brokers that provided research services as follows:
|
|
|
|
|
|
Total
Dollar Amount of Brokerage Transactions
Related to Research
Services |
Total
Dollar Amount of Brokerage Commissions
Paid on Transactions Related to Research Services |
| $770,506 |
$1,155,759 |
As
of December 31, 2021, the Fund owned equity securities of its regular
broker/dealers or their parent companies as follows:
|
|
|
|
|
|
| Entity |
Market Value of Shares Held |
| Bank
of America Corp |
$55,612,500 |
| JP
Morgan Chase & Co |
$55,422,500 |
Additional
Purchase, Redemption, Exchange, and Conversion Information
The
information provided below supplements the information contained in the
Prospectus regarding the purchase and redemption of Fund shares.
How
to Buy Shares
A
Financial Intermediary may offer Fund shares subject to variations in or
elimination of the Fund’s sales charges (“variations”), provided such variations
are described in the Fund’s Prospectus. For the variations applicable to shares
offered through specific Financial Intermediaries, please see Appendix A to the
Fund’s Prospectus - Financial Intermediary Sales Charge Variations (“Appendix A
to the Fund’s Prospectus”). Sales charge variations may apply to purchases,
sales, exchanges and reinvestments of Fund shares and a shareholder transacting
in Fund shares through the Financial Intermediary identified in Appendix A to
the Fund’s Prospectus should read those terms and conditions carefully. A
variation that is specific to the Financial Intermediary is not applicable to
shares held directly with the Fund or through another intermediary. Please
consult the Financial Intermediary with respect to any variations listed on
Appendix A to the Fund’s Prospectus.
You
may purchase shares of the Fund from Financial Intermediaries. Investors should
contact their Financial Intermediary directly for appropriate instructions, as
well as information pertaining to accounts and any service or transaction fees
that may be charged. The Fund may enter into arrangements with certain Financial
Intermediaries whereby such Financial Intermediaries are authorized to accept
your order on behalf of the Fund. If you transmit your order to these Financial
Intermediaries before the close of regular trading (generally 4:00 p.m., Eastern
Time) on a day that the New York Stock Exchange (“NYSE”) is open for business,
shares will be purchased at the appropriate per share price next computed after
it is received by the Financial Intermediary. Investors should check with their
Financial Intermediary to determine if it participates in these
arrangements.
The
public offering price of Fund shares is the NAV per share, plus any applicable
sales charge. Shares are purchased at the public offering price next determined
after the Transfer Agent receives your order in good order (i.e.,
the
purchase request includes the name of the Fund and share class; the dollar
amount of shares to be purchased; your account application or investment stub;
and a check payable to the Fund). In most cases, in order to receive that day’s
public offering price, the Transfer Agent must receive your order in good order
before the close of regular trading on the NYSE, normally 4:00 p.m.,
Eastern Time.
The
Trust reserves the right in its sole discretion (i) to suspend the continued
offering of the Fund’s shares and (ii) to reject purchase orders in whole or in
part when in the judgment of the Adviser or the Distributor such rejection is in
the best interest of the Fund. The Adviser has the right to reduce or waive the
minimum for initial and subsequent investments for certain fiduciary accounts or
under circumstances where certain economies can be achieved in sales of the
Fund’s shares.
In
addition to cash purchases, Fund shares may be purchased by tendering payment
in-kind in the form of shares of stock, bonds or other securities. Any
securities used to buy Fund shares must be readily marketable; their acquisition
consistent with the Fund’s objective and otherwise acceptable to the Adviser and
the Board.
Class
I and Class IS shares.
The
following persons are eligible to purchase Class I and Class IS shares directly
from the Fund: (i) current employees of the Fund’s Adviser and its
affiliates; (ii) former employees of the Fund’s Adviser and its affiliates with
existing accounts; (iii) current and former board members of Trust for Advised
Portfolios; and (iv) the immediate families of such persons. Immediate families
are such person’s spouse (and, in the case of a deceased board member, the
surviving spouse), and parents, grandparents, children, and grandchildren
(including step-relationships). For such investors, the minimum initial
investment is $1,000 and the minimum for each purchase of additional shares is
$50. Current employees may purchase additional Class I and Class IS shares
through a systematic investment plan.
Under
certain circumstances, an investor who purchases Fund shares pursuant to a
fee-based advisory account program of an Eligible Financial Intermediary as
authorized by the Adviser may be afforded an opportunity to make a conversion
between
one or more share classes owned by the investor in the same fund to Class I or
Class IS shares of that fund. Such a conversion in these particular
circumstances does not cause the investor to realize taxable gain or loss.
Automatic
Investment Plan (“AIP”).
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Automatic Investment Plan. Under the AIP,
the Transfer Agent is authorized through preauthorized transfers of at least $50
on a monthly, quarterly, every alternate month, semi-annual or annual basis to
charge the shareholder’s account held with a bank or other financial institution
as indicated by the shareholder, to provide for systematic additions to the
shareholder’s Fund account. If you wish to enroll in the AIP, complete the
appropriate section on the Account application. Your signed Account application
must be received at least 7 business days prior to the initial transaction. A
$25 fee will be imposed if your AIP transaction is returned for any reason. The
Fund may terminate or modify this privilege at any time. You may terminate your
participation in the AIP at any time by notifying the Transfer Agent
sufficiently in advance of the next withdrawal. Please contact your financial
institution to determine if it is an ACH member. Your financial institution must
be an ACH member in order for you to participate in the AIP.
The
AIP is a method of using dollar cost averaging as an investment strategy that
involves investing a fixed amount of money at regular time intervals. However, a
program of regular investment cannot ensure a profit or protect against a loss
as a result of declining markets. By continually investing the same amount, you
will be purchasing more shares when the price is low and fewer shares when the
price is high. Please call 1-888-593-5110
for additional information regarding the Fund’s AIP.
Sales
Charge Alternatives
The
following classes of shares are available for purchase. See the Prospectus for a
discussion of who is eligible to purchase certain classes and of factors to
consider in selecting which class of shares to purchase.
Class
A.
Class A shares are sold to investors at the public offering price, which is the
NAV plus an initial sales charge, as described in the Prospectus.
Sales
charges are calculated based on the aggregate of purchases of Class A shares of
the Fund made at one time by any “person,” which includes an individual and his
or her spouse and children under the age of 21, or a trustee or other fiduciary
of a single trust estate or single fiduciary account. For additional information
regarding sales charge reductions, see “Sales Charge Waivers and Reductions”
below.
Purchases
of Class A shares of $1 million or more will be made at NAV without any initial
sales charge, but are subject to a contingent deferred sales charge of 1.00% on
redemptions made within 18 months of purchase. The contingent deferred sales
charge is waived in the same circumstances in which the contingent deferred
sales charge applicable to Class C shares is waived. See “Contingent Deferred
Sales Charge Provisions” and “Waivers of Contingent Deferred Sales Charge”
below.
Class
C.
Class C shares are sold without an initial sales charge but are subject to a
contingent deferred sales charge of 1.00% on certain redemptions made within 12
months of purchase. See “Contingent Deferred Sales Charge Provisions” below.
Class
FI, Class R, Class I, and Class IS.
Class FI, Class R, Class I, and Class IS shares are sold at NAV with no initial
sales charge on purchases and no contingent deferred sales charge upon
redemption.
Sales
Charge Waivers and Reductions
Initial
Sales Charge Waivers. Purchases
of Class A shares may be made at NAV without an initial sales charge in the
following circumstances:
(a)Investors
purchasing shares directly though the Fund;
(b)sales
to (i) current and retired Board Members, (ii) current employees of
the Adviser and its subsidiaries, (iii) the “immediate families” of such
persons (“immediate families” are such person’s spouse, including the surviving
spouse of a deceased Board Member, and children under the age of 21) and
(iv) a pension, profit-sharing or other benefit plan for the benefit of
such persons;
(c)sales
to any employees of Financial Intermediaries having dealer, service or other
selling agreements with the Fund’s distributor or otherwise having an
arrangement with any such Financial Intermediary with respect to sales of Fund
shares, and by the immediate families of such persons or by a pension,
profit-sharing or other benefit plan for the benefit of such persons (providing
the purchase is made for investment purposes and such securities will not be
resold except through redemption or repurchase);
(d)offers
of Class A shares to any other investment company to effect the combination
of such company with the Fund by merger, acquisition of assets or otherwise;
(e)purchases
by shareholders who have redeemed Class A shares in the Fund (or
Class A shares of another Fund sold by the Adviser that is offered with a
sales charge) and who wish to reinvest their redemption proceeds in the Fund,
provided the reinvestment is made within 365 calendar days of the redemption;
(f)purchases
by certain separate accounts used to fund unregistered variable annuity
contracts;
(g)purchases
by investors participating in “wrap fee” or asset allocation programs or other
fee-based arrangements sponsored by broker/dealers and other financial
institutions that have entered into agreements with the Adviser;
(h)purchases
by direct retail investment platforms through mutual fund “supermarkets,” where
the sponsor links its client’s account (including IRA accounts on such
platforms) to a master account in the sponsor’s name; and
(i)sales
through Financial Intermediaries who have entered into an agreement with the
Adviser to offer shares to self-directed investment brokerage accounts that may
or may not charge a transaction fee to their customers.
In
order to obtain such discounts, the purchaser must provide sufficient
information at the time of purchase to permit verification that the purchase
qualifies for the elimination of the sales charge.
All
existing retirement plan shareholders who purchased Class A shares at NAV
prior to November 20, 2006, are permitted to purchase additional
Class A shares at NAV. Certain existing programs for current and
prospective retirement plan investors sponsored by Financial Intermediaries
approved by the Adviser prior to November 20, 2006 will also remain
eligible to purchase Class A shares at NAV.
In
order to take advantage of reductions in sales charges that may be available to
you when you purchase Fund shares, you must inform your Financial Intermediary
or the Fund if you are eligible for a letter of intent or a right of
accumulation and if you own shares of other Miller Value Funds that are eligible
to be aggregated with your purchases. Certain records, such as account
statements, may be necessary in order to verify your eligibility for a reduced
sales charge.
For
the sales charge variations applicable to shares offered through specific
Financial Intermediaries, please see Appendix A to the Fund’s Prospectus.
Rights
of Accumulation Privilege.
You may combine your new purchase of Class A shares with other Miller Value
Funds shares you currently own for the purpose of qualifying for the lower
initial sales charge rates that apply to larger purchases. The applicable sales
charge for the new purchase is based on the total of your current purchase and
the current value, calculated using the current day public offering price of all
other shares you own. You may also combine the account value of your spouse and
children under the age of 21. Only the shares held at the Financial Intermediary
or the transfer agent at which you are making the current purchase can be used
for the purposes of a lower sales charge based on Rights of
Accumulation.
If
you hold Fund shares in accounts at two or more Financial Intermediaries, please
contact your Financial Intermediaries to determine which shares may be
combined.
Letters
of Intent (“LOI”). By
signing a LOI you can reduce your Class A sales charge. Your individual
purchases will be made at the applicable sales charge based on the amount you
intend to invest over a 13-month period. The LOI will apply to all purchases of
Miller Value Funds shares. You have a choice of seven Asset Level Goal amounts,
as follows:
|
|
|
|
|
|
|
|
|
| (1) $25,000 |
|
(5) $500,000 |
| (2) $50,000 |
|
(6) $750,000 |
| (3) $100,000 |
|
(7) $1,000,000 |
| (4) $250,000 |
|
|
Any
shares purchased within 90 days of the date you sign the letter of intent may be
used as credit toward completion, but the reduced sales charge will only apply
to new purchases made on or after that date. Purchases resulting from the
reinvestment of dividends and capital gains do not apply toward fulfillment of
the LOI. Shares equal to 5.75% of the amount of the LOI will be held in escrow
during the 13-month period. If, at the end of that time the total amount of
purchases made is less than the amount intended, you will be required to pay the
difference between the reduced sales charge and the sales charge applicable to
the individual purchases had the LOI not been in effect. This amount will be
obtained from redemption of the escrow shares. Any remaining escrow shares will
be released to you.
If
you establish an LOI with the Fund you can aggregate your accounts as well as
the accounts of your spouse and children under age 21. You will need to provide
written instruction with respect to the other accounts whose purchases
should
be considered in fulfillment of the LOI. Only the accounts held at the Financial
Intermediary or the Transfer Agent at which you are making the purchase can be
used toward fulfillment of the LOI.
Sales
and Exchanges.
Shares acquired pursuant to a LOI, other than escrowed shares, may be redeemed
or exchanged at any time, although any shares that are redeemed prior to meeting
your Asset Level Goal will no longer count towards meeting your Asset Level
Goal. However, complete liquidation of purchases made under a LOI prior to
meeting the Asset Level Goal will result in the cancellation of the LOI. See
“Failure to Meet Asset Level Goal” below. Exchanges in accordance with the
Prospectus are permitted, and shares so exchanged will continue to count towards
your Asset Level Goal, as long as the exchange results in an Eligible Fund
Purchase.
Cancellation
of Letter of Intent.
You may cancel a LOI by notifying your Financial Intermediary in writing, or if
you purchase your shares directly through the Fund, by notifying the Fund in
writing. The LOI will be automatically cancelled if all shares are sold or
redeemed as set forth above. See “Failure to Meet Asset Level Goal” below.
Failure
to Meet Asset Level Goal.
If the total assets under your LOI within its 13-month term are less than your
Asset Level Goal or you elect to liquidate all of your holdings or otherwise
cancel the LOI before reaching your Asset Level Goal, you will be liable for the
difference between: (a) the sales charge actually paid and; (b) the
sales charge that would have applied if you had not entered into the LOI. You
may, however, be entitled to any breakpoints that would have been available to
you under the accumulation privilege. An appropriate number of shares in your
account will be redeemed to realize the amount due. For these purposes, by
entering into a LOI, you irrevocably appoint your Financial Adviser, or if you
purchase your shares directly through the Fund, the Fund, as your
attorney-in-fact for the purposes of holding the escrowed shares and
surrendering shares in your account for redemption. If there are insufficient
assets in your account, you will be liable for the difference. Any escrowed
shares remaining after such redemption will be released to your account.
Shareholders
purchasing shares at a reduced sales charge under a LOI indicate their
acceptance of these terms and those in the Prospectus with their first purchase.
Contingent
Deferred Sales Charge Provisions
The
“Contingent Deferred Sales Charge Shares” are: (a) Class C shares; and
(b) Class A that were purchased without an initial sales charge but
are subject to a contingent deferred sales charge. A contingent deferred sales
charge may be imposed on certain redemptions of these shares.
Any
applicable contingent deferred sales charge will be assessed on the NAV at the
time of purchase or redemption, whichever is less.
Class
C shares are subject to a 1.00% contingent deferred sales charge if redeemed
within 12 months of purchase.
Class A
shares that are Contingent Deferred Sales Charge Shares are subject to a 1.00%
contingent deferred sales charge if redeemed within 18 months of purchase.
In
determining the applicability of any contingent deferred sales charge, it will
be assumed that a redemption is made first of shares representing capital
appreciation, next of shares representing the reinvestment of dividends and
capital gain distributions, next of shares that are not subject to the
contingent deferred sales charge and finally of other shares held by the
shareholder for the longest period of time. The length of time that Contingent
Deferred Sales Charge shares acquired through an exchange have been held will be
calculated from the date the shares exchanged were initially acquired. For
federal income tax purposes, the amount of the contingent deferred sales charge
will reduce the gain or increase the loss, as the case may be, on the amount
realized on the redemption.
Waivers
of Contingent Deferred Sales Charge
The
contingent deferred sales charge will be waived on: (a) exchanges (see
“Exchange Privilege”); (b) automatic cash withdrawals in amounts equal to
or less than 2.00% of the shareholder’s account balance at the time the
withdrawals commence, up to a maximum of 12.00% in one year (see “Systematic
Withdrawal Plan”); (c) redemptions of shares within 12 months following the
death or disability (as defined in the Code) of the shareholder;
(d) mandatory post-retirement distributions from retirement plans or
individual retirement accounts (“IRAs”) commencing on or after attainment of the
qualified age based on the Code or regulations thereunder; (except that
shareholders of certain retirement plans or IRA accounts established prior to
May 23, 2005, will be eligible to obtain a waiver of the contingent
deferred sales charge on all funds held in those accounts at age 59 1/2
and may be required to demonstrate such eligibility at the time of redemption);
(e) involuntary redemptions; (f) redemptions of shares to effect a
combination of the Fund with any investment company by merger, acquisition of
assets or otherwise; (g) tax-free returns of an excess contribution to any
retirement plan; and (h) certain redemptions of shares of the Fund in
connection with lump-sum or other distributions
made
by eligible retirement plans or redemption of shares by participants in certain
“wrap fee” or asset allocation programs sponsored by broker/dealers and other
financial institutions that have entered into agreements with the Distributor or
the Adviser.
The
contingent deferred sales charge is waived on new Class C shares purchased by
retirement plan omnibus accounts held on the books of the Fund.
For
the contingent deferred sales charge variations applicable to shares offered
through specific Financial Intermediaries, please see Appendix A to the Fund’s
Prospectus.
Additional
Redemption Information
How
to Sell Shares and Delivery of Redemption Proceeds
You
can sell your Fund shares any day the NYSE is open for regular trading, either
directly to the Fund or through your Financial Intermediary.
Payments
to shareholders for shares of the Fund redeemed directly from the Fund will be
made as promptly as possible, but no later than seven calendar days after
receipt by the Transfer Agent of the written request in proper form, with the
appropriate documentation as stated in the Prospectus, except that the Fund may
suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the NYSE is restricted as determined by the SEC
or the NYSE is closed for other than weekends and holidays; (b) an
emergency exists as determined by the SEC making disposal of portfolio
securities or valuation of net assets of the Fund not reasonably practicable; or
(c) for such other period as the SEC may permit for the protection of the
Fund’s shareholders. Under these circumstances, the Fund may suspend
redemptions, or postpone payment for more than seven calendar days, but only as
authorized by SEC rules.
The
value of shares on redemption or repurchase may be more or less than the
investor’s cost, depending upon the market value of the Fund’s portfolio
securities at the time of redemption or repurchase.
Telephone
Redemptions
Shareholders
with telephone transaction privileges established on their account may redeem
Fund shares by telephone. Upon receipt of any instructions or inquiries by
telephone from the shareholder, the Fund or its authorized agents may carry out
the instructions and/or respond to the inquiry consistent with the shareholder’s
previously established account service options. For joint accounts, instructions
or inquiries from either party will be carried out without prior notice to the
other account owners. In acting upon telephone instructions, the Fund and its
agents use procedures that are reasonably designed to ensure that such
instructions are genuine. These include recording all telephone calls, requiring
pertinent information about the account and sending written confirmation of each
transaction to the registered owner.
The
Transfer Agent will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If the Transfer Agent fails to employ
reasonable procedures, the Fund and the Transfer Agent may be liable for any
losses due to unauthorized or fraudulent instructions. If these procedures are
followed, however, to the extent permitted by applicable law, neither the Fund
nor its agents will be liable for any loss, liability, cost or expense arising
out of any redemption request, including any fraudulent or unauthorized request.
For additional information, contact the Transfer Agent.
Systematic
Withdrawal Plan (“SWP”)
The
Systematic Withdrawal Plan is available to those shareholders who own shares
directly with the Fund, excluding those shares held in IRAs or Coverdell
education savings accounts (“Coverdell ESAs”). You should contact your Financial
Adviser to determine if it offers a similar service.
Class A
and Class C Shareholders Class A
and Class C shareholders having an account with a balance of $10,000 or more
($5,000 or more for Retirement Accounts) may elect to make withdrawals of a
minimum of $50 on a monthly, every alternate month, quarterly, semi-annual, or
annual basis. If you elect this method of redemption, the Fund will send a check
directly to your address of record or will send the payment directly to your
bank account via electronic funds transfer through the ACH network. You may
change the monthly, every alternate month, quarterly, semi-annual, or annual
amount to be paid to you without charge by notifying the Fund. You may terminate
the SWP at any time, without charge or penalty, by contacting the Fund. The
Fund, the Fund’s Transfer Agent, and the Adviser reserve the right to modify or
terminate the SWP at any time. See “Waivers of Contingent Deferred Sales
Charge,” above, for information about application of the contingent deferred
sales charge to withdrawals under the Systematic Withdrawal Plan.
Class
FI, Class I and Class IS Shareholders
Certain
shareholders of the Fund’s Class FI, Class I or Class IS may be eligible to
participate in the SWP. If you elect this method of redemption, the Fund will
send a check directly to your address of record or will send the payment
directly to your bank account via electronic funds transfer through the ACH
network. Requests must be made in writing to the Fund or a Financial
Intermediary to participate in, change or discontinue the SWP. You may change
the monthly amount to be paid to you or terminate the SWP at any time, without
charge or penalty, by notifying the Fund at 1-888-593-5110. The Fund, its
Transfer Agent and the Adviser also reserve the right to modify or terminate the
SWP at any time.
Redemptions
In-Kind
The
Fund has reserved the right to pay the redemption price of its shares, either
totally or partially by a distribution in-kind of portfolio securities (instead
of cash). The securities so distributed would be valued at the same amount as
that assigned to them in calculating the NAV per share for the shares being
sold. If a shareholder receives a distribution in-kind, the shareholder could
incur brokerage or other charges in converting the securities to
cash.
In
the unlikely event the Fund were to elect to make an in-kind redemption, the
Fund would make such distribution by way of a pro rata distribution of
securities that are traded on a public securities market or are otherwise
considered liquid pursuant to the Fund’s liquidity policies and procedures.
Except as otherwise may be approved by the Trustees, the Fund would not include
the following securities in an in-kind distribution: (1) unregistered securities
which, if distributed, would be required to be registered under the Securities
Act of 1933 (the “1933 Act”), as amended; (2) securities issued by entities in
countries which (a) restrict or prohibit the holding of securities by
non-nationals other than through qualified investment vehicles, such as a fund,
or (b) permit transfers of ownership of securities to be effected only by
transactions conducted on a local stock exchange; and (3) certain securities
that, although they may be liquid and marketable, must be traded through the
marketplace or with the counterparty to the transaction in order to effect a
change in beneficial ownership.
Exchange
Privilege
The
exchange privilege enables shareholders to acquire shares of the same class in
another Miller Value Fund with different investment objectives when they believe
that a shift between Funds is an appropriate investment decision. Prior to any
exchange, the shareholder should obtain and review a copy of the current
prospectus of each fund into which an exchange is being considered. The Fund’s
Prospectus describes the requirements for exchanging shares of the Fund.
Upon
receipt of proper instructions and all necessary supporting documents, shares
submitted for exchange are redeemed at the then-current net asset value, and the
proceeds, net of any applicable sales charge, are immediately invested in shares
of the fund being acquired at that fund’s then-current net asset value. The
Miller Value Funds reserve the right to reject any exchange request. The
exchange privilege may be modified or terminated at any time after written
notice to shareholders.
The
Miller Value Funds are not designed to provide investors with a means of
speculation on short-term market movements. A pattern of frequent exchanges by
investors can be disruptive to efficient portfolio management and, consequently,
can be detrimental to the Fund and its shareholders. See “Frequent trading of
Fund shares” in the Fund’s Prospectus.
During
times of drastic economic or market conditions, the Miller Value Funds may
suspend the exchange privilege temporarily without notice and treat exchange
requests based on their separate components—redemption orders with a
simultaneous request to purchase the other Fund’s shares. In such a case, the
redemption request would be processed at the Fund’s next determined NAV but the
purchase order would be effective only at the NAV next determined after the Fund
being purchased formally accepts the order, which may result in the purchase
being delayed.
The
exchange privilege may be modified or terminated at any time, and is available
only in those jurisdictions where such exchanges legally may be made. Before
making any exchange, shareholders should contact the Miller Value Funds’
Transfer Agent or, if they hold Fund shares through a Financial Intermediary,
their Financial Intermediary, to obtain more information and prospectuses of the
Miller Value Funds to be acquired through the exchange. An exchange is treated
as a sale of the shares exchanged and could result in taxable gain or loss to
the shareholder making the exchange.
Grandfathered
Retirement Program with Exchange Features
Certain
retirement plan programs with exchange features in effect prior to
November 20, 2006 (collectively, the “Grandfathered Retirement Program,”)
that are authorized by the distributor to offer eligible retirement plan
investors the opportunity to exchange all of their Class C shares for
Class A shares of the Fund, are permitted to maintain such share class
exchange feature for current and prospective retirement plan investors. Under
the Grandfathered Retirement
Program,
Class C shares of the Fund may be purchased by plans investing less than $3
million. Class C shares are eligible for exchange into Class A shares not
later than eight years after the plan joins the program. They are eligible for
exchange in the following circumstances:
For
participating plans established with the Fund or another fund in the Miller
family of funds prior to June 2, 2003, if such plan’s total Class C
holdings in all non-money market Miller Value Funds equal at least $1,000,000 at
the end of the fifth year after the date the participating plan enrolled in the
Grandfathered Retirement Program, the participating plan will be permitted to
exchange all of its Class C shares for Class A shares of the Fund. For
participating plans established with the Fund or another fund in the Miller
family of funds on or after June 2, 2003, if such plan’s total Class C
holdings in all non-money market the Miller Value Funds equal at least
$3,000,000 at the end of the fifth year after the date the participating plan
enrolled in the Grandfathered Retirement Program, the participating plan will be
permitted to exchange all of its Class C shares for Class A shares of the
Fund.
Unless
the exchange offer has been rejected in writing, the exchange will automatically
occur within approximately 30 days after the fifth anniversary date. If the
participating plan does not qualify for the five-year exchange to Class A
shares, a review of the participating plan’s holdings will be performed each
quarter until either the participating plan qualifies or the end of the eighth
year.
Any
participating plan that has not previously qualified for an exchange into
Class A shares will be offered the opportunity to exchange all of its Class
C shares for Class A shares of the same Fund regardless of asset size at
the end of the eighth year after the date the participating plan enrolled in the
Grandfathered Retirement Program. Unless the exchange has been rejected in
writing, the exchange will automatically occur on or about the eighth
anniversary date. Once an exchange has occurred, a participating plan will not
be eligible to acquire additional Class C shares, but instead may acquire
Class A shares of the same Fund. Any Class C shares not converted will
continue to be subject to the distribution fee.
For
further information regarding the Grandfathered Retirement Program, contact your
Financial Intermediary or the Transfer Agent. Participating plans that enrolled
in the Grandfathered Retirement Program prior to June 2, 2003 should
contact the Transfer Agent for information regarding Class C exchange privileges
applicable to their plan.
Conversion
Privilege
Under
certain circumstances, an investor who purchases or holds Miller Value Fund
shares pursuant to a fee-based advisory or brokerage account program of an
Eligible Financial Intermediary or through a no-load network or platform as
authorized by the Adviser, may be afforded an opportunity to make a conversion
between one or more share classes owned by the investor in a Miller Value Fund
to another class of shares of the same Miller Value Fund. The aggregate dollar
value of the shares of the class received upon any such conversion will equal
the aggregate dollar value of the converted shares on the date of the
conversion. An investor whose Fund shares are converted from one class to
another class will not realize taxable gain or loss as a result of the
conversion. Please refer to the section of the Prospectus titled “Retirement
Plans, Clients of Eligible Financial Intermediaries and Institutional Investors”
or contact your Financial Intermediary for more information.
Distribution
Plan
The
Fund has adopted a Distribution Plan pursuant to Rule 12b-1 (“12b-1 Plan”)
under the 1940 Act under which the Fund’s classes pay the Distributor an amount
which is accrued daily and paid quarterly, at the following rates of the average
daily net assets of the Fund:
|
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|
|
|
|
|
Class
A |
Class
C |
Class
FI |
Class
R |
Class
I |
Class
IS |
| Miller
Opportunity Trust |
0.25% |
1.00% |
0.25% |
0.50% |
N/A |
N/A |
Amounts
paid under the 12b-1 Plan, by the Fund, are paid to the Distributor to reimburse
it for costs of the services it provides and the expenses it bears in the
distribution of the Fund’s shares, including overhead and telephone expenses;
printing and distribution of prospectuses and reports used in connection with
the offering of the Fund’s shares to prospective investors; and preparation,
printing and distribution of sales literature and advertising materials. Such
fee is paid to the Distributor each year only to the extent of such costs and
expenses of the Distributor under the 12b-1Plan actually incurred in that year.
In addition, payments to the Distributor under the 12b-1 Plan reimburse the
Distributor for payments it makes to selected dealers and administrators which
have entered into Service Agreements with the Distributor of periodic fees for
services provided to shareholders of the Fund. The services provided by selected
dealers pursuant to the 12b-1 Plan are primarily designed to promote the sale of
shares of the Fund and include the furnishing of office space and equipment,
telephone facilities, personnel and assistance to the Fund in servicing such
shareholders. The services provided by the administrators pursuant to the 12b-1
Plan are designed to provide support services to the
Fund
and include establishing and maintaining shareholders’ accounts and records,
processing purchase and redemption transactions, answering routine client
inquiries regarding the Fund and providing other services to the Fund as may be
required.
Under
the 12b-1 Plan, the Trustees will be furnished quarterly with information
detailing the amount of expenses paid under the Plan and the purposes for which
payments were made. The 12b-1 Plan may be terminated at any time by vote of a
majority of the Trustees of the Trust who are not interested persons.
Continuation of the 12b-1 Plan is considered by such Trustees no less frequently
than annually. With the exception of the Distributor and the Adviser, in their
capacities as the Fund’s principal underwriter and distribution coordinator,
respectively, no interested person has or had a direct or indirect financial
interest in the Plan or any related agreement.
While
there is no assurance that the expenditures of the Fund’s assets to finance
distribution of shares will have the anticipated results, the Board believes
there is a reasonable likelihood that one or more of such benefits will result,
and because the Board is in a position to monitor the distribution expenses, it
is able to determine the benefit of such expenditures in deciding whether to
continue the Plan.
Any
material amendment to the 12b-1 Plan must be approved by the Board, including a
majority of the Independent Trustees, or by a vote of a “majority” (as defined
in the 1940 Act) of the outstanding voting securities of the applicable class or
classes. The 12b-1 Plan may be terminated, with respect to a class or classes of
the Fund, without penalty at any time: (1) by vote of a majority of the
Board, including a majority of the Independent Trustees; or (2) by a vote
of a “majority” (as defined in the 1940 Act) of the outstanding voting
securities of the applicable class or classes.
For
the fiscal year ended December 31, 2021, the Fund paid distribution expenses for
advertising, printing and mailing prospectuses, support services and overhead
expenses and compensation to Financial Intermediaries and third parties as
expressed in the following table.
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|
|
|
|
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|
|
| Class |
|
Advertising |
|
Printing/
Mailing |
|
Compensation
to Underwriter |
|
Compensation
to Broker-Dealer |
|
Compensation
to Sales Personnel |
|
Interest,
carrying or other financing charges |
|
Financial
Consultant Compensation (Amortized) |
|
Total |
| Class
A |
|
$139,351 |
|
$0 |
|
$0 |
|
$2,458,247 |
|
$0 |
|
$0 |
|
$0 |
|
$2,597,598 |
| Class
C |
|
$73,837 |
|
$0 |
|
$0 |
|
$1,939,235 |
|
$0 |
|
$0 |
|
$0 |
|
$2,013,072 |
| Class
FI |
|
$6,571 |
|
$0 |
|
$0 |
|
$38,621 |
|
$0 |
|
$0 |
|
$0 |
|
$45,192 |
| Class
R |
|
$1,755 |
|
$0 |
|
$0 |
|
$44,894 |
|
$0 |
|
$0 |
|
$0 |
|
$46,649 |
Sub-Accounting
Service Fees
In
addition to the fees that the Fund may pay to its Transfer Agent, the Board has
authorized the Fund to pay service fees, at the annual rate of up to 0.15% of
applicable average net assets or $20 per account, to intermediaries such as
banks, broker-dealers, financial advisers or other financial institutions for
sub administration, sub-transfer agency, recordkeeping (collectively,
“sub-accounting services”) and other shareholder services associated with
shareholders whose shares are held of record in omnibus, networked, or other
group accounts or accounts traded through registered securities clearing agents.
Unless the Fund has adopted a specific shareholder servicing plan which is
broken out as a separate expense, a sub-accounting fee paid by the Fund is
included in the total amount of “Other Expenses” listed in the Fund’s Fees and
Expenses table in the Prospectus.
Determination
of Share Price
The
NAV of the Fund is determined as of the close of regular trading on the New York
Stock Exchange (the “NYSE”) (generally 4:00 p.m., Eastern Time), each day the
NYSE is open for trading. However, the Fund’s NAV may be calculated earlier if
trading on the NYSE is restricted or as permitted by the SEC. The NYSE
annually announces the days on which it will not be open for trading. It is
expected that the NYSE will not be open for trading on the following holidays:
New Year’s Day, Martin Luther King, Jr. Day, Washington’s Birthday/Presidents’
Day, Good Friday, Memorial Day, Juneteenth National Independence Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The NAV will
not be calculated on days when the NYSE is closed for trading.
NAV
is calculated by adding the value of all securities and other assets
attributable to the Fund (including interest and dividends accrued, but not yet
received), then subtracting liabilities attributable to the Fund (including
accrued expenses).
Generally,
the Fund’s investments are valued at market value or, in the absence of a market
value, at fair value as determined in good faith by the Fund’s Adviser with
oversight by the Trust’s Valuation Committee pursuant to procedures adopted by
the Board. Pursuant to those procedures, the Adviser considers, among other
things: (1) the last sales price
on
the securities exchange, if any, on which a security is primarily traded;
(2) the mean between the bid and asked prices; (3) price quotations
from an approved pricing service; and (4) other factors as necessary to
determine a fair value under certain circumstances.
Securities
primarily traded in the NASDAQ Global Market®
for which market quotations are readily available shall be valued using the
NASDAQ®
Official Closing Price (“NOCP”). If the NOCP is not available, such securities
shall be valued at the last sale price on the day of valuation, or if there has
been no sale on such day, at the mean between the bid and asked prices. OTC
securities which are not traded in the NASDAQ Global Market®
shall be valued at the most recent sales price. Securities and assets for which
market quotations are not readily available (including restricted securities
which are subject to limitations as to their sale) are valued at fair value as
determined in good faith under procedures adopted by the Board.
Short-term
debt obligations with remaining maturities in excess of 60 days are valued at
current market prices, as discussed above.
The
Fund’s securities, including ADRs, EDRs and GDRs, which are traded on securities
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any reported sales, at the mean between the last
available bid and asked price. Securities that are traded on more than one
exchange are valued on the exchange determined by the Adviser to be the primary
market.
In
the case of foreign securities, the occurrence of certain events after the close
of foreign markets, but prior to the time the Fund’s NAV is calculated (such as
a significant surge or decline in the U.S. or other markets) often will result
in an adjustment to the trading prices of foreign securities when foreign
markets open on the following business day. If such events occur, the Fund will
value foreign securities at fair value, taking into account such events, in
calculating the NAV. In such cases, use of fair valuation can reduce an
investor’s ability to seek to profit by estimating the Fund’s NAV in advance of
the time the NAV is calculated. The Adviser anticipates that the Fund’s
portfolio holdings will be fair valued only if market quotations for those
holdings are considered unreliable or are unavailable.
An
option that is written or purchased by the Fund shall be valued using composite
pricing via the National Best Bid and Offer quotes. Composite pricing looks at
the last trade on the exchange where the option is traded. If there are no
trades for an option on a given business day, as of closing, the Fund will value
the option at the mean of the highest bid price and lowest ask price across the
exchanges where the option is traded. For options where market quotations are
not readily available, fair value shall be determined by the Fund’s Adviser with
oversight by the Trust’s Valuation Committee.
All
other assets of the Fund are valued in such manner as the Board in good faith
deems appropriate to reflect their fair value.
Tax
Information
The
following is only a summary of certain additional U.S. federal income tax
considerations generally affecting the Fund and its shareholders that is
intended to supplement the discussion contained in the Fund’s prospectus. No
attempt is made to present a detailed explanation of the tax treatment of the
Fund or its shareholders, and the discussion here and in the Fund’s prospectus
is not intended as a substitute for careful tax planning.
Fund
shares held in a tax-qualified retirement account will generally not be subject
to federal taxation on income and capital gains distributions from the Fund
until a shareholder begins receiving payments from their retirement account.
Because each shareholder’s tax situation is different, shareholders should
consult their tax advisors with specific reference to their own tax situations,
including their state, local, and foreign tax liabilities.
The
following general discussion of certain federal income tax consequences is based
on the Code and the regulations issued thereunder as in effect on the date of
this SAI. New legislation, as well as administrative changes or court decisions,
may significantly change the conclusions expressed herein, and may have a
retroactive effect with respect to the transactions contemplated
herein.
Qualification
as a Regulated Investment Company
The
Fund has elected to be, and has qualified and intends to qualify each year to be
treated, as a regulated investment company (“RIC”) under Subchapter M of the
Code. To qualify as a RIC, the Fund must, among other things: (a) derive at
least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to certain securities loans, and gains from the sale or
other disposition of stock or securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies, and net income derived from interests in “qualified
publicly traded partnerships” (i.e.,
partnerships that are traded on an established securities market or tradable on
a secondary market, other than
partnerships
that derive 90% of their income from interest, dividends, capital gains, and
other traditionally permitted mutual fund income) the “Qualifying Income Test”;
and (b) diversify its holdings so that, at the end of each quarter of the Fund’s
taxable year, (i) at least 50% of the market value of the Fund’s assets is
represented by cash, securities of other RICs, U.S. government securities and
other securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the Fund’s assets and not greater
than 10% of the outstanding voting securities of such issuer and (ii) not
more than 25% of the value of its assets is invested, including through
corporations in which the Fund owns a 20% or more voting stock interest, in the
securities (other than U.S. government securities or securities of other RICs)
of any one issuer, in the securities (other than the securities of other RICs)
of any two or more issuers that the Fund controls and that are determined to be
engaged in the same or similar trades or businesses or related trades or
businesses, or in the securities of one or more “qualified publicly traded
partnerships” (“Asset Test”).
As
a RIC, the Fund will not be subject to U.S. federal income tax on the portion of
its taxable investment income and capital gains that it timely distributes to
its shareholders, provided that it satisfies a minimum distribution requirement.
To satisfy the minimum distribution requirement, the Fund must distribute to its
shareholders at least the sum of (i) 90% of its “investment company taxable
income” (i.e.,
generally, its taxable income other than its net capital gain, computed without
regard to the dividends-paid deduction, plus or minus certain other
adjustments), and (ii) 90% of its net tax-exempt income for the taxable
year. The Fund will be subject to income tax at the regular corporate tax rate
on any taxable income or gains that it does not distribute to its shareholders.
The Fund’s policy is to distribute to its shareholders all of its investment
company taxable income (computed without regard to the dividends-paid deduction)
and any net realized long-term capital gains for each fiscal year in a manner
that complies with the distribution requirements of the Code, so that the Fund
will not be subject to any federal income or excise taxes. However, the Fund can
give no assurances that distributions will be sufficient to eliminate all taxes.
If,
for any taxable year, the Fund was to fail to qualify as a RIC under the Code or
were to fail to meet the distribution requirement, it would be taxed in the same
manner as an ordinary corporation at the 21% corporate income tax rate and
distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, in the event of a failure to qualify,
the Fund’s distributions, to the extent derived from the Fund’s current and
accumulated earnings and profits, including any distributions of net tax-exempt
interest income and net long-term capital gains, would be taxable to
shareholders as ordinary dividend income for federal income tax purposes.
However, such dividends would be eligible, subject to any generally applicable
limitations, (i) to be treated as qualified dividend income in the case of
shareholders taxed as individuals and (ii) for the dividends-received
deduction in the case of corporate shareholders. Moreover, if the Fund were to
fail to qualify as a RIC in any year, it would be required to pay out its
earnings and profits accumulated in that year in order to qualify again as a
RIC. Under certain circumstances, the Fund may cure a failure to qualify as a
RIC, but in order to do so the Fund may incur significant Fund-level taxes and
may be forced to dispose of certain assets. If the Fund failed to qualify as a
RIC for a period greater than two taxable years, the Fund would generally be
required to recognize, and would generally be subject to a corporate-level tax
with respect to, any net built-in gains with respect to certain of its assets
upon a disposition of such assets within five years of qualifying as a RIC in a
subsequent year.
Federal
Excise Tax
The
Fund will be subject to a nondeductible 4% federal excise tax to the extent it
fails to distribute by the end of the calendar year at least 98% of its ordinary
income and 98.2% of its capital gain net income (the excess of short- and
long-term capital gains over short- and long-term capital losses) for the
one-year period ending on October 31 of such year (including any retained amount
from the prior calendar year on which the Fund paid no federal income
tax).
The
Fund intends to make sufficient distributions to avoid liability for federal
excise tax, but can make no assurances that such tax will be completely
eliminated. The Fund may in certain circumstances be required to liquidate Fund
investments in order to make sufficient distributions to avoid federal excise
tax liability at a time when the investment adviser might not otherwise have
chosen to do so, and liquidation of investments in such circumstances may affect
the ability of the Fund to satisfy the requirements for qualification as a
RIC.
Capital
Losses.
The Fund may elect to treat part or all of any “qualified late year loss” as if
it had been incurred in the succeeding taxable year in determining the Fund’s
taxable income, net capital gain, net short-term capital gain, and earnings and
profits. The effect of this election is to treat any such “qualified late year
loss” as if it had been incurred in the succeeding taxable year in
characterizing Fund distributions for any calendar year. A “qualified late year
loss” generally includes net capital loss, net long-term capital loss, or net
short-term capital loss incurred after October 31 of the current taxable year
(commonly referred to as “post-October losses”) and certain other late-year
losses.
The
treatment of capital loss carryovers for the Fund is similar to the rules that
apply to capital loss carryovers of individuals, which provide that such losses
are carried over indefinitely. Thus, if the Fund has a “net capital loss” (that
is,
capital
losses in excess of capital gains) the excess of the Fund’s net short-term
capital losses over its net long-term capital gains is treated as a short-term
capital loss arising on the first day of the Fund’s next taxable year, and the
excess (if any) of the Fund’s net long-term capital losses over its net
short-term capital gains is treated as a long-term capital loss arising on the
first day of the Fund’s next taxable year. In addition, the carryover of capital
losses may be limited under the general loss limitation rules if the Fund
experiences an ownership change as defined in the Code.
For
the fiscal year ended December 31, 2021 the Fund did not have capital loss
carryovers.
Distributions
to Shareholders
The
Fund receives income generally in the form of dividends and interest on
investments. This income, plus net short-term capital gains, if any, less
expenses incurred in the operation of the Fund, constitutes the Fund’s net
investment income from which dividends may be paid to you. Net realized capital
gains for a fiscal period are computed by taking into account any capital loss
carryforward of the Fund. Taxable dividends and distributions are subject
to tax whether you receive them in cash or in additional shares.
Distributions
of net investment income including distributions of net short-term capital gains
are taxable to shareholders as ordinary income or, for non-corporate
shareholders, as qualified dividend income. Distributions from the Fund’s net
capital gain (i.e.,
the excess of the Fund’s net long-term capital gains over its net short-term
capital losses) are taxable to shareholders as long-term capital gains
regardless of the length of time shares have been held. In general, to the
extent that the Fund receives qualified dividend income, the Fund may report a
portion of the dividends it pays as qualified dividend income, which for
non-corporate shareholders is subject to U.S. federal income tax rates of up to
20%. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (i.e.,
foreign corporations incorporated in a possession of the United States or in
certain countries with a comprehensive tax treaty with the United States, and
foreign corporations if the stock with respect to which the dividend was paid is
readily tradable on an established securities market in the United States). A
dividend will not be treated as qualified dividend income to the extent that (i)
the shareholder has not held the shares on which the dividend was paid for more
than 60 days during the 121-day period that begins on the date that is 60 days
before the date on which the shares become “ex-dividend” with respect to such
dividend, (ii) the shareholder is under an obligation (whether pursuant to a
short sale or otherwise) to make related payments with respect to substantially
similar or related property, or (iii) the shareholder elects to treat such
dividend as investment income under section 163(d)(4)(B) of the Code. The
holding period requirements described in this paragraph apply to shareholders’
investments in the Fund and to the Fund’s investments in underlying
dividend-paying stocks. Distributions received by the Fund from another RIC will
be treated as qualified dividend income only to the extent so reported by such
other RIC. If 95% or more of the Fund’s gross income (calculated without taking
into account net capital gain derived from sales or other dispositions of stock
or securities) consists of qualified dividend income, the Fund may report all
distributions of such income as qualified dividend income.
Dividends
paid by the Fund that are attributable to dividends received by the Fund from
domestic corporations may qualify for the dividends-received deduction for
corporate shareholders of the Fund.
There
is no requirement that the Fund take into consideration any tax implications
when implementing its investment strategy. If the Fund’s distributions exceed
its earnings and profits, all or a portion of the distributions may be treated
as a return of capital to shareholders. A return of capital distribution
generally will not be taxable but will reduce each shareholder’s tax basis,
resulting in a higher capital gain or lower capital loss when the shares on
which the distribution was received are sold. After a shareholder’s tax basis in
the shares has been reduced to zero, distributions in excess of earnings and
profits will be treated as gain from the sale of the shareholder’s shares.
Each
shareholder who receives taxable distributions in the form of additional shares
will be treated for U.S. federal income tax purposes as if receiving a
distribution in an amount equal to the amount of money that the shareholder
would have received if he or she had instead elected to receive cash
distributions. The shareholder’s aggregate tax basis in shares of the Fund will
be increased by such amount.
A
dividend or distribution received shortly after the purchase of shares reduces
the net asset value of the shares by the amount of the dividend or distribution
and, although in effect a return of capital, will be taxable to the shareholder.
If the net asset value of shares were reduced below the shareholder’s cost by
dividends or distributions representing gains realized on sales of securities,
such dividends or distributions would be a return of investment though taxable
to the shareholder in the same manner as other dividends or
distributions.
A
dividend or other distribution by the Fund is generally treated under the Code
as received by the shareholders at the time the dividend or distribution is
made. However, distributions declared in October, November or December to
shareholders of record on a date in such a month and paid the following January
are taxable as if received on December 31. Distributions are includable in
alternative minimum taxable income of non-corporate shareholders in computing
such
shareholder’s
liability for the alternative minimum tax. Shareholders should note that
the Fund may make taxable distributions of income and capital gains even when
share values have declined.
The
Fund (or its administrative agent) will inform you of the amount of your
ordinary income dividends, qualified dividend income and capital gain
distributions, if any, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held your shares for a full year, the Fund may designate and distribute to
you, as ordinary income, qualified dividend income or capital gain, a percentage
of income that is not equal to the actual amount of such income earned during
the period of your investment in the Fund.
Sales,
Exchanges or Redemptions
Any
gain or loss recognized on a sale, exchange, or redemption of shares of the Fund
by a shareholder who is not a dealer in securities will generally, for
individual shareholders, be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise will be treated
as a short-term capital gain or loss.
Any
loss realized upon redemption of shares within six months from the date of their
purchase will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gains during such
six-month period. Any loss realized upon a redemption may be disallowed
under certain wash sale rules to the extent shares of the Fund are purchased
(through reinvestment of distributions or otherwise) within 30 days before or
after the redemption.
A
3.8% Medicare contribution tax generally applies to all or a portion of the net
investment income of a shareholder who is an individual and not a nonresident
alien for federal income tax purposes and who has adjusted gross income (subject
to certain adjustments) that exceeds a threshold amount ($250,000 if married
filing jointly or if considered a “surviving spouse” for federal income tax
purposes, $125,000 if married filing separately, and $200,000 in other cases).
This 3.8% tax also applies to all or a portion of the undistributed net
investment income of certain shareholders that are estates and trusts. For these
purposes, dividends, interest and certain capital gains (among other categories
of income) are generally taken into account in computing a shareholder’s net
investment income.
Under
the Code, the Fund will be required to report to the Internal Revenue Service
(the “IRS”) all distributions of taxable income and capital gains as well as
gross proceeds from the redemption of Fund shares, except in the case of exempt
shareholders, which includes most corporations. The Fund will also be
required to report tax basis information for such shares and indicate whether
these shares had a short-term or long-term holding period. If a shareholder
has a different basis for different shares of the Fund in the same account
(e.g.,
if a shareholder purchased shares in the same account at different times for
different prices), the Fund will calculate the basis of the shares sold using
its default method unless the shareholder has properly elected to use a
different method. The Fund’s default method for calculating basis will be
the average basis method, under which the basis per share is reported as the
average of the bases of all the shareholder’s Fund shares in the account. A
shareholder may elect, on an account-by-account basis, to use a method other
than average basis by following procedures established by the Fund or its
administrative agent. If such an election is made on or prior to the date
of the first exchange or redemption of shares in the account and on or prior to
the date that is one year after the shareholder receives notice of the Fund’s
default method, the new election will generally apply as if the average basis
method had never been in effect for such account. If such an election is not
made on or prior to such dates, the shares in the account at the time of the
election will retain their averaged bases. Shareholders should consult
their tax advisers concerning the tax consequences of applying the average basis
method or electing another method of basis calculation.
Tax
Treatment of Complex Securities
The
Fund may invest in complex securities and these investments may be subject to
numerous special and complex tax rules. These rules could affect the Fund’s
ability to qualify as a RIC, affect whether gains and losses recognized by the
Fund are treated as ordinary income or capital gain, accelerate the recognition
of income to the Fund and/or defer the Fund’s ability to recognize losses, and,
in limited cases, subject the Fund to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the amount,
timing or character of the income distributed to you by the Fund.
With
respect to investments in STRIPS, Treasury Receipts, and other zero coupon
securities which are sold at original issue discount and thus do not make
periodic cash interest payments, the Fund will be required to include as part of
its current income the imputed interest on such obligations even though the Fund
has not received any interest payments on such obligations during that period.
Because the Fund intends to distribute all of its net investment income to its
shareholders, the Fund may have to sell Fund securities to distribute such
imputed income which may occur at a time when the Adviser would not have chosen
to sell such securities and which may result in taxable gain or
loss.
Any
market discount recognized on a bond is taxable as ordinary income. A market
discount bond is a bond acquired in the secondary market at a price below
redemption value or adjusted issue price if issued with original issue discount.
Absent an election by the Fund to include the market discount in income as it
accrues, gain on the Fund’s disposition of such an obligation will be treated as
ordinary income rather than capital gain to the extent of the accrued market
discount.
The
Fund may invest in, or hold, debt obligations that are in the lowest rating
categories or that are unrated, including debt obligations of issuers not
currently paying interest or that are in default. Investments in debt
obligations that are at risk of or are in default present special tax issues for
the Fund. Federal income tax rules are not entirely clear about issues such as
when the Fund may cease to accrue interest, original issue discount or market
discount, when and to what extent deductions may be taken for bad debts or
worthless securities, how payments received on obligations in default should be
allocated between principal and interest and whether certain exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the Fund, in the event it invests in or holds such securities, in
order to seek to ensure that it distributes sufficient income to preserve its
status as a RIC and does not become subject to U.S. federal income or excise
tax.
In
general, for purposes of the Qualifying Income Test described above, income
derived from a partnership will be treated as qualifying income only to the
extent such income is attributable to items of income of the partnership that
would be qualifying income if realized directly by the Fund. However, 100% of
the net income derived from an interest in a “qualified publicly traded
partnership” (generally, a partnership (i) interests in which are traded on an
established securities market or are readily tradable on a secondary market or
the substantial equivalent thereof, (ii) that derives at least 90% of its income
from the passive income sources specified in Code section 7704(d), and (iii)
that generally derives less than 90% of its income from the same sources as
described in the Qualifying Income test) will be treated as qualifying income.
In addition, although in general the passive loss rules of the Code do not apply
to RICs, such rules do apply to a RIC with respect to items attributable to an
interest in a qualified publicly traded partnership.
The
Fund may invest in certain MLPs which may be treated as qualified publicly
traded partnerships. Income from qualified publicly traded partnerships is
qualifying income for purposes of the Qualifying Income Test, but the Fund’s
investment in one or more of such qualified publicly traded partnerships is
limited under the Asset Test to no more than 25% of the value of the Fund’s
assets. The Fund will monitor its investment in such qualified publicly traded
partnerships in order to ensure compliance with the Qualifying Income and Asset
Tests. MLPs and other partnerships that the Fund may invest in will deliver
Schedule K-1s to the Fund to report its share of income, gains, losses,
deductions and credits of the MLP or other partnership. These Schedule K-1s may
be delayed and may not be received until after the time that the Fund issues its
tax reporting statements. As a result, the Fund may at times find it necessary
to reclassify the amount and character of its distributions to you after it
issues you your tax reporting statement.
“Qualified
publicly traded partnership income” within the meaning of Section 199A(e)(5) of
the Code is eligible for a 20% deduction by non-corporate taxpayers. Qualified
publicly traded partnership income is generally income of a “publicly traded
partnership” that is not treated as a corporation for U.S. federal income tax
purposes that is effectively connected with such entity’s trade or business, but
does not include certain investment income. A “publicly traded partnership” for
purposes of this deduction is not the same as a “qualified publicly traded
partnership” as defined in the immediately preceding paragraphs. This deduction,
if allowed in full, equates to a maximum effective tax rate of 29.6% (37% top
rate applied to income after 20% deduction). A RIC, such as the Fund, is not
permitted to pass the special character of this income through to its
shareholders. Currently, direct investors in entities that generate “qualified
publicly traded partnership income” will enjoy the lower rate, but investors in
RICs that invest in such entities will not. It is uncertain whether future
technical corrections or administrative guidance will address this issue to
enable the Fund to pass through the special character of “qualified publicly
traded partnership income” to shareholders.
The
Fund may invest in REITs. Investments in REIT equity securities may require the
Fund to accrue and distribute income not yet received. To generate sufficient
cash to make the requisite distributions, the 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. The Fund’s investments in REIT
equity securities may at other times result in the Fund’s receipt of cash in
excess of the REIT’s earnings; if the Fund distributes these amounts, these
distributions could constitute a return of capital to the Fund’s shareholders
for federal income tax purposes. Dividends paid by a REIT, other than capital
gain distributions, will be taxable as ordinary income up to the amount of the
REIT’s current and accumulated earnings and profits. Capital gain dividends paid
by a REIT to the Fund will be treated as long-term capital gains by the Fund
and, in turn, may be distributed by the Fund to its shareholders as a capital
gain distribution. Dividends received by the Fund from a REIT generally will not
constitute qualified dividend income or qualify for the dividends received
deduction. If a REIT is operated in a manner such that it fails to qualify as a
REIT, an investment in the REIT would become subject to double taxation, meaning
the taxable income of the REIT would be subject to federal income tax at the
regular corporate rate without any deduction for dividends paid to shareholders
and the dividends would be taxable to shareholders as ordinary
income
(or possibly as qualified dividend income) to the extent of the REIT’s current
and accumulated earnings and profits.
“Qualified
REIT dividends” (i.e.,
ordinary REIT dividends other than capital gain dividends and portions of REIT
dividends designated as qualified dividend income eligible for capital gain tax
rates) are eligible for a 20% deduction by non-corporate taxpayers. This
deduction, if allowed in full, equates to a maximum effective tax rate of 29.6%
(37% top rate applied to income after 20% deduction). Pursuant to proposed
Treasury regulations on which the Fund may rely, distributions by the Fund to
its shareholders that are attributable to qualified REIT dividends received by
the Fund and which the Fund properly reports as “section 199A dividends,” are
treated as “qualified REIT dividends” in the hands of non-corporate
shareholders. A section 199A dividend is treated as a qualified REIT dividend
only if the shareholder receiving such dividend holds the dividend-paying RIC
shares for at least 46 days of the 91-day period beginning 45 days before the
shares become ex-dividend, and is not under an obligation to make related
payments with respect to a position in substantially similar or related
property. The Fund is permitted to report such part of its dividends as section
199A dividends as are eligible, but is not required to do so.
REITs
in which the Fund invests often do not provide complete and final tax
information to the Fund until after the time that the Fund issues a tax
reporting statement. As a result, the Fund may at times find it necessary to
reclassify the amount and character of its distributions to you after it issues
your tax reporting statement. When such reclassification is necessary, the Fund
(or its administrative agent) will send you a corrected, final Form 1099-DIV to
reflect the reclassified information. If you receive a corrected Form 1099-DIV,
use the information on this corrected form, and not the information on the
previously issued tax reporting statement, in completing your tax
returns.
If
the Fund owns shares in certain foreign investment entities, referred to as
“passive foreign investment companies” or “PFICs,” the Fund will generally be
subject to one of the following special tax regimes: (i) the Fund may be liable
for U.S. federal income tax, and an additional interest charge, on a portion of
any “excess distribution” from such foreign entity or any gain from the
disposition of such shares, even if the entire distribution or gain is paid out
by the Fund as a dividend to its shareholders; (ii) if the Fund were able and
elected to treat a PFIC as a “qualified electing fund” or “QEF,” the Fund would
be required each year to include in income, and distribute to shareholders in
accordance with the distribution requirements set forth above, the Fund’s pro
rata share of the ordinary earnings and net capital gains of the PFIC, whether
or not such earnings or gains are distributed to the Fund; or (iii) the Fund may
be entitled to mark-to-market annually shares of the PFIC, and in such event
would be required to distribute to shareholders any such mark-to-market gains in
accordance with the distribution requirements set forth above. The Fund intends
to make the appropriate tax elections, if possible, and take any additional
steps that are necessary to mitigate the effect of these rules. Amounts included
in income each year by the Fund arising from a QEF election will be “qualifying
income” under the Qualifying Income Test (as described above) even if not
distributed to the Fund, if the Fund derives such income from its business of
investing in stock, securities or currencies.
The
Fund may be subject to foreign withholding taxes on dividends and interest
earned with respect to securities of foreign corporations. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes in
some cases. Foreign countries generally do not impose taxes on capital gains
with respect to investments by foreign investors. If more than 50% of the value
of the Fund’s total assets at the close of their taxable year consists of stocks
or securities of foreign corporations, the Fund will be eligible to and intends
to file an election with the IRS that may enable shareholders, in effect, to
receive either the benefit of a foreign tax credit, or a deduction from such
taxes, with respect to any foreign and U.S. possessions income taxes paid by the
Fund, subject to certain limitations.
The
Fund may invest directly in the Grayscale Bitcoin Trust, which is expected to be
treated as a grantor trust for U.S. federal income tax purposes, and therefore
an investment by the Fund in Grayscale Bitcoin Trust will generally be treated
as a direct investment by the Fund in bitcoin for such purposes. Many
significant aspects of the U.S. federal income tax treatment of investments in
bitcoin are uncertain and an investment in bitcoin may produce income that if
directly earned by a RIC would not be treated as qualifying income for purposes
of the Qualifying Income Test (as described above) necessary for the Fund to
qualify as a RIC under Subchapter M of the Code. To the extent the Fund invests
in the Grayscale Bitcoin Trust, it will seek to restrict its income from such
investments to a maximum of 10% of its gross income (when combined with its
other investments that produce non-qualifying income) to comply with the
Qualifying Income Test (as described above) necessary for the Fund to qualify as
a RIC under Subchapter M of the Code. However, the Fund may generate more
non-qualifying income than anticipated, may not be able to generate qualifying
income in a particular taxable year at levels sufficient to meet the Qualifying
Income Test (as described above), or may not be able to accurately predict the
non-qualifying income from these investments. Accordingly, the extent to which
the Fund invests in the Grayscale Bitcoin Trust directly may be limited by the
Qualifying Income Test (as described above), which the Fund must continue to
satisfy to maintain its status as a RIC. Failure to comply with the Qualifying
Income Test (as described above) would have significant negative tax
consequences to Fund shareholders.
Tax
Shelter Reporting Regulations
Under
Treasury regulations, if a shareholder recognizes a loss with respect to the
Fund’s shares of $2 million or more for an individual shareholder, or $10
million or more for a corporate shareholder, in any single year (or certain
greater amounts over a combination of years), the shareholder must file with the
IRS a disclosure statement on IRS Form 8886. Direct shareholders of portfolio
securities are in many cases excepted from this reporting requirement, but under
current guidance, shareholders of a RIC are not excepted. A shareholder who
fails to make the required disclosure to the IRS may be subject to substantial
penalties. The fact that a loss is reportable under these regulations does not
affect the legal determination of whether the taxpayer’s treatment of the loss
is proper. Shareholders should consult their tax advisors to determine the
applicability of these regulations in light of their individual circumstances.
Backup
Withholding
Pursuant
to the backup withholding provisions of the Code, distributions of any taxable
income and capital gains and proceeds from the redemption of Fund shares may be
subject to withholding of federal income tax at a rate set under Section 3406 of
the Code for U.S. residents in the case of non-exempt shareholders who fail to
furnish the Fund with their taxpayer identification numbers or with required
certifications regarding their status under the federal income tax law, or if
the IRS notifies the Fund that such backup withholding is required. If the
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in additional shares, will be reduced by the
amounts required to be withheld. Corporate and other exempt shareholders
should provide the Fund with their taxpayer identification numbers or certify
their exempt status in order to avoid possible erroneous application of backup
withholding. Backup withholding is not an additional tax and any amounts
withheld may be credited against a shareholder’s ultimate federal income tax
liability if proper documentation is provided. The Fund reserves the right to
refuse to open an account for any person failing to provide a certified taxpayer
identification number.
Tax-Exempt
Shareholders
Certain
tax-exempt shareholders, including qualified pension plans, individual
retirement accounts, salary deferral arrangements, 401(k)s, and other tax-exempt
entities, generally are exempt from federal income taxation except with respect
to their unrelated business taxable income (“UBTI”). Tax-exempt entities are not
permitted to offset losses from one trade or business against the income or gain
of another trade or business. Certain net losses incurred prior to January 1,
2018 are permitted to offset gain and income created by an unrelated trade or
business, if otherwise available. Under current law, the Fund generally serves
to block UBTI from being realized by tax-exempt shareholders. However,
notwithstanding that the Fund generally blocks UBTI, a tax-exempt shareholder
could realize UBTI by virtue of an investment in the Fund where, for example:
(i) the Fund invests in residual interests of Real Estate Mortgage Investment
Conduits (“REMICs”), (ii) the Fund invests in a REIT that is a taxable mortgage
pool (“TMP”) or that has a subsidiary that is a TMP or that invests in the
residual interest of a REMIC, or (iii) shares in the Fund constitute
debt-financed property in the hands of the tax-exempt shareholder within the
meaning of section 514(b) of the Code. Charitable remainder trusts are subject
to special rules and should consult their tax advisor. The IRS has issued
guidance with respect to these issues and prospective shareholders, especially
charitable remainder trusts, are strongly encouraged to consult their tax
advisors regarding these issues.
The
foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts and estates.
Non-U.S.
Investors
Any
non-U.S. investors in the Fund may be subject to U.S. withholding and estate tax
and are encouraged to consult their tax advisors prior to investing in the Fund.
Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) are generally subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from taxable ordinary income.
The Fund may, under certain circumstances, report all or a portion of a dividend
as an “interest-related dividend” or a “short-term capital gain dividend,” which
would generally be exempt from this 30% U.S. withholding tax, provided certain
other requirements are met. Short-term capital gain dividends received by a
nonresident alien individual who is present in the U.S. for a period or periods
aggregating 183 days or more during the taxable year are not exempt from this
30% withholding tax. Gains realized by foreign shareholders from the sale or
other disposition of shares of the Fund generally are not subject to U.S.
taxation, unless the recipient is an individual who is physically present in the
U.S. for 183 days or more per year. Foreign shareholders who fail to provide an
applicable IRS form may be subject to backup withholding on certain payments
from the Fund. Backup withholding will not be applied to payments that are
subject to the 30% (or lower applicable treaty rate) withholding tax described
in this paragraph. Different tax consequences may result if the foreign
shareholder is engaged in a trade or
business
within the United States. In addition, the tax consequences to a foreign
shareholder entitled to claim the benefits of a tax treaty may be different than
those described above.
Under
legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act),
the Fund is required to withhold 30% of certain ordinary dividends it pays to
shareholders that fail to meet prescribed information reporting or certification
requirements. In general, no such withholding will be required with respect to a
U.S. person or non-U.S. person that timely provides the certifications required
by the Fund or its agent on a valid IRS Form W-9 or applicable IRS Form W-8,
respectively. Shareholders potentially subject to withholding include foreign
financial institutions (“FFIs”), such as non-U.S. investment funds, and
non-financial foreign entities (“NFFEs”). To avoid withholding under FATCA, an
FFI generally must enter into an information sharing agreement with the IRS in
which it agrees to report certain identifying information (including name,
address, and taxpayer identification number) with respect to its U.S. account
holders (which, in the case of an entity shareholder, may include its direct and
indirect U.S. owners), and an NFFE generally must identify and provide other
required information to the Fund or other withholding agent regarding its U.S.
owners, if any. Such non-U.S. shareholders also may fall into certain exempt,
excepted or deemed compliant categories as established by regulations and other
guidance. A non-U.S. shareholder resident or doing business in a country that
has entered into an intergovernmental agreement with the U.S. to implement FATCA
will be exempt from FATCA withholding provided that the shareholder and the
applicable foreign government comply with the terms of the
agreement.
A
non-U.S. entity that invests in the Fund will need to provide the Fund with
documentation properly certifying the entity’s status under FATCA in order to
avoid FATCA withholding. Non-U.S. investors in the Fund should consult their tax
advisors in this regard.
Tax-Deferred
Qualified Plans—Class A and Class C Shares
Investors
may invest in Class A and Class C shares of the Fund through IRAs, simplified
employee pension plans (“SEPs”), savings incentive match plans for employees
(“SIMPLES”), other qualified retirement plans and Coverdell ESAs (collectively,
“qualified plans”). In general, income earned through the investment of assets
of qualified plans is not taxed to their beneficiaries until the income is
distributed to those beneficiaries (or, in the case of Roth IRAs and Coverdell
ESAs, not at all if certain conditions are satisfied). Investors who are
considering establishing a qualified plan should consult their attorneys or
other tax advisers with respect to individual tax questions. Please consult your
financial adviser for further information with respect to these plans.
Individual
Retirement Account—IRA
TRADITIONAL
IRA. Certain Class A and Class C shareholders who receive compensation,
including earnings from self-employment, may establish and make contributions to
an IRA. Your IRA contributions can be tax-deductible if neither you nor your
spouse is an active participant in a qualified employer or government retirement
plan. If you or your spouse is an active participant in such a plan, your IRA
contribution may be deductible, in whole or in part, depending on the amount of
your and your spouse’s combined adjusted gross income. In addition, all earnings
grow tax-deferred until withdrawn, at which point distributions are taxed as
ordinary income to you, usually after age 59 1/2,
when you may be in a lower tax bracket. Withdrawals made before age
59 1/2
are generally subject to a 10% penalty.
ROTH
IRA. Unlike a traditional IRA, a Roth IRA is only available to individuals who
meet certain “modified adjusted gross income” (MAGI) limitations. Under certain
circumstances, a traditional IRA may be converted to a Roth IRA; these
conversions are, however, subject to federal income tax.
Contributions
to a Roth IRA are not deductible; however, earnings accumulate tax-free in a
Roth IRA, and withdrawals of earnings are not subject to federal income tax if
the account has been held for at least five years (or, in the case of earnings
attributable to a conversion of a traditional IRA, the conversion occurred more
than five years before the withdrawal) and the account holder has reached age
59 1/2
(or certain other conditions apply).
Simplified
Employee Pension Plan—SEP
The
Adviser makes available to corporate and other employers a SEP for investment in
Class A and Class C shares of the Fund.
Savings
Incentive Match Plan for Employees—SIMPLE
An
employer with no more than 100 employees that does not maintain another
qualified retirement plan may establish a SIMPLE, either as a plan using
separate IRAs or as part of a Code section 401(k) plan. A SIMPLE, which is not
subject to the complicated nondiscrimination rules that generally apply to other
qualified retirement plans, allows certain employees to make elective
contributions of up to certain amounts each year and requires the employer to
make matching contributions of up to 3% of each such employee’s salary or a 2%
non-elective contribution.
Coverdell
Education Savings Account—Coverdell ESA
A
Coverdell ESA provides a vehicle for saving for a child’s education. A Coverdell
ESA may be established for the benefit of any minor, and any person whose MAGI
does not exceed certain levels may contribute to a Coverdell ESA, subject to
certain annual limits on contributions. Contributions are not deductible and may
not be made after the beneficiary reaches age 18; however, earnings accumulate
tax-free, and withdrawals are not subject to tax if used to pay the qualified
education expenses of the beneficiary (or a qualified family member).
For
further information regarding any of the above qualified plans, including MAGI
limitations, contact your financial adviser or the Fund at 1-888-593-5110.
Withholding
Withholding
at the rate of 20% is required for federal income tax purposes on certain
distributions (excluding, for example, certain periodic payments) from qualified
retirement plans (except IRAs and SEPs), unless the recipient transfers the
distribution directly to an “eligible retirement plan” (including an IRA or
other qualified retirement plan) that accepts those distributions. Other
distributions generally are subject to regular wage withholding or to
withholding at the rate of 10% (depending on the type and amount of the
distribution), unless the recipient elects not to have any withholding apply.
Investors should consult their plan administrator or tax adviser for further
information.
This
discussion and the related discussion in the Prospectus have been prepared by
Fund management. The information above is only a summary of some of the tax
considerations generally affecting the Fund and its shareholders. No
attempt has been made to discuss individual tax consequences and this discussion
should not be construed as applicable to all shareholders’ tax
situations. Investors should consult their own tax advisors to determine
the suitability of the Fund and the applicability of any state, local or foreign
taxation.
Marketing
and Support Payments
The
Adviser, out of its own resources and without additional cost to the Fund or its
shareholders, may provide additional cash payments or other compensation to
certain Financial Intermediaries who sell shares of the Fund. Such payments may
be divided into categories as follows:
Support
Payments.
Payments may be made by the Adviser to certain Financial Intermediaries in
connection with the eligibility of the Fund to be offered in certain programs
and/or in connection with meetings between the Fund’s representatives and
Financial Intermediaries and its sales representatives. Such meetings may be
held for various purposes, including providing education and training about the
Fund and other general financial topics to assist Financial Intermediaries’
sales representatives in making informed recommendations to, and decisions on
behalf of, their clients.
Entertainment,
Conferences and Events.
The Adviser also may pay cash or non-cash compensation to sales representatives
of Financial Intermediaries in the form of (i) occasional gifts;
(ii) occasional meals, tickets or other entertainments; and/or
(iii) sponsorship support for the Financial Intermediary’s client seminars
and cooperative advertising. In addition, the Adviser pays for exhibit space or
sponsorships at regional or national events of Financial
Intermediaries.
The
prospect of receiving, or the receipt of additional payments or other
compensation as described above by Financial Intermediaries may provide such
intermediaries and/or their salespersons with an incentive to favor sales of
shares of the Fund, and other mutual funds whose affiliates make similar
compensation available, over sale of shares of mutual funds (or non-mutual fund
investments) not making such payments. You may wish to take such payment
arrangements into account when considering and evaluating any recommendations
relating to the Fund shares.
Anti-Money
Laundering Program
The
Trust has established an Anti-Money Laundering Program (the “Program”) as
required by the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”). In
order to ensure compliance with this law, the Trust’s Program provides for the
development of internal practices, procedures and controls, designation of
anti-money laundering compliance officers, an ongoing training program and an
independent audit function to determine the effectiveness of the
Program.
Procedures
to implement the Program include, but are not limited to, determining that the
Fund’s Distributor and Transfer Agent have established proper anti-money
laundering procedures, reporting suspicious and/or fraudulent activity, checking
shareholder names against designated government lists, including Office of
Foreign Asset Control (“OFAC”), and a complete and thorough review of all new
opening account applications. The Trust will not transact business with any
person
or legal entity whose identity and beneficial owners, if applicable, cannot be
adequately verified under the provisions of the USA PATRIOT Act.
Financial
Statements
The
Fund’s annual
report
to shareholders for the fiscal year ended December 31, 2021, is a separate
document and the financial statements, accompanying notes and report of the
independent registered public accounting firm appearing therein are incorporated
by reference into this SAI.
Appendix
A Description of Securities Ratings
Short-Term
Credit Ratings
A
Standard
& Poor’s
short-term issue credit rating is a forward-looking opinion about the
creditworthiness of an obligor with respect to a specific financial obligation
having an original maturity of no more than 365 days. The following summarizes
the rating categories used by Standard & Poor’s for short-term
issues:
“A-1”
– A short-term obligation rated “A-1” is rated in the highest category and
indicates 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”
– A short-term obligation rated “A-2” is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor’s capacity to meet
its financial commitment on the obligation is satisfactory.
“A-3”
– A short-term obligation rated “A-3” exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
“B”
– A short-term obligation rated “B” is regarded as vulnerable and has
significant speculative characteristics. The obligor currently has the capacity
to meet its financial commitments; however, it faces major ongoing uncertainties
which could lead to the obligor’s inadequate capacity to meet its financial
commitments.
“C”
– A short-term obligation rated “C” is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
“D”
– A short-term obligation rated “D” is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the “D” rating category is used
when payments on an obligation are not made on the date due, unless Standard
& Poor’s believes that such payments will be made within any stated grace
period. However, any stated grace period longer than five business days will be
treated as five business days. The “D” rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action and where default on
an obligation is a virtual certainty, for example due to automatic stay
provisions. An obligation’s rating is lowered to “D” if it is subject to a
distressed exchange offer.
Local
Currency and Foreign Currency Risks – Standard & Poor’s issuer credit
ratings make a distinction between foreign currency ratings and local currency
ratings. An issuer’s foreign currency rating will differ from its local currency
rating when the obligor has a different capacity to meet its obligations
denominated in its local currency, vs. obligations denominated in a foreign
currency.
Moody’s
Investors Service (“Moody’s”)
short-term ratings are forward-looking opinions of the relative credit risks of
financial obligations with an original maturity of thirteen months or less and
reflect the likelihood of a default on contractually promised payments. Ratings
may be assigned to issuers, short-term programs or to individual short-term debt
instruments.
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.
Fitch,
Inc. / Fitch Ratings Ltd. (“Fitch”)
short-term issuer or obligation rating is based in all cases on the short-term
vulnerability to default of the rated entity or security stream and relates to
the capacity to meet financial obligations in accordance with the documentation
governing the relevant obligation. Short-term ratings are assigned to
obligations whose initial maturity is viewed as “short-term” based on market
convention. Typically, this means up to 13 months for corporate, sovereign and
structured obligations, and up to 36 months for obligations in U.S. public
finance markets. The following summarizes the rating categories used by Fitch
for short-term obligations:
“F1”
– Securities possess the highest short-term credit quality. This designation
indicates the strongest intrinsic capacity for timely payment of financial
commitments; may have an added “+” to denote any exceptionally strong credit
feature.
“F2”
– Securities possess good short-term credit quality. This designation indicates
good intrinsic capacity for timely payment of financial
commitments.
“F3”
– Securities possess fair short-term credit quality. This designation indicates
that the intrinsic capacity for timely payment of financial commitments is
adequate.
“B”
– Securities possess speculative short-term credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
heightened vulnerability to near term adverse changes in financial and economic
conditions.
“C”
– Securities possess high short-term default risk. Default is a real
possibility.
“RD”
– Restricted default. Indicates an entity that has defaulted on one or more of
its financial commitments, although it continues to meet other financial
obligations. Typically applicable to entity ratings only.
“D”
– Default. Indicates a broad-based default event for an entity, or the default
of a short-term obligation.
The
DBRS®
Ratings Limited (“DBRS”)
short-term debt rating scale provides an opinion on the risk that an issuer will
not meet its short-term financial obligations in a timely manner. Ratings are
based on quantitative and qualitative considerations relevant to the issuer and
the relative ranking of claims. The R-1 and R-2 rating categories are further
denoted by the sub-categories “(high)”, “(middle)”, and “(low)”.
The
following summarizes the ratings used by DBRS for commercial paper and
short-term debt:
“R-1
(high)” - Short-term debt rated “R-1 (high)” is of the highest credit quality.
The capacity for the payment of short-term financial obligations as they fall
due is exceptionally high. Unlikely to be adversely affected by future
events.
“R-1
(middle)” – Short-term debt rated “R-1 (middle)” is of superior credit quality.
The capacity for the payment of short-term financial obligations as they fall
due is very high. Differs from “R-1 (high)” by a relatively modest degree.
Unlikely to be significantly vulnerable to future events.
“R-1
(low)” – Short-term debt rated “R-1 (low)” is of good credit quality. The
capacity for the payment of short-term financial obligations as they fall due is
substantial. Overall strength is not as favorable as higher rating categories.
May be vulnerable to future events, but qualifying negative factors are
considered manageable.
“R-2
(high)” – Short-term debt rated “R-2 (high)” is considered to be at the upper
end of adequate credit quality. The capacity for the payment of short-term
financial obligations as they fall due is acceptable. May be vulnerable to
future events.
“R-2
(middle)” – Short-term debt rated “R-2 (middle)” is considered to be of adequate
credit quality. The capacity for the payment of short-term financial obligations
as they fall due is acceptable. May be vulnerable to future events or may be
exposed to other factors that could reduce credit quality.
“R-2
(low)” – Short-term debt rated “R-2 (low)” is considered to be at the lower end
of adequate credit quality. The capacity for the payment of short-term financial
obligations as they fall due is acceptable. May be vulnerable to future events.
A number of challenges are present that could affect the issuer’s ability to
meet such obligations.
“R-3”
– Short-term debt rated “R-3” is considered to be at the lowest end of adequate
credit quality. There is a capacity for the payment of short-term financial
obligations as they fall due. May be vulnerable to future events and the
certainty of meeting such obligations could be impacted by a variety of
developments.
“R-4”
– Short-term debt rated “R-4” is considered to be of speculative credit quality.
The capacity for the payment of short-term financial obligations as they fall
due is uncertain.
“R-5”
– Short-term debt rated “R-5” is considered to be of highly speculative credit
quality. There is a high level of uncertainty as to the capacity to meet
short-term financial obligations as they fall due.
“D”
– Short-term debt rated “D” is assigned when the issuer has filed under any
applicable bankruptcy, insolvency or winding up statute or there is a failure to
satisfy an obligation after the exhaustion of grace periods, a downgrade to “D”
may occur. DBRS may also use “SD” (Selective Default) in cases where only some
securities are impacted, such as the case of a “distressed
exchange”.
Long-Term
Credit Ratings
The
following summarizes the ratings used by Standard
& Poor’s
for long-term issues:
“AAA”
– An obligation rated “AAA” has the highest rating assigned by Standard &
Poor’s. The obligor’s capacity to meet its financial commitment on the
obligation is extremely strong.
“AA”
– An obligation rated “AA” differs from the highest-rated obligations only to a
small degree. The obligor’s capacity to meet its financial commitment on the
obligation is very strong.
“A”
– An obligation rated “A” is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor’s capacity to meet its financial
commitment on the obligation is still strong.
“BBB”
– An obligation rated “BBB” exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
“BB,”
“B,” “CCC,” “CC” and “C” – Obligations rated “BB,” “B,” “CCC,” “CC” and “C” are
regarded as having significant speculative characteristics. “BB” indicates the
least degree of speculation and “C” the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
“BB”
– An obligation rated “BB” is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor’s inadequate capacity to meet its financial commitment on the
obligation.
“B”
– An obligation rated “B” is more vulnerable to nonpayment than obligations
rated “BB”, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor’s capacity or willingness to meet its
financial commitment on the obligation.
“CCC”
– An obligation rated “CCC” is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the
obligation.
“CC”
– An obligation rated “CC” is currently highly vulnerable to nonpayment. The
“CC” rating is used when a default has not yet occurred, but Standard &
Poor’s expects default to be a virtual certainty, regardless of the anticipated
time to default.
“C”
– An obligation rated “C” is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority or lower ultimate
recovery compared to obligations that are rated higher.
“D”
– An obligation rated “D” is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the “D” rating category is used when payments on
an obligation are not made on the date due, unless Standard & Poor’s
believes that such payments will be made within five business days in the
absence of a stated grace period or within the earlier of the stated grace
period or 30 calendar days. The “D” rating also will be used upon the filing of
a bankruptcy petition or the taking of similar action and where default on an
obligation is a virtual certainty, for example due to automatic stay provisions.
An obligation’s rating is lowered to “D” if it is subject to a distressed
exchange offer.
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, or that there is
insufficient information on which to base a rating, or that Standard &
Poor’s does not rate a particular obligation as a matter of policy.
Local
Currency and Foreign Currency Risks - Standard & Poor’s issuer credit
ratings make a distinction between foreign currency ratings and local currency
ratings. An issuer’s foreign currency rating will differ from its local currency
rating when the obligor has a different capacity to meet its obligations
denominated in its local currency, vs. obligations denominated in a foreign
currency.
Moody’s
long-term ratings are forward-looking opinions of the relative credit risks of
financial obligations with an original maturity of one year or more. Such
ratings reflect both the likelihood of default on contractually promised
payments and the expected 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 speculative of poor standing and are
subject to very high credit risk.
“Ca”
– Obligations rated “Ca” are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
“C”
– Obligations rated “C” are the lowest rated and are typically in default, with
little prospect for recovery of principal or interest.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from “Aa” through “Caa.” The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
The
following summarizes long-term ratings used by Fitch:
“AAA”
– Securities considered to be of the highest credit quality. “AAA” ratings
denote the lowest expectation of credit risk. They are assigned only in cases of
exceptionally strong capacity for payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable
events.
“AA”
– Securities considered to be of very high credit quality. “AA” ratings denote
expectations of very low credit risk. They indicate very strong capacity for
payment of financial commitments. This capacity is not significantly vulnerable
to foreseeable events.
“A”
– Securities considered to be of high credit quality. “A” ratings denote
expectations of low credit risk. The capacity for payment of financial
commitments is considered strong. This capacity may, nevertheless, be more
vulnerable to adverse business or economic conditions than is the case for
higher ratings.
“BBB”
– Securities considered to be of good credit quality. “BBB” ratings indicate
that expectations of credit risk are currently low. The capacity for payment of
financial commitments is considered adequate but adverse business or economic
conditions are more likely to impair this capacity.
“BB”
– Securities considered to be speculative. “BB” ratings indicate that there is
an elevated vulnerability to credit risk, particularly in the event of adverse
changes in business or economic conditions over time; however, business or
financial alternatives may be available to allow financial commitments to be
met.
“B”
– Securities considered to be highly speculative. “B” ratings indicate that
material credit risk is present.
“CCC”
– A “CCC” rating indicates that substantial credit risk is present.
“CC”
– A “CC” rating indicates very high levels of credit risk.
“C”
– A “C” rating indicates exceptionally high levels of credit risk.
Defaulted
obligations typically are not assigned “RD” or “D” ratings, but are instead
rated in the “B” to “C” rating categories, depending upon their recovery
prospects and other relevant characteristics. Fitch believes that this approach
better aligns obligations that have comparable overall expected loss but varying
vulnerability to default and loss.
Plus
(+) or minus (-) may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the “AAA” obligation
rating category, or to corporate finance obligation ratings in the categories
below “CCC”.
The
DBRS
long-term rating scale provides an opinion on the risk of default. That is, the
risk that an issuer will fail to satisfy its financial obligations in accordance
with the terms under which an obligation has been issued. Ratings are based on
quantitative and qualitative considerations relevant to the issuer, and the
relative ranking of claims. All rating categories other than AAA and D also
contain subcategories “(high)” and “(low)”. The absence of either a “(high)” or
“(low)” designation indicates the rating is in the middle of the category. The
following summarizes the ratings used by DBRS for long-term debt:
“AAA”
- Long-term debt rated “AAA” is of the highest credit quality. The capacity for
the payment of financial obligations is exceptionally high and unlikely to be
adversely affected by future events.
“AA”
– Long-term debt rated “AA” is of superior credit quality. The capacity for the
payment of financial obligations is considered high. Credit quality differs from
“AAA” only to a small degree. Unlikely to be significantly vulnerable to future
events.
“A”
– Long-term debt rated “A” is of good credit quality. The capacity for the
payment of financial obligations is substantial, but of lesser credit quality
than “AA.” May be vulnerable to future events, but qualifying negative factors
are considered manageable.
“BBB”
– Long-term debt rated “BBB” is of adequate credit quality. The capacity for the
payment of financial obligations is considered acceptable. May be vulnerable to
future events.
“BB”
– Long-term debt rated “BB” is of speculative, non-investment grade credit
quality. The capacity for the payment of financial obligations is uncertain.
Vulnerable to future events.
“B”
– Long-term debt rated “B” is of highly speculative credit quality. There is a
high level of uncertainty as to the capacity to meet financial
obligations.
“CCC”,
“CC” and “C” – Long-term debt rated in any of these categories is of very highly
speculative credit quality. In danger of defaulting on financial obligations.
There is little difference between these three categories, although “CC” and “C”
ratings are normally applied to obligations that are seen as highly likely to
default, or subordinated to obligations rated in the “CCC” to “B” range.
Obligations in respect of which default has not technically taken place but is
considered inevitable may be rated in the “C” category.
“D”
– A security rated “D” is assigned when the issuer has filed under any
applicable bankruptcy, insolvency or winding up statute or there is a failure to
satisfy an obligation after the exhaustion of grace periods, a downgrade to “D”
may occur. DBRS may also use “SD” (Selective Default) in cases where only some
securities are impacted, such as the case of a “distressed
exchange”.
Municipal
Note Ratings
A
Standard
& Poor’s
U.S. municipal note rating reflects Standard & Poor’s opinion about the
liquidity factors and market access risks unique to the notes. Notes due in
three years or less will likely receive a note rating. Notes with an
original
maturity of more than three years will most likely receive a long-term debt
rating. In determining which type of rating, if any, to assign, Standard &
Poor’s analysis will review the following considerations:
•Amortization
schedule - the larger the final maturity relative to other maturities, the more
likely it will be treated as a note; and
•Source
of payment - the more dependent the issue is on the market for its refinancing,
the more likely it will be treated as a note.
Municipal
Short-Term Note rating symbols are as follows:
“SP-1”
– A municipal note rated “SP-1” exhibits a strong capacity to pay principal and
interest. An issue determined to possess a very strong capacity to pay debt
service is given a plus (+) designation.
“SP-2”
– A municipal note rated “SP-2” exhibits a satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
“SP-3”
– A municipal note rated “SP-3” exhibits a speculative capacity to pay principal
and interest.
Moody’s
uses the Municipal Investment Grade (“MIG”) scale to rate U.S. municipal bond
anticipation notes of up to three years maturity. Municipal notes rated on the
MIG scale may be secured by either pledged revenues or proceeds of a take-out
financing received prior to note maturity. MIG ratings expire at the maturity of
the obligation, and the issuer’s long-term rating is only one consideration in
assigning the MIG rating. MIG ratings are divided into three levels – “MIG-1”
through “MIG-3” while speculative grade short-term obligations are designated
“SG”. The following summarizes the ratings used by Moody’s for short-term
municipal 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.
“NR”
– Is assigned to an unrated obligation.
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 rating scale called the Variable Municipal Investment Grade or “VMIG”
scale. The rating transitions on the VMIG scale differ from those on the Prime
scale to reflect the risk that external liquidity support generally will
terminate if the issuer’s long-term rating drops below investment
grade.
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.
“NR”
– Is assigned to an unrated obligation.
About
Credit Ratings
A
Standard
& Poor’s
issue credit rating is a forward-looking opinion about the creditworthiness of
an obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated. The opinion reflects Standard & Poor’s
view of the obligor’s capacity and willingness to meet its financial commitments
as they come due, and may assess terms, such as collateral security and
subordination, which could affect ultimate payment in the event of
default.
Moody’s
credit ratings must be construed solely as statements of opinion and not
statements of fact or recommendations to purchase, sell or hold any
securities.
Fitch’s
credit
ratings provide an opinion on the relative ability of an entity to meet
financial commitments, such as interest, preferred dividends, repayment of
principal, insurance claims or counterparty obligations. Fitch credit ratings
are used by investors as indications of the likelihood of receiving the money
owed to them in accordance with the terms on which they invested. Fitch’s credit
ratings cover the global spectrum of corporate, sovereign (including
supranational and sub-national), financial, bank, insurance, municipal and other
public finance entities and the securities or other obligations they issue, as
well as structured finance securities backed by receivables or other financial
assets.
DBRS
credit ratings are opinions based on the quantitative and qualitative analysis
of information sourced and received by DBRS, which information is not audited or
verified by DBRS. Ratings are not buy, hold or sell recommendations and they do
not address the market price of a security. Ratings may be upgraded, downgraded,
placed under review, confirmed and discontinued.
Appendix
B Proxy Voting Policy
MILLER
VALUE PARTNERS, LLC
PROXY
VOTING
MILLER
VALUE PARTNERS, LLC (the “Adviser”) will exercise its proxy voting
responsibilities to serve the best interests of its clients and in compliance
with applicable laws and regulations. The Adviser recognizes that proxy voting
is a valuable right of company shareholders and believes that shareholders are
best served by a voting process guided by the principles of preserving and
expanding the power of shareholders in areas of corporate governance and
allowing responsible management teams to run businesses.
Procedures
Oversight
of Principles and Procedures
The
Adviser’s Managing Member has full authority to determine the Adviser’s proxy
voting principles and procedures and vote proxies on behalf of the Adviser’s
clients. The Managing Member may delegate oversight and implementation of the
proxy voting process, including the principles and procedures that govern it, to
one or more portfolio managers.
Limitations
The
Adviser recognizes proxy voting as a valuable right of company shareholders.
Generally speaking, the Adviser will vote all proxies it receives. However, the
Adviser may refrain from voting in certain circumstances. For instance, the
Adviser generally intends to refrain from voting a proxy if the company’s shares
are no longer held by the Adviser’s clients at the time of the meeting.
Additionally, the Adviser may refrain from voting a proxy if the Adviser
concludes the potential impact on shareholders’ interests is insignificant while
the cost associated with analyzing and voting the proxy may be significant.
Client
Accounts for which the Adviser Votes Proxies
The
Adviser shall vote proxies for each client account for which the
client:
(i)has
specifically authorized the Adviser to vote proxies;
i.without
specifically authorizing the Adviser to vote proxies, has granted general
investment discretion to the Adviser in the investment management agreement;
or
i.is
subject to ERISA, unless the investment management agreement or another
applicable writing specifically reserves the responsibility for voting proxies
to the plan trustees or other named fiduciary.
At
or prior to account inception, the Adviser shall determine whether it has proxy
voting authority over such client account.
The
Adviser will deliver to each client for which it has proxy voting authority, no
later than the time it accepts such authority, a written summary of the Proxy
Voting Principles and Procedures. The summary will state that a copy of the
Adviser’s Proxy Voting Principles and Procedures is available upon request, as
well as guidelines that describe how the Adviser generally votes
proxies.
The
Adviser will maintain a record of each client request for proxy voting
information. The Adviser will also maintain a copy of its response thereto.
Proxy
Administration
The
Adviser will instruct each client custodian to forward proxy materials to the
vendor engaged by the Adviser to electronically receive ballots and transmit the
Adviser’s proxy votes, as well as to maintain proxy voting receipts and records
(the “Proxy Administration Vendor”). New client custodians will be notified at
account inception of their responsibility to deliver proxy materials to the
Adviser’s Proxy Administration Vendor.
Compliance
Review
A
member of the compliance team will review the pending proxies and identify any
potential conflicts between the Adviser, or its employees, and the Adviser’s
clients.
Identifying
Conflicts
In
identifying conflicts of interest, the compliance team will review the following
issues:
(i)
Whether there are any business or personal relationships between the Adviser, or
an employee of the Adviser, and the officers, directors or shareholder proposal
proponents of a company whose securities are held in client accounts that may
create an incentive to vote in a manner that is not consistent with the best
interests of the Adviser’s clients; and
(ii)
Whether the Adviser has any other economic incentive to vote in a manner that is
not consistent with the best interests of its clients.
Assessing
Materiality
If
it is determined that a conflict exists, the conflict will be deemed to be
material if a member of the compliance team determines, in the exercise of
reasonable judgment, that the conflict is likely to have an impact on the manner
in which the subject shares are voted.
If
it is determined that the conflict is not material, the proxy issue will be
forwarded to the portfolio manager for voting.
If
a member of the compliance team determines that the conflict may be material,
the following steps will be taken:
(i)(he
compliance team will consult with representatives of the Adviser’s senior
management to make a final determination of materiality. The compliance team
will maintain a record of this determination.
(ii)After
the determination is made, the following procedures will apply:
a.If
the final determination is that the conflict is not material, the proxy issue
will be forwarded to the portfolio manager for voting;
b.
f the final determination is that the conflict is material, the following
procedures will apply:
(1)If
the Adviser’s Proxy Voting Guidelines (“Guidelines”), a copy of which is
attached as Schedule
1,
definitively address the issues presented for vote, the Adviser will vote
according to the Guidelines;
(2)If
the issues presented for vote are not definitively addressed in the Guidelines,
the Adviser will either (x) follow the vote recommendation of an independent
voting delegate or (y) disclose the conflict to clients and obtain their consent
to vote.
Notification
to Clients
Upon
receipt of a client request for information on how proxies were voted for that
client’s account, the Adviser will promptly provide such requested information
to the client in writing.
Proxy
Administration
The
Adviser’s operations team, with the assistance of the Proxy Administration
Vendor will provide custodians with instructions to forward proxies to the
Adviser’s Proxy Administration Vendor for all clients for whom the Adviser is
responsible for voting proxies. The Adviser’s investment team or its designee,
per instructions from the applicable portfolio manager, will vote proxy issues
via the Proxy Administration Vendor’s software, online or via
facsimile.
Recordkeeping
The
Adviser shall maintain the following records relating to proxy
voting:
(i)a
copy of this Policy and Procedures, including any and all amendments that may be
adopted;
(ii)a
copy of each proxy statement that the Adviser receives regarding client
securities;
(iii)a
record of each vote cast by the Adviser on behalf of a client;
(iv)documentation
relating to the identification and resolution of conflicts of
interest;
(v)any
documents created by the Adviser that were material to a proxy voting decision
or that memorialized the basis for that decision; and
(vi)a
copy of each written client request for information on how the Adviser voted
proxies on behalf of the client, and a copy of any written response by the
Adviser to any (written or oral) client request for information on how the
Adviser voted proxies on behalf of the requesting client.
All
required records shall be maintained for a period of five years from the end of
the fiscal year during which the last entry was made on such record. For the
first two (2) years of the five (5) year period, the required records will be
maintained in the Adviser’s Offices. In lieu of keeping copies of proxy
statements, the Adviser may rely on proxy statements filed on the EDGAR filing
system as well as on third party records of proxy statements if the third party
provides an undertaking to provide copies of such proxy statements promptly upon
request. The Adviser may also rely on a third party to make and retain, on the
Adviser’s behalf, records of votes cast by the Adviser on behalf of clients if
the third party provides an undertaking to provide a copy of such records
promptly upon request.
In
addition, the Adviser shall maintain the following records on behalf of each
investment company client for a period of six years from the end of the fiscal
year during which the last entry was made on such record:
A
proxy log and supporting materials, including:
(i)Issuer
name;
(ii)Exchange
ticker symbol of the issuer’s shares to be voted;
(iii)Council
on Uniform Securities Identification Procedures (CUSIP) number for the shares to
be voted;
(iv)A
brief identification on the matter voted;
(v)Whether
the matter was proposed by the issuer or by a shareholder of the
issuer;
(vi)Whether
a vote was cast on the matter;
(vii)A
record of how the vote was cast; and
(viii)Whether
the vote was cast for or against the recommendation of the issuer’s management
team.
The
Adviser may also rely on a third party to make and retain, on the Adviser’s
behalf, these records if the third party provides an undertaking to provide a
copy of such records promptly upon request.
SCHEDULE
1
PROXY
VOTING GUIDELINES
The
Adviser maintains these proxy-voting guidelines, which set forth the manner in
which the Adviser generally votes on issues that are routinely presented. Please
note that for each proxy vote the Adviser takes into consideration its duty to
its clients, the specific circumstances of the vote and all other relevant facts
available at the time of the vote. While these guidelines provide the framework
for voting proxies, ultimately proxy votes are cast on a case-by-case basis.
Therefore actual votes for any particular proxy issue may differ from the
guidelines shown below.
______________________________________________________________________________
Four
principal areas of interest to shareholders:
1.Obligations
of the Board of Directors
2.Compensations
of management and the Board of Directors
3.Take-over
protections
4.Shareholders’
rights
5.
|
|
|
|
|
|
| Proxy
Issue |
Adviser
Guideline |
|
|
|
|
|
|
| BOARD
OF DIRECTORS |
|
| Independence
of Boards of Directors: majority of unrelated directors, independent of
management |
For |
| Nominating
Process: independent nominating committee seeking qualified candidates,
continually assessing directors and proposing new nominees |
For |
| Size
and Effectiveness of Boards of Directors: Boards must be no larger than 15
members |
For |
| Cumulative
Voting for Directors |
For |
| Staggered
Boards |
Against |
| Separation
of Board and Management Roles (CEO/Chairman) |
Case-by-Case |
| Compensation
Review Process: compensation committee comprised of outside, unrelated
directors to ensure shareholder value while rewarding good
performance |
For |
| Director
Liability & Indemnification: support limitation of liability and
provide indemnification |
For |
| Audit
Process |
For |
| Board
Committee Structure: audit, compensation, and nominating and/or governance
committee consisting entirely of independent directors |
For |
| Monetary
Arrangements for Directors: outside of normal board activities amts should
be approved by a board of independent directors and reported in
proxy |
For |
| Fixed
Retirement Policy for Directors |
Case-by-Case |
| Ownership
Requirement: all Directors have direct and material cash investment in
common shares of Company |
For |
| Proposals
on Board Structure: (lead director, shareholder advisory committees,
requirement that candidates be nominated by shareholders, attendance at
meetings) |
For |
| Annual
Review of Board/CEO by Board |
For |
| Periodic
Executive Sessions Without Mgmt (including CEO) |
For |
| Votes
for Specific Directors |
Case-by-Case |
|
|
|
|
|
|
| Proxy
Issue |
Adviser
Guideline |
|
|
|
|
|
|
| MANAGEMENT
AND DIRECTOR COMPENSATION |
|
| Stock
Option and Incentive Compensation Plans: |
Case-by-Case |
| Form
of Vehicle: grants of stock options, stock appreciation rights, phantom
shares and restricted stock |
Case-by-Case |
| Price |
Against
plans whose underlying securities are to be issued at less than 100% of
the current market value |
| Re-pricing:
plans that allow the Board of Directors to lower the exercise price of
options already granted if the stock price falls or under-performs the
market |
Against |
| Expiry:
plan whose options have a life of more than ten years |
Case-by-Case |
| Expiry:
“evergreen” stock option plans |
Against |
| Dilution: |
Case-by-Case
– taking into account value creation, commitment to shareholder-friendly
policies, etc. |
| Vesting:
stock option plans that are 100% vested when granted |
Against |
| Performance
Vesting: link granting of options, or vesting of options previously
granted, to specific performance targets |
For |
| Concentration:
authorization to allocate 20% or more of the available options to any one
individual in any one year |
Against |
| Director
Eligibility: stock option plans for directors if terms and conditions are
clearly defined and reasonable |
Case-by-Case |
| Change
in Control: stock option plans with change in control provisions that
allow option holders to receive more for their options than shareholders
would receive for their shares |
Against |
| Change
in Control: change in control arrangements developed during a take-over
fight specifically to entrench or benefit management |
Against |
| Change
in Control: granting options or bonuses to outside directors in event of a
change in control |
Against |
| Board
Discretion: plans to give Board broad discretion in setting terms and
conditions of programs |
Against |
| Employee
Loans: Proposals authorizing loans to employees to pay for stock or
options |
Against |
| Director
Compensation: % of directors’ compensation in form of common
shares |
For |
| Golden
Parachutes |
Case-by-Case |
| Expense
Stock Options |
For |
| Severance
Packages: must receive shareholder approval |
For |
| Lack
of Disclosure about Provisions of Stock-based Plans |
Against |
| Reload
Options |
Against |
| Plan
Limited to a Small Number of Senior Employees |
Against |
| Employee
Stock Purchase Plans |
Case-by-Case |
|
|
|
|
|
|
| Proxy
Issue |
Adviser
Guideline |
|
|
|
|
|
|
| SHAREHOLDERS’
RIGHTS |
|
| Confidential
Voting by Shareholders |
For |
| Dual-Class
Share Structures |
Against |
| Linked
Proposals: with the objective of making one element of a proposal more
acceptable |
Against |
| Blank
Check Preferred Shares: authorization of, or an increase in, blank check
preferred shares |
Against |
| Supermajority
Approval of Business Transactions: management seeks to increase the number
of votes required on an issue above two-thirds of the outstanding
shares |
Against |
| Increase
in Authorized Shares: provided the amount requested is necessary for sound
business reasons |
For |
| Shareholder
Proposals |
Case-by-Case |
| Stakeholder
Proposals |
Case-by-Case |
|
|
|
|
|
|
| SHAREHOLDERS’
RIGHTS |
|
| “Fair
Price” Provisions: Measures to limit ability to buy back shares from
particular shareholder at higher-than-market prices |
Against |
| “Fair
Price” Provisions: Measures to limit ability to buy back shares from
particular shareholder at higher-than-market prices |
For |
| Preemptive
Rights |
For |
| Actions
altering Board/Shareholder Relationship Require Prior Shareholder Approval
(including “anti-takeover” measures) |
For |
| Allow
Shareholder action by written consent |
For |
| Allow
Shareholders to call Special Meetings |
For |
| Social
and Environmental Issues |
As
recommended by Company Management |
| Reimbursing
Proxy Solicitation Expenses |
Case-by-Case |
