ck0001504079-20240331
GuideMark®
and GuidePath®
Funds
STATEMENT
OF ADDITIONAL INFORMATION
July
31, 2024
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GuideMark®
Large Cap Core Fund
Service
Shares (Ticker: GMLGX) |
GuidePath®
Tactical Allocation Fund
Service
Shares (Ticker: GPTUX)
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GuideMark®
Emerging Markets Fund
Service
Shares (Ticker: GMLVX)
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GuidePath®
Absolute Return Allocation Fund
Service
Shares (Ticker: GPARX)
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GuideMark®
Small/Mid Cap Core Fund
Service
Shares (Ticker: GMSMX)
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GuidePath®
Multi-Asset Income Allocation Fund
Service
Shares (Ticker: GPMIX)
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GuideMark®
World ex-US Fund
Service
Shares (Ticker: GMWEX)
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GuidePath®
Flexible Income Allocation Fund
Service
Shares (Ticker: GPIFX)
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GuideMark®
Core Fixed Income Fund
Service
Shares (Ticker: GMCOX)
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GuidePath®
Managed Futures Strategy Fund
Service
Shares (Ticker: GPMFX)
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GuidePath®
Growth Allocation Fund
Service
Shares (Ticker: GPSTX)
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GuidePath®
Conservative Income Fund
(Ticker:
GPICX)
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GuidePath®
Conservative Allocation Fund
Service
Shares (Ticker: GPTCX)
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GuidePath®
Income Fund
(Ticker:
GPINX)
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GuidePath®
Growth and Income Fund
(Ticker:
GPIGX)
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This
Statement of Additional Information (“SAI”) provides general information about
each of the series (individually, a “Fund” and collectively, the “Funds”) of GPS
Funds I and GPS Funds II. This SAI is not a prospectus and should be read in
conjunction with the Funds’ current Prospectus (the “Prospectus”) dated July 31,
2024, as supplemented and amended from time to time. This SAI is incorporated by
reference into the Prospectus. To obtain a copy of the Prospectus, please write
or call the Funds at the address or telephone number below.
The
Funds’ financial statements for the fiscal year ended March 31, 2024 are
incorporated herein by reference to the Funds’ Annual Report dated March 31,
2024. A copy of the Annual Report (Annual
Report for GPS Funds
I
and Annual
Report for GPS Fund
II)
may
be obtained without charge by calling or writing the Funds as shown
below.
GPS
Funds I & GPS Funds II
c/o
U.S. Bank Global Fund Services
P.O.
Box 701 Milwaukee, WI 53201-0701
Phone:
(888) 278-5809
General
Information about the Funds
GPS
Funds I and GPS Funds II (each a “Trust” and, together, the “Trusts”) are each
an open-end management investment company, organized as a Delaware statutory
trust on January 2, 2001 and October 20, 2010, respectively.
On
April 1, 2011, the GPS Funds I Trust’s name was changed from AssetMark Funds to
GPS Funds I. Effective April 1, 2011, the names of the AssetMark Large Cap
Growth Fund, AssetMark Large Cap Value Fund, AssetMark Small/Mid Cap Value Fund,
AssetMark International Equity Fund and AssetMark Core Plus Fixed Income Fund
were changed to GuideMark®
Large Cap Growth Fund, GuideMark®
Large Cap Value Fund, GuideMark®
Small/Mid Cap Core Fund, GuideMark®
World ex- US Fund, and GuideMark®
Core Fixed Income Fund, respectively. In addition, effective April 1, 2011, each
such series of GPS I Funds added a second class (Institutional Shares) and the
original class of shares was renamed (Service Shares). On October 9, 2015, the
name of the GuideMark®
Large Cap Growth Fund was changed to GuideMark®
Large Cap Core Fund and the name of the GuideMark®
Large Cap Value Fund was changed to GuideMark®
Emerging Markets Fund. The GuideMark®
Large Cap Core Fund, GuideMark®
Emerging Markets Fund, GuideMark®
Small/Mid
Cap Core Fund, GuideMark®
World ex-US Fund, and GuideMark®
Core Fixed Income Fund are collectively referred to as “GPS I Funds.” Most
recently, effective May 6, 2024, each such series of GPS I Funds liquidated and
dissolved the Institutional Shares.
The
GuidePath®
Growth Allocation Fund (the “Growth Allocation Fund”), GuidePath®
Conservative Allocation Fund (the “Conservative Allocation Fund”),
GuidePath®
Tactical Allocation Fund (the “Tactical Allocation Fund”), GuidePath®
Absolute Return Allocation Fund (the “Absolute Return Allocation Fund”),
GuidePath®
Multi-Asset Income Allocation Fund (“Multi-Asset Income Allocation Fund”),
GuidePath®
Flexible Income Allocation Fund (the “Flexible Income Allocation Fund”),
GuidePath®
Managed Futures Strategy Fund (the “Managed Futures Strategy Fund”),
GuidePath®
Conservative Income Fund (the “Conservative Income Fund”), GuidePath®
Income
Fund (the “Income Fund”), and GuidePath®
Growth and Income Fund (the “Growth and Income Fund”) are collectively referred
to as the “GPS II Funds.” The Growth Allocation Fund, Conservative Allocation
Fund, Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset
Income Allocation Fund, Flexible Income Allocation Fund, Conservative Income
Fund, Income Fund, and Growth and Income Fund invest primarily (or, in the case
of the Tactical Allocation Fund, between 10% and 100% of its assets), and
Managed Futures Strategy Fund also invests, in registered mutual funds and
exchange-traded funds (“ETFs”). The Income Fund and Growth and Income Fund also
invest in closed-end funds and other public and private pooled investment
vehicles. The funds in which each of the GPS II Funds may invest are referred to
herein as the “Underlying Funds.” By investing in the GPS II Funds, you will
indirectly bear fees and expenses of the Underlying Funds in addition to the GPS
II Fund’s direct fees and expenses.
Prior
to January 19, 2016, the Growth Allocation Fund was known as
GuidePath®
Strategic Asset Allocation Fund, the Conservative Allocation Fund was known as
GuidePath®
Tactical Constrained®
Asset Allocation Fund, the Tactical Allocation Fund was known as
GuidePath®
Tactical Unconstrained®
Asset Allocation Fund, the Absolute Return Allocation Fund was known as
GuidePath®
Absolute Return Asset Allocation Fund, the Multi-Asset Income Allocation Fund
was known as the GuidePath®
Multi-Asset Income Asset Allocation Fund, and the Flexible Income Allocation
Fund was known as GuidePath®
Fixed Income Allocation Fund. Effective May 6, 2024, the Growth Allocation Fund,
Conservative Allocation Fund, Tactical Allocation Fund, Absolute Return
Allocation Fund, Multi-Asset Income Allocation Fund, Flexible Income Allocation
Fund, and Managed Futures Strategy Fund liquidated and dissolved the
Institutional Shares.
The
GPS I Funds and GPS II Funds are each referred to as a “Fund” and, collectively
the “Funds”.
The
Declaration of Trusts permits the Trusts to offer separate series of shares of
beneficial interest (each of which is a separate mutual fund and separate
classes of such series). The Trusts currently offer a single class of shares
("Shares"). A holder of shares of a particular class of a particular Fund within
a Trust has an interest only in the assets attributable to the shares of that
class of that Fund. Shares of each class of a Fund participate equally in the
earnings, dividends, and assets allocated to the particular share class of that
Fund. Each share of each Fund represents an equal proportionate interest in the
assets and liabilities belonging to that Fund and is entitled to such dividends
and distributions out of the income and gains belonging to the Fund as are
declared by the Board (as defined below).
The
Trusts are authorized to issue an unlimited number of interests (or shares) with
no par value. Shares of each series have equal voting rights, and are voted in
the aggregate and not by the series except in matters where a separate vote is
required
by the Investment Company Act of 1940, as amended (the “1940 Act”), or when the
matter affects only the interest of a particular Fund. When matters are
submitted to shareholders for a vote, each shareholder is entitled to one vote
for each full share owned and fractional votes for fractional shares owned. The
Trusts do not normally hold annual meetings of shareholders. The shares of the
Funds do not have cumulative voting rights or any preemptive or conversion
rights. Expenses attributable to any Fund are borne by that Fund. Any general
expenses of the Trusts not readily identifiable as belonging to a particular
Fund are allocated by, or under the direction of, the Board (as defined below),
on the basis of relative net assets.
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Description
of GPS Funds I |
Each
GPS I Fund has its own investment objectives and policies. AssetMark, Inc.
serves as the investment advisor to the GPS I Funds (“AssetMark” or the
“Advisor”).
The
GuideMark®
Large Cap Core Fund (the “Large Cap Core Fund”), GuideMark®
Emerging Markets Fund (the “Emerging Markets Fund”), GuideMark®
Small/Mid Cap Core Fund (the “Small/Mid Cap Core Fund”) and
GuideMark®
World ex-US Fund (the “World ex-US Fund”) each have a fundamental investment
objective to provide capital appreciation over the long term. The
GuideMark®
Core Fixed Income Fund (the “Core Fixed Income Fund”) has a fundamental
investment objective to provide current income consistent with a low volatility
of principal.
Each
GPS I Fund’s investment objective is fundamental, which means that it may not be
changed without shareholder approval. Unless otherwise noted, all of the other
investment policies and strategies described in the Prospectus or hereafter are
non-fundamental.
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Description
of GPS Funds II |
Each
GPS II Fund has its own investment objectives and policies. Each Fund’s
investment objective is non-fundamental, and may be changed by the Trust’s Board
of Trustees without shareholder approval (the GPS Funds I Board of Trustees and
the GPS Funds II Board of Trustees are collectively referred to as the Board).
Unless otherwise noted, all of the other investment policies and strategies
described in the Prospectus or hereafter are non‑fundamental. AssetMark serves
as the investment advisor to the GPS II Funds.
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Diversification
of the Funds |
All
of the Funds are classified and operate as diversified funds under the 1940 Act.
Under the 1940 Act, a diversified fund is a fund that meets the following
requirements: at least 75% of the value of its total assets is represented by
cash and cash items (including receivables), government securities, securities
of other investment companies, and other securities for the purposes of this
calculation limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the total assets of such management company and to
not more than 10% of the outstanding voting securities of such issuer. A Fund
may not change its diversification classification to become non-diversified
without the approval of the holders of a majority of the Fund’s outstanding
voting securities. As used in this SAI, “a majority of a Fund’s outstanding
voting securities” means the lesser of (1) 67% of the shares of beneficial
interest of the Fund represented at a meeting at which more than 50% of the
outstanding shares are present, or (2) more than 50% of the outstanding shares
of beneficial interest of the Fund.
To
qualify for tax treatment as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the “Code”), each Fund intends to comply, as
of the end of each taxable quarter, with certain diversification requirements
imposed by the Code. Pursuant to these requirements, at the end of each taxable
quarter, the Fund, among other things, will not have investments in the
securities of any one issuer (other than U.S. government securities or
securities of other regulated investment companies) of more than 25% of the
value of the Fund’s total assets. In addition, with respect to 50% of the total
assets of the Fund, no investment can exceed 5% of the Fund’s total assets or
10% of the outstanding voting securities of the issuer.
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Investment
Restrictions GPS Funds I |
Each
of the GPS I Funds has adopted and is subject to the following fundamental
investment restrictions. These investment restrictions of the Funds may be
changed only with the approval of the holders of a majority of a Fund’s
outstanding voting securities.
The
percentage limitations referred to in these restrictions apply only at the time
of investment. A later increase or decrease in a percentage that results from a
change in value in the portfolio securities held by a Fund will not be
considered a violation of such limitation, and a Fund will not necessarily have
to sell a portfolio security or adjust its holdings in order to
comply.
1.No
Fund will act as underwriter for securities of other issuers except as they may
be deemed an underwriter in selling a portfolio security.
2.No
Fund will make loans if, as a result, the amount of a Fund’s assets loaned would
exceed the amount permitted under the 1940 Act or any applicable rule or
regulation thereof, or any exemption therefrom, except that each Fund may (i)
purchase or hold debt instruments in accordance with its investment objective
and policies; (ii) enter into repurchase agreements; (iii) lend its portfolio
securities and (iv) lend money to other Funds within the Trust in accordance
with the terms of the 1940 Act or any applicable rule or regulation thereof, or
any exemption therefrom.
3.No
Fund will purchase any securities that would cause more than 25% of the total
assets of the Fund to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry, provided
that this limitation does not apply to the securities of other investment
companies, investments in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities or tax- exempt municipal
securities.
4.No
Fund will borrow money in an amount exceeding the amount permitted under the
1940 Act or any applicable rule or regulation thereof, or any exemption
therefrom, provided that (i) investment strategies that either obligate a Fund
to purchase securities or require a Fund to segregate assets or maintain a
margin account to facilitate the settlement of securities transactions are not
considered borrowings for the purposes of this limitation and (ii) each Fund may
borrow money from other Funds within the Trust in accordance with the terms of
the 1940 Act or any applicable rule or regulation thereof, or any exemption
therefrom.
5.No
Fund will issue senior securities to the Funds’ presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the Funds from (i) making any permitted borrowings, loans, mortgages,
or pledges; (ii) entering into options, futures contracts, forward contracts,
repurchase transactions or reverse repurchase transactions or (iii) making short
sales of securities to the extent permitted by the 1940 Act and any rule or
order thereunder, or U.S. Securities and Exchange Commission (“SEC”) staff
interpretation thereof.
6.No
Fund will purchase or sell real estate, physical commodities, or commodities
contracts, except that each Fund may purchase (i) marketable securities issued
by companies that own or invest in real estate (including real estate investment
trusts (“REITs”)), commodities, or commodities contracts and (ii) commodities
contracts relating to financial instruments, such as financial futures contracts
and options on such contracts. Each Fund may temporarily hold and sell real
estate acquired through default, liquidation, or other distributions of an
interest in real estate as a result of such Fund’s ownership of real estate
investment trusts, securities secured by real estate or interests thereon or
securities of companies engaged in the real estate business.
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Investment
Restrictions GPS Funds II |
Each
of the GPS II Funds has adopted and is subject to the following fundamental
investment restrictions. These investment restrictions of the Funds may be
changed only with the approval of the holders of a majority of a Fund’s
outstanding voting securities.
The
percentage limitations referred to in these restrictions apply only at the time
of investment. A later increase or decrease in a percentage that results from a
change in value in the portfolio securities held by a Fund will not be
considered
a violation of such limitation, and a Fund will not necessarily have to sell a
portfolio security or adjust its holdings in order to comply.
Each
Fund may not:
1.borrow
money or issue senior securities, except as the 1940 Act, any rules or orders
thereunder, or SEC staff interpretation thereof, may permit;
2.underwrite
the securities of other issuers, except that it may engage in transactions
involving the acquisition, disposition or resale of its portfolio securities
under circumstances where it may be considered to be an underwriter under the
Securities Act of 1933;
3.purchase
or sell real estate, unless acquired as a result of ownership of securities or
other instruments and provided that this restriction does not prevent the Fund
from investing in issuers which invest, deal or otherwise engage in transactions
in real estate or interests therein, or investing in securities that are secured
by real estate or interests therein;
4.make
loans, provided that this restriction does not prevent the Fund from purchasing
debt obligations, entering into repurchase agreements, and loaning its assets to
broker/dealers or institutional investors and investing in loans, including
assignments and participation interests;
5.with
the exception of the Managed Futures Strategy Fund, make investments that will
result in the concentration (as that term may be defined in the 1940 Act, any
rules or orders thereunder, or SEC staff interpretation thereof) of its total
assets in securities of issuers in any one industry (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities or securities of other investment companies), except that a
fund of funds will concentrate to approximately the same extent that its
underlying funds index or indices concentrates in the stock of any particular
industry or industries;
6.with
respect to the Managed Futures Strategy Fund, purchase any security (other than
U.S. government securities) if, as a result, 25% or more of the Fund’s total
assets (taken at current value) would be invested in any one industry, except
that the Fund may invest more than 25% of its assets in securities and other
obligations of issuers in the financial services industry; and
7.with
the exception of the Managed Futures Strategy Fund, purchase or sell commodities
as defined in the Commodity Exchange Act, as amended, and the rules and
regulations thereunder, unless acquired as a result of ownership of securities
or other instruments and provided that this restriction does not prevent the
Fund from engaging in transactions involving futures contracts and options
thereon or investing in securities that are secured by physical
commodities.
The
Managed Futures Strategy Fund may:
8.Purchase
and sell commodities to the maximum extent permitted by applicable
law.
With
respect to #5 and #6 above, the Funds do not consider investment companies or a
wholly owned subsidiary of a Fund to be part of an industry.
With
respect to #6 above, although not part of the Managed Futures Strategy Fund’s
fundamental investment restriction, for illustration purposes: (i) telephone,
gas and electric public utilities are each regarded as separate industries and
finance companies whose financing activities are related primarily to the
activities of their parent companies are classified in the industry of their
parents; (ii) financial services industry includes banks, investment managers,
brokerage firms, investment banks and other companies that provide financial
services to consumers or industry; and (iii) asset-backed securities are not
considered to be bank obligations.
Non-Fundamental
Investment Restrictions
In
addition to the fundamental policies and investment restrictions described
above, and the various investment policies described in the Prospectus, each
Fund will be subject to the following investment restriction, which is
considered non-fundamental and may be changed by the Trust’s Board without
shareholder approval.
1.Each
Fund is permitted to invest in other investment companies, including open-end,
closed-end or unregistered investment companies, either within the percentage
limits set forth in the 1940 Act, any rule or order thereunder, or SEC staff
interpretation thereof, or to the extent permitted by exemptive rules or
exemptive relief under the 1940
Act,
without regard to the 1940 Act’s percentage limits, or in connection with a
merger, reorganization, consolidation or other similar transaction.
The
Advisor is responsible for constructing and monitoring the portfolio strategy
for each Fund. Each Fund invests in securities consistent with the Fund’s
investment objective(s) and strategies. The potential risks and returns of the
Funds vary with the degree to which a Fund invests in a particular market
segment and/or asset class.
The
Advisor manages certain Funds using a “manager of managers” approach by
selecting one or more sub-advisors to manage each Fund based upon the Advisor’s
evaluation of a sub-advisor’s expertise and performance in managing the
appropriate asset class. With respect to the Managed Futures Strategy Fund, the
Advisor may also manage a portion of the Fund’s portfolio directly, although it
has no current intention to do so. Each sub-advisor uses its own proprietary
research and securities selection processes to manage its allocated portion of
the Fund’s assets. From time to time, the Fund may have little or no assets
allocated to any one particular sub-advisor, as determined by the Advisor in its
sole discretion.
With
respect to the Growth Allocation Fund, Conservative Allocation Fund, Tactical
Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income Allocation
Fund, Flexible Income Allocation Fund and Managed Futures Strategy Fund, the
Advisor may also manage the Fund’s portfolio directly, using multiple research
providers to determine exposure across a variety of asset classes.
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Investment
Policies and Associated Risks |
The
Funds and the Underlying Funds may invest in a variety of securities and employ
a number of investment techniques, which involve risks. This SAI contains
additional information regarding both the principal and non-principal investment
strategies of the Funds and the Underlying Funds. In the following section, the
types of investments described and their related risks apply to both the Funds
and the Underlying Funds. For purposes of this section, the term “Fund” should
be read to mean the Funds and the Underlying Funds and the term “Advisor” should
be read to include a Fund’s respective sub-advisor(s), if
applicable.
Unless
otherwise noted in the Prospectus or this SAI or subject to a limitation under
the 1940 Act and its related regulations, the investments listed below are not
subject to a specific percentage limitation so long as they are made in a manner
consistent with a Fund’s principal investment strategies.
Asset-Backed
Securities
The
Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation Fund,
Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income
Allocation Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund may purchase
debt obligations known as “asset-backed securities.” Asset-backed securities are
securities that represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets, most often a pool or
pools of similar assets (e.g., receivables on home equity and credit loans and
receivables regarding automobile, credit card, mobile home and recreational
vehicle loans, wholesale dealer floor plans and leases).
Such
receivables are securitized in either a pass-through or a pay-through structure.
Pass-through securities provide investors with an income stream consisting of
both principal and interest payments based on the receivables in the underlying
pool. Pay-through asset-backed securities are debt obligations issued usually by
a special purpose entity, which are collateralized by the various receivables
and in which the payments on the underlying receivables provide that a Fund pay
the debt service on the debt obligations issued. The Core Fixed Income Fund,
Growth Allocation Fund, Conservative Allocation Fund, Tactical Allocation Fund,
Absolute Return Allocation Fund, Multi-Asset Income Allocation Fund, Flexible
Income Allocation Fund. Managed Futures Strategy Fund, Conservative Income Fund,
Income Fund, and Growth and Income Fund may invest in these and other types of
asset-backed securities that may be developed in the future.
The
credit quality of most asset-backed securities depends primarily on the credit
quality of the assets underlying such securities, how well the entity issuing
the security is insulated from the credit risk of the originator or any other
affiliated entities, and the amount and quality of any credit support provided
to the securities. The rate of principal payment on asset-backed securities
generally depends on the rate of principal payments received on the underlying
assets which in turn may be affected by a variety of economic and other factors.
As a result, the yield on any asset- backed security is difficult to predict
with precision and actual yield to maturity may be more or less than the
anticipated yield to maturity. Asset-backed securities may be classified as
“pass-through certificates” or “collateralized obligations.”
Asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligors on
underlying assets to make payment, such securities may contain elements of
credit support. Such credit support falls into two categories: (i) liquidity
protection; and (i) protection against losses resulting from ultimate default by
an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments due on the underlying pool is timely.
Protection against losses resulting from ultimate default enhances the
likelihood of payments of the obligations on at least some of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
Due
to the shorter maturity of the collateral backing such securities, there is less
of a risk of substantial prepayment than with mortgage-backed securities.
Asset-backed securities do, however, involve certain risks not associated with
mortgage-backed securities, including the risk that security interests cannot be
adequately, or in many cases, ever, established. In addition, with respect to
credit card receivables, a number of state and federal consumer credit laws give
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the outstanding balance. In the case of automobile receivables, there
is a risk that the holders may not have either a proper or first security
interest in all of the obligations backing such receivables due to the large
number of vehicles involved in a typical issuance and technical requirements
under state laws. Therefore, recoveries on repossessed collateral may not always
be available to support payments on the securities.
Examples
of credit support arising out of the structure of the transaction include
“senior-subordinated securities” (multiple class securities with one or more
classes subordinate to other classes as to the payment of principal thereof and
interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of “reserve
funds” (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and “over collateralization” (where the scheduled payments on, or the principal
amount of, the underlying assets exceeds that required to make payments of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical credit information
respecting the level of credit risk associated with the underlying assets.
Delinquencies or losses in excess of those anticipated could adversely affect
the return on an investment in such issue.
The
GPS II Funds may also gain exposure to asset-backed securities through entering
into credit default swaps or other derivative instruments related to
asset-backed securities. For example, a Fund may enter into credit default swaps
on ABX, which are indices made up of tranches of asset-backed securities, each
with different credit ratings. Utilizing ABX, a Fund can either gain synthetic
risk exposure to a portfolio of such securities by “selling protection” or take
a short position by “buying protection.” The protection buyer pays a monthly
premium to the protection seller, and the seller agrees to cover any principal
losses and interest shortfalls of the referenced underlying asset-backed
securities. Credit default swaps and other derivative instruments related to
asset-backed securities are subject to the risks associated with asset-backed
securities generally, as well as the risks of derivative
transactions.
Auction
Rate Securities
The
Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation Fund,
Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income
Allocation Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund may invest in
auction rate Municipal Securities. Auction rate securities usually permit the
holder to sell the securities in an auction at par value at specified intervals.
The dividend is reset by “Dutch” auction in which bids are made by
broker-dealers and
other
institutions for a certain amount of securities at a specified minimum yield.
The dividend rate set by the auction is the lowest interest or dividend rate
that covers all securities offered for sale. While this process is designed to
permit auction rate securities to be traded at par value, there is the risk that
an auction will fail due to insufficient demand for the securities.
Bank
Loans, Loan Participations and Assignments
Certain
Funds may invest in bank loans, which include both secured and unsecured loans
made by banks and other financial institutions to corporate customers. Senior
loans typically hold the most senior position in a borrower’s capital structure,
may be secured by the borrower’s assets and have interest rates that reset
frequently. The proceeds of senior loans primarily are used to finance leveraged
buyouts, recapitalizations, mergers, acquisitions, stock repurchases, dividends,
and, to a lesser extent, to finance internal growth and for other corporate
purposes. These loans may not be rated investment grade by the rating agencies.
Although secured loans are secured by collateral of the borrower, there is no
assurance that the liquidation of collateral from a secured loan would satisfy
the borrower’s obligation, or that the collateral can be liquidated. Economic
downturns generally lead to higher non-payment and default rates and a senior
loan could lose a substantial portion of its value prior to a default. Some
senior loans are subject to the risk that a court could subordinate such senior
loans to presently existing or future indebtedness of the borrower or take other
action detrimental to the holders of senior loans, including, in certain
circumstances, invalidating such senior loans or causing interest previously
paid to be refunded to the borrower.
The
Funds’ investments in loans are subject to credit risk. Indebtedness of
borrowers whose creditworthiness is poor involves substantial risks, and may be
highly speculative. The interest rates on many bank loans reset frequently, and
thus bank loans are subject to interest rate risk. Most bank loans are not
traded on any national securities exchange. Bank loans generally have less
liquidity than investment grade bonds and there may be less public information
available about them.
Large
loans to corporations or governments may be shared or syndicated among several
lenders, usually (but often not limited to) banks. The Funds may participate in
the primary syndicate for a loan and may purchase loans from other lenders
(sometimes referred to as loan assignments), in either case becoming a direct
lender. The Funds also may acquire a participation interest in another lender’s
portion of the loan. Participation interests involve special types of risk,
including liquidity risk and the risks of being a lender. When investing in a
loan participation, a Fund typically will have the right to receive payments
only from the lender to the extent the lender receives payments from the
borrower, and not from the borrower itself. Likewise, a Fund typically will be
able to enforce its rights only through the lender, and not directly against the
borrower. As a result, a Fund will assume the credit risk of both the borrower
and the lender that is selling the participation.
Investments
in loans through direct assignment of a financial institution’s interests with
respect to a loan may involve additional risks to a Fund. For example, if the
loan is foreclosed, a Fund could become part owner of any collateral, and would
bear the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is possible that a Fund could be held liable as a
co-lender. Loans and other debt instruments that are not in the form of
securities may offer less legal protection to a Fund in certain circumstances.
A
loan is often administered by a bank or other financial institution that acts as
agent for all holders. The agent administers the terms of the loan, as specified
in the loan agreement. Unless a Fund has direct recourse against the borrower,
under the terms of the loan or other indebtedness a Fund may have to rely on the
agent to pursue appropriate credit remedies against a borrower.
In
addition to investing in senior secured loans, the Funds may invest in other
loans, such as second lien loans and other secured loans, as well as unsecured
loans. Second lien loans and other secured loans are subject to the same risks
associated with investment in senior loans and lower-rated debt securities.
However, such loans may rank lower in right of payment than senior secured
loans, and are subject to additional risk that the cash flow of the borrower and
any property securing the loan may be insufficient to meet scheduled payments
after giving effect to the higher ranking secured obligations of the borrower.
Second lien loans and other secured loans are expected to have greater price
volatility than more senior loans and may be less liquid. There is also a
possibility that originators will not be able to sell participations in
lower‑ranking loans, which would create greater credit risk exposure. Each of
these risks may be increased in the case of unsecured loans, which are not
backed by a security interest in any specific collateral.
The
value of any collateral securing a loan may decline, be insufficient to meet the
borrower’s obligations, or be difficult or costly to liquidate. It may take
longer than 7 days for investments in loans to settle, which may adversely
affect a Fund’s ability to timely honor redemptions. In the event of a default,
a Fund may have difficulty collecting on any collateral and a loan can decline
significantly in value. A Fund’s access to collateral may also be limited by
bankruptcy or other insolvency laws. If a loan is acquired through an
assignment, a Fund may not be able to unilaterally enforce all rights and
remedies under the loan and with regard to any associated collateral. High yield
loans usually are more credit sensitive.
Bank
loans might not be considered securities for purposes of the Securities Act of
1933, as amended (the “Securities Act”) or the Securities Exchange Act of 1934,
and therefore a risk exists that purchasers, such as the Funds, may not be
entitled to rely on the anti-fraud provisions of those Acts. Additionally, the
Funds could be at a disadvantage to other traders in the market who take the
view that insider-trading prohibitions do not apply to trading in the loans,
because they are not considered securities.
Borrowings
Each
Fund may borrow funds to meet redemptions, for other emergency purposes or to
increase its portfolio holdings of securities, to the extent permitted by the
1940 Act. Such borrowings may be on a secured or unsecured basis, and at fixed
or variable rates of interest. A Fund may borrow for such purposes an amount
equal to 33 1/3% of the value of its total assets. The 1940 Act requires a Fund
to maintain continuous asset coverage of not less than 300% with respect to all
borrowings. If such asset coverage should decline to less than 300% due to
market fluctuations or other reasons, a Fund may be required to dispose of some
of its portfolio holdings within three days (not including Sundays and holidays)
in order to reduce the Fund’s debt and restore the 300% asset coverage, even
though it may be disadvantageous from an investment standpoint to dispose of
assets at that time.
Leveraging,
by means of borrowing, may exaggerate the effect of any increase or decrease in
the value of portfolio securities on a Fund’s net asset value, and money
borrowed will be subject to interest and other costs (which may include
commitment fees and/or the cost of maintaining minimum average balances), which
may or may not exceed the income received from the investments purchased with
borrowed funds.
Business
Development Companies
The
Income Fund and the Growth and Income Fund may invest in business development
companies (“BDCs”), to the extent permitted by the 1940 Act or any rules,
regulations or exemptive relief thereunder. BDCs are closed-end investment
companies that elect to register as BDCs and primarily invest in equity and debt
securities issued by private companies as well as small- and
medium-capitalization public companies. As with any investment by the Fund in
another investment company, shareholders bear both their proportionate share of
the Fund’s expenses and similar expenses of the BDC. Fees and expenses incurred
indirectly by the Fund as a result of its investment in shares of one or more
other investment companies, including BDCs, generally are referred to as
“acquired fund fees and expenses” and may appear as a separate line item in the
Fund’s prospectus fee table. For BDCs, acquired fund fees and expenses may be
significant.
The
debt securities in which BDCs generally invest are unrated or below investment
grade. Below investment grade debt securities are often referred to as “high
yield” or “junk” bonds. Further, debt securities held by BDCs may be unsecured
or secured with minimal, if any, collateral or cash flow coverage, making such
asset-backed securities higher risk than typical asset-backed instruments. The
revenues, income (or losses) and valuations of the companies can, and often do,
fluctuate suddenly and dramatically, and they face considerable risk of loss. As
a result, investments in BDCs may expose the Fund to greater risk and cause it
to experience higher volatility than it otherwise would.
In
addition to being difficult to value, privately placed securities in which BDCs
may invest may also be thinly traded or illiquid. BDCs that invest in such
securities accordingly may have difficulty liquidating them, including to
provide liquidity to shareholders such as the Fund.
The
Fund’s performance will be affected by both the BDCs in which it invests and the
performance of the BDCs’ portfolio companies. Little public information
generally exists about the portfolio companies in which BDCs may
invest.
Accordingly, the fair values of such companies’ securities often are not readily
determinable. Although each BDC’s board of directors is responsible for
determining the fair value of the BDC’s portfolio companies’ securities,
uncertainty surrounding the determination may adversely affect the determination
of the BDC’s net asset value. This could cause the Fund’s investments in a BDC
to be inaccurately valued, including overvalued. Investing in BDCs thus entails
a risk that a fully informed evaluation of the BDC and its portfolio companies
is not achievable.
BDCs
often borrow funds to make investments. Such borrowings expose BDCs to the risks
associated with interest rate fluctuations, which may have a material adverse
impact on their ability to achieve their investment objectives and on their rate
of return and performance. Such borrowings also expose the Fund to the risks of
leverage. Leverage magnifies the potential loss on amounts invested and
therefore increases the expected volatility and risk profile of the Fund.
Leverage is generally considered a speculative investment technique. Certain
BDCs may be incentivized by their management fee structure to engage in
leverage, particularly where their management fees are paid on gross assets,
including those acquired through the use of leverage. These management fee
structures may dramatically increase the management fees paid by BDCs to their
(usually external) managers, even though management fees generally paid by BDCs
may already be higher than those charged by other registered investment
companies.
Collateralized
Debt Obligations
Collateralized
debt obligations and similarly structured securities, sometimes known generally
as CDOs, are interests in a trust or other special purpose entity (SPE) and are
typically backed by a diversified pool of bonds, loans or other debt
obligations. CDOs are not limited to investments in one type of debt and,
accordingly, a CDO may be collateralized by corporate bonds, commercial loans,
asset-backed securities, residential mortgage-backed securities, REITs,
commercial mortgage-backed securities, emerging market debt, and municipal
bonds. Certain CDOs may use derivatives contracts, such as credit default swaps,
to create “synthetic” exposure to assets rather than holding such assets
directly, which entails the risks of derivative instruments. For more
information about the risks of derivatives, see “Derivatives”
below.
Common
varieties of CDOs include the following:
Collateralized
loan obligations. Collateralized
loan obligations (CLOs) are interests in a trust typically collateralized
substantially by a pool of loans, which may include, among others, domestic and
foreign senior secured loans, senior unsecured loans, and subordinate corporate
loans made to domestic and foreign borrowers, including loans that may be rated
below investment grade or equivalent unrated loans.
Collateralized
bond obligations. Collateralized
bond obligations (CBOs) are interests in a trust typically backed substantially
by a diversified pool of high risk, below investment grade fixed income
securities.
Structured
finance CDOs. Structured
finance CDOs are interests in a trust typically backed substantially by
structured investment products such as asset-backed securities and commercial
mortgage-backed securities.
Synthetic
CDOs. In
contrast to CDOs that directly own the underlying debt obligations, referred to
as cash CDOs, synthetic CDOs are typically collateralized substantially by
derivatives contracts, such as credit default swaps, to create “synthetic”
exposure to assets rather than holding such assets directly, which entails the
risks of derivative instruments. For more information about the risks of
derivatives, see “Derivatives” below.
CDOs
are similar in structure to collateralized mortgage obligations, described
elsewhere in this SAI. Unless the context indicates otherwise, the discussion of
CDOs below also applies to CLOs, CBOs and other similarly structured
securities.
In
CDOs, the cash flows from the SPE are split into two or more portions, called
tranches (or classes), that vary in risk and yield. The riskiest portion is the
“equity” tranche which bears the first loss from defaults on the bonds or loans
in the SPE and is intended to protect the other, more senior tranches from
severe, and potentially unforeseen, defaults or delinquent collateral payments
(though such protection is not complete). Because they may be partially
protected from defaults, senior tranches from a CDO typically have higher
ratings and lower yields than the underlying collateral securities held by the
trust, and may be rated investment grade. Despite protection from the equity
tranche, more senior tranches can experience, and may have experienced in the
past, substantial losses due to actual defaults, increased sensitivity to
defaults due to collateral default, downgrades of the underlying collateral by
rating agencies, forced
liquidation
of a collateral pool due to a failure of coverage tests, disappearance of
protecting tranches, market anticipation of defaults, as well as a market
aversion to CDO securities as a class.
The
risks of an investment in a CDO depend largely on the type of collateral held by
the SPE and the tranche of the CDO in which a Fund invests. Investment risk may
also be affected by the performance of a CDO’s collateral manager (the entity
responsible for selecting and managing the pool of collateral securities held by
the SPE trust), especially during a period of market volatility like that
experienced in 2007-2008. Normally, CDOs are privately offered and sold, and
thus, are not registered under the securities laws and traded in a public
market. As a result, investments in CDOs may be classified by a Fund as illiquid
investments. However, an active dealer market may exist for CDOs allowing a Fund
to trade CDOs with other qualified institutional investors under Rule 144A. To
the extent such investments are classified as illiquid, they will be subject to
the Fund’s restrictions on investments in illiquid investments. The Fund’s
investment in unregistered securities such as CDOs will not receive the same
investor protection as an investment in registered securities.
All
tranches of CDOs, including senior tranches with high credit ratings, can
experience, and many have recently experienced, substantial losses due to actual
defaults, increased sensitivity to future defaults due to the disappearance of
protecting tranches, market anticipation of defaults, as well as market aversion
to CDO securities as a class. In the past, prices of CDO tranches have declined
considerably. The drop in prices was initially triggered by the subprime
mortgage crisis. Subprime mortgages make up a significant portion of the
mortgage securities that collateralize many CDOs. As floating interest rates and
mortgage default rates increased, the rating agencies that had rated the
mortgage securities and CDO transactions backed by such mortgages realized their
default assumptions were too low and began to downgrade the credit rating of
these transactions. There can be no assurance that additional losses of equal or
greater magnitude will not occur in the future.
In
addition to the normal risks associated with debt securities and asset backed
securities (e.g., interest rate risk, credit risk and default risk), CDOs carry
additional risks including, but not limited to: (i) the possibility that
distributions from collateral securities will not be adequate to make interest
or other payments; (ii) the quality of the collateral may decline in value or
quality or go into default or be downgraded; (iii) a Fund may invest in tranches
of a CDO that are subordinate to other classes; and (iv) the complex structure
of the security may not be fully understood at the time of investment and may
produce disputes with the issuer, difficulty in valuing the security or
unexpected investment results.
Certain
issuers of CDOs may be deemed to be “investment companies” as defined in the
1940 Act. As a result, the Fund’s investment in these structured investments
from these issuers may be limited by the restrictions contained in the 1940 Act.
CDOs generally charge management fees and administrative expenses that the
shareholders of a Fund would pay indirectly.
Collateralized
Mortgage Obligations (“CMOs”) and Real Estate Mortgage Investment Conduits
(“REMICs”)
The
Funds may invest in CMOs and REMICs. A CMO is a debt security on which interest
and prepaid principal are paid, in most cases, semi-annually. CMOs may be
collateralized by whole mortgage loans but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, the Federal
Home Loan Mortgage Company, or the Federal National Mortgage Association (“FNMA”
or “Fannie Mae®”)
and their income streams. Privately-issued CMOs tend to be more sensitive to
interest rates than government-issued CMOs.
CMOs
are structured into multiple classes, each bearing a different stated maturity.
Actual maturity and average life will depend upon the prepayment experience of
the collateral. CMOs provide for a modified form of call protection through a de
facto breakdown of the underlying pool of mortgages according to how quickly the
loans are repaid. Monthly payments of principal received from the pool of
underlying mortgages, including prepayments, is first returned to investors
holding the shortest maturity class. The investors holding the longer maturity
classes receive principal only after the first class has been retired. An
investor is partially guarded against a sooner than desired return of principal
because of the sequential payments.
In
a typical CMO transaction, a corporation issues multiple series (e.g., A, B, C,
Z) of CMO bonds (“Bonds”). Proceeds of the Bond offering are used to purchase
mortgages or mortgage pass-through certificates (“Collateral”). The Collateral
is pledged to a third-party trustee as security for the Bonds. Principal and
interest payments from the Collateral are used to pay principal on the Bonds in
a specified order (e.g., first A, then B, then C, then Z). The A, B and C Bonds
all bear
current
interest. Interest on the Z Bond is accrued and added to principal and a like
amount is paid as principal on the A, B, or C Bond currently being paid off.
When the A, B and C Bonds are paid in full, interest and principal on the Z Bond
begins to be paid currently. With some CMOs, the issuer serves as a conduit to
allow loan originators (primarily builders or savings and loan associations) to
borrow against their loan portfolios. REMICs are private entities formed for the
purpose of holding a fixed pool of mortgages secured by an interest in real
property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
CMOs
and REMICs issued by private entities are not government securities and are not
directly guaranteed by any government agency. They are secured by the underlying
collateral of the private issuer. Yields on privately issued CMOs, as described
above, have been historically higher than yields on CMOs issued or guaranteed by
U.S. government agencies. However, the risk of loss due to default on such
instruments is higher because they are not guaranteed by the U.S. government.
Such instruments also tend to be more sensitive to interest rates than U.S.
government-issued CMOs. For federal income tax purposes, a Fund will be required
to accrue income on regular interest in CMOs and REMICs using the “catch-up”
method, with an aggregate prepayment assumption.
Common
and Preferred Stock
Equity
securities, such as common stocks, represent shares of ownership of a
corporation. Preferred stocks are equity securities that often pay dividends at
a specific rate and have a preference over common stocks in dividend payments
and the liquidation of assets. Some preferred stocks may be convertible into
common stock. Convertible securities are securities (such as debt securities or
preferred stock) that may be converted into or exchanged for a specified amount
of common stock of the same or different issuer within a particular period of
time at a specified price or formula.
Credit
Enhancement
Some
of the investments of the Funds may be credit enhanced by a guaranty, letter of
credit or insurance. Any bankruptcy, receivership, default or change in the
credit quality of the credit enhancer will adversely affect the quality and
marketability of the underlying security and could cause losses to a Fund and
affect the prices of shares issued by the Fund. The Growth Allocation Fund,
Conservative Allocation Fund, Tactical Allocation Fund, Absolute Return
Allocation Fund, Multi-Asset Income Allocation Fund, Flexible Income Allocation
Fund, Managed Futures Strategy Fund, Core Fixed Income Fund, Conservative Income
Fund, Income Fund, and Growth and Income Fund each may invest in securities that
are credit-enhanced by banks, and thus the value of those credit enhancements
will be affected by developments affecting the economic health and viability of
banks. A Fund typically evaluates the credit quality and ratings of
credit-enhanced securities based upon the financial condition and ratings of the
party providing the credit enhancement, rather than the financial condition
and/or rating of the issuer.
Cyber
Security Risks
As
technology becomes more integrated into the Funds’ operations, and as all
financial services firms continue to face increased security threats, the Funds
will face greater operational risks through breaches in cyber security. A breach
in cyber security refers to both intentional and unintentional events that may
cause the Funds to lose proprietary information, suffer data corruption, or lose
operational capacity. This in turn could cause the Funds to incur regulatory
penalties, reputational damage, additional compliance costs associated with
corrective measures, and/or financial loss. Cyber security threats may result
from unauthorized access to the Funds’ digital information systems (e.g.,
through “hacking” or malicious software coding), but may also result from
outside attacks such as denial-of-service attacks (i.e., efforts to make network
services unavailable to intended users) and ransomware attacks. In addition,
because the Funds work closely with third-party service providers (e.g.,
administrators, transfer agents, custodians and sub- advisors), cyber security
breaches at such third-party service providers may subject the Funds to many of
the same risks associated with direct cyber security breaches. The same is true
for cyber security breaches at any of the issuers in which the Funds may invest.
While the Funds and their third-party service providers have established
information technology and data security programs and have in place business
continuity plans and other systems designed to prevent losses and mitigate cyber
security risk, there are inherent limitations in such plans and systems,
including the possibility that certain risks have not been identified or that
cyber-attacks may be highly sophisticated.
Debt
Securities
The
Funds may invest in debt securities, including those convertible into common
stocks.
Unless
otherwise noted in a Fund’s prospectus, debt securities purchased by a Fund,
other than the Multi-Asset Income Allocation Fund, Flexible Income Allocation
Fund, Managed Futures Strategy Fund, Conservative Income Fund, Income Fund and
Growth and Income Fund, will typically consist of obligations that are rated
investment grade or better, having at least adequate capacity to pay interest
and typically repay principal. The Funds may invest in both fixed-rate and
variable-rate debt securities.
The
Funds consider investment grade securities to be those rated BBB- or higher by
S&P Global Ratings (“S&P®”),
or Baa or higher by Moody’s Investors Service©,
Inc. (“Moody’s”), or an equivalent rating by Fitch, Inc.©
(“Fitch”),
or determined to be of comparable quality by the Advisor if the security is
unrated. Bonds in the lowest investment grade category (BBB- by
S&P®
or
Baa3 by Moody’s) have speculative characteristics, and changes in the economy or
other circumstances are more likely to lead to a weakened capacity of the bonds
to make principal and interest payments than would occur with bonds rated in
higher categories.
The
Growth Allocation Fund, Conservative Allocation Fund, Tactical Allocation Fund,
Absolute Return Allocation Fund, Multi-Asset Income Allocation Fund, Flexible
Income Allocation Fund, Managed Futures Strategy Fund, Conservative Income Fund,
Income Fund, and Growth and Income Fund may invest in high-yield debt securities
or “junk bonds,” which are securities rated BB or below by S&P®
or
Ba or below by Moody’s (“lower-rated securities”). Additionally, the Core Fixed
Income Fund may hold lower-rated securities as a result of downgrades in the
rating of the securities subsequent to their purchase by the Fund. Lower-rated
securities are considered to be of poor standing and predominantly speculative
and are subject to a substantial degree of credit risk. Lower-rated securities
may be issued as a consequence of corporate restructurings, such as leveraged
buy-outs, mergers, acquisitions, debt recapitalizations or similar events. Also,
lower-rated securities are often issued by smaller, less creditworthy companies
or by highly leveraged (indebted) firms, which are generally less able than more
financially stable firms to make scheduled payments of interest and principal.
The risks posed by securities issued under such circumstances are
substantial.
The
higher yields from lower-rated securities may compensate for the higher default
rates on such securities. However, there can be no assurance that higher yields
will offset default rates on lower-rated securities in the future. Issuers of
these securities are often highly leveraged, so their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. In addition, such issuers may not have
more traditional methods of financing available to them and may be unable to
repay their debt at maturity by refinancing. The risk of loss due to default by
the issuer is significantly greater for the holders of lower- rated securities
because such securities may be unsecured and may be subordinated to other
creditors of the issuer. Further, an economic recession may result in default
levels with respect to such securities in excess of historic
averages.
The
value of lower-rated securities will be influenced not only by changing interest
rates, but also by the market’s perception of credit quality and the outlook for
economic growth. When economic conditions appear to be deteriorating,
lower-rated securities may decline in market value due to investors’ heightened
concern over credit quality, regardless of prevailing interest
rates.
Especially
during times of deteriorating economic conditions, trading in the secondary
market for lower-rated securities may become thin and market liquidity may be
significantly reduced. Even under normal conditions, the market for lower-rated
securities may be less liquid than the market for investment grade debt
securities. There are fewer securities dealers in the high yield market and
purchasers of lower-rated securities are concentrated among a smaller group of
securities dealers and institutional investors. In periods of reduced market
liquidity, lower-rated securities’ prices may become more volatile and a Fund’s
ability to dispose of particular issues when necessary to meet that Fund’s
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer may be adversely
affected.
The
ratings of S&P®,
Moody’s and other nationally recognized statistical rating organizations
(“NRSROs”) represent the opinions of those rating agencies as to the quality of
debt securities. It should be emphasized, however, that ratings are general and
are not absolute standards of quality, and debt securities with the same
maturity, interest rate and rating may have different yields, while debt
securities of the same maturity and interest rate with different ratings may
have the same yield.
The
payment of principal and interest on most debt securities will depend upon the
ability of the issuers to meet their obligations. An issuer’s obligations in
connection with its debt securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
federal or state legislatures extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations. The power or ability of an issuer to meet its obligations for the
payment of interest on, and principal of, its debt securities may be materially
adversely affected by litigation or other conditions.
Subsequent
to its purchase by a Fund, a rated security may cease to be rated or its rating
may be reduced below the minimum rating required for purchase by a Fund. The
Advisor will consider such an event in determining whether a Fund involved
should continue to hold the security. For a more detailed description of the
ratings of debt securities, see Appendix
A to
this SAI.
Derivatives
Each
Fund may use derivatives. A derivative is a financial instrument which has a
value that is based on (“derived from”) the value of one or more underlying
assets, reference rates, indices or other reference measures, and may relate to,
among other things, securities, interest rates, currencies, credit, commodities,
related indices, or other market factors. Derivatives used by the Funds may
include forwards, options, futures, options on futures, swaps and options on
swaps (see additional disclosure below).
Foreign
Currency Transactions
Although
the Funds value their assets daily in U.S. dollars, they are not required to
convert their holdings of foreign currencies to U.S. dollars on a daily basis. A
Fund’s foreign currencies generally will be held as “foreign currency call
accounts” at foreign branches of foreign or domestic banks. These accounts bear
interest at negotiated rates and are payable upon relatively short demand
periods. If a bank at which a Fund maintains such an account becomes insolvent,
a Fund could suffer a loss of some or all of the amounts deposited. A Fund may
convert foreign currency to U.S. dollars from time to time. Although foreign
exchange dealers generally do not charge a stated commission or fee for
conversion, the prices posted generally include a “spread,” which is the
difference between the prices at which the dealers are buying and selling
foreign currencies. The Emerging Markets Fund and the World ex-US Fund may hedge
their foreign currency exposure under normal market conditions.
The
Funds may enter into forward currency contracts. A forward currency contract
involves an obligation to purchase or sell a specific non U.S. currency in
exchange for another currency, which may be U.S. dollars, at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. At the maturity of a
forward currency contract, a Fund may either exchange the currencies specified
in the contract or, prior to maturity, a Fund may enter into a closing
transaction involving the purchase or sale of an offsetting contract. Closing
transactions with respect to forward currency contracts are usually effected
with the counterparty to the original contract. Thus, there can be no assurance
that a Fund will in fact be able to close out a forward currency contract at a
favorable price. In addition, in the event of bankruptcy or insolvency of a
counterparty, a Fund may be unable to close out a forward currency
contract.
The
Funds may enter into forward currency contracts that do not provide for physical
settlement of the reference asset but instead provide for settlement by a single
cash payment (“non-deliverable forwards”). Under definitions adopted by the
Commodity Futures Trading Commission (“CFTC”) and the SEC, non-deliverable
forwards are considered swaps. Although non-deliverable forwards have
historically been traded in the OTC market, as swaps they may in the future be
required to be centrally cleared and traded on public facilities. For more
information, see “Swaps and Options on Swaps,” “Risks of Swaps” and “Risks of
Potential Regulation of Swaps and Other Derivatives” below.
The
Funds may also enter into currency futures contracts. A currency futures
contract is a standard binding agreement to buy or sell a specified quantity of
a foreign currency at a specified price at a specified later date. Currency
futures contracts are bought and sold on U.S. and non-U.S. exchanges and must be
executed through a futures commission merchant (“FCM”). Certain futures
contracts may also be entered into on certain exempt markets, including exempt
boards of trade and electronic trading facilities, available to certain market
participants. For more information about futures contracts generally, see
“Futures Contracts and Options on Futures Contracts” and “Risks Associated with
Futures Contracts” below.
Certain
transactions involving forward currency contracts or currency futures contracts
may serve as long hedges (for example, if a Fund seeks to buy a security
denominated in a foreign currency, it may purchase a forward currency contract
or currency futures contract to lock in the U.S. dollar price of the security)
or as short hedges (if a Fund anticipates selling a security denominated in a
foreign currency, it may sell a forward currency contract or currency futures
contract to lock in the U.S. dollar equivalent of the anticipated sales
proceeds).
A
Fund may seek to hedge against changes in the value of a particular currency by
using forward contracts or currency futures contracts on another foreign
currency or a basket of currencies, the value of which the Advisor believes will
have a positive correlation to the values of the currency being hedged. In
addition, each Fund may use forward currency contracts or currency futures
contracts to shift exposure to foreign currency fluctuations from one country to
another. For example, if a Fund owns securities denominated in a foreign
currency and the Advisor believes that currency will decline relative to another
currency, it might enter into a forward or futures contract to sell an
appropriate amount of the first foreign currency, with payment to be made in the
second currency. Transactions that use two foreign currencies are sometimes
referred to as “cross hedges.” Use of different foreign currency magnifies the
risk that movements in the price of the instrument will not correlate or will
correlate unfavorably with the foreign currency being hedged.
The
cost to a Fund of engaging in forward currency contracts or currency futures
contracts varies with factors such as the interest rate environments in the
relevant countries, the currencies involved, the length of the contract period
and the market conditions then prevailing. The successful use of forward
currency contracts and currency futures contracts will usually depend on the
investment manager’s ability to accurately forecast currency exchange rate
movements. Should exchange rates move in an unexpected manner, a Fund may not
achieve the anticipated benefits of the transaction, or it may realize losses.
In addition, these techniques could result in a loss if the counterparty to the
transaction does not perform as promised, including because of the
counterparty’s bankruptcy or insolvency. In unusual or extreme market
conditions, a counterparty’s creditworthiness and ability to perform may
deteriorate rapidly, and the availability of suitable replacement counterparties
may become limited. Moreover, investors should bear in mind that a Fund is not
obligated to actively engage in hedging or other currency transactions. For
example, a Fund may not have attempted to hedge its exposure to a particular
foreign currency at a time when doing so might have avoided a loss.
Forward
currency contracts and currency futures contracts may limit potential gain from
a positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for a Fund than if it had not engaged in such contracts.
Moreover, there may be an imperfect correlation between a Fund’s portfolio
holdings of securities denominated in a particular currency and the currencies
bought or sold in the forward or futures contracts entered into by the Fund.
This imperfect correlation may cause a Fund to sustain losses that will prevent
the Fund from achieving a complete hedge or expose the Fund to risk of foreign
exchange loss.
Options
The
Funds may purchase and write call or put options on securities and indices and
enter into related closing transactions.
All
of the Funds may invest in options that are listed on U.S. exchanges or traded
over the counter. In addition, the World ex-US Fund may invest in options that
are listed on recognized foreign exchanges. A liquid secondary market in options
traded on an exchange may be more readily available than in the OTC market,
potentially permitting a Fund to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse market
movements. There is no assurance, however, that a Fund will be able to close
options positions at the time or price desired, which may have an adverse impact
on a Fund’s investments in such options. Certain options may be classified as
illiquid. Accordingly, a Fund will only invest in such options to the extent
consistent with its limit on investments in illiquid investments.
Call
Options
A
purchaser (holder) of a call option pays a non-refundable premium to the seller
(writer) of a call option to obtain the right to purchase a specified amount of
an investment at a fixed price (the exercise price) during a specified period
(exercise period). Conversely, the seller (writer) of a call option, upon
payment by the holder of the premium, has the
obligation
to sell the investment to the holder of the call option at the exercise price
during the exercise period. The Funds may both purchase and write call
options.
The
premium that a Fund pays when purchasing a call option or receives when writing
a call option will reflect, among other things, the market price of the
investment, the relationship of the exercise price to the market price of the
investment, the relationship of the exercise price to the volatility of the
investment, the length of the option period and supply and demand
factors.
Purchasing
Call Options
The
Funds may purchase call options. As a holder of a call option, a Fund has the
right, but not the obligation, to purchase an investment at the exercise price
during the exercise period. Instead of exercising the option and purchasing the
investment, a Fund may choose to allow the option to expire or enter into a
“closing sale transaction” with respect to the option. A closing sale
transaction gives a Fund the opportunity to cancel out its position in a
previously purchased option through the offsetting sale during the exercise
period of an option having the same features. The Fund will realize a profit
from a closing sale transaction if the cost of the transaction is more than the
premium it paid to purchase the option. The Fund will realize a loss from the
closing sale transaction if the cost of the transaction is less than the premium
paid by the Fund. A Fund may purchase call options on investments that it
intends to buy in order to limit the risk of a substantial change in the market
price of the investment. A Fund may also purchase call options on investments
held in its portfolio and on which it has written call options.
Although
a Fund will generally purchase only those call options for which there appears
to be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option, or at any particular
time, and for some options, no secondary market on an exchange may exist. In
such event, it may not be possible to effect closing transactions in particular
options, with the result being that a Fund would have to exercise its options in
order to realize any profit and would incur brokerage commissions upon the
exercise of such options and upon the subsequent disposition of the underlying
investments acquired through the exercise of such options. Further, unless the
price of the underlying investment changes sufficiently, a call option purchased
by a Fund may expire without any value to the Fund, in which event the Fund
would realize a capital loss which will be short-term unless the option was held
for more than one year.
Writing
Call Options
The
Funds may write call options. As the writer of a call option, a Fund has the
obligation to sell the security at the exercise price during the exercise
period.
A
Fund will generally only write “covered call options." A call option is
“covered” when a Fund either holds the security that is the subject of the
option or possesses the option to purchase the same security at an exercise
price equal to or less than the exercise price of the covered call
option.
As
the writer of a call option, in return for the premium, a Fund gives up the
opportunity to realize a profit from a price increase in the underlying security
above the exercise price and retains the risk of loss should the price of the
security decline. If a call option written by a Fund is not exercised, the Fund
will realize a gain in the amount of the premium. However, any gain may be
offset by a decline in the market value of the security during the exercise
period. If the option is exercised, a Fund will experience a profit or loss from
the sale of the underlying security. A Fund may have no control over when the
underlying securities must be sold because the Fund may be assigned an exercise
notice at any time during the exercise period.
A
Fund may choose to terminate its obligation as the writer of a call option by
entering into a “closing purchase transaction.” A closing purchase transaction
allows a Fund to terminate its obligation to sell a security subject to a call
option by allowing the Fund to cancel its position under a previously written
call option through an offsetting purchase during the exercise period of an
option having the same features. A Fund may not effect a closing purchase
transaction once it has received notice that the option will be exercised. In
addition, there is no guarantee that a Fund will be able to engage in a closing
purchase transaction at a time or price desirable to the Fund. Effecting a
closing purchase transaction on a call option permits a Fund to write another
call option on the underlying security with a different
exercise
price, exercise date or both. If a Fund wants to sell a portfolio security that
is subject to a call option, it will effect a closing purchase transaction prior
to or at the same time as the sale of the security.
A
Fund will realize a profit from a closing purchase transaction if the cost of
the transaction is less than the premium received from writing the option.
Conversely, a Fund will experience a loss from a closing purchase transaction if
the cost of the transaction is more than the premium received from writing the
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the closing purchase transaction of a written call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Fund.
Put
Options
A
purchaser (holder) of a put option pays a non-refundable premium to the seller
(writer) of a put option to obtain the right to sell a specified amount of a
security at a fixed price (the exercise price) during a specified period
(exercise period). Conversely, the writer of a put option, upon payment by the
holder of the premium, has the obligation to buy the security from the holder of
the put option at the exercise price during the exercise period. The Funds may
both purchase and write put options.
The
premium that a Fund pays when purchasing a put option or receives when writing a
put option will reflect, among other things, the market price of the investment,
the relationship of the exercise price to the market price of the investment,
the relationship of the exercise price to the volatility of the investment, the
length of the option period and supply and demand factors.
Purchasing
Put Options
As
a holder of a put option, a Fund has the right, but not the obligation, to sell
a security at the exercise price during the exercise period. Instead of
exercising the option and selling the security, a Fund may choose to allow the
option to expire or enter into a closing sale transaction with respect to the
option. A closing sale transaction gives a Fund the opportunity to cancel out
its position in a previously purchased option through the offsetting sale during
the exercise period of an option having the same features.
A
Fund may purchase put options on it portfolio securities for defensive purposes
(“protective puts”). A Fund may purchase a protective put for a security it
holds in its portfolio to protect against a possible decline in the value of the
security subject to the put option. A Fund may also purchase a protective put
for a security in its portfolio to protect the unrealized appreciation of the
security without having to sell the security. By purchasing a put option, a Fund
is able to sell the security subject to the put option at the exercise price
during the exercise period even if the security has significantly declined in
value.
A
Fund may also purchase put options for securities it is not currently holding in
its portfolio. A Fund would purchase a put option on a security it does not own
in order to benefit from a decline in the market price of the security during
the exercise period. A Fund will only make a profit by exercising a put option
if the market price of the security subject to the put option plus the premium
and the transaction costs paid by the Fund together total less than the exercise
price of the put option.
Writing
Put Options
As
the writer of a put option, a Fund has the obligation to buy the underlying
security at the exercise price during the exercise period.
A
Fund will only write put options on a covered basis. For a put option to be
considered covered, the Fund must either (1) maintain cash, U.S. government
securities, other liquid high-grade debt obligations, or other suitable cover
having a value of not less than the exercise price of the option; or (2) own an
option to sell the security subject to the put option, which has an exercise
price during the entire option period equal to or greater than the exercise
price of the covered put option. The rules of a clearing corporation may require
that such assets be deposited in escrow to ensure payment of the exercise
price.
If
a put option written by a Fund is not exercised, the Fund will realize a gain in
the amount of the premium. If the put option is exercised, a Fund must fulfill
the obligation to purchase the underlying security at the exercise price, which
will usually exceed the market value of the underlying security at that time. A
Fund may have no control over when the underlying securities must be purchased
because the Fund may be assigned an exercise notice at any time during the
exercise period.
A
Fund may choose to terminate its obligation as the writer of a put option by
entering into a “closing purchase transaction.” A closing purchase transaction
allows a Fund to terminate its obligation to purchase a security subject to a
put option by allowing the Fund to cancel its position under a previously
written put option through an offsetting purchase during the exercise period of
an option having the same features. A Fund may not effect a closing purchase
transaction once it has received notice that the option will be exercised. In
addition, there is no guarantee that a Fund will be able to engage in a closing
purchase transaction at a time or price desirable to the Fund. Effecting a
closing purchase transaction on a put option permits a Fund to write another put
option.
A
Fund will realize a profit from a closing purchase transaction if the cost of
the transaction is less than the premium received from writing the option.
Conversely, a Fund will experience a loss from a closing purchase transaction if
the cost of the transaction is more than the premium received from writing the
option.
A
Fund may write put options in situations when the Advisor wants to buy the
underlying security for the Fund’s portfolio at a price lower than the current
market price of the security. To effect this strategy, a Fund would write a put
option at an exercise price that, reduced by the premium received on the option,
reflects the lower price the Fund is willing to pay. Since a Fund may also
receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk of this strategy is that
the market price of the underlying security would decline below the exercise
price less the premiums received.
Options
on Foreign Currencies
The
Funds may buy and write options on foreign currencies in a manner similar to
that in which futures or forward contracts on foreign currencies will be
utilized, as described in the Prospectus. In addition, options on foreign
currencies may be used to hedge against adverse changes in foreign currency
conversion rates. For example, a decline in the U.S. dollar value of a foreign
currency in which portfolio securities are denominated will reduce the U.S.
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
the portfolio securities, a Fund may buy put options on the foreign currency. If
the value of the currency declines, a Fund will have the right to sell such
currency for a fixed amount in U.S. dollars, thereby offsetting, in whole or in
part, the adverse effect on its portfolio.
Conversely,
when a rise in the U.S. dollar value of a currency in which securities to be
acquired are denominated is projected, thereby increasing the cost of such
securities, a Fund may buy call options on the foreign currency. The purchase of
such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to a Fund from purchases of foreign currency options will be reduced
by the amount of the premium and related transaction costs. In addition, if
currency exchange rates do not move in the direction or to the extent desired, a
Fund could sustain losses on transactions in foreign currency options that would
require a Fund to forego a portion or all of the benefits of advantageous
changes in those rates.
The
GPS II Funds also may write options on foreign currencies. For example, to hedge
against a potential decline in the U.S. dollar due to adverse fluctuations in
exchange rates, a Fund could, instead of purchasing a put option, write a call
option on the relevant currency. If the decline expected by a Fund occurs, the
option will most likely not be exercised and the diminution in value of
portfolio securities will be offset at least in part by the amount of the
premium received. Similarly, instead of purchasing a call option to hedge
against a potential increase in the U.S. dollar cost of securities to be
acquired, a Fund could write a put option on the relevant currency which, if
rates move in the manner projected by a Fund, will expire unexercised and allow
a Fund to hedge the increased cost up to the amount of the premium. If exchange
rates do not move in the expected direction, the option may be exercised and a
Fund would be required to buy or sell the underlying currency at a loss, which
may not be fully offset by the amount of the premium. Through the writing of
options on foreign currencies, a Fund also may lose all or a portion of the
benefits that might otherwise have been obtained from favorable movements in
exchange rates.
Over-The-Counter
(“OTC”) Options
The
Funds may write covered put and call options and buy put and call options that
trade in the OTC market to the same extent that it may engage in exchange-traded
options. OTC options differ from exchange-traded options in certain material
respects. OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from market
makers. OTC options are available for a greater variety of securities and in a
wider range of expiration dates and exercise prices, however, than exchange
traded options and the writer of an OTC option is paid the premium in advance by
the dealer. There can be no assurance that a continuous liquid secondary market
will exist for any particular OTC option at any specific time. A Fund may be
able to realize the value of an OTC option it has purchased only by exercising
it or entering into a closing sale transaction with the dealer that issued it. A
Fund may suffer a loss if it is not able to exercise or sell its position on a
timely basis. When a Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer with which the Fund originally wrote the option.
Interest
Rate Caps, Floors and Collars
The
Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation Fund,
Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income
Allocation Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund may purchase
and write interest rate caps, floors and collars, which are OTC options. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination of a
cap and a floor that preserves a certain return within a predetermined range of
interest rates.
Options
on Indices
The
Funds may invest in options on indices. Put and call options 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 a 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 a 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 a 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 a 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 a Fund’s exercise of the put, to
deliver to a Fund an amount of cash equal to the difference between the exercise
price of the option and the value of the index, times a multiplier, similar to
that described above for calls. When a 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 a 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
Because
the value of an index option depends upon movements in the level of the index
rather than the price of a particular security, whether a Fund will realize gain
or loss on the purchase of an option on an index depends upon movements in the
level of prices in the market generally or in an industry or market segment
rather than movements in the price of a particular security. Accordingly,
successful use by a Fund of options on indices is subject to the Advisor’s
ability to predict correctly the direction of movements in the market generally
or in a particular industry. This requires different skills and techniques than
predicting changes in the prices of individual securities.
Index
prices may be distorted if trading of a substantial number of securities
included in the index is interrupted causing the trading of options on that
index to be halted. If a trading halt occurred, a Fund would not be able to
close out options
which
it had purchased and the Fund may incur losses if the underlying index moved
adversely before trading resumed. If a trading halt occurred and restrictions
prohibiting the exercise of options were imposed through the close of trading on
the last day before expiration, exercises on that day would be settled on the
basis of a closing index value that may not reflect current price information
for securities representing a substantial portion of the value of the
index.
If
a Fund holds an index option and exercises it before final determination of the
closing index value for that day, it runs the risk that the level of the
underlying index may change before closing. If such a change causes the
exercised option to fall “out-of-the-money,” a 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. Although a Fund may be
able to minimize this risk by withholding exercise instructions until just
before the daily cutoff time or by selling rather than exercising the option
when the index level is close to the exercise price, it may not be possible to
eliminate this risk entirely because the cutoff times for index options may be
earlier than those fixed for other types of options and may occur before
definitive closing index values are announced.
Index
Warrants
The
Funds may purchase put warrants and call warrants whose values vary depending on
the change in the value of one or more specified indices (“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 exercise. In general, if the value
of the underlying index rises above the exercise price of the index warrant, the
holder of a call warrant will be entitled to receive a cash payment from the
issuer upon exercise based on the difference between the value of the index and
the exercise price of the warrant; if the value of the underlying index falls,
the holder of a put warrant will be entitled to receive a cash payment from the
issuer upon exercise based on the difference between the exercise price of the
warrant and the value of the index. The holder of a warrant would not be
entitled to any payments from the issuer at a time when, in the case of a call
warrant, the exercise price is more than the value of the underlying index, or
in the case of a put warrant, the exercise price is less than the value of the
underlying index. If a Fund were not to exercise an index warrant prior to its
expiration, a Fund would lose the amount of the purchase price it paid for the
warrant. A Fund will normally use index warrants in a manner similar to its use
of options on indices.
Futures
Contracts and Options on Futures Contracts
The
Funds may purchase and sell futures contracts, including those based on
particular interest rates, securities, foreign currencies, securities indices,
debt obligations and other financial instruments and indices. A futures contract
is a standard binding agreement to buy or sell a specified quantity of an
underlying reference asset, such as a specific security, currency, commodity or
index, at a specified price at a specified later date. For more information
about the use of currency futures contracts, see “Foreign Currency Transactions”
above.
In
most cases the contractual obligation under a futures contract may be offset, or
“closed out,” before the settlement date so that the parties do not have to make
or take delivery of the reference asset. The closing out of a contractual
obligation is usually accomplished by buying or selling, as the case may be, an
identical, offsetting futures contract. This transaction, which is effected
through a member of an exchange, cancels the obligation to make or take delivery
of the underlying asset. Although some futures contracts by their terms require
the actual delivery or acquisition of the underlying asset, some (e.g., stock
index futures) require cash settlement.
Futures
contracts may be bought and sold on U.S. and non-U.S. exchanges. Futures
contracts in the U.S. have been designed by exchanges that have been designated
“contract markets” by the CFTC and must be executed through an FCM, which is a
brokerage firm that is a member of the relevant contract market. Each exchange
guarantees performance of the contracts as between the clearing members of the
exchange, thereby reducing the risk of counterparty default. Futures contracts
may also be entered into on certain exempt markets, including exempt boards of
trade and electronic trading facilities, available to certain market
participants. Because all transactions in the futures market are made, offset or
fulfilled by an FCM through a clearinghouse associated with the exchange on
which the contracts are traded, a Fund will incur brokerage fees when it buys or
sells futures contracts.
When
a Fund enters into a futures contract, it must deliver to an account controlled
by the FCM an amount referred to as “initial margin.” Initial margin
requirements are determined by the respective exchanges on which the futures
contracts
are traded and the FCM. Thereafter, a “variation margin” amount may be required
to be paid by a Fund or received by a Fund in accordance with margin controls
set for such accounts, depending upon changes in the marked-to-market value of
the futures contract. The account is marked-to-market daily. When the futures
contract is closed out, if a Fund has a loss equal to or greater than the margin
amount, the margin amount is paid to the FCM along with any loss in excess of
the margin amount. If a Fund has a loss of less than the margin amount, the
excess margin is returned to the Fund. If a Fund has a gain, the full margin
amount and the amount of the gain is paid to the Fund.
The
Funds may also purchase and write call and put options on futures contracts in
order to seek to increase total return or to hedge against changes in interest
rates, securities prices, or currency exchange rates, or, to the extent
permitted by its investment policies, to otherwise manage its portfolio of
investments. Options on futures contracts trade on the same contract markets as
the underlying futures contracts. When a Fund buys an option, it pays a premium
for the right, but does not have the obligation, to purchase (call) or sell
(put) a futures contract at a set price (called the exercise price). The seller
(writer) of an option becomes contractually obligated to take the opposite
futures position if the buyer of the option exercises its rights to the futures
position specified in the option. In return for the premium paid by the buyer,
the seller assumes the risk of taking a possibly adverse futures position. In
addition, the seller will be required to post and maintain initial and variation
margin with the FCM. One goal of selling (writing) options on futures may be to
receive the premium paid by the option buyer. For more general information about
the mechanics of purchasing and writing options, see “Options”
above.
Risks
Associated With Futures Contracts and Options on Futures Contracts
When
used for hedging, purchases and sales of futures contracts may not completely
offset a decline or rise in the value of a Fund’s investments during certain
market conditions. In the futures markets, it may not always be possible to
execute a buy or sell order at the desired price, or to close out an open
position due to market conditions, limits on open positions and/or daily price
fluctuations. Changes in the market value of a Fund’s investment securities may
differ substantially from the changes anticipated by a Fund when it established
its hedged positions, and unanticipated price movements in a futures contract
may result in a loss substantially greater than the amount that the Fund
delivered as initial margin. Because of the relatively low margin deposits
required, futures trading involves a 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 a Fund. In addition, if a Fund has
insufficient cash to meet daily variation margin requirements or close out a
futures position, it may have to sell securities from its portfolio at a time
when it may be disadvantageous to do so. Adverse market movements could cause a
Fund to experience substantial losses on an investment in a futures
contract.
Successful
use of futures contracts depends upon the Advisor’s ability to correctly predict
movements in the securities markets generally or of a particular segment of a
securities market. No assurance can be given that the Advisor’s judgment in this
respect will be correct.
There
is a risk of loss by a Fund of the initial and variation margin deposits in the
event of bankruptcy of the FCM with which the Fund has an open position in a
futures contract. The assets of a Fund may not be fully protected in the event
of the bankruptcy of the FCM or central counterparty because the Fund might be
limited to recovering only a pro rata share of all available funds and margin
segregated on behalf of an FCM’s customers. If the FCM does not provide accurate
reporting, a Fund is also subject to the risk that the FCM could use the Fund’s
assets, which are held in an omnibus account with assets belonging to the FCM’s
other customers, to satisfy its own financial obligations or the payment
obligations of another customer to the central counterparty.
The
CFTC and the various exchanges have established limits, referred to as
“speculative position limits,” on the maximum net long or net short position
that any person may hold or control in a particular futures contract. Trading
limits are imposed on the number of contracts that any person may trade on a
particular trading day. An exchange may order the liquidation of positions found
to be in violation of these limits and it may impose sanctions or restrictions.
The regulation of futures contracts, as well as other derivatives, is a rapidly
changing area of law. For more information, see “Risks of Potential Regulation
of Swaps and Other Derivatives” below.
Futures
and related options purchased or sold by the World ex-US Fund will normally have
foreign underlying securities or indices and may be traded on U.S. or non-U.S.
exchanges. Participation in foreign futures and foreign options transactions on
a non U.S. exchange involves the execution and clearing of trades on or subject
to the rules of a foreign board of trade. Neither the National Futures
Association (“NFA”) nor any domestic exchange regulates
activities
of any foreign boards of trade, including the execution, delivery and clearing
of transactions, or has the power to compel enforcement of the rules of a
foreign board of trade or any applicable foreign law. This is true even if the
exchange is formally linked to a domestic market so that a position taken on the
market may be liquidated by a transaction on another market. Moreover, such laws
or regulations will vary depending on the foreign country in which the foreign
futures or foreign options transaction occurs.
For
these reasons, customers who trade foreign futures of foreign options contracts
may not be afforded certain of the protective measures provided by the Commodity
Exchange Act (“CEA”), the CFTC’s regulations and the rules of the NFA and any
domestic exchange, including the right to use reparations proceedings before the
CFTC and arbitration proceedings provided by the NFA or any domestic futures
exchange. In particular, certain Fund’s investments in foreign futures or
foreign options transactions may not be provided the same protections in respect
of transactions on U.S. futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore the potential profit and loss
thereon may be affected by any variance in the foreign exchange rate between the
time an order is placed and the time it is liquidated, offset or
exercised.
When
a Fund purchases an option on a futures contract, the amount at risk is the
premium paid for the option plus related transaction costs. The purchase of an
option on a futures contract also entails the risk that changes in the value of
the underlying futures contract will not be fully reflected in the value of the
option purchased. The seller (writer) of an option on a futures contract is
subject to the risk of having to take a possibly adverse futures position if the
purchaser of the option exercises its rights. If the seller is required to take
such a position, it could bear substantial, and potentially unlimited,
losses.
Swaps
and Options on Swaps
The
Funds may enter into swaps, including interest rate, mortgage, credit default,
currency, total return and inflation index swaps, for hedging purposes or to
seek to increase total return. Generally, swap agreements are contracts between
a Fund and another party (the swap counterparty) involving the exchange of
payments on specified terms over periods ranging from a few days to multiple
years. In a basic swap transaction, the Fund agrees with the swap counterparty
to exchange the returns (or differentials in rates of return) and/or cash flows
earned or realized on a particular “notional amount” or value of predetermined
underlying reference instruments. The notional amount is the set dollar or other
value selected by the parties to use as the basis on which to calculate the
obligations that the parties to a swap agreement have agreed to
exchange.
Interest
rate swaps involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest, such as an exchange of fixed-rate
payments for floating rate payments. Mortgage swaps are similar to interest rate
swaps in that they represent commitments to pay and receive interest. The
notional principal amount, however, is tied to a reference pool or pools of
mortgages. Credit default swaps involve the receipt of floating or fixed rate
payments in exchange for assuming potential credit losses of an underlying
security. Credit default swaps give one party to a transaction the right to
dispose of or acquire an asset (or group of assets), or the right to receive or
make a payment from the other party, upon the occurrence of a specified credit
event. Currency swaps involve the exchange of the parties’ respective rights to
make or receive payments in specified currencies. Total return swaps are
contracts that obligate a party to pay or receive interest in exchange for
payment by the other party of the total return generated by a security, a basket
of securities, an index, or an index component.
An
inflation index swap is a contract between two parties, whereby one party makes
payments based on the cumulative percentage increase in an index that serves as
a measure of inflation (typically, the Consumer Price Index) and the other party
makes a regular payment based on a compounded fixed rate. Typically, an
inflation index swap has payment obligations netted and exchanged upon maturity.
The value of an inflation index swap is expected to change in response to
changes in the rate of inflation. If inflation increases at a faster rate than
anticipated at the time the swap is entered into, the swap will increase in
value. Similarly, if inflation increases at a rate slower than anticipated at
the time the swap is entered into, the swap will decrease in value.
The
Funds may also purchase and write (sell) options contracts on swaps, referred to
as “swaptions.” A swaption is an option to enter into a swap agreement. Like
other types of options, the buyer of a swaption pays a non-refundable premium
for the option and obtains the right, but not the obligation, to enter into an
underlying swap on agreed-upon
terms.
The seller of a swaption, in exchange for the premium, becomes obligated (if the
option is exercised) to enter into an underlying swap on agreed-upon
terms.
The
Funds may invest in publicly or privately issued interests in investment pools
whose underlying assets are credit default, credit-linked, interest rate,
currency exchange, equity-linked or other types of swap contracts and related
underlying securities or securities loan agreements. The pools’ investment
results may be designed to correspond generally to the performance of a
specified securities index or “basket” of securities, or sometimes a single
security. These types of pools are may be used by a Fund to gain exposure to
multiple securities with a smaller investment than would be required to invest
directly in the individual securities. They also may be used by a Fund to gain
exposure to foreign securities markets without investing in the foreign
securities themselves and/or the relevant foreign market. To the extent that a
Fund invests in pools of swaps and related underlying securities or securities
loan agreements whose return corresponds to the performance of a foreign
securities index or one or more foreign securities investing in such pools will
involve risks similar to the risks of investing in foreign securities. See the
section “Foreign Securities” below. In addition to the risks associated with
investing in swaps generally, a Fund bears the risks and costs generally
associated with investing in pooled investment vehicles, such as paying the fees
and expenses of the pool and the risk that the pool or the operator of the pool
may default on its obligations to the holder of interests in the pool, such as a
Fund. Interests in privately offered investment pools of swaps may be classified
as illiquid.
A
great deal of flexibility is possible in the way swap transactions are
structured. However, generally a Fund will enter into interest rate, total
return and mortgage swaps on a net basis, which means that the two payment
streams are netted out, with the Fund receiving or paying, as the case may be,
only the net amount of the two payments. Interest rate and mortgage swaps do not
normally involve the delivery of securities, other underlying assets or
principal. Accordingly, the risk of loss with respect to interest rate and
mortgage swaps is normally limited to the net amount of payments that a Fund is
contractually obligated to make. If the other party to an interest rate swap
defaults, a Fund’s risk of loss consists of the net amount of payments that the
Fund is contractually entitled to receive, if any. In contrast, currency swaps
usually involve the delivery of the entire principal amount of one designated
currency in exchange for the other designated currency. Therefore, the entire
principal value of a currency swap is subject to the risk that the other party
to the swap will default on its contractual delivery obligations.
A
swap agreement may be negotiated bilaterally and traded OTC between the two
parties (for an uncleared swap) or, in some instances, must be transacted
through an FCM and cleared through a clearinghouse that serves as a central
counterparty (for a cleared swap). In an uncleared swap, the swap counterparty
is typically a brokerage firm, bank or other financial institution. During the
term of an uncleared swap, a Fund will be required to pledge to the swap
counterparty, from time to time, an amount of cash and/or other assets equal to
the total net amount (if any) that would be payable by the Fund to the
counterparty if all outstanding swaps between the parties were terminated on the
date in question, including, any early termination payments (variation margin).
Periodically, changes in the amount pledged are made to recognize changes in
value of the contract resulting from, among other things, interest on the
notional value of the contract, market value changes in the underlying
investment, and/or dividends paid by the issuer of the underlying instrument
(variation margin). Likewise, the counterparty will be required to pledge cash
or other assets to cover its obligations to the Fund. However, the amount
pledged may not always be equal to or more than the amount due to the other
party. Therefore, if a counterparty defaults on its obligations to a Fund, the
amount pledged by the counterparty and available to the Fund may not be
sufficient to cover all the amounts due to the Fund and the Fund may sustain a
loss.
Certain
standardized swaps are subject to mandatory central clearing and trade execution
requirements. In a cleared swap, a Fund’s ultimate counterparty is a central
clearinghouse rather than a brokerage firm, bank or other financial institution.
Cleared swaps are submitted for clearing through each party’s FCM, which must be
a member of the clearinghouse that serves as the central counterparty. The
Dodd-Frank Act and implementing rules will ultimately require the clearing and
exchange-trading of many swaps. Mandatory exchange-trading and clearing will
occur on a phased-in basis based on the type of market participant, CFTC
approval of contracts for central clearing and public trading facilities making
such cleared swaps available to trade. To date, the CFTC has designated only
certain of the most common types of credit default index swaps and interest rate
swaps as subject to mandatory clearing and certain public trading facilities
have made certain of those swaps available to trade, but it is expected that
additional categories of swaps will in the future be designated as subject to
mandatory clearing and trade execution requirements. Central clearing is
intended to reduce counterparty credit risk and increase liquidity, but central
clearing does not eliminate
these
risks and may involve additional costs and risks not involved with uncleared
swaps. For more information, see “Risks of Swaps” and “Risks of Potential
Regulation of Swaps and Other Derivatives” below.
When
a Fund enters into a cleared swap, it must deliver to the central counterparty
(via an FCM) an amount referred to as “initial margin.” Initial margin
requirements are determined by the central counterparty, and are typically
calculated as an amount equal to the volatility in the market value of the swap
over a fixed period, but an FCM may require additional initial margin above the
amount required by the central counterparty. During the term of the swap
agreement, a “variation margin” amount may also be required to be paid by a Fund
or may be received by the Fund in accordance with margin controls set for such
accounts. If the value of a Fund’s cleared swap declines, the Fund will be
required to make additional “variation margin” payments to the FCM to settle the
change in value. Conversely, if the market value of a Fund’s position increases,
the FCM will post additional “variation margin” to the Fund’s account. At the
conclusion of the term of the swap agreement, if a Fund has a loss equal to or
greater than the margin amount, the margin amount is paid to the FCM along with
any loss in excess of the margin amount. If a Fund has a loss of less than the
margin amount, the excess margin is returned to the Fund. If a Fund has a gain,
the full margin amount and the amount of the gain is paid to the
Fund.
Risks
of Swaps
As
is the case with most investments, swaps are subject to market risk, and there
can be no guarantee that the Advisor will correctly forecast the future
movements of interest rates, indices or other economic factors. The use of swaps
requires an understanding of investment techniques, risk analysis and tax
treatment different than those of a Fund’s underlying portfolio investments.
Swaps may be subject to liquidity risk, when a particular contract is difficult
to purchase or sell at the most advantageous time. However, in recent years the
swaps market has become increasingly liquid, and central clearing and the
trading of cleared swaps on public facilities are intended to further increase
liquidity. Nevertheless, certain swaps may be subject to the Fund’s limitations
on illiquid investments.
Swaps
are also subject to pricing risk which can result in significant fluctuations in
value relative to historical prices. Significant fluctuations in value may mean
that it is not possible to initiate or liquidate a swap position in time to
avoid a loss or take advantage of a specific market opportunity.
The
risk of loss to a Fund for swap transactions that are entered into on a net
basis depends on which party is obligated to pay the net amount to the other
party. If the counterparty is obligated to pay the net amount to a Fund, the
risk of loss to the Fund is loss of the entire amount that the Fund is entitled
to receive. If a Fund is obligated to pay the net amount, the Fund’s risk of
loss is generally limited to that net amount. If the swap agreement involves the
exchange of the entire principal value of a security, the entire principal value
of that security is subject to the risk that the other party to the swap will
default on its contractual delivery obligations. In addition, a Fund’s risk of
loss also includes any margin at risk in the event of default by the
counterparty (in an uncleared swap) or the central counterparty or FCM (in a
cleared swap), plus any transaction costs.
Uncleared
swaps are typically executed bilaterally with a swap dealer rather than traded
on exchanges. As a result, swap participants may not be as protected as
participants on organized exchanges. Performance of a swap agreement is the
responsibility only of the swap counterparty and not of any exchange or
clearinghouse. As a result, the Funds are subject to counterparty risk (i.e.,
the risk that a counterparty will be unable or will refuse to perform under such
agreement, including because of the counterparty’s bankruptcy or insolvency). A
Fund risks the loss of the accrued but unpaid amounts under a swap agreement,
which could be substantial, in the event of a default, insolvency or bankruptcy
by a swap counterparty. In such an event, the Fund will have contractual
remedies pursuant to the swap agreements, but bankruptcy and insolvency laws
could affect the Fund’s rights as a creditor. While the Funds use only
counterparties that meet the credit quality standards established by the
Advisor, in unusual or extreme market conditions, a counterparty’s
creditworthiness and ability to perform may deteriorate rapidly, and the
availability of suitable replacement counterparties may become limited. If the
counterparty’s creditworthiness declines, the value of a swap agreement would
likely decline, potentially resulting in losses.
Certain
types of swaps are, and others eventually are expected to be, required to be
cleared through a central counterparty, which may affect counterparty risk and
other risks faced by a Fund. Central clearing is designed to reduce counterparty
credit risk and increase liquidity compared to bilateral swaps because central
clearing interposes the central clearinghouse as the counterparty to each
participant’s swap, but it does not eliminate those risks completely and
may
involve additional risks not involved with uncleared swaps. There is also a risk
of loss by a Fund of the initial and variation margin deposits in the event of
bankruptcy of the FCM with which the Fund has an open position, or the central
counterparty in a swap contract. The assets of the Fund may not be fully
protected in the event of the bankruptcy of the FCM or central counterparty
because the Fund might be limited to recovering only a pro rata share of all
available funds and margin segregated on behalf of an FCM’s customers. If the
FCM does not provide accurate reporting, the Fund is also subject to the risk
that the FCM could use the Fund’s assets, which are held in an omnibus account
with assets belonging to the FCM’s other customers, to satisfy its own financial
obligations or the payment obligations of another customer to the central
counterparty. Credit risk of cleared swap participants is concentrated in a few
clearinghouses, and the consequences of insolvency of a clearinghouse are not
clear. Transactions executed on a swap execution facility (“SEF”) may increase
market transparency and liquidity but may require the Fund to incur increased
expenses to access the same types of swaps that it has used in the
past.
With
cleared swaps, a Fund may not be able to obtain terms as favorable as it would
be able to negotiate for a bilateral, uncleared swap. In addition, an FCM may
unilaterally amend the terms of its agreement with a Fund, which may include the
imposition of position limits or additional margin requirements with respect to
the Fund’s investment in certain types of swaps. Central counterparties and FCMs
can require termination of existing cleared swap upon the occurrence of certain
events, and can also require increases in margin above the margin that is
required at the initiation of the swap agreement.
The
Funds are also subject to the risk that, after entering into a cleared swap with
an executing broker, no FCM or central counterparty is willing or able to clear
the transaction. In such an event, a Fund may be required to break the trade and
make an early termination payment to the executing broker.
Swaps
that are subject to mandatory clearing are also required to be traded on SEFs,
if any SEF makes the swap available to trade. An SEF is a trading platform where
multiple market participants can execute swap transactions by accepting bids and
offers made by multiple other participants on the platform. Transactions
executed on an SEF may increase market transparency and liquidity but may
require a Fund to incur increased expenses to access the same types of swaps
that it has used in the past.
Contracts
for Differences
The
Funds may enter into contracts for differences. Contracts for differences are
swap arrangements in which a Fund may agree with a counterparty that its return
(or loss) will be based on the relative performance of two different groups or
“baskets” of securities. For example, as to one of the baskets, a Fund’s return
is based on theoretical long futures positions in the securities comprising that
basket, and as to the other basket, a Fund’s return is based on theoretical
short futures positions in the securities comprising that other basket. The
notional sizes of the baskets will not necessarily be the same, which can give
rise to investment leverage. A Fund may also use actual long and short futures
positions to achieve the market exposure(s) as contracts for differences. A Fund
may enter into swaps and contracts for differences for investment return,
hedging, risk management and for investment leverage.
Hybrid
Instruments
A
hybrid instrument is a type of derivative that combines a traditional stock or
bond with an option or forward contract. Generally, the principal amount, amount
payable upon maturity or redemption, or interest rate of a hybrid is tied
(positively or negatively) to the price of a currency or securities index or
another interest rate or some other economic factor (each a “benchmark”). The
interest rate or (unlike most fixed income securities) the principal amount
payable at maturity of a hybrid security may be increased or decreased,
depending on changes in the value of the benchmark. An example of a hybrid could
be a bond issued by an oil company that pays a small base level of interest with
additional interest that accrues in correlation to the extent to which oil
prices exceed a certain predetermined level. Such a hybrid instrument would be
economically similar to a combination of a bond and a call option on oil.
Hybrids
can be used as an efficient means of pursuing a variety of investment goals,
including currency hedging, duration management and increased total return.
Hybrids may not bear interest or pay dividends. The value of a hybrid or its
interest rate may be a multiple of a benchmark and, as a result, may be
leveraged and move (up or down) more steeply and rapidly than the benchmark.
These benchmarks may be sensitive to economic and political events, such as
currency devaluations, which cannot be readily foreseen by the purchaser of a
hybrid. Under certain conditions, the
redemption
value of a hybrid could be zero. Thus, an investment in a hybrid may entail
significant market risks that are not associated with a similar investment in a
traditional, U.S. dollar-denominated bond that has a fixed principal amount and
pays a fixed rate or floating rate of interest. The purchase of hybrids also
exposes a Fund to the credit risk of the issuer of the hybrids. These risks may
cause significant fluctuations in the net asset value of a Fund.
Certain
issuers of structured products such as hybrid instruments may be deemed to be
investment companies as defined in the 1940 Act. As a result, a Fund’s
investments in these products may be subject to limits applicable to investments
in investment companies and may be subject to restrictions contained in the 1940
Act.
Synthetic
Securities
Incidental
to other transactions in fixed income securities and/or for investment purposes,
the GPS II Funds also may combine options on securities with cash, cash
equivalent investments or other fixed income securities in order to create
“synthetic” securities that approximate desired risk and return profiles. This
may be done where a “non-synthetic” security having the desired risk/return
profile either is unavailable (e.g., short-term securities of certain non-U.S.
governments) or possesses undesirable characteristics (e.g., interest payments
on the security would be subject to non-U.S. withholding taxes). The GPS II
Funds also may purchase forward non-U.S. exchange contracts in conjunction with
U.S. dollar-denominated securities in order to create a synthetic non-U.S.
currency denominated security that approximates desired risk and return
characteristics where the non-synthetic securities either are not available in
non-U.S. markets or possess undesirable characteristics. The use of synthetic
bonds and other synthetic securities may involve risks different from, or
potentially greater than, risks associated with direct investments in securities
and other assets including market risk, liquidity risk, and credit risk, and
their value may or may not correlate with the value of the relevant underlying
asset.
Loan
Based Derivatives
The
Funds may invest in derivative instruments that provide exposure to one or more
credit default swaps. For example, a Fund may invest in a derivative instrument
known as the Loan-Only Credit Default Swap Index (“LCDX”), a tradable index with
100 equally weighted underlying single-name loan-only credit default swaps
(“LCDS”). Each underlying LCDS references an issuer whose loans trade in the
secondary leveraged loan market. A Fund can either buy the index (take on credit
exposure) or sell the index (pass credit exposure to a counterparty). While
investing in these types of derivatives will increase the universe of debt
securities to which a Fund is exposed, such investments entail additional risks,
such as those discussed below, that are not typically associated with
investments in other debt securities. Credit default swaps and other derivative
instruments related to loans are subject to the risks associated with loans
generally, as well as the risks of derivative transactions.
Changing
Regulation of Derivatives
The
regulation of cleared and uncleared swaps, as well as other derivatives, is a
rapidly changing area of law and is subject to modification by government and
judicial action. In addition, the SEC, CFTC and the exchanges are authorized to
take extraordinary actions in the event of a market emergency, including, for
example, the implementation or reduction of speculative position limits, the
implementation of higher margin requirements, the establishment of daily price
limits and the suspension of trading.
In
October 2020, the SEC adopted new regulations governing the use of derivatives
by registered investment companies. Rule 18f-4 (the “Derivatives Rule”) imposes
limits on the amount of derivatives contracts the Funds can enter, and Funds
that invest in derivatives in excess of a limited specified exposure threshold
are required to establish and maintain a derivatives risk management program and
appoint a derivatives risk manager.
It
is not possible to predict fully the effects of current or future regulation.
However, it is possible that developments in government regulation of various
types of derivative instruments, such as additional limits on Fund leverage,
speculative position limits on certain types of derivatives, or limits or
restrictions on the counterparties with which the Funds engage in derivative
transactions, may limit or prevent a Fund from using or limit a Fund’s use of
these instruments effectively as a part of its investment strategy, may increase
the costs of such transactions, and could adversely affect a Fund’s ability to
achieve its investment objective.
The
Advisor will continue to monitor developments in the area, particularly to the
extent regulatory changes affect a Fund's ability to enter into desired
derivative transactions. New requirements, even if not directly applicable to
the Funds, may increase the cost of a Fund’s investments and cost of doing
business.
Commodity
Pool Operator Exclusions
With
Respect to Funds other than the Managed Futures Strategy Fund
The
Advisor has claimed an exclusion from the definition of commodity pool operator
under the CEA and the rules of the CFTC with respect to the Funds, other than
the Managed Futures Strategy Fund. The Funds for which such exclusion has been
claimed are referred to herein as the "Excluded Funds." The Advisor is therefore
not subject to registration or regulation as a commodity pool operator under the
CEA with respect to the Excluded Funds. The Excluded Funds are not intended as
vehicles for trading in the futures, commodity options or swaps markets. In
addition, the Advisor is relying upon a related exclusion from the definition of
commodity trading advisor under the CEA and the rules of the CFTC.
The
terms of the commodity pool operator exclusion require the Excluded Funds, among
other things, to adhere to certain limits on its investments in "commodity
interests." Commodity interests include commodity futures, commodity options and
swaps, which in turn include non-deliverable forwards, as further described
above. Because the Advisor and the Excluded Funds intend to comply with the
terms of the commodity pool operator exclusion, one or more of the Excluded
Funds may, in the future, need to adjust its investment strategies, consistent
with its investment objective, to limit its investments in these types of
instruments. The Excluded Funds are not intended as a vehicle for trading in the
commodity futures, commodity options or swaps markets. The CFTC has neither
reviewed nor approved the Advisor's reliance on these exclusions, or the
Excluded Funds, their investment strategies or Prospectus, or this SAI.
Generally,
the exclusion from commodity pool operator regulation on which the Advisor
relies requires each Excluded Funds to meet one of the following tests for its
commodity interest positions, other than positions entered into for bona fide
hedging purposes (as defined in the rules of the CFTC): either (1) the aggregate
initial margin and premiums required to establish the Excluded Fund's positions
in commodity interests may not exceed 5% of the liquidation value of the
Excluded Fund's portfolio (after taking into account unrealized profits and
unrealized losses on any such positions); or (2) the aggregate net notional
value of the Excluded Fund's commodity interest positions, determined at the
time the most recent such position was established, may not exceed 100% of the
liquidation value of the Excluded Fund's portfolio (after taking into account
unrealized profits and unrealized losses on any such positions). In addition to
meeting one of these trading limitations, an Excluded Fund may not be marketed
as a commodity pool or otherwise as a vehicle for trading in the commodity
futures, commodity options or swaps markets. If, in the future, a Excluded Fund
can no longer satisfy these requirements, the Advisor would withdraw its notice
claiming an exclusion from the definition of a commodity pool operator, and the
Advisor would be subject to registration and regulation as a commodity pool
operator with respect to that Fund, in accordance with CFTC rules that apply to
commodity pool operators of registered investment companies. Generally, these
rules allow for substituted compliance with CFTC disclosure and shareholder
reporting requirements, based on the Advisor's compliance with comparable SEC
requirements. However, as a result of CFTC regulation with respect to the Funds,
the Funds may incur additional compliance and other expenses.
With
Respect to the Managed Futures Strategy Fund
The
Advisor is registered as a commodity pool operator under the CEA and the rules
of the CFTC and, with respect to the Managed Futures Strategy Fund and its
Subsidiary (together, "Non-Excluded Fund"), is subject to regulation as a
commodity pool operator under the CEA. The Advisor is also a member of the NFA
and is subject to certain NFA rules and bylaws as they apply to commodity pool
operators of registered investment companies. The CFTC has adopted rules
regarding the disclosure, reporting and recordkeeping requirements that apply
with respect to the Non-Excluded Fund as a result of the Advisor's registration
as a commodity pool operator.
Generally,
these rules allow for substituted compliance with CFTC disclosure and
shareholder reporting requirements, based on the Advisor's compliance with
comparable SEC requirements. This means that for most of the CFTC's disclosure
and shareholder reporting requirements applicable to the Advisor as the
commodity pool operator of the Non-Excluded Fund, the Advisor's compliance with
SEC disclosure and shareholder reporting requirements will be deemed to fulfill
the Advisor's CFTC compliance obligations. As the Non-Excluded Fund is operated
subject to CFTC
regulation,
the Fund may incur additional compliance and related expenses. The CFTC has
neither reviewed nor approved the Funds, their investment strategies or the
Prospectus, or this SAI.
Commodities
and Commodity-Linked Instruments
Commodities
are assets that have tangible properties, such as oil, coal, natural gas,
agricultural products, industrial metals, livestock and precious metals. The
Managed Futures Strategy Fund and certain Underlying Funds may invest in
commodities markets directly through investment in physical commodities, as well
as indirectly through equity investments in commodity-related and natural
resource-oriented industries involved in mining, exploration, energy
transportation and related materials or support. The Managed Futures Strategy
Fund and certain Underlying Funds may invest in “commodity-linked” or “commodity
index-linked” investments such as commodity options contracts, futures
contracts, options on futures contracts and commodity-linked notes and swap
agreements. The Managed Futures Strategy Fund will invest in commodity-linked or
commodity index-linked investments through the Subsidiary, discussed below under
“Wholly Owned Subsidiary.” The value of commodity-linked derivative instruments
may be affected by overall market movements and other factors affecting the
value of a particular industry or commodity, such as weather, disease,
embargoes, or political and regulatory developments. The value of a
commodity-linked investment is generally based upon the price movements of a
physical commodity (such as oil, gas, gold, silver, other metals or agricultural
products), a commodity futures contract or commodity index, or other economic
variable based upon changes in the value of commodities or the commodities
markets.
Emerging
Market Countries
The
Emerging Markets Fund, Small/Mid Cap Core Fund, World ex-US Fund, Core Fixed
Income Fund, Growth Allocation Fund, Conservative Allocation Fund, Tactical
Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income Allocation
Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund may each
invest in emerging market countries. The Funds consider emerging market
countries to be those defined by the MSCI Emerging MarketsSM
Index.
Developing countries may impose restrictions on a Fund’s ability to repatriate
investment income or capital. Even where there is no outright restriction on
repatriation of investment income or capital, the mechanics of repatriation may
affect certain aspects of the operations of the Fund.
Some
of the currencies in emerging markets have experienced de-valuations relative to
the U.S. dollar, and major adjustments have been made periodically in certain of
such currencies. Certain developing countries face serious currency exchange
constraints.
Governments
of some developing countries exercise substantial influence over many aspects of
the private sector. In some countries, the government owns or controls many
companies. As such, government actions in the future could have a significant
effect on economic conditions in developing countries. Furthermore, certain
developing countries are among the largest debtors to commercial banks and
foreign governments. Trading in debt obligations issued or guaranteed by such
governments or their agencies and instrumentalities involves a high degree of
risk.
Investments
in emerging market countries may be subject to heightened risk of social,
political, and economic instability. Securities of emerging markets issuers may
experience relatively greater risks of illiquidity and price volatility due to
smaller capital markets and/or low trading volumes. In addition, regulatory
oversight of the securities markets may vary greatly across emerging markets.
Market participants such as custodians, clearinghouses, foreign exchanges and
broker-dealers may be subject to less scrutiny and regulation by local
authorities relative to more developed markets. Legal remedies available to
investors or other systems designed to ensure orderly enforcement of property
interests such as bankruptcy may be more limited in emerging market countries
than the remedies available in the United States, and the ability of U.S.
authorities (e.g., the SEC and the U.S. Department of Justice) to bring actions
against bad actors may be limited. A shareholder’s ability to bring and enforce
legal actions in emerging market countries, or to obtain information needed to
pursue or enforce such actions, may be limited and as a result such claims may
be difficult or impossible to pursue. In the event of a default on any
investments in foreign debt obligations, it may be more difficult for the Fund
to obtain or to enforce a judgment against the issuers of such securities. There
may be limited public information available regarding companies in emerging
markets and the quality of financial reporting and disclosures may vary
significantly. Differences in accounting and audit standards may make it
difficult to determine the
financial
condition of an issuer. Emerging markets may also present the risk of delayed
settlement and heightened risk of loss due to custody practices.
There
is a risk in developing countries that a current or future economic or political
crisis could lead to price controls, forced corporate restructurings,
expropriation or confiscatory taxation, imposition or enforcement of foreign
investment limits, seizure, nationalization, sanctions or imposition of
restrictions by various governmental entities on investment and trading, any of
which may have a detrimental effect on a Fund’s investments. Many emerging
market countries have experienced substantial, and in some periods extremely
high, rates of inflation or deflation for many years, and future inflation may
adversely affect the economies and securities markets of such countries. In
addition, the economies of developing countries tend to be heavily dependent
upon international trade and, as such, have historically been, and may continue
to be, adversely impacted by trade barriers and disputes, exchange controls,
managed adjustments in relative currency values, and other protectionist
measures. Emerging markets may be subject to a higher degree of corruption and
fraud than developed markets, and financial institutions and transaction
counterparties may have less financial sophistication, creditworthiness and/or
resources than participants in developed markets.
Exchange-Traded
Funds
The
Funds may invest in shares of ETFs. An ETF is an investment company and
typically is registered under the 1940 Act. Most ETFs hold a portfolio of
investments designed to track the performance of a particular index; however,
certain ETFs utilize active management of their investment portfolios. An ETF
sells and redeems its shares at net asset value in large blocks (typically
50,000 of its shares or more) called “creation units.” Shares representing
fractional interests in these creation units are listed for trading on one or
more national securities exchanges and can be purchased and sold in the
secondary market in lots of any size at any time during the trading day. Some
ETFs are non-registered investment companies that invest directly in securities,
commodities or other assets (such as precious metals).
Investments
in an ETF involve certain risks generally associated with investments in a
broadly based portfolio of securities, including risks that the general level of
stock prices may decline, thereby adversely affecting the value of each unit of
the ETF or other instrument. In addition, an ETF may not fully replicate the
performance of its benchmark index because of the temporary unavailability of
certain investments in the secondary market or discrepancies between the ETF and
the index with respect to the weighting or number of investments held. ETFs that
invest in other assets, such as commodities, are subject to the risks associated
with directly investing in those assets.
Because
ETFs and pools that issue similar instruments bear various fees and expenses, a
Fund’s investment in these instruments will involve certain indirect costs, as
well as transaction costs, such as brokerage commissions. The Advisor may
consider the expenses associated with an investment in determining whether to
invest in an ETF. See the section “Investment Companies” below for information
about investments in investment companies generally.
Exchange-Traded
Notes (“ETNs”)
The
Funds may invest in ETNs. ETNs are debt securities that are traded on an
exchange (e.g., the New York Stock Exchange) whose returns are linked to the
performance of a particular market benchmark or strategy. If a Fund holds an ETN
to maturity, the issuer of the ETN will pay a Fund a cash amount that is linked
to the performance of the corresponding index during the period beginning on the
inception date and ending at maturity, less investor fees. ETNs generally do not
make periodic coupon payments or provide principal protection. An ETN that is
tied to a specific benchmark or strategy may not produce returns that replicate
exactly the performance of its corresponding benchmark or strategy.
ETNs
are subject to credit risk, including the credit risk of the issuer. The value
of an ETN may drop due to a downgrade in the issuer’s credit rating, even when
the underlying benchmark or strategy remains unchanged. An ETN may trade at a
premium or discount to its benchmark or strategy. The value of an ETN may be
influenced by time to maturity, level of supply and demand for the ETN,
volatility and lack of liquidity in underlying assets, changes in the applicable
interest rates, changes in the issuer’s credit rating, and economic, legal,
political, or geographic events that affect the referenced underlying assets.
When a Fund invests in ETNs, it will bear its proportionate share of any fees
and expenses borne by the ETN. A decision by a Fund to sell ETN holdings may be
limited by the availability of a secondary market. Some ETNs that use leverage
may have relatively decreased liquidity at times and, as a result, may
be
difficult to purchase or sell at a fair price. Leveraged ETNs are subject to the
same risk as other instruments that use leverage.
Foreign
Securities
Each
Fund’s investments in the securities of foreign issuers may include both
securities of foreign corporations and securities of foreign governments and
their political subdivisions. By investing the majority of their respective
assets in investments that are tied economically to different countries
throughout the world, the Emerging Markets Fund and the World ex-US Fund will be
more susceptible to the additional risks of foreign investing than the other
Funds, and as a result, the net asset value of such Funds may be more volatile,
and have greater risks of loss than a domestic fund.
The
Funds may invest in foreign securities directly, or through depositary receipts,
such as American Depositary Receipts (“ADRs”) or Global Depositary Receipts
(“GDRs”). Depositary receipts are typically issued by a U.S. or foreign bank or
trust company and evidence ownership of underlying securities issued by a
foreign corporation. Investments in these types of securities, as well as
securities of foreign issuers, involve certain risks generally associated with
investments in foreign securities, including the following:
Political
and Economic Factors. The
economies of foreign countries may differ favorably or unfavorably from
the
U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency, diversification and balance of
payments position. The internal politics of certain foreign countries may not be
as stable as those of the United States. Governments in certain foreign
countries also continue to participate to a significant degree, through
ownership interest or regulation, in their respective economies. Actions by
these governments could include imposing restrictions on foreign investment,
nationalization, expropriation of goods or imposition of taxes, and could have a
significant effect on market prices of securities and payment of interest. The
economies of many foreign countries are heavily dependent upon international
trade and are accordingly affected by the trade policies and economic conditions
of the countries’ trading partners. Enactment by these trading partners of
protectionist trade legislation, or economic recessions or slow downs of those
partners, could have a significant adverse effect upon the securities markets of
such countries.
Currency
Fluctuations. A
change in the value of a foreign currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of securities denominated in
that currency held by a Fund. Such changes will also affect a Fund’s investments
in depositary receipts.
Taxes.
The
interest and dividends payable on certain foreign securities, including those
comprising an ADR, may be subject to foreign withholding taxes, thus reducing
the net amount of income to be paid to a Fund and the amount that may ultimately
be available for distribution to the Fund’s shareholders. See the section
entitled “Taxes” below.
Funding
Agreements
The
Funds may invest in Guaranteed Investment Contracts (“GICs”) and similar funding
agreements. In connection with these investments, a Fund makes cash
contributions to a deposit fund of an insurance company’s general account. The
insurance company then credits to a Fund on a monthly basis guaranteed interest,
which is based on an index. The funding agreements provide that this guaranteed
interest will not be less than a certain minimum rate. The purchase price paid
for a funding agreement becomes part of the general assets of the insurance
company. GICs may be classified as illiquid investments. Generally, funding
agreements are not assignable or transferable without the permission of the
issuing company, and an active secondary market in some funding agreements does
not currently exist. Investments in GICs are subject to the risks associated
with debt instruments generally, and are specifically subject to the credit risk
associated with an investment in the issuing insurance company.
Industrial
Development Bonds
The
Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation Fund,
Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income
Allocation Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund may each
invest in industrial development bonds, a type of Municipal Security. Industrial
development bonds are generally issued to provide financing aid to acquire sites
or construct and equip facilities for use by privately or publicly owned
entities.
Most
state and local governments have the power to permit the issuance of industrial
development bonds to provide financing for such entities in order to encourage
the privately or publicly owned entities to locate within their communities.
Industrial development bonds, which are in most cases revenue bonds, do not
represent a pledge of credit or create any debt of a municipality or a public
authority, and no taxes may be levied for the payment of principal or interest
on these bonds. The principal and interest is payable solely out of monies
generated by the entities using or purchasing the sites or facilities. These
bonds will be considered Municipal Securities eligible for purchase by a Fund if
the interest paid on them, in the opinion of bond counsel or in the opinion of
the officers of the Trusts and/or the Advisor, is exempt from federal income
tax. The Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation
Fund, Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset
Income Allocation Fund, Flexible Income Allocation Fund, Managed Futures
Strategy Fund, Conservative Income Fund, Income Fund, and Growth and Income Fund
may each invest in industrial development bonds (including pollution control
revenue bonds) so long as they are not from the same facility or similar types
of facilities or projects.
Inflation-Linked
and Inflation-Indexed Securities
Certain
Funds may invest in inflation-linked bonds. The principal amount of these bonds
increases with increases in the price index used as a reference value for the
bonds. In addition, the amounts payable as coupon interest payments increase
when the price index increases because the interest amount is calculated by
multiplying the principal amount (as adjusted) by a fixed coupon rate.
Although
inflation-indexed securities protect their holders from long-term inflationary
trends, short-term increases in inflation may result in a decline in value. The
values of inflation-linked securities generally fluctuate in response to changes
to real interest rates, which are in turn tied to the relationship between
nominal interest rates and the rate of inflation. If inflation were to rise at a
rate faster than nominal interest rates, real interest rates might decline,
leading to an increase in value of the inflation-linked securities. In contrast,
if nominal interest rates increased at a faster rate than inflation, real
interest rates might rise, leading to a decrease in the value of
inflation-linked securities. If inflation is lower than expected during a period
a Fund holds inflation-linked securities, a Fund may earn less on such bonds
than on a conventional bond. If interest rates rise due to reasons other than
inflation (for example, due to changes in currency exchange rates), investors in
inflation-linked securities may not be protected to the extent that the increase
is not reflected in the price index used as a reference for the securities.
There can be no assurance that the price index used for an inflation-linked
security will accurately measure the real rate of inflation in the prices of
goods and services. Inflation-linked and inflation-indexed securities include
Treasury Inflation-Protected Securities issued by the U.S. government (see the
section “U.S. Government Obligations” below for additional information), but
also may include securities issued by state, local and non-U.S. governments and
corporations and supranational entities.
Investment
Companies
The
Funds may invest in other investment companies, including ETFs as discussed
above. Investment companies are essentially pools of securities. Investing in
other investment companies involves substantially the same risks as investing
directly in the underlying securities, but may involve additional expenses at
the investment company level, such as investment advisory fees and operating
expenses. In some cases, investing in an investment company may involve the
payment of a premium over the value of the assets held in that investment
company’s portfolio. As an investor in another investment company, a Fund will
bear its ratable share of the investment company’s expenses, including advisory
fees, and a Fund’s shareholders will bear such expenses indirectly, in addition
to similar fees and expenses of a Fund. Despite the possibility of greater fees
and expenses, the Advisor will invest if it believes investment in other
investment companies provides attractive return opportunities. In addition, it
may be more efficient for a Fund to gain exposure to particular market segments
by investing in shares of one or more investment companies.
Investments
in Banks
Certain
Funds may invest in certificates of deposit (certificates representing the
obligation of a bank to repay funds deposited with it for a specified period of
time), time deposits (non-negotiable deposits maintained in a bank for a
specified period of time up to seven days at a stated interest rate), bankers’
acceptances (credit instruments evidencing the obligation of a bank to pay a
draft drawn on it by a customer) and other securities and instruments issued by
domestic banks, foreign branches of domestic banks, foreign subsidiaries of
domestic banks and domestic and foreign branches of foreign banks.
The
Growth Allocation Fund, Conservative Allocation Fund, Tactical Allocation Fund,
Absolute Return Allocation Fund, Multi-Asset Income Allocation Fund, Flexible
Income Allocation Fund, Managed Futures Strategy Fund, Conservative Income Fund,
Income Fund, and Growth and Income Fund also may purchase U.S.
dollar-denominated obligations issued by foreign branches of domestic banks or
foreign branches of foreign banks (“Eurodollar” obligations) and domestic
branches of foreign banks (“Yankee dollar” obligations).
Eurodollar
and other foreign obligations involve special investment risks, including the
possibility that (i) liquidity could be impaired because of future political and
economic developments, (ii) the obligations may be less marketable than
comparable domestic obligations of domestic issuers, (iii) a foreign
jurisdiction might impose withholding taxes on interest income payable on those
obligations, (iv) deposits may be seized or nationalized, (v) foreign
governmental restrictions, such as exchange controls, may be adopted, which
might adversely affect the payment of principal and interest on those
obligations, (vi) the selection of foreign obligations may be more difficult
because there may be less information publicly available concerning foreign
issuers, (vii) there may be difficulties in securing or enforcing a judgment
against a foreign issuer, and (viii) the accounting, auditing and financial
reporting standards, practices and requirements applicable to foreign issuers
may differ from those applicable to domestic issuers. In addition, foreign banks
are not subject to examination by U.S. government agencies or
instrumentalities.
Master
Limited Partnerships (“MLPs”)
Certain
Funds and certain Underlying Funds may invest in MLPs. An MLP is a limited
partnership, the interests of which are publicly traded on an exchange or in the
OTC market. Many MLPs operate pipelines that transport commodities such as crude
oil, natural gas and petroleum. The income of such MLPs correlates to the volume
of the commodities transported, not their price.
Although
investors in an MLP normally would not be liable for debts of the MLP beyond the
amount of their investment, they may not be shielded from liability to the same
extent as shareholders of a corporation.
Interests
in an MLP may be less liquid investments than other publicly traded securities
and involve additional risks related to: limited control and voting rights,
potential conflicts of interest between the MLP and the MLP’s general partner,
dilution of the Fund’s interest in the MLP and the general partner’s right to
require a Fund to sell its interest in the MLP at an undesirable time or price.
An investment in an MLP is also subject to interest rate risk, commodity risk
and regulatory risk.
An
investment in an MLP is also subject to tax risk. MLPs taxed as partnerships do
not pay U.S. federal income tax at the partnership level, subject to the
application of certain partnership audit rules. A change in current tax law or
the underlying business mix of an MLP could result in the MLP being treated as a
corporation for U.S. federal income tax purposes, in which case the MLP would be
required to pay U.S. federal income tax on its taxable income. Taxation of an
MLP in which a Fund invests would result in a reduction of the value of the
Fund’s investment in the MLP and, consequently, your investment in the Fund.
Additionally, a Fund must derive at least 90% of its gross income from
qualifying sources to qualify as a RIC. Income derived by a Fund from a
partnership that is not a qualified publicly traded partnership as defined in
the Code 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.
MLPs
taxed as partnerships have historically made cash distributions to limited
partners or members that exceed the amount of taxable income allocable to
limited partners or members, due to a variety of factors, including significant
non-cash deductions such as depreciation and depletion. If the cash
distributions exceed the taxable income reported in a particular tax year, the
excess cash distributions would not be treated as income to a Fund in that tax
year but rather would be treated as a return of capital for U.S. federal income
tax purposes to the extent of the Fund’s basis in the MLP units (but not below
zero). Any such return of capital distributions would reduce the Fund’s basis in
the MLP units, which may increase the amount of the Fund’s gain upon a sale of
such MLP units.
If
a Fund distributes a portion or all of such excess cash that is not supported by
other income, the distribution will be treated as a return of capital to
shareholders. Although return of capital distributions are not taxable, such
distributions would reduce the basis of a shareholder’s shares (but not below
zero) and therefore may increase a shareholder’s tax liability upon a sale of
such shares. The tax characterization of a Fund’s distributions made in a
taxable year cannot
finally
be determined until at or after the end of the year. Dividend distributions that
are attributable to a Fund’s investment in MLPs generally will not be eligible
for the reduced tax rate applicable to qualified dividends.
Certain
MLP investments made by a Fund may result in investors being required to either
request extensions to file their tax returns or file amended returns. Where a
Fund invests in MLPs taxed as partnerships, a Fund will typically not receive
its “K-1” tax statements from the MLPs until after January 31st, the date on
which the Fund is required to mail its own “1099s” to shareholders. The K-1 may
indicate that a Fund has miscalculated its own taxable income on the tax return
it is required to file as a result of mischaracterizing the tax character of the
MLP distributions it received. If so, the Fund will send shareholders a
corrected 1099, and this may require shareholders to file amended personal tax
returns.
Mortgage-Backed
Securities
The
Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation Fund,
Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income
Allocation Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund may purchase
mortgage-backed securities. Mortgage-backed securities are interests in pools of
mortgage loans, including mortgage loans made by savings and loan institutions,
mortgage bankers, commercial banks and others. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related and private organizations as further described below. The
Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation Fund,
Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income
Allocation Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund may also
purchase debt securities which are secured with collateral consisting of
mortgage-backed securities (“Collateralized Mortgage Obligations”) and in other
types of mortgage-related securities. Mortgage-backed securities may be issued
or guaranteed by U.S. government entities, such as the Government National
Mortgage Association (“GNMA”), or by private lenders.
The
timely payment of principal and interest on mortgage-backed securities issued or
guaranteed by GNMA is backed by GNMA and the full faith and credit of the U.S.
government. These guarantees, however, do not apply to the market value of fund
shares. Also, securities issued by GNMA and other mortgage-backed securities may
be purchased at a premium over the maturity value of the underlying mortgages.
This premium is not guaranteed and would be lost if prepayment occurs.
Mortgage-backed securities issued by U.S. government agencies or
instrumentalities other than GNMA are not “full faith and credit” obligations.
Unscheduled or early payments on the underlying mortgages may shorten the
securities’ effective maturities and reduce returns. A Fund may agree to
purchase or sell these securities with payment and delivery taking place at a
future date. A decline in interest rates may lead to a faster rate of repayment
of the underlying mortgages and expose a Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by a
Fund, the prepayment right of mortgagors may limit the increase in net asset
value of a Fund because the value of the mortgage-backed securities held by the
Fund may not appreciate as rapidly as the price of noncallable debt
securities.
Interests
in pools of mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates. Instead,
these securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a “pass-through” of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from the sale of the
underlying property, refinancing or foreclosure, net of fees or costs which may
be incurred. Some mortgage-backed securities (such as securities issued by the
GNMA) are described as “modified pass-through.” These securities entitle the
holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, at the scheduled payments dates regardless of whether or
not the mortgagor actually makes the payment.
Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers also create pass-through
pools of conventional mortgage loans. Such issuers may, in addition, be the
originators and/or servicers of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments.
However,
timely payment of interest and principal of these pools may be supported by
various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The insurance guarantees are issued
by governmental entities, private insurers and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof are
generally considered in determining whether a mortgage-related security meets a
Fund’s investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee or guarantees, even if through an examination of the loan
experience and practices of the originators/servicers and poolers, the Advisor
determines that the securities meet the Fund’s quality standards.
Certain
Funds may invest in credit risk transfer mortgaged-backed securities sponsored
by Fannie Mae®
(Connecticut Avenue Securities) and Freddie Mac®
(Structured Agency Credit Risk debt notes), among others. These securities can
be in the form of notes issued by or structured products sponsored by Fannie Mae
or Freddie Mac and have payments of interest and repayment of principal that are
conditional, based on the default performance of a reference pool. While their
cash flows mimic those of other securitized assets, these securities are not
backed or secured by those mortgage loans. Connecticut Avenue Securities
sponsored by Fannie Mae and Structured Agency Credit Risk debt notes sponsored
by Freddie Mac carry no guarantee whatsoever and the Fund would bear the risk of
default associated with these securities.
Under
the FHFA's “Single Security Initiative” intended to maximize liquidity for both
Fannie Mae and Freddie Mac mortgage-backed securities in the TBA market, Fannie
Mae and Freddie Mac started issuing uniform mortgage-backed securities (“UMBS”)
in place of their separate offerings of TBA-eligible mortgage-backed securities.
The issuance of UMBS may not achieve the intended results and may have
unanticipated or adverse effects on the market for mortgage-backed securities.
Mortgage
Dollar Rolls
The
Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation Fund,
Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income
Allocation Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund may enter into
mortgage dollar rolls. A dollar roll involves the sale of a security by a Fund
and its agreement to repurchase the instrument at a specified time and price,
and may be considered a form of borrowing for some purposes. A Fund will
designate on its records or segregate with its custodian bank assets determined
to be liquid in an amount sufficient to meet its obligations under the
transactions. A dollar roll involves potential risks of loss that are different
from those related to the securities underlying the transactions. A Fund may be
required to purchase securities at a higher price than may otherwise be
available on the open market. Since the counterparty in the transaction is
required to deliver a similar, but not identical, security to a Fund, the
security that a Fund is required to buy under the dollar roll may be worth less
than an identical security. There is no assurance that a Fund’s use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.
Municipal
Bond Insurance
Certain
Municipal Securities may be covered by insurance. The insurance guarantees the
timely payment of principal at maturity and interest on such securities. These
insured Municipal Securities are either covered by an insurance policy
applicable to a particular security, whether obtained by the issuer of the
security or by a third party (“Issuer-Obtained Insurance”), or insured under
master insurance policies issued by municipal bond insurers, which may be
purchased by a Fund (the “Policies”).
A
Fund will require or obtain municipal bond insurance when purchasing Municipal
Securities that would not otherwise meet the Fund’s quality standards. A Fund
may also require or obtain municipal bond insurance when purchasing or holding
specific Municipal Securities if, in the opinion of the Advisor, such insurance
would benefit the Fund, for example, through improvement of portfolio quality or
increased liquidity of certain securities. The Advisor anticipates that each
Fund may have investments in insured Municipal Securities.
Issuer-Obtained
Insurance Policies are non-cancelable and continue in force as long as the
Municipal Securities are outstanding and their respective insurers remain in
business. If a municipal security is covered by Issuer-Obtained Insurance, then
such security need not be insured by the Policies purchased by a
Fund.
A
Fund may purchase two types of Policies issued by municipal bond insurers. One
type of Policy covers certain Municipal Securities only during the period in
which they are in a Fund’s portfolio. In the event that a Municipal Security
covered by such a Policy is sold from the Fund, the insurer of the relevant
Policy will be liable only for those payments of interest and principal that are
then due and owing at the time of sale. The other type of Policy covers
Municipal Securities not only while they remain in the Fund’s portfolio, but
also until their final maturity, even if they are sold out of the Fund’s
portfolio. This type of Policy allows the securities to have coverage that
benefits all subsequent holders of those Municipal Securities. A Fund will
obtain insurance covering Municipal Securities until final maturity even after
they are sold out of the Fund’s portfolio only if, in the judgment of the
Advisor, the Fund would receive net proceeds from the sale of those securities.
Net proceeds are calculated after
deducting
the cost of the permanent insurance and related fees. Also, the proceeds
received must be significantly more than the proceeds the Fund would have
received if the Municipal Securities were sold without insurance. Payments
received from municipal bond insurers may not be tax-exempt income to
shareholders of the Fund.
A
Fund may purchase Policies from any municipal bond insurer that is rated in the
highest rating category by a NRSRO. Under each Policy, the insurer is obligated
to provide insurance payments pursuant to valid claims. The claims must be equal
to the payment of principal and interest on those Municipal Securities the
Policy insures. The Policies will have the same general characteristics and
features. A Municipal Security will be eligible for coverage if it meets certain
requirements set forth in a Policy. In the event interest or principal on an
insured Municipal Security is not paid when due, the insurer covering the
security will be obligated under its Policy to make such payment not later than
30 days after it has been notified by a Fund that such non-payment has occurred.
The insurance feature is intended to reduce financial risk, but the cost of the
insurance and compliance with the investment restrictions imposed by the
guidelines in the Policies will reduce the yield to shareholders of the
Fund.
Municipal
Leases
The
Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation Fund,
Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income
Allocation Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund may purchase
Municipal Securities in the form of participation interests that represent an
undivided proportional interest in lease payments by a governmental or nonprofit
entity. The lease payments and other rights under the lease provide for and
secure payments on the certificates. Municipal charters or the nature of the
appropriation for the lease may limit lease obligations. In particular, lease
obligations may be subject to periodic appropriation. If the entity does not
appropriate funds for future lease payments, the entity cannot be compelled to
make such payments. Furthermore, a lease may provide that the participants
cannot accelerate lease obligations upon default. The participants would only be
able to enforce lease payments as they became due. In the event of a default or
failure of appropriation, unless the participation interests are credit
enhanced, it is unlikely that the participants would be able to obtain an
acceptable substitute source of payment.
Because
municipal leases may be classified as illiquid, the Advisor must carefully
examine the liquidity of the lease before investing. The Advisor typically
considers: whether the lease can be terminated by the lessee; the potential
recovery, if any, from a sale of the leased property if the lease was
terminated; the lessee’s general credit strength; the possibility that the
lessee will discontinue appropriating funding for the lease property because the
property is no longer deemed essential to its operations; and any credit
enhancement or legal recourse provided upon an event of non-appropriation or
other termination of the lease.
Municipal
Securities
The
Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation Fund,
Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income
Allocation Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund may also
invest in municipal securities. Municipal securities are debt obligations issued
by or on behalf of states, territories, and possessions of the United States,
including the District of Columbia, and any political subdivisions or financing
authority of any of these, the income from which is, in the opinion of qualified
legal counsel, exempt from federal regular income tax (“Municipal
Securities”).
Municipal
Securities are generally issued to finance public works such as airports,
bridges, highways, housing, hospitals, mass transportation projects, schools,
and water and sewer works. They may also be issued to repay outstanding
obligations, to raise funds for general operating expenses, or to make loans to
other public institutions and facilities. Municipal Securities include
industrial development bonds issued by, or on behalf of, public authorities to
provide financing aid to acquire sites or construct and equip facilities for
privately or publicly owned corporations. The availability of this financing
encourages these corporations to locate within the sponsoring communities and
thereby increases local employment.
The
two principal classifications of Municipal Securities are “general obligation”
bonds and “revenue” bonds. General obligation bonds are secured by the issuer’s
pledge of its full faith and credit and taxing power for the payment of the
bond’s principal and interest. Interest on, and principal of, revenue bonds,
however, are payable only from the revenue generated by the facility financed by
the bond or other specified sources of revenue. Revenue bonds do not represent a
pledge of credit or create any debt of, or charge against, the general revenues
of a municipality or public authority. Industrial development bonds are
typically classified as revenue bonds. The Core Fixed Income Fund, Growth
Allocation Fund, Conservative Allocation Fund, Tactical Allocation Fund,
Absolute Return Allocation Fund, Multi-Asset Income Allocation Fund, Flexible
Income Allocation Fund, Managed Futures Strategy Fund, Conservative Income Fund,
Income Fund, and Growth and Income Fund each may invest in, but such investments
are not limited to, the following types of Municipal Securities: industrial
development bonds; municipal notes and bonds; serial notes and bonds sold with a
series of maturity dates; tax anticipation notes and bonds sold to finance
working capital needs of municipalities in anticipation of receiving taxes at a
later date; bond anticipation notes sold in anticipation of the issuance of
longer-term bonds in the future; pre-refunded municipal bonds refundable at a
later date (payment of principal and interest on pre-refunded bonds are assured
through the first call date by the deposit in escrow of U.S. government
securities or other investments); and general obligation bonds secured by a
municipality’s pledge of taxation. (2017 legislation, commonly known as the Tax
Cuts and Jobs Act (“TCJA”), repealed the exclusion from gross income for
interest paid on pre-refunded municipal bonds effective for such bonds issued
after December 31, 2017.)
The
Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation Fund,
Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income
Allocation Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund are not
required to sell a Municipal Security if the security’s rating is reduced below
the required minimum subsequent to the Fund’s purchase of the security. However,
the Core Fixed Income Fund will consider this event in the determination of
whether it should continue to hold the security in its portfolio. If ratings
made by Moody’s, S&P®,
or Fitch change because of changes in those organizations or in their rating
systems, a Fund will try to use comparable ratings as standards in accordance
with the investment policies described in the Fund’s Prospectus.
Municipal
Securities Risks
Municipal
Securities prices are interest rate sensitive, which means that their value
varies inversely with market interest rates. Thus, if market interest rates have
increased from the time a security was purchased, the security, if sold, might
be sold at a price less than its cost. Similarly, if market interest rates have
declined from the time a security was purchased, the security, if sold, might be
sold at a price greater than its cost. (In either instance, if the security was
held to maturity, no loss or gain normally would be realized as a result of
interim market fluctuations.)
Yields
on Municipal Securities depend on a variety of factors, including: the general
conditions of the money market and the taxable and Municipal Securities markets;
the size of the particular offering; the maturity of the obligations; and the
credit quality of the issue. The ability of a Fund to achieve its investment
objectives also depends on the continuing ability of the issuers of Municipal
Securities to meet their obligations for the payment of interest and principal
when due.
Further,
any adverse economic conditions or developments affecting the states or
municipalities could impact the Fund’s portfolio. Investing in Municipal
Securities that meet the Fund’s quality standards may not be possible if the
states and municipalities do not maintain their current credit
ratings.
Pandemic
Risk
Disease
outbreaks that affect local economies or the global markets as a whole may
materially and adversely impact the Funds and/or the Advisor’s or a
sub-advisor's business. For example, uncertainties regarding the outbreak and
subsequent global spread of the novel coronavirus (“COVID-19”) first detected in
December 2019 have resulted in significant economic disruptions across global
financial markets. These types of outbreaks can be expected to impair core
business activities such as manufacturing, consumer spending, tourism, business
conferences and workplace participation, among others. These disruptions could
lead to periods of prolonged market instability including stock market losses
and overall volatility, as has occurred in connection with COVID-19. In the face
of such instability, governments may take extreme and unpredictable measures to
combat the spread of disease and mitigate the resulting market disruptions and
losses. The Advisor and the sub-advisors have in place business continuity plans
reasonably designed to ensure that they maintain normal business operations in
the event of a significant disruption, and periodically test those plans.
However, in the event of a pandemic or an outbreak, there can be no assurance
that the Advisor, a sub-advisor, or the Funds’ service providers will be able to
maintain normal business operations for an extended period of time or will not
lose the services of key personnel on a temporary or long-term basis due to
illness or other reasons.
Participation
Interests
The
financial institutions from which a Fund may purchase participation interests
frequently provide or secure from other financial institutions irrevocable
letters of credit or guarantees and give a Fund the right to demand payment on
specified notice (normally within 30 days) from the issuer of the letter of
credit or guarantee. These financial institutions may charge certain fees in
connection with their repurchase commitments, including a fee equal to the
excess of the interest paid on the Municipal Securities over the negotiated
yield at which the participation interests were purchased by the Fund. By
purchasing participation interests, a Fund is buying a security meeting its
quality requirements and is also receiving the tax-free benefits of the
underlying securities.
In
the acquisition of participation interests, the Advisor will consider the
following quality factors: a high-quality underlying Municipal Security (of
which a Fund takes possession); a high-quality issuer of the participation
interest; or a guarantee or letter of credit from a high-quality financial
institution supporting the participation interest.
Participatory
Notes (“participation notes”)
Each
Fund may invest in participation notes. Participation notes are unsecured,
bearer securities typically issued by financial institutions, the return of
which is generally linked to the performance of the underlying listed shares of
a company in an emerging market (for example, the shares in a company
incorporated in India and listed on the Bombay Stock Exchange). Participation
notes are often used to gain exposure to securities of companies in markets that
restrict foreign ownership of local companies.
The
terms of participation notes vary widely. Investors in participation notes do
not have or receive any rights relating to the underlying shares, and the
issuers of the notes may not be obligated to hold any shares in the underlying
companies. Participation notes are not currently regulated by the governments of
the countries upon which securities the notes are based. These instruments,
issued by brokers with global registration, bear counterparty risk and may bear
additional liquidity risk.
Private
Placements
The
Funds may invest in securities that are purchased in private placements, which
are subject to restrictions on resale as a matter of contract or under federal
securities laws. Because there may be relatively few potential purchasers for
these securities, especially under adverse market or economic conditions or in
the event of adverse changes in the financial condition of the issuer, a Fund
could find it more difficult to sell the securities when the Advisor believes
that it is advisable to do so, or may be able to sell the securities only at
prices lower than if the securities were more widely held. At times, it also may
be more difficult to determine the fair value of the securities for purposes of
computing a Fund’s net asset value.
While
private placements may offer opportunities for investment that are not otherwise
available on the open market, the securities so purchased are often “restricted
securities” that cannot be sold to the public without registration under the
Securities Act, the availability of an exemption from registration (such as Rule
144 or Rule 144A under the Securities Act) or that are not readily marketable
because they are subject to other legal or contractual delays or restrictions on
resale.
The
absence of a trading market can make it difficult to ascertain a market value
for illiquid investments such as private placements. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for a Fund to sell the illiquid investments
promptly at an acceptable price or without significant dilution to remaining
investors’ interest. A Fund may have to bear the extra expense of registering
the securities for resale and the risk of substantial delay in effecting the
registration. In addition, market quotations are typically less readily
available for these securities. The judgment of the Advisor may at times play a
greater role in valuing these securities than in the case of unrestricted
securities.
Generally,
restricted securities may be sold only to qualified institutional buyers, in a
privately negotiated transaction to a limited number of purchasers, in limited
quantities after they have been held for a specified period of time and when
other conditions are met pursuant to an exemption from registration, or in a
public offering for which a registration statement is in effect under the
Securities Act. A Fund may be deemed to be an underwriter for purposes of the
Securities Act when selling restricted securities to the public. As such, a Fund
may be liable to purchasers of the securities if the registration statement
prepared by the issuer, or the prospectus forming a part of the registration
statement, is materially inaccurate or misleading.
Regional
Focus
To
the extent that a Fund invests a significant portion of its assets in a specific
geographic region, the Fund will have increased exposure to the risks affecting
that specific geographic region. In the event of economic or political turmoil
or a deterioration of diplomatic relations in a region where a substantial
portion of the Fund’s assets are invested, the Fund may experience substantial
illiquidity or reduction in the value of the Fund’s investments. In addition,
adverse economic events in a certain region can impact securities of issuers in
other countries whose economies appear to be unrelated.
Investments
in China
There
are special risks associated with investments in China, Hong Kong and Taiwan,
including exposure to currency fluctuations, less liquidity, expropriation,
confiscatory taxation, nationalization and exchange control regulations
(including currency blockage). Inflation and rapid fluctuations in inflation and
interest rates have had, and may continue to have, negative effects on the
economy and securities markets of China, Hong Kong and Taiwan. In addition,
investments in Hong Kong or Taiwan could be adversely affected by a
deterioration in their respective political and economic relationships with
China. The Chinese economy is heavily dependent on its large export sector and
its economic growth may be adversely affected by trade disputes with key trading
partners and escalating tariffs imposed on goods and services it produces. A
national economic slowdown in the export sector may also affect companies that
are not heavily dependent on exports. Companies that rely on imported products
may experience increased costs of production or reduced profitability, which may
harm consumers, investors and the domestic economy as a whole. Trade disputes
and retaliatory actions may include embargoes and other trade limitations, which
may trigger a significant reduction in international trade and impact the global
economy. Trade disputes may also lead to increased currency exchange rate
volatility, which can adversely affect the prices of Fund securities valued in
US dollars. The potential threat of trade disputes may also negatively affect
investor confidence in the markets generally and investment growth.
Investments
in Chinese companies may be made through a special structure known as a variable
interest entity (“VIE”). In a VIE structure, foreign investors, such as a Fund,
will only own stock in a shell company rather than directly in the Chinese
company, known as the VIE. The VIE must be owned by Chinese nationals (and/or
Chinese companies), which are typically the VIE’s founders, to obtain the
licenses and/or assets required to operate in certain restricted and/or
prohibited sectors in China. The value of the shell company is therefore derived
from its ability to consolidate the VIE into its financials pursuant to
contractual arrangements that allow the shell company to exert a degree of
control over, and obtain economic benefits arising from, the VIE without formal
legal ownership. The shell company is typically set up in an offshore
jurisdiction, such as the Cayman Islands, and enters into the service and other
contracts with the VIE
through
a wholly foreign-owned enterprise based in China. The VIE structure is designed
to provide foreign investors with exposure to Chinese companies that operate in
certain sectors in which China restricts and/or prohibits foreign investments,
such as internet, media, education and telecommunications.
VIEs
are common and are are well known to Chinese officials and regulators, but
historically the VIE structure has not been formally recognized under Chinese
law. There is uncertainty as to whether Chinese courts or arbitration bodies
would enforce the contractual rights of foreign investors in a VIE structure and
whether Chinese officials and regulators will reverse their acceptance of the
VIE structure generally, or with respect to certain industries. Each of these
potential events could cause significant and possibly permanent losses to the
value of such investments.
Significant
Geopolitical Events
Russian
Invasion of Ukraine.
Russia
launched a large-scale invasion of Ukraine on February 24, 2022. The extent and
duration of the military action, resulting sanctions and resulting future market
disruptions in the region are impossible to predict, but could be significant
and have a severe adverse effect on the region, including significant negative
impacts on the economy and the markets for certain securities and commodities,
such as oil and natural gas, as well as other sectors. Sanctions and other
similar measures could limit or prevent a Fund's ability to buy and sell
securities (in the sanctioned country and other markets), significantly delay or
prevent the settlement of trades, and significantly impact a Fund's liquidity or
performance.
Israel-Hamas
War.
In
October 2023, Hamas-led militant groups infiltrated Israel's southern border. In
response, Israel declared war on Hamas and invaded the Gaza Strip. Events in
Israel, Gaza, and the greater Middle East region are rapidly evolving, and the
extent and duration of the Israel-Hamas war are impossible to predict. Current
hostilities as well as the threat of future escalation may have a significant
adverse effect on Israel's economy, including increased volatility in the share
price of companies based in or with operations in Israel, local securities
trading suspensions, local securities market closures (including for extended
periods), a lack of transparency concerning Israeli issuers or other local
market information, and increased restrictions on foreign investment or
repatriation of capital. While it is not possible to predict the extent and
duration of any such conflict, the resulting market disruptions could be
significant, including in certain industries or sectors, such as the oil and
natural gas markets, and may negatively affect global supply chains, inflation
and global growth. These and any related events could significantly impact a
Fund’s performance and the value of an investment in the Fund, even if the Fund
does not have direct exposure to Israeli issuers or issuers in other countries
affected by the war.
REITs
The
Funds may invest in REITs. REITs are pooled investment vehicles that invest
primarily in income-producing real estate or real estate-related loans or
interests. REITs are generally classified as equity REITs, mortgage REITs or a
combination of equity and mortgage REITs. Equity REITs invest the majority of
their assets directly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority of
their assets in real estate mortgages and derive income from the collection of
interest payments. REITs are not taxed on income distributed to shareholders
provided they comply with the applicable requirements of the Code. A Fund will
indirectly bear its proportionate share of any management and other expenses
paid by REITs in which it invests in addition to the expenses paid by the Fund.
Debt securities issued by REITs are, for the most part, general and unsecured
obligations and are subject to risks associated with REITs.
Investing
in REITs involves certain unique risks in addition to those risks associated
with investing in the real estate industry in general. An equity REIT may be
affected by changes in the value of the underlying properties owned by the REIT.
A mortgage REIT may be affected by changes in interest rates and the ability of
the issuers of its portfolio mortgages to repay their obligations in addition to
the fact that a mortgage REIT that is in its liquidation stage may return
capital to investors when it is disadvantageous to do so. REITs are dependent
upon the skills of their managers
and
are not diversified. REITs are generally dependent upon maintaining cash flows
to repay borrowings and to make distributions to shareholders and are subject to
the risk of default by lessees or borrowers. REITs whose underlying assets are
concentrated in properties used by a particular industry, such as health care,
are also subject to risks associated with such industry. In addition, REITS are
subject to the possibilities of failing to qualify for tax- free pass-through of
income under the Code, and failing to maintain their exemptions from
registration under the 1940 Act.
REITs
(especially mortgage REITs) are also subject to interest rate risks, including
prepayment risk. When interest rates decline, the value of a REIT’s investment
in fixed rate obligations can be expected to rise. Conversely, when interest
rates rise, the value of a REIT’s investment in fixed rate obligations can be
expected to decline. If the REIT invests in adjustable rate mortgage loans the
interest rates on which are reset periodically, yields on a REIT’s investments
in such loans will gradually align themselves to reflect changes in market
interest rates. This causes the value of such investments to fluctuate less
dramatically in response to interest rate fluctuations than would investments in
fixed rate obligations.
REITs
may have limited financial resources, may trade less frequently and in a more
limited volume and may be subject to more abrupt or erratic price movements than
more widely held securities.
A
Fund’s investment in a REIT may require the Fund to accrue and distribute income
not yet received or may result in a Fund making distributions that constitute a
return of capital to Fund shareholders for federal income tax purposes. In
addition, distributions by a Fund from REITs will not qualify for the corporate
dividends-received deduction, or, generally, for treatment as qualified dividend
income.
To
the extent a Fund invests in REITs, the Fund’s distributions may be taxable to
investors as ordinary income because most REIT distributions come from mortgage
interest and rents as opposed to long-term capital gains. Fund distributions
taxable as ordinary income are taxed at higher ordinary income tax rates rather
than the lower tax rates that apply to capital gains and qualified dividend
income.
Repurchase
and Reverse Repurchase Agreements
Under
a repurchase agreement, a Fund agrees to buy securities guaranteed as to payment
of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to a Fund’s custodian
securities with an initial market value of at least 100% of the dollar amount
invested by a Fund in each repurchase agreement. The Advisor will monitor the
value of such securities daily to determine that the value equals or exceeds the
repurchase price.
Repurchase
agreements may involve risks in the event of default or insolvency of the bank
or broker-dealer, including possible delays or restrictions upon a Fund’s
ability to sell the underlying securities. A Fund will enter into repurchase
agreements only with parties who meet certain creditworthiness standards, i.e.,
banks or broker- dealers that the Advisor has determined present no serious risk
of becoming involved in bankruptcy proceedings within the time frame
contemplated by the repurchase transaction.
The
Funds may also each enter into reverse repurchase agreements. Under a reverse
repurchase agreement, a Fund agrees to sell a security in its portfolio and then
to repurchase the security at an agreed-upon price, date and interest payment.
The securities subject to the reverse repurchase agreement will be
marked-to-market daily.
The
use of repurchase agreements by a Fund involves certain risks. For example, if
the other party to a repurchase agreement defaults on its obligation to
repurchase the underlying security at a time when the value of the security has
declined, a Fund may incur a loss upon disposition of the security. If the other
party to the agreement becomes insolvent and subject to liquidation or
reorganization under the bankruptcy code or other laws, a court may determine
that the underlying security is collateral for the loan by a Fund not within the
control of that Fund, and therefore the realization by a Fund on the collateral
may be automatically stayed. Finally, it is possible that a Fund may not be able
to substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Advisor
acknowledges these risks, it is expected that if repurchase agreements are
otherwise deemed useful to a Fund, these risks can be controlled through careful
monitoring procedures.
Restricted
and Illiquid Investments
Pursuant
to Rule 22e-4 under the 1940 Act, each Fund may not acquire any illiquid
investment if, immediately after the acquisition, a Fund would have invested
more than 15% of its net assets in illiquid investments that are assets. An
illiquid investment as defined under Rule 22e-4 is any investment that a Fund
reasonably expects cannot be sold or disposed of in current market conditions in
seven calendar days or less without the sale or disposition significantly
changing the market value of the investment. Illiquid investments may include
securities and other financial instruments that do not have a readily available
market, repurchase agreements which have a maturity of longer than seven
calendar days, certain Rule 144A Securities (as described below) and time
deposits maturing in more than seven calendar days, unless, based upon a review
of the relevant market, trading and investment-specific considerations, those
investments are determined not to be illiquid. Securities that have legal or
contractual restrictions on resale but have a readily available market are
generally not classified as illiquid investments for purposes of this
limitation. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period. The Trusts have implemented a liquidity
risk management program and related procedures pursuant to Rule 22e-4, which
includes procedures to identify illiquid investments, and the Board has approved
the designation of AssetMark to administer the Trusts’ liquidity risk management
program and related procedures.
Securities
which have not been registered under the Securities Act of 1933, as amended (the
“Securities Act”) are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market.
Limitations on resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose of restricted
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within the allowable time period. A Fund might
also have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In
recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act including repurchase
agreements, commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold or
on an issuer’s ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such investments.
Each
Fund may invest in restricted securities (that is, securities that are not
registered pursuant to the Securities Act). Each Fund may invest in Rule 144A
securities. Rule 144A securities are securities which, while privately placed,
are eligible for purchase and resale pursuant to Rule 144A under the Securities
Act. This Rule permits certain qualified institutional buyers, such as the
Funds, to trade in privately placed securities even though such securities are
not registered under the Securities Act. To the extent that restricted or Rule
144A securities are classified as illiquid, they are subject to each Fund’s
limit on investments in illiquid investments.
Liquidity
classifications are made pursuant to the provisions of the Trusts’ liquidity
risk management program.
The
Advisor and/or a sub-advisor will also monitor the liquidity of Rule 144A
securities and, if as a result of changed conditions, the Advisor and/or a
sub-advisor determines that a Rule 144A security is no longer classified as
liquid, the Advisor and/or a sub-advisor will review the Funds’ holdings of
illiquid investments to determine what, if any, action is required to assure
that such Fund complies with its restriction on investment in illiquid
investments. Investing in Rule 144A securities could increase the amount of a
Fund’s investments in illiquid investments if qualified institutional buyers are
unwilling to purchase such securities.
Securities
Lending
To
generate additional income or to earn credits that offset expenses, each Fund
may lend its portfolio securities to unaffiliated broker/dealers, financial
institutions or other institutional investors pursuant to agreements requiring
that the loans be secured continuously by collateral, marked-to-market daily and
maintained in an amount at least equal in value to the current market value of
the securities loaned. The aggregate market value of securities lent by a Fund
will not at any time exceed 33 1/3% of the total assets of the Fund. All
relevant facts and circumstances, including the
creditworthiness
of the broker-dealer or institution, will be considered in making decisions with
respect to the lending of securities subject to review by the
Board.
The
cash collateral received from a borrower as a result of a Fund’s securities
lending activities will be invested in one or more registered money market funds
and/or unregistered, privately offered cash management vehicles that principally
invest in high quality, short term debt obligations, such as securities of the
U.S. government, its agencies or instrumentalities, instruments of U.S. and
foreign banks, corporate debt obligations, municipal obligations, debt
obligations of foreign governments, their agencies or instrumentalities,
repurchase agreements, funding agreements, asset-backed securities, including
asset-backed commercial paper, and money market funds. As a result of their
securities lending activities, the Funds collectively may own a significant
percentage of the interests of a cash management vehicle.
Securities
lending involves two primary risks: “investment risk” and “borrower default
risk.” Investment risk is the risk that a Fund will lose money from the
investment of the cash collateral received from the borrower. Borrower default
risk is the risk that a Fund will lose money due to the failure of a borrower to
return a borrowed security in a timely manner. There also may be risks of delay
in receiving additional collateral, in recovering the securities loaned, or a
loss of rights in the collateral should the borrower of the securities fail
financially. In the event a Fund is unsuccessful in seeking to enforce the
contractual obligation to deliver additional collateral, then the Fund could
suffer a loss. Securities lending may also result in the Fund being unable to
vote shares in a proxy solicitation by the issuer of a loaned security and/or
may cause the Fund to be ineligible to receive a distribution from the issuer of
a loaned security.
The
Funds are not obligated to engage in securities lending, and a Fund may
discontinue its securities lending activities at any time.
Short
Sales
Each
Fund has the ability to make short sales. Short sales are transactions where a
Fund sells securities it does not own in anticipation of a decline in the market
value of the securities. A Fund must borrow the security to deliver it to the
buyer. A Fund is then obligated to replace the security borrowed at the market
price at the time of replacement. Until the security is replaced, a Fund is
required to pay the lender any dividends or interest which accrues on the
security during the loan period. To borrow the security, a Fund also may be
required to pay a premium, which would increase the cost of the security sold.
To the extent necessary to meet margin requirements, the broker will retain
proceeds of the short sale until the short position is closed out. The Advisor
anticipates that the frequency of short sales will vary substantially under
different market conditions and each Fund (other than the Managed Futures
Strategy Fund) does not intend that any significant amount of its assets, as a
matter of practice, will be in short sales, if any.
In
addition to the short sales discussed above, each Fund also has the ability to
make short sales “against the box,” a transaction in which a Fund enters into a
short sale of a security owned by such Fund. A broker holds the proceeds of the
short sale until the settlement date, at which time a Fund delivers the security
to close the short position. A Fund receives the net proceeds from the short
sale.
Smaller
and Mid-Sized Companies/Capitalization Stock
The
Funds may each invest in companies that have limited product lines, services,
markets, or financial resources, or that are dependent on a small management
group. In addition, because these stocks may not be well-known to the investing
public, do not have significant institutional ownership and are followed by
relatively few security analysts, there will normally be less publicly available
information concerning these securities compared to what is available for the
securities of larger companies or companies with larger capitalizations
(“Large-Sized Companies”).
Historically,
smaller companies and the stocks of companies with smaller or mid-sized
capitalizations (“Small-Sized Companies”) have been more volatile in price than
Large-Sized Companies. Among the reasons for the greater price volatility of
these Small-Sized Company stocks are the less certain growth prospects of
Small-Sized Companies, the lower degree of liquidity in the markets for such
stocks, the greater sensitivity of Small-Sized Companies to changing economic
conditions and the fewer market makers and wider spreads between quoted bid and
asked prices which exist in the over-the-counter market for such stocks. Besides
exhibiting greater volatility, Small-Sized Company stocks may, to a degree,
fluctuate independently of Large-Sized Company stocks. Small- Sized Company
stocks may decline in
price
as Large-Sized Company stocks rise, or rise in price as Large-Sized Company
stocks decline. Investors should therefore expect that a Fund that invests
primarily in Small-Sized Companies will be more volatile than, and may fluctuate
independently of, broad stock market indices such as the S&P 500®
Index.
Step-Coupon
Securities
The
Growth Allocation Fund, Conservative Allocation Fund, Tactical Allocation Fund,
Absolute Return Allocation Fund, Multi-Asset Income Allocation Fund, Flexible
Income Allocation Fund, Managed Futures Strategy Fund, Conservative Income Fund,
Income Fund, and Growth and Income Fund may invest in step-coupon securities.
Step-coupon securities trade at a discount from their face value and pay coupon
interest. The coupon rate is low for an initial period and then increases to a
higher coupon rate thereafter. Market values of these types of securities
generally fluctuate in response to changes in interest rates to a greater degree
than conventional interest-paying securities of comparable term and quality.
Under many market conditions, investments in such securities may be illiquid,
making it difficult for a Fund to dispose of them or determine their current
value.
Stripped
Securities
Each
Fund has the ability to purchase participations in trusts that hold U.S.
Treasury and agency securities (such as Treasury Investment Growth Receipts
(“TIGRs”) and Certificates of Accrual on Treasury Securities (“CATs”)) and also
may purchase Treasury receipts and other “stripped” securities that evidence
ownership in either the future interest payments or the future principal
payments of U.S. government obligations. These participations are issued at a
discount to their “face value,” and may (particularly in the case of stripped
mortgage-backed securities) exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors.
Structured
Notes
The
Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation Fund,
Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income
Allocation Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund may invest in
structured notes. Structured notes are derivative debt securities, the interest
rate and/or principal of which is determined by an unrelated indicator. The
value of the principal of and/or interest on structured notes is determined by
reference to changes in the return, interest rate or value at maturity of a
specific asset, reference rate or index (the “reference instrument”) or the
relative change in two or more reference instruments. The interest rate or the
principal amount payable upon maturity or redemption may be increased or
decreased, depending upon changes in the applicable reference instruments.
Structured notes may be positively or negatively indexed, so that an increase in
value of the reference instrument may produce an increase or a decrease in the
interest rate or value of the structured note at maturity. In addition, changes
in the interest rate or the value of the structured note at maturity may be
calculated as a specified multiple of the change in the value of the reference
instrument; therefore, the value of such note may be very volatile. Structured
notes may entail a greater degree of market risk than other types of debt
securities because the investor bears the risk of the reference instrument.
Structured notes may also be more volatile, less liquid and more difficult to
accurately price than less complex securities or more traditional debt
securities.
Supranational
Entities
The
Growth Allocation Fund, Conservative Allocation Fund, Tactical Allocation Fund,
Absolute Return Allocation Fund, Multi-Asset Income Allocation Fund, Flexible
Income Allocation Fund, Managed Futures Strategy Fund, Conservative Income Fund,
Income Fund, and Growth and Income Fund may invest in obligations of
supranational entities. A supranational entity is an entity designated or
supported by national governments to promote economic reconstruction,
development or trade amongst nations. Examples of supranational entities include
the International Bank for Reconstruction and Development (also known as the
World Bank) and the European Investment Bank. Obligations of supranational
entities are subject to the risk that the governments on whose support the
entity depends for its financial backing or repayment may be unable or unwilling
to provide that support. Obligations of a supranational entity that are
denominated in foreign currencies will also be subject to the risks associated
with investments in foreign currencies, as described above in the section
“Foreign Currency Transactions.”
Temporary
Investments
Under
normal circumstances, each Fund may have money received from the purchase of
Fund shares, or money received on the sale of its portfolio securities for which
suitable investments consistent with such Fund’s investment objective(s) are not
immediately available. Under these circumstances, each Fund may have such monies
invested in cash or cash equivalents in order to earn income on this portion of
its assets. Cash equivalents include money market mutual funds, as well as
investments such as U.S. government obligations, repurchase agreements, bank
obligations, commercial paper and corporate bonds with remaining maturities of
thirteen months or less. A Fund may also have a portion of its assets invested
in cash equivalents in order to meet anticipated redemption requests or if other
suitable securities are unavailable. In addition, each Fund may reduce its
holdings in equity and other securities and may invest in cash and cash
equivalents for temporary defensive purposes, during periods in which the
Advisor believes changes in economic, financial or political conditions make it
advisable.
Bank
obligations include bankers’ acceptances, negotiable certificates of deposit and
non-negotiable time deposits, including U.S. dollar-denominated instruments
issued or supported by the credit of U.S. or foreign banks or savings
institutions. Although each of the Funds may invest in money market obligations
of foreign banks or foreign branches of U.S. banks only where the Advisor
determines the instrument to present minimal credit risks, such investments may
nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1 billion
in total assets at the time of purchase, and investments by each Fund in the
obligations of foreign banks and foreign branches of U.S. banks will not exceed
10% of such Fund’s total assets at the time of purchase. Each Fund may also make
interest-bearing savings deposits in commercial and savings banks in amounts not
in excess of 10% of its net assets.
Investments
by a Fund in commercial paper will consist of issues rated at the time of
investment as A-1 and/or P-1 by S&P®,
Moody’s or a similar rating by another NRSRO. In addition, a Fund may acquire
unrated commercial paper and corporate bonds that are determined by the Advisor
at the time of purchase to be of comparable quality to rated instruments that
may be acquired by such Fund, as previously described.
Trust
Preferred Securities
The
Growth Allocation Fund, Conservative Allocation Fund, Tactical Allocation Fund,
Absolute Return Allocation Fund, Multi-Asset Income Allocation Fund, Flexible
Income Allocation Fund, Managed Futures Strategy Fund, Conservative Income Fund,
Income Fund, and Growth and Income Fund may also purchase trust preferred
securities, which have characteristics of both subordinated debt and preferred
stock. Trust preferred securities are issued by a special purpose trust
subsidiary backed by subordinated debt of a corporate parent. These securities
generally have a final stated maturity date and a fixed schedule for periodic
payments. In addition, these securities have provisions that afford preference
over common and preferred stock upon liquidation, although the securities are
subordinated to other, more senior debt securities of the same issuer. The
issuers of these securities often have the right to defer interest payments for
a period of time.
Holders
of trust preferred securities have limited voting rights to control the
activities of the trust, and no voting rights with respect to the parent
company. The market value of trust preferred securities may be more volatile
than those of conventional debt securities. Trust preferred securities may be
issued in reliance on Rule 144A under the Securities Act or otherwise subject to
restrictions on resale. There can be no assurance as to the liquidity of trust
preferred securities and the ability of holders, such as a Fund, to sell their
holdings. If the parent company defaults on interest payments to the trust, the
trust will not be able to make dividend payments to holders of its securities.
Underlying
Pools
The
Managed Futures Strategy Fund may invest a portion of its assets directly, or
through its wholly owned and controlled Cayman Islands subsidiary (discussed
below), in securities of limited partnerships, corporations, limited liability
companies (including individual share classes therein) and other types of pooled
investment vehicles (collectively, “Underlying Pools”). Many of these Underlying
Pools invest in commodities.
The
Underlying Pools use a form of leverage often referred to as “notional funding,”
meaning that the nominal trading level for an Underlying Pools will exceed the
cash deposited in its trading accounts. The difference between the amount of
cash deposited in the Underlying Pool’s trading account and the nominal trading
level of the account is referred to as notional funding. The use of notional
funding (i.e., leverage) will increase the volatility of the Underlying Pools
and may make the Underlying Pools subject to more frequent margin calls. Being
forced to raise cash at inopportune times to meet margin calls may prevent the
Underlying Pool manager from making investments it considers optimal. In no
circumstance will the assets of the Managed Futures Strategy Fund or its wholly
owned subsidiary (discussed below) be available to meet the margin requirements
of an Underlying Pool. Underlying Pools are typically offered privately and no
public market for such securities will exist. However, shares of the Underlying
Pools are redeemable at intervals of one week or less.
U.S.
Government Obligations
Each
Fund may invest in a variety of U.S. Treasury obligations including bonds, notes
and bills, which mainly differ only in their interest rates, maturities and time
of issuance. The Funds may also each invest in other securities issued or
guaranteed by the U.S. government, its agencies and instrumentalities, such as
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, GNMA,
Fannie Mae®,
General Services Administration, Central Bank for Cooperatives, Federal Home
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Maritime
Administration and Resolution Trust Corp. Government agency obligations have
different levels of credit support and, therefore, different degrees of credit
risk. Securities issued by agencies and instrumentalities of the U.S. government
that are supported by the full faith and credit of the United States, such as
the Federal Housing Administration and Ginnie Mae®,
present little credit risk. Government agency obligations also include
instruments issued by certain instrumentalities established or sponsored by the
U.S. government, including the Federal Home Loan Banks, Fannie Mae®,
and the Federal Home Loan Mortgage Corporation (“FHLMC’’ or “Freddie
Mac®”).
Although these securities are issued, in general, under the authority of an Act
of Congress, the U.S. government is not obligated to provide financial support
to the issuing instrumentalities and these securities are neither insured nor
guaranteed by the U.S. government. As such, some or all of the mortgage default
or credit risk associated with those securities are transferred to the
investors. As a result, investors that hold these securities could lose some or
all of their investment in these securities if the underlying mortgage defaults.
The U.S. Department of the Treasury has the authority to support FNMA and FHLMC
by purchasing limited amounts of their respective obligations. In addition, the
U.S. government has, in the past, provided financial support to FNMA and FHLMC
with respect to their debt obligations. However, no assurance can be given that
the U.S. government will always do so or would do so yet again.
Election
to Invest Fund Assets Pursuant to Master/Feeder Fund Structure
In
lieu of investing directly, the Large Cap Core Fund, Emerging Markets Fund,
Small/Mid Cap Core Fund, World ex-US Fund, Core Fixed Income Fund, Conservative
Income Fund, Income Fund, and Growth and Income Fund are authorized to seek to
achieve their investment objective(s) by converting to a master/feeder fund
structure pursuant to which each Fund would invest all of its investable assets
in a corresponding investment company having substantially the same investment
objective(s) and policies as the Fund.
The
Funds’ methods of operation and shareholder services would not be materially
affected by their investment in other investment companies (“Master Portfolios”)
having substantially the same investment objective and policies as the
corresponding Funds, except that the assets of the Funds may be managed as part
of a larger pool. If the Funds invested all of their assets in corresponding
Master Portfolios, they would hold only beneficial interests in the Master
Portfolios; the Master Portfolios would directly invest in individual securities
of other issuers. The Funds would otherwise continue their normal operation. The
Board would retain the right to withdraw any Fund’s investment from its
corresponding Master Portfolio at any time it determines that it would be in the
best interest of shareholders; such Fund would then resume investing directly in
individual securities of other issuers or invest in another Master
Portfolio.
There
is no immediate intention to convert the Funds to a master/feeder fund
structure. The Board has authorized this non-fundamental investment policy to
facilitate such a conversion in the event that the Board determines that such a
conversion is in the best interest of the Funds’ shareholders. If the Board so
determines, it will consider and evaluate specific proposals prior to the
implementation of the conversion to a master/feeder fund structure. Further, the
Funds’
Prospectus
and SAI would be amended to reflect the implementation of the Funds’ conversion
and their shareholders would be notified.
Variable
Amount Master Demand Notes
The
Growth Allocation Fund, Conservative Allocation Fund, Tactical Allocation Fund,
Absolute Return Allocation Fund, Multi-Asset Income Allocation Fund, Flexible
Income Allocation Fund, Managed Futures Strategy Fund, Conservative Income Fund,
Income Fund, and Growth and Income Fund may invest in variable amount master
demand notes. Variable amount master demand notes are unsecured demand notes
that permit the investment of fluctuating amounts of money at variable rates of
interest pursuant to arrangements with issuers who have been rated in the
highest short-term rating category by NRSROs, or which have been determined by
the Advisor to be of comparable quality. The interest rate on a variable amount
master demand note is periodically adjusted according to a prescribed formula.
Although currently there is no established secondary market in master demand
notes, the payee may demand payment of the principal and interest upon notice
not exceeding five business days or seven calendar days.
Variable
and Floating Rate Instruments
The
Funds may purchase variable- and floating‑rate instruments (including bank
loans, which are discussed in the section “Bank Loans, Loan Participations and
Assignments” above). These instruments may include variable amount master demand
notes that permit the indebtedness thereunder to vary in addition to providing
for periodic adjustments in the interest rate. These instruments may also
include leveraged inverse floating‑rate debt instruments, or “inverse floaters.”
The interest rate of an inverse floater resets in the opposite direction from
the market rate of interest on a security or interest to which it is related. An
inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest, and is subject to many of the same risks as
derivatives. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Certain of these
investments may be illiquid. The absence of an active secondary market with
respect to these investments could make it difficult for a Fund to dispose of a
variable or floating rate note if the issuer defaulted on its payment obligation
or during periods that a Fund is not entitled to exercise its demand rights, and
a Fund could, for these or other reasons, suffer a loss with respect to such
instruments. Newly originated variable rate securities (including reissuances
and restructured loans) may possess lower levels of credit document protections
than has historically been the case. Accordingly, in the event of default the
Fund may experience lower levels of recoveries than has historically been the
norm.
Variable
Rate or Floating Rate Municipal Securities
The
Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation Fund,
Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income
Allocation Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund may purchase
Municipal Securities with variable or floating interest rates. Variable or
floating interest rates are ordinarily stated as a percentage of the prime rate
of a bank or some similar standard, such as the 91-day U.S. Treasury bill rate.
Variable interest rates are adjusted on a periodic basis (i.e., every 30 days)
and floating interest rates are adjusted whenever a benchmark rate changes. Many
variable or floating rate Municipal Securities are subject to payment of
principal on demand by a Fund, usually in not more than seven days. If a
variable or floating rate Municipal Security does not have this demand feature,
or the demand feature extends beyond seven days and the Advisor believes the
security cannot be sold within seven days, the security may be classified as
illiquid. As such, a Fund’s investment limitation on illiquid investments may be
implicated. All variable or floating rate Municipal Securities will meet the
respective Fund’s quality standards.
Variable
and floating interest rates generally reduce changes in the market value of
Municipal Securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less for variable or floating rate Municipal Securities than for
fixed income obligations. Many Municipal Securities with variable or floating
interest rates purchased by the Core Fixed Income Fund, Growth Allocation Fund,
Conservative Allocation Fund, Tactical Allocation Fund, Absolute Return
Allocation Fund, Multi-Asset Income Allocation Fund, Flexible Income Allocation
Fund, Managed Futures Strategy Fund, Conservative Income Fund, Income Fund, and
Growth and Income Fund are subject to repayment of principal (usually within
seven days) on the demand of each Fund. The terms of these variable or floating
rate demand instruments require payment of principal and
accrued
interest from the issuer of the municipal obligations, the issuer of the
participation interests, or a guarantor of either issuer.
Warrants
Each
of the Funds has the ability to purchase warrants and similar rights, which are
privileges issued by corporations enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at the specified price
during a specified period of time. Warrants do not represent ownership of the
securities, but only the right to buy them. Warrants have no voting rights, pay
no dividends and have no rights with respect to the assets of the company
issuing them. Warrants differ from call options in that warrants are issued by
the issuer of the security that may be purchased on their exercise, whereas call
options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying
securities.
The
purchase of warrants involves the risk that a Fund could lose the purchase value
of a warrant if the right to subscribe to additional shares is not exercised
prior to the warrant’s expiration. Also, the purchase of warrants involves the
risk that the effective price paid for the warrant added to the subscription
price of the related security may exceed the value of the subscribed security’s
market price, such as when there is no movement in the level of the underlying
security. Under normal circumstances, no more than 5% of each Fund’s net assets
will be invested in warrants. This 5% limit includes warrants that are not
listed on any stock exchange. Warrants acquired by the World ex-US Fund, Growth
Allocation Fund, Conservative Allocation Fund, Tactical Allocation Fund,
Absolute Return Allocation Fund, Multi-Asset Income Allocation Fund, Flexible
Income Allocation Fund, Managed Futures Strategy Fund, Conservative Income Fund,
Income Fund, and Growth and Income Fund in units or attached to securities are
not subject to these limits.
When-Issued
Purchases, Delayed Delivery and Forward Commitments
Each
Fund may purchase or sell particular securities with payment and delivery taking
place at a later date. A Fund’s forward commitments and when-issued purchases
are not expected to exceed 25% of the value of its total assets absent unusual
market conditions.
When-issued
and forward commitment transactions involve the risk that the price or yield
obtained in a transaction (and therefore the value of a security) may be less
favorable then the price or yield (and therefore the value of a security)
available in the market when the delivery of the securities takes
place.
If
deemed advisable as a matter of investment strategy, a Fund may dispose of or
renegotiate a commitment after it is entered into, and may sell securities it
has committed to purchase before those securities are delivered to a Fund on the
settlement date. In these cases, a Fund may realize a capital gain or
loss.
When
a Fund engages in when-issued, delayed delivery and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in a Fund incurring a loss or failing to receive
a cumulative profit on the trade.
The
market value of the securities underlying a when-issued purchase or a forward
commitment to purchase securities, and any subsequent fluctuations in their
market value, are taken into account when determining the net asset value of a
Fund starting on the day the Fund agrees to purchase the securities. A Fund does
not earn interest on the securities it has committed to purchase until they are
paid for and delivered on the settlement date. When a Fund makes a forward
commitment to sell securities it owns, the proceeds to be received upon
settlement are included in such Fund’s assets. Fluctuations in the market value
of the underlying securities are not reflected in the Fund’s net asset value as
long as the commitment remains in effect.
The
Core Fixed Income Fund, Conservative Income Fund, Income Fund, and Growth and
Income Fund may also engage in shorting of when-issued, delayed delivery
securities (TBAs). When a Fund enters into a short sale of a TBA security it
effectively agrees to sell a security it does not own at a future price and
date. Although most TBA short sales transactions are closed prior to any
requirement to deliver the security sold short, if the Fund does not close the
position, the Fund may have to purchase the securities needed to settle the
short sale at a higher price than anticipated, which would cause the Fund to
lose money. A Fund may not always be able to purchase securities to close out
the short
position
at a particular time or at an attractive price. The Funds may incur increased
transaction costs associated with selling TBA securities short. In addition,
taking short positions in TBA securities may result in a form of leverage which
could increase the volatility of a Fund’s returns. The Core Fixed Income Fund
may also engage in short sales of TBA securities when it contemporaneously owns
or has the right to obtain, at no added cost, securities identical to those sold
short. If a Fund sells securities in this manner, it may protect itself from
loss if the price of the securities declines in the future, but will lose the
opportunity to profit on such securities if the price rises. If a Fund effects a
short sale of securities at a time when it has an unrealized gain on the
securities, it may be required to recognize that gain as if it had actually sold
the securities (as a “constructive sale”) on the date it effects the short
sale.
Wholly
Owned Subsidiary
The
Managed Futures Strategy Fund may gain exposure to certain strategies that trade
non-financial commodity futures contracts within the limitations of the federal
tax requirements of Subchapter M of the Code by investing up to 25% of its
assets through a wholly owned and controlled subsidiary (the
“Subsidiary”).
The
Subsidiary will not be registered under the 1940 Act and will not be subject to
all of the investor protections of the 1940 Act. Changes in the laws of the
United States and/or the Cayman Islands, under which the Fund and the Subsidiary
are organized, respectively, could affect the inability of the Fund and/or
Subsidiary to operate as described herein and could negatively affect the Fund
and its shareholders. Your cost of investing in the Fund will be higher because
you indirectly bear the expenses of the Subsidiary. Furthermore, because the
Subsidiary is a controlled foreign corporation, any income received from its
investments in underlying pooled investment vehicles may be taxed to the Fund at
less favorable rates than capital gains. Additionally, the IRS has issued a
number of private letter rulings to mutual funds, which indicate that income
from a fund’s investment in a wholly owned foreign subsidiary that invests in
commodity-linked derivatives, such as the Subsidiary, constitutes qualifying
income. In September 2016, the IRS announced that it will no longer issue
private letter rulings on questions relating to the treatment of a corporation
as a regulated investment company that require a determination of whether a
financial instrument or position is a security under section 2(a)(36) of the
1940 Act. (A financial instrument or position that constitutes a security under
section 2(a)(36) of the 1940 Act generates qualifying income for a corporation
taxed as a regulated investment company.) This caused the IRS to revoke the
portion of any rulings that required such a determination, some of which were
revoked retroactively and others of which were revoked prospectively as of a
date agreed upon with the IRS. The Fund also may incur transaction and other
costs to comply with any new or additional guidance from the IRS.
To
the extent the Fund invests through the Subsidiary, the Fund will comply with
the provisions of the 1940 Act governing investment policies (Section 8) and
capital structure and leverage (Section 18) on an aggregate basis with the
Subsidiary.
Underlying
Funds that Invest in Whole Loans
The
Income Fund and the Growth and Income Fund may invest in Underlying Funds that
are not registered under the 1940 Act (i.e., “private funds”) that provide
exposure to pools of whole loans. The private funds in which the Fund may invest
are expected to be offered pursuant to an exemption from registration under
Section 4(a)(2) of the Securities Act, Rule 506 thereunder and applicable state
securities laws. Such companies are also expected to be relying on Section
3(c)(1) or 3(c)(7) under the 1940 Act for an exemption from registration as
investment companies under such Act. By investing in the Funds, you will
indirectly bear fees and expenses of the Underlying Funds in which it invests.
Certain Underlying Funds in which the Funds may invest are private funds that
charge, in addition to a base management fee, a performance-based fee calculated
as a percentage of the Underlying Fund’s income, capital gains and/or
appreciation.
As
a general matter, the whole loans to which the Funds expect to invest indirectly
through the Underlying Funds are unsecured obligations of the borrowers and are
not secured by any collateral, not guaranteed or insured by any third-party and
not backed by any governmental authority in any way. In some instances, whole
loans may be secured (generally in the case of loans to businesses and real
estate loans). For example, real estate loans may be secured by a deed of trust,
mortgage, security agreement or legal title to real estate. Even in these
instances, there can be no assurance that any collateral pledged to secure a
loan can be liquidated quickly or at all or will generate proceeds sufficient to
offset any defaults on such loans. Individual loans are not rated by the NRSROs
and may constitute a high-risk and speculative investment.
Unsecured
and have speculative characteristics and therefore may be high risk, including a
heightened risk of nonpayment of interest or repayment of principal. The Funds
may also invest in loans or other securities that are rated below investment
grade or, if not rated, are considered to be below investment grade by the
Advisor. Below investment grade securities are commonly referred to as “junk
bonds” or “high yield” securities and are considered speculative with respect to
the issuer’s capacity to pay interest and repay principal.
Underlying
Fund Investments in Marketplace Loans
Certain
Underlying Funds in which the Income Fund and the Growth and Income Fund may
invest are private funds that provide exposure to whole loans sourced through
peer-to-peer or marketplace lending platforms (“marketplace loans”). There are
several different models of marketplace lending platforms, but generally, a
platform typically matches consumers, small or medium-sized businesses or other
types of borrowers with investors that are interested in gaining investment
exposure to the loans made to such borrowers. Prospective borrowers are usually
required to provide or give access to certain financial information to the
platform, such as the intended purpose of the loan, income, employment
information, credit score, debt-to-income ratio, credit history (including
defaults and delinquencies) and home ownership status, and, in the case of small
business loans, business financial statements and personal credit information
regarding any guarantor, some of which information is made available to
prospective lenders. Often, platforms charge fees to borrowers to cover these
screening and administrative costs. Based on this and other relevant
supplemental information, the platform usually assigns its own credit rating to
the borrower and sets the interest rate for the requested borrowing. Platforms
then post the borrowing requests online and investors may choose among the
loans, based on the interest rates the loans are expected to yield less any
servicing or origination fees charged by the platform or others involved in the
lending arrangement, the background data provided on the borrowers and the
credit rating assigned by the platform. In some cases, a platform partners with
a bank to originate a loan to a borrower, after which the bank sells the loan to
the platform or directly to the investor; alternatively, some platforms may
originate loans themselves. Some investors may not review the particular
characteristics of the loans in which they invest at the time of investment, but
rather negotiate in advance with platforms the general criteria of the
investments, as described above. As a result, such investors are dependent on
the platforms’ ability to collect, verify and provide information about each
loan and borrower.
When
an Underlying Fund invests in marketplace loans, it typically purchases all
rights, title and interest in the loans pursuant to a loan purchase agreement
directly from the platform or its affiliate. The platform or a third-party
servicer typically continues to service the loans, collecting payments and
distributing them to investors, less any servicing fees assessed against the
Underlying Fund, and the servicing entity typically will make all decisions
regarding acceleration or enforcement of the loans following any default by a
borrower. Where a platform or its affiliate acts as the loan servicer, there is
typically a backup servicer in place in case that platform or affiliate ceases
or fails to perform these servicing functions. The Underlying Fund, as an
investor in a marketplace loan, would be entitled to receive payment only from
the borrower and/or any guarantor, and would not be able to recover any
deficiency from the platform, except under very narrow circumstances, which may
include fraud by the borrower in some cases. Marketplace loans may be secured or
unsecured. They are not rated by the NRSROs and may constitute a high-risk and
speculative investment.
Default
Risk. If
a borrower is unable or fails to make payments on a loan for any reason, an
Underlying Fund may be greatly limited in its ability to recover any outstanding
principal or interest due, as (among other reasons) the Underlying Fund may not
have direct recourse against the borrower or may otherwise be limited in its
ability to directly enforce its rights under the loan, whether through the
borrower or the platform through which such loan was originated, the loan may be
unsecured or under-collateralized and/or it may be impracticable to commence a
legal proceeding against the defaulting borrower. If an Underlying Fund were
unable to recover unpaid principal or interest due, this would cause the
Underlying Fund’s net asset value to decrease, resulting in a loss to the Fund.
Marketplace
lending platforms may not limit borrowers from incurring additional debt. If a
borrower incurs additional debt obligations after obtaining a loan through an
marketplace lending platform, the borrower’s creditworthiness may diminish and
any additional obligations could cause the borrower to experience financial
distress, insolvency or bankruptcy, all of which would impair the borrower’s
ability to repay its loan. Furthermore, the ability of secured creditors to
pursue remedies against the collateral of the borrower may impair the borrower’s
ability to repay its unsecured loan or it may impair the platform’s or loan
servicer’s ability to collect on the loan upon default. Default rates on loans
obtained through marketplace lending platforms may be adversely affected by a
number, such as economic
downturns
or general economic or political conditions, including prevailing interest
rates, the rate of unemployment, the level of consumer confidence, residential
real estate values, the value of the various currencies, energy prices, changes
in consumer spending, the number of personal bankruptcies, insolvencies,
disruptions in the credit markets, the borrower’s personal circumstances and
other factors.
The
default history for alternative lending borrowing arrangements is limited.
Future defaults may be higher than historical defaults and the timing of
defaults may vary significantly from historical observations. The credit profile
and interest rates available to certain borrowers who seek credit through
marketplace lending platforms may result in a higher rate of default for
alternative lending related securities as compared with the debt instruments
associated with more traditional lending models, such as banks.
Platform
Risk.
An Underlying Fund will receive payments on loans only if the platform or
third-party service provider servicing the loans receives the borrower’s
payments on such loans and passes such payments through to the Underlying Fund.
If a borrower is unable or fails to make payments on a loan for any reason, an
Underlying Fund may be greatly limited in its ability to recover any outstanding
principal or interest due, as (among other reasons) an Underlying Fund may not
have direct recourse against the borrower or may otherwise be limited in its
ability to directly enforce its rights under the loan, whether through the
borrower or the platform through which such loan was originated, the loan may be
unsecured or under-collateralized and/or it may be impracticable to commence a
legal proceeding against the defaulting borrower.
An
Underlying Fund may have limited knowledge about the underlying loans and is
dependent upon the platform for information regarding underlying loans. An
Underlying Fund generally will not have the ability to independently verify the
information provided by the platforms, other than payment information regarding
loans and other alternative lending-related securities owned by the Underlying
Fund, which the Underlying Fund observes directly as payments are received.
Underlying Funds may not be permitted to review the particular characteristics
of the loans in which they invest at the time of investment, but rather
negotiate in advance with platforms the general criteria of the investments, as
described above. As a result, Underlying Funds are dependent on the platforms’
ability to collect, verify and provide information about each loan and
borrower.
Underlying
Funds rely on the borrower credit information provided by platforms. However,
such information may be out of date, incomplete or inaccurate and may,
therefore, not accurately reflect the borrower’s actual creditworthiness.
Platforms may not have an obligation to update borrower information, and,
therefore, an Underlying Fund may not be aware of any impairment in a borrower’s
creditworthiness subsequent to the making of a particular loan. Underlying Funds
typically do not have access to all of the data that platforms utilize to assign
credit scores to particular loans purchased directly or indirectly by the
Underlying Funds, and are not able to independently confirm the truthfulness of
such information or otherwise evaluate the basis for the platform’s credit score
of those loans. As a result, Underlying Funds may make investments based on
outdated, inaccurate or incomplete information. In addition, the platforms’
credit decisions and scoring models are based on algorithms that could
potentially contain programming or other errors or prove to be ineffective or
otherwise flawed. This could adversely affect loan pricing data and approval
processes and could cause loans to be mispriced or misclassified, which could
ultimately have a negative impact on an Underlying Fund’s performance, which
would in turn have a negative impact on the Fund’s performance.
In
addition, the underlying loans, in some cases, may be affected by the success of
the platforms through which they are facilitated. Therefore, disruptions in the
businesses of such platforms may also negatively impact the value of an
Underlying Fund’s investments. In addition, disruption in the business of a
platform could limit or eliminate the ability of an Underlying Fund to invest in
loans originated by that platform, and therefore the Underlying Fund could lose
some or all of the benefit of its diligence effort with respect to that
platform.
An
Underlying Fund’s investments could be adversely impacted if a platform that
services the Underlying Fund’s investments becomes unable or unwilling to
fulfill its obligations to do so. In order to mitigate this risk, an Underlying
Fund would likely seek to rely on a backup servicer provided through the
platform or through an unaffiliated backup servicer. To the extent that it is
not possible to collect on defaulted loans or to the extent borrowers prepay
loans, a platform that services loans may no longer be able to collect a
servicing fee, which would negatively impact its business operations. These or
other similar negative events could adversely affect the platforms’ businesses
and/or investor participation in a platform’s marketplace and, in turn, the
business of the platforms, which creates a risk of loss for the Underlying
Fund’s investments in securities issued by a platform or derivatives
thereon.
Platforms
may have a higher risk profile than companies engaged in lines of business with
a longer, more established operating history and such investments should be
viewed as longer-term investments. They have met with and will continue to meet
with challenges, including navigating evolving regulatory and competitive
environments; increasing the number of borrowers and investors utilizing their
marketplace; increasing the volume of loans facilitated through their
marketplace and transaction fees received for matching borrowers and investors
through their marketplace; entering into new markets and introducing new loan
products; continuing to revise the marketplace’s proprietary credit decisions
and scoring models; continuing to develop, maintain and scale their platforms;
effectively maintaining and scaling financial and risk management controls and
procedures; maintaining the security of the platform and the confidentiality of
the information provided and utilized across the platform; and attracting,
integrating and retaining an appropriate number of qualified employees. If
platforms are not successful in addressing these issues, the platforms’
businesses and their results of operations may be harmed, which may reduce the
possible available investments for an Underlying Fund or negatively impact the
value of the Underlying Fund’s investments in platforms or in alternative
lending-related securities more generally.
Platforms
may rely on debt facilities and other forms of borrowing in order to finance
many of the borrower loans they facilitate. However, these financing sources may
become unavailable after their current maturity dates or the terms may become
less favorable to the borrowing platforms. As the volume of loans that a
platform facilitates increases, the platform may need to expand its borrowing
capacity on its existing debt arrangements or may need to seek new sources of
capital. Platforms may also default on or breach their existing debt agreements,
which could diminish or eliminate their access to funding at all or on terms
acceptable to the platforms. Such events could cause an Underlying Fund to incur
losses on its investments that are dependent upon the performance of the
platforms, which would in turn cause the Funds to incur losses on their
investments in the Underlying Funds.
Servicer
Risk. Loans
originated by marketplace lending platforms are typically serviced by that
platform or a third-party servicer. In the event that the servicer is unable to
service the loan, there can be no guarantee that a backup servicer will be able
to assume responsibility for servicing the loans in a timely or cost-effective
manner; any resulting disruption or delay could jeopardize payments due on an
Underlying Fund’s investments. If a servicer becomes subject to a bankruptcy or
similar proceeding, there is some risk that an Underlying Fund’s investments
could be recharacterized as a secured loan from the Underlying Fund to the
platform, which could result in uncertainty, costs and delays from having the
Underlying Fund’s investment deemed part of the bankruptcy estate of the
platform, rather than an asset owned outright by the Underlying
Fund.
Lender
Liability. A
number of judicial decisions have upheld judgments of borrowers against lending
institutions on the basis of various evolving legal theories, collectively
termed “lender liability.” Generally, lender liability is founded on the premise
that a lender has violated a duty (whether implied or contractual) of good
faith, commercial reasonableness and fair dealing, or a similar duty owed to the
borrower or has assumed an excessive degree of control over the borrower
resulting in the creation of a fiduciary duty owed to the borrower or its other
creditors or shareholders. If a loan held directly or indirectly by an
Underlying Fund were found to have been made or serviced under circumstances
that give rise to lender liability, the borrower’s obligation to repay that loan
could be reduced or eliminated or an Underlying Fund’s recovery on that loan
could be otherwise impaired, which would adversely impact the value of that
loan, which would in turn impact the value of the Fund’s investment in the
Underlying Fund.
In
limited cases, courts have subordinated the loans of a senior lender to a
borrower to claims of other creditors of the borrower when the senior lender or
its agents, such as a loan servicer, is found to have engaged in unfair,
inequitable or fraudulent conduct with respect to the other creditors. If a loan
held directly or indirectly by an Underlying Fund were subject to such
subordination, it would be junior in right of payment to other indebtedness of
the borrower, which could adversely impact the value of that loan and the value
of the Fund’s investment in the Underlying Fund.
Zero-Coupon,
Delayed Interest and Capital Appreciation Securities
The
Core Fixed Income Fund, Growth Allocation Fund, Conservative Allocation Fund,
Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset Income
Allocation Fund, Flexible Income Allocation Fund, Managed Futures Strategy Fund,
Conservative Income Fund, Income Fund, and Growth and Income Fund may each
invest in zero-coupon, delayed interest, pay-in-kind (“PIK”) and capital
appreciation securities, which are securities that make no periodic interest
payments, but are sold at a deep discount from their face value. The buyer
recognizes a rate of return
determined
by the gradual appreciation of the security, which is redeemed at face value on
a specified maturity date. The discount varies depending on the time remaining
until maturity, as well as market interest rates, the liquidity of the security,
and the issuer’s perceived credit quality. The discount, in the absence of
financial difficulties of the issuer, typically decreases as the final maturity
date approaches. If the issuer defaults, a Fund may not receive any return on
its investment. Because such securities bear no interest and compound
semi-annually at the rate fixed at the time of issuance, their value generally
is more volatile than the value of other fixed income securities. Since such
bondholders do not receive interest payments, when interest rates rise,
zero-coupon, delayed interest and capital appreciation securities fall more
dramatically in value than bonds paying interest on a current basis. When
interest rates fall, zero-coupon, delayed interest and capital appreciation
securities rise more rapidly in value because the bonds reflect a fixed rate of
return. An investment in zero-coupon, delayed interest and capital appreciation
securities may cause a Fund to recognize income and make distributions to
shareholders before it receives any cash payments on its investment. To generate
cash to satisfy distribution requirements, a Fund may have to sell portfolio
securities that it otherwise would have continued to hold or to use cash flows
from other sources such as the sale of Fund shares.
PIK
securities may be debt obligations or preferred shares that provide the issuer
with the option of paying interest or dividends on such obligations in cash or
in the form of additional securities rather than cash. Similar to zero-coupon
bonds and delayed interest securities, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can be either senior or subordinated debt and generally trade flat
(i.e., without interest). The trading price of PIK debt securities generally
reflects the market value of the underlying debt plus an amount representing
accrued interest since the last interest payment.
To
the extent a Fund invests in original issue discount instruments, such as those
described above, shareholders will be exposed to certain risks associated with
income from such instruments being included in a Fund’s taxable and accounting
income prior to a corresponding receipt of cash. Such risks include the
following:
•Original
issue discount instruments may have unreliable valuations because the accruals
require judgments about collectability.
•Original
issue discount instruments may create heightened credit risks because the
inducement to trade higher rates for the deferral of cash payments typically
represents, to some extent, speculation on the part of the borrower and a Fund
about the borrower’s future ability to pay.
• Because
original issue discount income is accrued by a Fund without any cash being
received by the Fund, required cash distributions, so that a Fund can maintain
its status as a regulated investment company, may have to be paid from the sale
of a Fund’s portfolio securities. A Fund could have difficulty meeting such
annual distribution requirement necessary to obtain and maintain its regulated
investment company tax status under the Code. If a Fund is not able to obtain
cash from other sources, and chooses not to make required distributions, the
Fund may fail to qualify as a regulated investment company and become subject to
federal income tax at the Fund level. If for any taxable year a Fund does not
qualify as a regulated investment company, all of its taxable income (including
its net capital gain) would be subject to tax at the corporate income tax rate
(at the Fund level) without any deduction for dividends paid to shareholders,
and the dividends paid by the Fund would be taxable to shareholders as dividends
(possibly as qualified dividend income) to the extent of the Fund’s current or
accumulated earnings and profits.
• In
the case of PIK “toggle” debt, the PIK election has the effect of increasing
investment income, thus increasing the potential for increasing the assets under
management, thus increasing future management fees.
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Disclosure
of Portfolio Holdings
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The
Board has adopted a policy and procedures relating to the disclosure of the
Funds’ portfolio holdings information (the “Policy”). Generally, the Policy
restricts the disclosure of portfolio holdings data to certain persons or
entities, under certain conditions. In all cases, the Trusts’ Chief Compliance
Officer (or designee) is responsible for authorizing the disclosure of a Fund’s
portfolio holdings, and for monitoring that the Funds do not accept compensation
or consideration of any sort in return for the preferential release of portfolio
holdings information. Any such disclosure is made only if consistent with the
general anti-fraud provisions of the federal securities laws and the Advisor’s
fiduciary duties to its clients, including the Funds.
The
Trusts’ Chief Compliance Officer and staff are responsible for monitoring the
disclosure of portfolio holdings information and ensuring that any such
disclosures are made in accordance with the Policy. The Board has, through the
adoption of the Policy, delegated the monitoring of the disclosure of portfolio
holdings information to the Advisor’s compliance staff. The Board reviews the
Policy for operational effectiveness and makes revisions as needed, in order to
ensure that the disclosures are in the best interest of the shareholders and to
address any conflicts between the shareholders of the Funds and those of the
Advisor or any other affiliate of the Funds.
In
accordance with the Policy, each Fund will disclose its portfolio holdings
periodically, to the extent required by applicable federal securities laws.
These disclosures include the filing of a complete schedule of each Fund’s
portfolio holdings with the SEC semi-annually on Form N-CSR and as an exhibit to
its filings on Form N-PORT. These filings are available to the public through
the EDGAR Database on the SEC’s Internet website at: http://www.sec.gov. The
Funds also post their respective portfolio holdings on their website at
www.AssetMark.com/info/funds, subject to a month’s lag, on approximately the
first business day following the calendar month end. The Trusts’ Chief
Compliance Officer (or designee) will conduct periodic reviews of compliance
with the procedures established by the Policy.
The
Policy also provides that a Fund’s portfolio holdings information may be
released to selected third parties only when the Fund has a legitimate business
purpose for doing so and the recipients are subject to a duty of confidentiality
(including appropriate related limitations on trading), either through the
nature of their relationship with the Funds or through a confidentiality
agreement.
Under
the Policy, the Funds also may share their portfolio holdings information with
certain primary service providers that have a legitimate business need for such
information, including, but not limited to, the Funds’ custodian, administrator,
proxy voting vendor, consultants, liquidity classification agent, legal counsel
and independent registered public accounting firm as well as ratings agencies.
The Trusts’ service arrangements with each of these entities include a duty of
confidentiality (including appropriate limitations on trading) regarding
portfolio holdings data by each service provider and its employees, either by
law or by contract. In addition, because certain Funds are managed using a
multi-advisor approach, the Advisor may, from time to time, add or replace
sub-advisors to those Funds. In these instances, a Fund’s portfolio holdings may
be disclosed in advance (typically 10-20 days) to the incoming sub-advisor to
allow the sub-advisor to implement as streamlined a transition as possible. In
addition, the Funds may provide portfolio holdings to transition managers, such
as Abel/Noser.
Board
of Trustees
The
management and affairs of the Funds are overseen by the Board. The Board
consists of four individuals, three of whom are not “interested persons” of the
Trusts, as that term is defined in the 1940 Act (the “Independent Trustees”).
The Board establishes policies for the operation of the Funds and appoints the
officers who conduct the daily business of the Funds. The current Trustees and
officers of the Trusts and their years of birth are listed below with their
addresses, present positions with the Trusts, term of office with the Trusts and
length of time served, principal occupations over at least the last five years
and other directorships/trusteeships held.
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Name,
Address and Year of Birth |
Position(s)
Held with the Trusts |
Term
of Office and Length of
Time
Served |
Principal
Occupation During Past
Five
Years or Longer |
Number
of Portfolios in Fund Complex Overseen by Trustee |
Other
Directorship/ Trustee Positions held by Trustee During the Past 5 Years or
Longer |
Independent
Trustees |
David
M. Dunford Year of Birth: 1949 c/o AssetMark, Inc. 1655 Grant
Street, 10th Floor Concord, CA 94520 |
Lead
Independent Trustee |
Indefinite
Term (since 2013 for GPS Funds I and since 2011 for GPS Funds
II) |
Retired;
formerly, Senior Vice President, Merrill Lynch Insurance Group
(1989-2001). |
15 |
Trustee,
Savos Investments Trust,
("Savos"),(2015-2022).
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Name,
Address and Year of Birth |
Position(s)
Held with the Trusts |
Term
of Office and Length of
Time
Served |
Principal
Occupation During Past
Five
Years or Longer |
Number
of Portfolios in Fund Complex Overseen by Trustee |
Other
Directorship/ Trustee Positions held by Trustee During the Past 5 Years or
Longer |
Paul
S. Feinberg Year of Birth: 1942 c/o AssetMark, Inc. 1655 Grant
Street, 10th Floor Concord, CA 94520 |
Independent
Trustee |
Indefinite
Term (since 2013 for GPS Funds I and since 2011 for GPS Funds
II)
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Retired;
formerly, President, CitiStreet Funds, Inc. (2000-2005); Executive
Vice President and General Counsel, CitiStreet Associates LLC
(insurance agency), CitiStreet Equities LLC (broker-dealer),
CitiStreet Financial Services LLC (registered investment advisor)
and CitiStreet Funds Management LLC (registered investment
advisor) (1990-2005). .
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15 |
Trustee,
Savos (2015-2022).
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Dennis
G. Schmal Year of Birth: 1947 c/o AssetMark, Inc. 1655 Grant
Street, 10th Floor Concord, CA 94520 |
Independent
Trustee |
Indefinite
Term (since 2007 for GPS Funds I and since 2013 for GPS Funds
II) |
Self-employed
consultant (1999- present); formerly, Partner, Arthur Andersen LLP (audit
services) (1972-1999). |
15 |
Trustee,
Savos (2015-2022);
Director,
Blue
Calypso,
Inc. (2015-2019);
Director,
Owens Realty
Mortgage
Inc. (2013-2019);
Director,
Cambria ETF Series Trust (2013-present);
Director,
Wells Fargo GAI
Hedge
Funds (2008-2019); Director, First Guarantee Mortgage
Corporation
(2021-
2022).
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Name,
Address and Year of Birth |
Position(s)
Held with the Trusts |
Term
of Office and Length of
Time
Served |
Principal
Occupation During Past
Five
Years or Longer |
Number
of Portfolios in Fund Complex Overseen by Trustee |
Other
Directorship/ Trustee Positions held by Trustee During the Past 5 Years or
Longer |
Interested
Trustee |
Carrie
E. Hansen* Year of Birth: 1970 c/o AssetMark, Inc. 1655
Grant Street, 10th Floor Concord, CA 94520 |
Interested
Trustee and Chairperson
President |
Indefinite
Term since 2014
Renewed
1-Year Term since 2008 |
President,
GPS Funds I (2008-present) and GPS Funds II (2011-present); President,
Savos (2008-2022); Executive Vice President and Chief Operating Officer,
AssetMark (2008-present); President, AssetMark Brokerage®,
LLC (2014-present).
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Trustee,
Savos
(2008-2022);
Director and Chairperson,
AssetMark
Trust Co. (2008-present); Director, AssetMark, Inc. (2013-present);
Treasurer, Acalanes Booster Club (2017- 2019); Director
Rheumatology
Research
Foundation
(2021-present). |
Officers
of the Trust** |
John
Koval Year of Birth: 1966 c/o AssetMark, Inc. 1655 Grant Street,
10th Floor Concord, CA 94520 |
Chief
Compliance Officer and AML Compliance Officer |
Renewed
1-Year Term since 2013 |
Chief
Compliance Officer, GPS Funds I, GPS Funds II (2013-present), and Savos
(2013-2022); Interim Chief Compliance Officer, GPS Funds I, GPS Funds II,
and Savos (2012-2013); Senior Compliance Officer, AssetMark (2011-2012);
Chief Operating Officer, SEAL Capital, Inc. (2009-2010); Chief
Compliance Officer, Cliffwood Partners LLC (2004-2009). |
N/A |
N/A |
Patrick
R. Young Year of Birth: 1982 c/o AssetMark, Inc. 1655 Grant
Street, 10th Floor Concord, CA 94520 |
Vice
President and Treasurer |
Renewed
1-Year Term since 2014 |
Vice
President and Treasurer, GPS Funds I, GPS Funds II (2014- present), and
Savos (2014-2022); Director of Mutual Fund Operations and Finance,
AssetMark (2016-present); Manager of Fund Administration, AssetMark
(2014-2016); Senior Fund Administration Officer, AssetMark
(2008-2014). |
N/A |
N/A |
Jennifer
Diedenhofen Year of Birth: 1966 c/o AssetMark, Inc. 1655 Grant
Street 10th Floor Concord, CA 94520 |
Secretary |
1-Year
Term since May 2024 |
Secretary,
GPS Funds I and GPS Funds II (2024-present), Director of
Derivatives Compliance and Fund Administration, AssetMark
(2022-present), Manager, Compliance and Fund Administration, AssetMark
(2018-2022), Senior Compliance Officer, AssetMark (2018). |
N/A |
N/A |
* Ms.
Hansen is a Trustee who is an “interested person” of the Trusts as defined in
the 1940 Act because she is an officer of AssetMark and certain of its
affiliates.
**
Each Officer of the Trusts serves at the pleasure of the Board.
Leadership
Structure, Qualifications and Responsibilities of the Board of
Trustees
The
Trustees have the authority to take all actions necessary in connection with
their oversight of the business affairs of the Trusts, including, among other
things, approving the investment objectives, policies and procedures for the
Funds. The Trusts enter into agreements with various entities to manage the
day-to-day operations of the Funds, including the Advisor, administrator,
transfer agent, distributor and custodian. The Trustees are responsible for
approving the agreements between these service providers and the Trusts,
approving agreements between the Advisor and any sub-advisors, and exercising
general service provider oversight.
Leadership
Structure and the Board of Trustees. The
Board is currently composed of three Independent Trustees and one Trustee who is
affiliated with the Advisor, Ms. Hansen. The Board has appointed Ms. Hansen to
serve in the role of Chairperson. Ms. Hansen is the Executive Vice President and
Chief Operating Officer of the Advisor. The Independent Trustees have designated
Mr. Dunford as the Lead Independent Trustee. The Lead Independent Trustee
participates in the preparation of agendas for the Board meetings. The Lead
Independent Trustee also acts as a liaison between meetings with the Trusts’
officers, other Trustees, the Advisor, other service providers and counsel to
the Independent Trustees. The Lead Independent Trustee may also perform such
other functions as may be requested by the Board from time to time. The Board’s
leadership structure also allows all of the Independent Trustees to participate
in the full range of the Board’s oversight responsibilities. The Board reviews
its structure regularly as part of its annual self-evaluation. The Board has
determined that its leadership and committee structure is appropriate because it
provides a structure for the Board to work effectively with management and
service providers and facilitates the exercise of the Board’s informed and
independent judgment. The Board’s leadership structure permits important roles
for the Executive Vice President and Chief Operating Officer of the Advisor, who
serves as Chairperson of the Trusts and oversees the Advisor’s day-to-day
management of the Funds. In addition, the committee structure provides for: (1)
effective oversight of audit and financial reporting responsibilities through
the Audit Committee, (2) an effective forum for considering governance and other
matters through the Nominating and Governance Committee, and (3) the ability to
meet independently with independent counsel and outside the presence of
management on governance, contract review and other matters. Except for any
duties specified in each Trust’s Declaration of Trust or By-laws, the
designation of Chairperson, Lead Independent Trustee or Chairperson of a
Committee does not impose on such Trustee any duties, obligations or liability
that is greater than the duties, obligations or liability imposed on such person
as a member of the Board generally. The leadership structure of the Board may be
changed, at any time and in the discretion of the Board, including in response
to changes in circumstances or the characteristics of the Funds.
Oversight
of Risk. The
Board oversees risk as part of its general oversight of the Funds. The Funds are
subject to a number of risks, including investment, liquidity, derivatives,
compliance, financial, operational and valuation risks. The Funds’ officers, the
Advisor and other Fund service providers perform risk management as part of the
day-to-day operations of the Funds. The Board has appointed a Chief Compliance
Officer who oversees the implementation and testing of the Funds’ compliance
program and regularly reports to the Board regarding compliance matters for the
Funds and their principal service providers. The Board recognizes that it is not
possible to identify all risks that may affect the Funds, and that it is not
possible to develop processes or controls to eliminate all risks and their
possible effects. Risk oversight is addressed as part of various Board and
Committee activities, including the following: (1) at quarterly Board meetings,
and on an ad hoc basis as needed, receiving and reviewing reports from the
Trusts’ Chief Compliance Officer and Advisor personnel regarding Fund
performance, risk exposures, compliance and operations; (2) quarterly meetings
by the Independent Trustees in executive session with the Trusts’ Chief
Compliance Officer, including reports on compliance and
risk
management processes used by the Advisor; (3) periodic meetings with investment
personnel to review investment strategies, techniques and the processes used to
manage risks; (4) reviewing and approving, as applicable, the compliance
policies and procedures of the Trusts, the Advisor and any sub-advisors; (5) at
quarterly Board meetings, and on an ad hoc basis as needed, receiving and
reviewing reports from Fund officers and the independent registered public
accounting firm on financial, valuation and operational matters; and (6) on an
annual basis, receiving and reviewing a written report from the Advisor that
addresses the operation, adequacy and effectiveness of the Trusts’ liquidity and
derivatives risk management programs. The Board may, at any time and in its
discretion, change the manner in which it conducts its risk oversight role.
The
Board has two standing committees, as described below:
Audit
Committee.
The Audit Committee is responsible for advising the full Board with respect to
the oversight of accounting, auditing and financial matters affecting the
Trusts. In performing its oversight function the Audit Committee has, among
other things, specific power and responsibility to: (1) oversee the Trusts’
accounting and financial reporting policies and practices, internal control over
the Trusts’ financial reporting and, as appropriate, the internal control over
financial reporting of service providers; (2) to oversee the quality and
objectivity of the Trusts’ financial statements and the independent audit
thereof; (3) to approve, prior to appointment by the Board, the engagement of
the Trusts’ independent registered public accounting firm and, in connection
therewith, to review and evaluate the qualifications, independence and
performance of the Trusts’ independent registered public accounting firm; and
(4) to act as a liaison between the Trusts’ independent auditors and the Board.
The Audit Committee meets as often as necessary or appropriate to discharge its
functions and will meet at least once annually. The Audit Committee is comprised
of all of the Independent Trustees. Mr. Schmal is the Chairman of the Audit
Committee. During the fiscal year ended March 31, 2024, the Audit Committee met
four times.
Nominating
and Governance Committee.
The Nominating and Governance Committee is responsible for: (1) seeking and
reviewing candidates for consideration as nominees to serve as Trustees, as is
considered necessary from time to time; (2) making recommendations to the Board
regarding the composition of the Board and its committees; (3) coordinating the
process to assess Board effectiveness, including the agenda setting process and
related matters; and (4) developing and implementing governance policies. The
Nominating and Governance Committee is comprised of all of the Independent
Trustees. Mr. Feinberg is the Chairman of the Nominating and Governance
Committee. Shareholders who wish to recommend a nominee should send nominations
to the Secretary of the Trusts, including biographical information and
qualifications of the proposed nominee. The Nominating and Governance Committee
may request additional information deemed reasonably necessary for the Committee
to evaluate such nominee. The Nominating and Governance Committee meets as often
as necessary or appropriate to discharge its functions, and reports its actions
and recommendations to the Board on a regular basis. During the fiscal year
ended March 31, 2024, the Nominating and Governance Committee met four
times.
Trustees’
Qualifications and Experience.
The governing documents for the Trusts do not set forth any specific
qualifications to serve as a Trustee. The charter of the Nominating and
Governance Committee also does not set forth any specific qualifications. Among
the attributes and skills common to all Trustees are the ability to review,
evaluate and discuss information and proposals provided to them regarding the
Funds, the ability to interact effectively with the Advisor and other service
providers, and the ability to exercise independent business judgment. Each
Trustee’s ability to perform his or her duties effectively has been attained
through: (1) the individual’s business and professional experience and
accomplishments; (2) the individual’s experience working with the other Trustees
and management; (3) the individual’s prior experience serving in senior
executive positions and/or on the boards of other companies and organizations;
and (4) the individual’s educational background, professional training, and/or
other experiences. Generally, no one factor was decisive in determining that an
individual should serve as a Trustee. Set forth below is a summary of the
specific qualifications and experiences of each Trustee that support the
conclusion that each individual is qualified to serve as a Trustee. As noted
above, a majority of the Board are Independent Trustees. Additional details
regarding the background of each Trustee is included in the chart earlier in
this section.
David
M. Dunford.
Mr. Dunford has served as a Trustee of GPS Funds II since it was created in 2011
and as a Trustee of GPS Funds I since 2013. Mr. Dunford serves as the Lead
Independent Trustee. He served as a Trustee of Savos Investments Trust from 2015
to 2022. He also served from 2008 to 2012 as a trustee of other mutual funds
managed by the Advisor, which have been liquidated. Mr. Dunford has more than 30
years of investment experience in the insurance and investment management
industries, including serving as chief investment officer. Mr. Dunford also
served on the board of a bank and in public office. He previously served as a
delegate of the Barnstable County (Massachusetts) Assembly of
Delegates.
Paul
S. Feinberg.
Mr. Feinberg has served as a Trustee of GPS Funds II since it was created in
2011 and as a Trustee of GPS Funds I since 2013. He serves as the Chairman of
the Nominating and Governance Committee. He served as a Trustee of Savos
Investments Trust from 2015 to 2022. He also served from 2008 to 2012 as a
trustee of other mutual funds managed by the Advisor, which have been
liquidated. Mr. Feinberg has more than 30 years of experience in leadership and
legal positions in the insurance and investment management industries, including
serving as executive vice president and general counsel of a financial services
company providing services to the retirement plan marketplace. Mr. Feinberg also
served as president of a mutual fund group.
Dennis
G. Schmal.
Mr. Schmal has served as a Trustee of GPS Funds I since 2007, as a Trustee of
GPS Funds II since 2013. He serves as the Chairman of the Audit Committee. He
served as a Trustee of Savos Investments Trust from 2015 to 2022. Mr. Schmal has
over 30 years of business/financial experience, including serving as a partner
of an independent accounting firm, where his work included auditing the
financial statements of public companies and financial
institutions.
Carrie
E. Hansen.
Ms. Hansen has served as President, Chairperson and Trustee of GPS Funds I and
GPS Funds II since 2014, and as President, Chairperson and Trustee of Savos
Investments Trust from 2014 to 2022. She has served in various executive roles
with AssetMark and its predecessor companies, and has over 25 years of senior
management and accounting experience.
Compensation
The
Compensation Table below sets forth the total compensation paid to the Trustees
of the AssetMark Mutual Funds complex, which includes the Trusts, before
reimbursement of expenses, for the fiscal year ending March 31, 2024. As an
Interested Trustee, Ms. Hansen receives no compensation from the Trusts for her
service as a Trustee. The Funds reimburse the Advisor an allocated amount for
the compensation and related expenses of certain officers of the Trusts who
provide compliance services to the Funds. The aggregate amount of all such
reimbursements is determined by the Trustees. No other compensation or
retirement benefits are received by any Trustee or officer from the
Funds.
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NAME
OF TRUSTEE |
AGGREGATE
COMPENSATION FROM THE TRUSTS |
PENSION
RETIREMENT BENEFITS ACCRUED AS PART OF TRUST EXPENSES |
ESTIMATED
ANNUAL BENEFITS UPON RETIREMENT |
TOTAL
COMPENSATION FOR THE COMPLEX(1) |
David
M. Dunford |
$137,500 |
$0 |
$0 |
$137,500 |
Paul
S. Feinberg |
$137,500 |
$0 |
$0 |
$137,500 |
Dennis
G. Schmal |
$137,500 |
$0 |
$0 |
$137,500 |
(1)The
AssetMark Mutual Funds complex consists of GPS Funds I, which currently consists
of 5 funds, and GPS Funds II, which currently consists of 10 funds. Trustee
compensation has been allocated among GPS Funds I and GPS Funds II based on net
assets of the Funds.
Trustees'
Ownership of Fund Shares
As
of December 31, 2023, no Independent Trustee beneficially owned equity
securities in any of the Funds. The table below sets forth the dollar range of
shares of the Funds owned by the Interested Trustee as of December 31, 2023
using the following ranges: none; $1-$10,000; $10,001 - $50,000; $50,001 -
$100,000; and over $100,000.
|
|
|
|
|
|
|
|
|
|
| |
Name
of Trustee |
Dollar
Range of Equity Securities in GPS Funds I |
Dollar
Range of Equity Securities in GPS Funds II |
Aggregate
Dollar Range of Equity Securities in Fund Complex Overseen by
Trustee |
Carrie
E. Hansen* |
None |
over
$100,000 |
over
$100,000 |
*shares
beneficially owned are in the GuidePath®
Managed
Futures Strategy Fund only and no other fund.
|
Principal
Holders, Control Persons and Management Ownership
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of any class of a 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. Note
that a control person may possess the ability to control the outcome of matters
submitted for shareholder vote of the Trusts. As of July 1, 2024, the officers
and Trustees of the Trusts, as a group, owned less than 1% of the outstanding
shares of each class of each Fund.
The
following table provides the name, address, and number of shares of each class
owned by any person who owns of record or beneficially 5% or more of the
outstanding shares of such class of a Fund as of July 1, 2024. To the best
knowledge of the Funds, there were no control persons of any of the Funds as of
July 1, 2024.
Principal
Holders and Control Persons of the Large Cap Core Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
90.90% |
Record |
Pershing
LLC 1 Pershing Plaza Jersey City, NJ 07399-2052 |
6.35% |
Record |
Principal
Holders and Control Persons of the Emerging Markets Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
73.29% |
Record |
Pershing
LLC 1 Pershing Plaza Jersey City, NJ 07399-2052 |
15.48% |
Record |
Charles
Schwab & Co. Inc. Special Custody A/C FBO Customers 211 Main
St. San Francisco, CA 94105-1901 |
11.06% |
Record |
Principal
Holders and Control Persons of the Small/Mid Cap Core Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
87.76% |
Record |
Pershing
LLC 1 Pershing Plaza Jersey City, NJ 07399-2052 |
7.92% |
Record |
Principal
Holders and Control Persons of the World ex-US Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
83.13% |
Record |
Pershing
LLC 1 Pershing Plaza Jersey City, NJ 07399-2052 |
10.61% |
Record |
Charles
Schwab & Co. Inc. Special Custody A/C FBO Customers 211 Main
St. San Francisco, CA 94105-1901 |
6.26% |
Record |
Principal
Holders and Control Persons of the Core Fixed Income Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
86.59% |
Record |
Pershing
LLC 1 Pershing Plaza Jersey City, NJ 07399-2052 |
9.04% |
Record |
Principal
Holders and Control Persons of the Growth Allocation Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
94.17% |
Record |
Principal
Holders and Control Persons of the Conservative Allocation Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
95.33% |
Record |
Principal
Holders and Control Persons of the Tactical Allocation Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
94.13% |
Record |
Pershing
LLC 1 Pershing Plaza Jersey City, NJ 07399-2052 |
5.04% |
Record |
Principal
Holders and Control Persons of the Absolute Return Allocation Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
95.55% |
Record |
Principal
Holders and Control Persons of the Multi-Asset Income Allocation
Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
95.94% |
Record |
Principal
Holders and Control Persons of the Flexible Income Allocation Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
90.34% |
Record |
Pershing
LLC 1 Pershing Plaza Jersey City, NJ 07399-2052 |
9.04% |
Record |
Principal
Holders and Control Persons of the Managed Futures Strategy Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
93.89% |
Record |
Pershing
LLC 1 Pershing Plaza Jersey City, NJ 07399-2052 |
5.04% |
Record |
Principal
Holders and Control Persons of the Conservative Income Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
91.26% |
Record |
Pershing
LLC 1 Pershing Plaza Jersey City, NJ 07399-2052 |
8.21% |
Record |
Principal
Holders and Control Persons of the Income Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
89.65% |
Record |
Pershing
LLC 1 Pershing Plaza Jersey City, NJ 07399-2052 |
9.79% |
Record |
Principal
Holders and Control Persons of the Growth and Income Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services LLC For The Exclusive Benefit of its
Customers Attn: Mutual Funds Dept., 4th FL 499 Washington Blvd
Jersey City, NJ 07310-1995 |
88.73% |
Record |
Pershing
LLC 1 Pershing Plaza Jersey City, NJ 07399-2052 |
10.69% |
Record |
|
| |
Investment
Advisor and Sub-Advisors |
AssetMark,
located at 1655 Grant Street, 10th Floor, Concord, California 94520, serves as
the investment advisor to the Funds. AssetMark is registered as an investment
advisor with the SEC. AssetMark is a wholly-owned indirect subsidiary of
AssetMark Financial Holdings, Inc. In turn, AssetMark Financial Holdings, Inc.
is an indirect subsidiary of Huatai Securities, Co., Ltd., the controlling
shareholder. AssetMark Financial Holdings, Inc., is publicly listed on the New
York Stock Exchange. On April 25, 2024, AssetMark Financial Holdings, Inc., the
parent company of the Advisor, announced that it signed a definitive agreement
pursuant to which Chicago-based private equity firm GTCR LLC will acquire a 100%
interest in AssetMark Financial and its subsidiaries, including AssetMark (the
“Transaction”). The Transaction is expected to close in the fourth quarter of
2024, subject to certain conditions and requisite regulatory approvals.
With
respect to each of the Funds, the Advisor oversees the investment advisory
services provided to the Funds. Pursuant to separate sub-advisory agreements
with the Advisor, and under the supervision of the Advisor and the Board, a
number of sub-advisors are responsible for the day-to-day investment management
of the Funds.
Subject
to Board review, the Advisor allocates and, when appropriate, reallocates the
Funds’ assets among sub-advisors, monitors and evaluates sub-advisor
performance, and oversees sub-advisor compliance with the Funds’ investment
objectives, policies and restrictions. The Advisor has ultimate responsibility
for the investment performance of the Funds pursuant to its responsibility to
oversee the sub-advisors and recommend their hiring and/or replacement. Under
the Expense Waiver and Reimbursement Agreement, the Advisor may recapture waived
fees and expenses borne for a three-year period under specified
conditions.
For
the fiscal years ended March 31, 2024, March 31, 2023, and March 31, 2022, the
following advisory fees were charged/paid to the Advisor:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Advisory
Fee Charged |
Fees
Waived and/or Expenses Reimbursed |
Recouped
Fees and Expenses |
Net
Fees Paid to the Advisor |
Large
Cap Core Fund |
|
|
| |
Year
Ended March 31, 2024 |
$2,940,930 |
| $130,708 |
| $0 |
| $2,810,222 |
|
Year
Ended March 31, 2023 |
$2,414,505 |
| $0 |
| $0 |
| $2,414,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Year
Ended March 31, 2022 |
$3,101,663 |
| $0 |
| $0 |
| $3,101,663 |
|
Emerging
Markets Fund |
|
|
| |
Year
Ended March 31, 2024 |
$265,707 |
| $240,534 |
| $0 |
| $25,173 |
|
Year
Ended March 31, 2023 |
$303,578 |
| $219,516 |
| $0 |
| $84,062 |
|
Year
Ended March 31, 2022 |
$538,444 |
| $0 |
| $0 |
| $538,444 |
|
Small/Mid
Cap Core Fund |
|
|
| |
Year
Ended March 31, 2024 |
$557,738 |
| $34,247 |
| $0 |
| $523,491 |
|
Year
Ended March 31, 2023 |
$553,065 |
| $0 |
| $0 |
| $553,065 |
|
Year
Ended March 31, 2022 |
$608,578 |
| $0 |
| $0 |
| $608,578 |
|
World
ex-US Fund |
|
|
| |
Year
Ended March 31, 2024 |
$548,605 |
| $159,152 |
| $15,852 |
| $405,305 |
|
Year
Ended March 31, 2023 |
$499,720 |
| $110,946 |
| $10,557 |
| $399,331 |
|
Year
Ended March 31, 2022 |
$709,203 |
| $155,025 |
| $0 |
| $554,178 |
|
Core
Fixed Income Fund |
|
|
| |
Year
Ended March 31, 2024 |
$661,766 |
| $83,252 |
| $0 |
| $578,514 |
|
Year
Ended March 31, 2023 |
$725,518 |
| $80,939 |
| $0 |
| $644,579 |
|
Year
Ended March 31, 2022 |
$785,783 |
| $89,425 |
| $6,296 |
| $702,654 |
|
Growth
Allocation Fund |
|
|
| |
Year
Ended March 31, 2024 |
$2,593,425 |
| $0 |
| $0 |
| $2,593,425 |
|
Year
Ended March 31, 2023 |
$2,420,239 |
| $0 |
| $0 |
| $2,420,239 |
|
Year
Ended March 31, 2022 |
$2,922,725 |
| $0 |
| $0 |
| $2,922,725 |
|
Conservative
Allocation Fund |
|
|
| |
Year
Ended March 31, 2024 |
$1,100,845 |
| $789,830 |
| $0 |
| $311,015 |
|
Year
Ended March 31, 2023 |
$1,084,258 |
| $671,969 |
| $0 |
| $412,289 |
|
Year
Ended March 31, 2022 |
$1,250,079 |
| $812,082 |
| $0 |
| $437,997 |
|
Tactical
Allocation Fund |
|
|
| |
Year
Ended March 31, 2024 |
$1,860,837 |
| $0 |
| $0 |
| $1,860,837 |
|
Year
Ended March 31, 2023 |
$1,726,048 |
| $0 |
| $0 |
| $1,726,048 |
|
Year
Ended March 31, 2022 |
$1,768,743 |
| $0 |
| $0 |
| $1,768,743 |
|
Absolute
Return Allocation Fund |
|
|
| |
Year
Ended March 31, 2024 |
$730,608 |
| $476,285 |
| $0 |
| $254,323 |
|
Year
Ended March 31, 2023 |
$1,125,924 |
| $692,243 |
| $0 |
| $433,681 |
|
Year
Ended March 31, 2022 |
$778,484 |
| $312,450 |
| $0 |
| $466,034 |
|
Multi-Asset
Income Allocation Fund |
|
|
| |
Year
Ended March 31, 2024 |
$309,286 |
| $0 |
| $0 |
| $309,286 |
|
Year
Ended March 31, 2023 |
$331,962 |
| $0 |
| $0 |
| $331,962 |
|
Year
Ended March 31, 2022 |
$433,225 |
| $0 |
| $0 |
| $433,225 |
|
Flexible
Income Allocation Fund |
|
|
| |
Year
Ended March 31, 2024 |
$686,879 |
| $374,055 |
| $0 |
| $312,824 |
|
Year
Ended March 31, 2023 |
$792,628 |
| $308,528 |
| $17,224 |
| $501,324 |
|
Year
Ended March 31, 2022 |
$798,403 |
| $212,962 |
| $9,226 |
| $594,667 |
|
Managed
Futures Strategy Fund |
|
|
| |
Year
Ended March 31, 2024 |
$5,010,827 |
| $0 |
| $0 |
| $5,010,827 |
|
Year
Ended March 31, 2023 |
$4,574,211 |
| $0 |
| $0 |
| $4,574,211 |
|
Year
Ended March 31, 2022 |
$2,272,963 |
| $0 |
| $0 |
| $2,272,963 |
|
Conservative
Income Fund |
|
|
| |
Year
Ended March 31, 2024 |
$63,783 |
| $24,854 |
| $2,710 |
| $41,639 |
|
Year
Ended March 31, 2023 |
$57,506 |
| $31,182 |
| $0 |
| $26,324 |
|
Year
Ended March 31, 2022 |
$49,111 |
| $53,047 |
| $0 |
| $0 |
|
Income
Fund |
|
|
| |
Year
Ended March 31, 2024 |
$325,744 |
| $2,578 |
| $56,908 |
| $380,074 |
|
Year
Ended March 31, 2023 |
$247,542 |
| $18,873 |
| $7,197 |
| $235,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Year
Ended March 31, 2022 |
$196,649 |
| $3,614 |
| $51,419 |
| $244,454 |
|
Growth
and Income Fund |
|
|
| |
Year
Ended March 31, 2024 |
$416,130 |
| $4,874 |
| $77,394 |
| $488,650 |
|
Year
Ended March 31, 2023 |
$451,330 |
| $2,958 |
| $57,714 |
| $506,086 |
|
Year
Ended March 31, 2022 |
$483,433 |
| $43,413 |
| $6,613 |
| $446,633 |
|
As
of March 31, 2024, the Advisor had waived expenses for the Funds listed below to
keep these Funds at their expense cap. Waived expenses subject to potential
recovery for the fiscal years ended March 31, 2022, March 31, 2023, and March
31, 2024 are as follows:
|
|
|
|
|
|
|
|
|
|
| |
| Year
of Expiration |
Fund |
03/31/2025 |
03/31/2026 |
03/31/2027 |
Emerging
Markets Fund |
- |
$219,516 |
$213,513 |
World
ex-US Fund |
$128,616 |
$110,947 |
$114,158 |
Core
Fixed Income Fund |
$89,424 |
$80,939 |
$83,252 |
Conservative
Allocation Fund |
$812,082 |
$671,969 |
$789,830 |
Absolute
Return Allocation Fund |
$312,450 |
$692,243 |
$476,285 |
Flexible
Income Allocation Fund |
$212,963 |
$308,528 |
$374,055 |
Conservative
Income Fund |
$53,047 |
$31,182 |
$24,854 |
Growth
and Income Fund |
$35,661 |
$2,958 |
$4,874 |
Effective
April 1, 2023, the Advisor implemented a voluntary waiver with respect to
certain Funds as described in the Funds' prospectus. Fees waived pursuant to a
voluntary fee waiver by the Advisor are not subject to recoupment. The voluntary
waiver may be discontinued by the Advisor at any time.
The
Advisor pays the sub-advisors a fee out of its advisory fee that is based on a
percentage of the average daily net assets managed by each sub-advisor. For the
fiscal years ended March 31, 2024, March 31, 2023, and March 31, 2022, the
following fees, as a percentage of such Fund’s average daily net assets, were
paid to the sub-advisors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| 2024 |
2023 |
2022 |
Fund* |
Percentage
of average daily net assets |
Aggregate
dollar amounts |
Percentage
of average daily net assets |
Aggregate
dollar amounts |
Percentage
of average daily net assets |
Aggregate
dollar amounts |
Large
Cap Core Fund |
0.10% |
$677,832 |
0.13% |
$691,557 |
0.12% |
$884,258 |
Emerging
Markets Fund |
0.29% |
$130,601 |
0.35% |
$180,089 |
0.35% |
$319,416 |
Small/Mid
Cap Core Fund |
0.18% |
$181,020 |
0.22% |
$213,464 |
0.22% |
$232,182 |
World
ex-US Fund |
0.21% |
$235,585 |
0.26% |
$259,855 |
0.25% |
$352,049 |
Core
Fixed Income Fund |
0.14% |
$228,530 |
0.14% |
$247,655 |
0.14% |
$265,734 |
Managed
Futures Strategy Fund |
0.74% |
$3,540,593 |
0.75% |
$3,249,474 |
0.79% |
$1,715,308 |
* No
information is provided for the Growth Allocation Fund, Conservative Allocation
Fund, Tactical Allocation Fund, Absolute Return Allocation Fund, Multi-Asset
Income Allocation Fund, Flexible Income Allocation Fund, Conservative Income
Fund, Income Fund, and the Growth and Income Fund as such Funds are not managed
by sub-advisors.
The
advisory agreement and certain portions of the sub-advisory agreements provide
that the Advisor or any sub-advisor shall not be protected against any liability
to the Trusts or their shareholders by reason of willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties, or for the
reckless disregard of its obligations or duties thereunder. In addition, certain
of the sub-advisory agreements provide that the sub-advisor shall not be
protected against any liability to the Trusts or their shareholders by reason of
willful misfeasance, bad faith or negligence on its part in the performance of
its duties, or for the reckless disregard of its obligations or duties
thereunder.
The
Advisor, Sub-Advisors and Portfolio Managers
The
Advisor, sub-advisors and portfolio managers set forth below are responsible for
the day-to-day portfolio management of the respective Funds. In the performance
of their responsibilities, conflicts of interest may occur between the
management of the respective Funds and the other accounts of the Advisor or
sub-advisor. In addition to the conflicts identified by the Advisor or
sub-advisors, other actual or apparent conflicts may arise. Unequal time and
attention may be devoted to the management of the respective Funds and the
Advisor or sub-advisors’ other accounts.
The
Advisor
AssetMark,
Inc. (“AssetMark”)
Other
Accounts Managed
Selwyn
Crews and Christian Chan are primarily responsible for the day-to-day management
of the Growth Allocation Fund, Conservative Allocation Fund, Tactical Allocation
Fund, Absolute Return Allocation Fund, Multi-Asset Income Allocation Fund,
Flexible Income Allocation Fund, Conservative Income Fund, Income Fund, and
Growth and Income Fund. The following table provides information about other
accounts managed by Selwyn Crews and Christian Chan as of March 31, 2024.
None of the accounts shown in the table is charged a fee based on
performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other
Accounts |
Total
Accounts |
Accounts
with Performance Fees |
| Number |
Assets |
Number |
Assets |
Christian
Chan |
|
|
| |
Registered
Investment Companies |
0 |
$0 |
0 |
$0 |
Other
Pooled Investment Vehicles |
0 |
0 |
0 |
$0 |
Other
Accounts |
87,437 |
$11,452,268,708
billion |
0 |
$0 |
|
|
|
| |
Selwyn
Crews |
|
|
| |
Registered
Investment Companies |
0 |
$0 |
0 |
$0 |
Other
Pooled Investment Vehicles |
0 |
$0 |
0 |
$0 |
Other
Accounts |
0 |
$0 |
0 |
$0 |
Portfolio
Manager Compensation
The
portfolio managers receive their compensation from AssetMark in the form of
salary, bonus, stock options, and restricted stock. A portfolio manager’s bonus
is variable and generally is based on (1) an evaluation of the portfolio
manager’s ability to remain compliant with investment management guidelines and
regulatory issues, and (2) the results of a peer and/or management review of the
portfolio manager, which takes into account skills and attributes such as team
participation, investment process, communication and professionalism. In some
cases, the level of assets raised in the funds is considered for assessing the
portfolio manager’s bonus. In evaluating investment performance, AssetMark
generally considers the performance of mutual funds and other accounts managed
by the portfolio manager relative to the benchmarks and peer groups, including
the performance of certain investment strategies available on the AssetMark
platform, emphasizing the portfolio manager’s overall performance. AssetMark
also may consider a portfolio manager’s performance in managing client assets in
sectors and industries assigned to the portfolio manager as part of his/her
investment team responsibilities, where applicable. For portfolio managers who
also have group management responsibilities, another factor in their evaluation
is an assessment of the group’s overall investment performance.
The
size of the overall bonus pool each year is determined by AssetMark and depends
on, among other factors, the levels of compensation generally in the investment
management industry (based on market compensation data) and AssetMark’s
profitability for the year, which is largely determined by assets under
management. Part of the bonus is
based
on a qualitative assessment of an individual’s contribution to the management of
the fund in addition to compliance with investment guidelines and regulatory
mandates.
Description
of Potential Material Conflicts of Interest
Actual
or apparent conflicts of interest may arise when a portfolio manager has
day-to-day management responsibilities with respect to more than one fund or
other account. More specifically, portfolio managers who manage multiple funds
and/or other accounts may be presented with one or more of the following
potential conflicts:
•Time
and attention. The management of multiple funds and/or other accounts may result
in a portfolio manager devoting unequal time and attention to the management of
each fund and/or other account.
•Limited
investment opportunities. If a portfolio manager identifies a limited investment
opportunity which may be suitable for more than one fund or other account, a
Fund may not be able to take full advantage of that opportunity due to an
allocation of filled purchase or sale orders across all eligible funds and other
accounts.
•Brokerage
allocation. With respect to securities transactions for the Funds, the Advisor
determines which broker to use to execute each order, consistent with their duty
to seek best execution of the transaction. However, with respect to
certain other accounts (such as mutual funds for which a sub-advisor or an
affiliate of a sub-advisor acts as sub-advisor, other pooled investment vehicles
that are not registered mutual funds and other accounts managed for
organizations and individuals), the Advisor may be limited by the client with
respect to the selection of brokers or may be instructed to direct trades
through a particular broker. In these cases, trades for a Fund in a particular
security may be placed separately from, rather than aggregated with, such other
accounts. Having separate transactions with respect to a security may
temporarily affect the market price of the security or the execution of the
transaction, or both, to the possible detriment of the Fund or other account(s)
involved.
•Pursuit
of differing strategies. At times, a portfolio manager may determine that an
investment opportunity may be appropriate for only some of the funds and/or
accounts for which he or she exercises investment responsibility, or may decide
that certain of the funds and/or accounts should take differing, including
potentially opposite, positions with respect to a particular
security. Moreover, there may be circumstances when a portfolio
manager’s purchases or sales of portfolio securities for one or more accounts
may have an adverse effect on other accounts.
•Variation
in compensation. The appearance of a conflict of interest may arise where a
portfolio manager has an incentive, such as a performance-based management fee,
which relates to the management of one fund or account but not all funds and
accounts with respect to which a portfolio manager has day-to-day management
responsibilities.
•Personal
investments. Potential conflicts of interest also may arise in the
event that a portfolio manager has personal investments in other accounts that
may create an incentive to favor those accounts or when a portfolio manager
personally owns or trades in a security that is owned or considered for purchase
or sale by a client.
•Investments
of the Advisor or affiliated entities. The substantial investment of
the assets of the Advisor or an affiliated entity in certain securities or
mutual funds may lead to conflicts of interest. For example, the Advisor’s or an
affiliated entity’s profit margin may vary depending upon the Underlying Fund in
which a fund of funds invests.
•Sharing
of information among accounts. The Advisor and its affiliates and other related
entities also may possess information that could be material to the management
of a Fund and may not be able to, or may determine not to, share that
information with the portfolio managers, even though it might be beneficial
information for the Fund. This information may include actual knowledge
regarding the particular investments and transactions of other funds and
accounts, as well as proprietary investment, trading and other market research,
analytical and technical models, and new investment techniques, strategies and
opportunities.
•Soft
dollar benefits. Certain products and services, commonly referred to as “soft
dollar services,” (including, to the extent permitted by law, research reports,
economic and financial data, financial publications, proxy analysis, computer
databases and other research-oriented materials) that the Advisor may receive in
connection with brokerage services provided to a Fund may have the inadvertent
effect of disproportionately benefiting other advised/managed
funds
or accounts. This could happen because of the relative amount of brokerage
services provided to a Fund as compared to other advised/managed funds or
accounts, as well as the relative compensation paid by the Fund.
•Investment
limitations arising from the activities of affiliated
entities. Regulatory restrictions applicable to the Advisor or its
affiliates may limit a Fund’s investment activities in various ways. For
example, regulations regarding certain industries and markets, such as those in
emerging or international markets, and certain transactions, such as those
involving certain futures and derivatives, may impose a cap on the aggregate
amount of investments that may be made by affiliated investors, including
accounts managed by the same affiliated manager, in the aggregate or in
individual issuers. At certain times, the Advisor or its affiliates also may be
restricted in the securities that can be bought or sold for a Fund and other
advised/managed funds and accounts because of the investment banking, lending or
other relationships that the Advisor or its affiliates have with the issuers of
securities. In addition, the internal policies and procedures of the
Advisor or its affiliates covering these types of regulatory restrictions and
addressing similar issues also may at times restrict the Funds’ investment
activities.
•Non-advisory
relationships of a sub-advisor and its affiliates. The lending, investment
banking and other relationships that a sub-advisor and its affiliates may have
with companies and other entities in which a Fund may invest can give rise to
actual and potential conflicts of interest. The purchase, holding and
sale of certain securities by the Funds may enhance the profitability and the
business interests of the Advisor and/or its affiliates. In addition,
to the extent permitted by applicable law and a Fund’s individual investment
objectives and restrictions, a Fund may be permitted to enter into transactions
and invest in futures, securities, currencies, swaps, options, forward contracts
or other instruments in which the Advisor (or a related entity) acting as
principal or on a proprietary basis for its customers, serves as the
counterparty. The Funds may also be permitted to enter into cross transactions
in which the Advisor (or a related entity) acts on behalf of the Fund and for
the other party to the transaction. In such situations, the Advisor or related
entity may have a potentially conflicting division of responsibilities to both
parties to a cross transaction. In addition, subject to applicable
legal and regulatory requirements, a Fund may enter into transactions in which
entities that are affiliated with a Fund sub-advisor may have an interest that
potentially conflicts with the interests of the Fund.
A
portfolio manager may also face other potential conflicts of interest in
managing a Fund, and the description above is not a complete description of
every conflict of interest that could be deemed to exist. The Advisor
has adopted certain compliance procedures which are designed to prevent and
address these types of conflicts. However, there is no guarantee that such
procedures will detect each and every situation in which a conflict
arises.
The
following table sets forth the dollar range of Fund shares beneficially owned by
each portfolio manager for the Funds that they manage as of March 31, 2024,
using the following ranges: None, $1-$10,000, $10,001-$50,000, $50,001-$100,000,
$100,001-$500,000, $500,001-$1,000,000 or over $1,000,000.
|
|
|
|
|
|
|
| |
Fund
/ Portfolio Manager |
| Dollar
Range of Shares Owned |
Growth
Allocation Fund |
| |
Selwyn
Crews |
| None |
Christian
Chan |
| None |
|
| |
Conservative
Allocation Fund |
| |
Selwyn
Crews |
| None |
Christian
Chan |
| None |
|
| |
Tactical
Allocation Fund |
| |
Selwyn
Crews |
| None |
Christian
Chan |
| None |
|
| |
Absolute
Return Allocation Fund |
| |
Selwyn
Crews |
| None |
Christian
Chan |
| None |
|
| |
Multi-Asset
Income Allocation Fund |
| |
Selwyn
Crews |
| None |
Christian
Chan |
| None |
|
| |
Flexible
Income Allocation Fund |
| |
Selwyn
Crews |
| None |
Christian
Chan |
| None |
|
| |
Conservative
Income Fund |
| |
Selwyn
Crews |
| None |
Christian
Chan |
| None |
|
| |
Income
Fund |
| |
Selwyn
Crews |
| None |
Christian
Chan |
| None |
|
| |
Growth
and Income Fund |
| |
Selwyn
Crews |
| None |
Christian
Chan |
| None |
The
Sub-Advisors – GPS Funds I
Goldman
Sachs Asset Management, L.P. (“GSAM”)
is the sub-advisor to the Large Cap Core Fund, Emerging Markets Fund, Small/Mid
Cap Core Fund and World ex-US Fund. GSAM is a Delaware limited partnership with
principal offices at 200 West Street, New York, New York 10282. GSAM is an
indirect wholly-owned subsidiary of The Goldman Sachs Group, Inc. (together with
its affiliates, directors, partners, trustees, managers, members, officers and
employees, “Goldman Sachs”), a financial holding company. GSAM has been
registered with the SEC as an investment advisor since 1990.
Messrs.
Karhan E. Akcoglu, and Andrew Alford managed the following accounts as of March
31, 2024:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other
Accounts |
Total
Accounts |
Accounts
with Performance Fees |
| Number |
Assets |
Number |
Assets |
Andrew
Alford |
|
|
| |
Registered
Investment Companies |
10 |
$9.0
billion |
0 |
$0 |
Other
Pooled Investment Vehicles |
0 |
0 |
0 |
$0 |
Other
Accounts |
7 |
$597
million |
0 |
$0 |
|
|
|
| |
Karhan
E. Akcoglu |
|
|
| |
Registered
Investment Companies |
9 |
$3.6
billion |
0 |
$0 |
Other
Pooled Investment Vehicles |
0 |
0 |
0 |
$0 |
Other
Accounts |
6 |
$553
million |
0 |
$0 |
Conflicts
of Interest
GSAM
is part of The Goldman Sachs Group, Inc. (together with its affiliates,
directors, partners, trustees, managers, members, officers and employees,
“Goldman Sachs”), a financial holding company. The involvement of GSAM, Goldman
Sachs and their affiliates in the management of, or their interest in, other
accounts and other activities of Goldman Sachs will present conflicts of
interest with respect to a Fund and will, under certain circumstances, limit
such Fund’s investment activities. Goldman Sachs is a worldwide, full service
investment banking, broker dealer, asset management and financial services
organization and a major participant in global financial markets that provides a
wide range of financial services to a substantial and diversified client base
that includes corporations, financial institutions, governments and individuals.
Goldman Sachs acts as a broker-dealer, investment adviser, investment banker,
underwriter research provider, administrator, financier, adviser, market maker,
trader, prime broker, derivatives dealer, clearing agent, lender, counterparty,
agent, principal, distributor, investor or in other commercial capacities for
accounts or companies or affiliated or unaffiliated investment funds (including
pooled investment vehicles and private funds). In those and other capacities,
Goldman Sachs and its affiliates advise and deal with clients and third parties
in all markets and transactions and purchase, sell, hold and recommend a broad
array of investments, including securities, derivatives, loans, commodities,
currencies, credit default swaps, indices, baskets and other financial
instruments and products for their own accounts or for the accounts of their
customers and have other direct and indirect interests in the global fixed
income, currency, commodity, equities, bank loans and other markets and the
securities and issuers in which the Funds may directly and indirectly invest.
Thus, it is expected that a Fund will have multiple business relationships with
and will invest in, engage in transactions with, make voting decisions with
respect to, or obtain services from entities for which Goldman Sachs and its
affiliates perform or seek to perform investment banking or other services. As
manager of the Funds, GSAM receives management fees from the Funds. In addition,
GSAM’s affiliates may earn fees from relationships with the Funds. Although
these fees are generally based on asset levels, the fees are not directly
contingent on Fund performance, and Goldman Sachs would still receive
significant compensation from a Fund even if shareholders lose money. Goldman
Sachs and its affiliates engage in proprietary trading and advise accounts and
funds which have investment objectives similar to those of the Funds and/or
which engage in and compete for transactions in the same types of securities,
currencies and instruments as the Funds. Goldman Sachs and its affiliates will
not have any obligation to make available any information regarding their
proprietary activities or strategies, or the activities or strategies used for
other accounts managed by them, for the benefit of the management of the Funds.
The results of a Fund’s investment activities, therefore, will likely differ
from those of Goldman Sachs, its affiliates, and other accounts managed by
Goldman Sachs, and it is possible that a Fund could sustain losses during
periods in which Goldman Sachs and its affiliates and other accounts achieve
significant profits on their trading for proprietary or other accounts. In
addition, a Fund may enter into transactions in which Goldman Sachs and its
affiliates or their other clients have an adverse interest. For example, a Fund
may take a long position in a security at the same time that Goldman Sachs and
its affiliates or other accounts managed by GSAM or its affiliates take a short
position in the same security (or vice versa). These and other transactions
undertaken by Goldman Sachs, its affiliates or Goldman Sachs advised clients
may, individually or in the aggregate, adversely impact a Fund. In some cases,
such adverse impacts may result from differences in timing of transactions by
accounts relative to when a Fund executes transactions in the same securities.
Transactions by one or more Goldman Sachs advised clients or GSAM may have the
effect of diluting or otherwise disadvantaging the values, prices or investment
strategies of a Fund. A Fund’s activities will, under certain circumstances, be
limited because of regulatory restrictions applicable to Goldman Sachs and its
affiliates, and/or their internal policies designed to comply with such
restrictions. As a global financial services firm, Goldman Sachs and its
affiliates also provide a wide range of investment banking and financial
services to issuers of securities and investors in
securities.
Goldman Sachs, its affiliates and others associated with it are expected to
create markets or specialize in, have positions in and/or effect transactions
in, securities of issuers held by a Fund, and will likely also perform or seek
to perform investment banking and financial services for one or more of those
issuers. Goldman Sachs and its affiliates are expected to have business
relationships with and purchase or distribute or sell services or products from
or to distributors, consultants or others who recommend a Fund or who engage in
transactions with or for a Fund.
For
a more detailed description of potential conflicts of interest, please refer to
the language from GSAM’s ADV Part 2.
Portfolio
Manager Compensation
GSAM
receives a fee based on the assets under management of each Fund as set forth in
the Sub-advisory Agreement between GSAM and the Advisor, on behalf of each Fund.
GSAM pays its investment professionals out of its total revenues, including the
advisory fees earned with respect to the Funds. The following information is as
of March 31, 2024.
Compensation
for GSAM portfolio managers is comprised of a base salary and year-end
discretionary variable compensation. The base salary is fixed from year to year.
Year-end discretionary variable compensation is primarily a function of each
portfolio manager's individual performance; his or her contribution to the
overall team performance; the performance of GSAM and Goldman Sachs; the team’s
net revenues for the past year which in part is derived from advisory fees, and
for certain accounts, performance-based fees; and anticipated compensation
levels among competitor firms. Portfolio managers are rewarded, in part, for
their delivery of investment performance, which is reasonably expected to meet
or exceed the expectations of clients and fund shareholders in terms of: excess
return over an applicable benchmark, peer group ranking, risk management and
factors specific to certain funds such as yield or regional focus. Performance
is judged over 1-, 3-, and 5-year time horizons.
For
compensation purposes:
•
The benchmark for the Large Cap Core Fund is the Russell 1000 Index
•
The benchmark for the Emerging Markets Fund is the MSCI Emerging Markets
Index
•
The benchmark for the Small/Mid Cap Core Fund is the Russell 2500
Index
•
The benchmark for the World ex-US fund is the MSCI World ex-US
Index
The
discretionary variable compensation for portfolio managers is also significantly
influenced by various factors, including: (1) effective participation in team
research discussions and process; and (2) management of risk in alignment with
the targeted risk parameters and investment objective(s) of the fund. Other
factors may also be considered, including: (1) general client/shareholder
orientation and (2) teamwork and leadership.
As
part of their year-end discretionary variable compensation and subject to
certain eligibility requirements, portfolio managers may receive deferred
equity-based and similar awards, in the form of: (1) shares of The Goldman Sachs
Group, Inc. (restricted stock units); and (2) for certain portfolio managers,
performance-tracking (or “phantom”) shares of the GSAM mutual funds that they
oversee or service. Performance-tracking shares are designed to provide a rate
of return (net of fees) equal to that of the fund(s) that a portfolio manager
manages, or one or more other eligible funds, as determined by senior
management, thereby aligning portfolio manager compensation with fund
shareholder interests. The awards are subject to vesting requirements, deferred
payment and clawback and forfeiture provisions. GSAM, Goldman Sachs or their
affiliates expect, but are not required to, hedge the exposure of the
performance-tracking shares of a fund by, among other things, purchasing shares
of the relevant fund(s).
Other
Compensation - In addition to base salary and year-end discretionary variable
compensation, the Firm has a number of additional benefits in place including
(1) a 401(k) program that enables employees to direct a percentage of their base
salary and bonus income into a tax-qualified retirement plan; and (2) investment
opportunity programs in which certain professionals may participate subject to
certain eligibility requirements.
There
are no differences between the method used to determine the portfolio manager's
compensation with respect to the Funds and other accounts.
As
of March 31, 2024, the portfolio managers did not own any shares of the Large
Cap Core Fund, Emerging Markets Fund, Small/Mid Cap Core Fund or World ex-US
Fund.
Wellington
Management Company LLP (“Wellington
Management”) is the sub-advisor of the Core Fixed Income Fund. Wellington
Management is a Delaware limited liability partnership with principal offices at
280 Congress Street, Boston, Massachusetts 02210. Wellington Management is a
professional investment counseling firm which provides investment services to
investment companies, employee benefit plans, endowments, foundations and other
institutions. Wellington Management and its predecessor organizations have
provided investment advisory services for over 90 years. Wellington Management
is owned by the partners of Wellington Management Group LLP, a Massachusetts
limited liability partnership. Wellington Management is an SEC-registered
investment advisor.
Wellington
Management’s portfolio is managed by a team led by Campe Goodman, CFA, Joseph F.
Marvan, CFA and Robert D. Burn, CFA. As of March 31, 2024, in addition to
Wellington’s allocated portion of the Core Fixed Income Fund, these individuals
managed the following accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other
Accounts |
Total
Accounts |
Accounts
with Performance Fees |
| Number |
Assets |
Number |
Assets |
Campe
Goodman, CFA |
|
|
| |
Registered
Investment Companies |
18 |
$13.6
billion |
0 |
0 |
Other
Pooled Investment Vehicles |
16 |
$11.1
billion |
0 |
0 |
Other
Accounts |
42 |
$16.1
billion |
1 |
$292
million |
|
|
|
| |
Joseph
F. Marvan, CFA |
|
|
| |
Registered
Investment Companies |
19 |
$13.9
billion |
0 |
0 |
Other
Pooled Investment Vehicles |
23 |
$11.2
billion |
0 |
0 |
Other
Accounts |
65 |
$33.5
billion |
1 |
$292
million |
|
|
|
| |
Robert
D. Burn, CFA |
|
|
| |
Registered
Investment Companies |
18 |
$13.6
billion |
0 |
0 |
Other
Pooled Investment Vehicles |
13 |
$9.5
billion |
0 |
0 |
Other
Accounts |
39 |
$15.6
billion |
1 |
$292
million |
Conflicts
of Interest
Individual
investment professionals at Wellington Management manage multiple accounts for
multiple clients. These accounts may include mutual funds, separate accounts
(assets managed on behalf of institutions, such as pension funds, insurance
companies, foundations, or separately managed account programs sponsored by
financial intermediaries), bank common trust accounts, and hedge funds. The
Fund’s managers listed in the prospectus who are primarily responsible for the
day-to-day management of the Fund (the “Portfolio Managers”) generally manage
accounts in several different investment styles. These accounts may have
investment objectives, strategies, time horizons, tax considerations and risk
profiles that differ from those of the Fund. The Portfolio Managers make
investment decisions for each account, including the Fund, based on the
investment objectives, policies, practices, benchmarks, cash flows, tax and
other relevant investment considerations applicable to that account.
Consequently, the Portfolio Managers may purchase or sell securities, including
IPOs, for one account and not another account, and the performance of securities
purchased for one account may vary from the performance of securities purchased
for other accounts. Alternatively, these accounts may be managed in a similar
fashion to the Funds and thus the accounts may have similar, and in some cases
nearly identical, objectives, strategies and/or holdings to that of the
Fund.
The
Portfolio Managers or other investment professionals at Wellington Management
may place transactions on behalf of other accounts that are directly or
indirectly contrary to investment decisions made on behalf of the Fund, or make
investment decisions that are similar to those made for the Fund, both of which
have the potential to adversely impact the Fund depending on market conditions.
For example, an investment professional may purchase a security in one account
while appropriately selling that same security in another account. Similarly,
the Portfolio Managers may purchase the same security for the Funds and one or
more other accounts at or about the same time.
In
those instances the other accounts will have access to their respective holdings
prior to the public disclosure of the Fund’s holdings. In addition, some of
these accounts have fee structures, including performance fees, which are or
have the potential to be higher, in some cases significantly higher, than the
fees Wellington Management receives for managing the Fund. Messrs. Burn,
Goodman, and Marvan also manage accounts which pay performance allocations to
Wellington Management or its affiliates. Because incentive payments paid by
Wellington Management to the Portfolio Managers are tied to revenues earned by
Wellington Management and, where noted, to the performance achieved by the
manager in each account, the incentives associated with any given account may be
significantly higher or lower than those associated with other accounts managed
by the Portfolio Managers. Finally, the Portfolio Managers may hold shares or
investments in the other pooled investment vehicles and/or other accounts
identified above.
Wellington
Management’s goal is to meet its fiduciary obligation to treat all clients
fairly and provide high quality investment services to all of its clients.
Wellington Management has adopted and implemented policies and procedures,
including brokerage and trade allocation policies and procedures, which it
believes address the conflicts associated with managing multiple accounts for
multiple clients. In addition, Wellington Management monitors a variety of
areas, including compliance with primary account guidelines, the allocation of
IPOs, and compliance with the firm’s Code of Ethics, and places additional
investment restrictions on investment professionals who manage hedge funds and
certain other accounts. Furthermore, senior investment and business personnel at
Wellington Management periodically review the performance of Wellington
Management’s investment professionals. Although Wellington Management does not
track the time an investment professional spends on a single account, Wellington
Management does periodically assess whether an investment professional has
adequate time and resources to effectively manage the investment professional’s
various client mandates.
Portfolio
Manager Compensation
Wellington
Management receives a fee based on the assets under management of the Fund as
set forth in the Sub- advisory Agreement between Wellington Management and the
Advisor, on behalf of the Core Fixed Income Fund. Wellington Management pays its
investment professionals out of its total revenues, including the advisory fees
earned with respect to the Fund. The following information is as of March 31,
2024.
Wellington
Management’s compensation structure is designed to attract and retain
high-caliber investment professionals necessary to deliver high quality
investment management services to its clients. Wellington Management’s
compensation of the Core Fixed Income Fund’s Portfolio Managers listed in the
prospectus who are primarily responsible for the day-to-day management of the
fund (“Portfolio Managers”) includes a base salary and incentive components. The
base salary for each Portfolio Manager who is a partner (a “Partner”) of
Wellington Management Group LLP, the ultimate holding company of Wellington
Management, is generally a fixed amount that is determined by the managing
partners of Wellington Management Group LLP. Each Portfolio Manager is eligible
to receive an incentive payment based on the revenues earned by Wellington
Management from the Core Fixed Income Fund managed by the Portfolio Managers and
generally each other account managed by the Portfolio Managers. The Portfolio
Managers’ incentive payment relating to the Core Fixed Income Fund is linked to
the gross pre-tax performance of the portion of the Core Fixed Income Fund
managed by the Portfolio Managers compared to the Bloomberg Barclays US
Aggregate Bond Index over one, three, and five year periods, with an emphasis on
five year results. Wellington Management applies similar incentive compensation
structures (although the benchmarks or peer groups, time periods and rates may
differ) to other accounts managed by the Portfolio Managers, including accounts
with performance fees.
Portfolio-based
incentives across all accounts managed by an investment professional can, and
typically do, represent a significant portion of an investment professional’s
overall compensation; incentive compensation varies significantly by individual
and can vary significantly from year to year. The Portfolio Managers may also be
eligible for bonus payments based on their overall contribution to Wellington
Management’s business operations. Senior management at Wellington Management may
reward individuals as it deems appropriate based on other factors. Each Partner
is eligible to participate in a Partner-funded tax qualified retirement plan,
the contributions to which are made pursuant to an actuarial formula. Messrs.
Goodman, Marvan and Burn are Partners.
As
of March 31, 2024, the portfolio managers did not own any shares of the Core
Fixed Income Fund.
The
Sub-Advisors – GPS Funds II
AlphaSimplex
Group, LLC (“Sub-Advisor”)
Sub-Advisor,
located at 200 State Street, Boston, MA 02109, serves as the sub-advisor to the
Managed Futures Strategy Fund.
Other
Accounts Managed
Messrs.
Robert S. Rickard, Alexander D. Healy, Ph.D., John C. Perry, Ph.D., Phillippe P.
Ludi, Ph.D. and Ms. Kathryn M. Kaminski, Ph.D., are responsible for managing the
Managed Futures Strategy Fund’s portfolio. In addition to the Managed Futures
Strategy Fund, these individuals also managed the following accounts as of March
31, 2024:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other
Accounts |
Total
Accounts |
Accounts
with Performance Fees |
Number |
Assets |
Number |
Assets |
Robert
S. Rickard |
|
|
| |
Registered
Investment Companies |
2 |
$2.5
billion |
0 |
$0 |
Other
Pooled Investment Vehicles |
2 |
$1.1
billion |
1 |
$980
million |
Other
Accounts |
2 |
$380
million |
0 |
$0 |
|
|
|
| |
Alexander
D. Healy, Ph.D. |
|
|
| |
Registered
Investment Companies |
3 |
$2.6
billion |
0 |
$0 |
Other
Pooled Investment Vehicles |
2 |
$1.1
billion |
1 |
$980
million |
Other
Accounts |
7 |
$898
million |
0 |
$0 |
|
|
|
| |
John
C. Perry, Ph.D. |
|
|
| |
Registered
Investment Companies |
2 |
$2.4
billion |
0 |
$0 |
Other
Pooled Investment Vehicles |
2 |
$1.1
billion |
1 |
$980
million |
Other
Accounts |
6 |
$898
million |
0 |
$0 |
|
|
|
| |
Phillippe
P. Lüdi, Ph.D. |
|
|
| |
Registered
Investment Companies |
3 |
$2.6
billion |
0 |
$0 |
Other
Pooled Investment Vehicles |
2 |
$1.1
billion |
1 |
$980
million |
Other
Accounts |
6 |
$898
million |
0 |
$0 |
|
|
|
| |
Kathryn
M. Kaminski, Ph.D. |
|
|
| |
Registered
Investment Companies |
3 |
$2.6
billion |
0 |
$0 |
Other
Pooled Investment Vehicles |
2 |
$1.1
billion |
1 |
$980
million |
Other
Accounts |
6 |
$898
million |
0 |
$0 |
Portfolio
Manager Compensation
Compensation
Structure for AlphaSimplex. AlphaSimplex
believes that the firm’s compensation program is adequate and competitive to
attract and retain high-caliber investment professionals. Investment
professionals at AlphaSimplex receive a competitive base salary, an incentive
bonus opportunity and a benefits package. Certain professionals who supervise
and manage others also participate in a management incentive program reflecting
their personal contribution and team performance. Certain key individuals also
have the opportunity to take advantage of a long-term incentive compensation
program, including potential awards of Virtus (AlphaSimplex’s parent company)
restricted stock units (“Virtus RSUs”) with multi-year vesting, subject to
Virtus board of directors’ approval. Following is a more detailed description of
Virtus’ compensation structure.
Base
Salary. Each
portfolio manager is paid a fixed base salary, which is designed to be
competitive in light of the individual’s experience and responsibilities. Base
salary is determined using compensation survey results of investment industry
compensation conducted by an independent third party in evaluating competitive
market compensation for its investment management professionals.
Incentive
Bonus.
Annual incentive payments are based on targeted compensation levels, adjusted
based on profitability, investment performance factors and a subjective
assessment of contribution to the team effort. The short-term incentive payment
is generally paid in cash, but a portion may be made in Virtus RSUs and mutual
fund investments that appreciate or depreciate in value based on the returns of
one or more mutual funds managed by the investment professional. Individual
payments are assessed using comparisons of actual investment performance with
specific peer group or index measures. Performance of the Funds managed is
generally measured over one-, three- and five-year periods and an individual
manager’s participation is based on the performance of each Fund/account
managed.
While
portfolio manager compensation contains a performance component, this component
is adjusted to reward investment personnel for managing within the stated
framework and for not taking unnecessary risk. This approach ensures that
investment management personnel remain focused on managing and acquiring
securities that correspond to a Fund’s mandate and risk profile and are
discouraged from taking on more risk and unnecessary exposure to chase
performance for personal gain. We believe we have appropriate controls in place
to handle any potential conflicts that may result from a substantial portion of
portfolio manager compensation being tied to performance.
Other
Benefits.
Portfolio managers are also eligible to participate in broad-based plans offered
generally to employees of AlphaSimplex, including 401(k), health and other
employee benefit plans.
Description
of Potential Material Conflicts of Interest
AlphaSimplex
and its investment personnel provide investment management services to multiple
portfolios for multiple clients. AlphaSimplex may purchase or sell securities
for one client portfolio and not another client portfolio, and the performance
of securities purchased for one portfolio may vary from the performance of
securities purchased for other portfolios. In addition, client account
structures may have fee structures, such as performance-based fees, that differ.
The firm has adopted and implemented a Statement of Policy and Procedures
Regarding Allocation Among Investment Advisory Clients intended to address
conflicts of interest relating to the management of multiple accounts, including
accounts with multiple fee arrangements, and the allocation of investment
opportunities. AlphaSimplex reviews investment decisions for the purpose of
ensuring that all accounts with substantially similar investment objectives are
treated equitably. The performance of similarly managed accounts is also
regularly compared to determine whether there are any unexplained significant
discrepancies. Finally, AlphaSimplex has adopted trade allocation procedures
that require equitable allocation of trade orders for a particular security
among participating accounts. The implementation of these procedures is
monitored by AlphaSimplex’s Chief Compliance Officer.
In
addition, AlphaSimplex is aware of the potential for a conflict of interest in
cases where AlphaSimplex, a related person or any of their employees, buys or
sells securities recommended by AlphaSimplex to the clients. AlphaSimplex, in
recognition of its fiduciary obligations to its clients and its desire to
maintain its high ethical standards, has adopted a Code of Ethics containing
provisions designed to prevent improper personal trading, identify conflicts of
interest and provide a means to resolve any actual or potential conflict in
favor of the client. AlphaSimplex requires all employees to obtain preclearance
of personal securities transactions (other than certain exempted transactions as
set forth in the Code of Ethics).
As
of March 31, 2024, the portfolio managers did not own any shares in the
Fund.
|
| |
Distribution
and Shareholder Servicing |
Distributor
AssetMark
Brokerage®,
LLC, 1655 Grant Street, 10th Floor Concord, CA 94520, an affiliate of the
Advisor, is the distributor for shares of the Funds pursuant to a Distribution
Agreement (the “Distribution Agreement”), between the
Trusts
on behalf of the Funds and the Distributor. The Distributor is a registered
broker-dealer and member of the Financial Industry Regulatory Authority, Inc.
Shares of each Fund are offered on a continuous basis. The Funds did not pay any
commissions or other compensation to the Distributor during the Funds’ most
recent fiscal year ended March 31, 2024.
The
Advisor’s primary business is to operate the AssetMark Platform, a managed
account platform that is used by financial advisors and financial services
firms, such as investment advisors and financial intermediaries, including
broker-dealers, banks and/or trust companies to deliver investment advisory,
asset allocation and back office administrative services to their clients.
Through the AssetMark Platform, investors can invest in, among other things, a
variety of asset allocation portfolios using open-end mutual funds and other
investment vehicles. The GuideMark®
and GuidePath®
Funds are included among the many investment solutions made available through
the AssetMark Platform.
AssetMark
invests a portion of its revenues from operating the AssetMark Platform back
into the program in the form of benefits to qualifying financial advisors that
utilize the platform. Under its Advisor Benefits Program, qualifying
representatives (“Financial Advisors”) of financial advisory firms (“Financial
Advisory Firms”) can receive an allowance for reimbursement for qualified
marketing/practice development expenses incurred by the individual Financial
Advisor. AssetMark also enters into strategic relationships focused on assisting
Financial Advisory Firms with all areas of their practice such as marketing and
succession planning. These strategic relationships can offer discounted rates
for services. Additionally, certain Financial Advisory Firms enter into
marketing arrangements with AssetMark whereby the Firms receive compensation
and/or allowances in amounts based either upon a percentage of the value of new
or existing Account assets of Clients referred to AssetMark by Financial
Advisors, or a flat dollar amount. These arrangements provide for the
communication of AssetMark’s service capabilities to Financial Advisors and
their Clients in various venues including participation in meetings, conferences
and workshops. In addition to the fee reductions and/or allowances granted the
financial advisory firm by AssetMark, AssetMark may agree to provide the
financial advisory firm or its Financial Advisors with organizational
consulting, education, training and marketing support.
AssetMark
may sponsor annual conferences for participating Financial Advisory Firms and/or
Financial Advisors designed to facilitate and promote the success of the
AssetMark Platform and its participating Financial Advisory Firms and/or
Financial Advisors. AssetMark may offer portfolio strategists, investment
managers and investment management firms, who may also be sub-advisors for the
GuideMark®
Funds, the opportunity to contribute to the costs of AssetMark’s annual
conference and be identified as a sponsor of a portion of the conference.
AssetMark also may bear the cost of travel related expenses for certain
Financial Advisors to attend AssetMark’s annual conference, quarterly meeting,
or to conduct due diligence visits to AssetMark’s offices. Financial Advisors
may also receive discounted pricing on affiliate coaching programs, as well as
other practice management related services. AssetMark may also offer credit
incentives for customized marketing material. Certain Financial Advisors may be
selected by AssetMark to provide feedback on AssetMark’s services, technology or
other business processes for further improvement. For their participation, these
Financial Advisors may receive nominal compensation from AssetMark. In addition,
AssetMark may, from time to time, contribute to the costs incurred by
participating Financial Advisory Firms in connection with conferences or other
client events conducted by Financial Advisory Firms and their Financial
Advisors.
The
primary method of distributing the Funds is through the AssetMark Platform, and
the Advisor is responsible for all aspects of the operation of the AssetMark
Platform. In addition, intermediaries facilitate the operation of the AssetMark
Platform by maintaining investor accounts, and providing back office,
shareholder and recordkeeping services that enable investors to access the Funds
and other funds.
Shareholder
Servicing
Each
Fund may enter into agreements with certain organizations that provide various
services to Fund shareholders. Pursuant to such arrangements, organizations that
provide shareholder services may be entitled to receive fees from a Fund for
shareholder support. Such support may include, among other things, assisting
investors in processing their purchase, exchange or redemption requests, or
processing dividend and distribution payments.
The
Funds paid the following shareholder servicing fees for the fiscal years ended
March 31, 2024, March 31, 2023, and March 31, 2022, as applicable:
|
|
|
|
|
|
|
|
|
|
| |
Fund |
2024 |
2023 |
2022 |
Large
Cap Core Fund |
$653,540 |
$536,538 |
$688,924 |
Emerging
Markets Fund |
$45,035 |
$51,454 |
$91,262 |
Small/Mid
Cap Core Fund |
$97,849 |
$97,029 |
$106,768 |
World
ex-US Fund |
$109,741 |
$99,941 |
$141,793 |
Core
Fixed Income Fund |
$165,441 |
$181,379 |
$196,446 |
Growth
Allocation Fund |
$1,037,368 |
$968,020 |
$1,167,790 |
Conservative
Allocation Fund |
$440,335 |
$433,669 |
$499,493 |
Tactical
Allocation Fund |
$531,539 |
$492,619 |
$504,403 |
Absolute
Return Allocation Fund |
$208,738 |
$321,651 |
$222,121 |
Multi-Asset
Income Allocation Fund |
$88,367 |
$94,846 |
$123,779 |
Flexible
Income Allocation Fund |
$274,749 |
$317,043 |
$319,353 |
Managed
Futures Strategy Fund |
$477,222 |
$435,546 |
$216,201 |
Conservative
Income Fund |
$96 |
$116 |
$7
(1) |
Income
Fund |
$410 |
$386 |
$37
(1) |
Growth
and Income Fund |
$623 |
$901 |
$159
(1) |
(1)
Effective January 1, 2022, the Conservative Income Fund, Income Fund and
Growth and Income Fund began paying certain fees for shareholder
servicing. |
The
Trusts entered into a number of agreements whereby certain parties provide
various services to the Funds.
U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services
(“Fund Services”) provides accounting and administrative services and
shareholder servicing to the Funds as transfer agent and dividend disbursing
agent. Fund Services’ address is 615 East Michigan Street, Milwaukee, Wisconsin
53202. The services provided under the Transfer Agent Servicing Agreement
include processing purchase and redemption transactions; establishing and
maintaining shareholder accounts and records; disbursing dividends declared by
the Funds; day-to-day administration of matters related to the existence of the
Trusts under state law (other than rendering investment advice); maintenance of
its records; preparation, mailing and filing of reports; and assistance in
monitoring the total number of shares sold in each state for “Blue Sky”
purposes.
Pursuant
to a Fund Administration Servicing Agreement and a Fund Accounting Servicing
Agreement, each between Fund Services and the Trust, Fund Services also performs
certain administrative, accounting and tax reporting functions for the Funds,
including preparing and filing federal and state tax returns, preparing and
filing securities registration compliance filings with various states, compiling
data for and preparing notices to the SEC, assistance in the preparation of the
Funds’ registration statement under federal and state securities laws, preparing
financial statements for Form N-CSR to the SEC and current investors, monitoring
the Funds’ expense accruals, and calculating the daily net asset value for each
Fund from time to time, monitoring the Funds’ compliance with their investment
objectives and restrictions.
For
the fiscal years ended March 31, 2024, March 31, 2023, and March 31, 2022, the
Trusts paid the following amounts to Fund Services for administrative services
(excluding fund accounting or transfer agent services):
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Administration
Fee Paid |
| 2024 |
2023 |
2022 |
Large
Cap Core Fund |
$115,666 |
$95,463 |
$115,424 |
Emerging
Markets Fund |
$30,490 |
$30,578 |
$28,013 |
Small/Mid
Cap Core Fund |
$35,888 |
$38,495 |
$39,333 |
World
ex-US Fund |
$44,570 |
$39,606 |
$108,926 |
Core
Fixed Income Fund |
$42,845 |
$44,169 |
$40,664 |
Growth
Allocation Fund |
$143,442 |
$127,317 |
$164,528 |
Conservative
Allocation Fund |
$65,221 |
$65,406 |
$83,350 |
Tactical
Allocation Fund |
$84,140 |
$76,964 |
$80,682 |
Absolute
Return Allocation Fund |
$27,844 |
$45,860 |
$30,158 |
Multi-Asset
Income Allocation Fund |
$13,972 |
$14,500 |
$18,631 |
Flexible
Income Allocation Fund |
$38,146 |
$41,606 |
$41,540 |
Managed
Futures Strategy Fund |
$71,724 |
$62,297 |
$29,088 |
Conservative
Income Fund |
$2,811 |
$2,281 |
$2,349 |
Income
Fund |
$9,933 |
$7,551 |
$5,974 |
Growth
and Income Fund |
$16,822 |
$15,937 |
$15,155 |
U.S.
Bank, N.A., an affiliate of Fund Services, is the custodian of the assets of the
Funds and the Subsidiary of the Managed Futures Strategy Fund, as well as the
Funds’ Foreign Custody Manager (“Custodian”), pursuant to a custody agreement
between the Custodian and each Trust (“Custody Agreement”). The Custodian also
maintains certain books and records of the Funds that are required by applicable
federal regulations. The Custodian is compensated for its services to the Trusts
by fees paid on a per transaction basis, and the Trusts also pay certain of the
Custodian’s related out-of-pocket expenses. The Custodian’s address is Custody
Operations, 1555 North RiverCenter Drive, Suite 302, Milwaukee, Wisconsin
53212.
The
Advisor provides certain administrative services to the Funds in connection with
the operation of the Platform pursuant to an Administrative Services Agreement
between each Trust and the Advisor, for which the Advisor receives a fee of
0.25% of the average daily net assets of the applicable Shares of the Funds.
Investors holding the applicable Shares of the Funds outside of the AssetMark
Platform are subject to these administrative services fees, but may not receive
all of the related services.
The
Administrative Services Agreement between GPS Funds I and the Advisor entered
into effect on March 31, 2011. The Administrative Services Agreement between GPS
Funds II and the Advisor entered into effect on April 1, 2011.
For
the fiscal years ended March 31, 2024, March 31, 2023, and March 31, 2022, the
Trusts paid the following amounts to the Advisor under the Administrative
Services Agreement:
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Administrative
Services Fee Paid |
| 2024 |
2023 |
2022 |
Large
Cap Core Fund |
$1,622,316 |
$1,329,418 |
$1,706,579 |
Emerging
Markets Fund |
$111,172 |
$126,792 |
$225,348 |
Small/Mid
Cap Core Fund |
$243,875 |
$241,431 |
$265,392 |
World
ex-US Fund |
$273,373 |
$248,491 |
$352,414 |
Core
Fixed Income Fund |
$410,154 |
$449,495 |
$485,899 |
Growth
Allocation Fund |
$2,579,347 |
$2,419,083 |
$2,918,307 |
Conservative
Allocation Fund |
$1,100,397 |
$1,084,004 |
$1,248,315 |
Tactical
Allocation Fund |
$1,328,357 |
$1,231,422 |
$1,260,586 |
Absolute
Return Allocation Fund |
$521,585 |
$804,002 |
$555,266 |
Multi-Asset
Income Allocation Fund |
$220,897 |
$237,116 |
$309,436 |
Flexible
Income Allocation Fund |
$686,873 |
$792,609 |
$798,382 |
Managed
Futures Strategy Fund |
$1,192,996 |
$1,088,864 |
$540,307 |
Conservative
Income Fund |
$45,559 |
$41,076 |
$35,079 |
Income
Fund |
$180,969 |
$137,523 |
$109,250 |
Growth
and Income Fund |
$231,184 |
$250,739 |
$268,574 |
|
| |
Anti-Money
Laundering Program |
The
Trusts have established an Anti-Money Laundering Compliance Program (the “AML
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 Trusts’ Program
provides for the development of internal practices, procedures and controls,
designation of an Anti-Money Laundering Compliance Officer, an ongoing training
program and an independent audit function to determine the effectiveness of the
AML Program.
The
Board has delegated implementation of certain elements of the AML Program to
each Fund’s omnibus account holders, also known as intermediaries. Procedures to
implement the AML Program include, but are not limited to, a determination by
the Board that each Fund’s omnibus account holders have established proper
anti-money laundering procedures, the omnibus account holders are reporting
suspicious and/or fraudulent activity, and the omnibus account holders are
performing a complete and thorough review of all new opening accounts. The
Trusts will not transact business with any person or entity whose identity
cannot be adequately verified in accordance with the AML Program.
The
Trust, the Advisor, the Distributor and each sub-advisor have adopted codes of
ethics that govern the personal securities transactions of their respective
personnel. Pursuant to each such code of ethics, their respective personnel may
invest securities for their personal accounts (including securities that may be
purchased or held by the Trust), subject to certain conditions.
Federal
law requires the Trust, the Advisor and each sub-advisor to adopt procedures for
voting proxies (the “Proxy Voting Guidelines”) and to provide a summary of those
Proxy Voting Guidelines used to vote the securities held by a Fund. Descriptions
of such Proxy Voting Guidelines are attached as Appendix
B to
this SAI. Information about how the Funds voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 may
be
obtained (1) without charge, upon request, by calling 800-352-9910 and (2) on
the SEC’s website at http://www.sec.gov.
Shares
of each Fund are sold on a continuous basis at the net asset value (“NAV”) per
share next computed following acceptance of an order by the Fund. Each Fund’s
NAV per share for the purpose of pricing purchase and redemption orders is
generally determined at 4:00 p.m. Eastern time on each day the Fund is open as
determined by the Board. The Funds are generally open on the same days that the
New York Stock Exchange (“NYSE”) is open for trading. The NYSE is closed on the
following holidays: New Year’s Day, Martin Luther King, Jr. Day, Washington’s
Birthday, Good Friday, Memorial Day, Juneteenth, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The
NAV per share of a class of a Fund is calculated by adding the value of all
assets of the Fund attributable to that share class, deducting all liabilities
of the Fund attributable to that share class, and dividing by the number of
outstanding shares of that share class of the Fund, the result being adjusted to
the nearest cent. The NAV for each Fund-of-Funds is generally based on the NAV
of the Underlying Funds. Each Fund’s daily NAV is available by calling
1-888-278-5809.
Portfolio
securities listed on a national or foreign securities exchange, except those
listed on the National Association of Securities Dealers' Automated Quotation
System (“NASDAQ®”),
for which market quotations are available, are valued at the last quoted sale
price on each business day (defined as days on which the Funds are open for
business (“Business Day”)). Portfolio securities traded on the
NASDAQ®
will be valued at the NASDAQ Official Closing Price on each Business Day. If
there is no such reported sale on an exchange or NASDAQ®,
the portfolio security will be valued at the mean between the most recent quoted
bid and asked price or, if an asked price is not available, at the most recent
quoted bid price. Price information on listed securities is taken from the
exchange where the security is primarily traded.
Information
about the market value of each portfolio security may be obtained from an
independent pricing service. The pricing service relies primarily on prices of
actual market transactions as well as trader quotations. However, the pricing
service may use a matrix system to determine valuations of fixed income
securities. This system considers such factors as security prices, yields,
maturities, call features, ratings and developments relating to specific
securities in arriving at valuations. The procedures used by the pricing service
and its valuations are reviewed by the officers of the Trusts under the general
supervision of the Trustees.
U.S.
government and agency securities are valued at the mean between the most recent
bid and asked prices. Other fixed-income securities that have a maturity of
greater than 60 days are normally valued on the basis of quotes obtained from
pricing services, which take into account appropriate factors such as
institutional sized trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Fixed-income securities with remaining maturities of 60 days or less will
be valued by the amortized cost method, which approximates market value and
involves valuing a security at its cost on the date of purchase and thereafter
(absent unusual circumstances), assuming a constant amortization to maturity of
any discount or premium, regardless of the impact of fluctuations in general
market rates of interest on the value of the instrument. While this method
provides certainty in valuation, it may result in periods during which value, as
determined by this method, is higher or lower than the price the Trusts would
receive if it sold the instrument. During periods of declining interest rates,
the daily yield of a Fund may tend to be higher than a comparable computation
made by a company with identical investments utilizing a method of valuation
based upon market prices and estimates of market prices for all of its portfolio
securities. Thus, if the use of amortized cost by a Fund resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in a Fund
would be able to obtain a somewhat higher yield than would result from
investment in a company solely utilizing market values, and existing
shareholders in the Fund would experience a lower yield. The converse would
apply during a period of rising interest rates.
Options
traded on an exchange are valued at the last reported sale price on the exchange
on which the option is traded. If no sales are reported for exchange-traded
options, or the options are not exchange-traded, then they are valued at the
mean of the highest bid and lowest asked quotations at the close of the exchange
on which they are traded. Futures contracts traded on an exchange are valued
based on the last sale price on an exchange on the valuation date. Other
assets
and securities for which no quotations are readily available (including
restricted securities) will be valued in good faith at fair value using
procedures and methods approved by the Board.
Securities
for which no market quotations are readily available or when a significant event
has occurred between the time of the security’s last close and the time that a
Fund next calculates its net asset value will be valued at their fair value in
accordance with the requirements of Rule 2a-5. The Board designated the Advisor
as Valuation Designee of the Trusts. The Valuation Designee has established a
Valuation Committee to oversee the implementation of the valuation procedures on
behalf of the Funds.
|
| |
Purchase
and Redemption of Shares |
The
purchase and redemption price of shares is the NAV next calculated after receipt
of an order in proper form. A Fund will be deemed to have received a purchase or
redemption order when an authorized broker or, if applicable, a broker’s
authorized designee, receives the order. As described in the Funds’ Prospectus,
financial institutions and intermediaries may purchase or redeem Fund shares on
any day that the NYSE is open for business by placing orders with the Funds’
transfer agent (or their authorized agent). Institutions and intermediaries that
use certain proprietary systems of the Advisor may place orders electronically
through those systems. Each Fund reserves the right to refuse any purchase
requests, particularly those that would not be in the best interests of the Fund
or its shareholders or that could adversely affect the Fund or its
operations.
It
is currently the Trusts’ policy to pay all redemptions in cash. The Trusts
retain the right, however, to alter this policy to provide for redemptions in
whole or in part by a distribution in kind of readily marketable securities held
by a Fund in lieu of cash. Shareholders may incur subsequent brokerage charges
on the sale of any such securities so received in payment of redemptions. A gain
or loss for federal income tax purposes may be realized by a taxable shareholder
upon an in-kind redemption depending upon the shareholder’s basis in the shares
of the Trusts redeemed.
Purchases
and redemptions of Fund shares may be made on any day the NYSE is open for
business. The Trusts reserve the right to suspend the right of redemption and/or
to postpone the date of payment upon redemption for any period during which
trading on the NYSE is restricted, or during the existence of an emergency (as
determined by the SEC by rule or regulation) as a result of which disposal or
evaluation of the portfolio securities is not reasonably practicable, or for
such other periods as the SEC may by order permit. The Trusts also reserve the
right to suspend sales of shares of the Funds for any period during which the
NYSE, the Distributor and/or the Custodian are not open for
business.
Assets
of a Fund are invested by the Advisor and the sub-advisors in a manner
consistent with the Fund’s investment objectives, strategies, policies and
restrictions, as well as with any instructions the Board may issue from time to
time. Within this framework, the Advisor and sub-advisors are responsible for
making all determinations as to the purchase and sale of portfolio securities
for a Fund, and for taking all steps necessary to implement securities
transactions on behalf of a Fund. When placing orders, the Advisor and
sub-advisors will seek to obtain the best net results taking into account such
factors as price (including applicable dealer spread), size, type and difficulty
of the transaction involved, the firm’s general execution and operational
facilities, and the firm’s risk in positioning the securities
involved.
The
Funds have no obligation to deal with any broker-dealer or group of brokers or
dealers in the execution of transactions in portfolio securities. The Advisor
may, from time to time, request that sub-advisors direct trades to certain
brokers that provide favorable commission rates, subject to the sub-advisor’s
obligation to obtain best execution. The Funds will not purchase portfolio
securities from any affiliated person acting as principal except in conformity
with SEC regulations.
For
securities traded in the over-the-counter markets, the Advisor or sub-advisors
deal directly with the dealers who make markets in these securities unless
better prices and execution are available elsewhere. The Advisor or sub-
advisors negotiate commission rates with brokers based on the quality and
quantity of services provided in light of generally prevailing rates, and while
the Advisor or sub-advisors generally seek reasonably competitive commission
rates,
a Fund does not necessarily pay the lowest commissions available. The Board
periodically reviews the commission rates and the allocation of
orders.
When
consistent with the objectives of best price and execution, portfolio
transactions may be placed with broker-dealers who furnish investment research
or services to the sub-advisors. The commissions on such brokerage transactions
with investment research or services may be higher than another broker might
have charged for the same transaction in recognition of the value of research or
services provided. Such research or services include advice, both orally and in
writing, as to: the value of securities; the advisability of investing in,
purchasing or selling securities; the availability of securities, or purchasers
or sellers of securities; as well as analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy and the
performance of accounts. In addition, for the Advisor, such research or services
may include advice concerning the allocation of assets among sub- advisors and
the suitability of sub-advisors. To the extent portfolio transactions are
effected with broker-dealers who furnish research and/or other services to the
Advisor or sub-advisor, the Advisor or sub-advisor receives a benefit, not
capable of evaluation in dollar amounts, without providing any direct monetary
benefit to the Fund from these transactions. Such research or services provided
by a broker-dealer through whom the Advisor or a sub-advisor effects securities
transactions for a Fund may be used by the Advisor or sub-advisor in servicing
all of its accounts. In addition, the Advisor or sub-advisor may not use all of
the research and services provided by such broker-dealer in connection with the
Fund.
The
Trusts may also enter into arrangements, commonly referred to as
“brokerage/service arrangements” with broker-dealers pursuant to which a
broker-dealer agrees to pay the cost of certain products or services provided to
the Funds in exchange for fund brokerage. Under a typical brokerage/service
arrangement, a broker agrees to pay a portion of a Fund’s custodian,
administrative or transfer agency fees, and in exchange, the Fund agrees to
direct a minimum amount of brokerage to the broker. The Advisor or sub-advisor,
on behalf of the Trusts, usually negotiates the terms of the contract with the
service provider, which is paid directly by the broker.
The
same security may be suitable for a Fund, another portfolio series of the Trusts
or other private accounts managed by the Advisor or sub-advisor. If and when a
Fund and two or more accounts simultaneously purchase or sell the same security,
the transactions will be allocated as to price and amount in accordance with
arrangements equitable to the Fund and the accounts. The simultaneous purchase
or sale of the same securities by a Fund and other accounts may have a
detrimental effect on the Fund, as this may affect the price paid or received by
the Fund or the size of the position obtainable or able to be sold by the
Fund.
The
brokerage commissions paid by the Funds for the fiscal years ended March 31,
2024, March 31, 2023, and March 31, 2022, were as follows:
|
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|
| |
Total
Brokerage Fees Paid |
Fund |
2024 |
2023 |
2022 |
Large
Cap Core Fund |
$18,148 |
$25,588 |
$16,235 |
Emerging
Markets Fund |
$18,362 |
$20,150 |
$33,954 |
Small/Mid
Cap Core Fund |
$8,871 |
$8,841 |
$9,682 |
World
ex-US Fund |
$9,948 |
$17,248 |
$15,369 |
Core
Fixed Income Fund |
$7,011 |
$9,661 |
$7,664 |
Growth
Allocation Fund |
$29,379 |
$33,069 |
$18,748 |
Conservative
Allocation Fund |
$14,855 |
$41,470 |
$14,125 |
Tactical
Allocation Fund |
$206,407 |
$99,864 |
$247,306 |
Absolute
Return Allocation Fund |
$22,506 |
$62,197 |
$8,139 |
Multi-Asset
Income Allocation Fund |
$6,393 |
$15,260 |
$7,560 |
Flexible
Income Allocation Fund |
$141,904 |
$343,437 |
$128,855 |
Managed
Futures Strategy Fund |
$465,702 |
$538,748 |
$298,549 |
Conservative
Income Fund |
$5,570 |
$9,099 |
$4,100 |
Income
Fund |
$52,277 |
$33,459 |
$17,382 |
Growth
and Income Fund |
$21,859 |
$14,601 |
$25,777 |
For
the fiscal year ended March 31, 2024, the Funds did not pay brokerage
commissions to brokers who also provided research services.
The
SEC requires the Trusts to provide certain information for those Funds that held
securities of their regular brokers or dealers (or their parents) during the
Trusts’ most recent fiscal year. The following tables identify, for each
applicable Fund, those brokers or dealers and the value of the Fund’s aggregate
holdings of the securities of each such issuer as of the fiscal year ended March
31, 2024.
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|
|
|
| |
Large
Cap Core Fund |
Broker-Dealer |
Aggregate
Value |
JP
Morgan Chase & Co. |
$5,967,137 |
Citigroup,
Inc. |
$1,941,595 |
World
ex-US Fund |
HSBC
Investment Bank PLC |
$668,580 |
Barclay
Investments Ltd. |
$246,764 |
Growth
and Income Fund |
Citigroup,
Inc. |
$278,940 |
The
Funds not included in the tables above did not hold securities of their regular
brokers or dealers, as of March 31, 2024.
Portfolio
Turnover
Although
the Funds generally will not invest for short-term trading purposes, portfolio
securities may be sold without regard to the length of time they have been held
when, in the opinion of the Advisor or sub-advisors, 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 a Fund’s
portfolio, with the exception of securities whose maturities at the time of
acquisition were one year or less, were sold and either repurchased or replaced
within one year. A high rate of portfolio turnover (100% or more) generally
leads to higher transaction costs and may result in a greater number of taxable
transactions. For purposes of calculating a Fund’s portfolio turnover rate, all
securities, including options, whose maturities or expiration dates at the time
of acquisition were one year or less are excluded. If such
investments were included, a Fund’s portfolio turnover rate would be
significantly higher.
For
the fiscal years ended March 31, 2024 and March 31, 2023, the Funds had the
following portfolio turnover rates:
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|
|
|
|
|
|
| |
Portfolio
Turnover Rates |
Fund |
2024 |
2023 |
Large
Cap Core Fund |
19.47% |
46.39% |
Emerging
Markets Fund |
43.80% |
43.50% |
Small/Mid
Cap Core Fund |
16.37% |
24.59% |
World
ex-US Fund |
30.33% |
54.13% |
Core
Fixed Income Fund |
267.22% |
252.14% |
Growth
Allocation Fund |
18.58% |
22.84% |
Conservative
Allocation Fund |
19.92% |
48.39% |
Tactical
Allocation Fund |
333.31% |
248.27% |
Absolute
Return Allocation Fund
(1) |
53.14% |
152.99% |
Multi-Asset
Income Allocation Fund |
27.54% |
65.66% |
Flexible
Income Allocation Fund
|
247.29% |
483.66% |
Managed
Futures Strategy Fund |
0.00% |
0.00% |
Conservative
Income Fund |
258.88% |
398.32% |
Income
Fund |
288.92% |
300.76% |
Growth
and Income Fund (2) |
122.79% |
73.19% |
(1)
The decrease in the Fund’s portfolio turnover for the fiscal year ended
March 31, 2024 was due to a lower number of research provider changes.
|
(2)
The increase in the Fund’s portfolio turnover for the fiscal year ended
March 31, 2024 was due to a higher number of portfolio optimization
changes. |
U.S.
Bank, N.A. serves as securities lending agent for the Funds and in that role
administers the Funds’ securities lending program approved by the Board pursuant
to the terms of the Third Amended and Restated Securities Lending Agreement
entered into between GPS Funds I and U.S. Bank, N.A., and the terms of the First
Amended and Restated Securities Lending Agreement entered into between GPS Funds
II and U.S. Bank, N.A.
As
securities lending agent, U.S. Bank, N.A. is responsible for marketing to
approved borrowers available securities from the Fund’s portfolio. U.S. Bank,
N.A. is responsible for the administration and management of the Funds’
securities lending program, including the preparation and execution of a
participant agreement with each borrower governing the terms and conditions of
any securities loan, ensuring that securities loans are properly coordinated and
documented with the Funds’ custodian, ensuring that loaned securities are daily
valued and that the corresponding required cash collateral of at least 102% of
the current market value of the loaned securities is delivered by the
borrower(s), using best efforts to obtain additional collateral on the next
business day if the value of the collateral falls below the required amount, and
arranging for the investment of cash collateral received from borrowers in
accordance with the Funds’ investment guidelines.
U.S.
Bank, N.A. receives as compensation for its services a portion of the amount
earned by the Funds for lending securities.
The
following table sets forth, for a Fund’s most recently completed fiscal year,
the Fund’s gross income received from securities lending activities, the fees
and/or other compensation paid by the Fund for securities lending activities,
and the net income earned by the Fund for securities lending activities.
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
| |
| Gross
income from securities lending activities: |
Fees
paid to securities lending agent from a revenue split: |
Fees
paid for any cash collateral management service that are not included in
the revenue split: |
Administrative
fees not included in revenue split: |
Indemnification
fee not included in revenue split: |
Rebates
(paid to borrower): |
Other
fees not included in revenue split: |
Aggregate
fees/compensation for securities lending activities: |
Securities
lending credits from securities lending activities: |
Large
Cap Core Fund |
$4,100,392 |
$50,441 |
$21,755 |
$0 |
$0 |
$3,742,329 |
$0 |
$3,814,525 |
$285,867 |
Emerging
Markets Fund |
$107,726 |
$828 |
$594 |
$0 |
$0 |
$101,625 |
$0 |
$103,047 |
$4,680 |
Small/Mid
Cap Core Fund |
$1,441,937 |
$14,332 |
$7,821 |
$0 |
$0 |
$1,338,509 |
$0 |
$1,360,662 |
$81,275 |
World
ex-US Fund |
$134,703 |
$1,831 |
$736 |
$0 |
$0 |
$121,760 |
$0 |
$124,327 |
$10,376 |
Core
Fixed Income Fund |
$438,909 |
$1,799 |
$2,380 |
$0 |
$0 |
$424,537 |
$0 |
$428,716 |
$10,193 |
Growth
Allocation Fund |
$9,084,610 |
$94,093 |
$49,592 |
$0 |
$0 |
$8,407,721 |
$0 |
$8,551,407 |
$533,204 |
Conservative
Allocation Fund |
$4,599,369 |
$51,749 |
$25,053 |
$0 |
$0 |
$4,229,321 |
$0 |
$4,306,123 |
$293,246 |
Tactical
Allocation Fund |
$2,685,087 |
$19,800 |
$14,815 |
$0 |
$0 |
$2,538,269 |
$0 |
$2,572,884 |
$112,204 |
Absolute
Return Allocation Fund |
$1,848,206 |
$21,257 |
$10,056 |
$0 |
$0 |
$1,696,430 |
$0 |
$1,727,743 |
$120,463 |
Multi-Asset
Income Allocation Fund |
$1,276,208 |
$22,135 |
$6,926 |
$0 |
$0 |
$1,121,709 |
$0 |
$1,150,771 |
$125,437 |
Flexible
Income Allocation Fund |
$2,654,750 |
$36,450 |
$14,545 |
$0 |
$0 |
$2,397,207 |
$0 |
$2,448,203 |
$206,547 |
Managed
Futures Strategy Fund |
$1,635,117 |
$2,937 |
$8,919 |
$0 |
$0 |
$1,606,616 |
$0 |
$1,618,472 |
$16,644 |
Conservative
Income Fund |
$109,091 |
$5,100 |
$600 |
$0 |
$0 |
$74,493 |
$0 |
$80,193 |
$28,898 |
Income
Fund |
$1,045,660 |
$15,730 |
$5,691 |
$0 |
$0 |
$935,103 |
$0 |
$956,524 |
$89,136 |
Growth
and Income Fund |
$690,379 |
$23,199 |
$3,425 |
$0 |
$0 |
$532,278 |
$0 |
$558,902 |
$131,477 |
Unclaimed
Property
It
is important that a Fund maintain a correct address for each shareholder. An
incorrect address may cause a shareholder's account statements and other
mailings to be returned to the Fund. Based upon statutory requirements for
returned mail, the Funds will attempt to locate the shareholder or rightful
owner of the account. If a Fund is unable to locate the shareholder, then it
will determine whether the shareholder's account should be considered abandoned
in accordance with applicable law. Your account may be transferred to the state
government of your state of residence if no activity occurs within your account
during the “inactivity period” specified in your state's abandoned property
laws. The Funds are legally obligated to escheat (or transfer) abandoned
property to the appropriate state's unclaimed property administrator in
accordance with statutory requirements. The shareholder's last known address of
record determines
which
state has jurisdiction. Please proactively contact the Transfer Agent toll-free
at (888) 278-5809 at least annually to ensure your account remains in active
status.
If
you are a resident of the state of Texas, you may designate a representative to
receive notifications that, due to inactivity, your mutual fund account assets
may be delivered to the Texas Comptroller. Please contact the Transfer Agent if
you wish to complete a Texas Designation of Representative form.
The
following is a summary of certain additional tax considerations generally
affecting a Fund (sometimes referred to as “the Fund”) and its shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
This
“Taxes” section is based on the Code and applicable regulations in effect on the
date of this SAI. Future legislative, regulatory or administrative changes,
including provisions of current law that sunset and thereafter no longer apply,
or court decisions may significantly change the tax rules applicable to the Fund
and its shareholders. Any of these changes or court decisions may have a
retroactive effect.
Unless
otherwise indicated, the discussion below with respect to a Fund includes its
pro rata share of the dividends and distributions paid by any Underlying
Funds.
This
is for general information only and not tax advice. All investors should consult
their own tax advisors as to the federal, state, local and foreign tax
provisions applicable to them.
Taxation
of the Fund.
The Fund has elected and intends to qualify, or, if newly organized, intends to
elect and qualify, each year as a regulated investment company (sometimes
referred to as a “regulated investment company,” “RIC” or “fund”) under
Subchapter M of the Code. If the Fund so qualifies, the Fund will not be subject
to federal income tax on the portion of its investment company taxable income
(that is, generally, taxable interest, dividends, net short-term capital gains,
and other taxable ordinary income, net of expenses, without regard to the
deduction for dividends paid) and net capital gain (that is, the excess of net
long-term capital gains over net short-term capital losses) that it distributes
to shareholders.
In
order to qualify for treatment as a regulated investment company, the Fund must
satisfy the following requirements:
iDistribution
Requirement —
the Fund must distribute an amount equal to the sum of at least 90% of its
investment company taxable income and 90% of its net tax-exempt income, if any,
for the tax year (including, for purposes of satisfying this distribution
requirement, certain distributions made by the Fund after the close of its
taxable year that are treated as made during such taxable year).
iiIncome
Requirement —
the Fund must derive at least 90% of its gross income from dividends, interest,
certain payments with respect to securities loans, and gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived from its business of investing in such stock, securities or
currencies and net income derived from qualified publicly traded partnerships
(“QPTPs”).
iiiAsset
Diversification Test —
the Fund must satisfy the following asset diversification test at the close of
each quarter of the Fund’s tax year: (1) at least 50% of the value of the Fund’s
assets must consist of cash and cash items, U.S. government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of the
Fund’s total assets in securities of an issuer and as to which the Fund does not
hold more than 10% of the outstanding voting securities of the issuer); and (2)
no more than 25% of the value of the Fund’s total assets may be invested in the
securities of any one issuer (other than U.S. government securities or
securities of other regulated investment companies) or of two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
businesses, or, in the securities of one or more QPTPs.
In
some circumstances, the character and timing of income realized by the Fund for
purposes of the Income Requirement or the identification of the issuer for
purposes of the Asset Diversification Test is uncertain under current law with
respect to a particular investment, and an adverse determination or future
guidance by the Internal Revenue Service (“IRS”) with respect to such type of
investment may adversely affect the Fund’s ability to satisfy these
requirements. See, “Tax Treatment of Portfolio Transactions” below with respect
to the application of these requirements to certain types of investments. In
other circumstances, the Fund may be required to sell portfolio holdings in
order to meet the Income Requirement, Distribution Requirement, or Asset
Diversification Test, which may have a negative impact on the Fund’s income and
performance.
The
Fund may use “equalization accounting” (in lieu of making some cash
distributions) in determining the portion of its income and gains that has been
distributed. If the Fund uses equalization accounting, it will allocate a
portion of its undistributed investment company taxable income and net capital
gain to redemptions of Fund shares and will correspondingly reduce the amount of
such income and gains that it distributes in cash. If the IRS determines that
the Fund’s allocation is improper and that the Fund has under-distributed its
income and gain for any taxable year, the Fund may be liable for federal income
and/or excise tax. If, as a result of such adjustment, the Fund fails to satisfy
the Distribution Requirement, the Fund will not qualify that year as a regulated
investment company the effect of which is described in the following
paragraph.
If
for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) would be
subject to tax at the applicable corporate income tax rate without any deduction
for dividends paid to shareholders, and the dividends would be taxable to the
shareholders as ordinary income (or possibly as qualified dividend income) to
the extent of the Fund’s current and accumulated earnings and profits. Failure
to qualify as a regulated investment company would thus have a negative impact
on the Fund’s income and performance. Subject to savings provisions for certain
inadvertent failures to satisfy the Income Requirement or Asset Diversification
Test, which, in general, are limited to those due to reasonable cause and not
willful neglect, it is possible that the Fund will not qualify as a regulated
investment company in any given tax year. Even if such savings provisions apply,
the Fund may be subject to a monetary sanction of $50,000 or more. Moreover, the
Board reserves the right not to maintain the qualification of the Fund as a
regulated investment company if it determines such a course of action to be
beneficial to shareholders.
Portfolio
turnover. For
investors that hold their Fund shares in a taxable account, a high portfolio
turnover rate may result in higher taxes. This is because a fund with a high
turnover rate is likely to accelerate the recognition of capital gains and more
of such gains are likely to be taxable as short-term rather than long-term
capital gains in contrast to a comparable fund with a low turnover rate. Any
such higher taxes would reduce the Fund’s after-tax performance. See, “Taxation
of Fund Distributions - Distributions of capital gains” below. For non-U.S.
investors, any such acceleration of the recognition of capital gains that
results in more short-term and less long-term capital gains being recognized by
the Fund may cause such investors to be subject to increased U.S. withholding
taxes. See, “Non-U.S. Investors – Capital gain dividends” and “ –
Interest-related dividends and short-term capital gain dividends”
below.
Capital
loss carryovers.
The capital losses of the Fund, if any, do not flow through to shareholders.
Rather, the Fund may use its capital losses, subject to applicable limitations,
to offset its capital gains without being required to pay taxes on or distribute
to shareholders such gains that are offset by the losses. If the Fund has a “net
capital loss” (that is, capital losses in excess of capital gains), the excess
(if any) 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. Any such net capital losses of the Fund that are not used to offset
capital gains may be carried forward indefinitely to reduce any future capital
gains realized by the Fund in succeeding taxable years.
The
amount of capital losses that can be carried forward and used in any single year
is subject to an annual limitation if there is a more than 50% “change in
ownership” of the Fund. An ownership change generally results when shareholders
owning 5% or more of the Fund increase their aggregate holdings by more than 50%
over a three-year look-back period. An ownership change could result in capital
loss carryovers being used at a slower rate, thereby reducing the Fund’s ability
to offset capital gains with those losses. An increase in the amount of taxable
gains distributed to the Fund’s shareholders could result from an ownership
change. The Fund undertakes no obligation to avoid or prevent an
ownership
change, which can occur in the normal course of shareholder purchases and
redemptions or as a result of engaging in a tax-free reorganization with another
fund. Moreover, because of circumstances beyond the Fund’s control, there can be
no assurance that the Fund will not experience, or has not already experienced,
an ownership change. Additionally, if the Fund engages in a tax-free
reorganization with another fund, the effect of these and other rules not
discussed herein may be to disallow or postpone the use by the Fund of its
capital loss carryovers (including any current year losses and built-in losses
when realized) to offset its own gains or those of the other fund, or vice
versa, thereby reducing the tax benefits Fund shareholders would otherwise have
enjoyed from use of such capital loss carryovers.
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|
| |
Capital
losses: |
| No
expiration |
| Short
Term |
Long
Term |
Large
Cap Core Fund |
$— |
$— |
Emerging
Markets Fund |
$1,011,469 |
$1,211,931 |
Small/Mid
Cap Core Fund |
$— |
$— |
World
ex-US Fund |
$— |
$— |
Core
Fixed Income Fund |
$7,469,566 |
$8,175,892 |
Growth
Allocation Fund |
$— |
$— |
Conservative
Allocation Fund |
$2,134,629 |
$3,957,169 |
Tactical
Allocation Fund |
$— |
$— |
Absolute
Return Allocation Fund |
$11,941,506 |
$15,401,987 |
Multi-Asset
Income Allocation Fund |
$592,569 |
$5,032,413 |
Flexible
Income Allocation Fund |
$45,897,200 |
$12,004,242 |
Managed
Futures Strategy Fund |
$19,719,404 |
$17,522,991 |
Conservative
Income Fund |
$500,902 |
$49,288 |
Income
Fund |
$6,729,296 |
$3,079,135 |
Growth
and Income Fund |
$— |
$1,449,251 |
Deferral
of late year 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 (see, “Taxation of Fund
Distributions - Distributions of capital gains” below). A “qualified late year
loss” includes:
1.any
net capital loss incurred after October 31 of the current taxable year, or, if
there is no such loss, any net long-term capital loss or any net short-term
capital loss incurred after October 31 of the current taxable year
(“post-October capital losses”), and
2.the
sum of (1) the excess, if any, of (a) specified losses incurred after October 31
of the current taxable year, over (b) specified gains incurred after October 31
of the current taxable year and (2) the excess, if any, of (a) ordinary losses
incurred after December 31 of the current taxable year, over (b) the ordinary
income incurred after December 31 of the current taxable year.
The
terms “specified losses” and “specified gains” mean ordinary losses and gains
from the sale, exchange, or other disposition of property (including the
termination of a position with respect to such property), foreign currency
losses and gains, and losses and gains resulting from holding stock in a passive
foreign investment company (“PFIC”) for which a mark-to-market election is in
effect. The terms “ordinary losses” and “ordinary income” mean other ordinary
losses and income that are not described in the preceding sentence.
Undistributed
capital gains.
The Fund may retain or distribute to shareholders its net capital gain for each
taxable year. The Fund currently intends to distribute net capital gains. If the
Fund elects to retain its net capital gain, the Fund will be taxed thereon
(except to the extent of any available capital loss carryovers) at the corporate
income tax rate. If the Fund elects to retain its net capital gain, it is
expected that the Fund also will elect to have shareholders treated as if each
received a distribution of its pro rata share of such gain, with the result that
each shareholder will be required to report its pro rata share of such gain on
its tax return as long-term capital gain, will receive a refundable tax credit
for its
pro
rata share of tax paid by the Fund on the gain, and will increase the tax basis
for its shares by an amount equal to the deemed distribution less the tax
credit.
Fund
of funds.
If the Fund is a fund of funds, distributions by the Underlying Funds,
redemptions of shares in the Underlying Funds and changes in asset allocations
may result in taxable distributions to shareholders of ordinary income or
capital gains. A fund of funds generally will not be able to currently offset
gains realized by one Underlying Fund in which the fund of funds invests against
losses realized by another Underlying Fund. If shares of an Underlying Fund are
purchased within 30 days before or after redeeming at a loss other shares of
that Underlying Fund (whether pursuant to a rebalancing of the Fund’s portfolio
or otherwise), all or a part of the loss will not be deductible by the Fund and
instead will increase its basis for the newly purchased shares. Also, except
with respect to qualified fund of funds discussed below, a fund of funds (a) is
not eligible to pass-through to shareholders foreign tax credits from an
Underlying Fund that pays foreign income taxes (see, “Taxation of Fund
Distributions — Pass-through of foreign tax credits” below), (b) is not eligible
pass-through to shareholders exempt-interest dividends from an Underlying Fund,
and (c) dividends paid by a fund of funds from interest earned by an Underlying
Fund on U.S. government obligations is unlikely to be exempt from state and
local income tax (see, “U.S. government securities” below). However, a fund of
funds is eligible to pass-through to shareholders qualified dividends earned by
an Underlying Fund (see, “Taxation of Fund Distributions — Qualified dividend
income for individuals” and “— Dividends-received deduction for corporations”
below). A qualified fund of funds, i.e. a Fund at least 50 percent of the value
of the total assets of which (at the close of each quarter of the taxable year)
is represented by interests in other RICs, is eligible to pass-through to
shareholders (a) foreign tax credits and (b) exempt-interest dividends.
Federal
excise tax. To
avoid a 4% non-deductible excise tax, the Fund must distribute by December 31 of
each year an amount equal to at least: (1) 98% of its ordinary income for the
calendar year, (2) 98.2% of capital gain net income (that is, the excess of the
gains from sales or exchanges of capital assets over the losses from such sales
or exchanges) for the one-year period ended on October 31 of such calendar year,
and (3) any prior year undistributed ordinary income and capital gain net
income. The Fund may elect to defer to the following year any net ordinary loss
incurred for the portion of the calendar year which is after the beginning of
the Fund’s taxable year. Also, the Fund will defer any “specified gain” or
“specified loss” which would be properly taken into account for the portion of
the calendar year after October 31. Any net ordinary loss, specified gain, or
specified loss deferred shall be treated as arising on January 1 of the
following calendar year. Generally, the Fund intends to make sufficient
distributions prior to the end of each calendar year to avoid any material
liability for federal income and excise tax, but can give no assurances that all
or a portion of such liability will be avoided. In addition, under certain
circumstances, temporary timing or permanent differences in the realization of
income and expense for book and tax purposes can result in the Fund having to
pay an excise tax.
Foreign
income tax.
Investment income received by the Fund from sources within foreign countries may
be subject to foreign income tax withheld at the source and the amount of tax
withheld generally will be treated as an expense of the Fund. The United States
has entered into tax treaties with many foreign countries which entitle the Fund
to a reduced rate of, or exemption from, tax on such income. Some countries
require the filing of a tax reclaim or other forms to receive the benefit of the
reduced tax rate; whether or when the Fund will receive the tax reclaim is
within the control of the individual country. Information required on these
forms may not be available such as shareholder information; therefore, the Fund
may not receive the reduced treaty rates or potential reclaims. Other countries
have conflicting and changing instructions and restrictive timing requirements
which may cause the Fund not to receive the reduced treaty rates or potential
reclaims. Other countries may subject capital gains realized by the Fund on sale
or disposition of securities of that country to taxation. It is impossible to
determine the effective rate of foreign tax in advance since the amount of the
Fund’s assets to be invested in various countries is not known. Under certain
circumstances, the Fund may elect to pass-through foreign taxes paid by the Fund
to shareholders, although it reserves the right not to do so. If the Fund makes
such an election and obtains a refund of foreign taxes paid by the Fund in a
prior year, the Fund may be eligible to reduce the amount of foreign taxes
reported by the Fund to its shareholders, generally by the amount of the foreign
taxes refunded, for the year in which the refund is received.
Investment
in the Subsidiary – Managed Futures Strategy Fund.
The
Managed Futures Strategy Fund may invest in the stock of its own wholly owned
subsidiary (the Subsidiary) to gain exposure to the commodity markets. This
strategy may cause the Fund to realize more ordinary income than would be the
case if the Fund invested directly in commodities. Also, these commodity-linked
investments and the income earned thereon must be taken into account by the Fund
in complying with the Distribution and Income Requirements and the Asset
Diversification Test as described below.
Distribution
requirement. The
Managed Futures Strategy Fund intends to distribute the Subsidiary’s income each
year in satisfaction of the Fund’s Distribution Requirement. The Subsidiary will
be classified for federal income tax purposes as a controlled foreign
corporation (CFC) with respect to the Fund (deemed inclusions). Treasury
Regulations also permit the Fund to treat deemed inclusions as satisfying the
Income Requirement (described below) even if the Subsidiary does not make a
distribution of such income. Consequently, the Fund and the Subsidiary reserve
the right to rely on deemed Inclusions being treated as qualifying income to the
Fund consistent with Treasury Regulations. As such, the Fund will be required to
include in its gross income each year amounts earned by the Subsidiary during
that year (subpart F income), whether or not such earnings are distributed by
the Subsidiary to the Fund. Subpart F income will be distributed by the Fund
(whether such income is received by the Fund as an actual distribution or
included in the Fund’s income as a deemed inclusion), and in turn, to the
shareholders each year as ordinary income, in satisfaction of the Fund’s
Distribution Requirement. Such distribution by the Fund will not be qualified
dividend income eligible for taxation at long-term capital gain rates.
Income
requirement.
As described above, the Managed Futures Strategy Fund must derive at least 90%
of its gross income from qualifying sources to qualify as a regulated investment
company. Gains from the disposition of commodities, including precious metals,
are not considered qualifying income for purposes of satisfying the Income
Requirement. See, “Tax Treatment of Portfolio Transactions — Investments in
commodities — structured notes, corporate subsidiary and certain ETFs.” Also,
the IRS has issued a revenue ruling which holds that income derived from
commodity-linked swaps is not qualifying income under Subchapter M of the Code.
As a result, the Funds’ ability to directly invest in commodity-linked swaps as
part of its investment strategy is limited to a maximum of 10% of its gross
income. The IRS has issued a number of private letter rulings, which indicate
that income from a fund’s investment in certain commodity-linked notes and a
wholly owned foreign subsidiary that invests in commodity-linked derivatives,
such as the Subsidiary, constitutes qualifying income. In September 2016, the
IRS announced that it will no longer issue private letter rulings on questions
relating to the treatment of a corporation as a regulated investment company
that require a determination of whether a financial instrument or position is a
security under section 2(a)(36) of the 1940 Act. A financial instrument or
position that constitutes a security under section 2(a)(36) of the 1940 Act
generates qualifying income for a corporation taxed as a regulated investment
company. This caused the IRS to revoke the portion of any rulings that required
such a determination, some of which were revoked retroactively and other of
which were revoked prospectively as of a date agreed upon with the IRS. Treasury
regulations treat “Subpart F” income (defined in Section 951 of the Code to
include passive income such as income from commodity-linked derivatives) as
satisfying the Income Requirement, even if a foreign corporation, such as a
Subsidiary, does not make a distribution of such income. If a distribution is
made, such income will be treated as a dividend by the Fund to the extent that,
under applicable provisions of the Code, there is a distribution out of the
earnings and profits of the foreign corporation attributable to the
distribution.
Accordingly,
the extent to which a Fund directly invests in commodities or commodity-linked
derivatives may be limited by the Income Requirement, which the Fund must
continue to satisfy to maintain its status as a RIC. The tax treatment of the
Fund and its shareholders in the event the Fund fails to qualify as a RIC is
described above under “Taxation of the Fund – Qualification as a regulated
investment company.”
Asset
diversification test. For
purposes of the Asset Diversification Test, the Managed Futures Strategy Fund’s
investment in the Subsidiary would be considered a security of one issuer.
Accordingly, the Fund intends to limit its investment in the Subsidiary to no
more than 25% of the value of the Fund’s total assets in order to satisfy the
Asset Diversification Test.
Taxation
of the Subsidiary. On
the basis of current law and practice, the Subsidiary will not be liable for
income tax in the Cayman Islands. Distributions by the Subsidiary to the Managed
Futures Strategy Fund will not be subject to withholding tax in the Cayman
Islands. In addition, the Subsidiary’s investment in commodity-linked
derivatives and other assets held as collateral are anticipated to qualify for a
safe harbor under Code Section 864(b) so that the Subsidiary will not be treated
as conducting a U.S. trade or business. Thus, the Subsidiary should not be
subject to U.S. federal income tax on a net basis. However, if certain of the
Subsidiary’s activities were determined not to be of the type described in the
safe harbor (which is not expected), then the activities of the Subsidiary may
constitute a U.S. trade or business, or be taxed as such.
In
general, a foreign corporation, such as the Subsidiary, that does not conduct a
U.S. trade or business is nonetheless subject to tax at a flat rate of 30
percent (or lower tax treaty rate), generally payable through withholding, on
the gross amount of certain U.S.-source income that is not effectively connected
with a U.S. trade or business, subject to certain exemptions, including among
others, exemptions for capital gains, portfolio interest and income from
notional principal contracts. It is not anticipated that the Subsidiary will be
subject to material amounts of U.S. withholding tax on its portfolio
investments. The Subsidiary intends to properly certify its status as a non-U.S.
person to each custodian and withholding agent to avoid U.S. backup withholding
requirements discussed below.
Taxation
of Fund Distributions.
The
Fund anticipates distributing substantially all of its investment company
taxable income and net capital gain for each taxable year. Distributions by the
Fund will be treated in the manner described below regardless of whether such
distributions are paid in cash or reinvested in additional shares of the Fund
(or of another fund). The Fund will send you information annually as to the
federal income tax consequences of distributions made (or deemed made) during
the year.
Distributions
of net investment income.
The Fund receives ordinary income generally in the form of dividends and/or
interest on its investments. The Fund may also recognize ordinary income from
other sources, including, but not limited to, certain gains on foreign
currency-related transactions. This income, less expenses incurred in the
operation of the Fund, constitutes the Fund’s net investment income from which
dividends may be paid to you. If you are a taxable investor, distributions of
net investment income generally are taxable as ordinary income to the extent of
the Fund’s earnings and profits. In the case of a Fund whose strategy includes
investing in stocks of corporations, a portion of the income dividends paid to
you may be qualified dividends eligible to be taxed at reduced rates. See the
discussion below under the headings, “Qualified dividend income for individuals”
and “Dividends-received deduction for corporations.”
Distributions
of capital gains. The
Fund may derive capital gain and loss in connection with sales or other
dispositions of its portfolio securities. Distributions derived from the excess
of net short-term capital gain over net long-term capital loss will be taxable
to you as ordinary income. Distributions paid from the excess of net long-term
capital gain over net short-term capital loss will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
Fund. Any net short-term or long-term capital gain realized by the Fund (net of
any capital loss carryovers) generally will be distributed once each year and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the Fund.
Returns
of capital. Distributions
by the Fund that are not paid from earnings and profits will be treated as a
return of capital to the extent of (and in reduction of) the shareholder's tax
basis in his shares; any excess will be treated as gain from the sale of his
shares. Thus, the portion of a distribution that constitutes a return of capital
will decrease the shareholder’s tax basis in his Fund shares (but not below
zero), and will result in an increase in the amount of gain (or decrease in the
amount of loss) that will be recognized by the shareholder for tax purposes on
the later sale of such Fund shares. Return of capital distributions can occur
for a number of reasons including, among others, the Fund over-estimates the
income to be received from certain investments such as those classified as
partnerships or equity REITs (see, “Tax Treatment of Portfolio Transactions
—Investments in U.S. REITs” below).
Qualified
dividend income for individuals. Ordinary
income dividends reported by the Fund to shareholders as derived from qualified
dividend income will be taxed in the hands of individuals and other noncorporate
shareholders at the rates applicable to long-term capital gain. “Qualified
dividend income” means dividends paid to the Fund (a) by domestic corporations,
(b) by foreign corporations that are either (i) incorporated in a possession of
the United States, or (ii) are eligible for benefits under certain income tax
treaties with the United States that include an exchange of information program,
or (c) with respect to stock of a foreign corporation that is readily tradable
on an established securities market in the United States. Both the Fund and the
investor must meet certain holding period requirements to qualify Fund dividends
for this treatment. Specifically, the Fund must hold the stock for at least 61
days during the 121-day period beginning 60 days before the stock becomes
ex-dividend. Similarly, investors must hold their Fund shares for at least 61
days during the 121-day period beginning 60 days before the Fund distribution
goes ex-dividend. Income derived from investments in derivatives, fixed income
securities, U.S. REITs, PFICs, and income received “in lieu of” dividends in a
securities lending transaction generally is not eligible for treatment as
qualified dividend income. If the qualifying dividend income received by the
Fund is equal to or greater than 95% of the Fund’s gross income (exclusive of
net capital gain) in any taxable year, all of the ordinary income dividends paid
by the Fund will be qualifying dividend income.
Dividends-received
deduction for corporations.
For corporate shareholders, a portion of the dividends paid by the Fund may
qualify for the 50% corporate dividends-received deduction. The portion of
dividends paid by the Fund that so qualifies will be reported by the Fund to
shareholders each year and cannot exceed the gross amount of dividends received
by the Fund from domestic (U.S.) corporations. The availability of the
dividends-received deduction is subject to certain holding period and debt
financing restrictions that apply to both the Fund and the investor.
Specifically, the amount that the Fund may report as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends earned by the Fund were debt-financed or held by the Fund
for less than a minimum period of time, generally 46 days during a 91-day period
beginning 45 days before the stock becomes ex-dividend. Similarly, if your Fund
shares are debt-financed or held by you for less than a 46-day period then the
dividends-received deduction for Fund dividends on your shares may also be
reduced or eliminated. Income derived by the Fund from investments in
derivatives, fixed income and foreign securities generally is not eligible for
this treatment.
Qualified
REIT dividends.
Under the TCJA, “qualified REIT dividends” (i.e., ordinary REIT dividends other
than capital gain dividends and portions of REIT dividends designated as
qualified dividend income) are treated as eligible for a 20% deduction by
noncorporate 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). A Fund may choose to report the special character of “qualified REIT
dividends” to its shareholders, provided both the Fund and the shareholder meet
certain holding period requirements. The amount of a RIC’s dividends eligible
for the 20% deduction for a taxable year is limited to the excess of the RIC’s
qualified REIT dividends for the taxable year over allocable expenses. A
noncorporate shareholder receiving such dividends would treat them as eligible
for the 20% deduction, provided the shareholder meets certain holding period
requirements for its shares in the RIC (i.e., generally, RIC shares must be held
by the shareholder for more than 45 days during the 91-day period beginning on
the date that is 45 days before the date on which the shares become ex-dividend
with respect to such dividend).
Impact
of realized but undistributed income and gains, and net unrealized appreciation
of portfolio securities.
At the time of your purchase of shares, the Fund’s net asset value may reflect
undistributed income, undistributed capital gains, or net unrealized
appreciation of portfolio securities held by the Fund. A subsequent distribution
to you of such amounts, although constituting a return of your investment, would
be taxable, and would be taxed as ordinary income (some portion of which may be
taxed as qualified dividend income), capital gains, or some combination of both,
unless you are investing through a tax-advantaged arrangement, such as a 401(k)
plan or an individual retirement account. The Fund may be able to reduce the
amount of such distributions from capital gains by utilizing its capital loss
carryovers, if any.
Pass-through
of foreign tax credits.
If more than 50% of the value of the Fund’s total assets at the end of a fiscal
year is invested in foreign securities (or if the Fund is a qualified fund of
funds (i.e. a fund at least 50 percent of the value of the total assets) of
which, at the close of each quarter of the taxable year, is represented by
interests in other RICs), the Fund may elect to pass through to you your pro
rata share of foreign taxes paid by the Fund. If this election is made, the Fund
may report more taxable income to you than it actually distributes. You will
then be entitled either to deduct your share of these taxes in computing your
taxable income, or to claim a foreign tax credit for these taxes against your
U.S. federal income tax (subject to limitations for certain shareholders). The
Fund will provide you with the information necessary to claim this deduction or
credit on your personal income tax return if it makes this election. No
deduction for foreign tax may be claimed by a noncorporate shareholder who does
not itemize deductions or who is subject to the alternative minimum tax.
Shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income tax paid by the Fund due to certain
limitations that may apply. The Fund reserves the right not to pass through to
its shareholders the amount of foreign income taxes paid by the Fund.
Additionally, any foreign tax withheld on payments made “in lieu of” dividends
or interest will not qualify for the pass-through of foreign tax credits to
shareholders. See, “Tax Treatment of Portfolio Transactions – Securities
lending” below.
Tax
credit bonds. If
the Fund holds, directly or indirectly, one or more “tax credit bonds”
(including build America bonds, clean renewable energy bonds and qualified tax
credit bonds) on one or more applicable dates during a taxable year, the Fund
may elect to permit its shareholders to claim a tax credit on their income tax
returns equal to each shareholder’s proportionate share of tax credits from the
applicable bonds that otherwise would be allowed to the Fund. In such a case,
shareholders must include in gross income (as interest) their proportionate
share of the income attributable to their proportionate share of those
offsetting tax credits. A shareholder’s ability to claim a tax credit associated
with one or more tax credit bonds may be subject to certain limitations imposed
by the Code. (Under the TCJA, build America bonds, clean renewable energy bonds
and certain other qualified bonds may no longer be issued
after
December 31, 2017.) Even if the Fund is eligible to pass through tax credits to
shareholders, the Fund may choose not to do so.
U.S.
government securities. Income
earned on certain U.S. government obligations is exempt from state and local
personal income taxes if earned directly by you. States also grant tax-free
status to dividends paid to you from interest earned on direct obligations of
the U.S. government, subject in some states to minimum investment or reporting
requirements that must be met by the Fund. Income on investments by the Fund in
certain other obligations, such as repurchase agreements collateralized by U.S.
government obligations, commercial paper and federal agency-backed obligations
(e.g., GNMA or FNMA obligations), generally does not qualify for tax-free
treatment. The rules on exclusion of this income are different for corporations.
If the Fund is a fund of funds, see, “Taxation of the Fund — Fund of funds”
above.
Dividends
declared in December and paid in January.
Ordinarily, shareholders are required to take distributions by the Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year
in accordance with the guidance that has been provided by the IRS.
Medicare
tax.
A 3.8% Medicare tax is imposed on net investment income earned by certain
individuals, estates and trusts. “Net investment income,” for these purposes,
means investment income, including ordinary dividends and capital gain
distributions received from the Fund and net gains from redemptions or other
taxable dispositions of Fund shares, reduced by the deductions properly
allocable to such income. In the case of an individual, the tax will be imposed
on the lesser of (1) the shareholder’s net investment income or (2) the amount
by which the shareholder’s modified adjusted gross income exceeds $250,000 (if
the shareholder is married and filing jointly or a surviving spouse), $125,000
(if the shareholder is married and filing separately) or $200,000 (in any other
case). Net investment income does not include exempt-interest dividends. This
Medicare tax, if applicable, is reported by you on, and paid with, your federal
income tax return.
Sales,
Exchanges and Redemptions of Fund Shares.
Sales,
exchanges and redemptions (including redemptions in kind) of Fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your Fund shares, the IRS requires you to report any gain or loss on your
redemption. If you held your shares as a capital asset, the gain or loss that
you realize will be a capital gain or loss and will be long-term or short-term,
generally depending on how long you have held your shares. Any redemption fees
you incur on shares redeemed will decrease the amount of any capital gain (or
increase any capital loss) you realize on the sale. Capital losses in any year
are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
Tax
basis information.
Your broker-dealer or other financial intermediary (such as a bank or financial
advisor) (collectively, “broker-dealers”) is required to report to you and the
IRS annually on Form 1099-B the cost basis of shares purchased or acquired on or
after January 1, 2012 where the cost basis of the shares is known (referred to
as “covered shares”) and which are disposed of after that date. However, cost
basis reporting is not required for certain shareholders, including shareholders
investing in the Fund through a tax-advantaged retirement account, such as a
401(k) plan or an individual retirement account. Your broker-dealer will compute
and report the cost basis of your Fund shares sold or exchanged by taking into
account all of the applicable adjustments to cost basis and holding periods as
required by the Code and Treasury regulations for purposes of reporting these
amounts to you and the IRS. However your broker-dealer is not required to, and
in many cases, does not possess the information to take all possible basis,
holding period or other adjustments into account in reporting cost basis
information to you. Therefore, shareholders should carefully review the cost
basis information provided by the broker-dealer and make any additional basis,
holding period or other adjustments that are required when reporting these
amounts on their federal income tax returns. Please contact your broker-dealer
with respect to reporting of cost basis and available elections for your
account.
Wash
sales.
All or a portion of any loss that you realize on a redemption of your Fund
shares will be disallowed to the extent that you buy other shares in the Fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares.
Redemptions
at a loss within six months of purchase.
Any loss incurred on a redemption or exchange of shares held for six months or
less will be treated as long-term capital loss to the extent of any long-term
capital gain distributed to you by the Fund on those shares. Any loss incurred
on the redemption or exchange of shares held for six months or less will be
disallowed to the extent of any exempt-interest dividends paid to you with
respect to your Fund shares, and any remaining loss will be treated as a
long-term capital loss to the extent of any long-term capital gain distributed
to you by the Fund on those shares. However, this rule does not apply to any
loss incurred on a redemption or exchange of shares of a tax-free money market
fund or other fund that declares exempt-interest dividends daily and distributes
them at least monthly for which your holding period began after December 22,
2010.
Reportable
transactions. 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 (or certain greater amounts over a
combination of years), the shareholder must file with the IRS a disclosure
statement on Form 8886. The fact that a loss is reportable under these
regulations does not affect the legal determination of whether the taxpayer’s
treatment of the loss is proper. Shareholders should consult their tax advisors
to determine the applicability of these regulations in light of their individual
circumstances.
Tax
Treatment of Portfolio Transactions.
Set forth below is a general description of the tax treatment of certain types
of securities, investment techniques and transactions that may apply to a fund
and, in turn, affect the amount, character and timing of dividends and
distributions payable by the fund to its shareholders. This section should be
read in conjunction with the discussion above under “Investment Policies and
Associated Risks” for a detailed description of the various types of securities
and investment techniques that apply to the Fund.
In
general.
In general, gain or loss recognized by a fund on the sale or other disposition
of portfolio investments will be a capital gain or loss. Such capital gain and
loss may be long-term or short-term depending, in general, upon the length of
time a particular investment position is maintained and, in some cases, upon the
nature of the transaction. Property held for more than one year generally will
be eligible for long-term capital gain or loss treatment. The application of
certain rules described below may serve to alter the manner in which the holding
period for a security is determined or may otherwise affect the characterization
as long-term or short-term, and also the timing of the realization and/or
character, of certain gains or losses.
Certain
fixed-income investments.
Gain recognized on the disposition of a debt obligation purchased by a fund at a
market discount (generally, at a price less than its principal amount) will be
treated as ordinary income to the extent of the portion of the market discount
which accrued during the period of time the fund held the debt obligation unless
the fund made a current inclusion election to accrue market discount into income
as it accrues. If a fund purchases a debt obligation (such as a zero coupon
security or pay-in-kind security) that was originally issued at a discount, the
fund generally is required to include in gross income each year the portion of
the original issue discount which accrues during such year. Therefore, a fund’s
investment in such securities may cause the fund to recognize income and make
distributions to shareholders before it receives any cash payments on the
securities. To generate cash to satisfy those distribution requirements, a fund
may have to sell portfolio securities that it otherwise might have continued to
hold or to use cash flows from other sources such as the sale of fund
shares.
Investments
in debt obligations that are at risk of or in default present tax issues for a
fund.
Tax rules are not entirely clear about issues such as whether and to what extent
a fund should recognize market discount on a debt obligation, when a fund may
cease to accrue interest, original issue discount or market discount, when and
to what extent a fund may take deductions for bad debts or worthless securities
and how a fund should allocate payments received on obligations in default
between principal and income. These and other related issues will be addressed
by a fund in order to ensure that it distributes sufficient income to preserve
its status as a regulated investment company.
Options,
futures, forward contracts, swap agreements and hedging transactions.
In general, option premiums received by a fund are not immediately included in
the income of the fund. Instead, the premiums are recognized when the option
contract expires, the option is exercised by the holder, or the fund transfers
or otherwise terminates the option (e.g., through a closing transaction). If an
option written by a fund is exercised and the fund sells or delivers the
underlying stock, the fund generally will recognize capital gain or loss equal
to (a) the sum of the strike price and the option premium received by the fund
minus (b) the fund’s basis in the stock. Such gain or loss generally will be
short-term or long-term depending upon the holding period of the underlying
stock. If securities are purchased by a fund pursuant to the exercise of a put
option written by it, the fund generally will subtract the premium received from
its cost
basis
in the securities purchased. The gain or loss with respect to any termination of
a fund’s obligation under an option other than through the exercise of the
option and related sale or delivery of the underlying stock generally will be
short-term gain or loss depending on whether the premium income received by the
fund is greater or less than the amount paid by the fund (if any) in terminating
the transaction. Thus, for example, if an option written by a fund expires
unexercised, the fund generally will recognize short-term gain equal to the
premium received.
The
tax treatment of certain futures contracts entered into by a fund as well as
listed non-equity options written or purchased by the fund on U.S. exchanges
(including options on futures contracts, broad-based equity indices and debt
securities) may be governed by section 1256 of the Code (“section 1256
contracts”). Gains or losses on section 1256 contracts generally are considered
60% long-term and 40% short-term capital gains or losses (“60/40”), although
certain foreign currency gains and losses from such contracts may be treated as
ordinary in character. Also, any section 1256 contracts held by a fund at the
end of each taxable year (and, for purposes of the 4% excise tax, on certain
other dates as prescribed under the Code) are “marked to market” with the result
that unrealized gains or losses are treated as though they were realized and the
resulting gain or loss is treated as ordinary or 60/40 gain or loss, as
applicable. Section 1256 contracts do not include any interest rate swap,
currency swap, basis swap, interest rate cap, interest rate floor, commodity
swap, equity swap, equity index swap, credit default swap, or similar
agreement.
In
addition to the special rules described above in respect of options and futures
transactions, a fund’s transactions in other derivative instruments (including
options, forward contracts and swap agreements) as well as its other hedging,
short sale, or similar transactions, may be subject to one or more special tax
rules (including the constructive sale, notional principal contract, straddle,
wash sale and short sale rules). These rules may affect whether gains and losses
recognized by a fund are treated as ordinary or capital or as short-term or
long-term, accelerate the recognition of income or gains to the fund, defer
losses to the fund, and cause adjustments in the holding periods of the fund’s
securities. These rules, therefore, could affect the amount, timing and/or
character of distributions to shareholders. Moreover, because the tax rules
applicable to derivative instruments are in some cases uncertain under current
law, an adverse determination or future guidance by the IRS with respect to
these rules (which determination or guidance could be retroactive) may affect
whether a fund has made sufficient distributions, and otherwise satisfied the
relevant requirements, to maintain its qualification as a regulated investment
company and avoid a fund-level tax.
Certain
of a fund’s investments in derivatives and foreign currency-denominated
instruments, and the fund’s transactions in foreign currencies and hedging
activities, may produce a difference between its book income and its taxable
income. If a fund’s book income is less than the sum of its taxable income and
net tax-exempt income (if any), the fund could be required to make distributions
exceeding book income to qualify as a regulated investment company. If a fund’s
book income exceeds the sum of its taxable income and net tax-exempt income (if
any), the distribution of any such excess will be treated as (i) a dividend to
the extent of the fund’s remaining earnings and profits (including current
earnings and profits arising from tax-exempt income, reduced by related
deductions), (ii) thereafter, as a return of capital to the extent of the
recipient’s basis in the shares, and (iii) thereafter, as gain from the sale or
exchange of a capital asset.
Foreign
currency transactions.
A fund’s transactions in foreign currencies, foreign currency-denominated debt
obligations and certain foreign currency options, futures contracts and forward
contracts (and similar instruments) may give rise to ordinary income or loss to
the extent such income or loss results from fluctuations in the value of the
foreign currency concerned. This treatment could increase or decrease a fund’s
ordinary income distributions to you, and may cause some or all of the fund’s
previously distributed income to be classified as a return of capital. In
certain cases, a fund may make an election to treat such gain or loss as
capital.
PFIC
investments.
A fund may invest in securities of foreign companies that may be classified
under the Code as PFICs. In general, a foreign company is classified as a PFIC
if at least one-half of its assets constitute investment- type assets or 75% or
more of its gross income is investment-type income. When investing in PFIC
securities, a fund intends to mark-to-market these securities under certain
provisions of the Code and recognize any unrealized gains as ordinary income at
the end of the fund’s fiscal and excise tax years. Deductions for losses are
allowable only to the extent of any current or previously recognized gains.
These gains (reduced by allowable losses) are treated as ordinary income that a
fund is required to distribute, even though it has not sold or received
dividends from these securities. You should also be aware that the designation
of a foreign security as a PFIC security will cause its income dividends to fall
outside of the definition of qualified foreign corporation dividends. These
dividends generally will not qualify for the reduced rate of taxation on
qualified dividends when distributed to you by a fund. Foreign companies are not
required to identify
themselves
as PFICs. Due to various complexities in identifying PFICs, a fund can give no
assurances that it will be able to identify portfolio securities in foreign
corporations that are PFICs in time for the fund to make a mark-to-market
election. If a fund is unable to identify an investment as a PFIC and thus does
not make a mark-to-market election, the fund may be subject to U.S. federal
income tax on a portion of any “excess distribution” or gain from the
disposition of such shares even if such income is distributed as a taxable
dividend by the fund to its shareholders. Additional charges in the nature of
interest may be imposed on a fund in respect of deferred taxes arising from such
distributions or gains.
Investments
in U.S. REITs. A
U.S. REIT is not subject to federal income tax on the income and gains it
distributes to shareholders. Dividends paid by a U.S. REIT, other than capital
gain distributions, will be taxable as ordinary income up to the amount of the
U.S. REIT’s current and accumulated earnings and profits. Capital gain dividends
paid by a U.S. REIT to a 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. Because of certain noncash expenses, such as property
depreciation, an equity U.S. REIT’s cash flow may exceed its taxable income. The
equity U.S. REIT, and in turn a fund, may distribute this excess cash to
shareholders in the form of a return of capital distribution. However, if a U.S.
REIT is operated in a manner that fails to qualify as a REIT, an investment in
the U.S. REIT would become subject to double taxation, meaning the taxable
income of the U.S. REIT would be subject to federal income tax at the corporate
income tax 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 U.S. REIT’s current and
accumulated earnings and profits. Also, see, “Tax Treatment of Portfolio
Transactions — Investment in taxable mortgage pools (excess inclusion income)”
and “Non-U.S. Investors — Investment in U.S. real property” below with respect
to certain other tax aspects of investing in U.S. REITs.
Investment
in non-U.S. REITs.
While non-U.S. REITs often use complex acquisition structures that seek to
minimize taxation in the source country, an investment by a fund in a non-U.S.
REIT may subject the fund, directly or indirectly, to corporate taxes,
withholding taxes, transfer taxes and other indirect taxes in the country in
which the real estate acquired by the non-U.S. REIT is located. A fund’s pro
rata share of any such taxes will reduce the fund’s return on its investment. A
fund’s investment in a non-U.S. REIT may be considered an investment in a PFIC,
as discussed above in “PFIC investments.” Additionally, foreign withholding
taxes on distributions from the non-U.S. REIT may be reduced or eliminated under
certain tax treaties, as discussed above in “Taxation of the Fund — Foreign
income tax.” Also, a fund in certain limited circumstances may be required to
file an income tax return in the source country and pay tax on any gain realized
from its investment in the non-U.S. REIT under rules similar to those in the
United States which tax foreign persons on gain realized from dispositions of
interests in U.S. real estate.
Investment
in taxable mortgage pools (excess inclusion income). Under
a Notice issued by the IRS, the Code and Treasury regulations to be issued, a
portion of a fund’s income from a U.S. REIT that is attributable to the REIT’s
residual interest in a real estate mortgage investment conduit (“REMIC”) or
equity interests in a “taxable mortgage pool” (referred to in the Code as an
excess inclusion) will be subject to federal income tax in all events. The
excess inclusion income of a regulated investment company, such as a fund, will
be allocated to shareholders of the regulated investment company in proportion
to the dividends received by such shareholders, with the same consequences as if
the shareholders held the related REMIC residual interest or, if applicable,
taxable mortgage pool directly. In general, excess inclusion income allocated to
shareholders (i) cannot be offset by net operating losses (subject to a limited
exception for certain thrift institutions), (ii) will constitute unrelated
business taxable income (“UBTI”) to entities (including qualified pension plans,
individual retirement accounts, 401(k) plans, Keogh plans or other tax-exempt
entities) subject to tax on UBTI, thereby potentially requiring such an entity
that is allocated excess inclusion income, and otherwise might not be required
to file a tax return, to file a tax return and pay tax on such income, and (iii)
in the case of a foreign stockholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any taxable year a
“disqualified organization” (which generally includes certain cooperatives,
governmental entities, and tax-exempt organizations not subject to UBTI) is a
record holder of a share in a regulated investment company, then the regulated
investment company will be subject to a tax equal to that portion of its excess
inclusion income for the taxable year that is allocable to the disqualified
organization, multiplied by the applicable corporate income tax rate. The Notice
imposes certain reporting requirements upon regulated investment companies that
have excess inclusion income. There can be no assurance that a fund will not
allocate to shareholders excess inclusion income.
These
rules are potentially applicable to a fund with respect to any income it
receives from the equity interests of certain mortgage pooling vehicles, either
directly or, as is more likely, through an investment in a U.S. REIT. It is
unlikely that these rules will apply to a fund that has a non-REIT
strategy.
Investments
in partnerships and QPTPs.
For purposes of the Income Requirement, income derived by a fund from a
partnership that is not
a QPTP 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. While the rules are not entirely clear
with respect to a fund investing in a partnership outside a master-feeder
structure, for purposes of testing whether a fund satisfies the Asset
Diversification Test, the fund generally is treated as owning a pro rata share
of the underlying assets of a partnership. See, “Taxation of the Fund.” In
contrast, different rules apply to a partnership that is a QPTP. A QPTP is a
partnership (a) the interests in which are traded on an established securities
market, (b) that is treated as a partnership for federal income tax purposes,
and (c) that derives less than 90% of its income from sources that satisfy the
Income Requirement (e.g., because it invests in commodities). All of the net
income derived by a fund from an interest in a QPTP will be treated as
qualifying income but the fund may not invest more than 25% of its total assets
in one or more QPTPs. However, there can be no assurance that a partnership
classified as a QPTP in one year will qualify as a QPTP in the next year. Any
such failure to annually qualify as a QPTP might, in turn, cause a fund to fail
to qualify as a regulated investment company. Although, in general, the passive
loss rules of the Code do not apply to RICs, such rules do apply to a fund with
respect to items attributable to an interest in a QPTP. Fund investments in
partnerships, including in QPTPs, may result in the fund being subject to state,
local or foreign income, franchise or withholding tax liabilities.
To
the extent an MLP is treated as a partnership for U.S. federal income tax
purposes (whether or not a QPTP), all or a portion of the dividends received by
a fund with respect to an investment in MLPs likely will be treated as a return
of capital for U.S. federal income tax purposes because of accelerated
deductions available with respect to the activities of such MLPs. Further,
because of these accelerated deductions, on the disposition of interests in such
an MLP, a fund will likely realize taxable income in excess of economic gain
with respect to those MLP interests (or if the fund does not dispose of the MLP,
the fund will likely realize taxable income in excess of cash flow with respect
to the MLP in a later period), and the fund must take such income into account
in determining whether the fund has satisfied its Distribution Requirement. A
fund may have to borrow or liquidate securities to satisfy its Distribution
Requirement and to meet its redemption requests, even though investment
considerations might otherwise make it undesirable for the fund to sell
securities or borrow money at such time. In addition, any gain recognized,
either upon the sale of a fund’s MLP interest or sale by the MLP of property
held by it, including in excess of economic gain thereon, treated as so-called
“recapture income,” will be treated as ordinary income. Therefore, to the extent
a fund invests in MLPs, fund shareholders might receive greater amounts of
distributions from the fund taxable as ordinary income than they otherwise would
in the absence of such MLP investments.
Although
MLPs are generally expected to be treated as partnerships for U.S. federal
income tax purposes, some MLPs may be treated as PFICs, controlled foreign
corporations (“CFCs”), or “regular” corporations for U.S. federal income tax
purposes. The treatment of particular MLPs for U.S. federal income tax purposes
will affect the extent to which a fund can invest in MLPs and will impact the
amount, character, and timing of income recognized by the Fund. The U.S. federal
income tax consequences of a fund’s investments in PFICs are discussed
above.
Investments
in commodities —structured notes, corporate subsidiary and certain
ETFs.
Gains from the disposition of commodities, including precious metals, will
neither be considered to generate qualifying income for purposes of satisfying
the Income Requirement nor be considered qualifying assets for purposes of
satisfying the Asset Diversification Test. See “Taxation of the Fund.” The IRS
has issued a revenue ruling which holds that income derived from
commodity-linked swaps is not qualifying income for purposes of the Income
Requirement. In a subsequent revenue ruling, as well as in a number of follow-on
private letter rulings (upon which only the fund that received the private
letter ruling may rely), the IRS provided that income from certain alternative
investments which create commodity exposure, such as certain commodity
index-linked or structured notes or a corporate subsidiary (such as the
Subsidiary) that invests in commodities, may be considered qualifying income
under the Code. In September 2016, the IRS announced that it will no longer
issue private letter rulings on questions relating to the treatment of a
corporation as a RIC that require a determination of whether a financial
instrument or position, such as a commodity-linked or structure note, is a
security under section 2(a)(36) of the 1940 Act. A financial instrument or
position that constitutes a security under section 2(a)(36) of the 1940 Act
generates qualifying income for a corporation taxed as a regulated investment
company. This caused the IRS to revoke the portion of any rulings that required
such a determination, some
of
which were revoked retroactively and others of which were revoked prospectively
as of a date agreed upon with the IRS. In addition, a RIC may gain exposure to
commodities through investment in a QPTP, such as an exchange-traded fund or ETF
that is classified as a partnership or trust and which invests in commodities,
or through investment in a wholly-owned subsidiary that is treated as a
controlled foreign corporation for federal income tax purposes. Treasury
regulations treat “Subpart F” income (defined in Section 951 of the Code to
include passive income such as income from commodity-linked derivatives) as
satisfying the Income Requirement, even if a foreign corporation, such as a
Subsidiary, does not make a distribution of such income. Consequently, the Fund
and the Subsidiary reserve the right to rely on deemed inclusions of the
“Subpart F” income being treated as qualifying income to the Fund consistent
with Treasury Regulations. If a distribution is made, such income will be
treated as a dividend by the Fund to the extent that, under applicable
provisions of the Code, there is a distribution out of the earnings and profits
of the foreign corporation attributable to the distribution. Accordingly, the
extent to which a fund invests in commodities or commodity-linked derivatives
may be limited by the Income Requirement and the Asset Diversification Test,
which the fund must continue to satisfy to maintain its status as a RIC. A fund
also may be limited in its ability to sell its investments in commodities,
commodity-linked derivatives, and certain ETFs or be forced to sell other
investments to generate income due to the Income Requirement. If a fund does not
appropriately limit such investments or if such investments (or the income
earned on such investments) were to be recharacterized for U.S. tax purposes,
the fund could fail to qualify as a RIC and thus be subject to tax on its
taxable income at the corporate income tax rate, and all distributions from
earnings and profits, including any distributions of net long-term capital
gains, would be taxable to shareholders as dividend income. In lieu of potential
disqualification, a fund is permitted to pay a tax for certain failures to
satisfy the Asset Diversification Test or Income Requirement, which, in general,
are limited to those due to reasonable cause and not willful neglect. Also see
“Investment in the Subsidiary – Managed Futures Strategy Fund”.
Securities
lending.
While securities are loaned out by a fund, the fund generally will receive from
the borrower amounts equal to any dividends or interest paid on the borrowed
securities. For federal income tax purposes, payments made “in lieu of”
dividends are not considered dividend income. These distributions will neither
qualify for the reduced rate of taxation for individuals on qualified dividends
nor the 50% dividends-received deduction for corporations. Also, any foreign tax
withheld on payments made “in lieu of” dividends or interest will not qualify
for the pass-through of foreign tax credits to shareholders. Additionally, in
the case of a fund with a strategy of investing in tax-exempt securities, any
payments made “in lieu of” tax-exempt interest will be considered taxable income
to the fund, and thus, to the investors, even though such interest may be
tax-exempt when paid to the borrower.
Investments
in convertible securities.
Convertible debt is ordinarily treated as a “single property” consisting of a
pure debt interest until conversion, after which the investment becomes an
equity interest. If the security is issued at a premium (i.e., for cash in
excess of the face amount payable on retirement), the creditor-holder may
amortize the premium over the life of the bond. If the security is issued for
cash at a price below its face amount, the creditor- holder must accrue original
issue discount in income over the life of the debt. The creditor-holder's
exercise of the conversion privilege is treated as a nontaxable event.
Mandatorily convertible debt (e.g., an exchange traded note or ETN issued in the
form of an unsecured obligation that pays a return based on the performance of a
specified market index, exchange currency, or commodity) is often, but not
always, treated as a contract to buy or sell the reference property rather than
debt. Similarly, convertible preferred stock with a mandatory conversion feature
is ordinarily, but not always, treated as equity rather than debt. Dividends
received generally are qualified dividend income and eligible for the corporate
dividends-received deduction. In general, conversion of preferred stock for
common stock of the same corporation is tax-free. Conversion of preferred stock
for cash is a taxable redemption. Any redemption premium for preferred stock
that is redeemable by the issuing company might be required to be amortized
under original issue discount principles.
Investments
in securities of uncertain tax character. A
fund may invest in securities the U.S. federal income tax treatment of which may
not be clear or may be subject to recharacterization by the IRS. To the extent
the tax treatment of such securities or the income from such securities differs
from the tax treatment expected by a fund, it could affect the timing or
character of income recognized by the fund, requiring the fund to purchase or
sell securities, or otherwise change its portfolio, in order to comply with the
tax rules applicable to regulated investment companies under the
Code.
Backup
Withholding.
By law, the Fund may be required to withhold a portion of your taxable dividends
and sales proceeds unless you:
i.provide
your correct social security or taxpayer identification number,
ii.certify
that this number is correct,
iii.certify
that you are not subject to backup withholding, and
iv.certify
that you are a U.S. person (including a U.S. resident alien).
The
Fund also must withhold if the IRS instructs it to do so. When withholding is
required, the amount will be 24% of any distributions or proceeds paid. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder’s U.S. federal income tax liability, provided the
appropriate information is furnished to the IRS. Certain payees and payments are
exempt from backup withholding and information reporting. The special U.S. tax
certification requirements applicable to non-U.S. investors to avoid backup
withholding are described under the “Non-U.S. Investors” heading
below.
Non-U.S.
Investors.
Non-U.S. investors (shareholders who, as to the United States, are nonresident
alien individuals, foreign trusts or estates, foreign corporations, or foreign
partnerships) may be subject to U.S. withholding and estate tax and are subject
to special U.S. tax certification requirements. Non-U.S. investors should
consult their tax advisors about the applicability of U.S. tax withholding and
the use of the appropriate forms to certify their status.
In
general.
The United States imposes a flat 30% withholding tax (or a withholding tax at a
lower treaty rate) on U.S. source dividends, including on income dividends paid
to you by the Fund, subject to certain exemptions described below. However,
notwithstanding such exemptions from U.S. withholding at the source, any
dividends and distributions of income and capital gains, including the proceeds
from the sale of your Fund shares, will be subject to backup withholding at a
rate of 24% if you fail to properly certify that you are not a U.S.
person.
Capital
gain dividends. In
general, capital gain dividends reported by the Fund to shareholders, as paid
from its net long-term capital gains, other than long-term capital gains
realized on disposition of U.S. real property interests (see the discussion
below), are not subject to U.S. withholding tax unless you are a nonresident
alien individual present in the United States for a period or periods
aggregating 183 days or more during the calendar year.
Exempt-interest
dividends.
In general, exempt-interest dividends reported by the Fund to shareholders as
paid from net tax-exempt income are not subject to U.S. withholding
tax.
Interest-related
dividends and short-term capital gain dividends. Generally,
dividends reported by the Fund to shareholders as interest-related dividends and
paid from its qualified net interest income from U.S. sources are not subject to
U.S. withholding tax. “Qualified interest income” includes, in general, U.S.
source (1) bank deposit interest, (2) short-term original discount, (3) interest
(including original issue discount, market discount, or acquisition discount) on
an obligation that is in registered form, unless it is earned on an obligation
issued by a corporation or partnership in which the Fund is a 10-percent
shareholder or is contingent interest, and (4) any interest-related dividend
from another regulated investment company. Similarly, short-term capital gain
dividends reported by the Fund to shareholders as paid from its net short-term
capital gains, other than short-term capital gains realized on the disposition
of certain U.S. real property interests (see the discussion below), are not
subject to U.S. withholding tax unless you were a nonresident alien individual
present in the United States for a period or periods aggregating 183 days or
more during the calendar year.
The
Fund reserves the right to not report interest-related dividends or short-term
capital gain dividends. Additionally, the Fund’s reporting of interest-related
dividends or short-term capital gain dividends may not be passed through to
shareholders by intermediaries who have assumed tax reporting responsibilities
for this income in managed or omnibus accounts due to systems limitations or
operational constraints.
Net
investment income from dividends on stock and foreign source interest income
continue to be subject to withholding tax; foreign tax credits. Ordinary
dividends paid by the Fund to non-U.S. investors on the income earned on
portfolio investments in (i) the stock of domestic and foreign corporations and
(ii) the debt of foreign issuers continue to be subject to U.S. withholding tax.
Foreign shareholders may be subject to U.S. withholding tax at a rate of 30% on
the income resulting from an election to pass-through foreign tax credits to
shareholders, but may not be able to claim a credit or deduction with respect to
the withholding tax for the foreign tax treated as having been paid by
them.
Income
effectively connected with a U.S. trade or business.
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends and
any
gains realized upon the sale or redemption of shares of the Fund will be subject
to U.S. federal income tax at the rates applicable to U.S. citizens or domestic
corporations and require the filing of a nonresident U.S. income tax
return.
Investment
in U.S. real property.
The Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) makes
non-U.S. persons subject to U.S. tax on disposition of a U.S. real property
interest (“USRPI”) as if he or she were a U.S. person. Such gain is sometimes
referred to as FIRPTA gain. The Fund may invest in equity securities of
corporations that invest in USRPI, including U.S. REITs, which may trigger
FIRPTA gain to the Fund’s non-U.S. shareholders.
The
Code provides a look-through rule for distributions of FIRPTA gain when a RIC is
classified as a qualified investment entity. A RIC will be classified as a
qualified investment entity if, in general, 50% or more of the RIC’s assets
consist of interests in U.S. REITs and other U.S. real property holding
corporations (“USRPHC”). If a RIC is a qualified investment entity and the
non-U.S. shareholder owns more than 5% of a class of Fund shares at any time
during the one-year period ending on the date of the FIRPTA distribution, the
FIRPTA distribution to the non-U.S. shareholder is treated as gain from the
disposition of a USRPI, causing the distribution to be subject to U.S.
withholding tax at the corporate income tax rate, and requiring the non-U.S.
shareholder to file a nonresident U.S. income tax return. In addition, even if
the non-U.S. shareholder does not own more than 5% of a class of Fund shares,
but the Fund is a qualified investment entity, the FIRPTA distribution will be
taxable as ordinary dividends (rather than as a capital gain or short-term
capital gain dividend) subject to withholding at 30% or lower treaty
rate.
Because
the Fund expects to invest less than 50% of its assets at all times, directly or
indirectly, in U.S. real property interests, the Fund expects that neither gain
on the sale or redemption of Fund shares nor Fund dividends and distributions
would be subject to FIRPTA reporting and tax withholding.
U.S.
estate tax.
Transfers by gift of shares of the Fund by a foreign shareholder who is a
nonresident alien individual will not be subject to U.S. federal gift tax. An
individual who, at the time of death, is a non-U.S. shareholder will
nevertheless be subject to U.S. federal estate tax with respect to Fund shares
at the graduated rates applicable to U.S. citizens and residents, unless a
treaty exemption applies. If a treaty exemption is available, a decedent’s
estate may nonetheless need to file a U.S. estate tax return to claim the
exemption in order to obtain a U.S. federal transfer certificate. The transfer
certificate will identify the property (i.e., Fund shares) as to which the U.S.
federal estate tax lien has been released. In the absence of a treaty, there is
a $13,000 statutory estate tax credit (equivalent to U.S. situs assets with a
value of $60,000). For estates with U.S. situs assets of not more than $60,000,
the Fund may accept, in lieu of a transfer certificate, an affidavit from an
appropriate individual evidencing that decedent’s U.S. situs assets are below
this threshold amount.
U.S.
tax certification rules.
Special U.S. tax certification requirements may apply to non-U.S. shareholders
both to avoid U.S. backup withholding imposed at a rate of 24% and to obtain the
benefits of any treaty between the United States and the shareholder’s country
of residence. In general, if you are a non-U.S. shareholder, you must provide a
Form W-8 BEN (or other applicable Form W-8) to establish that you are not a U.S.
person, to claim that you are the beneficial owner of the income and, if
applicable, to claim a reduced rate of, or exemption from, withholding as a
resident of a country with which the United States has an income tax treaty. A
Form W-8 BEN provided without a U.S. taxpayer identification number will remain
in effect for a period beginning on the date signed and ending on the last day
of the third succeeding calendar year unless an earlier change of circumstances
makes the information on the form incorrect. Certain payees and payments are
exempt from backup withholding.
The
tax consequences to a non-U.S. shareholder entitled to claim the benefits of an
applicable tax treaty may be different from those described herein. Non-U.S.
shareholders are urged to consult their own tax advisors with respect to the
particular tax consequences to them of an investment in the Fund, including the
applicability of foreign tax.
Foreign
Account Tax Compliance Act (“FATCA”).
Under FATCA, the Fund will be required to withhold a 30% tax on income dividends
made by the Fund to certain foreign entities, referred to as foreign financial
institutions (“FFI”) or nonfinancial foreign entities (“NFFE”). After December
31, 2018, FATCA withholding would also have applied to certain capital gain
distributions, return of capital distributions and the proceeds arising from the
sale of Fund shares; however, based on proposed regulations issued by the IRS,
which can be relied upon currently, such withholding is no longer required
unless final regulations provide otherwise (which is not expected). The FATCA
withholding tax generally can be avoided: (a) by an FFI, if it reports certain
direct and indirect ownership of foreign financial accounts held by U.S. persons
with the FFI and (b) by an NFFE, if it: (i) certifies that it has no substantial
U.S. persons as owners
or
(ii) if it does have such owners, reporting information relating to them. The
U.S. Treasury has negotiated intergovernmental agreements (“IGA”) with certain
countries and is in various stages of negotiations with a number of other
foreign countries with respect to one or more alternative approaches to
implement FATCA; an entity in one of those countries may be required to comply
with the terms of an IGA instead of US Treasury regulations.
An
FFI can avoid FATCA withholding if it is deemed compliant or by becoming a
“participating FFI,” which requires the FFI to enter into a U.S. tax compliance
agreement with the IRS under section 1471(b) of the Code (“FFI agreement”) under
which it agrees to verify, report and disclose certain of its U.S.
accountholders and meet certain other specified requirements. The FFI will
either report the specified information about the U.S. accounts to the IRS, or,
to the government of the FFI’s country of residence (pursuant to the terms and
conditions of applicable law and an applicable IGA entered into between the U.S.
and the FFI’s country of residence), which will, in turn, report the specified
information to the IRS. An FFI that is resident in a country that has entered
into an IGA with the U.S. to implement FATCA will be exempt from FATCA
withholding provided that the FFI shareholder and the applicable foreign
government comply with the terms of such agreement.
An
NFFE that is the beneficial owner of a payment from the Fund can avoid the FATCA
withholding tax generally by certifying that it does not have any substantial
U.S. owners or by providing the name, address and taxpayer identification number
of each substantial U.S. owner. The NFFE will report the information to the Fund
or other applicable withholding agent, which will, in turn, report the
information to the IRS.
Such
foreign shareholders also may fall into certain exempt, excepted or deemed
compliant categories as established by U.S. Treasury regulations, IGAs, and
other guidance regarding FATCA. An FFI or NFFE 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
should consult their own tax advisors regarding the impact of these requirements
on their investment in the Fund. The requirements imposed by FATCA are different
from, and in addition to, the U.S. tax certification rules to avoid backup
withholding described above. Shareholders are urged to consult their tax
advisors regarding the application of these requirements to their own
situation.
Effect
of Future Legislation; Local Tax Considerations.
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes, including provisions of current law that sunset and
thereafter no longer apply, or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein. Rules
of state and local taxation of ordinary income, qualified dividend income and
capital gain dividends may differ from the rules for U.S. federal income
taxation described above. Distributions may also be subject to additional state,
local and foreign taxes depending on each shareholder's particular situation.
Non-U.S. shareholders may be subject to U.S. tax rules that differ significantly
from those summarized above. Shareholders are urged to consult their tax
advisors as to the consequences of these and other state and local tax rules
affecting investment in the Fund.
The
Funds may compare their investment performance to appropriate market and mutual
fund indices and investments for which reliable performance data is available.
Such indices are generally unmanaged and are prepared by entities and
organizations which track the performance of investment companies or investment
advisors. Unmanaged indices often do not reflect deductions for administrative
and management costs and expenses. The performance of the Funds may also be
compared in publications to averages, performance rankings, or other information
prepared by recognized mutual fund statistical services. Any performance
information, whether related to the Funds or to the Advisor, should be
considered in light of a Funds’ investment objectives and policies,
characteristics and the quality of the portfolio and market conditions during
the time period indicated and should not be considered to be representative of
what may be achieved in the future.
|
| |
Independent
Registered Public Accounting Firm |
Cohen
& Company, Ltd., 342 North Water Street, Suite 830, Milwaukee, Wisconsin
53202, serves as the Funds’ independent registered public accounting firm, whose
services include an audit of the Funds’ financial statements and the performance
of other related tax services.
Stradley
Ronon Stevens & Young, LLP, 2005 Market Street, Suite 2600, Philadelphia,
Pennsylvania 19103, serves as the Funds’ legal counsel.
The
GPS
Funds I Annual Report
and GPS
Funds II Annual Report
for the fiscal year ended March 31, 2024 are separate documents than this SAI
and the financial statements, accompanying notes and report of independent
accountants appearing therein are incorporated by reference in this
SAI.
APPENDIX
A
DESCRIPTION
OF SECURITIES RATINGS
Short-Term
Credit Ratings
An
S&P
Global Ratings short-term
issue credit rating is generally assigned to those obligations considered
short-term in the relevant market. The following summarizes the rating
categories used by S&P Global Ratings for short-term issues:
“A-1”
– A short-term obligation rated “A-1” is rated in the highest category by
S&P Global Ratings. The obligor’s capacity to meet its financial commitments
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor’s capacity to
meet its financial commitment on these obligations is extremely
strong.
“A-2”
– A short-term obligation rated “A-2” is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor’s capacity to meet
its financial commitments on the obligation is satisfactory.
“A-3”
– A short-term obligation rated “A-3” exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to weaken an obligor’s capacity to meet its financial commitments on the
obligation.
“B”
– A short-term obligation rated “B” is regarded as vulnerable and has
significant speculative characteristics. The obligor currently has the capacity
to meet its financial commitments; however, it faces major ongoing uncertainties
that could lead to the obligor’s inadequate capacity to meet its financial
commitments.
“C”
– A short-term obligation rated “C” is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitments on the obligation.
“D”
– A short-term obligation rated “D” is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the “D” rating category is used
when payments on an obligation are not made on the date due, unless S&P
Global Ratings believes that such payments will be made within any stated grace
period. However, any stated grace period longer than five business days will be
treated as five business days. The “D” rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action and where default on
an obligation is a virtual certainty, for example due to automatic stay
provisions. A rating on an obligation is lowered to “D” if it is subject to a
distressed debt restructuring.
Local
Currency and Foreign Currency Ratings – S&P Global Ratings’ issuer credit
ratings make a distinction between foreign currency ratings and local currency
ratings. A foreign currency rating on an issuer can differ from the local
currency rating on it when the obligor has a different capacity to meet its
obligations denominated in its local currency, versus obligations denominated in
a foreign currency.
“NR”
– This indicates that a rating has not been assigned or is no longer
assigned.
Moody’s
Investors Service (“Moody’s”)
short-term ratings are forward-looking opinions of the relative credit risks of
financial obligations with an original maturity of thirteen months or less and
reflect both on the likelihood of a default or impairment on contractual
financial obligations and the expected financial loss suffered in the event of
default or impairment.
Moody’s
employs the following designations to indicate the relative repayment ability of
rated issuers:
“P-1”
– Issuers (or supporting institutions) rated Prime-1 reflect a superior ability
to repay short-term obligations.
“P-2”
– Issuers (or supporting institutions) rated Prime-2 reflect a strong ability to
repay short-term obligations.
“P-3”
– Issuers (or supporting institutions) rated Prime-3 reflect an acceptable
ability to repay short-term obligations.
“NP”
– Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
“NR”
– Is assigned to an unrated issuer, obligation and/or program.
Fitch,
Inc. / Fitch Ratings Ltd. (“Fitch”)
short-term issuer or obligation rating is based in all cases on the short-term
vulnerability to default of the rated entity and relates to the capacity to meet
financial obligations in accordance with the documentation governing the
relevant obligation. Short-term deposit ratings may be adjusted for loss
severity. Short-term ratings are assigned to obligations whose initial maturity
is viewed as “short-term” based on market convention.1
Typically, this means up to 13 months for corporate, sovereign, and structured
obligations and up to 36 months for obligations in U.S. public finance markets.
The following summarizes the rating categories used by Fitch for short-term
obligations:
“F1”
– Securities possess the highest short-term credit quality. This designation
indicates the strongest intrinsic capacity for timely payment of financial
commitments; may have an added “+” to denote any exceptionally strong credit
feature.
“F2”
– Securities possess good short-term credit quality. This designation indicates
good intrinsic capacity for timely payment of financial
commitments.
“F3”
– Securities possess fair short-term credit quality. This designation indicates
that the intrinsic capacity for timely payment of financial commitments is
adequate.
“B”
– Securities possess speculative short-term credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
heightened vulnerability to near term adverse changes in financial and economic
conditions.
“C”
– Securities possess high short-term default risk. Default is a real
possibility.
“RD”
– Restricted default. Indicates an entity that has defaulted on one or more of
its financial commitments, although it continues to meet other financial
obligations. Typically applicable to entity ratings only.
“D”
– Default. Indicates a broad-based default event for an entity, or the default
of a short-term obligation.
“NR”
– Is assigned to an issue of a rated issuer that are not and have not been
rated.
The
DBRS
Morningstar® Ratings Limited (“DBRS Morningstar”)
short-term obligation ratings provide DBRS Morningstar’s opinion on the risk
that an issuer will not meet its short-term financial obligations in a timely
manner. The obligations rated in this category typically have a term of shorter
than one year. The R-1 and R-2 rating categories are further denoted by the
subcategories “(high)”, “(middle)”, and “(low)”.
1
A
long-term rating can also be used to rate an issue with short
maturity.
The
following summarizes the ratings used by DBRS Morningstar for commercial paper
and short-term debt:
“R-1
(high)” - Short-term debt rated “R-1 (high)” is of the highest credit quality.
The capacity for the payment of short-term financial obligations as they fall
due is exceptionally high. Unlikely to be adversely affected by future
events.
“R-1
(middle)” – Short-term debt rated “R-1 (middle)” is of superior credit quality.
The capacity for the payment of short-term financial obligations as they fall
due is very high. Differs from “R-1 (high)” by a relatively modest degree.
Unlikely to be significantly vulnerable to future events.
“R-1
(low)” – Short-term debt rated “R-1 (low)” is of good credit quality. The
capacity for the payment of short-term financial obligations as they fall due is
substantial. Overall strength is not as favorable as higher rating categories.
May be vulnerable to future events, but qualifying negative factors are
considered manageable.
“R-2
(high)” – Short-term debt rated “R-2 (high)” is considered to be at the upper
end of adequate credit quality. The capacity for the payment of short-term
financial obligations as they fall due is acceptable. May be vulnerable to
future events.
“R-2
(middle)” – Short-term debt rated “R-2 (middle)” is considered to be of adequate
credit quality. The capacity for the payment of short-term financial obligations
as they fall due is acceptable. May be vulnerable to future events or may be
exposed to other factors that could reduce credit quality.
“R-2
(low)” – Short-term debt rated “R-2 (low)” is considered to be at the lower end
of adequate credit quality. The capacity for the payment of short-term financial
obligations as they fall due is acceptable. May be vulnerable to future events.
A number of challenges are present that could affect the issuer’s ability to
meet such obligations.
“R-3”
– Short-term debt rated “R-3” is considered to be at the lowest end of adequate
credit quality. There is a capacity for the payment of short-term financial
obligations as they fall due. May be vulnerable to future events, and the
certainty of meeting such obligations could be impacted by a variety of
developments.
“R-4”
– Short-term debt rated “R-4” is considered to be of speculative credit quality.
The capacity for the payment of short-term financial obligations as they fall
due is uncertain.
“R-5”
– Short-term debt rated “R-5” is considered to be of highly speculative credit
quality. There is a high level of uncertainty as to the capacity to meet
short-term financial obligations as they fall due.
“D”
– A downgrade to “D” may occur when the issuer has filed under any applicable
bankruptcy, insolvency or winding-up statute, or there is a failure to satisfy
an obligation after the exhaustion of grace periods. DBRS Morningstar may also
use “SD” (Selective Default) in cases where only some securities are impacted,
such as the case of a “distressed exchange”.
Long-Term
Issue Credit Ratings
The
following summarizes the ratings used by S&P
Global Ratings for
long-term issues:
“AAA”
– An obligation rated “AAA” has the highest rating assigned by S&P Global
Ratings. The obligor’s capacity to meet its financial commitments on the
obligation is extremely strong.
“AA”
– An obligation rated “AA” differs from the highest-rated obligations only to a
small degree. The obligor’s capacity to meet its financial commitments on the
obligation is very strong.
“A”
– An obligation rated “A” is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor’s capacity to meet its financial
commitments on the obligation is still strong.
“BBB”
– An obligation rated “BBB” exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to weaken
the obligor’s capacity to meet its financial commitments on the
obligation.
“BB,”
“B,” “CCC,” “CC” and “C” – Obligations rated “BB,” “B,” “CCC,” “CC” and “C” are
regarded as having significant speculative characteristics. “BB” indicates the
least degree of speculation and “C” the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposure to adverse conditions.
“BB”
– An obligation rated “BB” is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions that could lead to the
obligor’s inadequate capacity to meet its financial commitments on the
obligation.
“B”
– An obligation rated “B” is more vulnerable to nonpayment than obligations
rated “BB”, but the obligor currently has the capacity to meet its financial
commitments on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor’s capacity or willingness to meet its
financial commitments on the obligation.
“CCC”
– An obligation rated “CCC” is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitments on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitments on the
obligation.
“CC”
– An obligation rated “CC” is currently highly vulnerable to nonpayment. The
“CC” rating is used when a default has not yet occurred but S&P Global
Ratings expects default to be a virtual certainty, regardless of the anticipated
time to default.
“C”
– An obligation rated “C” is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority or lower ultimate
recovery compared with obligations that are rated higher.
“D”
– An obligation rated “D” is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the “D” rating category is used when payments on
an obligation are not made on the date due, unless S&P Global Ratings
believes that such payments will be made within the next five business days in
the absence of a stated grace period or within the earlier of the stated grace
period or the next 30 calendar days. The “D” rating also will be used upon the
filing of a bankruptcy petition or the taking of similar action and where
default on an obligation is a virtual certainty, for example due to automatic
stay provisions. A rating on an obligation is lowered to “D” if it is subject to
a distressed debt restructuring
Plus
(+) or minus (-) – Ratings from “AA” to “CCC” may be modified by the addition of
a plus (+) or minus (-) sign to show relative standing within the rating
categories.
“NR”
– This indicates that a rating has not been assigned, or is no longer
assigned.
Local
Currency and Foreign Currency Ratings - S&P Global Ratings’ issuer credit
ratings make a distinction between foreign currency ratings and local currency
ratings. A foreign currency rating on an
issuer
can differ from the local currency rating on it when the obligor has a different
capacity to meet its obligations denominated in its local currency, versus
obligations denominated in a foreign currency.
Moody’s
long-term ratings are forward-looking opinions of the relative credit risks of
financial obligations with an original maturity of eleven months or more. Such
ratings reflect both on the likelihood of default or impairment on contractual
financial obligations and the expected financial loss suffered in the event of
default or impairment. The following summarizes the ratings used by Moody’s for
long-term debt:
“Aaa”
– Obligations rated “Aaa” are judged to be of the highest quality, subject to
the lowest level of credit risk.
“Aa”
– Obligations rated “Aa” are judged to be of high quality and are subject to
very low credit risk.
“A”
– Obligations rated “A” are judged to be upper-medium grade and are subject to
low credit risk.
“Baa”
– Obligations rated “Baa” are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative
characteristics.
“Ba”
– Obligations rated “Ba” are judged to be speculative and are subject to
substantial credit risk.
“B”
– Obligations rated “B” are considered speculative and are subject to high
credit risk.
“Caa”
– Obligations rated “Caa” are judged to be speculative of poor standing and are
subject to very high credit risk.
“Ca”
– Obligations rated “Ca” are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
“C”
– Obligations rated “C” are the lowest rated and are typically in default, with
little prospect for recovery of principal or interest.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from “Aa” through “Caa.” The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
“NR”
– Is assigned to unrated obligations, obligation and/or program.
The
following summarizes long-term ratings used by Fitch:
“AAA”
– Securities considered to be of the highest credit quality. “AAA” ratings
denote the lowest expectation of credit risk. They are assigned only in cases of
exceptionally strong capacity for payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable
events.
“AA”
– Securities considered to be of very high credit quality. “AA” ratings denote
expectations of very low credit risk. They indicate very strong capacity for
payment of financial commitments. This capacity is not significantly vulnerable
to foreseeable events.
“A”
– Securities considered to be of high credit quality. “A” ratings denote
expectations of low credit risk. The capacity for payment of financial
commitments is considered strong. This capacity may, nevertheless, be more
vulnerable to adverse business or economic conditions than is the case for
higher ratings.
“BBB”
– Securities considered to be of good credit quality. “BBB” ratings indicate
that expectations of credit risk are currently low. The capacity for payment of
financial commitments is considered adequate, but adverse business or economic
conditions are more likely to impair this capacity.
“BB”
– Securities considered to be speculative. “BB” ratings indicates an elevated
vulnerability to credit risk, particularly in the event of adverse changes in
business or economic conditions over time; however, business or financial
alternatives may be available to allow financial commitments to be
met.
“B”
– Securities considered to be highly speculative. “B” ratings indicate that
material credit risk is present
“CCC”
– A “CCC” rating indicates that substantial credit risk is present.
“CC”
– A “CC” rating indicates very high levels of credit risk.
“C”
– A “C” rating indicates exceptionally high levels of credit risk.
Defaulted
obligations typically are not assigned “RD” or “D” ratings but are instead rated
in the “CCC” to “C” rating categories, depending on their recovery prospects and
other relevant characteristics. Fitch believes that this approach better aligns
obligations that have comparable overall expected loss but varying vulnerability
to default and loss.
Plus
(+) or minus (-) may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the “AAA” obligation
rating category, or to corporate finance obligation ratings in the categories
below “CCC”.
“NR”
– Is assigned to an unrated issue of a rated issuer.
The
DBRS Morningstar long-term obligation ratings provide DBRS Morningstar’s opinion
on the risk that investors may not be repaid in accordance with the terms under
which the long-term obligation was issued. The obligations rated in this
category typically have a term of one year or longer. All rating categories from
AA to CCC contain subcategories “(high)” and “(low)”. The absence of either a
“(high)” or “(low)” designation indicates the rating is in the middle of the
category. The following summarizes the ratings used by DBRS Morningstar for
long-term debt:
“AAA”
– Long-term debt rated “AAA” is of the highest credit quality. The capacity for
the payment of financial obligations is exceptionally high and unlikely to be
adversely affected by future events.
“AA”
– Long-term debt rated “AA” is of superior credit quality. The capacity for the
payment of financial obligations is considered high. Credit quality differs from
“AAA” only to a small degree. Unlikely to be significantly vulnerable to future
events.
“A”
– Long-term debt rated “A” is of good credit quality. The capacity for the
payment of financial obligations is substantial, but of lesser credit quality
than “AA.” May be vulnerable to future events, but qualifying negative factors
are considered manageable.
“BBB”
– Long-term debt rated “BBB” is of adequate credit quality. The capacity for the
payment of financial obligations is considered acceptable. May be vulnerable to
future events.
“BB”
– Long-term debt rated “BB” is of speculative, non-investment grade credit
quality. The capacity for the payment of financial obligations is uncertain.
Vulnerable to future events.
“B”
– Long-term debt rated “B” is of highly speculative credit quality. There is a
high level of uncertainty as to the capacity to meet financial
obligations.
“CCC”,
“CC” and “C” – Long-term debt rated in any of these categories is of very highly
speculative credit quality. In danger of defaulting on financial obligations.
There is little difference between these three categories, although “CC” and “C”
ratings are normally applied to obligations that are seen as highly likely to
default or subordinated to obligations rated in the “CCC” to “B” range.
Obligations in respect of which default has not technically taken place but is
considered inevitable may be rated in the “C” category.
“D”
– A downgrade to “D” may occur when the issuer has filed under any applicable
bankruptcy, insolvency or winding up statute or there is a failure to satisfy an
obligation after the exhaustion of grace periods. DBRS Morningstar may also use
“SD” (Selective Default) in cases where only some securities are impacted, such
as the case of a “distressed exchange”.
Municipal
Note Ratings
An
S&P
Global Ratings U.S.
municipal note rating reflects S&P Global Ratings’ opinion about the
liquidity factors and market access risks unique to the notes. Notes due in
three years or less will likely receive a note rating. Notes with an original
maturity of more than three years will most likely receive a long-term debt
rating. In determining which type of rating, if any, to assign, S&P Global
Ratings’ analysis will review the following considerations:
•Amortization
schedule - the larger the final maturity relative to other maturities, the more
likely it will be treated as a note; and
•Source
of payment - the more dependent the issue is on the market for its refinancing,
the more likely it will be treated as a note.
Municipal
Short-Term Note rating symbols are as follows:
“SP-1”
– A municipal note rated “SP-1” exhibits a strong capacity to pay principal and
interest. An issue determined to possess a very strong capacity to pay debt
service is given a plus (+) designation.
“SP-2”
– A municipal note rated “SP-2” exhibits a satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
“SP-3”
– A municipal note rated “SP-3” exhibits a speculative capacity to pay principal
and interest.
“D”
– This rating is assigned upon failure to pay the note when due, completion of a
distressed debt restructuring, or the filing of a bankruptcy petition or the
taking of similar action and where default on an obligation is a virtual
certainty, for example due to automatic stay provisions.
Moody’s
uses the global short-term Prime rating scale (listed above under Short-Term
Credit Ratings) for commercial paper issued by U.S. municipalities and
nonprofits. These commercial paper programs may be backed by external letters of
credit or liquidity facilities, or by an issuer’s self-liquidity.
For
other short-term municipal obligations, Moody’s uses one of two other short-term
rating scales, the Municipal Investment Grade (“MIG”) and Variable Municipal
Investment Grade (“VMIG”) scales provided below.
Moody’s
uses the MIG scale for U.S. municipal cash flow notes, bond anticipation notes
and certain other short-term obligations, which typically mature in three years
or less.
MIG
Scale
“MIG-1”
– This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
“MIG-2”
– This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group.
“MIG-3”
– This designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market access for refinancing is likely to be less
well-established.
“SG”
– This designation denotes speculative-grade credit quality. Debt instruments in
this category may lack sufficient margins of protection.
“NR”
– Is assigned to an unrated obligation, obligation and/or program.
In
the case of variable rate demand obligations (“VRDOs”), Moody’s assigns both a
long-term rating and a short-term payment obligation rating. The long-term
rating addresses the issuer’s ability to meet scheduled principal and interest
payments. The short-term payment obligation rating addresses the ability of the
issuer or the liquidity provider to meet any purchase price payment obligation
resulting from optional tenders (“on demand”) and/or mandatory tenders of the
VRDO. The short-term payment obligation rating uses the VMIG scale. Transitions
of VMIG ratings with conditional liquidity support differ from transitions of
Prime ratings reflecting the risk that external liquidity support will terminate
if the issuer’s long-term rating drops below investment grade.
Moody’s
typically assigns the VMIG rating if the frequency of the payment obligation is
less than every three years. If the frequency of the payment obligation is less
than three years but the obligation is payable only with remarketing proceeds,
the VMIG short-term rating is not assigned and it is denoted as
“NR”.
“VMIG-1”
– This designation denotes superior credit quality. Excellent protection is
afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections.
“VMIG-2”
– This designation denotes strong credit quality. Good protection is afforded by
the strong short-term credit strength of the liquidity provider and structural
and legal protections.
“VMIG-3”
– This designation denotes acceptable credit quality. Adequate protection is
afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections.
“SG”
– This designation denotes speculative-grade credit quality. Demand features
rated in this category may be supported by a liquidity provider that does not
have a sufficiently strong short-term rating or may lack the structural and/or
legal protections.
“NR”
– Is assigned to an unrated obligation, obligation and/or program.
About
Credit Ratings
An
S&P
Global Ratings issue
credit rating is a forward-looking opinion about the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated. The opinion reflects S&P Global
Ratings’ view of the obligor’s capacity and willingness to meet its financial
commitments
as they come due, and this opinion may assess terms, such as collateral security
and subordination, which could affect ultimate payment in the event of
default.
Ratings
assigned on Moody’s
global long-term and short-term rating scales are forward-looking opinions of
the relative credit risks of financial obligations issued by non-financial
corporates, financial institutions, structured finance vehicles, project finance
vehicles, and public sector entities.
Fitch’s
credit
ratings are forward-looking opinions on the relative ability of an entity or
obligation to meet financial commitments. Issuer Default Ratings (IDRs) are
assigned to corporations, sovereign entities, financial institutions such as
banks, leasing companies and insurers, and public finance entities (local and
regional governments). Issue-level ratings are also assigned and often include
an expectation of recovery, which may be notched above or below the issuer-level
rating. Issue ratings are assigned to secured and unsecured debt securities,
loans, preferred stock and other instruments. Credit ratings are indications of
the likelihood of repayment in accordance with the terms of the issuance. In
limited cases, Fitch may include additional considerations (i.e., rate to a
higher or lower standard than that implied in the obligation’s
documentation).
DBRS
Morningstar
offers independent, transparent, and innovative credit analysis to the market.
Credit ratings are forward-looking opinions about credit risk that reflect the
creditworthiness of an issuer, rated entity, security and/or obligation based on
DBRS Morningstar’s quantitative and qualitative analysis in accordance with
applicable methodologies and criteria. They are meant to provide opinions on
relative measures of risk and are not based on expectations of, or meant to
predict, any specific default probability. Credit ratings are not statements of
fact. DBRS Morningstar issues credit ratings using one or more categories, such
as public, private, provisional, final(ized), solicited, or unsolicited. From
time to time, credit ratings may also be subject to trends, placed under review,
or discontinued. DBRS Morningstar credit ratings are determined by credit rating
committees.
APPENDIX
B
The
following information is a summary of the proxy voting guidelines for the
Advisor and the sub-advisors.
ASSETMARK,
INC.
GPS
Funds I
GPS
Funds II
PROXY
VOTING POLICY
I.BACKGROUND
In
accordance with Rule 206(4)-6 under the Advisers Act, a registered investment
adviser must adopt and implement written policies and procedures reasonably
designed to ensure that it is voting proxies in the best interest of its
clients, describe how material conflicts that arise between the investment
adviser and clients are resolved, disclose how clients may obtain information on
how the investment adviser voted proxies, and describe its proxy voting
procedures and furnish a copy upon request. Furthermore, Rule 204-2 requires
certain books and records related to proxy voting to be maintained by the
investment adviser.
II.POLICY
AssetMark
owes each client duties of care and loyalty with respect to the services
undertaken for them, including the voting of proxies. In those circumstances
where AssetMark will be voting proxies of securities held directly by a client,
AssetMark, guided by general fiduciary principles, will act prudently and solely
in the best interest of the client. AssetMark will attempt to consider all
factors of its vote that could affect the value of its investments and will vote
proxies in the manner that it believes will be consistent with efforts to
maximize shareholder value.
If
the account is invested in an AssetMark Investment Management (“AIM”) investment
solution, the client designates AssetMark as its agent to vote the proxies on
securities in the account. Unless the account is held at AssetMark Trust,
AssetMark will not vote proxies on securities held in mutual fund and ETF
investment solutions, in the AIM investment solutions at third-party custodians.
For the Guided Portfolios and the proprietary funds, the client retains the
right to vote proxies. AssetMark will deliver proprietary mutual fund
prospectuses and proxies to the client.
Under
both Advisor and Referral Model, if the account is invested in an IMA Solution
Type, the client designates the applicable Investment Management Firm as its
agent to vote proxies on securities in the account. However, the client retains
the right to vote proxies and may do so by notifying AssetMark in writing of the
desire to vote future proxies.
The
designation of AIM or the client to vote proxies may not apply to securities
that may have been loaned pursuant to a securities lending
arrangement.
For
the GuidePath Funds, AssetMark’s, as the investment adviser to the Funds, has
proxy voting authority with respect to securities in the Fund’s portfolio. For
the sub-advised proprietary mutual funds, AssetMark generally has contractually
delegated each Fund's proxy voting authority to its respective Sub-Advisor(s),
as applicable. The Fund Compliance group monitors proxy voting activities of
AssetMark and the Sub-Advisors to ensure compliance with underlying proxy voting
guidelines; coordinates the preparation of the annual Form N-PX filing; and
performs an annual review of the Funds’ proxy voting program to confirm that
review, monitoring and filing processes are satisfied. AssetMark will review
each its own and the Sub-Advisors’ proxy voting guidelines to ensure that they
meet the standards set forth from time to time by the SEC. The Fund Compliance
group will report to the Boards at least annually regarding the compliance of
AssetMark’s proxy voting guidelines and each Sub-Advisor's proxy voting
guidelines with such SEC standards, including the procedures that AssetMark and
each Sub-Advisor uses when a vote presents a conflict between the interests of
Fund shareholders and those of AssetMark or the Sub-Advisor, respectively. The
Sub-Advisors shall report to AssetMark on a regular basis, but not less than
annually, any conflicts of interest that arose from proxy votes and how such
conflicts were resolved. AssetMark shall provide such reports to the Board at
the next regular meeting of the Board after such reports were received from the
Sub-Advisors. AssetMark will also report
to
the Board at least annually on any conflicts of interest that arose from its own
proxy votes and how such conflicts were resolved.
In
the instance of the Trusts held in client accounts at AssetMark Trust, AssetMark
Trust will vote 100% of the shares it holds in custody for AssetMark clients in
the proportion of the votes received from beneficial shareholders whose shares
AssetMark Trust holds in custody. This is known as “mirror voting.”
III.RESPONSIBILITY
AIM
is responsible for monitoring the votes cast by the independent proxy voting
service. On a periodic basis AIM will certify that it voted in a manner
consistent with their fiduciary duties to the clients.
The
Advisor Compliance group is responsible for overseeing and monitoring compliance
with the Proxy Voting Policy. To this end, Compliance will verify that proxies
are voted in accordance with the policy and in a timely manner, by sampling
proxies voted on a periodic basis.
IV.
PROCEDURES
Use
of Independent Proxy Voting Service
For
certain holdings in client accounts, AssetMark has contracted with Glass Lewis
& Co. (“GL”) to vote proxies on its behalf and has adopted the GL Proxy
Paper Policy Guidelines, with additional Voting Policies where applicable. Under
this arrangement, GL is contracted to vote all proxies according to the adopted
guidelines and is charged with ensuring timely votes. These guidelines outline
in detail the method for determining how to vote and are found in Exhibit B to
this Manual. Under this arrangement, GL will generally vote all securities that
are eligible to be voted using the Broadridge ProxyEdge system. This arrangement
only includes securities where the custodian or transfer agent can be instructed
to deliver proxies directly to the ProxyEdge system. Securities exempted from
proxy voting are generally those not custodied or sub-custodied at a
broker-dealer or at any transfer agent for the Trusts, such as mutual fund
shares that are held in omnibus accounts directly with a mutual fund family. For
such securities, AssetMark will vote these shares directly and not use the
ProxyEdge system, but will generally follow the GL guidelines, unless AssetMark
is provided with direction from third party Investment Management Firms, as
noted below. AssetMark retains the authority, in its discretion, to override any
votes cast by GL.
GL’s
guidelines outline AssetMark’s duties to clients when voting proxies. AssetMark
is responsible in certain circumstances to ensure its fiduciary duties are
exercised appropriately.
Summarized
Proxy Voting Guidelines
These
summarized guidelines apply to proxies received through Proxy Edge, as well as
outside of the Proxy Edge system.
1.Duty
of Care
GL’s
proxy policy ensures the monitoring of corporate events and the voting of client
proxies. As noted above, in certain instances AssetMark will vote shares
directly but generally follow GL guidelines. However, there may be instances
when it is in the best interests of the client to refrain from voting (such as
when AssetMark determines that the cost of voting exceeds the expected benefit
to the client).
2.Duty
of Loyalty
AssetMark,
with assistance from GL, will ensure proxy votes are cast in a manner consistent
with the best interests of the client. AssetMark and/or GL will use the
following process to address conflicts of interest: a) identify potential
conflicts of interest; b) determine which conflicts, if any, are material; and
c) establish procedures to ensure that AssetMark’s voting decisions are based on
the best interests of clients and are not a product of the
conflict.
AIdentify
Potential Conflicts of Interest.
Conflicts
of interest may occur due to business, personal or family relationships.
Potential conflicts may include votes affecting AssetMark or its affiliates. An
example of a potential conflict would be the solicitation of proxies to vote on
the approval of a 12b-1 plan for a mutual fund in which AssetMark client assets
are invested when that fund, or a service provider to that fund, pays, or may
potentially pay,
administrative
service fees to AssetMark’s affiliate, AssetMark Trust. Another potential
conflict of interest may be for AssetMark to cast a vote for a proxy issued by
the GPS Funds, since it directly manages the fund of funds.
BDetermine
which Conflicts are Material.
A
“material” conflict should generally be considered as one that is reasonably
likely to be viewed as important by the average shareholder. For example, an
issue may not be viewed as material unless it has the potential to affect at
least 1% of an advisor’s annual revenue.
CEstablish
Procedures to Address Material Conflicts.
AssetMark
has established multiple methods to address voting items it has identified as
those in which it has a material conflict of interest.
■Use
an independent third party to recommend how a proxy presenting a conflict should
be voted or authorize the third party to vote the proxy. AssetMark’s use of GL
facilitates this process.
■Refer
the proposal to the client and obtain the client’s instruction on how to
vote.
■Disclose
the conflict to the client and obtain the client’s consent to AssetMark’s
vote.
Additional
Considerations
AssetMark
may have different voting policies and procedures for different clients and may
vote proxies of different clients differently, if appropriate in the fulfillment
of its duties. Additional GL policies include the Investment Manager Policy,
Catholic Policy and ESG Thematic Policy.
Proxy
Voting Involving Underlying Funds
Certain
Funds advised by AssetMark (“Investing Funds”) invest their assets in
exchange-traded securities of other investment companies and other open-end
investment companies (“Underlying Funds”). Proxy voting described in this
section refers to Funds that invest in Underlying Funds.
Voting
Proxies of Third-Party Underlying Funds
Any
Investing Fund that invests in an Underlying Fund in reliance on Rule 12d1-4
under the 1940 Act will vote its shares of the Underlying Fund in accordance
with the applicable terms and conditions of the rule as well as the Investing
Fund’s policies and procedures.
Voting
Proxies of Underlying Proprietary Funds
AWhere
an Investing Fund is not the Sole Shareholder of the Underlying Proprietary
Fund
If
an Investing Fund is not the Sole Shareholder of the Underlying Proprietary Fund
and there is no material conflict of interest, AssetMark will vote proxies
relating to shares of the Underlying Proprietary Fund in the same proportion as
the vote of all other holders of such Underlying Proprietary Fund
shares.
BWhere
a FOFs is the Sole Shareholder of the Underlying Proprietary Fund
In
the event that one or more Investing Funds are the sole shareholders of an
Underlying Proprietary Fund, AssetMark or the Sub-Advisor(s) to the Investing
Fund, as applicable, will vote proxies relating to the shares of the Underlying
Proprietary Fund as set forth below unless the Board of the Investing Fund
elects to have such Fund seek voting instructions from its shareholders, in
which case the Investing Fund will vote proxies relating to shares of the
Underlying Proprietary Fund in the same proportion as the instructions timely
received from such shareholders.
◦
Where
Both the Underlying Proprietary Fund and an Investing Fund are Voting on
Substantially
Identical Proposals
In
the event that the Underlying Proprietary Fund and a FOFs are voting on
substantially identical proposals (the “Substantially Identical Proposal”), then
AssetMark or the Sub-Advisor(s) of the Investing Fund, as applicable, will vote
proxies relating to shares of the Underlying Proprietary Fund in the same
proportion as the vote of the shareholders of the Investing Fund on the
Substantially Identical Proposal.
•Where
the Underlying Proprietary Fund is Voting on a Proposal that is Not Being Voted
on By the Investing Fund
•Where
there is No Material Conflict of Interest between the Interests of the
Shareholders of the Underlying Proprietary Fund and AssetMark or the Sub-
Advisor(s) Relating to the Proposal
In
the event that an Investing Fund is voting on a proposal of the Underlying
Proprietary Fund and the Investing Fund is not also voting on a substantially
identical proposal and there is no material conflict of interest between the
interests of the shareholders of the Underlying Proprietary Fund and AssetMark
or the Sub-Advisor(s), as applicable, relating to the Proposal, then AssetMark
or the Sub-Advisor(s), as applicable, will vote proxies relating to the shares
of the Underlying Proprietary Fund pursuant to their respective Proxy Voting
Procedures.
Where
there is a Material Conflict of Interest between the Interests of the
Shareholders of the Underlying Proprietary Fund and AssetMark or the Sub-
Advisor(s) Relating to the Proposal.
In
the event that an Investing Fund is voting on a proposal of an Underlying
Proprietary Fund and the Investing Fund is not also voting on a substantially
identical proposal and there is a material conflict of interest between the
interests of the shareholders of the Underlying Proprietary Fund and AssetMark
or the Sub- Advisor(s), as applicable, relating to the Proposal, then the
Investing Fund will seek voting instructions from its shareholders on the
proposal and will vote proxies relating to shares of the Underlying Proprietary
Fund in the same proportion as the instructions timely received from such
shareholders. A material
conflict is
generally defined as a proposal involving a matter in which AssetMark or a Sub-
Advisor, as applicable, or one of their affiliates, has a material economic
interest.
Disclosure
Requirements
In
addition to implementing these policies regarding the voting of proxies,
AssetMark shall also provide clients with a summary of its Proxy Voting Policy
in the Disclosure Brochure and, upon request, provide clients with a copy of
this Policy. It is anticipated that AssetMark will usually provide clients with
the summary of its Policy by delivery of its Rule 204-3 disclosure document,
Form ADV Part 2A, Appendix 1, as applicable to the services provided the client.
This concise summary will also disclose how clients may obtain information about
how AssetMark voted their securities.
Record
Keeping Requirements
AssetMark
will retain the following types of records relating to proxy
voting:
1This
Proxy Voting Policy and all amendments thereto, as well as the GL
guidelines.
2Proxy
statements received for client securities. AssetMark may rely on statements
maintained by a proxy voting service provided that AssetMark has obtained an
undertaking from the service that it will provide a copy of the statements
promptly upon request.
3Records
of votes cast on behalf of clients by AssetMark or GL. AssetMark relies on the
records of proxy voted pursuant to GL’s recommendations as maintained in
ProxyEdge. The records of votes cast shall also include documentation of any AIM
overrides of a GL recommendation.
4Client
written requests for information as to how AssetMark voted securities of such
Client, and any AssetMark written responses to such requests.
5Any
document prepared by AssetMark that is material to making a proxy voting
decision or that memorialized the basis for that decision.
WELLINGTON
MANAGEMENT COMPANY LLP
SUMMARY
OF PROXY VOTING POLICIES
SUB-ADVISOR
TO THE CORE FIXED INCOME FUND
INTRODUCTION
Wellington
Management has adopted and implemented policies and procedures that it believes
are reasonably designed to ensure that proxies are voted in the best interests
of clients for whom it exercises proxy-voting discretion.
Wellington
Management’s Proxy Voting Guidelines (the “Guidelines”) set forth broad
guidelines and positions on
common
proxy issues that Wellington Management uses in voting on proxies In addition,
Wellington Management also
considers
each proposal in the context of the issuer, industry and country or countries in
which the issuer’s business is
conducted.
The Guidelines are not rigid rules and the merits of a particular proposal may
cause Wellington
Management
to enter a vote that differs from the Guidelines. Wellington Management seeks to
vote all proxies with
the
goal of increasing long-term client value and, while client investment
strategies may differ, applying this common
set
of guidelines is consistent with the investment objective of achieving positive
long-term investment performance
for
each client.
STATEMENT
OF POLICY
Wellington
Management:
1.Votes
client proxies for which clients have affirmatively delegated proxy-voting
authority, in writing, unless it has arranged in advance with the client to
limit the circumstances in which it would exercise voting authority or
determines that it is in the best interest of one or more clients to refrain
from voting a given proxy.
2.Votes
all proxies in the best interests of the client for whom it is
voting.
3.Identifies
and resolves all material proxy-related conflicts of interest between the firm
and its clients in the best interests of the client.
RESPONSIBILITY
AND OVERSIGHT
The
Investment Research Group (“Investment Research”) monitors regulatory
requirements with respect to proxy
voting
and works with the firm’s Legal and Compliance Group and the Investment
Stewardship Committee to develop
practices
that implement those requirements. Investment Research also acts as a resource
for portfolio managers
and
research analysts on proxy matters as needed. Day-to-day administration of the
proxy voting process is the
responsibility
of Investment Research. The Investment Stewardship Committee is responsible for
oversight of the
implementation
of the Global Proxy Policy and Procedures, review and approval of the
Guidelines, identification and
resolution
of conflicts of interest, and for providing advice and guidance on specific
proxy votes for individual issuers.
The
Investment Stewardship Committee reviews the Global Proxy Policy and Procedures
annually.
PROCEDURES
Use
of Third-Party Voting Agent
Wellington
Management uses the services of a third-party voting agent for research, voting
recommendations, and to
manage
the administrative aspects of proxy voting. The voting agent processes proxies
for client accounts, casts
votes
based on the Guidelines and maintains records of proxies voted. Wellington
Management complements the
research
received by its primary voting agent with research from another voting
agent.
Receipt
of Proxy
If
a client requests that Wellington Management votes proxies on its behalf, the
client must instruct its custodian bank
to
deliver all relevant voting material to Wellington Management or its voting
agent.
Reconciliation
Each
public security proxy received by electronic means is matched to the securities
eligible to be voted and a
reminder
is sent to any custodian or trustee that has not forwarded the proxies as due.
This reconciliation is
performed
at the ballot level. Although proxies received for private securities, as well
as those received in non-electronic format, are voted as received, Wellington
Management is not able to reconcile these ballots, nor does it
notify
custodians of non-receipt.
Research
In
addition to proprietary investment research undertaken by Wellington Management
investment professionals,
Investment
Research conducts proxy research internally, and uses the resources of a number
of external sources
including
third-party voting agents to keep abreast of developments in corporate
governance and of current practices
of
specific companies.
Proxy
Voting
Following
the reconciliation process, each proxy is compared against the Guidelines, and
handled as follows:
•Generally,
issues for which explicit proxy voting guidance is provided in the Guidelines
(i.e., “For”, “Against”, “Abstain”) are voted in accordance with the
Guidelines.
•Issues
identified as “case-by-case” in the Guidelines are further reviewed by
Investment Research. In certain circumstances, further input is needed, so the
issues are forwarded to the relevant research analyst and/or portfolio
manager(s) for their input.
•Absent
a material conflict of interest, the portfolio manager has the authority to
decide the final vote. Different portfolio managers holding the same securities
may arrive at different voting conclusions for their clients’
proxies.
Wellington
Management reviews a subset of the voting record to ensure that proxies are
voted in accordance with these Global
Proxy Policy and Procedures and
the Guidelines; and ensures that documentation and reports, for clients and for
internal purposes, relating to the voting of proxies are promptly and properly
prepared and disseminated.
Material
Conflict of Interest Identification and Resolution Processes
Wellington
Management’s broadly diversified client base and functional lines of
responsibility serve to minimize the number of, but not prevent, material
conflicts of interest it faces in voting proxies. Annually, the Investment
Stewardship Committee sets standards for identifying material conflicts based on
client, vendor, and lender
relationships,
and publishes those standards to individuals involved in the proxy voting
process. In addition, the
Investment
Stewardship Committee encourages all personnel to contact Investment Research
about apparent
conflicts
of interest, even if the apparent conflict does not meet the published
materiality criteria. Apparent conflicts
are
reviewed by designated members of the Investment Stewardship Committee to
determine if there is a conflict and
if
so whether the conflict is material.
If
a proxy is identified as presenting a material conflict of interest, the matter
must be reviewed by designated
members
of the Investment Stewardship Committee, who will resolve the conflict and
direct the vote. In certain
circumstances,
the designated members may determine that the full Investment Stewardship
Committee should
convene.
OTHER
CONSIDERATIONS
In
certain instances, Wellington Management may be unable to vote or may determine
not to vote a proxy on behalf of one or more clients. While not exhaustive, the
following are potential instances in which a proxy vote might not be
entered.
Securities
Lending
In
general, Wellington Management does not know when securities have been lent out
pursuant to a client’s securities
lending
program and are therefore unavailable to be voted. Efforts to recall loaned
securities are not always effective,
but,
in rare circumstances, Wellington Management may determine voting would outweigh
the benefit to the client
resulting
from use of securities for lending and recommend that a client attempt to have
its custodian recall the
security
to permit voting of related proxies.
Share
Blocking and Re-registration
Certain
countries impose trading restrictions or requirements regarding re-registration
of securities held in omnibus
accounts
in order for shareholders to vote a proxy. The potential impact of such
requirements is evaluated when
determining
whether to vote such proxies.
Lack
of Adequate Information, Untimely Receipt of Proxy Materials, or Excessive
Costs
Wellington
Management may abstain from voting a proxy when the proxy statement or other
available information is
inadequate
to allow for an informed vote, when the proxy materials are not delivered in a
timely fashion or when, in
Wellington
Management’s judgment, the costs exceed the expected benefits to clients (such
as when powers of
attorney
or consularization are required).
ADDITIONAL
INFORMATION
Wellington
Management maintains records related to proxies pursuant to Rule 204-2 of the
Investment Advisers Act
of
1940 (the “Advisers Act”), the Employee Retirement Income Security Act of 1974,
as amended (“ERISA”), and other applicable laws. In addition, Wellington
Management discloses annually how it has exercised its voting rights
for
significant
votes, as require by the EU Shareholder Rights Directive II (“SRD
II”).
Wellington
Management provides clients with a copy of its Global Proxy Policy and
Procedures, including the
Guidelines,
upon written request. In addition, Wellington Management will provide specific
client information relating
to
proxy voting to a client upon written request.
Dated:
1 September 2020
ALPHASIMPLEX
PROXY
VOTING POLICY AND PROCEDURES
Adopted
October 5, 2004
Revised
as of December 22, 2021
I.Policy
Proxy
voting is an important right of shareholders and reasonable care and diligence
must be undertaken to ensure that such rights are properly and timely exercised.
When the Adviser has discretion to vote the proxies of its clients, it will vote
the proxies in a manner that is consistent with what it believes to be the best
interests of such clients and in accordance with these policies and procedures.
In the absence of specific voting guidelines from a client, the Adviser will
generally vote proxies for clients with the same or substantially similar
investment strategies and objectives the same way.
II.Use
of Third-Party Proxy Voting Service
Retention
of Proxy Voting Service
The
Adviser has entered into an agreement with an independent third-party proxy
voting service (the “Proxy Voting Service”) to provide the Adviser with its
research and voting recommendations on proxies and to facilitate the electronic
voting of proxies.
The
Adviser has instructed the Proxy Voting Service to execute all proxies in
accordance with its recommendations unless instructed otherwise by the
Adviser.
The
Adviser will seek to consider whether the Proxy Voting Service has the capacity
and competency to adequately analyze the matters for which the Adviser is
responsible for voting, taking into account (as applicable):
•The
adequacy and quality of the Proxy Voting Service’s staffing, personnel and/or
technology;
•Whether
the Proxy Voting Service has an effective process for seeking timely input from
issuers and Proxy Voting Service clients with respect to, among other things,
its proxy voting policies, methodologies, and peer group
constructions;
•Whether
the Proxy Voting Service has adequately disclosed to the Adviser its
methodologies in formulating voting recommendations, such that the Adviser
understands the factors underlying the Proxy Voting Service’s
recommendations;
•The
nature of any third-party information sources that the Proxy Voting Service uses
as a basis for its voting recommendations; and
•The
Proxy Voting Service’s policies and procedures regarding how it identifies and
addresses conflicts of interest.
Conflicts
of Interest of the Proxy Voting Service
The
Compliance Officer will examine information provided by the Proxy Voting Service
that describes conflicts to which the Proxy Voting Service is subject or
otherwise obtained by the Adviser. The Adviser will seek to require that the
Proxy Voting Service promptly provide updates to the Compliance Officer of
business changes that might affect or create conflicts and of changes to the
proxy voting service’s conflict policies and procedures.
If,
as a result of the Compliance Officer’s examination of the Proxy Voting
Service’s conflicts of interest, a determination is made that a material
conflict of interest exists, the Compliance Officer will determine whether to
follow
the Proxy Voting Service’s recommendation with respect to the proxy or take
other action with respect to the proxy (such as follow the Adviser’s general
proxy voting guidelines, if applicable).
To
the extent the Adviser’s votes are pre-populated on the Proxy Voting Service’s
electronic voting platform, the Compliance Officer will seek to ensure that the
Proxy Voting Service would not be permitted to utilize information regarding how
the Adviser intends to vote (or the aggregated voting intentions of the Proxy
Voting Service’s clients) in a manner that would not be in the best interest of
the Adviser’s clients.
Periodic
Review of Proxy Voting Service’s Policies and Procedures and Continued Retention
of the Proxy
Voting
Service
The
Compliance Officer will periodically review the Proxy Voting Service’s policies
and procedures for:
•Adequacy
in identifying, disclosing and addressing actual and potential conflicts of
interest, including conflicts relating to the provision of proxy voting
recommendations and proxy voting services generally, conflicts relating to
activities other than providing proxy voting recommendations and proxy voting
services, and conflicts presented by certain affiliations;
•Adequate
disclosure of the Proxy Voting Service’s actual and potential conflicts of
interest with respect to the services the Proxy Voting Service provides to the
Adviser; and
•Adequacy
in utilizing technology in delivering conflicts disclosures that are readily
accessible.
The
Adviser shall review periodically the proxy voting policies, procedures and
methodologies, conflicts of interest and competency of the Proxy Voting Service.
The Adviser will also review the continued retention of the Proxy Voting
Service, including whether any relevant credible potential factual errors,
incompleteness or methodological weaknesses in the Proxy Voting Service’s
analysis that the Adviser is aware of materially affected the research and
recommendations used by the Adviser. In addition, the Adviser will also consider
the effectiveness of the Proxy Voting Service’s policies and procedures for
obtaining current and accurate information relevant to matters included in its
research and on which it makes voting recommendations. This will include the
Proxy Voting Service’s:
•engagement
with issuers, including the Proxy Voting Service's process for ensuring that it
has complete and accurate information about the issuer and each particular
matter;
•process,
if any, for the Adviser to access the issuer's views about the Proxy Voting
Service’s voting recommendations in a timely and efficient manner;
•efforts
to correct any identified material deficiencies in its analysis;
•disclosure
to the Adviser regarding sources of information and methodologies used in
formulating voting recommendations or executing voting
instructions;
•consideration
of factors unique to a specific issuer or proposal when evaluating a matter
subject to a shareholder vote; and
•updates
to its methodologies, guidelines and voting recommendations on an ongoing basis,
including in response to feedback from issuers and their
shareholders.
The
Adviser will seek to require the Proxy Voting Service to update the Adviser
regarding business changes that are material to the services provided by the
Proxy Voting Service to the Adviser. The Adviser will consider whether the bases
on which it made its initial decision to retain the Proxy Voting Service has
materially changed, and will document such review.
At
a minimum annually, or more frequently as deemed necessary, the Compliance
Officer will seek to ensure that a review of the independence and impartiality
of the Proxy Voting Service is carried out, including obtaining certification or
other information from the Proxy Voting Service to enable the Adviser to make
such an assessment. The Compliance Officer will also monitor any new SEC
interpretations regarding the voting of proxies and the use of third-party proxy
voting services and revise the Adviser’s policies and procedures as
necessary.
III.Proxy
Voting Procedures
Proxies
relating to securities held in client accounts will be sent directly to the
Proxy Voting Service. If a proxy is received by the Adviser and not sent
directly to the Proxy Voting Service, the Compliance Officer will promptly
forward it to the Proxy Voting Service. In the event that (a) the Proxy Voting
Service is unable to complete/provide its research regarding a security on a
timely basis, (b) the Compliance Officer or the Proxy Voting Service determines
that the Proxy Voting Service has a conflict of interest with respect to voting
a proxy, or (c) the Adviser has made a determination that it is in the best
interests of the Adviser's clients for the Adviser to vote a proxy, the
Adviser’s general proxy-voting procedures are required to be followed, as
follows. The Compliance Officer will:
•Keep
a record of each proxy received;
•Forward
the proxy to the portfolio management team;
•Determine
which accounts managed by the Adviser hold the security to which the proxy
relates;
•Provide
the portfolio management team with a list of accounts that hold the security,
together with the number of votes each account controls (reconciling any
duplications), and the date by which the Adviser must vote the proxy in order to
allow enough time for the completed proxy to be returned to the issuer prior to
the vote taking place;
•Absent
material conflicts (see Section V below), the portfolio management team will
determine how the Adviser will vote a proxy and communicate this determination
to the Compliance Officer. The Compliance Officer is responsible for completing
the proxy and mailing or otherwise submitting the proxy in a timely and
appropriate manner; and
•Perform
reconciliations to ensure that all proxies are voted (e.g., reconcile the list
of clients for which the Adviser has proxy voting obligations against a list of
votes cast by the Adviser or by the Proxy Voting Service for clients) or that
the Adviser has determined that not voting for a particular client is
appropriate; and
•The
Proxy Voting Service will pre-populate the Adviser’s votes on the Proxy Voting
Service’s electronic voting platform with the Proxy Voting Service’s
recommendations based on the Adviser’s voting instructions to the Proxy Voting
Service. To the extent the Adviser becomes aware that an issuer that is the
subject of the Proxy Voting Service’s voting recommendation intends to file or
has filed additional solicitating materials (“Additional Information”) after the
Adviser has received the Proxy Voting Service’s voting recommendation but before
the proxy submission deadline, and the Additional Information would reasonably
be expected to affect the Adviser’s voting determination, the Adviser will
consider the Additional Information prior to exercising voting authority to
confirm that the Adviser is voting in its client’s best interest.
IV.Voting
Guidelines
In
the absence of specific voting guidelines from the client, the Adviser will vote
proxies in the best interests of each particular client, which may result in
different voting results for proxies for the same issuer. The Adviser believes
that voting proxies in accordance with the following guidelines is in the best
interests of its clients.
•Generally,
the Adviser will vote in favor of routine corporate housekeeping proposals,
including election of directors (where no corporate governance issues are
implicated), selection of auditors, and increases in or reclassification of
common stock.
•Generally,
the Adviser will vote against proposals that make it more difficult to replace
members of the issuer’s board of directors, including proposals to stagger the
board, cause management to be overrepresented on the board, introduce cumulative
voting, introduce unequal voting rights, and create supermajority
voting.
•For
other proposals, the Adviser shall determine whether a proposal is in the best
interests of its clients and may take into account the following factors, among
others:
◦whether
the proposal was recommended by management and the Adviser’s opinion of
management;
◦whether
the proposal acts to entrench existing management; and
◦whether
the proposal fairly compensates management for past and future
performance.
The
Adviser will abstain from voting or affirmatively decide not to vote if the
Adviser determines that abstention or not voting is in the best interests of the
client. In making this determination, the Adviser will consider various factors,
including, but not limited to, (i) the costs associated with exercising the
proxy (e.g., translation or travel costs); (ii) any legal restrictions on
trading resulting from the exercise of a proxy; and (iii) regulatory
restrictions related to the Adviser’s relationship with affiliates. The Adviser
may determine not to vote proxies relating to securities in which clients have
no position as of the receipt of the proxy (for example, when the Adviser has
sold, or has otherwise closed, a client position after the proxy record date but
before the proxy receipt date).
V.
Conflicts of Interest
1.In
the event that the Adviser is directly voting a proxy, the Compliance Officer
will examine conflicts that exist between the interests of the Adviser and its
clients. This examination will seek to include a review of the relationship of
the Adviser and its affiliates with the issuer of each security and any of the
issuer’s affiliates to determine if the issuer is a client of the Adviser or an
affiliate of the Adviser or has some other relationship with the Adviser or an
affiliate of the Adviser.
2.If,
as a result of the Compliance Officer’s examination, a determination is made
that a material conflict of interest exists, the Adviser will determine whether
voting in accordance with the voting guidelines and factors described above is
in the best interests of the client. If the proxy involves a matter covered by
the voting guidelines and factors described above, the Adviser will generally
vote
the proxy in accordance with the voting guidelines. Alternatively, the Adviser
may vote the proxy in accordance with the recommendation of the Proxy Voting
Service.
The
Adviser may disclose the conflict to the affected clients and, except in the
case of clients that are subject to the Employee Retirement Income Security Act
of 1974, as amended (“ERISA”), give the clients the opportunity to vote their
proxies themselves. In the case of ERISA clients, if the Investment
Management
Agreement reserves to the ERISA client the authority to vote proxies when the
Adviser determines it has a material conflict that affects its best judgment as
an ERISA fiduciary, the Adviser will give the ERISA client the opportunity to
vote the proxies themselves. Absent the client reserving voting rights, the
Adviser will either vote the proxies in accordance with the policies outlined in
Section III “Voting Guidelines” above or vote the proxies in accordance with the
recommendation of the Proxy Voting Service.
VI.
Disclosure
a.The
Adviser will disclose in its Form ADV Part 2 that clients may contact the Chief
Compliance Officer, via e-mail or telephone, in order to obtain information on
how the Adviser voted such client’s proxies, and to request a copy of these
policies and procedures. If a client requests this information, the Chief
Compliance Officer will prepare a written response to the client that lists,
with respect to each voted proxy about which the client has inquired, (a) the
name of the issuer; (b) the proposal voted upon; and (c) how the Adviser voted
the client’s proxy.
b.A
concise summary of this Proxy Voting Policy and Procedures will be included in
the Adviser’s Form ADV Part 2A, and will be updated whenever these policies and
procedures are updated. The Compliance Officer will arrange for a copy of this
summary to be sent to all existing clients (who will already have been sent the
Adviser’s Form ADV Part 2A) either as a separate mailing or along with periodic
account statements or other correspondence sent to clients.
VII.
Recordkeeping
The
Compliance Officer will maintain files relating to the Adviser’s proxy voting
procedures in an easily accessible place. (Under the services contract between
the Adviser and its Proxy Voting Service, the Proxy Voting Service will maintain
the Adviser’s proxy-voting records). Records will be maintained and preserved
for five years from the end of the fiscal year during which the last entry was
made on a record, with records for the first two years kept in the offices of
the Adviser. Records of the following will be included in the
files:
1.Copies
of this proxy voting policy and procedures, and any amendments
thereto.
2.A
copy of each proxy statement that the Adviser receives, provided, however, that
the Adviser may rely on third parties or the SEC’s EDGAR system.
3.A
record of each vote that the Adviser casts.
4.A
copy of any document that the Adviser created that was material to making a
decision how to vote proxies, or that memorializes the decision. (For votes that
are inconsistent with the Adviser's general proxy voting polices, the
reason/rationale for such an inconsistent vote is required to be briefly
documented and maintained).
5.A
copy of each written client request for information on how the Adviser voted
such client’s proxies, and a copy of any written response to any (written or
oral) client request for information on how the Adviser voted its
proxies.
VIII.
Additional Procedures
Due
Diligence.
The
Compliance Officer will periodically review a sample of proxy votes to determine
whether those votes complied with these policies and procedures.
Sampling
Pre-Populated Votes.
The
Compliance Officer will periodically assess pre-populated votes shown on the
Proxy Voting Service’s electronic voting platform before such votes are
cast.
Consideration
of Additional Information.
In
addition to voting recommendations from the Proxy Voting Service, the Adviser
will consider additional information related to a proposal such as a shareholder
proponent’s subsequently filed additional definitive proxy materials or other
relevant, material information conveyed by an issuer or shareholder proponent to
the Adviser.
Higher
Degree of Analysis.
The
Adviser will conduct a higher degree of analysis with respect to proposals that
concern matters not addressed in these policies and procedures or where the
matter is highly contested or controversial.
Material
Inaccuracies.
If
the Adviser becomes aware of any material inaccuracies in the information
provided by the Proxy Voting Service, the Compliance Officer will investigate
the matter to determine the cause, evaluate the adequacy of the Proxy Voting
Service’s control structure and assess the efficacy of the measures instituted
to prevent further errors.
Annual
Review.
The
Compliance Officer shall review, no less frequently than annually, the adequacy
of these policies and procedures to make sure they have been implemented
effectively, including whether the policies and procedures continue to be
reasonably designed to ensure that proxies are voted in the best interests of
its clients. As part of this review, the Compliance Officer may review a sample
of votes cast (including a sample of proxy votes related to proposals requiring
more issuer-specific analysis (e.g.,
mergers,
acquisitions, dissolutions, conversions, consolidations or contested elections
for directors) and controversial issues) to determine whether those votes were
made in accordance with these policies and procedures. The Compliance
Officer/operations department will also review the Adviser’s client disclosures
(e.g., the Adviser’s Form ADV, private fund offering documentation, due
diligence questionnaires and marketing materials) regarding its proxy voting
policies and procedures.
Policy,
Procedures
and
Guidelines
for
Goldman
Sachs
Asset
Management’s
Global
Proxy
Voting
2024
Edition
March
2024
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Table
of Contents |
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PART
I |
1 |
GOLDMAN
SACHS ASSET MANAGEMENT POLICY AND PROCEDURES ON PROXY VOTING FOR
INVESTMENT ADVISORY CLIENTS |
1 |
A: |
Our
Approach to Proxy Voting |
1 |
B: |
The
Proxy Voting Process |
1 |
C: |
Implementation |
2 |
D: |
Conflicts
of Interest |
3 |
PART
II |
4 |
GOLDMAN
SACHS ASSET MANAGEMENT PROXY VOTING GUIDELINES SUMMARY |
4 |
Region:
Americas |
4 |
1 |
Business
Items |
4 |
2 |
Board
of Directors |
5 |
3 |
Remuneration |
9 |
4 |
Shareholders
Rights and Defenses |
12 |
5 |
Strategic
Transactions and Capital Structures |
12 |
6 |
Environmental
and Social Issues. |
15 |
Region:
Europe, Middle East and Africa (EMEA) Proxy Items |
19 |
1 |
Business
Items |
19 |
2 |
Board
of Directors |
20 |
3 |
Executive
and Non-Executive Compensation |
25 |
4 |
Shareholders
Rights and Defenses |
26 |
5 |
Strategic
Transactions, Capital Structures and other Business
Considerations |
27 |
6 |
Environmental
and Social Issues. |
29 |
Region:
Asia Pacific (APAC) Proxy Items |
33 |
1 |
Business
Items |
33 |
2 |
Board
of Directors |
34 |
3 |
Remuneration |
39 |
4 |
Shareholders
Rights and Defenses |
40 |
5 |
Strategic
Transactions, Capital Structures and other Business
Considerations |
40 |
6 |
Environmental
and Social Issues. |
43 |
Region:
Japan Proxy Items |
47 |
1 |
Operational
Items |
47 |
2 |
Board
of Directors |
48 |
3 |
Compensation |
51 |
4 |
Shareholders
Rights and Defenses |
52 |
5 |
Strategic
Transactions, Capital Structures and other Business
Considerations |
52 |
6 |
Environmental
and Social Issues. |
54 |
PART
I:
GOLDMAN
SACHS
ASSET
MANAGEMENT1
POLICY
AND
PROCEDURES ON PROXY VOTING FOR INVESTMENT ADVISORY CLIENTS
A:
Our
Approach
to
Proxy Voting
Proxy
voting and the analysis of corporate governance issues in general are important
elements of the portfolio management services we provide to our advisory clients
who have authorized us to address these matters on their behalf.
Our
guiding
principles
in
performing
proxy
voting
are
to
make
decisions
that
favor
proposals
that
in
our
view
maximize
a
company’s
shareholder
value
and
are
not
influenced
by conflicts
of
interest.
These
principles
reflect
our
belief that sound corporate governance will create a framework within which a
company can be managed in the interests of its shareholders. We recognize that
Environmental, Social and Governance (ESG) factors can affect investment
performance, expose potential investment
risks
and provide an indication of management
excellence
and leadership.
When
evaluating ESG proxy issues, we balance the purpose of a proposal with the
overall benefit to shareholders.
To
implement
these
guiding
principles
for
investments
in
publicly
traded
equities
for
which
we
have
voting
power
on
any
record
date,
we
follow
customized
proxy
voting
guidelines
that
have
been
developed
by
our
portfolio
management
and
our
Global
Stewardship
Team
(the
“Guidelines”).
The
Guidelines
embody
the
positions
and
factors
we
generally
consider important in casting proxy votes.
They
address a wide variety of individual topics, including, among other matters,
shareholder voting rights, anti-takeover defenses, board structures, the
election of directors, executive and director compensation, reorganizations,
mergers, issues of corporate social responsibility and various shareholder
proposals.
Recognizing
the
complexity
and
fact-specific
nature
of
many
corporate
governance
issues,
the
Guidelines
identify
factors
we
consider
in
determining
how
the
vote
should
be
cast.
A
summary
of
the
Guidelines
is
attached
as
Part II.
The
principles
and
positions
reflected
in
this
Policy
are
designed
to
guide
us
in
voting
proxies,
and
not
necessarily
in
making investment decisions.
Our
portfolio management teams (each, a “Portfolio Management Team”) base their
determinations of whether to invest in a particular company on a variety of
factors, and while corporate governance may be one such factor, it may not be
the primary consideration.
Goldman
Sachs Asset Management has adopted the policies and procedures set out below
regarding the voting of proxies (the “Policy”).
The
Global Stewardship Team periodically reviews this Policy to ensure it continues
to be consistent with our guiding principles.
B:
The
Proxy
Voting
Process
Public
Equity
Investments
1
For
purposes
of
this
Policy,
“Global
Sachs
Asset
Management”
or
“we”
includes
,
collectively,
to
the
public
investing
businesses of the following legal entities to the extent
applicable:
Goldman
Sachs
Asset
Management,
L.P.;
Goldman
Sachs
Asset
Management
International;
Goldman
Sachs
Hedge
Fund
Strategies
LLC;
GSAM
Stable
Value, LLC; Goldman Sachs Asset Management (Singapore) Pte. Ltd; Goldman Sachs
Asset Management (Hong Kong) Limited.;
Goldman
Sachs Asset
Management
Co.
Ltd.;
Goldman Sachs Asset
Management
(India)
Private
Limited;
GS
Investment Strategies
Canada
Inc.;
Goldman
Sachs Asset Management Australia Pty Ltd; Goldman Sachs Services Private
Limited.; Goldman Sachs Bank Europe SE; Goldman
Sachs
Asset
Management
Fund Services Limited; Aptitude Investment
Management
L.P.;
Rocaton
Investment Advisors, LLC; GSAM
Strategist
Portfolios,
LLC; Goldman Sachs Asset Management B.V.; Goldman Sachs Asset Management Belgium
S.A.; Goldman Sachs Towarzystwo
Funduszy
Inwestycyjnych S.A.; and Goldman Sachs Investment Management (Singapore)
Ltd.
Fundamental
Equity
Team
The
Fundamental Equity Team views the analysis of corporate governance practices as
an integral part of the investment research and stock valuation
process.
In
forming their views on particular matters, these Portfolio Management
Teams
may
consider applicable
regional
rules
and
practices, including codes
of
conduct and other
guides,
regarding
proxy voting, in addition to the Guidelines and Recommendations (as defined
below). For the managed portfolios
that
participate
in
a
securities
lending
program,
GSAM
will
seek
to
recall
shares
that
are
out
on
loan
for
the
purpose
of
voting
at
shareholder
meetings,
recognizing
that
the
handling
of
such
recall
requests
is
beyond
the
Portfolio
Management Team’s control and may not be satisfied in time for it to vote the
shares in question.
Quantitative
Investment
Strategies
(“QIS”)
and
Quantitative
Equity
Strategies
(“QES”)
Portfolio
Management
Teams
The
QIS and QES Portfolio Management Teams have decided to generally follow the
Guidelines and Recommendations based on such Portfolio Management Teams’
investment philosophy and approach to portfolio construction,
as
well
as
their
participation
in
the
creation
of
the
Guidelines.
The
QIS
and
QES
Portfolio
Management
Teams may from time to time, however, review and individually assess any
specific shareholder vote. For managed portfolios that
participate
in a
securities
lending program, GSAM generally will not
recall
shares
that are out on loan for the purpose of voting at shareholder
meetings.
Fixed
Income
and
Private
Investments
Voting
decisions with respect to client investments in fixed income securities and the
securities of privately held issuers
generally
will
be
made
by
the
relevant
Portfolio
Management
Teams
based
on
their
assessment
of
the
particular
transactions
or
other
matters
at
issue.
Those
Portfolio
Management
Teams
may
also
adopt
policies
related
to
the
fixed
income or private investments they make that supplement this
Policy.
External
Investing
Group
(“XIG”)
and
Externally Managed Strategies
Where
we
place
client
assets
with
managers
outside
of
Asset
Management,
for
example
within
our
XIG
business
unit,
such external managers generally will be responsible for voting proxies in
accordance with the managers’ own policies.
XIG
may, however, retain proxy voting responsibilities where it deems appropriate or
necessary under prevailing circumstances.
To
the extent XIG portfolio managers assume proxy voting responsibility with
respect to publicly traded
equity
securities
they
will
follow
the
Guidelines
and
Recommendations
as
discussed
below
unless
an
override is requested.
C:
Implementation
We
have retained a third-party proxy voting service (the “Proxy Service”) to assist
in the implementation of certain proxy voting-related functions, including,
without limitation, operational, recordkeeping and reporting services.
Among
its
responsibilities,
the
Proxy
Service
prepares
a
written
analysis
and
recommendation
(a
“Recommendation”)
of each proxy vote that reflects the Proxy Service’s application of the
Guidelines to the particular proxy issues.
In
addition,
in
order
to
facilitate
the
casting
of
votes
in
an
efficient
manner,
the
Proxy
Service
generally
prepopulates
and
automatically
submits
votes
for
all
proxy
matters
in
accordance
with
such
Recommendations,
subject
to
our
ability
to
recall
such
automatically
submitted
votes.
If
the
Proxy
Service
or
Goldman
Sachs
Asset
Management
becomes
aware
that an issuer has filed, or will file, additional proxy solicitation materials
sufficiently in advance of the voting deadline, we will generally endeavor to
consider such information where such information is viewed as material in
our
discretion
when
casting
its
vote,
which
may,
but
need
not,
result
in
a
change
to
the
Recommendation,
which
may
take the form of an override (as described below) or a revised Recommendation
issued by the Proxy Service. We retain the responsibility for proxy voting
decisions. We conduct an annual due diligence meeting with the Proxy Service to
review the processes and procedures the Proxy Service follows when making proxy
voting recommendations
based
on
the
Guidelines
and
to
discuss
any
material
changes
in
the
services,
operations,
staffing
or
processes.
Our
Portfolio Management Teams generally cast proxy votes consistently with the
Guidelines and the Recommendations.
Each
Portfolio
Management
Team,
however,
may
on
certain
proxy
votes
seek
approval
to
diverge
from
the
Guidelines
or
a
Recommendation
by
following
a
process
that
seeks
to
ensure
that
override
decisions
are
not
influenced
by
any
conflict
of
interest.
As
a
result
of
the
override
process,
different
Portfolio
Management
Teams
may
vote differently
for
particular
votes
for
the
same company. In addition, the Global
Stewardship
Team may on certain proxy
votes
also
seek
approval
to
diverge
from
the
Guidelines
or
a
Recommendation
and
follow
the
override
process
described above that seeks to
ensure
these decisions are
not
influenced
by
any conflict of interest. In these instances, all shares voted are generally
voted in the same manner.
Our
clients
who
have
delegated
voting
responsibility
to
us
with
respect
to
their
account
may
from
time
to
time
contact
their
client
representative
if
they
would
like
to
direct
us
to
vote
in
a
particular
manner
for
a
particular
solicitation.
We
will
use
commercially
reasonable
efforts
to
vote
according
to
the
client’s
request
in
these
circumstances,
however,
our
ability
to
implement
such
voting
instruction
will
be
dependent
on
operational
matters
such
as
the
timing
of
the
request.
While
we seek to vote at all eligible shareholder meetings, from time to
time,
our
ability to vote proxies may be affected
by
regulatory
requirements
and
compliance,
legal
or
logistical
considerations.
As
a
result,
from
time
to
time,
we may determine that it is not practicable or desirable to vote at certain
shareholder meetings.
We
disclose our voting publicly each year in a filing with the US Securities and
Exchange Commission and on our website
for
all
Goldman
Sachs
Asset
Management
US
registered
mutual
funds.
We
also
generally
disclose
our
voting
publicly on a quarterly basis on our website for company proxies voted according
to the Guidelines and Recommendations.
D.
Conflicts
of
Interest
Goldman
Sachs Asset Management has implemented processes designed to prevent conflicts
of interest from influencing its proxy voting decisions. These processes include
information barriers as well as the use of the Guidelines and Recommendations
and the override process described above in instances when a Portfolio
Management Team is interested in voting in a manner that diverges from the
initial Recommendation based on the Guidelines. To mitigate
perceived
or potential
conflicts
of
interest
when
a proxy is
for
shares
of
The
Goldman
Sachs
Group
Inc.
or
a
Goldman
Sachs
Asset
Management
managed
fund,
we
will
generally
instruct
that
such
shares
be
voted
in
the
same
proportion
as
other
shares
are
voted
with
respect
to
a
proposal,
subject
to
applicable
legal,
regulatory
and
operational requirements.
PART
II
GOLDMAN
SACHS
ASSET
MANAGEMENT’S
PROXY
VOTING
GUIDELINES SUMMARY
The
following is
a
summary
of
the material Proxy Voting
Guidelines
(the
“Guidelines”),
which
form
the
substantive basis
of
our
Policy
and
Procedures
on
Proxy
Voting
for
Investment
Advisory
Clients
(the
“Policy”).
As
described
in
the main body of the Policy, one or more Portfolio Management Teams and/or the
Global Stewardship Team may diverge from the Guidelines and a related
Recommendation on any particular proxy vote or in connection with any individual
investment decision in accordance with the Policy.
Region:
Americas
The
following section is
a
summary of the Guidelines, which
form
the substantive basis
of
the Policy with respect to North, Central and South American public equity
investments of operating and/or holding companies. Applying these
guidelines
is
subject
to
certain
regional
and
country-specific
exceptions
and
modifications
and
is
not
inclusive
of all considerations in each market.
1.Business
Items
Auditor
Ratification
Vote
FOR
proposals
to
ratify
auditors,
unless
any
of
the
following
apply
within
the
last
year:
•An
auditor
has
a
financial
interest
in
or
association
with
the
company,
and
is
therefore
not
independent;
•There
is
reason
to
believe
that
the
independent
auditor
has
rendered
an
opinion
that
is
neither
accurate nor indicative of the company’s financial position;
•Poor
accounting
practices
are
identified
that
rise
to
a
serious
level
of
concern,
such
as:
fraud;
misapplication of GAAP; or material weaknesses identified in Section 404
disclosures; or
•Fees
for
non-audit
services
are
excessive
(generally
over
50%
or
more
of
the
audit
fees).
Vote
CASE-BY-CASE
on
shareholder
proposals
asking
companies
to
prohibit
or
limit
their
auditors
from
engaging
in non-audit services or asking for audit firm rotation.
Reincorporation
Proposals
We
may support management proposals to reincorporate as long as the reincorporation
would not substantially diminish
shareholder
rights.
We
may
not
support
shareholder
proposals
for
reincorporation
unless
the
current
state
of incorporation is substantially less shareholder friendly than the proposed
reincorporation, there is a strong economic
case
to
reincorporate
or
the
company
has
a
history
of
making decisions
that
are
not
shareholder
friendly.
Exclusive
Venue
for
Shareholder
Lawsuits
Generally
vote
FOR
on
exclusive
venue
proposals,
taking
into
account:
•Whether
the
company
has
been
materially
harmed
by
shareholder
litigation
outside
its
jurisdiction
of incorporation, based on disclosure in the company's proxy
statement;
•Whether
the
company
has
the
following
governance
features:
Majority
independent
board;
Independent
key
committees;
An
annually
elected
board;
A
majority
vote
standard
in
uncontested
director
elections;
The
absence
of
a
poison
pill,
unless
the
pill
was
approved
by
shareholders;
and/or
Separate
Chairman
CEO
role
or,
if
combined,
an
independent
chairman
with
clearly
delineated duties.
Virtual
Meetings
Generally
vote FOR proposals allowing for the convening of
hybrid*
shareholder
meetings
if
it is clear that it is not the
intention
to
hold
virtual-only
AGMs.
Generally
vote
AGAINST
proposals
allowing
for
the
convening
of
virtual-
only* shareholder meetings.
*
The
phrase
“virtual-only
shareholder
meeting”
refers
to
a
meeting
of
shareholders
that
is
held
exclusively
through
the use of online technology without a corresponding in-person
meeting.
The
term “hybrid shareholder meeting” refers to an in-person, or physical, meeting
in which shareholders are permitted to participate online.
Public
Benefit
Corporation
Proposals
Generally
vote
FOR
management
proposals
and
CASE-BY-CASE
on
shareholder
proposals
related
to
the
conversion
of the company into a public benefit corporation.
Amend
Articles
of
Incorporation
to
Provide
for
Officer
and
Director
Exculpation
Generally
vote
FOR
management
proposals
to
amend
the
company's
certificate
of
incorporation
to
reflect
new
Delaware law provisions regarding officer and director exculpation.
Transact
Other
Business
Vote
AGAINST
other
business
when
it
appears
as
a
voting
item.
Administrative
Requests
Generally
vote
FOR
non-contentious
administrative
management
requests.
2.Board
of
Directors
The
board
of
directors
should
promote
the
interests
of
shareholders
by
acting
in
an
oversight
and/or
advisory
role;
should consist of a majority of independent directors and/or meet local best
practice expectations; and should be held accountable for actions and results
related to their responsibilities. Vote on director nominees should be
determined on a CASE-BY-CASE basis.
Voting
on
Director
Nominees
in
Uncontested
Elections
Board Composition
We
generally
believe
diverse
teams
have
the
potential
to
outperform
and
we
expect
the
companies
that
we
invest
in
to
focus on the importance of diversity. When evaluating board composition, we
believe a diversity of ethnicity, gender
and
experience
is
an
important
consideration.
We
encourage
companies
to
disclose
the
composition
of
their
board in the proxy statement and may vote against members of the board without
disclosure. See below how we execute our vote at companies that do not meet our
diversity expectations.
Vote
AGAINST
or
WITHHOLD
from
members
of
the
Nominating
Committee:
•At
companies
that
do
not
meet
the
board
diversity
requirements
of
local
listing
rules,
corporate
governance
codes, national targets, or is not representative relative to the board
composition of companies in their market; and
•At
companies
within
the
S&P
500,
if,
in
addition
to
our
gender
expectations,
the
board
does
not
have
at
least one diverse director from a minority ethnic group;
Vote
AGAINST
or
WITHHOLD
from
the
full
board
at
companies
incorporated
in
the
US
that
do
not
have
any
woman directors.
.
Vote
AGAINST
or
WITHHOLD
from
individual
directors
who:
•Sit
on
more
than
five
public
company
boards;
•Are
CEOs
of
public
companies
who
sit
on
the
boards
of
more
than
two
public
companies
besides
their own--withhold only at their outside boards.
Vote
AGAINST
or
WITHHOLD
from
members
of
the
Nominating
Committee
if
the
average
board
tenure
exceeds
15 years, and there has not been a new nominee in the past 5 years.
Director
Independence
At
companies incorporated in the US, where applicable, the New York Stock Exchange
or NASDAQ Listing Standards
definition
is
to
be
used
to
classify
directors
as
inside
directors,
affiliated
outside
directors,
or
independent
outside directors.
Additionally,
we
will
consider
compensation
committee
interlocking
directors
to
be
affiliated
(defined
as
CEOs
who
sit on each other’s compensation committees).
Vote
AGAINST
or
WITHHOLD
from
inside
directors
and
affiliated
outside
directors
(as
described
above)
when:
•The
inside
director
or
affiliated
outside
director
serves
on
the
Audit,
Compensation
or
Nominating
Committees; and
•The
company lacks an Audit, Compensation or Nominating Committee so that the full
board functions
as
such
committees
and
inside
directors
or
affiliated
outside
directors
are
participating
in
voting on matters that independent committees should be voting on.
Director
Accountability
Vote
AGAINST
or
WITHHOLD
from
individual
directors
who
attend
less
than
75%
of
the
board
and
committee
meetings without a disclosed valid excuse.
Generally,
vote FOR the bundled election of
management
nominees, unless adequate
disclosures
of the
nominees
have
not
been
provided
in
a
timely
manner
or
if
one
or
more
of
the
nominees
does
not
meet
the
expectation
of
our policy.
Other
items considered for an AGAINST vote include specific concerns about the
individual or the company, such as
criminal
wrongdoing
or
breach
of
fiduciary
responsibilities,
sanctions
from
government
or
authority,
violations
of
laws and regulations, the presence of inappropriate related party transactions,
or other issues related to improper business practices.
Vote
AGAINST
or
WITHHOLD
from
members
of
the
full
board
or
appropriate
committee
(or
only
the
independent
chairman or lead director as may be appropriate in situations
such
as where there is a classified board and members
of
the appropriate committee are not up for re-election or the appropriate
committee is comprised of the entire board)
for
the
below
reasons.
New
nominees
will
be
considered
on
a
case-by-case
basis.
Extreme
cases
may
warrant
a vote against the entire board.
•Material
failures of governance, stewardship, or fiduciary responsibilities at the
company including
but
not
limited
to
violations
of
global
norms
principles
and/or
other
significant
global
standards;
•Failure
to
disclose
material
environmental,
social
and
governance
information;
•Egregious
actions
related
to
the
director(s)’
service
on
other
boards
that
raise
substantial
doubt
about his or her ability to effectively oversee management and serve the best
interests of shareholders at any company;
•The
board failed to act on a shareholder proposal that received approval of the
majority of shares cast the previous year (a management proposal with other than
a FOR recommendation by management will not be considered as sufficient action
taken); an adopted proposal that is substantially similar to the original
shareholder proposal will be deemed sufficient; (vote against
members
of
the
committee
of
the
board
that
is
responsible
for
the
issue
under
consideration).
If
we
did not support the shareholder proposal,, we may still vote against the
committee member(s).
•The
company’s
poison
pill
has
a
dead-hand
or
modified
dead-hand
feature
for
two
or
more
years.
Vote against/withhold every year until this feature is removed; however, vote
against the poison pill if there is one on the ballot with this feature rather
than the director;
•The
board
adopts
or
renews
a
poison
pill
without
shareholder
approval,
does
not
commit
to
putting
it to shareholder vote within 12 months of adoption (or in the case of a newly
public company, does not commit to put the pill to a shareholder vote within 12
months following the IPO), or reneges on a commitment to put the pill to a vote,
and has not yet received a withhold/against recommendation for this
issue;
•The
board
failed
to
act
on
takeover
offers
where
the
majority
of
the
shareholders
tendered
their
shares;
•The
company
does
not
disclose
various
components
of
current
emissions,
a
proxy
for
a
company’s
dependency on fossil fuels and other sources of greenhouse gasses (Scope 1,
Scope 2, Scope 3 emissions), material to the company’s business
•If
in
an
extreme
situation
the
board
lacks
accountability
and
oversight,
coupled
with
sustained
poor performance relative to peers.
Committee
Responsibilities
and
Expectations
Companies
should
establish
committees
to
oversee
areas
such
as
audit,
executive
and
non-executive
compensation,
director nominations and ESG oversight. The responsibilities of the committees
should be publicly disclosed.
Audit
Committee
Vote
AGAINST
or
WITHHOLD
from
the
members
of
the
Audit
Committee
if:
•The
non-audit
fees
paid
to
the
auditor
are
excessive
(generally
over
50%
or
more
of
the
audit
fees);
•The
company
receives
an
adverse
opinion
on
the
company’s
financial
statements
from
its
auditor
and there is not clear evidence that the situation has been
remedied;
•There
is
excessive
pledging
or
hedging
of
stock
by
executives;
•There
is persuasive evidence that the Audit Committee entered into an inappropriate
indemnification
agreement
with
its
auditor
that
limits
the
ability
of
the
company,
or
its
shareholders, to pursue legitimate legal recourse against the audit firm;
or
•No
members
of
the
Audit
Committee
hold
sufficient
financial
expertise.
Vote
CASE-BY-CASE
on
members
of
the
Audit
Committee
and/or
the
full
board
if
poor
accounting
practices,
which rise to a level of serious concern are identified, such as fraud,
misapplication of GAAP and material weaknesses identified in Section 404
disclosures.
Examine
the
severity,
breadth,
chronological
sequence
and
duration,
as
well
as
the
company’s
efforts
at
remediation
or corrective actions, in determining whether negative
vote
recommendations
are warranted against the members of the Audit Committee who are responsible for
the poor accounting practices, or the entire board.
Compensation
Committee
See
section
3
on
Executive
and
Non-Executive
compensation
for
reasons
to
withhold
from
members
of
the
Compensation Committee.
Nominating/Governance
Committee
Generally
vote
AGAINST
or
WITHHOLD
from
the
members
of
the
Nominating/Governance
Committee
if:
•A
company
maintains
a
classified
board
structure
without
a
sunset
provision,
has
opted
into,
or
failed
to
opt
out of, state laws requiring a classified board structure or has a capital
structure with unequal voting rights
•At
the
previous
board
election,
any
director
received
more
than
50%
withhold/against
votes
of
the
shares
cast and the company has failed to address the underlying issue(s) that caused
the high withhold/against vote;
•The
board
does
not
meet
our
diversity
expectations;
•The
board
amends
the
company’s
bylaws
or
charter
without
shareholder
approval
in
a
manner
that
materially diminishes shareholders’ rights or could adversely impact
shareholders.
Voting
on
Director
Nominees
in
Contested
Elections
Vote
on
a
CASE-BY-CASE
basis
in
contested
elections
of
directors,
e.g.,
the
election
of
shareholder
nominees
or
the dismissal of incumbent directors, determining which directors are best
suited to add value for shareholders.
The
analysis
will
generally
be
based
on,
but
not
limited
to,
the
following
major
decision
factors:
•Company
performance
relative
to
its
peers;
•Strategy
of
the
incumbents
versus
the
dissidents;
•Independence
of
board
candidates;
•Experience
and
skills
of
board
candidates;
•Governance
profile
of
the
company;
•Evidence
of
management
entrenchment;
•Responsiveness
to
shareholders;
•Whether
a
takeover
offer
has
been
rebuffed;
and
•Whether
minority
or
majority
representation
is
being
sought.
Proxy
Access
Vote
CASE-BY-CASE
on
shareholder
or
management
proposals
asking
for
proxy
access.
We
may support proxy access as an important right for shareholders and as an
alternative to costly proxy contests and
as
a
method
for
us
to
vote
for
directors
on
an
individual
basis,
as
appropriate,
rather
than
voting
on
one
slate
or
the
other.
While
this
could
be
an
important
shareholder
right,
the
following
factors
will
be
taken
into
account
when
evaluating the shareholder proposals:
•The
ownership
thresholds,
percentage
and
duration
proposed
(we
generally
will
not
support
if
the
ownership threshold is less than 3%);
•The
maximum
proportion
of
directors
that
shareholders
may
nominate
each
year
(we
generally
will
not support if the proportion of directors is greater than 25%);
and
•Other
restricting
factors
that
when
taken
in
combination
could
serve
to
materially
limit
the
proxy
access provision.
We
will
take
the
above
factors
into
account
when
evaluating
proposals
proactively
adopted
by
the
company
or
in
response to a shareholder proposal to adopt or amend the right. A vote against
governance committee members could result if provisions exist that materially
limit the right to proxy access.
Reimbursing
Proxy
Solicitation
Expenses
Vote
CASE-BY-CASE
on
proposals
to
reimburse
proxy
solicitation
expenses
Other
Board Related Proposals (Management and Shareholder) Independent Board Chair
(for
applicable markets)
We
will
generally
vote
AGAINST
shareholder
proposals
requiring
that
the
chairman’s
position
be
filled
by
an
independent director, if the company satisfies 3 of the 4 following
criteria:
•Two-thirds
independent
board,
or
majority
in
countries
where
employee
representation
is
common
practice;
•A
designated,
or
a
rotating,
lead
director,
elected
by
and
from
the
independent
board
members
with
clearly
delineated and comprehensive duties;
•Fully
independent
key
committees;
and/or
•Established,
publicly
disclosed,
governance
guidelines
and
director
biographies/profiles.
Proposals
Regarding
Board
Declassification
We
will
generally
vote
FOR
management
and
shareholder
proposals
regarding
the
adoption
of
a
declassified
board
structure.
Majority
Vote
Shareholder
Proposals
We
will vote FOR proposals requesting that the board adopt majority voting in the
election of directors provided it does
not
conflict
with
the
state
law
where
the
company
is
incorporated.
We
also
look
for
companies
to
adopt
a
post-
election policy outlining how the company will address the situation of a
holdover director.
Cumulative
Vote
Shareholder
Proposals
We
will
generally
vote
FOR
shareholder
proposals
to
restore
or
provide
cumulative
voting
unless:
•The
company has adopted (i) majority vote standard with a carve-out for plurality
voting in situations where
there
are
more
nominees
than
seats
and
(ii)
a
director
resignation
policy
to
address
failed
elections.
3.Executive
and
Non-
Executive
Compensation
Pay
Practices
Good
pay practices should align management’s interests with long-term shareholder
value creation. Detailed disclosure of compensation criteria is preferred; proof
that companies follow the criteria should be evident and retroactive performance
target changes without proper disclosure is not viewed favorably.
Compensation
practices should allow a company to attract and retain proven
talent.
Some
examples of poor pay practices include: abnormally
large
bonus
payouts
without
justifiable
performance
linkage
or
proper
disclosure,
egregious
employment
contracts, excessive severance and/or change in control provisions, repricing or
replacing of underwater stock options/stock appreciation rights without prior
shareholder approval, and excessive perquisites. A company should
also
have
an
appropriate
balance
of
short-term
vs.
long-term
metrics
and
the
metrics
should
be
aligned
with
business
goals and objectives.
If
the
company
maintains
problematic
or
poor
pay
practices,
generally
vote:
•AGAINST
Management
Say
on
Pay
(MSOP)
Proposals;
or
•AGAINST
an
equity-based
incentive
plan
proposal
if
excessive
non-performance-based
equity
awards are the major contributor to a pay-for-performance
misalignment.
•If
no
MSOP
or
equity-based
incentive
plan
proposal
item
is
on
the
ballot,
vote
AGAINST/WITHHOLD from compensation committee members.
Equity
Compensation
Plans
We
will generally vote FOR management proposals on equity-based compensation
plans.
Evaluation
takes into account
potential
plan
cost,
plan
features
and
grant
practices.
While
a
negative
combination
of
these
factors
could
cause a vote AGAINST, other reasons to vote AGAINST the equity plan could
include the following factors:
•The
plan
permits
the
repricing
of
stock
options/stock
appreciation
rights
(SARs)
without
prior
shareholder approval; or
•There
is
more
than
one
problematic
material
feature
of
the
plan,
which
could
include
one
of
the
following: unfavorable change-in-control features, presence of gross ups and
options reload.
Advisory
Vote
on
Executive
Compensation
(Say-on-Pay,
MSOP)
Management
Proposals
Vote
FOR
annual
frequency
and
AGAINST
all
proposals
asking
for
any
frequency
less
than
annual.
We
will
generally
vote
FOR
management
proposals
for
an
advisory
vote
on
executive
compensation
considering
the
context of each company’s specific circumstances and the board’s disclosed
rationale for its practices.
Pay
practices
that
may
result
in
a
vote
AGAINST
management
proposals
for
an
advisory
vote
on
executive
compensation
may include:
•A
disconnect
between
pay
and
performance
based
on
a
quantitative
assessment
of
the
following:
pay vs TSR (“Total Shareholder Return”) and company disclosed
peers;
•Lack
of
transparent
disclosure
of
compensation
philosophy
and
goals
and
targets,
including
details
on short-term and long-term performance incentives;
•Long
term
incentive
awards
consisting
of
less
than
50%
performance-based
awards;
•Long
term
incentive
awards
evaluated
over
a
time
period
of
less
than
three
years;
•The
Board
used
discretion
without
sufficient
disclosure;
•The
Board
changed
the
targets
and/or
performance
metrics
during
the
pay
period;
•The
Board
awarded
a
multi-year
guaranteed
cash
bonus
or
non-performance
equity
award;
•The
Board
retested
performance
goals
or
awarded
a
pay
for
failure
pay
plan;
•Lack
of
the
Board’s
response
to
failed
MSOP
vote
the
previous
year;
•The
plan
allows
for
the
single
trigger
acceleration
of
unvested
equity
awards
and/or
provides
excise
tax gross ups;
•Abnormally
large
bonus
payouts
without
justifiable
performance
linkage
or
proper
disclosure;
•Egregious
employment
or
retention
contracts;
•Excessive
perquisites
or
excessive
severance
and/or
change
in
control
provisions;
•Repricing
or
replacing
of
underwater
stock
options
without
prior
shareholder
approval;
•Egregious
pension/SERP
(supplemental
executive
retirement
plan)
payouts;
•Extraordinary
relocation
benefits;
•Internal
pay
disparity;
and
•The
Board
has
adopted
other
pay
practices
that
may
increase
risk
to
shareholders.
Other
Compensation
Proposals
and
Policies
Employee
Stock
Purchase
Plans
--
Non-Qualified
Plans
Vote
CASE-BY-CASE
on
nonqualified
employee
stock
purchase
plans
taking
into
account
the
following
factors:
•Broad-based
participation;
•Limits
on
employee
contributions;
•Company
matching
contributions;
and
•Presence
of
a
discount
on
the
stock
price
on
the
date
of
purchase.
Option
Exchange
Programs/Repricing
Options
Vote
CASE-BY-CASE
on
management
proposals
seeking
approval
to
exchange/reprice
options,
taking
into
consideration:
•Historic
trading
patterns--the
stock
price
should
not
be
so
volatile
that
the
options
are
likely
to
be
back “in-the-money” over the near term;
•Rationale
for
the
re-pricing;
•If
it
is
a
value-for-value
exchange;
•If
surrendered
stock
options
are
added
back
to
the
plan
reserve;
•Option
vesting;
•Term
of
the
option--the
term
should
remain
the
same
as
that
of
the
replaced
option;
•Exercise
price--should
be
set
at
fair
market
or
a
premium
to
market;
•Participants--executive
officers
and
directors
should
be
excluded.
Vote
FOR
shareholder
proposals
to
put
option
repricings
to
a
shareholder
vote.
Stock
Retention
Holding
Period
Vote
FOR shareholder proposals asking for a policy requiring that senior executives
retain a significant percentage of shares acquired through equity compensation
programs if the policy requests retention for two years or less
following
the
termination
of
their
employment
(through
retirement
or
otherwise)
and
a
holding
threshold
percentage
of 50% or less.
Also
consider
whether
the
company
has
any
holding
period,
retention
ratio,
or
officer
ownership
requirements
in
place and the terms/provisions of awards already granted.
Elimination
of
Accelerated
Vesting
in
the
Event
of
a
Change
in
Control
Vote
AGAINST
shareholder
proposals
seeking
a
policy
eliminating
the
accelerated
vesting
of
time-based
equity
awards in the event of a change-in-control.
Performance-based
Equity
Awards
and
Pay-for-Superior-Performance
Proposals
Generally
vote FOR unless there is sufficient evidence that the current compensation
structure is already substantially
performance-based.
We
consider
performance-based
awards
to
include
awards
that
are
tied
to
shareholder return or other metrics that are relevant to the
business.
Say
on
Supplemental
Executive
Retirement
Plans
(SERP)
Generally
vote
AGAINST
proposals
asking
for
shareholder
votes
on
SERP.
Compensation
Committee
Vote
AGAINST
or
WITHHOLD
from
the
members
of
the
Compensation
Committee
if:
•We
voted
against
the
company’s
MSOP
in
the
previous
year,
the
company’s
previous
MSOP
received
significant opposition of votes cast and we are voting against this year’s
MSOP;
•The
board
implements
a
MSOP
on
a
less
frequent
basis
than
the
frequency
that
received
the
plurality
of
votes cast
1.Shareholders
Rights and Defenses Shareholder
Ability
to
Act
by
Written
Consent
Generally
vote
FOR
shareholder
proposals
that
provide
shareholders
with
the
ability
to
act
by
written
consent,
unless:
•The
company
already
gives
shareholders
the
right
to
call
special
meetings
at
a
threshold
of
25%
or
lower; and
•The
company
has
a
history
of
strong
governance
practices.
Special
Meetings
Arrangements
Generally
vote
FOR
management
proposals
that
provide
shareholders
with
the
ability
to
call
special
meetings.
Generally
vote FOR shareholder proposals that provide shareholders with the ability to
call special meetings at a threshold of 25% or lower if the company currently
does not give shareholders the right to call special meetings.
However,
if
a
company
already
gives
shareholders
the
right
to
call
special
meetings
at
a
threshold
of
at
least
25%,
vote AGAINST shareholder proposals to further reduce the threshold.
Generally
vote AGAINST management proposals seeking shareholder approval for the company
to hold special meetings
with
14
days
notice
unless
the
company
offers
shareholders
the
ability
to
vote
by
electronic
means
and
a
proposal to reduce the period of notice to not less than 14 days has received
majority support.
Advance
Notice
Requirements
for
Shareholder
Proposals/Nominations
Vote
CASE-BY-CASE
on
advance
notice
proposals,
giving
support
to
proposals
that
allow
shareholders
to
submit
proposals/nominations
reasonably
close to the meeting date
and
within the
broadest
window possible, recognizing the need to allow sufficient notice for company,
regulatory and shareholder review.
Shareholder
Voting
Requirements
Vote
AGAINST
proposals
to
require
a
supermajority
shareholder
vote.
Generally
vote
FOR
management
and
shareholder proposals to reduce supermajority vote requirements.
Poison
Pills
Vote
FOR
shareholder
proposals
requesting
that
the
company
submit
its
poison
pill
to
a
shareholder
vote
or
redeem
it, unless the company has:
•a
shareholder-approved
poison
pill
in
place;
or
•adopted
a
policy
concerning
the
adoption
of
a
pill
in
the
future
specifying
certain
shareholder
friendly provisions.
Vote
FOR
shareholder
proposals
calling
for
poison
pills
to
be
put
to
a
vote
within
a
time
period
of
less
than
one
year
after adoption.
Vote
CASE-BY-CASE
on
management
proposals
on
poison
pill
ratification,
focusing
on
the
features
of
the
shareholder rights plan.
In
addition,
the
rationale
for
adopting
the
pill
should
be
thoroughly
explained
by
the
company.
In
examining
the
request for the pill, take into consideration the company’s existing governance
structure, including: board independence, existing takeover defenses, and any
problematic governance concerns.
2.Strategic
Transactions
and
Capital
Structures
Reorganizations/Restructurings
Vote
reorganizations
and
restructurings
on
a
CASE-BY-CASE
basis.
Mergers
and
Acquisitions
Vote
CASE-BY-CASE
on
mergers
and
acquisitions
taking
into
account
the
following
based
on
publicly
available
information:
•Valuation;
•Market
reaction;
•Strategic
rationale;
•Management’s
track
record
of
successful
integration
of
historical
acquisitions;
•Presence
of
conflicts
of
interest;
and
•Governance
profile
of
the
combined
company.
Dual
Class
Structures
Vote
FOR
resolutions
that
seek
to
maintain
or
convert
to
a
one-share,
one-vote
capital
structure.
Vote
AGAINST
requests
for
the
creation
or
continuation
of
dual-class
capital
structures
or
the
creation
of
new
or
additional super voting shares.
Share
Issuance
Requests
General
Issuances:
Vote
FOR
issuance
requests
with
preemptive
rights
to
a
maximum
of
100%
over
currently
issued
capital
or any stricter limit set in local best practice recommendations or
law.
Vote
FOR
issuance
requests
without
preemptive
rights
to
a
maximum
of
20%
of
currently
issued
capital
or
any
stricter limit set in local best practice recommendations or law.
Specific
Issuances:
Vote
on
a
CASE-BY-CASE
basis
on
all
requests,
with
or
without
preemptive
rights.
Increases
in
Authorized
Capital
Vote
FOR
non-specific
proposals
to
increase
authorized
capital
up
to
100%
over
the
current
authorization
unless
the
increase would leave the company with less than 30% of its new authorization
outstanding, or any stricter limit set in local best practice recommendations or
law.
Vote
FOR
specific
proposals
to
increase
authorized
capital
to
any
amount,
unless:
•The
specific
purpose
of
the
increase
(such
as
a
share-based
acquisition
or
merger)
does
not
meet
guidelines for the purpose being proposed; or
•The
increase
would
leave
the
company
with
less
than
30%
of
its
new
authorization
outstanding
after adjusting for all proposed issuances or any stricter limit set in local
best practice recommendations or law.
Vote
AGAINST
proposals
to
adopt
unlimited
capital
authorizations.
Reduction
of
Capital
Vote
FOR
proposals
to
reduce
capital
for
routine
accounting
purposes
unless
the
terms
are
unfavorable
to
shareholders.
Vote
proposals
to
reduce
capital
in
connection
with
corporate
restructuring
on
a
CASE-BY-CASE
basis.
Preferred
Stock
Vote
FOR
the
creation
of
a
new
class
of
preferred
stock
or
for
issuances
of
preferred
stock
up
to
50%
of
issued
capital unless the terms of the preferred stock would adversely affect the
rights of existing shareholders.
Vote
FOR
the
creation/issuance
of
convertible
preferred
stock
as
long
as
the
maximum
number
of
common
shares that could be issued upon conversion meets guidelines on equity issuance
requests.
Vote
AGAINST
the
creation
of
a
new
class
of
preference
shares
that
would
carry
superior
voting
rights
to
the
common shares.
Vote
AGAINST
the
creation
of
blank
check
preferred
stock
unless
the
board
clearly
states
that
the
authorization
will
not be used to thwart a takeover bid.
Vote
proposals
to
increase
blank
check
preferred
authorizations
on
a
CASE-BY-CASE
basis.
Debt
Issuance
Requests
Vote
non-convertible
debt
issuance
requests
on
a
CASE-BY-CASE
basis,
with
or
without
preemptive
rights.
Vote
FOR
the
creation/issuance
of
convertible
debt
instruments
as
long
as
the
maximum
number
of
common
shares
that could be issued upon conversion meets guidelines on equity issuance
requests.
Vote
FOR
proposals
to
restructure
existing
debt
arrangements
unless
the
terms
of
the
restructuring
would
adversely affect the rights of shareholders.
Increase
in
Borrowing
Powers
Vote
proposals
to
approve
increases
in
a
company's
borrowing
powers
on
a
CASE-BY-CASE
basis.
Share
Repurchase
Plans
We
will
generally
recommend
FOR
share
repurchase
programs
taking
into
account
whether:
•The
share
repurchase
program
can
be
used
as
a
takeover
defense;
•There
is
clear
evidence
of
historical
abuse;
•There
is
no
safeguard
in
the
share
repurchase
program
against
selective
buybacks;
•Pricing
provisions
and
safeguards
in
the
share
repurchase
program
are
deemed
to
be
unreasonable
in light of market practice.
Reissuance
of
Repurchased
Shares
Vote
FOR
requests
to
reissue
any
repurchased
shares
unless
there
is
clear
evidence
of
abuse
of
this
authority
in
the
past.
Capitalization
of
Reserves
for
Bonus
Issues/Increase
in
Par
Value
Vote
FOR
requests
to
capitalize
reserves
for
bonus
issues
of
shares
or
to
increase
par
value.
Reorganizations/Restructurings
Vote
reorganizations
and
restructurings
on
a
CASE-BY-CASE
basis.
Reincorporation
Proposals
Vote
reincorporation
proposals
on
a
CASE-BY-CASE
basis.
Related-Party
Transactions
Vote
related-party
transactions
on
a
CASE-BY-CASE
basis,
considering
factors
including,
but
not
limited
to,
the
following:
•The
parties
on
either
side
of
the
transaction;
•The
nature
of
the
asset
to
be
transferred/service
to
be
provided;
•The
pricing
of
the
transaction
(and
any
associated
professional
valuation);
•The
views
of
independent
directors
(where
provided);
•The
views
of
an
independent
financial
adviser
(where
appointed);
•Whether
any
entities
party
to
the
transaction
(including
advisers)
is
conflicted;
and
•The
stated
rationale
for
the
transaction,
including
discussions
of
timing
Common
and
Preferred
Stock
Authorization
Generally
vote
FOR
proposals
to
increase
the
number
of
shares
of
common
stock
authorized
for
issuance.
Generally
vote
FOR
proposals
to
increase
the
number
of
shares
of
preferred
stock,
as
long
as
there
is
a
commitment
to not use the shares for anti-takeover purposes.
3.Environmental
and
Social
Issues
Overall Approach
Proposals
considered
under
this
category
could
include,
among
others,
requests
that
a
company:
•Publish
a
report
or
additional
information
related
to
the
company’s
business
and
impact
on
stakeholders;
•Disclose
policies
related
to
specific
business
practices
and/or
services;
•Conduct
third
party
audits,
reports
or
studies
related
to
the
company’s
business
practices,
services
and/or
impact on stakeholders
When
evaluating
environmental
and
social
shareholder
proposals,
the
following
factors
are
generally
considered:
•Whether
the
subject
of
the
proposal
is
considered
to
be
material
to
the
company’s
business;
•The
company’s
current
level
of
publicly
available
disclosure,
including
if
the
company
already
discloses similar information through existing reports or policies;
•The
proponent
of
the
proposal;
•If
the company has implemented or formally committed to the implementation of a
reporting program
based
on
the
International
Sustainability
Standards
Board’s
Sustainability
Accounting
Standards, the Sustainability Accounting Standards Board’s (SASB) standards, the
European Sustainability Reporting Standards, the Task Force on Climate-related
Financial Disclosure’s (TCFD) recommendations, or a similar
standard;
•Whether
adoption
of
the
proposal
is
likely
to
enhance
or
protect
shareholder
value;
•Whether
the
information
requested
concerns
business
issues
that
relate
to
a
meaningful
percentage
of the company’s business;
•The
degree
to
which
the
company’s
stated
position
on
the
issues
raised
in
the
proposal
could
affect
its reputation or sales, or leave it vulnerable to a boycott or selective
purchasing;
•Whether
the
company
has
already
responded
in
some
appropriate
manner
to
the
request
embodied
in the proposal;
•What
other
companies
in
the
relevant
industry
have
done
in
response
to
the
issue
addressed
in
the
proposal;
•Whether
the
proposal
itself
is
well
framed
and
the
cost
of
preparing
the
report
and/or
the
implementation is reasonable;
•Whether
the
subject
of
the
proposal
is
best
left
to
the
discretion
of
the
board;
•Whether
the
proposal
is
legally
binding
for
the
board;
•Whether
the
company
has
material
fines
or
violations
in
the
area
and
if
so,
if
appropriate
actions
have already been taken to remedy going forward; and
•Whether
providing
this
information
would
reveal
proprietary
or
confidential
information
that
would
place the company at a competitive disadvantage.
Environmental
Issues Climate
Transition
Plans
Generally
vote
CASE-BY-CASE
on
management
proposed
climate
transition
plans.
When
evaluating
management
proposed
plans,
the
following
factors
are
generally
considered:
•If
the
company
has
detailed
disclosure
of
the
governance,
strategy,
risk
mitigation
efforts,
and
metrics and targets based on the TCFD’s recommendations, or a similar
standard;
•If
the
company
has
detailed
disclosure
of
their
current
emissions
data
based
on
the
SASB
materiality framework; and
•If
the
company
has
detailed
disclosure
in
line
with
Paris
Agreement
goals.
Generally
vote
CASE-BY-CASE
on
shareholder
proposals
requesting
climate
transition
plans.
When
evaluating
these shareholder proposals, the following factors are generally
considered:
•The
company’s
current
level
of
publicly
available
disclosure
including
if
the
company
already discloses similar information through existing reports or
policies;
•If
the
proposal
asks
for
detailed
disclosure
according
to
the
TCFD’s
recommendations;
•If
the
proposal
asks
for
detailed
disclosure
of
the
company’s
current
emissions
data
based
on
the
SASB materiality framework;
•If
the
proposal
asks
for
long-term
targets,
as
well
as
short
and
medium
term
milestones;
•If
the
proposal
asks
for
targets
to
be
aligned
to
a
globally
accepted
framework,
such
as
Paris
Aligned or Net Zero;
•If
the
proposal
asks
for
targets
to
be
approved
by
the
Science
Based
Target
Initiative
(“SBTi”);
•If
the
proposal
seeks
to
add
reasonable
transparency
and
is
not
onerous
or
overly
prescriptive;
and
•Whether
the
proposal
is
binding
or
non-binding.
Environmental
Sustainability
Reporting
Generally
vote
FOR
shareholders
proposals
requesting
the
company
to
report
on
its
policies,
initiatives
and
oversight mechanisms
related
to
environmental sustainability, including the impacts
of
climate change and biodiversity loss. The following factors will be
considered:
•The
company’s
current
level
of
publicly
available
disclosure
including
if
the
company
already
discloses similar information through existing reports or policies;
•If
the company has implemented or formally committed to the implementation of a
reporting program
based
on
the
International
Sustainability
Standards
Board’s
Sustainability
Accounting
Standards, the Sustainability Accounting Standards Board’s (SASB) standards, the
European Sustainability Reporting Standards, the Task Force on Climate-related
Financial Disclosure’s (TCFD) recommendations, or a similar
standard;
•If
the
company’s
current
level
of
disclosure
is
comparable
to
that
of
its
industry
peers;
and
•If
there
are
significant
controversies,
fines,
penalties,
or
litigation
associated
with
the
company’s
environmental performance.
Other
Environmental
Proposals
Vote
CASE-BY-CASE
on
the
following
shareholder
proposals
if
relevant
to
the
company:
•seeking
information on the financial, physical, or regulatory risks a company faces
related to climate
change
on
its
operations
and
investment,
or
on
how
the
company
identifies,
measures
and
manages such risks;
•Calling
for
the
reduction
of
Greenhouse
Gas
(GHG)
emissions;
•Seeking
reports
on
responses
to
regulatory
and
public
pressures
surrounding
climate
change,
and
for disclosure of research that aided in setting company policies around climate
change;
•Requesting
an
action
plan
including
science
based
targets
and
a
commitment
to
net
zero
emissions
by 2050 or earlier;
•Requesting
a
report/disclosure
of
goals
on
GHG
emissions
from
company
operations
and/or
products;
•Requesting
a
company
report
on
its
energy
efficiency
policies;
and
•Requesting
reports
on
the
feasibility
of
developing
renewable
energy
resources.
Social
Issues
Board
and
Workforce
Demographics
A
company
should
have
a
clear,
public
Equal
Employment
Opportunity
(EEO) statement
and/or
diversity
policy. Generally
vote
FOR
proposals
seeking
to
amend
a
company’s
EEO
statement
or
diversity
policies
to
additionally
prohibit discrimination based on sexual orientation and/or gender
identity.
Generally
vote
FOR
proposals
requesting
reports
on
a
company’s
efforts
to
diversify
the
board,
unless:
•The
gender
and
racial
minority
representation
of
the
company’s
board
meets
our
board
composition
expectations; and
•The
board
already
reports
on
its
nominating
procedures
and
gender
and
racial
minority
initiatives
on the board.
Gender
Pay
Gap
Generally
vote
CASE-BY-CASE
on
proposals
requesting
reports
on
a
company’s
pay
data
by
gender,
or
a
report
on
a company’s policies and goals to reduce any gender pay gap, taking into
account:
•The
company’s
current
policies
and
disclosure
related
to
both
its
diversity
and
inclusion
policies
and practices and its compensation philosophy and fair and equitable
compensation practices;
•Whether
the
company
has
been
the
subject
of
recent
controversy,
litigation
or
regulatory
actions
related to gender pay gap issues; and
•Whether
the
company’s
reporting
regarding
gender
pay
gap
policies
or
initiatives
is
lagging
its
peers.
Labor,
Human
and
Animal
Rights
Standards
Generally
vote
FOR
proposals
requesting
a
report
on
company
or
company
supplier
labor,
human,
and/or
animal
rights standards and policies, or on the impact of its operations on society,
unless such information is already publicly disclosed considering:
•The
degree
to
which
existing
relevant
policies
and
practices
are
disclosed;
•Whether
or
not
existing
relevant
policies
are
consistent
with
internationally
recognized
standards;
•Whether
company
facilities
and
those
of
its
suppliers
are
monitored
and
how;
•Company
participation
in
fair
labor
organizations
or
other
internationally
recognized
human
rights
initiatives;
•Scope
and
nature
of
business
conducted
in
markets
known
to
have
higher
risk
of
workplace
labor/human rights abuse;
•Recent,
significant
company
controversies,
fines,
or
litigation
regarding
human
rights
at
the
company or its suppliers;
•The
scope
of
the
request;
and
•Deviation
from
industry
sector
peer
company
standards
and
practices.
Generally
vote CASE-BY-CASE on shareholder proposals requesting reports about a company’s
use of mandatory arbitrations
in
employment
claims,
taking
into
account
the
company’s
existing
policies
and
disclosures
of
policies.
Generally
vote
CASE-BY-CASE
on
shareholder
proposals
requesting
reports
on
the
actions
taken
by
a
company
to
prevent
sexual
and
other
forms
of
harassment
or
on
the
risks
posed
by the
company’s
failure
to
take
such
actions, taking into account the company’s existing policies and disclosures of
policies.
Racial
Equity
Audit
Generally
vote
CASE-BY-CASE
on
shareholder
proposals
requesting
the
board
oversee
a
racial
equity
audit.
While
we believe the decision to initiate an independent audit is best left to
management judgment under the oversight of the board of directors, the following
factors are generally considered:
•The
degree
to
which
existing
relevant
policies
and
practices
are
disclosed;
•Recent,
significant
company
controversies,
fines,
or
litigation
regarding
human
rights
at
the
company or its suppliers; and
•The
gender
and
racial
minority
representation
of
the
company’s
board.
Political
Contributions
and
Trade
Association
Spending/Lobbying
Expenditures
and
Initiatives
We
generally believe that it is the role of boards and management to determine the
appropriate level of disclosure of all types of corporate political
activity.
When
evaluating these proposals, we consider the prescriptive nature of the proposal
and the overall benefit to shareholders along with a company’s current
disclosure of policies, practices and oversight.
Generally
vote
AGAINST
proposals
asking
the
company
to
affirm
political
nonpartisanship
in
the
workplace
so
long as:
•There
are
no
recent,
significant
controversies,
fines
or
litigation
regarding
the
company’s
political
contributions or trade association spending; and
•The
company has procedures in place to ensure that employee contributions to
company- sponsored
political
action
committees
(PACs)
are
strictly
voluntary
and
prohibits
coercion.
Generally
vote
AGAINST
proposals
requesting
increased
disclosure
of
a
company’s
policies
with
respect
to
political contributions, lobbying and trade association spending as long
as:
•There
is
no
significant
potential
threat
or
actual
harm
to
shareholders’
interests;
•There
are
no
recent
significant
controversies
or
litigation
related
to
the
company’s
political
contributions or governmental affairs; and
•There
is
publicly
available
information
to
assess
the
company’s
oversight
related
to
such
expenditures of corporate assets.
We
generally
will
vote
AGAINST
proposals
asking
for
detailed
disclosure
of
political
contributions
or
trade
association or lobbying expenditures.
We
generally
will
vote
AGAINST
proposals
barring
the
company
from
making
political
contributions.
Businesses
are affected by legislation at the federal, state, and local level and barring
political contributions can put the company at a competitive
disadvantage.
Region:
Europe,
Middle
East
and
Africa
(EMEA)
Proxy
Items
The
following section is a broad summary of the Guidelines, which form the basis of
the Policy with respect to EMEA public equity investments of operating and/or
holding companies.
Applying
these guidelines is subject to certain
regional
and
country-specific
exceptions
and
modifications
and
is
not
inclusive
of
all
considerations
in
each
market.
1.Business
Items
Financial
Results/Director
and
Auditor
Reports
Vote
FOR
approval
of
financial
statements
and
director
and
auditor
reports,
unless:
•There
are
serious
concerns
about
the
accounts
presented,
audit
procedures
used
or
audit
opinion
rendered; or
•The
company
is
not
responsive
to
shareholder
questions
about
specific
items
that
should
be
publicly disclosed.
Appointment
of
Auditors
and
Auditor
Fees
Vote
FOR
the
re-election
of
auditors
and
proposals
authorizing
the
board
to
fix
auditor
fees
unless:
•There
are
serious
concerns
about
the
accounts
presented,
audit
procedures
used
or
audit
opinion
rendered;
•There
is
reason
to
believe
that
the
auditor
has
rendered
an
opinion
that
is
neither
accurate
nor
indicative of the company’s financial position;
•Name
of
the
proposed
auditor
has
not
been
published;
•The
auditors
are
being
changed
without
explanation;
•Non-audit-related
fees
are
substantial,
or
are
in
excess
of
standard
annual
audit-related
fees,
or
in
excess of permitted local limits and guidelines; or
•The
appointment
of
external
auditors
if
they
have
previously
served
the
company
in
an
executive
capacity or can otherwise be considered affiliated with the
company.
Appointment
of
Internal
Statutory
Auditors
Vote
FOR
the
appointment
or
re-election
of
statutory
auditors,
unless:
•There
are
serious
concerns
about
the
statutory
reports
presented
or
the
audit
procedures
used;
•Questions
exist
concerning
any
of
the
statutory
auditors
being
appointed;
or
•The
auditors
have
previously
served
the
company
in
an
executive
capacity
or
can
otherwise
be
considered affiliated with the company.
Reincorporation
Proposals
Vote
reincorporation
proposals
on
a
CASE-BY-CASE
basis
Allocation
of
Income
Vote
FOR
approval
of
the
allocation
of
income,
unless:
•The
dividend
payout
ratio
has
been
consistently
low
without
adequate
explanation;
or
•The
payout
is
excessive
given
the
company’s
financial
position.
Stock
(Scrip)
Dividend
Alternative
Vote
FOR
most
stock
(scrip)
dividend
proposals.
Vote
AGAINST
proposals
that
do
not
allow
for
a
cash
option
unless
management
demonstrates
that
the
cash
option
is harmful to shareholder value.
Amendments
to
Articles
of
Association
Vote
amendments
to
the
articles
of
association
on
a
CASE-BY-CASE
basis.
Change
in
Company
Fiscal
Term
Vote
FOR
resolutions
to
change
a
company’s
fiscal
term
unless
a
company’s
motivation
for
the
change
is
to
postpone its annual general meeting.
Lower
Disclosure
Threshold
for
Stock
Ownership
Vote
AGAINST
resolutions
to
lower
the
stock
ownership
disclosure
threshold
below
5%
unless
specific
reasons
exist to implement a lower threshold.
Amend
Quorum
Requirements
Vote
proposals
to
amend
quorum
requirements
for
shareholder
meetings
on
a
CASE-BY-CASE
basis.
Virtual
Meetings
Generally
vote FOR proposals allowing for the convening of
hybrid*
shareholder
meetings
if
it is clear that it is not the
intention
to
hold
virtual-only
AGMs.
Generally
vote
AGAINST
proposals
allowing
for
the
convening
of
virtual-
only* shareholder meetings.
*
The
phrase
“virtual-only
shareholder
meeting”
refers
to
a
meeting
of
shareholders
that
is
held
exclusively
through
the use of online technology without a corresponding in-person
meeting.
The
term “hybrid shareholder meeting” refers to an in-person, or physical, meeting
in which shareholders are permitted to participate online.
Public
Benefit
Corporation
Proposals
Generally
vote
FOR
management
proposals
and
CASE-BY-CASE
on
shareholder
proposals
related
to
the
conversion
of the company into a public benefit corporation.
Transact
Other
Business
Vote
AGAINST
other
business
when
it
appears
as
a
voting
item.
Administrative
Requests
Generally
vote
FOR
non-contentious
administrative
management
requests.
2.Board
of
Directors
The
board
of
directors
should
promote
the
interests
of
shareholders
by
acting
in
an
oversight
and/or
advisory
role;
should consist of a majority
of
independent
directors
and
/
or
meet
local best practice expectations; and should
be
held accountable for actions and results related to their
responsibilities.
Voting
on
Director
Nominees
in
Uncontested
Elections
Vote
on
director
nominees
should
be
determined
on
a
CASE-BY-CASE
basis
taking
into
consideration
the
following:
•Adequate
disclosure
has
not
been
provided
in
a
timely
manner;
or
•There
are
clear
concerns
over
questionable
finances
or
restatements;
or
•There
have
been
questionable
transactions
or
conflicts
of
interest;
or
•There
are
any
records
of
abuses
against
minority
shareholder
interests;
or
•The
board
fails
to
meet
minimum
corporate
governance
standards;
or
•There
are
reservations
about:
oDirector
terms
oBundling
of
proposals
to
elect
directors
oBoard
independence
oDisclosure
of
named
nominees
oCombined
Chairman/CEO
oElection
of
former
CEO
as
Chairman
of
the
board
oOverboarded
directors
oComposition
of
committees
oDirector
independence
oNumber
of
directors
on
the
board
oLack
of
diversity
on
the
board
•Specific
concerns
about
the
individual
or
company,
such
as
criminal
wrongdoing
or
breach
of
fiduciary responsibilities; or
•There
are other considerations which may include sanction from government or
authority, violations
of
laws
and
regulations,
or
other
issues
relate
to
improper
business
practice,
failure
to
replace management, or egregious actions related to service on other
boards.
Board
Composition
We
generally
believe
diverse
teams
have
the
potential
to
outperform
and
we
expect
the
companies
that
we
invest
in
to focus on the importance of diversity. When evaluating board composition, we
believe a diversity of ethnicity, gender and experience
is
an
important
consideration.
We
encourage
companies
to
disclose
the
composition
of their board in the proxy statement and may vote against members of the board
without disclosure. See below how we execute our vote at companies that do not
meet our diversity expectations.
Vote
AGAINST
members
of
the
Nominating
Committee:
•At
companies
that
do
not
meet
the
board
diversity
requirements
of
local
listing
rules,
corporate
governance
codes, national targets, or is not representative relative to the board
composition of companies in their market;
•At
companies
in
the
FTSE100
if
the
board
composition
does
not
align
with
the
Parker
review
guidelines.
Employee
and
/or
Labor
Representatives
Vote
FOR
employee
and/or
labor
representatives
if
they
sit
on
either
the
audit
or
compensation
committee
and
are
required by law to be on those committees.
Vote
AGAINST
employee
and/or
labor
representatives
if
they
sit
on
either
the
audit
or
compensation
committee,
if
they are not required to be on those committees.
Director
Independence--Classification
of
Directors
Executive Director
•Employee
or
executive
of
the
company;
•Any
director
who
is
classified
as
a
non-executive,
but
receives
salary,
fees,
bonus,
and/or
other
benefits that are in line with the highest-paid executives of the
company.
Non-Independent
Non-Executive
Director
(NED)
•Any
director
who
is
attested
by
the
board
to
be
a
non-independent
NED;
•Any
director
specifically
designated
as
a
representative
of
a
significant
shareholder
of
the
company;
•Any
director
who
is
also
an
employee
or
executive
of
a
significant
shareholder
of
the
company;
•Beneficial
owner (direct
or
indirect) of at least 10% of the company’s stock, either in economic
terms
or
in
voting
rights
(this
may
be
aggregated
if
voting
power
is
distributed
among
more
than
one member of a defined group, e.g., family members who beneficially own less
than 10% individually, but collectively own more than 10%), unless market best
practice dictates a lower ownership and/or disclosure threshold (and in other
special market-specific circumstances);
•Government
representative;
•Currently
provides
(or
a
relative
provides)
professional
services
to
the
company,
to
an
affiliate
of
the company, or to an individual officer of the company or of one of its
affiliates in excess of
$10,000
per
year;
•Represents
customer,
supplier,
creditor,
banker,
or
other
entity
with
which
company
maintains
transactional/commercial relationship (unless company discloses information to
apply a materiality test);
•Any
director
who
has
conflicting
or
cross-directorships
with
executive
directors
or
the
chairman
of
the company;
•Relative
of
a
current
employee
of
the
company
or
its
affiliates;
•Relative
of
a
former
executive
of
the
company
or
its
affiliates;
•A
new
appointee
elected
other
than
by
a
formal
process
through
the
General
Meeting
(such
as
a
contractual appointment by a substantial shareholder);
•Founder/co-founder/member
of
founding
family
but
not
currently
an
employee;
•Former
executive
(a
cooling
off
period
may
be
applied);
•Years
of
service
is
generally
not
a
determining
factor
unless
it
is
recommended
best
practice
in
a
market and/or in extreme circumstances, in which case it may be considered;
and
•Any
additional
relationship
or
principle
considered
to
compromise
independence
under
local
corporate governance best practice guidance.
Independent
NED
•No
material
connection,
either
directly
or
indirectly,
to
the
company
other
than
a
board
seat.
Employee
Representative
•Represents
employees
or
employee
shareholders
of
the
company
(classified
as
“employee
representative” but considered a non-independent NED).
Director
Accountability
Vote
AGAINST
individual
directors
who
attend
less
than
75%
of
the
board
and
committee
meetings
without
a
disclosed valid excuse.
Generally,
vote FOR the bundled election of
management
nominees, unless adequate
disclosures
of the
nominees
have
not
been
provided
in
a
timely
manner or
if
one
or
more
of
the
nominees
does
not
meet
the
expectation
of
our policy.
Other
items considered for an AGAINST vote include specific concerns about the
individual or the company, such as
criminal
wrongdoing
or
breach
of
fiduciary
responsibilities,
sanctions
from
government
or
authority,
violations
of
laws and regulations, the presence of inappropriate related party transactions,
or other issues related to improper business practices
Vote
AGAINST members of the full board or appropriate committee (or only the
independent chairman or lead director
as
may
be
appropriate
in
situations
such
as
where
there
is
a
classified
board
and
members
of
the
appropriate
committee are not up for re-election or the appropriate committee is comprised
of the entire board) for the below reasons. New nominees will be considered on a
case-by-case basis. Extreme cases may warrant a vote against the entire
board.
•Material
failures of governance, stewardship, or fiduciary responsibilities at the
company, including
but
not
limited
to
violations
of
global
norms
principles
and/or
other
significant
global
standards;
•Failure
to
disclose
material
environmental,
social
and
governance
information;
•Egregious
actions
related
to
the
director(s)’
service
on
other
boards
that
raise
substantial
doubt
about his or her ability to effectively oversee management and serve the best
interests of shareholders at any company;
•The
board failed to act on a shareholder proposal that received approval of the
majority of shares cast for previous year (a management proposal with other than
a FOR recommendation by management will not be considered as sufficient action
taken); an adopted proposal that is substantially similar to the original
shareholder proposal will be deemed sufficient; (vote against
members
of
the
committee
of
the
board
that
is
responsible
for
the
issue
under
consideration).
If
we
did not support the shareholder proposal, we may still vote against the
committee member(s).
•The
board
failed
to
act
on
takeover
offers
where
the
majority
of
the
shareholders
tendered
their
shares;
•The
company
does
not
disclose
various
components
of
current
emissions,
a
proxy
for
a
company’s
dependency on fossil fuels and other sources of greenhouse gasses (Scope 1,
Scope 2, Scope 3 emissions), material to the company’s business;
•If
in
an
extreme
situation
the
board
lacks
accountability
and
oversight,
coupled
with
sustained
poor performance relative to peers.
Discharge
of
Directors
Generally
vote
FOR
the
discharge
of
directors,
including
members
of
the
management
board
and/or
supervisory
board, unless there is reliable information about significant and compelling
controversies that the board is not fulfilling its fiduciary duties warranted
by:
•A
lack of oversight or actions by board members which invoke shareholder distrust
related to malfeasance
or
poor
supervision,
such
as
operating
in
private
or
company
interest
rather
than
in
shareholder interest; or
•Any
legal
issues
(e.g.,
civil/criminal)
aiming
to
hold
the
board
responsible
for
breach
of
trust
in
the
past or related to currently alleged actions yet to be confirmed (and not only
the fiscal year in question), such as price fixing, insider trading, bribery,
fraud, and other illegal actions; or
•Other
egregious
governance
issues
where
shareholders
may
bring
legal
action
against
the
company
or its directors; or
•Vote
on
a
CASE-BY-CASE
basis
where
a
vote
against
other
agenda
items
are
deemed
inappropriate.
Committee
Responsibilities
and
Expectations
Companies
should
establish
committees
to
oversee
areas
such
as
audit,
executive
and
non-executive
compensation,
director nominations and ESG oversight. The responsibilities of the committees
should be publicly disclosed.
Audit
Committee
Vote
AGAINST
members
of
the
Audit
Committee
if:
•Non-audit-related
fees
are
substantial,
or
are
in
excess
of
standard
annual
audit-related
fees,
or
in
excess of permitted local limits and guidelines.
•The
company
receives
an
adverse
opinion
on
the
company’s
financial
statements
from
its
auditor
and there is not clear evidence that the situation has been
remedied;
•There
is
excessive
pledging
or
hedging
of
stock
by
executives;
•There
is persuasive evidence that the Audit Committee entered into an inappropriate
indemnification
agreement
with
its
auditor
that
limits
the
ability
of
the
company,
or
its
shareholders, to pursue legitimate legal recourse against the audit firm;
or
•No
members
of
the
Audit
Committee
hold
sufficient
financial
expertise.
Vote
CASE-BY-CASE on members of the Audit Committee and/or the full board if poor
accounting practices, which
rise
to
a
level
of
serious
concern
are
identified,
such
as
fraud,
misapplication
of
accounting
principles
and
material weaknesses identified in audit-related disclosures.
Examine
the
severity,
breadth,
chronological
sequence
and
duration,
as
well
as
the
company’s
efforts
at
remediation
or corrective actions, in determining whether negative
vote
recommendations
are warranted against the members of the Audit Committee who are responsible for
the poor accounting practices, or the entire board.
Remuneration
Committee
See
section
3
on
Remuneration
for
reasons
to
vote
against
members
of
the
Remuneration
Committee.
Nominating/Governance
Committee
Vote
AGAINST
members
of
the
Nominating/Governance
Committee
if:
•At
the
previous
board
election,
any
director
received
more
than
50%
withhold/against
votes
of
the
shares
cast and the company has failed to address the underlying issue(s) that caused
the high withhold/against vote;
•The
board
does
not
meet
our
diversity
expectations;
•The
board
amends
the
company’s
bylaws
or
charter
without
shareholder
approval
in
a
manner
that
materially diminishes shareholders’ rights or could adversely impact
shareholders
Voting
on
Director
Nominees
in
Contested
Elections
Vote
on
a
CASE-BY-CASE
basis
in
contested
elections
of
directors,
e.g.,
the
election
of
shareholder
nominees
or
the dismissal of incumbent directors, determining which directors are best
suited to add value for shareholders.
The
analysis
will
generally
be
based
on,
but
not
limited
to,
the
following
major
decision
factors:
•Company
performance
relative
to
its
peers;
•Strategy
of
the
incumbents
versus
the
dissidents;
•Independence
of
board
candidates;
•Experience
and
skills
of
board
candidates;
•Governance
profile
of
the
company;
•Evidence
of
management
entrenchment;
•Responsiveness
to
shareholders;
•Whether
a
takeover
offer
has
been
rebuffed;
and
•Whether
minority
or
majority
representation
is
being
sought.
Other
Board
Related
Proposals
(Management
and
Shareholder)
Vote
AGAINST
the
introduction
of
classified
boards
and
/
or
mandatory
retirement
ages
for
directors.
Vote
AGAINST
proposals
to
alter
board
structure
or
size
in
the
context
of
a
fight
for
control
of
the
company
or
the
board.
Independent
Board
Chair
(for
applicable
markets)
We
will
generally
vote
AGAINST
shareholder
proposals
requiring
that
the
chairman’s
position
be
filled
by
an
independent director, if the company satisfies 3 of the 4 following
criteria:
•Two-thirds
independent
board,
or
majority
in
countries
where
employee
representation
is
common
practice;
•A
designated,
or
a
rotating,
lead
director,
elected
by
and
from
the
independent
board
members
with clearly delineated and comprehensive duties;
•Fully
independent
key
committees;
and/or
•Established,
publicly
disclosed,
governance
guidelines
and
director
biographies/profiles.
3.Remuneration
Pay
Practices
Good
pay practices should align management’s interests with long-term shareholder
value creation. Detailed disclosure of remuneration criteria is preferred; proof
that companies follow the criteria should be evident and retroactive performance
target changes without proper disclosure is not viewed favorably.
Remuneration
practices should allow a company to attract and retain proven
talent.
Some
examples of poor pay practices include: abnormally
large
bonus
payouts
without
justifiable
performance
linkage
or
proper
disclosure,
egregious
employment
contracts, excessive severance and/or change in control provisions, repricing or
replacing of underwater stock options/stock appreciation rights without prior
shareholder approval, and excessive perquisites. A company should
also
have
an
appropriate
balance
of
short-term
vs.
long-term
metrics
and
the
metrics
should
be
aligned
with
business
goals and objectives.
If
the
company
maintains
problematic
or
poor
pay
practices,
generally
vote:
•AGAINST
Management
Say
on
Pay
(MSOP)
Proposals,
Remuneration
Reports;
or
•AGAINST
an
equity-based
incentive
plan
proposal
if
excessive
non-performance-based
equity
awards are the major contributor to a pay-for-performance
misalignment.
•If
no
MSOP
or
equity-based
incentive
plan
proposal
item
is
on
the
ballot,
vote
AGAINST
Remuneration Committee members.
Remuneration
Plans
Vote
CASE-BY-CASE on management proposals for a vote on executive remuneration,
considering the following factors
in
the
context
of
each
company’s
specific
circumstances
and
the
board’s
disclosed
rationale
for
its
practices.
Factors
considered
may
include:
•Pay
for
Performance
Disconnect;
- We
will consider there to be a disconnect based on a quantitative assessment of the
following:
CEO
pay
vs.
TSR
(“Total
Shareholder
Return”)
and
peers,
CEO
pay
as
a
percentage of the median peer group or CEO pay vs. shareholder return over
time.
•Long-term
equity-based
compensation
is
100%
time-based;
•Board’s
responsiveness
if
company
received
low
shareholder
support
in
the
previous
year’s
MSOP or remuneration vote;
•Abnormally
large
bonus
payouts
without
justifiable
performance
linkage
or
proper
disclosure;
•Egregious
employment
contracts;
•Excessive
perquisites
or
excessive
severance
and/or
change
in
control
provisions;
•Repricing
or
replacing
of
underwater
stock
options
without
prior
shareholder
approval;
•Egregious
pension/SERP
(supplemental
executive
retirement
plan)
payouts;
•Extraordinary
relocation
benefits;
•Internal
pay
disparity;
and
•Lack
of
transparent
disclosure
of
compensation
philosophy
and
goals
and
targets,
including
details
on short-term and long-term performance incentives.
Non-Executive
Director
Compensation
Vote
FOR
proposals
to
award
cash
fees
to
non-executive
directors
unless
the
amounts
are
excessive
relative
to
other
companies in the country or industry.
Vote
non-executive
director
compensation
proposals
that
include
both
cash
and
share-based
components
on
a
CASE-BY-CASE basis.
Vote
proposals
that
bundle
compensation
for
both
non-executive
and
executive
directors
into
a
single
resolution
on
a
CASE-BY-CASE basis.
Vote
AGAINST
proposals
to
introduce
retirement
benefits
for
non-executive
directors.
Director,
Officer,
and
Auditor
Indemnification
and
Liability
Provisions
Vote
proposals
seeking
indemnification
and
liability
protection
for
directors
and
officers
on
a
CASE-BY-CASE
basis.
Vote
AGAINST
proposals
to
indemnify
auditors.
Other
Remuneration
Related
Proposals
Vote
on
other
remuneration
related
proposals
on
a
CASE-BY-CASE
basis.
Remuneration
Committee
When
voting
for
members
of
the
Remuneration
Committee,
factors
considered
may
include:
•We
voted
against
the
company’s
MSOP
in
the
previous
year,
the
company’s
previous
MSOP
received
significant opposition of votes cast and we are voting against this year’s MSOP;
and
•The
board
implements
a
MSOP
on
a
less
frequent
basis
than
the
frequency
that
received
the
plurality
of
votes cast
•Remuneration
structure
is
widely
inconsistent
with
local
market
best
practices
or
regulations
4.Shareholder
Rights
and
Defenses
Antitakeover Mechanisms
Generally
vote
AGAINST
all
antitakeover
proposals,
unless
they
are
structured
in
such
a
way
that
they
give
shareholders the ultimate decision on any proposal or offer.
For
the
Netherlands,
vote
recommendations
regarding
management
proposals
to
approve
protective
preference
shares will be determined on a CASE-BY-CASE basis.
For
French
companies
listed
on
a
regulated
market,
generally
VOTE
AGAINST
any
general
authorities
impacting
the share capital (i.e. authorities for share repurchase plans and any general
share issuances with or without preemptive rights) if they can be used for
antitakeover purposes without shareholders' prior explicit
approval.
5.Strategic
Transactions,
Capital
Structures
and
other
Business
Considerations
Reorganizations/Restructurings
Vote
reorganizations
and
restructurings
on
a
CASE-BY-CASE
basis.
Mergers
and
Acquisitions
Vote
CASE-BY-CASE
on
mergers
and
acquisitions
taking
into
account
the
following
based
on
publicly
available
information:
•Valuation;
•Market
reaction;
•Strategic
rationale;
•Management’s
track
record
of
successful
integration
of
historical
acquisitions;
•Presence
of
conflicts
of
interest;
and
•Governance
profile
of
the
combined
company.
Dual
Class
Structures
Vote
FOR
resolutions
that
seek
to
maintain
or
convert
to
a
one-share,
one-vote
capital
structure.
Vote
AGAINST
requests
for
the
creation
or
continuation
of
dual-class
capital
structures
or
the
creation
of
new
or
additional super voting shares.
Share
Issuance
Requests
General
Issuances:
Vote
FOR
issuance
requests
with
preemptive
rights
to
a
maximum
of
100%
over
currently
issued
capital
or any stricter limit set in local best practice recommendations or
law.
Vote
FOR
issuance
requests
without
preemptive
rights
to
a
maximum
of
20%
of
currently
issued
capital
or
any
stricter limit set in local best practice recommendations or law.
Specific
Issuances:
Vote
on
a
CASE-BY-CASE
basis
on
all
requests,
with
or
without
preemptive
rights.
Increases
in
Authorized
Capital
Vote
FOR
non-specific
proposals
to
increase
authorized
capital
up
to
100%
over
the
current
authorization
unless
the
increase would leave the company with less than 30% of its new authorization
outstanding, or any stricter limit set in local best practice recommendations or
law.
Vote
FOR
specific
proposals
to
increase
authorized
capital
to
any
amount,
unless:
•The
specific
purpose
of
the
increase
(such
as
a
share-based
acquisition
or
merger)
does
not
meet
guidelines for the purpose being proposed; or
•The
increase
would
leave
the
company
with
less
than
30%
of
its
new
authorization
outstanding
after adjusting for all proposed issuances or any stricter limit set in local
best practice recommendations or law.
.
Vote
AGAINST
proposals
to
adopt
unlimited
capital
authorizations.
Reduction
of
Capital
Vote
FOR
proposals
to
reduce
capital
for
routine
accounting
purposes
unless
the
terms
are
unfavorable
to
shareholders.
Vote
proposals
to
reduce
capital
in
connection
with
corporate
restructuring
on
a
CASE-BY-CASE
basis.
Preferred
Stock
Vote
FOR
the
creation
of
a
new
class
of
preferred
stock
or
for
issuances
of
preferred
stock
up
to
50%
of
issued
capital unless the terms of the preferred stock would adversely affect the
rights of existing shareholders.
Vote
FOR
the
creation/issuance
of
convertible
preferred
stock
as
long
as
the
maximum
number
of
common
shares that could be issued upon conversion meets guidelines on equity issuance
requests.
Vote
AGAINST
the
creation
of
a
new
class
of
preference
shares
that
would
carry
superior
voting
rights
to
the
common shares.
Vote
AGAINST
the
creation
of
blank
check
preferred
stock
unless
the
board
clearly
states
that
the
authorization
will
not be used to thwart a takeover bid.
Vote
proposals
to
increase
blank
check
preferred
authorizations
on
a
CASE-BY-CASE
basis.
Debt
Issuance
Requests
Vote
non-convertible
debt
issuance
requests
on
a
CASE-BY-CASE
basis,
with
or
without
preemptive
rights.
Vote
FOR
the
creation/issuance
of
convertible
debt
instruments
as
long
as
the
maximum
number
of
common
shares
that could be issued upon conversion meets guidelines on equity issuance
requests.
Vote
FOR
proposals
to
restructure
existing
debt
arrangements
unless
the
terms
of
the
restructuring
would
adversely affect the rights of shareholders.
Increase
in
Borrowing
Powers
Vote
proposals
to
approve
increases
in
a
company's
borrowing
powers
on
a
CASE-BY-CASE
basis.
Share
Repurchase
Plans
We
will
generally
recommend
FOR
share
repurchase
programs
taking
into
account
whether:
•The
share
repurchase
program
can
be
used
as
a
takeover
defense;
•There
is
clear
evidence
of
historical
abuse;
•There
is
no
safeguard
in
the
share
repurchase
program
against
selective
buybacks;
•Pricing
provisions
and
safeguards
in
the
share
repurchase
program
are
deemed
to
be
unreasonable
in light of market practice.
Reissuance
of
Repurchased
Shares
Vote
FOR
requests
to
reissue
any
repurchased
shares
unless
there
is
clear
evidence
of
abuse
of
this
authority
in
the
past.
Capitalization
of
Reserves
for
Bonus
Issues/Increase
in
Par
Value
Vote
FOR
requests
to
capitalize
reserves
for
bonus
issues
of
shares
or
to
increase
par
value.
Reorganizations/Restructurings
Vote
reorganizations
and
restructurings
on
a
CASE-BY-CASE
basis.
Reincorporation
Proposals
Vote
reincorporation
proposals
on
a
CASE-BY-CASE
basis.
Related-Party
Transactions
Vote
related-party
transactions
on
a
CASE-BY-CASE
basis,
considering
factors
including,
but
not
limited
to,
the
following:
•The
parties
on
either
side
of
the
transaction;
•The
nature
of
the
asset
to
be
transferred/service
to
be
provided;
•The
pricing
of
the
transaction
(and
any
associated
professional
valuation);
•The
views
of
independent
directors
(where
provided);
•The
views
of
an
independent
financial
adviser
(where
appointed);
•Whether
any
entities
party
to
the
transaction
(including
advisers)
is
conflicted;
and
•The
stated
rationale
for
the
transaction,
including
discussions
of
timing
6.Environmental
and
Social
Issues
Overall Approach
Proposals
considered
under
this
category
could
include,
among
others,
requests
that
a
company:
•Publish
a
report
or
additional
information
related
to
the
company’s
business
and
impact
on
stakeholders;
•Disclose
policies
related
to
specific
business
practices
and/or
services;
•Conduct
third
party
audits,
reports
or
studies
related
to
the
company’s
business
practices,
services
and/or
impact on stakeholders
When
evaluating
environmental
and
social
shareholder
proposals,
the
following
factors
are
generally
considered:
•Whether
the
subject
of
the
proposal
is
considered
to
be
material
to
the
company’s
business;
•The
company’s
current
level
of
publicly
available
disclosure,
including
if
the
company
already
discloses similar information through existing reports or policies;
•The
proponent
of
the
proposal;
•If
the company has implemented or formally committed to the implementation of a
reporting program
based
on
the
International
Sustainability
Standards
Board’s
Sustainability
Accounting
Standards, the Sustainability Accounting Standards Board’s (SASB) standards, the
European Sustainability Reporting Standards, the Task Force on Climate-related
Financial Disclosure’s (TCFD) recommendations, or a similar
standard;
•Whether
adoption
of
the
proposal
is
likely
to
enhance
or
protect
shareholder
value;
•Whether
the
information
requested
concerns
business
issues
that
relate
to
a
meaningful
percentage
of the company’s business;
•The
degree
to
which
the
company’s
stated
position
on
the
issues
raised
in
the
proposal
could
affect
its reputation or sales, or leave it vulnerable to a boycott or selective
purchasing;
•Whether
the
company
has
already
responded
in
some
appropriate
manner
to
the
request
embodied
in the proposal;
•What
other
companies
in
the
relevant
industry
have
done
in
response
to
the
issue
addressed
in
the
proposal;
•Whether
the
proposal
itself
is
well
framed
and
the
cost
of
preparing
the
report
and/or
the
implementation is reasonable ;
•Whether
the
subject
of
the
proposal
is
best
left
to
the
discretion
of
the
board;
•Whether
the
proposal
is
legally
binding
for
the
board;
•Whether
the
company
has
material
fines
or
violations
in
the
area
and
if
so,
if
appropriate
actions
have already been taken to remedy going forward; and
•Whether
providing
this
information
would
reveal
proprietary
or
confidential
information
that
would
place the company at a competitive disadvantage.
Environmental
Issues Climate
Transition
Plans
Generally
vote
CASE-BY-CASE
on
management
proposed
climate
transition
plans.
When
evaluating
management
proposed
plans,
the
following
factors
are
generally
considered:
•If
the
company
has
detailed
disclosure
of
the
governance,
strategy,
risk
mitigation
efforts,
and
metrics and targets based on the TCFD’s recommendations, or a similar
standard;
•If
the
company
has
detailed
disclosure
of
their
current
emissions
data
based
on
the
SASB
materiality framework; and
•If
the
company
has
detailed
disclosure
in
line
with
Paris
Agreement
goals.
Generally
vote
CASE-BY-CASE
on
shareholder
proposals
requesting
climate
transition
plans.
When
evaluating
these shareholder proposals, the following factors are generally
considered:
•The
company’s
current
level
of
publicly
available
disclosure
including
if
the
company
already discloses similar information through existing reports or
policies;
•If
the
proposal
asks
for
detailed
disclosure
according
to
the
TCFD’s
recommendations;
•If
the
proposal
asks
for
detailed
disclosure
of
the
company’s
current
emissions
data
based
on
the
SASB materiality framework;
•If
the
proposal
asks
for
long-term
targets,
as
well
as
short
and
medium
term
milestones;
•If
the
proposal
asks
for
targets
to
be
aligned
to
a
globally
accepted
framework,
such
as
Paris
Aligned or Net Zero;
•If
the
proposal
asks
for
targets
to
be
approved
by
the
Science
Based
Target
Initiative
(“SBTi”);
•If
the
proposal
seeks
to
add
reasonable
transparency
and
is
not
onerous
or
overly
prescriptive;
and
•Whether
the
proposal
is
binding
or
non-binding.
Environmental
Sustainability
Reporting
Generally
vote
FOR
shareholders
proposals
requesting
the
company
to
report
on
its
policies,
initiatives
and
oversight mechanisms
related
to
environmental sustainability, including the impacts
of
climate change and biodiversity loss. The following factors will be
considered:
•The
company’s
current
level
of
publicly
available
disclosure
including
if
the
company
already
discloses similar information through existing reports or policies;
•If
the company has implemented or formally committed to the implementation of a
reporting program
based
on
the
International
Sustainability
Standards
Board’s
Sustainability
Accounting
Standards, the Sustainability Accounting Standards Board’s (SASB) standards, the
European Sustainability Reporting Standards, the Task Force on Climate-related
Financial Disclosure’s (TCFD) recommendations, or a similar
standard;
•If
the
company’s
current
level
of
disclosure
is
comparable
to
that
of
its
industry
peers;
and
•If
there
are
significant
controversies,
fines,
penalties,
or
litigation
associated
with
the
company’s
environmental performance.
Other
Environmental
Proposals
Vote
CASE-BY-CASE
on
the
following
shareholder
proposals
if
relevant
to
the
company:
•Seeking
information on the financial, physical, or regulatory risks a company faces
related to climate
change
on
its
operations
and
investment,
or
on
how
the
company
identifies,
measures
and
manages such risks;
•Calling
for
the
reduction
of
Greenhouse
Gas
(GHG)
emissions;
•Seeking
reports
on
responses
to
regulatory
and
public
pressures
surrounding
climate
change,
and
for disclosure of research that aided in setting company policies around climate
change;
•Requesting
an
action
plan
including
science
based
targets
and
a
commitment
to
net
zero
emissions
by 2050 or earlier;
•Requesting
a
report/disclosure
of
goals
on
GHG
emissions
from
company
operations
and/or
products;
•Requesting
a
company
report
on
its
energy
efficiency
policies;
and
•Requesting
reports
on
the
feasibility
of
developing
renewable
energy
resources.
Social
Issues
Board
and
Workforce
Demographics
A
company
should
have
a
clear
diversity
policy.
Generally
vote
FOR
proposals
seeking
to
amend
a
company’s
diversity policy to additionally prohibit discrimination based on sexual
orientation and/or gender identity.
Generally
vote
FOR
proposals
requesting
reports
on
a
company’s
efforts
to
diversify
the
board,
unless:
•The
gender
and
racial
minority
representation
of
the
company’s
board
meets
our
board
composition
expectations; and
•The
board
already
reports
on
its
nominating
procedures
and
gender
and
racial
minority
initiatives
on the board.
Gender
Pay
Gap
Generally
vote
CASE-BY-CASE
on
proposals
requesting
reports
on
a
company’s
pay
data
by
gender,
or
a
report
on
a company’s policies and goals to reduce any gender pay gap, taking into
account:
•The
company’s
current
policies
and
disclosure
related
to
both
its
diversity
and
inclusion
policies
and practices and its compensation philosophy and fair and equitable
compensation practices;
•Whether
the
company
has
been
the
subject
of
recent
controversy,
litigation
or
regulatory
actions
related to gender pay gap issues; and
•Whether
the
company’s
reporting
regarding
gender
pay
gap
policies
or
initiatives
is
lagging
its
peers.
Labor,
Human
and
Animal
Rights
Standards
Generally
vote
FOR
proposals
requesting
a
report
on
company
or
company
supplier
labor,
human,
and/or
animal
rights standards and policies, or on the impact of its operations on society,
unless such information is already publicly disclosed considering:
•The
degree
to
which
existing
relevant
policies
and
practices
are
disclosed;
•Whether
or
not
existing
relevant
policies
are
consistent
with
internationally
recognized
standards;
•Whether
company
facilities
and
those
of
its
suppliers
are
monitored
and
how;
•Company
participation
in
fair
labor
organizations
or
other
internationally
recognized
human
rights
initiatives;
•Scope
and
nature
of
business
conducted
in
markets
known
to
have
higher
risk
of
workplace
labor/human rights abuse;
•Recent,
significant
company
controversies,
fines,
or
litigation
regarding
human
rights
at
the
company or its suppliers;
•The
scope
of
the
request;
and
•Deviation
from
industry
sector
peer
company
standards
and
practices.
Generally
vote
CASE-BY-CASE
on
shareholder
proposals
requesting
reports
on
the
actions
taken
by
a
company
to
prevent
sexual
and
other
forms
of
harassment
or
on
the
risks
posed
by the
company’s
failure
to
take
such
actions, taking into account the company’s existing policies and disclosures of
policies.
Political
Contributions
and
Trade
Association
Spending/Lobbying
Expenditures
and
Initiatives
We
generally believe that it is the role of boards and management to determine the
appropriate level of disclosure of all types of corporate political
activity.
When
evaluating these proposals, we consider the prescriptive nature of the proposal
and the overall benefit to shareholders along with a company’s current
disclosure of policies, practices and oversight.
Generally
vote
AGAINST
proposals
asking
the
company
to
affirm
political
nonpartisanship
in
the
workplace
so
long as:
•There
are
no
recent,
significant
controversies,
fines
or
litigation
regarding
the
company’s
political
contributions or trade association spending; and
Generally
vote
AGAINST
proposals
requesting
increased
disclosure
of
a
company’s
policies
with
respect
to
political contributions, lobbying and trade association spending as long
as:
•There
is
no
significant
potential
threat
or
actual
harm
to
shareholders’
interests;
•There
are
no
recent
significant
controversies
or
litigation
related
to
the
company’s
political
contributions or governmental affairs; and
•There
is
publicly
available
information
to
assess
the
company’s
oversight
related
to
such
expenditures of corporate assets.
We
generally
will
vote
AGAINST
proposals
asking
for
detailed
disclosure
of
political
contributions
or
trade
association or lobbying expenditures.
We
generally
will
vote
AGAINST
proposals
barring
the
company
from
making
political
contributions.
Businesses
are affected by legislation at the federal, state, and local level and barring
political contributions can put the company at a competitive
disadvantage.
Region:
Asia
Pacific
(APAC)
Proxy
Items
The
following section is a broad summary of the Guidelines, which form the basis of
the Policy with respect to APAC public equity investments of operating and/or
holding companies.
Applying
these guidelines is subject to certain
regional
and
country-specific
exceptions
and
modifications
and
is
not
inclusive
of
all
considerations
in
each
market. For Japan-specific policies, see the Japan Proxy Items
section.
1.Business
Items
Financial
Results/Director
and
Auditor
Reports
Vote
FOR
approval
of
financial
statements
and
director
and
auditor
reports,
unless:
•There
are
serious
concerns
about
the
accounts
presented,
audit
procedures
used
or
audit
opinion
rendered; or
•The
company
is
not
responsive
to
shareholder
questions
about
specific
items
that
should
be
publicly disclosed.
Appointment
of
Auditors
and
Auditor
Fees
Vote
FOR
the
re-election
of
auditors
and
proposals
authorizing
the
board
to
fix
auditor
fees
unless:
•There
are
serious
concerns
about
the
accounts
presented,
audit
procedures
used
or
audit
opinion
rendered;
•There
is
reason
to
believe
that
the
auditor
has
rendered
an
opinion
that
is
neither
accurate
nor
indicative of the company’s financial position;
•Name
of
the
proposed
auditor
has
not
been
published;
•The
auditors
are
being
changed
without
explanation;
•Non-audit-related
fees
are
substantial,
or
are
in
excess
of
standard
annual
audit-related
fees,
or
in
excess of permitted local limits and guidelines; or
•The
appointment
of
external
auditors
if
they
have
previously
served
the
company
in
an
executive
capacity or can otherwise be considered affiliated with the
company.
Appointment
of
Internal
Statutory
Auditors
Vote
FOR
the
appointment
or
re-election
of
statutory
auditors,
unless:
•There
are
serious
concerns
about
the
statutory
reports
presented
or
the
audit
procedures
used;
•Questions
exist
concerning
any
of
the
statutory
auditors
being
appointed;
or
•The
auditors
have
previously
served
the
company
in
an
executive
capacity
or
can
otherwise
be
considered affiliated with the company.
Reincorporation
Proposals
Vote
reincorporation
proposals
on
a
CASE-BY-CASE
basis.
Allocation
of
Income
Vote
FOR
approval
of
the
allocation
of
income,
unless:
•The
dividend
payout
ratio
has
been
consistently
low
without
adequate
explanation;
or
•The
payout
is
excessive
given
the
company’s
financial
position.
Stock
(Scrip)
Dividend
Alternative
Vote
FOR
most
stock
(scrip)
dividend
proposals.
Vote
AGAINST
proposals
that
do
not
allow
for
a
cash
option
unless
management
demonstrates
that
the
cash
option
is harmful to shareholder value.
Amendments
to
Articles
of
Association
Vote
amendments
to
the
articles
of
association
on
a
CASE-BY-CASE
basis.
Change
in
Company
Fiscal
Term
Vote
FOR
resolutions
to
change
a
company’s
fiscal
term
unless
a
company’s
motivation
for
the
change
is
to
postpone its annual general meeting.
Lower
Disclosure
Threshold
for
Stock
Ownership
Vote
AGAINST
resolutions
to
lower
the
stock
ownership
disclosure
threshold
below
5%
unless
specific
reasons
exist to implement a lower threshold.
Amend
Quorum
Requirements
Vote
proposals
to
amend
quorum
requirements
for
shareholder
meetings
on
a
CASE-BY-CASE
basis.
Virtual
Meetings
Generally
vote FOR proposals allowing for the convening of
hybrid*
shareholder
meetings
if
it is clear that it is not the
intention
to
hold
virtual-only
AGMs.
Generally
vote
AGAINST
proposals
allowing
for
the
convening
of
virtual-
only* shareholder meetings.
*
The
phrase
“virtual-only
shareholder
meeting”
refers
to
a
meeting
of
shareholders
that
is
held
exclusively
through
the use of online technology without a corresponding in-person
meeting.
The
term “hybrid shareholder meeting” refers to an in-person, or physical, meeting
in which shareholders are permitted to participate online.
Transact
Other
Business
Vote
AGAINST
other
business
when
it
appears
as
a
voting
item.
Administrative
Requests
Generally
vote
FOR
non-contentious
administrative
management
requests.
2.Board
of
Directors
The
board
of
directors
should
promote
the
interests
of
shareholders
by
acting
in
an
oversight
and/or
advisory
role;
should consist of a majority
of
independent
directors
and
/
or
meet
local best practice expectations; and should
be
held accountable for actions and results related to their
responsibilities.
Voting
on
Director
Nominees
in
Uncontested
Elections
Vote
on
director
nominees
should
be
determined
on
a
CASE-BY-CASE
basis
taking
into
consideration
the
following:
•Adequate
disclosure
has
not
been
provided
in
a
timely
manner;
or
•There
are
clear
concerns
over
questionable
finances
or
restatements;
or
•There
have
been
questionable
transactions
or
conflicts
of
interest;
or
•There
are
any
records
of
abuses
against
minority
shareholder
interests;
or
•The
board
fails
to
meet
minimum
corporate
governance
standards;
or
•There
are
reservations
about:
oDirector
terms
oBundling
of
proposals
to
elect
directors
oBoard
independence
oDisclosure
of
named
nominees
oCombined
Chairman/CEO
oElection
of
former
CEO
as
Chairman
of
the
board
oOverboarded
directors
oComposition
of
committees
oDirector
independence
oNumber
of
directors
on
the
board
oLack
of
gender
diversity
on
the
board
•Specific
concerns
about
the
individual
or
company,
such
as
criminal
wrongdoing
or
breach
of
fiduciary responsibilities; or
•There
are other considerations which may include sanction from government or
authority, violations
of
laws
and
regulations,
or
other
issues
relate
to
improper
business
practice,
failure
to
replace management, or egregious actions related to service on other
boards.
Board
Composition
We
generally
believe
diverse
teams
have
the
potential
to
outperform
and
we
expect
the
companies
that
we
invest
in
to focus on the importance of diversity. When evaluating board composition, we
believe a diversity of ethnicity, gender and experience
is
an
important
consideration.
We
encourage
companies
to
disclose
the
composition
of their board in the proxy statement and may vote against members of the board
without disclosure. See below how we execute our vote at companies that do not
meet our diversity expectations.
Vote
AGAINST
members
of
the
Nominating
Committee:
•At
companies
that
do
not
meet
the
board
diversity
requirements
of
local
listing
rules,
corporate
governance
codes, national targets, or is not representative relative to the board
composition of companies in their market;
Employee
and
/or
Labor
Representatives
Vote
FOR
employee
and/or
labor
representatives
if
they
sit
on
either
the
audit
or
compensation
committee
and
are
required by law to be on those committees.
Vote
AGAINST
employee
and/or
labor
representatives
if
they
sit
on
either
the
audit
or
compensation
committee,
if
they are not required to be on those committees.
Director
Independence--Classification
of
Directors
Executive Director
•Employee
or
executive
of
the
company;
•Any
director
who
is
classified
as
a
non-executive,
but
receives
salary,
fees,
bonus,
and/or
other
benefits that are in line with the highest-paid executives of the
company.
Non-Independent
Non-Executive
Director
(NED)
•Any
director
who
is
attested
by
the
board
to
be
a
non-independent
NED;
•Any
director
specifically
designated
as
a
representative
of
a
significant
shareholder
of
the
company;
•Any
director
who
is
also
an
employee
or
executive
of
a
significant
shareholder
of
the
company;
•Beneficial
owner (direct or indirect) of at least 10% of the company’s stock, either in
economic terms
or
in
voting
rights
(this
may
be
aggregated
if
voting
power
is
distributed
among
more
than
one member of a defined group, e.g., family members who beneficially own less
than 10% individually, but collectively own more than 10%), unless market best
practice dictates a lower ownership and/or disclosure threshold (and in other
special market-specific circumstances);
•Government
representative;
•Currently
provides
(or
a
relative
provides)
professional
services
to
the
company,
to
an
affiliate
of
the company, or to an individual officer of the company or of one of its
affiliates in excess of
$10,000
per
year;
•Represents
customer,
supplier,
creditor,
banker,
or
other
entity
with
which
company
maintains
transactional/commercial relationship (unless company discloses information to
apply a materiality test);
•Any
director
who
has
conflicting
or
cross-directorships
with
executive
directors
or
the
chairman
of
the company;
•Relative
of
a
current
employee
of
the
company
or
its
affiliates;
•Relative
of
a
former
executive
of
the
company
or
its
affiliates;
•A
new
appointee
elected
other
than
by
a
formal
process
through
the
General
Meeting
(such
as
a
contractual appointment by a substantial shareholder);
•Founder/co-founder/member
of
founding
family
but
not
currently
an
employee;
•Former
executive
(a
cooling
off
period
may
be
applied);
•Years
of
service
is
generally
not
a
determining
factor
unless
it
is
recommended
best
practice
in
a
market and/or in extreme circumstances, in which case it may be considered;
and
•Any
additional
relationship
or
principle
considered
to
compromise
independence
under
local
corporate governance best practice guidance.
Independent
NED
•No
material
connection,
either
directly
or
indirectly,
to
the
company
other
than
a
board
seat.
Employee
Representative
•Represents
employees
or
employee
shareholders
of
the
company
(classified
as
“employee
representative” but considered a non-independent NED).
Director
Accountability
Vote
AGAINST
individual
directors
who
attend
less
than
75%
of
the
board
and
committee
meetings
without
a
disclosed valid excuse.
Generally,
vote FOR the bundled election of
management
nominees, unless adequate
disclosures
of the
nominees
have
not
been
provided
in
a
timely
manner
or
if
one
or
more
of
the
nominees
does
not
meet
the
expectation
of
our policy.
Other
items considered for an AGAINST vote include specific concerns about the
individual or the company, such as
criminal
wrongdoing
or
breach
of
fiduciary
responsibilities,
sanctions
from
government
or
authority,
violations
of
laws and regulations, the presence of inappropriate related party transactions,
or other issues related to improper business practices
Vote
AGAINST members of the full board or appropriate committee (or only the
independent chairman or lead director
as
may
be
appropriate
in
situations
such
as
where
there
is
a
classified
board
and
members
of
the
appropriate
committee are not up for re-election or the appropriate committee is comprised
of the entire board) for the below reasons.
New
nominees
will
be
considered
on
a
case-by-case
basis.
Extreme
cases
may
warrant
a
vote
against
the
entire board.
•Material
failures of governance, stewardship, or fiduciary responsibilities at the
company, including
but
not
limited
to
violations
of
global
norms
principles
and/or
other
significant
global
standards;
•Failure
to
disclose
material
environmental,
social
and
governance
information;
•Egregious
actions
related
to
the
director(s)’
service
on
other
boards
that
raise
substantial
doubt
about his or her ability to effectively oversee management and serve the best
interests of shareholders at any company;
•The
board failed to act on a shareholder proposal that received approval of the
majority of shares cast the previous year (a management proposal with other than
a FOR recommendation by management will not be considered as sufficient action
taken); an adopted proposal that is substantially similar to the original
shareholder proposal will be deemed sufficient; (vote against
members
of
the
committee
of
the
board
that
is
responsible
for
the
issue
under
consideration).
If
we
did not support the shareholder proposal, we may still vote against the
committee member(s).
•The
board
failed
to
act
on
takeover
offers
where
the
majority
of
the
shareholders
tendered
their
shares;
•The
company
does
not
disclose
various
components
of
current
emissions,
a
proxy
for
a
company’s
dependency on fossil fuels and other sources of greenhouse gasses (Scope 1,
Scope 2, Scope 3 emissions), material to the company’s business;
•If
in
an
extreme
situation
the
board
lacks
accountability
and
oversight,
coupled
with
sustained
poor performance relative to peers.
Discharge
of
Directors
Generally
vote
FOR
the
discharge
of
directors,
including
members
of
the
management
board
and/or
supervisory
board, unless there is reliable information about significant and compelling
controversies that the board is not fulfilling its fiduciary duties warranted
by:
•A
lack of oversight or actions by board members which invoke shareholder distrust
related to malfeasance
or
poor
supervision,
such
as
operating
in
private
or
company
interest
rather
than
in
shareholder interest; or
•Any
legal
issues
(e.g.,
civil/criminal)
aiming
to
hold
the
board
responsible
for
breach
of
trust
in
the
past or related to currently alleged actions yet to be confirmed (and not only
the fiscal year in question), such as price fixing, insider trading, bribery,
fraud, and other illegal actions; or
•Other
egregious
governance
issues
where
shareholders
may
bring
legal
action
against
the
company
or its directors; or
•Vote
on
a
CASE-BY-CASE
basis
where
a
vote
against
other
agenda
items
are
deemed
inappropriate.
Committee
Responsibilities
and
Expectations
Companies
should
establish
committees
to
oversee
areas
such
as
audit,
executive
and
non-executive
compensation,
director nominations and ESG oversight. The responsibilities of the committees
should be publicly disclosed.
Audit
Committee
Vote
AGAINST
members
of
the
Audit
Committee
if:
•Non-audit-related
fees
are
substantial,
or
are
in
excess
of
standard
annual
audit-related
fees,
or
in
excess of permitted local limits and guidelines.
•The
company
receives
an
adverse
opinion
on
the
company’s
financial
statements
from
its
auditor
and there is not clear evidence that the situation has been
remedied;
•There
is
excessive
pledging
or
hedging
of
stock
by
executives;
•There
is persuasive evidence that the Audit Committee entered into an inappropriate
indemnification
agreement
with
its
auditor
that
limits
the
ability
of
the
company,
or
its
shareholders, to pursue legitimate legal recourse against the audit firm;
or
•No
members
of
the
Audit
Committee
hold
sufficient
financial
expertise.
Vote
CASE-BY-CASE on members of the Audit Committee and/or the full board if poor
accounting practices, which
rise
to
a
level
of
serious
concern
are
identified,
such
as
fraud,
misapplication
of
accounting
principles
and
material weaknesses identified in audit-related disclosures.
Examine
the
severity,
breadth,
chronological
sequence
and
duration,
as
well
as
the
company’s
efforts
at
remediation
or corrective actions, in determining whether negative
vote
recommendations
are warranted against the members of the Audit Committee who are responsible for
the poor accounting practices, or the entire board.
At
companies
incorporated
in
India,
vote
AGAINST
Audit
Committee
members
who
are
classified
as
promoters
or
beneficial owners in the company.
Remuneration
Committee
See
section
3
on
Remuneration
for
reasons
to
vote
against
members
of
the
Remuneration
Committee.
Nominating/Governance
Committee
Vote
AGAINST
members
of
the
Nominating/Governance
Committee
if:
•At
the
previous
board
election,
any
director
received
more
than
50%
withhold/against
votes
of
the
shares
cast and the company has failed to address the underlying issue(s) that caused
the high withhold/against vote;
•The
board
does
not
meet
our
diversity
expectations;
•The
board
amends
the
company’s
bylaws
or
charter
without
shareholder
approval
in
a
manner
that
materially diminishes shareholders’ rights or could adversely impact
shareholders
Voting
on
Director
Nominees
in
Contested
Elections
Vote
on
a
CASE-BY-CASE
basis
in
contested
elections
of
directors,
e.g.,
the
election
of
shareholder
nominees
or
the dismissal of incumbent directors, determining which directors are best
suited to add value for shareholders.
The
analysis
will
generally
be
based
on,
but
not
limited
to,
the
following
major
decision
factors:
•Company
performance
relative
to
its
peers;
•Strategy
of
the
incumbents
versus
the
dissidents;
•Independence
of
board
candidates;
•Experience
and
skills
of
board
candidates;
•Governance
profile
of
the
company;
•Evidence
of
management
entrenchment;
•Responsiveness
to
shareholders;
•Whether
a
takeover
offer
has
been
rebuffed;
and
•Whether
minority
or
majority
representation
is
being
sought.
Other
Board
Related
Proposals
(Management
and
Shareholder)
Vote
AGAINST
the
introduction
of
classified
boards
and
mandatory
retirement
ages
for
directors.
Vote
AGAINST
proposals
to
alter
board
structure
or
size
in
the
context
of
a
fight
for
control
of
the
company
or
the
board.
Independent
Board
Chair
(for
applicable
markets)
We
will
generally
vote
AGAINST
shareholder
proposals
requiring
that
the
chairman’s
position
be
filled
by
an
independent director, if the company satisfies 3 of the 4 following
criteria:
•Two-thirds
independent
board,
or
majority
in
countries
where
employee
representation
is
common
practice;
•A
designated,
or
a
rotating,
lead
director,
elected
by
and
from
the
independent
board
members
with clearly delineated and comprehensive duties;
•Fully
independent
key
committees;
and/or
•Established,
publicly
disclosed,
governance
guidelines
and
director
biographies/profiles.
3.Remuneration
Pay
Practices
Good
pay practices should align management’s interests with long-term shareholder
value creation. Detailed disclosure of remuneration criteria is preferred; proof
that companies follow the criteria should be evident and retroactive performance
target changes without proper disclosure is not viewed favorably.
Remuneration
practices should allow a company to attract and retain proven
talent.
Some
examples of poor pay practices include: abnormally
large
bonus
payouts
without
justifiable
performance
linkage
or
proper
disclosure,
egregious
employment
contracts, excessive severance and/or change in control provisions, repricing or
replacing of underwater stock options/stock appreciation rights without prior
shareholder approval, and excessive perquisites. A company should
also
have
an
appropriate
balance
of
short-term
vs.
long-term
metrics
and
the
metrics
should
be
aligned
with
business
goals and objectives.
If
the
company
maintains
problematic
or
poor
pay
practices,
generally
vote:
•AGAINST
Management
Say
on
Pay
(MSOP)
Proposals,
Remuneration
Reports;
or
•AGAINST
an
equity-based
incentive
plan
proposal
if
excessive
non-performance-based
equity
awards are the major contributor to a pay-for-performance
misalignment.
•If
no
MSOP
or
equity-based
incentive
plan
proposal
item
is
on
the
ballot,
vote
AGAINST
from
Remuneration Committee members.
Remuneration
Plans
Vote
CASE-BY-CASE on management proposals for a vote on executive remuneration,
considering the following factors
in
the
context
of
each
company’s
specific
circumstances
and
the
board’s
disclosed
rationale
for
its
practices.
Factors
considered
may
include:
•Pay
for
Performance
Disconnect;
- We
will consider there to be a disconnect based on a quantitative assessment of the
following:
CEO
pay
vs.
TSR
(“Total
Shareholder
Return”)
and
peers,
CEO
pay
as
a
percentage of the median peer group or CEO pay vs. shareholder return over
time.
•Long-term
equity-based
compensation
is
100%
time-based;
•Board’s
responsiveness
if
company
received
low
shareholder
support
in
the
previous
year’s
MSOP or remuneration vote;
•Abnormally
large
bonus
payouts
without
justifiable
performance
linkage
or
proper
disclosure;
•Egregious
employment
contracts;
•Excessive
perquisites
or
excessive
severance
and/or
change
in
control
provisions;
•Repricing
or
replacing
of
underwater
stock
options
without
prior
shareholder
approval;
•Egregious
pension/SERP
(supplemental
executive
retirement
plan)
payouts;
•Extraordinary
relocation
benefits;
•Internal
pay
disparity;
and
•Lack
of
transparent
disclosure
of
compensation
philosophy
and
goals
and
targets,
including
details
on short-term and long-term performance incentives.
Non-Executive
Director
Compensation
Vote
FOR
proposals
to
award
cash
fees
to
non-executive
directors
unless
the
amounts
are
excessive
relative
to
other
companies in the country or industry.
Vote
non-executive
director
compensation
proposals
that
include
both
cash
and
share-based
components
on
a
CASE-BY-CASE basis.
Vote
proposals
that
bundle
compensation
for
both
non-executive
and
executive
directors
into
a
single
resolution
on
a
CASE-BY-CASE basis.
Vote
AGAINST
proposals
to
introduce
retirement
benefits
for
non-executive
directors.
Director,
Officer,
and
Auditor
Indemnification
and
Liability
Provisions
Vote
proposals
seeking
indemnification
and
liability
protection
for
directors
and
officers
on
a
CASE-BY-CASE
basis.
Vote
AGAINST
proposals
to
indemnify
auditors.
Other
Remuneration
Related
Proposals
Vote
on
other
remuneration
related
proposals
on
a
CASE-BY-CASE
basis.
Remuneration
Committee
When
voting
for
members
of
the
Remuneration
Committee,
factors
considered
may
include:
•We
voted
against
the
company’s
MSOP
in
the
previous
year,
the
company’s
previous
MSOP
received
significant opposition of votes cast and we are voting against this year’s MSOP;
and
•The
board
implements
a
MSOP
on
a
less
frequent
basis
than
the
frequency
that
received
the
plurality
of
votes cast
•Remuneration
structure
is
widely
inconsistent
with
local
market
best
practices
or
regulations
4.Shareholder
Rights
and
Defenses
Antitakeover Mechanisms
Generally
vote
AGAINST
all
antitakeover
proposals,
unless
they
are
structured
in
such
a
way
that
they
give
shareholders the ultimate decision on any proposal or offer.
5.Strategic
Transactions,
Capital
Structures
and
other
Business
Considerations
Reorganizations/Restructurings
Vote
reorganizations
and
restructurings
on
a
CASE-BY-CASE
basis.
Mergers
and
Acquisitions
Vote
CASE-BY-CASE
on
mergers
and
acquisitions
taking
into
account
the
following
based
on
publicly
available
information:
•Valuation;
•Market
reaction;
•Strategic
rationale;
•Management’s
track
record
of
successful
integration
of
historical
acquisitions;
•Presence
of
conflicts
of
interest;
and
•Governance
profile
of
the
combined
company.
Dual
Class
Structures
Vote
FOR
resolutions
that
seek
to
maintain
or
convert
to
a
one-share,
one-vote
capital
structure.
Vote
AGAINST
requests
for
the
creation
or
continuation
of
dual-class
capital
structures
or
the
creation
of
new
or
additional super voting shares.
Share
Issuance
Requests
General
Issuances:
Vote
FOR
issuance
requests
with
preemptive
rights
to
a
maximum
of
100%
over
currently
issued
capital
or
any
stricter limit set in local best practice recommendations or law.
Vote
FOR issuance requests without preemptive rights to a maximum of 20% of currently
issued capital or any stricter
limit
set
in
local
best
practice
recommendations
or
law.
At
companies
in
India,
vote
FOR
issuance
requests
without preemptive rights to a maximum of 25% of currently issued
capital.
Specific
Issuances:
Vote
on
a
CASE-BY-CASE
basis
on
all
requests,
with
or
without
preemptive
rights.
Increases
in
Authorized
Capital
Vote
FOR
non-specific
proposals
to
increase
authorized
capital
up
to
100%
over
the
current
authorization
unless
the
increase would leave the company with less than 30% of its new authorization
outstanding, or any stricter limit set in local best practice recommendations or
law.
Vote
FOR
specific
proposals
to
increase
authorized
capital
to
any
amount,
unless:
•The
specific
purpose
of
the
increase
(such
as
a
share-based
acquisition
or
merger)
does
not
meet
guidelines for the purpose being proposed; or
•The
increase
would
leave
the
company
with
less
than
30%
of
its
new
authorization
outstanding
after adjusting for all proposed issuances, or any stricter limit set in local
best practice recommendations or law
Vote
AGAINST
proposals
to
adopt
unlimited
capital
authorizations.
Reduction
of
Capital
Vote
FOR
proposals
to
reduce
capital
for
routine
accounting
purposes
unless
the
terms
are
unfavorable
to
shareholders.
Vote
proposals
to
reduce
capital
in
connection
with
corporate
restructuring
on
a
CASE-BY-CASE
basis.
Preferred
Stock
Vote
FOR
the
creation
of
a
new
class
of
preferred
stock
or
for
issuances
of
preferred
stock
up
to
50%
of
issued
capital unless the terms of the preferred stock would adversely affect the
rights of existing shareholders.
Vote
FOR
the
creation/issuance
of
convertible
preferred
stock
as
long
as
the
maximum
number
of
common
shares that could be issued upon conversion meets guidelines on equity issuance
requests.
Vote
AGAINST
the
creation
of
a
new
class
of
preference
shares
that
would
carry
superior
voting
rights
to
the
common shares.
Vote
AGAINST
the
creation
of
blank
check
preferred
stock
unless
the
board
clearly
states
that
the
authorization
will
not be used to thwart a takeover bid.
Vote
proposals
to
increase
blank
check
preferred
authorizations
on
a
CASE-BY-CASE
basis.
Debt
Issuance
Requests
Vote
non-convertible
debt
issuance
requests
on
a
CASE-BY-CASE
basis,
with
or
without
preemptive
rights.
Vote
FOR
the
creation/issuance
of
convertible
debt
instruments
as
long
as
the
maximum
number
of
common
shares
that could be issued upon conversion meets guidelines on equity issuance
requests.
Vote
FOR
proposals
to
restructure
existing
debt
arrangements
unless
the
terms
of
the
restructuring
would
adversely affect the rights of shareholders.
Increase
in
Borrowing
Powers
Vote
proposals
to
approve
increases
in
a
company's
borrowing
powers
on
a
CASE-BY-CASE
basis.
Share
Repurchase
Plans
We
will
generally
recommend
FOR
share
repurchase
programs
taking
into
account
whether:
•The
share
repurchase
program
can
be
used
as
a
takeover
defense;
•There
is
clear
evidence
of
historical
abuse;
•There
is
no
safeguard
in
the
share
repurchase
program
against
selective
buybacks;
•Pricing
provisions
and
safeguards
in
the
share
repurchase
program
are
deemed
to
be
unreasonable
in light of market practice.
Reissuance
of
Repurchased
Shares
Vote
FOR
requests
to
reissue
any
repurchased
shares
unless
there
is
clear
evidence
of
abuse
of
this
authority
in
the
past.
Capitalization
of
Reserves
for
Bonus
Issues/Increase
in
Par
Value
Vote
FOR
requests
to
capitalize
reserves
for
bonus
issues
of
shares
or
to
increase
par
value.
Reorganizations/Restructurings
Vote
reorganizations
and
restructurings
on
a
CASE-BY-CASE
basis.
Reincorporation
Proposals
Vote
reincorporation
proposals
on
a
CASE-BY-CASE
basis.
Related-Party
Transactions
Vote
related-party
transactions
on
a
CASE-BY-CASE
basis,
considering
factors
including,
but
not
limited
to,
the
following:
•The
parties
on
either
side
of
the
transaction;
•The
nature
of
the
asset
to
be
transferred/service
to
be
provided;
•The
pricing
of
the
transaction
(and
any
associated
professional
valuation);
•The
views
of
independent
directors
(where
provided);
•The
views
of
an
independent
financial
adviser
(where
appointed);
•Whether
any
entities
party
to
the
transaction
(including
advisers)
is
conflicted;
and
The
stated
rationale for the transaction, including discussions of timing
6.Environmental
and
Social
Issues
Overall Approach
Proposals
considered
under
this
category
could
include,
among
others,
requests
that
a
company:
•Publish
a
report
or
additional
information
related
to
the
company’s
business
and
impact
on
stakeholders;
•Disclose
policies
related
to
specific
business
practices
and/or
services;
•Conduct
third
party
audits,
reports
or
studies
related
to
the
company’s
business
practices,
services
and/or
impact on stakeholders
When
evaluating
environmental
and
social
shareholder
proposals,
the
following
factors
are
generally
considered:
•Whether
the
subject
of
the
proposal
is
considered
to
be
material
to
the
company’s
business;
•The
company’s
current
level
of
publicly
available
disclosure,
including
if
the
company
already
discloses similar information through existing reports or policies;
•The
proponent
of
the
proposal;
•If
the company has implemented or formally committed to the implementation of a
reporting program
based
on
the
International
Sustainability
Standards
Board’s
Sustainability
Accounting
Standards, the Sustainability Accounting Standards Board’s (SASB) standards, the
European Sustainability Reporting Standards, the Task Force on Climate-related
Financial Disclosure’s (TCFD) recommendations, or a similar
standard;
•Whether
adoption
of
the
proposal
is
likely
to
enhance
or
protect
shareholder
value;
•Whether
the
information
requested
concerns
business
issues
that
relate
to
a
meaningful
percentage
of the company’s business;
•The
degree
to
which
the
company’s
stated
position
on
the
issues
raised
in
the
proposal
could
affect
its reputation or sales, or leave it vulnerable to a boycott or selective
purchasing;
•Whether
the
company
has
already
responded
in
some
appropriate
manner
to
the
request
embodied
in the proposal;
•What
other
companies
in
the
relevant
industry
have
done
in
response
to
the
issue
addressed
in
the
proposal;
•Whether
the
proposal
itself
is
well
framed
and
the
cost
of
preparing
the
report
and/or
the
implementation is reasonable;
•Whether
the
subject
of
the
proposal
is
best
left
to
the
discretion
of
the
board;
•Whether
the
proposal
is
legally
binding
for
the
board;
•Whether
the
company
has
material
fines
or
violations
in
the
area
and
if
so,
if
appropriate
actions
have already been taken to remedy going forward; and
•Whether
providing
this
information
would
reveal
proprietary
or
confidential
information
that
would
place the company at a competitive disadvantage.
Environmental
Issues Climate
Transition
Plans
Generally
vote
CASE-BY-CASE
on
management
proposed
climate
transition
plans.
When
evaluating
management
proposed plans, the following factors are generally considered:
•If
the
company
has
detailed
disclosure
of
the
governance,
strategy,
risk
mitigation
efforts,
and
metrics and targets based on the TCFD’s recommendations, or a similar
standard;
•If
the
company
has
detailed
disclosure
of
their
current
emissions
data
based
on
the
SASB
materiality framework; and
•If
the
company
has
detailed
disclosure
in
line
with
Paris
Agreement
goals.
Generally
vote
CASE-BY-CASE
on
shareholder
proposals
requesting
climate
transition
plans.
When
evaluating
these shareholder proposals, the following factors are generally
considered:
•The
company’s
current
level
of
publicly
available
disclosure
including
if
the
company
already
discloses similar information through existing reports or policies;
•If
the
proposal
asks
for
detailed
disclosure
according
to
the
TCFD’s
recommendations;
•If
the
proposal
asks
for
detailed
disclosure
of
the
company’s
current
emissions
data
based
on
the
SASB materiality framework;
•If
the
proposal
asks
for
long-term
targets,
as
well
as
short
and
medium
term
milestones;
•If
the
proposal
asks
for
targets
to
be
aligned
to
a
globally
accepted
framework,
such
as
Paris
Aligned or Net Zero;
•If
the
proposal
asks
for
targets
to
be
approved
by
the
Science
Based
Target
Initiative
(“SBTi”);
•If
the
proposal
seeks
to
add
reasonable
transparency
and
is
not
onerous
or
overly
prescriptive;
and
•Whether
the
proposal
is
binding
or
non-binding.
Environmental
Sustainability
Reporting
Generally
vote
FOR
shareholders
proposals
requesting
the
company
to
report
on
its
policies,
initiatives
and
oversight mechanisms
related
to
environmental sustainability, including the impacts
of
climate change and biodiversity loss. The following factors will be
considered:
•The
company’s
current
level
of
publicly
available
disclosure
including
if
the
company
already
discloses similar information through existing reports or policies;
•If
the company has implemented or formally committed to the implementation of a
reporting program
based
on
the
International
Sustainability
Standards
Board’s
Sustainability
Accounting
Standards, the Sustainability Accounting Standards Board’s (SASB) standards, the
European Sustainability Reporting Standards, the Task Force on Climate-related
Financial Disclosure’s (TCFD) recommendations, or a similar
standard;
•If
the
company’s
current
level
of
disclosure
is
comparable
to
that
of
its
industry
peers;
and
•If
there
are
significant
controversies,
fines,
penalties,
or
litigation
associated
with
the
company’s
environmental performance.
Other
Environmental
Proposals
Vote
CASE-BY-CASE
on
the
following
shareholder
proposals
if
relevant
to
the
company:
•Seeking
information on the financial, physical, or regulatory risks a company faces
related to climate
change
on
its
operations
and
investment,
or
on
how
the
company
identifies,
measures
and
manages such risks;
•Calling
for
the
reduction
of
Greenhouse
Gas
(GHG)
emissions;
•Seeking
reports
on
responses
to
regulatory
and
public
pressures
surrounding
climate
change,
and
for disclosure of research that aided in setting company policies around climate
change;
•Requesting
an
action
plan
including
science
based
targets
and
a
commitment
to
net
zero
emissions
by 2050 or earlier;
•Requesting
a
report/disclosure
of
goals
on
GHG
emissions
from
company
operations
and/or
products;
•Requesting
a
company
report
on
its
energy
efficiency
policies;
and
•Requesting
reports
on
the
feasibility
of
developing
renewable
energy
resources.
Social
Issues
Board
and
Workforce
Demographics
A
company
should
have
a
clear
diversity
policy.
Generally
vote
FOR
proposals
seeking
to
amend
a
company’s
diversity policy to additionally prohibit discrimination based on sexual
orientation and/or gender identity.
Generally
vote
FOR
proposals
requesting
reports
on
a
company’s
efforts
to
diversify
the
board,
unless:
•The
gender
and
racial
minority
representation
of
the
company’s
board
does
not
meet
our
board
composition expectations; and
•The
board
already
reports
on
its
nominating
procedures
and
gender
and
racial
minority
initiatives
on the board.
Labor,
Human
and
Animal
Rights
Standards
Generally
vote
FOR
proposals
requesting
a
report
on
company
or
company
supplier
labor,
human,
and/or
animal
rights standards and policies, or on the impact of its operations on society,
unless such information is already publicly disclosed considering:
•The
degree
to
which
existing
relevant
policies
and
practices
are
disclosed;
•Whether
or
not
existing
relevant
policies
are
consistent
with
internationally
recognized
standards;
•Whether
company
facilities
and
those
of
its
suppliers
are
monitored
and
how;
•Company
participation
in
fair
labor
organizations
or
other
internationally
recognized
human
rights
initiatives;
•Scope
and
nature
of
business
conducted
in
markets
known
to
have
higher
risk
of
workplace
labor/human rights abuse;
•Recent,
significant
company
controversies,
fines,
or
litigation
regarding
human
rights
at
the
company or its suppliers;
•The
scope
of
the
request;
and
•Deviation
from
industry
sector
peer
company
standards
and
practices.
Generally
vote
CASE-BY-CASE
on
shareholder
proposals
requesting
reports
on
the
actions
taken
by
a
company
to
prevent
sexual
and
other
forms
of
harassment
or
on
the
risks
posed
by the
company’s
failure
to
take
such
actions, taking into account the company’s existing policies and disclosures of
policies.
Political
Contributions
and
Trade
Association
Spending/Lobbying
Expenditures
and
Initiatives
We
generally believe that it is the role of boards and management to determine the
appropriate level of disclosure of all types of corporate political
activity.
When
evaluating these proposals, we consider the prescriptive nature of the proposal
and the overall benefit to shareholders along with a company’s current
disclosure of policies, practices and oversight.
Generally
vote
AGAINST
proposals
asking
the
company
to
affirm
political
nonpartisanship
in
the
workplace
so
long as:
•There
are
no
recent,
significant
controversies,
fines
or
litigation
regarding
the
company’s
political
contributions or trade association spending; and
Generally
vote
AGAINST
proposals
requesting
increased
disclosure
of
a
company’s
policies
with
respect
to
political contributions, lobbying and trade association spending as long
as:
•There
is
no
significant
potential
threat
or
actual
harm
to
shareholders’
interests;
•There
are
no
recent
significant
controversies
or
litigation
related
to
the
company’s
political
contributions or governmental affairs; and
•There
is
publicly
available
information
to
assess
the
company’s
oversight
related
to
such
expenditures of corporate assets.
We
generally
will
vote
AGAINST
proposals
asking
for
detailed
disclosure
of
political
contributions
or
trade
association or lobbying expenditures.
We
generally
will
vote
AGAINST
proposals
barring
the
company
from
making
political
contributions.
Businesses
are affected by legislation at the federal, state, and local level and barring
political contributions can put the company at a competitive
disadvantage.
Region:
Japan
Proxy
Items
The
following
section
is
a
broad
summary
of
the
Guidelines,
which
form
the
basis
of
the
Policy
with
respect
to
Japanese public equity investments of operating and/or holding
companies.
Applying
these guidelines is not inclusive of all considerations in the Japanese
market.
1.Operational
Items
Financial
Results/Director
and
Auditor
Reports
Vote
FOR
approval
of
financial
statements
and
director
and
auditor
reports,
unless:
•There
are
concerns
about
the
accounts
presented
or
audit
procedures
used;
or
•The
company
is
not
responsive
to
shareholder
questions
about
specific
items
that
should
be
publicly disclosed.
Appointment
of
Auditors
and
Auditor
Fees
Vote
FOR
the
re-election
of
auditors
and
proposals
authorizing
the
board
to
fix
auditor
fees,
unless:
•There
are
serious
concerns
about
the
accounts
presented,
audit
procedures
used
or
audit
opinion
rendered;
•There
is
reason
to
believe
that
the
auditor
has
rendered
an
opinion
that
is
neither
accurate
nor
indicative of the company’s financial position;
•Name
of
the
proposed
auditor
has
not
been
published;
•The
auditors
are
being
changed
without
explanation;
•Non-audit-related
fees
are
substantial
or
are
in
excess
of
standard
annual
audit-related
fees;
or
•The
appointment
of
external
auditors
if
they
have
previously
served
the
company
in
an
executive
capacity or can otherwise be considered affiliated with the
company.
Reincorporation
Proposals
Vote
reincorporation
proposals
on
a
CASE-BY-CASE
basis.
Allocation
of
Income
Vote
FOR
approval
of
the
allocation
of
income,
unless:
•The
dividend
payout
ratio
has
been
consistently
low
without
adequate
explanation;
or
•The
payout
is
excessive
given
the
company’s
financial
position;
Amendments
to
Articles
of
Association
Vote
amendments
to
the
articles
of
association
on
a
CASE-BY-CASE
basis.
Change
in
Company
Fiscal
Term
Vote
FOR
resolutions
to
change
a
company’s
fiscal
term
unless
a
company’s
motivation
for
the
change
is
to
postpone its annual general meeting.
Amend
Quorum
Requirements
Vote
proposals
to
amend
quorum
requirements
for
shareholder
meetings
on
a
CASE-BY-CASE
basis.
Virtual
Meetings
Generally
vote
AGAINST
proposals
allowing
for
the
convening
of
virtual-only*
shareholder
meetings.
*
The
phrase
“virtual-only
shareholder
meeting”
refers
to
a
meeting
of
shareholders
that
is
held
exclusively
through
the use of online technology without a corresponding in-person
meeting.
The
term “hybrid shareholder meeting” refers to an in-person, or physical, meeting
in which shareholders are permitted to participate online.
2.Board
of
Directors
and
Statutory
Auditors
The
board of directors should promote the interests of shareholders by acting in an
oversight and/or advisory role; should
have
independent
oversight
of
management;
and
should
be
held
accountable
for
actions
and
results
related
to
their responsibilities.
Voting
on
Director
Nominees
in
Uncontested
Elections
Vote
on
director
nominees
should
be
determined
on
a
CASE-BY-CASE
basis
taking
into
consideration
the
following:.
•The
company’s
committee
structure:
statutory
auditor
board
structure,
U.S.-type
three
committee
structure, or audit committee structure; or
•Adequate
disclosure
has
not
been
provided
in
a
timely
manner;
or
•There
are
clear
concerns
over
questionable
finances
or
restatements;
or
•There
have
been
questionable
transactions
or
conflicts
of
interest;
or
•There
are
any
records
of
abuses
against
minority
shareholder
interests;
or
•The
board
fails
to
meet
minimum
corporate
governance
standards;
or
•There
are
reservations
about:
oDirector
terms
oBundling
of
proposals
to
elect
directors
oBoard
independence
oDisclosure
of
named
nominees
oCombined
Chairman/CEO
oElection
of
former
CEO
as
Chairman
of
the
board
oOverboarded
directors
oComposition
of
committees
oDirector
independence
oNumber
of
directors
on
the
board
oLack
of
gender
diversity
on
the
board
•Specific
concerns
about
the
individual
or
company,
such
as
criminal
wrongdoing
or
breach
of
fiduciary responsibilities; or
•There
are other considerations which may include sanctions from government or
authority, violations
of
laws
and
regulations,
or
other
issues
related
to
improper
business
practice,
failure
to
replace management, or egregious actions related to service on other
boards.
Vote
AGAINST
top
executives
when
the
company
has
an
excessive
amount
of
strategic
shareholdings.
Vote
AGAINST
top
executives
when
the
company
has
posted
average
return
on
equity
(ROE)
of
less
than
five
percent over the last five fiscal years.
Vote
AGAINST top executives when the company does not disclose various components of
current emissions, a proxy
for
a
company’s
dependency
on
fossil
fuels
and
other
sources
of
greenhouse
gasses
(such
as
Scope
1,
Scope
2,
Scope 3 emissions), material to the company’s business. For companies with
3-committee structure boards, vote AGAINST the Audit Committee
Chair.
Board
Composition
We
generally
believe
diverse
teams
have
the
potential
to
outperform
and
we
expect
the
companies
that
we
invest
in
to focus on the importance of diversity. When evaluating board composition, we
believe a diversity of ethnicity, gender
and
experience
is
an
important
consideration.
We
encourage
companies
to
disclose
the
composition
of
their
board
in the proxy statement and may vote against members of the board without
disclosure. See below how we execute our vote at companies that do not meet our
diversity expectations.
Vote
AGAINST members of the Nominating Committee if the board is not representative
relative to the board composition
of
companies
in
their
market.
For
Japanese
boards
with
statutory
auditors
or
audit
committee
structure,
vote AGAINST top executives.
Director
Independence--Classification
of
Directors
Inside Director
•Employee
or
executive
of
the
company;
•Any
director
who
is
not
classified
as
an
outside
director
of
the
company.
Non-Independent
Non-Executive
Director
(affiliated
outsider)
•Any
director
specifically
designated
as
a
representative
of
a
significant
shareholder
of
the
company;
•Any
director
who
is/was
also
an
employee
or
executive
of
a
significant
shareholder
of
the
company;
•Beneficial
owner (direct or indirect) of at least 10% of the company’s stock, or one of
the
top
10 shareholders,
either
in
economic
terms
or
in
voting
rights
(this
may
be
aggregated
if
voting
power
is distributed among more than one member of a defined group, e.g., family
members who beneficially own less than 10% individually, but collectively own
more than 10%)
•Individuals
who
are
employees
or
were
previously
employed
at
main
lenders/banks
of
the
company;
•Relative
of
a
current
employee
of
the
company
or
its
affiliates;
•Any
director
who
works
or
has
worked
at
a
company
whose
shares
are
held
by
the
company
in
question as strategic shareholdings (i.e. “cross-shareholdings”)
•Any
director
who
has
served
at
a
company
as
an
outside
director
for
12
years
or
more;
•Any
additional
relationship
or
principle
considered
to
compromise
independence
under
local
corporate governance best practice guidance.
Independent
Non-Executive
Directors
(independent
outsider)
•No
material
connection,
either
directly
or
indirectly,
to
the
company
other
than
a
board
seat.
At
companies adopting a board with a statutory auditor committee structure or an
audit committee structure, vote AGAINST top executives
when
the
board
consists
of
fewer
than
two independent
outside
directors
or
less
than
1/3
of
the
board
consists
of
independent
outside
directors.
Additionally,
if
the
company
is
a
member
of
the
TOPIX
100
index, vote AGAINST top executives when less than 1/2 of the board consists of
outside directors.
At
companies
adopting
an
audit
committee
structure,
vote
AGAINST
affiliated
outside
directors
who
are
audit
committee members.
At
companies
adopting
a
U.S.-type
three
committee
structure,
vote
AGAINST
members
of
the
Nominating
Committee when less than a majority of the board consists of independent outside
directors.
At
controlled
companies
adopting
board
with
a
statutory
auditor
structure
or
an
audit
committee
structure,
vote
AGAINST top executives if the board does not consist of majority independent
outside directors.
Director
Accountability
Vote
AGAINST
individual
outside
directors
who
attend
less
than
75%
of
the
board
and/or
committee
meetings
without a disclosed valid excuse.
Other
items considered for an AGAINST vote include specific concerns about the
individual or the company, such as
criminal
wrongdoing
or
breach
of
fiduciary
responsibilities,
sanctions
from
government
or
authority,
violations
of
laws
and regulations, the presence of inappropriate related party transactions, or
other issues related to improper business practices
Vote
AGAINST members of the full board or appropriate committee (or only the
independent chairman or lead director
as
may
be
appropriate
in
situations
such
as
where
there
is
a
classified
board
and
members
of
the
appropriate
committee are not up for re-election or the appropriate committee is comprised
of the entire board) for the below reasons. New nominees will be considered on a
case-by-case basis. Extreme cases may warrant a vote against the entire
board.
•Material
failures of governance, stewardship, or fiduciary responsibilities at the
company, including
but
not
limited
to
violations
of
global
norms
principles
and/or
other
significant
global
standards;
•Failure
to
disclose
material
environmental,
social
and
governance
information;
•Egregious
actions
related
to
the
director(s)’
service
on
other
boards
that
raise
substantial
doubt
about his or her ability to effectively oversee management and serve the best
interests of shareholders at any company;
•The
board
adopts
or
renews
a
poison
pill
without
shareholder
approval,
does
not
commit
to
putting
it to shareholder vote within 12 months of adoption (or in the case of a newly
public company, does not commit to put the pill to a shareholder vote within 12
months following the IPO), or reneges on a commitment to put the pill to a vote,
and has not yet received a withhold/against recommendation for this
issue;
•The
board
failed
to
act
on
takeover
offers
where
the
majority
of
the
shareholders
tendered
their
shares;
•If
in
an
extreme
situation
the
board
lacks
accountability
and
oversight,
coupled
with
sustained
poor performance relative to peers.
Voting
on
Director
Nominees
in
Contested
Elections
Vote
on
a
CASE-BY-CASE
basis
in
contested
elections
of
directors,
e.g.,
the
election
of
shareholder
nominees
or
the dismissal of incumbent directors, determining which directors are best
suited to add value for shareholders.
The
analysis
will
generally
be
based
on,
but
not
limited
to,
the
following
major
decision
factors:
•Company
performance
relative
to
its
peers;
•Strategy
of
the
incumbents
versus
the
dissidents;
•Independence
of
board
candidates;
•Experience
and
skills
of
board
candidates;
•Governance
profile
of
the
company;
•Evidence
of
management
entrenchment;
•Responsiveness
to
shareholders;
•Whether
a
takeover
offer
has
been
rebuffed;
•Whether
minority
or
majority
representation
is
being
sought.
Other
Board
Related
Proposals
(Management
and
Shareholder)
Vote
AGAINST
the
introduction
of
classified
boards
and
mandatory
retirement
ages
for
directors.
Vote
AGAINST
proposals
to
alter
board
structure
or
size
in
the
context
of
a
fight
for
control
of
the
company
or
the
board.
Independent
Board
Chair
We
will
generally
vote
AGAINST
shareholder
proposals
requiring
that
the
chairman’s
position
be
filled
by
an
independent director, if the company satisfies 3 of the 4 following
criteria:
•Two-thirds
independent
board;
•A
designated,
or
a
rotating,
lead
director,
elected
by
and
from
the
independent
board
members
with clearly delineated and comprehensive duties;
•Fully
independent
key
committees;
and/or
•Established,
publicly
disclosed,
governance
guidelines
and
director
biographies/profiles.
Statutory
Auditor Elections Statutory
Auditor
Independence
Vote
AGAINST
affiliated
outside
statutory
auditors.
For
definition
of
affiliated
outsiders,
see
“Classification
of
Directors”
Statutory Auditor Appointment
Vote
FOR
management
nominees
taking
into
consideration
the
following:
•Adequate
disclosure
has
not
been
provided
in
a
timely
manner;
or
•There
are
clear
concerns
over
questionable
finances
or
restatements;
or
•There
have
been
questionable
transactions
or
conflicts
of
interest;
or
•There
are
any
records
of
abuses
against
minority
shareholder
interests;
or
•The
board
fails
to
meet
minimum
corporate
governance
standards;
or
•Specific
concerns
about
the
individual
or
company,
such
as
criminal
wrongdoing
or
breach
of
fiduciary
responsibilities; or
•Outside
statutory
auditor’s
attendance
at
less
than
75%
of
the
board
and
statutory
auditor
meetings
without
a disclosed valid excuse; or
•Unless
there are other considerations which may include sanctions from government or
authority, violations
of
laws
and
regulations,
or
other
issues
related
to
improper
business
practice,
failure
to
replace
management, or egregious actions related to service on other
boards.
3.Compensation
Director
Compensation
Vote
FOR
proposals
to
award
cash
fees
to
non-executive
directors
unless
the
amounts
are
excessive
relative
to
other
companies in the country or industry.
Vote
non-executive
director
compensation
proposals
that
include
both
cash
and
share-based
components
on
a
CASE-BY-CASE basis.
Vote
proposals
that
bundle
compensation
for
both
non-executive
and
executive
directors
into
a
single
resolution
on
a
CASE-BY-CASE basis.
Vote
AGAINST
proposals
to
introduce
retirement
bonuses
for
outside
directors
and/or
outside
statutory
auditors,
unless the amounts are disclosed and are not excessive relative to other
companies in the country or industry.
Compensation
Plans
Vote
compensation
plans
on
a
CASE-BY-CASE
basis.
Director,
Officer,
and
Auditor
Indemnification
and
Liability
Provisions
Vote
proposals
seeking
indemnification
and
liability
protection
for
directors
and
statutory
auditors
on
a
CASE-BY-
CASE basis.
Vote
AGAINST
proposals
to
indemnify
auditors.
4.Shareholder
Rights
and
Defenses
Antitakeover
Mechanisms
Generally
vote AGAINST all
antitakeover
proposals,
unless
certain
conditions
are
met to ensure the proposal is intended
to
enhance
shareholder
value,
including
consideration
of
the
company’s
governance
structure,
the
anti-
takeover
defense
duration,
the
trigger
mechanism and governance, and the intended purpose of the antitakeover
defense.
5.Strategic
Transactions
and
Capital
Structures
Reorganizations/Restructurings
Vote
reorganizations
and
restructurings
on
a
CASE-BY-CASE
basis.
Mergers
and
Acquisitions
Vote
CASE-BY-CASE
on
mergers
and
acquisitions
taking
into
account
the
following
based
on
publicly
available
information:
•Valuation;
•Market
reaction;
•Strategic
rationale;
•Management’s
track
record
of
successful
integration
of
historical
acquisitions;
•Presence
of
conflicts
of
interest;
and
•Governance
profile
of
the
combined
company.
Dual
Class
Structures
Vote
FOR
resolutions
that
seek
to
maintain
or
convert
to
a
one-share,
one-vote
capital
structure.
Vote
AGAINST
requests
for
the
creation
or
continuation
of
dual-class
capital
structures
or
the
creation
of
new
or
additional super voting shares.
Share
Issuance
Requests
General
Issuances:
Vote
FOR
issuance
requests
with
preemptive
rights
to
a
maximum
of
100%
over
currently
issued
capital.
Vote
FOR
issuance
requests
without
preemptive
rights
to
a
maximum
of
20%
of
currently
issued
capital.
Specific
Issuances:
Vote
on
a
CASE-BY-CASE
basis
on
all
requests,
with
or
without
preemptive
rights.
Increases
in
Authorized
Capital
Vote
FOR
non-specific
proposals
to
increase
authorized
capital
up
to
100%
over
the
current
authorization
unless
the
increase would leave the company with less than 30% of its new authorization
outstanding.
Vote
FOR
specific
proposals
to
increase
authorized
capital
to
any
amount,
unless:
•The
specific
purpose
of
the
increase
(such
as
a
share-based
acquisition
or
merger)
does
not
meet
guidelines for the purpose being proposed.
Vote
AGAINST
proposals
to
adopt
unlimited
capital
authorizations.
Reduction
of
Capital
Vote
FOR
proposals
to
reduce
capital
for
routine
accounting
purposes
unless
the
terms
are
unfavorable
to
shareholders.
Vote
proposals
to
reduce
capital
in
connection
with
corporate
restructuring
on
a
CASE-BY-CASE
basis.
Preferred
Stock
Vote
FOR
the
creation
of
a
new
class
of
preferred
stock
or
for
issuances
of
preferred
stock
up
to
50%
of
issued
capital unless the terms of the preferred stock would adversely affect the
rights of existing shareholders.
Vote
FOR
the
creation/issuance
of
convertible
preferred
stock
as
long
as
the
maximum
number
of
common
shares that could be issued upon conversion meets guidelines on equity issuance
requests.
Vote
AGAINST
the
creation
of
a
new
class
of
preference
shares
that
would
carry
superior
voting
rights
to
the
common shares.
Vote
AGAINST
the
creation
of
blank
check
preferred
stock
unless
the
board
clearly
states
that
the
authorization
will
not be used to thwart a takeover bid.
Vote
proposals
to
increase
blank
check
preferred
authorizations
on
a
CASE-BY-CASE
basis.
Share
Repurchase
Plans
We
will
generally
recommend
FOR
share
repurchase
programs
taking
into
account
whether:
•The
share
repurchase
program
can
be
used
as
a
takeover
defense;
•There
is
clear
evidence
of
historical
abuse;
•There
is
no
safeguard
in
the
share
repurchase
program
against
selective
buybacks;
•Pricing
provisions
and
safeguards
in
the
share
repurchase
program
are
deemed
to
be
unreasonable
in light of market practice.
Related-Party
Transactions
Vote
related-party
transactions
on
a
CASE-BY-CASE
basis,
considering
factors
including,
but
not
limited
to,
the
following:
•The
parties
on
either
side
of
the
transaction;
•The
nature
of
the
asset
to
be
transferred/service
to
be
provided;
•The
pricing
of
the
transaction
(and
any
associated
professional
valuation);
•The
views
of
independent
directors
(where
provided);
•The
views
of
an
independent
financial
adviser
(where
appointed);
•Whether
any
entities
party
to
the
transaction
(including
advisers)
is
conflicted;
and
•The
stated
rationale
for
the
transaction,
including
discussions
of
timing.
6.Environmental
and
Social
Issues
Overall Approach
Proposals
considered
under
this
category
could
include,
among
others,
requests
that
a
company:
•Publish
a
report
or
additional
information
related
to
the
company’s
business
and
impact
on
stakeholders;
•Disclose
policies
related
to
specific
business
practices
and/or
services;
•Conduct
third
party
audits,
reports
or
studies
related
to
the
company’s
business
practices,
services
and/or
impact on stakeholders
When
evaluating
environmental
and
social
shareholder
proposals,
the
following
factors
are
generally
considered:
•Whether
the
subject
of
the
proposal
is
considered
to
be
material
to
the
company’s
business;
•The
company’s
current
level
of
publicly
available
disclosure,
including
if
the
company
already
discloses similar information through existing reports or policies;
•The
proponent
of
the
proposal;
•If
the company has implemented or formally committed to the implementation of a
reporting program
based
on
the
International
Sustainability
Standards
Board’s
Sustainability
Accounting
Standards, the Sustainability Accounting Standards Board’s (SASB) standards, the
European Sustainability Reporting Standards, the Task Force on Climate-related
Financial Disclosure’s (TCFD) recommendations, or a similar
standard;
•Whether
adoption
of
the
proposal
is
likely
to
enhance
or
protect
shareholder
value;
•Whether
the
information
requested
concerns
business
issues
that
relate
to
a
meaningful
percentage
of the company’s business;
•The
degree
to
which
the
company’s
stated
position
on
the
issues
raised
in
the
proposal
could
affect
its reputation or sales, or leave it vulnerable to a boycott or selective
purchasing;
•Whether
the
company
has
already
responded
in
some
appropriate
manner
to
the
request
embodied
in the proposal;
•What
other
companies
in
the
relevant
industry
have
done
in
response
to
the
issue
addressed
in
the
proposal;
•Whether
the
proposal
itself
is
well
framed
and
the
cost
of
preparing
the
report
and/or
the
implementation is reasonable;
•Whether
the
subject
of
the
proposal
is
best
left
to
the
discretion
of
the
board;
•Whether
the
proposal
is
legally
binding
for
the
board;
•Whether
the
company
has
material
fines
or
violations
in
the
area
and
if
so,
if
appropriate
actions
have already been taken to remedy going forward; and
•Whether
providing
this
information
would
reveal
proprietary
or
confidential
information
that
would
place the company at a competitive disadvantage.
Environmental
Issues Climate
Transition
Plans
Generally
vote
CASE-BY-CASE
on
management
proposed
climate
transition
plans.
When
evaluating
management
proposed
plans,
the
following
factors
are
generally
considered:
•If
the
company
has
detailed
disclosure
of
the
governance,
strategy,
risk
mitigation
efforts,
and
metrics and targets based on the TCFD’s recommendations, or a similar
standard;
•If
the
company
has
detailed
disclosure
of
their
current
emissions
data
based
on
the
SASB
materiality framework; and
•If
the
company
has
detailed
disclosure
in
line
with
Paris
Agreement
goals.
Generally
vote
CASE-BY-CASE
on
shareholder
proposals
requesting
climate
transition
plans.
When
evaluating
these shareholder proposals, the following factors are generally
considered:
•The
company’s
current
level
of
publicly
available
disclosure
including
if
the
company
already
discloses similar information through existing reports or policies;
•If
the
proposal
asks
for
detailed
disclosure
according
to
the
TCFD’s
recommendations;
•If
the
proposal
asks
for
detailed
disclosure
of
the
company’s
current
emissions
data
based
on
the
SASB materiality framework;
•If
the
proposal
asks
for
long-term
targets,
as
well
as
short
and
medium
term
milestones;
•If
the
proposal
asks
for
targets
to
be
aligned
to
a
globally
accepted
framework,
such
as
Paris
Aligned or Net Zero;
•If
the
proposal
asks
for
targets
to
be
approved
by
the
Science
Based
Target
Initiative
(“SBTi”);
•If
the
proposal
seeks
to
add
reasonable
transparency
and
is
not
onerous
or
overly
prescriptive;
and
•Whether
the
proposal
is
binding
or
non-binding.
Environmental
Sustainability
Reporting
Generally
vote
FOR
shareholders
proposals
requesting
the
company
to
report
on
its
policies,
initiatives
and
oversight mechanisms
related
to
environmental sustainability, including the impacts
of
climate change and biodiversity loss. The following factors will be
considered:
•The
company’s
current
level
of
publicly
available
disclosure
including
if
the
company
already discloses similar information through existing reports or
policies;
•If
the company has implemented or formally committed to the implementation of a
reporting program
based
on
the
International
Sustainability
Standards
Board’s
Sustainability
Accounting
Standards, the Sustainability Accounting Standards Board’s (SASB) standards, the
European Sustainability Reporting Standards, the Task Force on Climate-related
Financial Disclosure’s (TCFD) recommendations, or a similar
standard;
•If
the
company’s
current
level
of
disclosure
is
comparable
to
that
of
its
industry
peers;
and
•If
there
are
significant
controversies,
fines,
penalties,
or
litigation
associated
with
the
company’s
environmental performance.
Other
Environmental
Proposals
Vote
CASE-BY-CASE
on
the
following
shareholder
proposals
if
relevant
to
the
company:
•Seeking
information on the financial, physical, or regulatory risks a company faces
related to climate
change
on
its
operations
and
investment,
or
on
how
the
company
identifies,
measures
and
manages such risks;
•Calling
for
the
reduction
of
Greenhouse
Gas
(GHG)
emissions;
•Seeking
reports
on
responses
to
regulatory
and
public
pressures
surrounding
climate
change,
and
for disclosure of research that aided in setting company policies around climate
change;
•Requesting
an
action
plan
including
science
based
targets
and
a
commitment
to
net
zero
emissions
by 2050 or earlier;
•Requesting
a
report/disclosure
of
goals
on
GHG
emissions
from
company
operations
and/or
products;
•Requesting
a
company
report
on
its
energy
efficiency
policies;
and
•Requesting
reports
on
the
feasibility
of
developing
renewable
energy
resources.
Social
Issues
Board
and
Workforce
Demographics
A
company
should
have
a
clear
diversity
policy.
Generally
vote
FOR
proposals
seeking
to
amend
a
company’s
diversity policy to additionally prohibit discrimination based on sexual
orientation and/or gender identity.
Generally
vote
FOR
proposals
requesting
reports
on
a
company’s
efforts
to
diversify
the
board,
unless:
•The
gender
and
racial
minority
representation
of
the
company’s
board
meets
our
board
composition
expectations; and
•The
board
already
reports
on
its
nominating
procedures
and
gender
and
racial
minority
initiatives
on the board.
Labor,
Human
and
Animal
Rights
Standards
Generally
vote
FOR
proposals
requesting
a
report
on
company
or
company
supplier
labor,
human,
and/or
animal
rights standards and policies, or on the impact of its operations on society,
unless such information is already publicly disclosed considering:
•The
degree
to
which
existing
relevant
policies
and
practices
are
disclosed;
•Whether
or
not
existing
relevant
policies
are
consistent
with
internationally
recognized
standards;
•Whether
company
facilities
and
those
of
its
suppliers
are
monitored
and
how;
•Company
participation
in
fair
labor
organizations
or
other
internationally
recognized
human
rights
initiatives;
•Scope
and
nature
of
business
conducted
in
markets
known
to
have
higher
risk
of
workplace
labor/human rights abuse;
•Recent,
significant
company
controversies,
fines,
or
litigation
regarding
human
rights
at
the
company or its suppliers;
•The
scope
of
the
request;
and
•Deviation
from
industry
sector
peer
company
standards
and
practices.
Generally
vote
CASE-BY-CASE
on
shareholder
proposals
requesting
reports
on
the
actions
taken
by
a
company
to
prevent
sexual
and
other
forms
of
harassment
or
on
the
risks
posed
by the
company’s
failure
to
take
such
actions, taking into account the company’s existing policies and disclosures of
policies.