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.
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| |
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:
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|
|
|
|
|
|
|
|
|
| |
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):
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|
|
|
|
|
|
|
|
|
| |
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 |
|