ck0001511699-20231231
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Symbols |
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Kensington
Managed Income Fund |
Class
A (KAMAX) Institutional Class (KAMIX) Class C (KAMCX) |
Kensington
Dynamic Growth Fund |
Class
A (KAGAX) Institutional Class (KAGIX) Class C (KAGCX) |
Kensington
Active Advantage Fund |
Class
A (KADAX) Institutional Class (KADIX) Class C (KADCX) |
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Kensington
Defender Fund |
Institutional
Class (DFNDX) |
Statement
of Additional Information
April 30,
2024
This
Statement of Additional Information (“SAI”) provides general information about
the Kensington Managed Income Fund, Kensington Dynamic Growth Fund, Kensington
Active Advantage Fund, and Kensington Defender Fund (each a “Fund” and together
the “Funds”), four series of Managed Portfolio Series (the “Trust”). The
Kensington Managed Income Fund and the Kensington Dynamic Growth Fund are
successors to identically named series of Advisors Preferred Trust (the
“Predecessor Funds”, “Managed Income Predecessor Fund”, or “Dynamic Growth
Predecessor Fund”). This SAI is not a prospectus and should be read in
conjunction with the Funds’ current prospectus dated April 30, 2024 (the
“Prospectus”), as supplemented and amended from time to time. In addition, the
Funds’ audited financial statements for the fiscal year ended December 31, 2023,
are incorporated herein by reference to the Funds’ annual
report
dated December 31, 2023. To obtain a copy of the Prospectus and/or annual
report, free of charge, please write or call the Funds at the address or
toll-free telephone number below, or visit the Kensington Funds’ website at
www.kensingtonassetmanagement.com/funds/documents.
Kensington
Funds
c/o
U.S. Bank Global Fund Services
P.O.
Box 701
Milwaukee,
Wisconsin 53201-0701
844-577-3863
TABLE
OF CONTENTS
The
Trust
The
Trust is a Delaware statutory trust organized on January 27, 2011, and is
registered with the U.S. Securities and Exchange Commission (“SEC”) as an
open-end management investment company. Each Fund is a series, or mutual fund,
of the Trust. The Kensington Managed Income Fund (“Managed Income Fund”),
Kensington Dynamic Growth Fund (“Dynamic Growth Fund”), and Kensington Active
Advantage Fund (“Active Advantage Fund”) have three classes of shares: Class A,
Institutional Class, and Class C shares. The Kensington Defender Fund (“Defender
Fund”) has one class of shares: Institutional Class shares. The Funds are
non-diversified series and have their own investment objectives and
policies.
Shares
of other series of the Trust are offered in separate prospectuses and SAIs. The
Funds do not hold themselves out as related to any other series within the Trust
for purposes of investment and investor services, nor do they share the same
investment adviser with any other series of the Trust. The Funds’ Prospectus and
this SAI are a part of the Trust’s Registration Statement filed with the SEC.
Copies of the Trust’s complete Registration Statement may be obtained from the
SEC upon payment of the prescribed fee or may be accessed free of charge at the
SEC’s website at www.sec.gov. As permitted by Delaware law, the Trust’s Board of
Trustees (the “Board”) may create additional classes of the Funds and may create
additional series (and classes thereof) of the Trust and offer shares of these
series and classes under the Trust at any time without the vote of shareholders.
Effective as of the close of business June 24, 2022, the Managed Income
Predecessor Fund reorganized into the Kensington Managed Income Fund and the
Dynamic Growth Predecessor Fund reorganized into the Kensington Dynamic Growth
Fund (the “Reorganization”). The Funds have the same investment objectives and
substantially similar investment strategies as the Predecessor
Funds.
All
shares of a series shall represent an equal proportionate interest in the assets
held with respect to that series (subject to the liabilities held with respect
to that series and such rights and preferences as may have been established and
designated with respect to classes of shares of such series), and each share of
a series shall be equal to each other share of that series.
Shares
are voted in the aggregate and not by series or class, except in matters where a
separate vote is required by the Investment Company Act of 1940, as amended (the
“1940 Act”), or when the matters affect only the interest of a particular series
or class. 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
Trust is not required to hold annual meetings of shareholders, and does not
normally do so. Meetings of the shareholders shall be called by any member of
the Board upon written request of shareholders holding, in the aggregate, not
less than 10% of the shares, with such request specifying the purpose or
purposes for which such meeting is to be called.
Interests
in the Funds are represented by shares of beneficial interest, each with no par
value per share. Each share of a Fund represents an equal proportionate interest
in the assets and liabilities belonging to a Fund and is entitled to such
distributions out of the income belonging to a Fund as may be declared by the
Board.
The
Board has the authority from time to time to divide or combine the shares of any
series into a greater or lesser number of shares of that series without
materially changing the proportionate beneficial interest of the shares of that
series in the assets belonging to that series or materially affecting the rights
of shares of any other series. In case of the liquidation of a series, the
holders of shares of the series being liquidated are entitled to receive a
distribution out of the assets, net of the liabilities, belonging to that
series. Expenses attributable to any series (or class thereof) are borne by that
series (or class). Any general expenses of the Trust not readily identifiable as
belonging to a particular series are allocated by, or under the direction of,
the Board to all applicable series (and classes thereof) in such manner and on
such basis as deemed fair and equitable. No shareholder is liable to further
calls for the payment of any sum of money or assessment whatsoever with respect
to the Trust or any series of the Trust without his or her express
consent.
All
consideration received by the Trust for the issue or sale of a Fund’s shares,
together with all assets in which such consideration is invested or reinvested,
and all income, earnings, profits and proceeds thereof, including any proceeds
derived from the sale, exchange or liquidation of such assets, and any fund or
payments derived from any reinvestment of such proceeds, subject only to the
rights of creditors, shall constitute the underlying assets of the
Fund.
Kensington
Asset Management, LLC (the “Adviser” or “Kensington”) serves as the investment
adviser for the Funds. Liquid Strategies, LLC (the “Sub-Adviser” or “LS”) serves
as sub-adviser to the Defender Fund.
Investment
Objective, Policies, Strategies and Associated Risks
The
following discussion supplements the description of the Funds’ principal
investment strategies and principal risks set forth in the Prospectus. Unless an
investment strategy or policy described below is specifically prohibited by the
investment restrictions listed in the Prospectus, under the “Fundamental and
Non-Fundamental Investment Limitations” in this SAI, or by applicable law, the
Funds may hold securities and engage in various strategies as described
hereafter, but are not obligated to do so. The Funds might not invest in all of
these types of securities or use all of these techniques at any one time. Each
Fund’s transactions in a particular type of security or use of a particular
technique is subject to limitations imposed by a Fund’s investment objective,
policies and restrictions described in the Funds’ Prospectus and/or this SAI, as
well as by applicable laws.
Investment
Objective
The
investment objective of each Fund is set forth under the “Summary Section” in
the Funds’ Prospectus.
Percentage
Limitations
Each
Fund’s compliance with its investment policy and limitation will be determined
immediately after and as a result of the Fund’s acquisition of such security or
other asset. Accordingly, except with respect to borrowing or illiquid
investments, any subsequent change in values, net assets or other circumstances
will not be considered when determining whether an investment complies with a
Fund’s investment policies and limitations. In addition, if a bankruptcy or
other extraordinary event occurs concerning a particular investment by a Fund,
the Fund may receive stock, real estate, or other investments that the Fund
would not, or could not, buy. If this happens, the Fund will sell such
investments as soon as practicable while trying to maximize the return to its
shareholders.
Market
Volatility
U.S.
and international markets have from time to time experienced significant
volatility. Certain social, political, economic, environmental and other
conditions and events (such as natural disasters and weather-related phenomena
generally, epidemics and pandemics, terrorism, conflicts and social unrest) may
adversely interrupt the global economy and result in prolonged periods of
significant market volatility. During certain volatile periods, the fixed income
markets have experienced substantially lower valuations, reduced liquidity,
price volatility, credit downgrades, increased likelihood of default and
valuation difficulties. At times, concerns have spread to domestic and
international equity markets. In some cases, the stock prices of individual
companies have been negatively impacted even though there may be little or no
apparent degradation in the financial conditions or prospects of that company.
Continued volatility may have adverse effects on the Funds, thus the risks
discussed below and in the Prospectus may increase.
Equity
Securities
An
equity security represents a proportionate share of the ownership of a company.
Its value is based on the success of the company’s business, any income paid to
stockholders, the value of its assets and general market conditions. The value
of equity securities will be affected by changes in the stock markets, which may
be the result of domestic or international political or economic news, changes
in interest rates or changing investor sentiment. At times, stock markets can be
volatile and stock prices can change substantially. Equity securities risk
affects a Fund’s net asset value per share (“NAV”), which will fluctuate as the
value of the securities it holds changes. Not all stock prices change uniformly
or at the same time, and not all stock markets move in the same direction at the
same time. Other factors affect a particular stock’s prices, such as poor
earnings reports by an issuer, loss of major customers, major litigation against
an issuer, or changes in governmental regulations affecting an industry. Adverse
news affecting one company can sometimes depress the stock prices of all
companies in the same industry. Not all factors can be predicted. Common stocks
and preferred stocks are examples of equity securities. The fundamental risk of
investing in common and preferred stock is the risk that the value of the stock
might decrease.
Asset-Backed
Securities and Collateralized Debt Obligations
The
Funds may invest in asset-backed securities and collateralized debt obligations
(“CDOs”). Asset-backed securities and CDOs are created by the grouping of
certain governmental, government related and private loans, receivables and
other non-mortgage lender assets/collateral into pools. A sponsoring
organization establishes a special purpose vehicle to hold the assets/collateral
and issue securities. Interests in these pools are sold as individual
securities. Payments of principal and interest are passed through to investors
and are typically supported by some form of credit enhancement, such as a letter
of credit, surety bond, limited guaranty or senior/subordination. Payments from
the asset pools may be divided into several different tranches of debt
securities, offering investors various maturity and credit risk characteristics.
Some tranches are entitled to receive regular installments of principal and
interest, other tranches are entitled to receive regular installments of
interest, with principal payable at maturity or upon specified call dates, and
other tranches are only entitled to receive payments of principal and accrued
interest at maturity or upon specified call dates. Different tranches of
securities will bear different interest rates, which may be fixed or
floating.
Investors
in and CDOs bear the credit risk of the assets/collateral. Tranches are
categorized as senior, mezzanine, and subordinated/equity, according to their
degree of credit risk. If there are defaults or the CDO’s collateral otherwise
underperforms, scheduled payments to senior tranches take precedence over those
of mezzanine tranches, and scheduled payments to mezzanine tranches take
precedence over those to subordinated/equity tranches. Senior and mezzanine
tranches are typically rated, with the former receiving ratings of A to AAA and
the latter receiving ratings of B to BBB. The ratings reflect both the credit
quality of underlying collateral as well as how much protection a given tranche
is afforded by tranches that are subordinate to it.
Because
the loans held in the pool often may be prepaid without penalty or premium,
asset-backed securities and CDOs can be subject to higher prepayment risks than
most other types of debt instruments. Prepayments may result in a capital loss
to a Fund to the extent that the prepaid securities purchased at a market
discount from their stated principal amount will accelerate the recognition of
interest income by the Fund, which would be taxed as ordinary income when
distributed to the shareholders.
The
credit characteristics of asset-backed securities and CDOs also differ in a
number of respects from those of traditional debt securities. The credit quality
of most asset-backed securities and CDOs depends primarily upon the credit
quality of the assets/collateral underlying such securities, how well the entity
issuing the securities is insulated from the credit risk of the originator or
any other affiliated entities, and the amount and quality of any credit
enhancement to such securities.
Brady
Bonds
Brady
bonds are securities created through the exchange of existing commercial bank
loans to public and private entities in certain emerging markets for new bonds
in connection with debt restructurings. In light of the history of defaults of
countries issuing Brady bonds on their commercial bank loans, investments in
Brady bonds may be viewed as speculative. Brady bonds may be fully or partially
collateralized or uncollateralized, are issued in various currencies (but
primarily the dollar) and are actively traded in over-the-counter secondary
markets. Incomplete collateralization of interest or principal payment
obligations results in increased credit risk. Dollar-denominated collateralized
Brady bonds, which may be fixed-rate bonds or floating-rate bonds, are generally
collateralized by U.S. Treasury zero coupon bonds having the same maturity as
the Brady bonds.
Certificates
of Deposit and Bankers’ Acceptances
Certificates
of deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers’ acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then “accepted” by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or
less.
Closed-End
Investment Companies
The
Funds may invest in closed-end investment companies. Shares of closed-end funds
are typically offered to the public in a one-time initial public offering by a
group of underwriters who retain a spread or underwriting commission of between
4% or 6% of the initial public offering price. Such securities are then listed
for trading, for example, on the New York Stock Exchange (“NYSE”), the National
Association of Securities Dealers Automated Quotation System (commonly known as
“NASDAQ”) and, in some cases, may be traded in other over-the-counter markets.
Because the shares of closed-end funds cannot be redeemed upon demand to the
issuer like the shares of an open-end investment company (such as a Fund),
investors seek to buy and sell shares of closed-end funds in the secondary
market.
The
Funds generally will purchase shares of closed-end funds only in the secondary
market. The Funds will incur normal brokerage costs on such purchases similar to
the expenses a Fund would incur for the purchase of securities of any other type
of issuer in the secondary market. The Funds may, however, also purchase
securities of a closed-end fund in an initial public offering when, in the
opinion of the Adviser, based on a consideration of the nature of the closed-end
fund’s proposed investments, the prevailing market conditions and the level of
demand for such securities, they represent an attractive opportunity for growth
of capital. The initial offering price typically will include a dealer spread,
which may be higher than the applicable brokerage cost if the Funds purchased
such securities in the secondary market.
The
shares of many closed-end funds, after their initial public offering, frequently
trade at a price per share that is less than the net asset value (“NAV”) per
share, the difference representing the “market discount” of such shares. This
market discount may be due in part to the investment objective of long-term
appreciation, which is sought by many closed-end funds, as well as to the fact
that the shares of closed-end funds are not redeemable by the holder upon demand
to the issuer at the next determined NAV, but rather, are subject to supply and
demand in the secondary market. A relative lack of secondary market purchasers
of closed-end fund shares also may contribute to such shares trading at a
discount to their NAV.
The
Funds may invest in shares of closed-end funds that are trading at a discount to
NAV or at a premium to NAV. There can be no assurance that the market discount
on shares of any closed-end fund purchased by a Fund will ever decrease. In
fact, it is possible that this market discount may increase and a Fund may
suffer realized or unrealized capital losses due to further decline in the
market price of the securities of such closed-end funds, thereby adversely
affecting the NAV of a Fund’s shares. Similarly, there can be no assurance that
any shares of a closed-end fund purchased by a Fund at a premium will continue
to trade at a premium or that the premium will not decrease subsequent to a
purchase of such shares by the Funds.
Closed-end
funds may issue senior securities (including preferred stock and debt
obligations) to leveraging the closed-end fund’s common shares in an attempt to
enhance the current return to such closed-end fund’s common shareholders. A
Fund’s investment in the common shares of closed-end funds that are financially
leveraged may create an opportunity for greater total return on its investment,
but at the same time may be expected to exhibit more volatility in market price
and NAV value than an investment in shares of investment companies without a
leveraged capital structure.
Commercial
Paper
The
Funds may purchase commercial paper. Commercial paper consists of short-term
(usually from 1 to 270 days) unsecured promissory notes issued by corporations
in order to finance current operations.
Convertible
Securities
Convertible
securities include fixed income securities that may be exchanged or converted
into a predetermined number of shares of the issuer’s underlying common stock at
the option of the holder during a specified period. Convertible securities may
take the form of convertible preferred stock, convertible bonds or debentures,
units consisting of “usable” bonds and warrants or a combination of the features
of several of these securities. Convertible securities are senior to common
stocks in an issuer’s capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar nonconvertible security), a convertible security also
gives an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of the issuing company depending upon a
market price advance in the convertible security’s underlying common
stock.
Corporate
Debt
Corporate
debt securities are long and short-term debt obligations issued by companies
(such as publicly issued and privately placed bonds, notes and commercial
paper). The Funds consider corporate debt securities to be of investment grade
quality if they are rated BBB- or higher by S&P or Baa3 or higher by
Moody’s, or if unrated, determined by the Adviser to be of comparable quality.
Investment grade debt securities generally have adequate to strong protection of
principal and interest payments. In the lower end of this category, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal than in higher rated
categories. A Fund may invest in both secured and unsecured corporate bonds. A
secured bond is backed by collateral and an unsecured bond is not. Therefore, an
unsecured bond may have a lower recovery value than a secured bond in the event
of a default by its issuer. The Adviser may incorrectly analyze the risks
inherent in corporate bonds, such as the issuer’s ability to meet interest and
principal payments, resulting in a loss to a Fund. A Fund’s investments in debt
instruments may be in the form of a zero-coupon bond or other original issue
discount (“OID”) instruments. The following risks are created by investing in
OID instruments.
a.The
higher interest rates of OID instruments reflect the payment deferral and credit
risk associated with them. Investors in a Fund share the risks and rewards of
OID and market discount. These risks, however, are not shared by the Adviser,
who in the case of payment-in-kind (“PIK”) loans, collect higher asset-based
fees with no deferral of cash payments and no repayment obligation to a Fund if
any of these loans are uncollectible.
b.OID
instruments may have unreliable valuations because their continuing accruals
require continuing judgments about the collectability of the deferred payments
and the value of any associated collateral.
c.OID
instruments generally represent a significantly higher credit risk than coupon
loans.
d.OID
income received by a Fund may create uncertainty about the source of the Fund’s
cash distributions. For accounting purposes, any cash distributions to
shareholders representing OID or market discount income are not treated as
coming from paid-in capital, even though the cash to pay them comes from the
offering proceeds. Thus, although a distribution of OID or market discount
interest comes from the cash invested by shareholders, Section 19(a) of the
Investment Company Act of 1940 (the “1940 Act”) does not require that
shareholders be given notice of this fact by reporting it as a return of
capital.
e.In
the case of PIK debt, the deferral of PIK interest has the simultaneous effects
of increasing the assets under management and increasing the management fee at a
compounding rate. In addition, the deferral of PIK interest also reduces the
loan-to-value ratio at a compounding rate.
Depositary
Receipts
Sponsored
and unsponsored American Depositary Receipts (“ADRs”), which are receipts issued
by an American bank or trust company evidencing ownership of underlying
securities issued by a foreign issuer. ADRs, in sponsored form, are designed for
use in U.S. securities markets. A sponsoring company provides financial
information to the bank and may subsidize administration of the ADR. Unsponsored
ADRs may be created by a broker-dealer or depository bank without the
participation of the foreign issuer. Holders of these ADRs generally bear all
the costs of the ADR facility, whereas foreign issuers typically bear certain
costs in a sponsored ADR. The bank or trust company depositary of an unsponsored
ADR may be under no obligation to distribute shareholder communications received
from the foreign issuer or to pass through voting rights. Unsponsored ADRs may
carry more risk than sponsored ADRs because of the absence of financial
information provided by the underlying company. Many of the risks described
below regarding foreign securities apply to investments in ADRs.
Emerging
Markets Securities
Investing
in emerging market securities imposes risks different from, or greater than,
risks of investing in foreign developed countries. These risks include (i) the
smaller market capitalization of securities markets, which may suffer periods of
relative illiquidity, (ii) significant price volatility, (iii) restrictions on
foreign investment, and (iv) possible repatriation of investment income and
capital. In addition, foreign investors may be required to register the proceeds
of sales, and future economic or political crises could lead to price controls,
forced mergers, expropriation or confiscatory taxation, seizure,
nationalization, or the creation of government monopolies. The currencies of
emerging market countries may experience significant declines against the U.S.
dollar, and devaluation may occur subsequent to investments in these currencies
by a Fund. Inflation and rapid fluctuations in inflation rates have had, and may
continue to have, negative effects on the economies and securities markets of
certain emerging market countries.
Certain
emerging markets limit, or require governmental approval prior to, investments
by foreign persons. Repatriation of investment income and capital from certain
emerging markets is subject to certain governmental consents. Even where there
is no outright restriction on repatriation of capital, the mechanics of
repatriation may affect the operation of a Fund.
Additional
risks of emerging markets securities may include (i) greater social, economic
and political uncertainty and instability, (ii) more substantial governmental
involvement in the economy, (iii) less governmental supervision and regulation,
(iv) the unavailability of currency hedging technique, (v) companies that
are newly organized and small, (vi) differences in auditing and financial
reporting standards, which may result in unavailability of material information
about issuers, and (vii) less developed legal systems. In addition, emerging
securities markets may have different clearance and settlement procedures, which
may be unable to keep pace with the volume of securities transactions or
otherwise make it difficult to engage in such transactions. Settlement problems
may cause a Fund to miss attractive investment opportunities, hold a portion of
its assets in cash pending investment, or be delayed in disposing of a portfolio
security. Such a delay could result in possible liability to a purchaser of the
security.
Exchange-Traded
Funds
A
Fund may invest in a range of exchange-traded funds (“ETFs”). ETFs may include,
but are not limited to, Standard & Poor’s Depositary Receipts (“SPDRs”),
DIAMONDS, SM Nasdaq-100 Index Tracking Stock (“QQQs”), iShares, HOLDRs, Fidelity
Select Portfolios, Select Sector SPDRs, Fortune e-50 and Fortune 50.
Additionally, a Fund may invest in new exchange traded shares as they become
available.
SPDRs
represent ownership in the SPDR Trust, a unit investment trust that holds a
portfolio of common stocks designed to closely track the price performance and
dividend yield of the Standard & Poor’s 500 Composite Stock Price IndexTM
(“S&P 500 Index”). SPDRs trade on the NYSE Arca under the symbol SPY. The
value of SPDRs fluctuates in relation to changes in the value of the underlying
portfolio of common stocks. A MidCap SPDR is similar to a SPDR except that it
tracks the performance of the S&P MidCap 400 Index and trades on the NYSE
Arca under the symbol MDY. DIAMONDS represent an investment in the DIAMONDS
Trust, a unit investment trust that serves as an index to the Dow Jones
Industrial Average (the “Dow”) in that its holding consists of the 30 component
stocks of the Dow. The DIAMONDS Trust is structured so that its shares trade at
approximately 1/100 (one one-hundredth) of the value of the Dow Index. The
DIAMONDS Trust’s shares trade on the NYSE Arca under the symbol DIA. QQQs
represent ownership in the Nasdaq-100 Trust, a unit investment trust that holds
a portfolio of common stocks designed to track the price performance and
dividend yield of the Nasdaq 100 Index by holding shares of all the companies on
the Index. Shares trade on the NYSE Arca under the symbol QQQ. The iShares are
managed by BlackRock (“BlackRock”). They track 80 different indexes, including
sector/industry indexes (such as the S&P Financial Sector Index), bond
indexes (such as the Barclay’s Capital U.S. Aggregate Index and the Barclay’s
Capital 1-3 Year Treasury Bond Index) and international indexes (such as the
S&P Europe 500 Index). Each iShares international ETF represents a broad
portfolio of publicly traded stocks in a selected country. Each iShares
international ETF seeks to generate investment results that generally correspond
to the market yield performance of a given Morgan Stanley Capital International
(“MSCI”) Index. BlackRock offers six iShares fixed income ETFs that track a
particular Barclay’s Capital bond index. ETFs (both stock and fixed income) are
subject to all of the common stock risks, and the international iShares are
subject to all of the foreign securities risks described above. Investments in
SPDRs, DIAMONDS, QQQs and iShares are considered to be investments in investment
companies, see “Investments in Other Investment Companies” below.
When
a Fund invests in sector ETFs, there is a risk that securities within the same
group of industries will decline in price due to sector-specific market or
economic developments. If a Fund invests more heavily in a particular sector,
the value of its shares may be especially sensitive to factors and economic
risks that specifically affect that sector. As a result, a Fund’s share price
may fluctuate more widely than the value of shares of a mutual fund that invests
in a broader range of industries. Additionally, some sectors could be subject to
greater government regulation than other sectors. Therefore, changes in
regulatory policies for those sectors may have a material effect on the value of
securities issued by companies in those sectors. The sectors in which a Fund may
be more heavily invested will vary.
The
shares of an ETF may be assembled in a block (typically 50,000 shares) known as
a creation unit and redeemed in-kind for a portfolio of the underlying
securities (based on the ETF’s NAV) together with a cash payment generally equal
to accumulated dividends as of the date of redemption. Conversely, a creation
unit may be purchased from the ETF by depositing a specified portfolio of the
ETF’s underlying securities, as well as a cash payment generally equal to
accumulated dividends of the securities (net of expenses) up to the time of
deposit. A fund may redeem creation units for the underlying securities (and any
applicable cash), and may assemble a portfolio of the underlying securities and
use it (and any required cash) to purchase creation units, if a fund’s manager
believes it is in the relevant fund’s interest to do so. A fund’s ability to
redeem creation units may be limited by the Investment Company Act of 1940, as
amended (the “1940 Act”), which provides that the ETFs will not be obligated to
redeem shares held by a fund in an amount exceeding one percent of their total
outstanding securities during any period of less than 30 days.
There
is a risk that the underlying ETFs in which a Fund invests may terminate due to
extraordinary events that may cause any of the service providers to the ETFs,
such as the trustee or sponsor, to close or otherwise fail to perform their
obligations to the ETF. Also, because the ETFs in which a Fund intends to invest
may be granted licenses by agreement to use the indices as a basis for
determining their compositions and/or otherwise to use certain trade names, the
ETFs may terminate if such license agreements are terminated. In addition, an
ETF may terminate if its entire NAV falls below a certain amount. Although a
Fund believes that, in the event of the termination of an underlying ETF the
Fund will be able to invest instead in shares of an alternate ETF tracking the
same market index or another market index with the same general market, there is
no guarantee that shares of an alternate ETF would be available for investment
at that time. To the extent a Fund invests in a sector product, the Fund will be
subject to the risks associated with that sector.
Foreign
Securities
Purchases
of foreign equity securities entail certain risks. For example, there may be
less information publicly available about a foreign company than about a U.S.
company, and foreign companies generally are not subject to accounting, auditing
and financial reporting standards and practices comparable to those in the U.S.
Other risks associated with investments in foreign securities include changes in
restrictions on foreign currency transactions and rates of exchanges, changes in
the administrations or economic and monetary policies of foreign governments,
the imposition of exchange control regulations, the possibility of expropriation
decrees and other adverse foreign governmental action, the imposition of foreign
taxes, less liquid markets, less government supervision of exchanges, brokers
and issuers, difficulty in enforcing contractual obligations, delays in
settlement of securities transactions and greater price volatility. In addition,
investing in foreign securities will generally result in higher commissions than
investing in similar domestic securities.
Futures
Contracts
Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security, class of securities, commodity, or
an index at a specified future time and at a specified price. Futures contracts
may be issued with respect to fixed-income securities, foreign currencies,
single stocks or financial indices, including indices of U.S. government
securities, foreign government securities, and equity or fixed-income securities
as well as commodities. U.S. futures contracts are traded on exchanges that have
been designated “contract markets” by the Commodity Futures Trading Commission
(the “CFTC”) and must be executed through a futures commission merchant (“FCM”),
or brokerage firm, which is a member of the relevant contract market. Through
their clearing corporations, the exchanges guarantee performance of the
contracts between the clearing members of the exchange. A Fund may invest in
futures traded on a foreign exchange, which may be subject to fewer regulations
and investors protections.
The
Funds may at times engage in futures transactions for hedging purposes, to gain
exposure to a particular asset or asset class or to enhance returns. This means
that a purpose in entering into futures contracts is to protect a Fund from
fluctuations in the value of securities or interest rates without actually
buying or selling the underlying debt or equity security or other reference
asset; or to seek outright returns. For example, if a Fund anticipates an
increase in the price of stocks, and it intends to purchase stocks at a later
time, the Fund could enter into a futures contract to purchase a stock index as
a temporary substitute for stock purchases. If an increase in the market occurs
that influences the stock index as anticipated, the value of the futures
contracts will increase, thereby serving as a hedge against the Fund not
participating in a market advance. This technique is sometimes known as an
anticipatory hedge. Conversely, if a Fund holds stocks and seeks to protect
itself from a decrease in stock prices, the Fund might sell stock index futures
contracts, thereby hoping to offset the potential decline in the value of its
portfolio securities by a corresponding increase in the value of the futures
contract position. A Fund could protect against a decline in stock prices by
selling portfolio securities and investing in money market instruments, but the
use of futures contracts enables it to maintain a defensive position without
having to sell portfolio securities.
If
a Fund owns Treasury bonds and the portfolio manager expects interest rates to
increase, the Fund may take a short position in interest rate futures contracts.
Taking such a position would have much the same effect as the Fund selling
Treasury bonds in its portfolio. If interest rates increase as anticipated, the
value of the Treasury bonds would decline, but the value of the Fund’s interest
rate futures contract will increase, thereby keeping the NAV of the Fund from
declining as much as it may have otherwise. If, on the other hand, a portfolio
manager expects interest rates to decline, a Fund may take a long position in
interest rate futures contracts in anticipation of later closing out the futures
position and purchasing the bonds. Although the Fund can accomplish similar
results by buying securities with long maturities and selling securities with
short maturities, given the greater liquidity of the futures market than the
cash market, it may be possible to accomplish the same result more easily and
more quickly by using futures contracts as an investment tool to reduce
risk.
Risk
Factors in Futures Transactions
Liquidity
Risk.
Because futures contracts are generally settled within a day from the date they
are closed out, compared with a settlement period of two days for some types of
securities, the futures markets can provide superior liquidity to the securities
markets. Nevertheless, there is no assurance that a liquid secondary market will
exist for any particular futures contract at any particular time. In addition,
futures exchanges may establish daily price fluctuation limits for futures
contracts and may halt trading if a contract’s price moves upward or downward
more than the limit in a given day. On volatile trading days when the price
fluctuation limit is reached, it may be impossible for a Fund to enter into new
positions or close out existing positions. If the secondary market for a futures
contract is not liquid because of price fluctuation limits or otherwise, a Fund
may not be able to promptly liquidate unfavorable futures positions and
potentially could be required to continue to hold a futures position until the
delivery date, regardless of changes in its value. As a result, the Fund’s
access to other assets held to cover its futures positions also could be
impaired.
Risk
of Loss.
Although a Fund may believe that the use of such contracts will benefit the
Fund, the Fund’s overall performance could be worse than if the Fund had not
entered into futures contracts if the Adviser’s investment judgment proves
incorrect. For example, if the Fund has hedged against the effects of a possible
decrease in prices of securities held in its portfolio and prices increase
instead, the Fund will lose part or all of the benefit of the increased value of
these securities because of offsetting losses in its futures positions. In
addition, if the Fund has insufficient cash, it may have to sell securities from
its portfolio to meet daily variation margin requirements. Those sales may be,
but will not necessarily be, at increased prices that reflect the rising market
and may occur at a time when the sales are disadvantageous to the
Fund.
The
risk of loss in trading futures contracts in some strategies can be substantial,
due both to the low margin deposits required, and the extremely high degree of
leverage involved in futures pricing. Because the deposit requirements in the
futures markets are less onerous than margin requirements in the securities
market, there may be increased participation by speculators in the futures
market that may also cause temporary price distortions. A relatively small price
movement in a futures contract may result in immediate and substantial loss (as
well as gain) to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a subsequent 10%
decrease in the value of the futures contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the contract. A Fund will
only engage in futures transactions when it is believed these risks are
justified and will engage in futures transactions primarily for risk management
purposes and to seek returns.
Correlation
Risk.
The prices of futures contracts depend primarily on the value of their
underlying instruments or reference asset, such as a commodity. Because there
are a limited number of types of futures contracts, it is possible that the
standardized futures contracts available to a Fund will not match exactly the
Fund’s current or potential investments. A Fund may buy and sell futures
contracts based on underlying instruments with different characteristics from
the securities in which it typically invests for example, by hedging investments
in portfolio securities with a futures contract based on a broad index of
securities, which involves a risk that the futures position will not correlate
precisely with the performance of the Fund’s investments.
Futures
prices can also diverge from the prices of their underlying instruments or
reference asset, even if the underlying instruments closely correlate with the
Fund’s investments. Futures prices are affected by factors such as current and
anticipated short-term interest rates, changes in volatility of the underlying
instruments or reference asset and the time remaining until expiration of the
contract. Those factors may affect securities or commodity prices differently
from futures prices. Imperfect correlations between a Fund’s investments and its
futures positions also may result from differing levels of demand in the futures
markets and the securities markets, from structural differences in how futures
and securities or commodities are traded, and from imposition of daily price
fluctuation limits for futures contracts. A Fund may buy or sell futures
contracts with a greater or lesser value than the securities it wishes to hedge
or is considering purchasing in order to attempt to compensate for differences
in historical volatility between the futures contract and the securities,
although this may not be successful in all cases. If price changes in a Fund’s
futures positions are poorly correlated with its other investments, its futures
positions may fail to produce desired gains or result in losses that are not
offset by the gains in the Fund’s other investments.
Margin
Requirements:
The
buyer or seller of a futures contract is not required to deliver or pay for the
underlying instrument unless the contract is held until the delivery date.
However, both the buyer and seller are required to deposit “initial margin” for
the benefit of the FCM when the contract is entered into. Initial margin
deposits:
•Are
equal to a percentage of the contract’s value, as set by the exchange on which
the contract is traded; and
•Are
similar to good faith deposits or performance bonds.
Unlike
margin extended by a securities broker, initial margin payments do not
constitute purchasing securities on margin for purposes of a Fund’s investment
limitations. If the value of either party’s position declines, that party will
be required to make additional “variation margin” payments for the benefit of
the FCM to settle the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. In the event of
the bankruptcy of the FCM that holds margin on behalf of the Fund, the Fund may
be entitled to return of margin owed to the Fund only in proportion to the
amount received by the FCM’s other customers.
Forward
Contracts
A
Fund may use forward contracts to achieve substantially similar strategies as
those executed using futures contracts. A forward contract is an obligation to
purchase or sell an asset at a future date at a price agreed upon by the
parties. A Fund may either accept or make delivery of the asset at the maturity
of the contract or, prior to maturity, enter into a closing transaction
involving the purchase or sale of an offsetting contract. A Fund may engage in
forward contracts for hedging or investment purposes. Forward contracts are not
traded on regulated exchanges and incur the risk of default by the counter party
to the transaction.
Foreign
Currency Transactions
A
Fund may enter into foreign currency futures contracts and forward currency
contracts to hedge or seek returns. A foreign currency futures contract is a
standardized contract for the future delivery of a specified amount of a foreign
currency, at a future date at a price set at the time of the contract. A forward
currency contract is an obligation to purchase or sell a currency against
another currency at a future date at a price agreed upon by the parties. A Fund
may either accept or make delivery of the currency at the maturity of the
contract or, prior to maturity, enter into a closing transaction involving the
purchase or sale of an offsetting contract. A Fund will engage in foreign
currency futures contracts and forward currency transactions in anticipation of
or to protect itself against fluctuations in currency exchange rates or as an
investment strategy. Forward currency contracts are not traded on regulated
commodities exchanges. Any Fund entering into a forward currency contract incurs
the risk of default by the counter party to the transaction.
There
can be no assurance that a liquid market will exist when a Fund seeks to close
out a foreign currency futures or forward currency position, in which case the
Fund might not be able to effect a closing purchase transaction at any
particular time. While these contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, at the same time, they tend to
limit any potential gain which might result should the value of such currency
increase.
Although
a Fund values assets daily in U.S. dollars, it does not intend to physically
convert its holdings of foreign currencies into U.S. dollars on a daily basis. A
Fund will do so from time to time and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the “spread”)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
Options
on Foreign Currencies
A
Fund may invest in call and put options on domestic and foreign securities and
foreign currencies. A Fund may purchase and write call and put options on
foreign currencies as a hedge against changes in the value of the U.S. dollar
(or another currency) in relation to a foreign currency in which portfolio
securities of the Fund may be denominated, or as an investment strategy. A call
option on a foreign currency gives the purchaser the right to buy, and a put
option the right to sell, a certain amount of foreign currency at a specified
price during a fixed period of time. A Fund may enter into closing sale
transactions with respect to such options, exercise them, or permit them to
expire.
A
Fund may employ hedging strategies with options on currencies before the Fund
purchases a foreign security denominated in the hedged currency, during the
period the Fund holds the foreign security, or between the day the foreign
security is purchased or sold and the date on which payment therefore is made or
received. Hedging against a change in the value of a foreign currency in the
foregoing manner does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline.
Furthermore, such hedging transactions reduce or preclude the opportunity for
gain if the value of the hedged currency should increase relative to the U.S.
dollar. A Fund will purchase options on foreign currencies for hedging purposes
and may also speculate in options on foreign currencies. A Fund may invest in
options on foreign currencies which are either listed on a domestic securities
exchange or traded on a recognized foreign exchange.
An
option position on a foreign currency may be closed out only on an exchange
which provides a secondary market for an option of the same series. Although a
Fund will typically purchase exchange-traded options, there is no assurance that
a liquid secondary market on an exchange will exist for any particular option,
or at any particular time. In the event no liquid secondary market exists, it
might not be possible to effect closing transactions in particular options. If
the Fund cannot close out an exchange-traded option which it holds, it would
have to exercise its option in order to realize any profit and would incur
transactional costs on the sale of the underlying assets.
Swap
Agreements
A
Fund may enter into swap agreements for purposes of attempting to gain exposure
to equity, debt, commodities or other asset markets without actually purchasing
those assets, or to hedge a position. Swap agreements are two-party contracts
entered into primarily by institutional investors for periods ranging from a day
to more than one year. In a standard “swap” transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or “swapped” between the parties are calculated with respect to a
“notional amount,” i.e., the return on or increase in value of a particular
dollar amount invested in a “basket” of securities representing a particular
index.
Most
swap agreements entered into by a Fund calculate the obligations of the parties
to the agreement on a “net basis.” Consequently, the Fund’s current obligations
(or rights) under a swap agreement will generally be equal only to the net
amount to be paid or received under the agreement based on the relative values
of the positions held by each party to the agreement (the “net amount”).
Payments may be made at the conclusion of a swap agreement or periodically
during its term.
Swap
agreements do not involve the delivery of securities or other underlying assets.
Accordingly, if a swap is entered into on a net basis, if the other party to a
swap agreement defaults, a Fund’s risk of loss consists of the net amount of
payments that the Fund is contractually entitled to receive, if
any.
The
net amount of the excess, if any, of a Fund’s obligations over its entitlements
with respect to a swap agreement entered into on a net basis will be accrued
daily and an amount of cash or liquid asset having an aggregate NAV value at
least equal to the accrued excess will be maintained in an account with the
Custodian. The Fund will also establish and maintain such accounts with respect
to its total obligations under any swaps that are not entered into on a net
basis.
Because
they are two-party contracts and because they may have terms of greater than
seven days, swap agreements may be considered to be illiquid for a Fund’s
illiquid investment limitations. A Fund will not enter into any swap agreement
unless the Adviser believes that the other party to the transaction is
creditworthy. The Fund bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a
swap agreement counterparty.
A
Fund may enter into a swap agreement in circumstances where the Adviser believes
that it may be more cost effective or practical than buying the securities
represented by such index or a futures contract or an option on such index. The
counterparty to any swap agreement will typically be a bank, investment banking
firm or broker/dealer. The counter-party will generally agree to pay the Fund
the amount, if any, by which the notional amount of the swap agreement would
have increased in value had it been invested in the particular stocks
represented in the index, plus the dividends that would have been received on
those stocks. The Fund will agree to pay to the counter-party a floating rate of
interest on the notional amount of the swap agreement plus the amount, if any,
by which the notional amount would have decreased in value had it been invested
in such stocks. Therefore, the return to the Fund on any swap agreement should
be the gain or loss on the notional amount plus dividends on the stocks less the
interest paid by the Fund on the notional amount.
The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments
that are traded in the OTC market.
Credit
Default Swap Agreement and Credit Default Index Swap Agreement Risk
The
Funds may enter into credit default swap agreements, credit default index swap
agreements and similar agreements as a “buyer” or as a “seller” of credit
protection. The credit default swap agreement or similar instruments may have as
reference obligations one or more securities that are not then held by a Fund.
The protection “buyer” in a credit default swap agreement is generally obligated
to pay the protection “seller” a periodic stream of payments over the term of
the agreement, provided generally that no credit event on a reference obligation
has occurred. In addition, at the inception of the agreement, the protection
“buyer” may receive or be obligated to pay an additional up-front amount
depending on the current market value of the contract. If a credit event occurs,
an auction process is used to determine the “recovery value” of the contract.
The seller then must pay the buyer the “par value” (full notional value) of the
swap contract minus the “recovery value” as determined by the auction process. A
Fund may be either the buyer or seller in the transaction. If a Fund is a buyer
and no credit event occurs, the Fund’s net cash flows over the life of the
contract will be the initial up-front amount paid or received minus the sum of
the periodic payments made over the life of the contract. However, if a credit
event occurs, a Fund may elect to receive a cash amount equal to the “par value”
(full notional value) of the swap contract minus the “recovery value” as
determined by the auction process. As a seller of protection, a Fund generally
receives a fixed rate of income throughout the term of the swap provided that
there is no credit event. In addition, at the inception of the agreement, a Fund
may receive or be obligated to pay an additional up-front amount depending on
the current market value of the contract. If a credit event occurs, a Fund will
be generally obligated to pay the buyer the “par value” (full notional value) of
the swap contract minus the “recovery value” as determined by the auction
process. Credit default swaps could result in losses if the Adviser does not
correctly evaluate the creditworthiness of the underlying instrument on which
the credit default swap is based. Additionally, if a Fund is a seller of a
credit default swap and a credit event occurs, the Fund could suffer significant
losses.
Options
A
Fund may utilize call and put options, on securities and/or futures, to attempt
to protect against possible changes in the market value of securities held in or
to be purchased for the Fund’s portfolio and to generate income or gain for the
Fund. The ability of a Fund to successfully utilize options will depend on the
Adviser’s ability to predict pertinent market movements, which cannot be
assured. A Fund will comply with applicable regulatory requirements when
implementing these techniques and instruments.
A
Fund may write (sell) covered call options and covered put options and purchase
call and put options. The purpose of engaging in options transactions is to
reduce the effect of price fluctuations of the securities owned by the Fund (and
involved in the options) on the Fund’s NAV per share and to generate additional
revenues.
A
covered call option is an option sold on a security owned by the seller of the
option in exchange for a premium. A call option gives the purchaser of the
option the right to buy the underlying securities at the exercise price during
the option period. If the option is exercised by the purchaser during the option
period, the seller is required to deliver the underlying security against
payment of the exercise price. The seller’s obligation terminates upon
expiration of the option period or when the seller executes a closing purchase
transaction with respect to such option. When a Fund writes a covered call
option, it profits from the premium paid by the buyer but gives up the
opportunity to profit from an increase in the value of the underlying security
above the exercise price. At the same time, the seller retains the risk of loss
from a decline in the value of the underlying security during the option period.
Although the seller may terminate its obligation by executing a closing purchase
transaction, the cost of effecting such a transaction may be greater than the
premium received upon its sale, resulting in a loss to the seller if such an
option expires unexercised, the seller realizes a gain equal to the premium
received. Such a gain may be offset or exceeded by a decline in the market value
of the underlying security during the option period. If an option is exercised,
the exercise price, the premium received and the market value of the underlying
security determine the gain or loss realized by the seller.
When
a Fund sells a covered put option, it has the obligation to buy, and the
purchaser of the put the right to sell, the underlying security at the exercise
price during the option period. The obligation of the Fund is terminated when
the purchaser exercises the put option, when the option expires or when a
closing purchase transaction is effected by the Fund. The Fund’s gain on the
sale of a put option is limited to the premium received. The Fund’s potential
loss on a put option is determined by taking into consideration the exercise
price of the option, the market price of the underlying security when the put is
exercised and the premium received. Although the Fund risks a substantial loss
if the price of the security on which it has sold a put option drops suddenly,
it can protect itself against serious loss by entering into a closing purchase
transaction. The degree of loss will depend upon the Fund’s ability to detect
the movement in the security’s price and to execute a closing transaction at the
appropriate time.
A
Fund will write options on such portion of its portfolio as management
determines is appropriate in seeking to attain the relevant Fund’s objective. A
Fund will write options when management believes that a liquid secondary market
will exist on a national securities exchange for options of the same series so
that the Fund can effect a closing purchase transaction if it desires to close
out its position. Consistent with the investment policies of the relevant Fund,
a closing purchase transaction will ordinarily be effected to realize a profit
on an outstanding option, to prevent an underlying security from being called or
to permit the sale of the underlying security. Effecting a closing purchase
transaction will permit the Fund to write another option on the underlying
security with either a different exercise price or expiration date or
both.
A
Fund may purchase put options to protect against declines in the market value of
portfolio securities or to attempt to retain unrealized gains in the value of
portfolio securities. Put options might also be purchased to facilitate the sale
of portfolio securities. A Fund may purchase call options as a temporary
substitute for the purchase of individual securities, which then could be
purchased in orderly fashion. Upon the purchase of the securities, the Fund
would normally terminate the call position. The purchase of both put and call
options involves the risk of loss of all or part of the premium paid. If the
price of the underlying security does not rise (in the case of a call) or drop
(in the case of a put) by an amount at least equal to the premium paid for the
option contract, the Fund will experience a loss on the option contract equal to
the deficiency.
Regulation
as a Commodity Pool Operator
The
Adviser, with respect to the Funds, has filed with the National Futures
Association, a notice claiming an exclusion from the definition of the term
“commodity pool operator” under the Commodity Exchange Act, as amended, and Rule
4.5 of the Commodity Futures Trading Commission promulgated thereunder, with
respect to each Fund’s operations. Accordingly, neither the Funds, nor the
Adviser or the Sub-Adviser to the Defender Fund, are subject to registration or
regulation as a commodity pool operator.
Cayman
Subsidiary (Defender
Fund)
Investment
in the Subsidiary (as defined below) is expected to provide the Defender Fund
with exposure to the commodity markets within the limitations of Subchapter M of
the Code and recent Internal Revenue Service revenue rulings. A Subsidiary is a
company organized under the laws of the Cayman Islands and is overseen by its
own board of directors. The Defender Fund is the sole shareholder of the
Subsidiary, and it is not currently expected that shares of a Subsidiary will be
sold or offered to other investors.
It
is expected that the Subsidiary will invest primarily in commodity-linked
derivative instruments, such as swap agreements and commodity futures, but the
Subsidiary may also invest in other investments and cash instruments to serve as
margin or collateral for the Subsidiary’s derivative positions. Although the
Defender Fund may enter into these commodity-linked derivative instruments
directly, the Defender Fund will likely gain exposure to these derivative
instruments indirectly by investing in its Subsidiary. The Defender Fund’s
investment in the Subsidiary may vary depending on the types of instruments
selected by the Adviser to gain exposure to the commodities markets. To the
extent that the Defender Fund invests in the Subsidiary, the Defender Fund may
be subject to the risks associated with the above mentioned derivative
instruments and other securities, which are discussed elsewhere in the
Prospectus and this SAI.
While
the Subsidiary may be considered similar to investment companies, it is not
registered under the 1940 Act and, unless otherwise noted in the applicable
Prospectus and this SAI, is not subject to all of the investor protections of
the 1940 Act and other U.S. regulations. Changes in the laws of the United
States and/or the Cayman Islands could result in the inability of the Defender
Fund and/or the Subsidiary to operate as described in the applicable Prospectus
and this SAI and could negatively affect the Defender Fund and its
shareholders.
High
Yield Securities
A
Fund may invest in high yield securities. High yield, high risk bonds are
securities that are generally rated below investment grade by the rating
agencies (e.g., BB+ or lower by S&P and Ba1 or lower by Moody’s). Other
terms used to describe such securities include “lower rated bonds,”
“non-investment grade bonds,” “below investment grade bonds,” and “junk bonds.”
These securities are considered to be high-risk investments.
Risk
Factors for Yield Securities:
Greater
Risk of Loss.
These securities are regarded as predominately speculative. There is a greater
risk that issuers of lower rated securities will default than issuers of higher
rated securities. Issuers of lower rated securities generally are less
creditworthy and may be highly indebted, financially distressed, or bankrupt.
These issuers are more vulnerable to real or perceived economic changes,
political changes or adverse industry developments. In addition, high yield
securities are frequently subordinated to the prior payment of senior
indebtedness. If an issuer fails to pay principal or interest, a Fund would
experience a decrease in income and a decline in the market value of its
investments. An Underlying Fund also may incur additional expenses in seeking
recovery from the issuer.
Sensitivity
to Interest Rate and Economic Changes.
The income and market value of lower-rated securities may fluctuate more than
higher rated securities. Although non-investment grade securities tend to be
less sensitive to interest rate changes than investment grade securities,
non-investment grade securities are more sensitive to short-term corporate,
economic and market developments. During periods of economic uncertainty and
change, the market price of the investments in lower-rated securities may be
volatile. The default rate for high yield bonds tends to be cyclical, with
defaults rising in periods of economic downturn.
Valuation
Difficulties.
It is often more difficult to value lower-rated securities than higher-rated
securities. If an issuer’s financial condition deteriorates, accurate financial
and business information may be limited or unavailable. In addition, the
lower-rated investments may be thinly traded and there may be no established
secondary market. Because of the lack of market pricing and current information
for investments in lower-rated securities, valuation of such investments is much
more dependent on judgment than is the case with higher-rated
securities.
Liquidity.
There may be no established secondary or public market for investments in
lower-rated securities. Such securities are frequently traded in markets that
may be relatively less liquid than the market for higher rated securities. In
addition, relatively few institutional purchasers may hold a major portion of an
issue of lower-rated securities at times. As a result, an Underlying Fund that
invests in lower-rated securities may be required to sell investments at
substantial losses or retain them indefinitely even where an issuer’s financial
condition is deteriorating.
Credit
Quality.
Credit quality of non-investment grade securities can change suddenly and
unexpectedly, and even recently issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security.
New
Legislation.
Future legislation may have a possible negative impact on the market for high
yield, high risk bonds. As an example, in the late 1980’s, legislation required
federally insured savings and loan associations to divest their investments in
high-yield, high-risk bonds. New legislation, if enacted, could have a material
negative effect on an Underlying Fund’s investments in lower-rated
securities.
High-yield,
high-risk investments may include the following:
Straight
fixed-income debt securities.
These include bonds and other debt obligations that bear a fixed or variable
rate of interest payable at regular intervals and have a fixed or resettable
maturity date. The particular terms of such securities vary and may include
features such as call provisions and sinking funds.
Zero-coupon
debt securities.
These bear no interest obligation but are issued at a discount from their value
at maturity. When held to maturity, their entire return equals the difference
between their issue price and their maturity value.
Zero-fixed-coupon
debt securities.
These are zero-coupon debt securities that convert on a specified date to
interest-bearing debt securities.
Pay-in-kind
bonds.
These are bonds which allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds.
These
are bonds commonly sold without registration under the Securities Act of 1933,
as amended (“933 Act”), usually to a relatively small number of institutional
investors.
Convertible
Securities.
These are bonds or preferred stock that may be converted to common
stock.
Preferred
Stock.
These are stocks that generally pay a dividend at a specified rate and have
preference over common stock in the payment of dividends and in
liquidation.
Loan
Participations and Assignments.
These are participations in, or assignments of all or a portion of loans to
corporations or to governments, including governments of less-developed
countries (“LDCs”).
Securities
issued in connection with Reorganizations and Corporate
Restructurings.
In connection with reorganizing or restructuring of an issuer, an issuer may
issue common stock or other securities to holders of its debt
securities.
Borrowing
The
Funds may engage in borrowing. Borrowing creates an opportunity for increased
return, but, at the same time, creates special risks. Furthermore, if a Fund
were to engage in borrowing, an increase in interest rates could reduce the
value of the Fund’s shares by increasing the Fund’s interest expense. Subject to
the limitations described under “Investment Limitations” below, a Fund may be
permitted to borrow for temporary purposes and/or for investment purposes. Such
a practice will result in leveraging of a Fund’s assets and may cause the Fund
to liquidate portfolio positions when it would not be advantageous to do so.
This borrowing may be secured or unsecured. Provisions of the 1940 Act require a
Fund to maintain continuous asset coverage (that is, total assets including
borrowings, less liabilities
exclusive
of borrowings) of 300% of the amount borrowed, with an exception for borrowings
not in excess of 5% of the Fund’s total assets made for temporary purposes. Any
borrowings for temporary purposes in excess of 5% of a Fund’s total assets will
count against this asset coverage requirement. If the 300% asset coverage should
decline as a result of market fluctuations or other reasons, a Fund may be
required to sell some of its portfolio holdings within three days to reduce the
debt and restore the 300% asset coverage, even though it may be disadvantageous
from an investment standpoint if the Fund sells securities at that time.
Borrowing will tend to exaggerate the effect on NAV of any increase or decrease
in the market value of a Fund’s portfolio. Money borrowed will be subject to
interest costs which may or may not be recovered by appreciation of the
securities purchased, if any. A Fund also may be required to maintain minimum
average balances in connection with such borrowings or to pay a commitment or
other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate.
Illiquid
Investments
A
Fund may be invested in securities that become illiquid investments, which may
include securities that are not readily marketable and securities that are not
registered under the Securities Act. A Fund may not acquire any illiquid
investments if, immediately after the acquisition, the Fund would have invested
more than 15% of its net assets in illiquid investments that are assets. The
term “illiquid investments” for this purpose means 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, as determined pursuant to the
provisions of Rule 22e-4 under the 1940 Act. A Fund may not be able to sell
illiquid investments when the Adviser considers it desirable to do so or may
have to sell such investments at a price that is lower than the price that could
be obtained if the investments were more liquid. In addition, the sale of
illiquid investments also may require more time and may result in higher dealer
discounts and other selling expenses than does the sale of investments that are
more liquid. Illiquid investments also may be more difficult to value due to the
unavailability of reliable market quotations for such investments, and
investments in illiquid investments may have an adverse impact on
NAV.
Institutional
markets for restricted securities have developed as a result of the promulgation
of Rule 144A under the Securities Act, which provides a safe harbor from
Securities Act registration requirements for qualifying sales to institutional
investors. When Rule 144A restricted securities present an attractive investment
opportunity and otherwise meet selection criteria, a Fund may make such
investments. Whether or not such investments are illiquid depends on the market
that exists for the particular investment. It is not possible to predict with
assurance exactly how the market for Rule 144A restricted securities or any
other security will develop. An investment which when purchased enjoyed a fair
degree of marketability may subsequently become illiquid. In such event,
appropriate remedies are considered to minimize the effect on a Fund’s
liquidity.
Indexed
Securities
A
Fund may purchase indexed securities consistent with its investment objectives.
Indexed securities are those, the value of which varies positively or negatively
in relation to the value of other securities, securities indices or other
financial indicators. Indexed securities may be debt securities or deposits
whose value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Issuers of indexed securities have included banks,
corporations and certain U.S. Government agencies.
The
performance of indexed securities depends to a great extent on the performance
of the security or other instrument to which they are indexed and also may be
influenced by interest rate changes in the U.S. and abroad. Indexed securities
are subject to the credit risks associated with the issuer of the security, and
their values may decline substantially if the issuer’s creditworthiness
deteriorates. Indexed securities may be more volatile than the underlying
instruments. Certain indexed securities that are not traded on an established
market may be deemed illiquid.
Insured
Bank Obligations
A
Fund may invest in insured bank obligations. The Federal Deposit Insurance
Corporation (“FDIC”) insures the deposits of federally insured banks and savings
and loan associations (collectively referred to as “banks”) up to $250,000. A
Fund may purchase bank obligations which are fully insured as to principal by
the FDIC. Currently, to remain fully insured as to principal, these investments
must be limited to $250,000 per bank, if the principal amount and accrued
interest together exceed $250,000, the excess principal and accrued interest
will not be insured. Insured bank obligations may have limited
marketability.
Investment
Company Securities
A
Fund may invest in the securities of other investment companies to the extent
that such an investment would be consistent with the requirements of the 1940
Act, and the Fund’s investment objectives. Investments in the securities of
other investment companies may involve duplication of advisory fees and certain
other expenses. By investing in another investment company, the Fund becomes a
shareholder of that investment company. As a result, the Fund’s shareholders
indirectly will bear the Fund’s proportionate share of the fees and expenses
paid by shareholders of the other investment company, in addition to the fees
and expenses the Fund’s shareholders directly bear in connection with the Fund’s
own operations.
Generally,
under Section 12(d) (1) of the 1940 Act, a Fund may invest only up to 5% of its
total assets in the securities of any one investment company (ETF or other
mutual funds), but may not own more than 3% of the outstanding voting stock of
any one investment company (the “3% Limitation”) or invest more than 10% of its
total assets in the securities of other investment companies. However, Section
12(d)(1)(F) of the 1940 Act allows a Fund to exceed the 5% limitation and the
10% limitation described above. Section 12(d)(1)(F) of the 1940 Act, provides
that the provisions of paragraph 12(d)(1) shall not apply to securities
purchased or otherwise acquired by the Fund if (i) immediately after such
purchase or acquisition not more than 3% of the total outstanding stock of such
registered investment company is owned by the Fund and all affiliated persons of
the Fund; and (ii) the Fund has not offered or sold after January 1, 1971, and
is not proposing to offer or sell any security issued by it through a principal
underwriter or otherwise at a public or offering price which includes a sales
load of more than 1½% percent. An investment company that issues shares to the
Fund pursuant to paragraph 12(d)(1)(F) shall not be required to redeem its
shares in an amount exceeding 1% of such investment company’s total outstanding
shares in any period of less than thirty days. A Fund (or the Adviser acting on
behalf of the Fund) must comply with the following voting restrictions: when the
Fund exercises voting rights, by proxy or otherwise, with respect to investment
companies owned by the Fund, the Fund will either seek instruction from the
Fund’s shareholders with regard to the voting of all proxies and vote in
accordance with such instructions, or vote the shares held by the Fund in the
same proportion as the vote of all other holders of such security. Because other
investment companies employ an investment adviser, such investments by the Fund
may cause shareholders to bear duplicate fees.
In
October 2020, the SEC adopted regulatory changes related to the ability of an
investment company to invest in other investment companies in excess of
specified statutory limits. These changes include, among other things,
amendments to Rule 12d1-1, the rescission of Rule 12d1-2, the adoption of new
Rule 12d1-4, and the rescission of certain exemptive relief issued by the SEC
permitting certain fund of funds arrangements. Rule 12d1-4, which became
effective on January 19, 2021, permits each Fund to invest in other investment
companies, including money market funds, beyond the statutory limits, subject to
certain conditions. The rescission of the applicable exemptive orders and the
withdrawal of the applicable no- action letters was effective on January 19,
2022. Following this effectiveness, an investment company is no longer able to
rely on these exemptive orders and no-action letters, and is subject instead to
Rule 12d1-4 and other applicable rules under Section 12(d)(1).
Lending
Portfolio Securities
A
Fund may lend its securities in order to increase the return on its portfolio.
The SEC currently requires that the following conditions must be met whenever a
Fund’s portfolio securities are loaned: (1) the Fund must receive at least 102%
collateral for domestic securities and 105% cash collateral for foreign
securities from the borrower; (2) the borrower must increase such collateral
whenever the market value of the securities rises above the level of such
collateral; (3) the Fund must be able to terminate the loan at any time; (4) the
Fund must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities, and any increase in
market value; (5) the Fund may pay only reasonable custodian fees approved by
the Board in connection with the loan; (6) while voting rights on the loaned
securities may pass to the borrower, the Board must terminate the loan and
regain the right to vote the securities if a material event adversely affecting
the investment occurs; and (7) the Fund may not loan its portfolio securities so
that the value of the loaned securities is more than one-third of its total
asset value, including collateral received from such loans. These conditions may
be subject to future modification. Such loans will be terminable at any time
upon specified notice.
A
Fund might experience the risk of loss if the institution with which it has
engaged in a portfolio loan transaction breaches its agreement with the Fund. In
addition, a Fund will not enter into any portfolio security lending arrangement
having a duration of longer than one year. The principal risk of portfolio
lending is potential default or insolvency of the borrower. In either of these
cases, a Fund could experience delays in recovering securities or collateral or
could lose all or part of the value of the loaned securities. As part of
participating in a lending program, a Fund may be required to invest in
collateralized debt or other securities that bear the risk of loss of principal.
In addition, all investments made with the collateral received are subject to
the risks associated with such investments. If such investments lose value, a
Fund will have to cover the loss when repaying the collateral.
The
Board appoints agents to be responsible for monitoring the creditworthiness of
borrowers. To the extent a Fund is participating in securities lending, on a
quarterly basis, the Board reviews a report regarding the Fund’s loans. Such
report includes, among other things, the identity and value of all securities
comprising each loan, the length of time that the loan has been outstanding, the
amount earned by the Fund, the amount of fees paid in connection with the loan
and the ratio of the value of the collateral to the value of the
loan.
Any
loans of portfolio securities are fully collateralized based on values that are
marked-to-market daily. Any securities that a Fund may receive as collateral
will not become part of the Fund’s investment portfolio at the time of the loan
and, in the event of a default by the borrower, the Fund will, if permitted by
law, dispose of such collateral except for such part thereof that is a security
in which the Fund is permitted to invest. During the time securities are on
loan, the borrower will pay the Fund any accrued
income
on those securities, and the Fund may invest the cash collateral and earn income
or receive an agreed-upon fee from a borrower that has delivered cash-equivalent
collateral.
The
Funds participate in a securities lending arrangement where each Fund lends
certain of its portfolio securities to brokers, dealers and financial
institutions (not with individuals) in order to receive additional income and
increase the rate of return of its portfolio. U.S. Bancorp Asset Management,
Inc. serves as each Fund’s securities lending agent. For the most recent fiscal
period year December 31, 2023, the Funds did not engage in securities
lending activity.
.Mortgage-Backed
Securities
A
Fund may invest in mortgage-backed securities. Mortgage-backed securities
represent participation interests in pools of one-to-four family residential
mortgage loans originated by private mortgage originators. Traditionally,
residential mortgage-backed securities have been issued by governmental agencies
such as the Ginnie Mae, Fannie Mae and Freddie Mac. A Fund does not intend to
invest in commercial mortgage-backed securities. Non-governmental entities that
have issued or sponsored residential mortgage-backed securities offerings
include savings and loan associations, mortgage banks, insurance companies,
investment banks and special purpose subsidiaries of the foregoing.
While
residential loans do not typically have prepayment penalties or restrictions,
they are often structured so that subordinated classes may be locked out of
prepayments for a period of time. However, in a period of extremely rapid
prepayments, during which senior classes may be retired faster than expected,
the subordinated classes may receive unscheduled payments of principal and would
have average lives that, while longer than the average lives of the senior
classes, would be shorter than originally expected. The types of residential
mortgage-backed securities in which a Fund may invest may include the
following:
Guaranteed
Mortgage Pass-Through Securities.
A Fund may invest in mortgage pass-through securities representing participation
interests in pools of residential mortgage loans originated by the U.S.
government and guaranteed, to the extent provided in such securities, by the
U.S. government or one of its agencies or instrumentalities. Such securities,
which are ownership interests in the underlying mortgage loans, differ from
conventional debt securities, which provide for periodic payment of interest in
fixed amounts (usually semi-annually) and principal payments at maturity or on
specified call dates. Mortgage pass-through securities provide for monthly
payments that are a “pass-through” of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such securities
and the servicer of the underlying mortgage loans. The guaranteed mortgage
pass-through securities in which the Fund will invest are those issued or
guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac.
Private
Mortgage Pass-Through Securities.
Private mortgage pass-through securities (“Private Pass-Throughs”) are
structured similarly to the Ginnie Mae, Fannie Mae and Freddie Mac mortgage
pass-through securities described above and are issued by originators of and
investors in mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Private Pass-Throughs are usually backed by a pool of
conventional fixed rate or adjustable rate mortgage loans.
Since
Private Pass-Throughs typically are not guaranteed by an entity having the
credit status of Ginnie Mae, Fannie Mae or Freddie Mac, such securities
generally are structured with one or more types of credit
enhancement.
Collateralized
Mortgage Obligations (“CMOs”).
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac Certificates, but also may be collateralized by whole
loans or Private Pass-Throughs (such collateral collectively hereinafter
referred to as “Mortgage Assets”).
Multi-class
pass-through securities are equity interests in a pool of Mortgage Assets.
Unless the context indicates otherwise, all references herein to CMOs include
multi-class pass-through securities. Payments of principal of and interest on
the Mortgage Assets, and any reinvestment income thereon, provide a Fund to pay
debt service on the CMOs or make scheduled distributions on the multi-class
pass-through securities. CMOs may be sponsored by agencies or instrumentalities
of the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing. Under
current law, every newly created CMO issuer must elect to be treated for federal
income tax purposes as a Real Estate Mortgage Investment Conduit.
In
a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a “tranche,” is issued at a specific fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any principal prepayments, on
the Mortgage Assets are applied to the classes of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in
full.
A
Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its payments of a specified amount of principal
on each payment date.
Ginnie
Mae Certificates.
Ginnie Mae is a wholly owned corporate instrumentality of the U.S. government
within the Department of Housing and Urban Development. The National Housing Act
of 1934, as amended (the “Housing Act”), authorizes Ginnie Mae to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration under the Housing Act, or Title V of the Housing Act of 1949
(“FHA Loans”), or guaranteed by the Veterans’ Administration under the
Servicemen’s Readjustment Act of 1944, as amended (“VA Loans”), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. government is pledged to the payment of all amounts that may
be required to be paid under any guarantee.
The
Ginnie Mae Certificates will represent a pro rata interest in one or more pools
of the following types of mortgage loans: (i) fixed rate level payment mortgage
loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed rate
growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower’s monthly payments during the early years of the mortgage
loans (“buydown” mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully amortizing loans secured by first liens on
one-to-four family housing units.
Fannie
Mae Certificates.
Fannie Mae is a federally chartered and privately-owned corporation organized
and existing under the Federal National Mortgage Association Charter Act. Fannie
Mae was originally established in 1938 as a U.S. government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately managed corporation by legislation enacted in
1968. Fannie Mae provides funds to the mortgage market primarily by purchasing
home mortgage loans from local lenders, thereby replenishing their funds for
additional lending. Fannie Mae acquires funds to purchase home mortgage loans
from many capital market investors that may not ordinarily invest in mortgage
loans directly, thereby expanding the total amount of funds available for
housing.
Each
Fannie Mae Certificate entitles the registered holder thereof to receive amounts
representing such holder’s pro rata interest in scheduled principal payments and
interest payments (at such Fannie Mae Certificate’s pass-through rate, which is
net of any servicing and guarantee fees on the underlying mortgage loans), and
any principal prepayments on the mortgage loans in the pool represented by such
Fannie Mae Certificate and such holder’s proportionate interest in the full
principal amount of any foreclosed or otherwise finally liquidated mortgage
loan. The full and timely payment of principal of and interest on each Fannie
Mae Certificate will be guaranteed by Fannie Mae, which guarantee is not backed
by the full faith and credit of the U.S. government. In order to meet its
obligations under such guarantee, Ginnie Mae is authorized to borrow from the
U.S. Treasury with no limitations as to amount.
Each
Fannie Mae Certificate will represent a pro rata interest in one or more pools
of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage loans that
are not insured or guaranteed by any governmental agency) of the following
types: (i) fixed rate level payment mortgage loans; (ii) fixed rate growing
equity mortgage loans; (iii) fixed rate graduated payment mortgage loans; (iv)
variable rate California mortgage loans; (v) other adjustable rate mortgage
loans; and (vi) fixed rate mortgage loans secured by multifamily projects. On
September 7, 2008, the U.S. Treasury Department and the Federal Housing Finance
Authority (the “FHFA”) announced that Fannie Mae and Freddie Mac had been placed
into conservatorship, a statutory process designed to stabilize a troubled
institution with the objective of returning the entity to normal business
operations. The U.S. Treasury Department and the FHFA at the same time
established a secured lending facility and a Secured Stock Purchase Agreement
with both Fannie Mae and Freddie Mac to ensure that each entity had the ability
to fulfill its financial obligations. The FHFA announced that it does not
anticipate any disruption in pattern of payments or ongoing business operations
of Fannie Mae or Freddie Mac.
Freddie
Mac Certificates.
Freddie Mac is a corporate instrumentality of the U.S. government created
pursuant to the Emergency Home Finance Act of 1970, as amended (the “FHLMC
Act”). Freddie Mac was established primarily for the purpose of increasing the
availability of mortgage credit for the
financing
of needed housing. The principal activity of Freddie Mac currently consists of
the purchase of first lien, conventional, residential mortgage loans and
participation interests in such mortgage loans and the resale of the mortgage
loans so purchased in the form of mortgage securities, primarily Freddie Mac
Certificates.
Freddie
Mac guarantees to each registered holder of a Freddie Mac Certificate the timely
payment of interest at the rate provided for by such Freddie Mac Certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac Certificate ultimate collection of all principal of the related
mortgage loans, without any offset or deduction, but does not generally
guarantee the timely payment of scheduled principal. Freddie Mac may remit the
amount due on account of its guarantee of collection of principal at any time
after default on an underlying mortgage loan, but not later than 30 days
following (i) foreclosure sale, (ii) payment of a claim by any mortgage insurer,
or (iii) the expiration of any right of redemption, whichever occurs later, but
in any event no later than one year after demand has been made upon the
mortgagor for acceleration of payment of principal. The obligations of Freddie
Mac under its guarantee are obligations solely of Freddie Mac and are not backed
by the full faith and credit of the U.S. government.
Freddie
Mac Certificates represent a pro rata interest in a group of mortgage loans (a
“Freddie Mac Certificate group”) purchased by Freddie Mac. The mortgage loans
underlying the Freddie Mac Certificates will consist of fixed rate or adjustable
rate mortgage loans with original terms to maturity of between ten and thirty
years, substantially all of which are secured by first liens on one-to-four
family residential properties or multifamily projects. Each mortgage loan must
meet the applicable standards set forth in the FHLMC Act. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans and undivided interests in whole loans and participations comprising
another Freddie Mac Certificate group.
Federal
Home Loan Bank Securities.
The Federal Home Loan Bank system (“FHLB”) was created in 1932 pursuant to the
Federal Home Loan Bank Act. The FHLB was created to support residential mortgage
lending and community investment. The FHLB consists of 12 member-banks which are
owned by over 8,000 member community financial institutions. The FHLB provides
liquidity for housing finance and community development by making direct loans
to these community financial institutions, and through two FHLB mortgage
programs, which help expand home ownership by giving lenders an alternative
option for mortgage funding. Each member financial institution (typically a bank
or savings and loan) is a shareholder in one or more of 12 regional FHLB banks,
which are privately capitalized, separate corporate entities. Federal oversight,
in conjunction with normal bank regulation and shareholder vigilance, assures
that the 12 regional Banks will remain conservatively managed and well
capitalized. The FHLB banks are among the largest providers of mortgage credit
in the U.S.
The
FHLB is also one of the world’s largest private issuers of fixed-income debt
securities, and the Office of Finance serves as the FHLB’s central debt issuance
facility. Debt is issued in the global capital markets and the Fund is channeled
to member financial institutions to fund mortgages, community development, and
affordable housing.
Securities
issued by the FHLB are not obligations of the U.S. government and are not
guaranteed by the U.S. government. The FHLB may issue either bonds or discount
notes. The securities, issued pursuant to the Act, are joint and several
unsecured general obligations of the FHLB banks. The bonds or discount notes
will not limit other indebtedness that the FHLB banks may incur and they will
not contain any financial or similar restrictions on the FHLB banks or any
restrictions on their ability to secure other indebtedness. Under the Federal
Home Loan Bank Act, the FHLB banks may incur other indebtedness such as secured
joint and several obligations of the FHLB banks and unsecured joint and several
obligations of the FHL Banks, as well as obligations of individual FHLB banks
(although current Federal Housing Finance Board rules prohibit their
issuance).
Municipal
Securities
A
Fund may invest in securities issued by states, municipalities and other
political subdivisions, agencies, authorities and instrumentalities of states
and multi-state agencies or authorities. Although the interest earned on many
municipal securities is exempt from federal income tax, a Fund may invest in
taxable municipal securities.
Municipal
securities share the attributes of a debt/fixed income securities in general,
but are generally issued by states, municipalities and other political
subdivisions, agencies, authorities and instrumentalities of states and
multi-state agencies or authorities. The municipal securities which a Fund may
purchase include general obligation bonds and limited obligation bonds (or
revenue bonds), including industrial development bonds issued pursuant to former
federal tax law. General obligation bonds are obligations involving the credit
of an issuer possessing taxing power and are payable from such issuer’s general
revenues and not from any particular source. Limited obligation bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Tax-exempt private activity bonds and industrial
development bonds generally are also revenue bonds and thus are not payable from
the issuer’s general revenues. The credit and quality of private activity bonds
and industrial development bonds are usually related to the credit of the
corporate user of the facilities. Payment of interest on and repayment of
principal of such bonds is the responsibility of the corporate user (and/or any
guarantor).
Under
the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”),
certain limited obligation bonds are considered “private activity bonds” and
interest paid on such bonds is treated as an item of tax preference for purposes
of calculating federal alternative minimum tax liability.
Preferred
Stock
Preferred
stocks are securities that have characteristics of both common stocks and
corporate bonds. Preferred stocks may receive dividends, but payment is not
guaranteed as with a bond. These securities may be undervalued because of a lack
of analyst coverage resulting in a high dividend yield or yield to maturity. The
risks of preferred stocks are a lack of voting rights and the Adviser may
incorrectly analyze the security, resulting in a loss to the relevant Fund.
Furthermore, preferred stock dividends are not guaranteed, and management can
elect to forego the preferred dividend, resulting in a loss to the
Fund.
Publicly
Traded Partnerships
A
Fund may invest in publicly traded partnerships (“PTPs”). PTPs are limited
partnerships the interests in which (known as “units”) are traded on public
exchanges, just like corporate stock. PTPs are limited partnerships that provide
an investor with a direct interest in a group of assets (generally, oil and gas
properties). Publicly traded partnership units typically trade publicly, like
stock, and thus may provide the investor more liquidity than ordinary limited
partnerships. Publicly traded partnerships are also called master limited
partnerships and public limited partnerships. A limited partnership has one or
more general partners (they may be individuals, corporations, partnerships or
another entity) which manage the partnership, and limited partners, which
provide capital to the partnership but have no role in its management. When an
investor buys units in a PTP, he or she becomes a limited partner. PTPs are
formed in several ways. A non-traded partnership may decide to go public.
Several non-traded partnerships may “roll up” into a single PTP. A corporation
may spin off a group of assets or part of its business into a PTP of which it is
the general partner, either to realize what it believes to be the assets’ full
value or as an alternative to issuing debt. A corporation may fully convert to a
PTP, although since 1986 the tax consequences have made this unappealing; or, a
newly formed company may operate as a PTP from its inception.
There
are different types of risks to investing in PTPs including regulatory risks and
interest rate risks. Currently most partnerships enjoy pass through taxation of
their income to partners, which avoids double taxation of earnings. If the
government were to change PTP business tax structure, unitholders would not be
able to enjoy the relatively high yields in the sector for long. In addition,
PTP’s which charge government-regulated fees for transportation of oil and gas
products through their pipelines are subject to unfavorable changes in
government-approved rates and fees, which would affect a PTPs revenue stream
negatively. PTPs also carry some interest rate risks. During increases in
interest rates, PTPs may not produce decent returns to
shareholders.
Income
Trusts
A
Fund may invest in income trusts which are investment trusts that hold assets
that are income producing. The income is passed on to the “unitholders.” Each
income trust has an operating risk based on its underlying business. The term
may also be used to designate a legal entity, capital structure and ownership
vehicle for certain assets or businesses. Shares or “trust units” are traded on
securities exchanges just like stocks. Income is passed on to the investors,
called unitholders, through monthly or quarterly distributions. Historically,
distributions have typically been higher than dividends on common stocks. The
unitholders are the beneficiaries of a trust, and their units represent their
right to participate in the income and capital of the trust. Income trusts
generally invest funds in assets that provide a return to the trust and its
beneficiaries based on the cash flows of an underlying business. This return is
often achieved through the acquisition by the trust of equity and debt
instruments, royalty interests or real properties. The trust can receive
interest, royalty or lease payments from an operating entity carrying on a
business, as well as dividends and a return of capital.
Each
income trust has an operating risk based on its underlying business; and,
typically, the higher the yield, the higher the risk. They also have additional
risk factors, including, but not limited to, poorer access to debt markets.
Similar to a dividend paying stock, income trusts do not guarantee minimum
distributions or even return of capital. If the business starts to lose money,
the trust can reduce or even eliminate distributions; this is usually
accompanied by sharp losses in a unit’s market value. Since the yield is one of
the main attractions of income trusts, there is the risk that trust units will
decline in value if interest rates offering in competing markets, such as in the
cash/treasury market, increase. Interest rate risk is also present within the
trusts themselves because they hold very long-term capital assets (e.g.
pipelines, power plants, etc.), and much of the excess distributable income is
derived from a maturity (or duration) mismatch between the life of the asset,
and the life of the financing associated with it. In an increasing interest rate
environment, not only does the attractiveness of trust distributions decrease,
but quite possibly, the distributions may themselves decrease, leading to a
double whammy of both declining yield and substantial loss of unitholder value.
Because most income is passed on to unitholders, rather than reinvested in the
business, in some cases, a trust can become a wasting asset unless more equity
is issued. Because many income trusts pay out more than their net income, the
unitholder equity (capital) may decline over time. To the extent that the value
of the trust is driven by the deferral or reduction of tax, any change in
government tax regulations to remove the benefit will reduce the value of the
trusts. Generally, income trusts also carry the same risks as dividend paying
stocks that are traded on stock markets.
Real
Estate Investment Trusts (“REITs”)
A
Fund may invest in equity interests or debt obligations issued by REITs. REITs
are pooled investment vehicles which invest primarily in income producing real
estate or real estate related loans or interest. 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 property that has appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments. Similar to investment
companies, REITs are not taxed on income distributed to shareholders provided
they comply with several requirements of the Internal Revenue Code. A Fund will
indirectly bear its proportionate share of expenses incurred by REITs in which
the Fund invests in addition to the expenses incurred directly by the relevant
Fund.
Investing
in REITs involves certain unique risks in addition to those risks associated
with investing in the real estate industry in general. Equity REITs may be
affected by changes in the value of the underlying property owned by the REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified, are subject to
heavy cash flow dependency, default by borrowers and self-liquidation. REITs are
also subject to the possibilities of failing to qualify for tax free
pass-through of income under the Internal Revenue Code and failing to maintain
their exemption from registration under the 1940 Act.
REITs
(especially mortgage REITs) are also subject to interest rate risks. 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. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT’s investment in such loans will gradually
align themselves to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed-rate obligations.
Investment
in REITs involves risks similar to those associated with investing in small
capitalization companies. These risks include:
•limited
financial resources;
•infrequent
or limited trading;
•more
abrupt or erratic price movements than larger company securities;
and
•in
addition, small capitalization stocks, such as REITs, historically have been
more volatile in price than the larger capitalization stocks included in the
S&P 500 Index.
Repurchase
Agreements
A
Fund may invest in fully collateralized repurchase agreements. A repurchase
agreement is a short-term investment in which the purchaser (i.e., the Fund)
acquires ownership of a security and the seller agrees to repurchase the
obligation at a future time at a set price, thereby determining the yield during
the purchaser’s holding period (usually not more than 7 days from the date of
purchase). Any repurchase transaction in which the Fund engages will require
full collateralization of the seller’s obligation during the entire term of the
repurchase agreement. In the event of a bankruptcy or other default of the
seller, the Fund could experience both delays in liquidating the underlying
security and losses in value. However, the Fund intends to enter into repurchase
agreements only with its custodian, other banks with assets of $1 billion or
more and registered securities dealers determined by the Adviser to be
creditworthy. The Adviser monitors the creditworthiness of the banks and
securities dealers with which the Fund engages in repurchase transactions. A
Fund may not enter into a repurchase agreement with a term of more than seven
days if, as a result, more than 15% of the value of its net assets would then be
invested in such repurchase agreements and other illiquid
investments.
Rights
Rights
are usually granted to existing shareholders of a corporation to subscribe to
shares of a new issue of common stock before it is issued to the public. The
right entitles its holder to buy common stock at a specified price. Rights have
similar features to warrants, except that the life of a right is typically much
shorter, usually a few weeks. The Adviser believes rights may become underpriced
if they are sold without regard to value and if analysts do not include them in
their research. The risk in investing in rights is that the Adviser might
miscalculate their value resulting in a loss to a Fund. Another risk is the
underlying common stock may not reach the Adviser’s anticipated price within the
life of the right.
Short
Sales
A
Fund may seek to realize additional gains or hedge investments by selling a
security short. A short sale is a transaction in which the Fund sells a security
that it does not own in anticipation of a decline in the market price of the
security. To complete the short sale, the Fund must arrange through a broker to
borrow the security in order to deliver it to the buyer. The Fund is obligated
to replace the borrowed security by purchasing it at a market price at or prior
to the time it must be returned to the lender. The price at which the Fund is
required to replace the borrowed security may be more or less than the price at
which the security was sold by the Fund. Until the security is replaced, the
Fund is required to repay the lender any dividends or interest attributable to
the borrowed security that may accrue during the period of the loan. To borrow
the security, the Fund may be required to pay a premium, which would increase
the cost of the security sold. Until the short position is closed out, the Fund
also will incur fees and other transaction costs.
The
net proceeds of the short sale plus any additional cash collateral will be
retained by the broker to the extent necessary to meet margin requirements and
provide a collateral cushion in the event that the value of the security sold
short increases. The Fund will receive the net proceeds after it closes out the
short position by replacing the borrowed security.
A
Fund will incur a loss if the price of the security increases between the date
of the short sale and the date on which the Fund replaces the borrowed security.
The Fund will realize a gain if the price of the security declines between those
dates. The amount of any gain will be decreased, and the amount of any loss
increased, by the amount of any premium, dividend, interest or expenses the Fund
may be required to pay in connection with the short sale. There can be no
assurance that a Fund will be able to close out a short position at any
particular time or at an acceptable price.
The
Funds may also take short positions through the use of derivative
instruments.
STRIPS
The
Federal Reserve creates STRIPS (Separate Trading of Registered Interest and
Principal of Securities) by separating the coupon payments and the principal
payment from an outstanding Treasury security and selling them as individual
securities. To the extent a Fund purchases the principal portion of the STRIP,
the Fund will not receive regular interest payments. Instead they are sold at a
deep discount from their face value. The Fund will accrue income on such STRIPS
for tax and accounting purposes, in accordance with applicable law, which income
is distributable to shareholders. Because no cash is received at the time such
income is accrued, the Fund may be required to liquidate other Fund securities
to satisfy its distribution obligations. Because the principal portion of the
STRIP does not pay current income, its price can be very volatile when interest
rates change. In calculating its dividend, the Fund takes into account as income
a portion of the difference between the principal portion of the STRIP’s
purchase price and its face value.
Time
Deposits and Variable Rate Notes
A
Fund may invest in fixed time deposits, whether or not subject to withdrawal
penalties.
The
commercial paper obligations which a Fund may buy are unsecured and may include
variable rate notes. The nature and terms of a variable rate note (i.e., a
“Master Note”) permit the Fund to invest fluctuating amounts at varying rates of
interest pursuant to a direct arrangement between the Fund as Lender, and the
issuer, as borrower. It permits daily changes in the amounts borrowed. The Fund
has the right at any time to increase, up to the full amount stated in the note
agreement, or to decrease the amount outstanding under the note. The issuer may
prepay at any time and without penalty any part of or the full amount of the
note. The note may or may not be backed by one or more bank letters of credit.
Because these notes are direct lending arrangements between the Fund and the
issuer, it is not generally contemplated that they will be traded; moreover,
there is currently no secondary market for them. Except as specifically provided
in the Prospectus, there is no limitation on the type of issuer from whom these
notes may be purchased; however, in connection with such purchase and on an
ongoing basis, the Adviser will consider the earning power, cash flow and other
liquidity ratios of the issuer, and its ability to pay principal and interest on
demand, including a situation in which all holders of such notes made demand
simultaneously. Variable rate notes are subject to each Fund’s investment
restriction on illiquid securities unless such notes can be put back to the
issuer on demand within seven days.
U.S.
Government Securities
A
Fund may invest in U.S. government securities. These securities may be backed by
the credit of the government as a whole or only by the issuing agency. U.S.
Treasury bonds, notes, and bills and some agency securities, such as those
issued by the Federal Housing Administration and the Government National
Mortgage Association (Ginnie Mae), are backed by the full faith and credit of
the U.S. government as to payment of principal and interest and are the highest
quality government securities. Other securities issued by U.S. government
agencies or instrumentalities, such as securities issued by the Federal Home
Loan Banks and the Federal Home Loan Mortgage Corporation (Freddie Mac), are
supported only by the credit of the agency that issued them, and not by the U.S.
government. Securities issued by the Federal Farm Credit System, the Federal
Land Banks, and the Federal National Mortgage Association (Fannie Mae) are
supported by the agency’s right to borrow money from the U.S. Treasury under
certain circumstances, but are not backed by the full faith and credit of the
U.S. government.
A
Fund's investments in U.S. Government securities may include agency step-up
obligations. These obligations are structured with a coupon rate that “steps-up”
periodically over the life of the obligation. Step-up obligations typically
contain a call option, permitting the issuer to buy back the obligation upon
exercise of the option. Step-up obligations are designed for investors who are
unwilling to invest in a long-term security in a low interest rate environment.
Step-up obligations are used in an attempt to reduce the risk of a price decline
should interest rates rise significantly at any time during the life of the
obligation. However, step-up obligations also carry the risk that market
interest rates may be significantly below the new, stepped-up coupon rate. If
this occurs, the issuer of the obligation likely will exercise the call option,
leaving investors with cash to reinvest. As a result, these obligations may
expose the Fund to the risk that proceeds from a called security may be
reinvested in another security paying a lower rate of interest.
Warrants
Warrants
are securities that are usually issued with a bond or preferred stock but may
trade separately in the market. A warrant allows its holder to purchase a
specified amount of common stock at a specified price for a specified time. The
risk in investing in warrants is the Adviser might miscalculate their value,
resulting in a loss to a Fund. Another risk is the warrants will not realize
their value because the underlying common stock does reach the Adviser’s
anticipated price within the life of the warrant.
When-Issued,
Forward Commitments and Delayed Settlements
A
Fund may purchase and sell securities on a when-issued, forward commitment or
delayed settlement basis. The Funds do not intend to engage in these
transactions for speculative purposes but only in furtherance of its investment
objectives.
A
Fund will purchase securities on a when-issued, forward commitment or delayed
settlement basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, 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 the Fund
on the settlement date. In these cases, a Fund may realize a taxable capital
gain or loss. When a Fund engages in when-issued, forward commitment and delayed
settlement transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Fund incurring a loss or
missing an opportunity to obtain a price credited to be
advantageous.
The
market value of the securities underlying a when-issued purchase, forward
commitment to purchase securities, or a delayed settlement and any subsequent
fluctuations in their market value is taken into account when determining the
market value of the Fund starting on the day the Fund agrees to purchase the
securities. The Funds do not earn interest on the securities it has committed to
purchase until it has paid for and delivered on the settlement
date.
Fundamental
and Non-Fundamental Investment Limitations
The
Trust (on behalf of the Funds) has adopted the following restrictions as
fundamental policies, which may not be changed without the favorable “vote of
the holders of a majority of the outstanding voting securities” of a Fund, as
defined under the 1940 Act. Under the 1940 Act, the “vote of the holders of a
majority of the outstanding voting securities” means the vote of the holders of
the lesser of (i) 67% of the shares of a Fund represented at a meeting at
which the holders of more than 50% of its outstanding shares are represented at
the meeting in person or by proxy; or (ii) more than 50% of the outstanding
shares of the Fund.
The
Funds may not:
1.Issue
senior securities, borrow money or pledge their assets, except that (i) a
Fund may borrow from banks in amounts not exceeding one-third of its total
assets (including the amount borrowed) less liabilities (other than borrowings);
and (ii) this restriction shall not prohibit a Fund from engaging in
options transactions, reverse repurchase agreements, purchasing securities on a
when-issued, delayed delivery, or forward delivery basis, or short sales in
accordance with its objectives and strategies;
2.Underwrite
the securities of other issuers (except that a Fund 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);
3.Purchase
or sell real estate or interests in real estate, unless acquired as a result of
ownership of securities (although a Fund may purchase and sell securities which
are secured by real estate and securities of companies that invest or deal in
real estate);
4.Purchase
or sell physical commodities or commodities contracts, unless acquired as a
result of ownership of securities or other instruments and provided that this
restriction does not prevent a Fund from engaging in transactions involving
currencies and futures contracts and options thereon or investing in securities
or other instruments that are secured by physical commodities;
5.Make
personal loans of money or loans of its assets to persons who control or are
under common control with a Fund (except that a Fund may lend its portfolio
securities, enter into repurchase agreements, purchase debt securities
consistent with the investment policies of the Fund, and invest in loans,
including assignments and participation interests); or
6.Invest
in the securities of any one industry or group of industries if, as a result,
25% or more of a Fund’s total assets would be invested in the securities of such
industry or group of industries; except that, the foregoing does not apply to
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities or repurchase agreements with respect thereto.
Management
of the Funds
Board
of Trustees
The
management and affairs of the Funds are supervised by the Board. The Board
consists of four individuals. The Trustees are fiduciaries and are governed by
the laws of the State of Delaware in this regard. The Board establishes policies
for the operation of the Funds and appoints the officers who conduct the daily
business of the Funds.
The
Role of the Board of Trustees
The
Board provides oversight of the management and operations of the Trust. Like all
mutual funds, the day-to-day responsibility for the management and operation of
the Trust is the responsibility of various service providers to the Trust and
its individual series, such as the Adviser; Quasar Distributors, LLC, the Funds’
principal underwriter (the “Distributor”); U.S. Bancorp Fund Services, LLC,
doing business as U.S. Bank Global Fund Services, the Funds’ administrator (the
“Administrator”) and transfer agent (the “Transfer Agent”); and U.S. Bank, N.A.,
the Funds’ Custodian, each of whom are discussed in greater detail in this SAI.
The Board approves all significant agreements between the Trust and its service
providers, including the agreements with the Adviser, Distributor,
Administrator, Custodian and Transfer Agent. The Board has appointed various
individuals of certain of these service providers as officers of the Trust, with
responsibility to monitor and report to the Board on the Trust’s day-to-day
operations. In conducting this oversight, the Board receives regular reports
from these officers and service providers regarding the Trust’s operations. The
Board has appointed a Chief Compliance Officer (“CCO”) who reports directly to
the Board and who administers the Trust’s compliance program and regularly
reports to the Board as to compliance matters, including an annual compliance
review. Some of these reports are provided as part of formal “Board Meetings,”
which are held four times per year, in person, and such other times as the Board
determines is necessary, and involve the Board’s review of recent Trust
operations. From time to time one or more members of the Board may also meet
with Trust officers in less formal settings, between formal Board Meetings, to
discuss various topics. In all cases, however, the role of the Board and of any
individual Trustee is one of oversight and not of management of the day-to-day
affairs of the Trust, and its oversight role does not make the Board a guarantor
of the Trust’s investments, operations, or activities.
Board
Leadership Structure
The
Board has structured itself in a manner that it believes allows it to
effectively perform its oversight function. The Board is comprised of four
Trustees that are not considered to be “interested persons” of the Funds, as
defined by the 1940 Act (“Independent Trustees”) – Messrs. David A. Massart,
Leonard M. Rush, David M. Swanson and Robert J. Kern. Accordingly, 100% of the
members of the Board are Independent Trustees, who are Trustees that are not
affiliated with: the investment adviser or sub-adviser to the Fund, affiliates
of the investment adviser or sub-adviser to the Fund, or other service providers
to the Fund. Prior to July 6, 2020, Mr. Kern was considered an “interested
person” of the Trust as defined in the 1940 Act (“Interested Trustee”). He was
considered an Interested Trustee by virtue of the fact that he had served as a
board member of Quasar Distributors, LLC, which acts as principal underwriter to
many of the Trust’s series and had been an Executive Vice President of the
Administrator. The Board has established two standing committees, an Audit
Committee and a Nominating & Governance Committee. The Committees are
discussed in greater detail under “Board Committees” below. Each of the Audit
Committee and the Nominating & Governance Committee are comprised entirely
of Independent Trustees. The Independent Trustees have engaged independent
counsel to advise them on matters relating to their responsibilities in
connection with the Trust, as well as the Funds.
The
Independent Trustees have appointed Leonard M. Rush as Chairman. Prior to July
6, 2020, Mr. Kern served as Chairman of the Trust and Mr. Rush served as lead
Independent Trustee with the responsibilities to coordinate activities of the
Independent Trustees, act as a liaison with the Trust’s service providers,
officers, legal counsel, and other Trustees between meetings, help to set Board
meeting agendas, and serve as chair during executive sessions of the Independent
Trustees.
In
accordance with the fund governance standards prescribed by the SEC under the
1940 Act, the Independent Trustees on the Nominating & Governance Committee
select and nominate all candidates for Independent Trustee positions. Each
Trustee was appointed to serve on the Board because of his
experience,
qualifications, attributes and skills as set forth in the subsection “Trustee
Qualifications” below.
The
Board reviews its structure regularly in light of the characteristics and
circumstances of the Trust, including: the affiliated or unaffiliated nature of
each investment adviser; the number of funds that comprise the Trust; the
variety of asset classes that those funds reflect; the net assets of the Trust;
the committee structure of the Trust; and the independent distribution
arrangements of each of the Trust’s series.
The
Board has determined that the inclusion of all Independent Trustees as members
of the Audit Committee and the Nominating & Governance Committee allows all
such Trustees to participate in the full range of the Board’s oversight duties,
including oversight of risk management processes discussed below. Given the
composition of the Board and the function and composition of its various
committees as described above, the Trust has determined that the Board’s
leadership structure is appropriate.
Board
Oversight of Risk Management
As
part of its oversight function, the Board receives and reviews various risk
management reports and assessments and discusses these matters with appropriate
management and other personnel, including personnel of the Trust’s service
providers. Because risk management is a broad concept comprised of many elements
(such as, for example, investment risk, issuer and counter-party risk,
compliance risk, operational risk, business continuity risk, etc.) the oversight
of different types of risks is handled in different ways. For example, the CCO
regularly reports to the Board during Board Meetings and meets in executive
session with the Independent Trustees and their legal counsel to discuss
compliance and operational risks. In addition, Mr. Rush, the Independent Trustee
designated as the Audit Committee’s “audit committee financial expert”, meets
with the President, Treasurer and the Funds’ independent registered public
accounting firm to discuss, among other things, the internal control structure
of the Funds’ financial reporting function. The full Board receives reports from
the investment advisers to the underlying funds and the portfolio managers as to
investment risks.
Trustees
and Officers
The
Trustees and officers of the Trust are listed below with their addresses,
present positions with the Trust and principal occupations over at least the
last five years.
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Name,
Address and Year of Birth |
Position(s) Held
with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other Directorships Held
by Trustee During the Past Five Years |
Independent
Trustees |
Leonard
M. Rush, CPA 615 E. Michigan St. Milwaukee, WI 53202 Year of
Birth: 1946 |
Chairman, Trustee
and Audit Committee Chairman |
Indefinite Term;
Since April 2011 |
30 |
Retired
(2011 - present); Chief Financial Officer, Robert W. Baird & Co.
Incorporated, (2000-2011). |
Independent Trustee,
ETF Series Solutions (60
Portfolios) (2012-Present) |
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Name,
Address and Year of Birth |
Position(s) Held
with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other Directorships Held
by Trustee During the Past Five Years |
David
A. Massart 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1967 |
Trustee
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Indefinite Term;
Since April 2011 |
30 |
Partner
and Managing Director, Beacon Pointe Advisors, LLC (since 2022);
Co-Founder and Chief Investment Strategist, Next Generation Wealth
Management, Inc. (2005-2021). |
Independent Trustee,
ETF Series Solutions (60
Portfolios) (2012-Present) |
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Name,
Address and Year of Birth |
Position(s) Held
with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other Directorships Held
by Trustee During the Past Five Years |
David
M. Swanson 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1957 |
Trustee
and Nominating & Governance Committee Chairman |
Indefinite Term;
Since April 2011 |
30 |
Founder
and Managing Principal, SwanDog Strategic Marketing, LLC
(2006-present). |
Independent
Trustee, ALPS Variable Investment Trust (7 Portfolios) (2006 to Present);
Independent Trustee, RiverNorth Funds (3 Portfolios) (2018 to Present);
RiverNorth Managed Duration Municipal Income Fund, Inc. (1 Portfolio)
(2019 to Present); RiverNorth Opportunistic Municipal Income Fund, Inc. (1
Portfolio) (2018 to Present); RiverNorth Capital and Income Fund (1
Portfolio) (2018 to Present); RiverNorth Opportunities Fund, Inc. (1
Portfolio) (2015 to present); RiverNorth/DoubleLine Strategic Opportunity
Fund, Inc. (1 Portfolio) (2019 to Present); RiverNorth Flexible Municipal
Income Fund, Inc. (1 Portfolio) (2020 to Present); RiverNorth Flexible
Municipal Income Fund II, Inc. (1 Portfolio) (2021 to Present); RiverNorth
Managed Duration Municipal Income Fund II, Inc. (1 Portfolio) (2022 to
Present). |
Robert
J. Kern 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1958 |
Trustee |
Indefinite Term;
Since January 2011 |
30 |
Retired
(2018-present); Executive Vice President, U.S. Bancorp Fund Services, LLC
(1994-2018). |
None |
Officers |
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Name,
Address and Year of Birth |
Position(s) Held
with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other Directorships Held
by Trustee During the Past Five Years |
Brian
R. Wiedmeyer 615 E. Michigan St. Milwaukee, WI 53202 Year of
Birth: 1973 |
President
and Principal Executive Officer |
Indefinite
Term; Since November 2018 |
N/A |
Vice
President, U.S. Bancorp Fund Services, LLC (2005-present). |
N/A |
Deborah
Ward 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1966 |
Vice
President, Chief Compliance Officer and Anti-Money Laundering
Officer |
Indefinite
Term; Since April 2013 |
N/A |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (2004-present). |
N/A |
Benjamin
Eirich 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1981 |
Treasurer,
Principal Financial Officer and Vice President |
Indefinite Term;
Since August 2019 (Treasurer); Indefinite Term;
Since November 2018 (Vice President) |
N/A |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (2008-present). |
N/A |
John
Hadermayer 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1977 |
Secretary |
Indefinite
Term; Since May 2022 |
N/A |
Vice
President, U.S. Bancorp Fund Services, LLC (2022-present); Executive
Director, AQR Capital Management, LLC (2013-2022). |
N/A |
Peter
A. Walker, CPA 615 E. Michigan St. Milwaukee, WI 53202 Year of
Birth: 1993 |
Assistant
Treasurer and Vice President |
Indefinite
Term: Since November 2021 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2016-present). |
N/A |
Silinapha
Saycocie 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1998 |
Assistant
Treasurer and Vice President |
Indefinite
Term; Since November 2023 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2020-Present) |
N/A |
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Name,
Address and Year of Birth |
Position(s) Held
with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other Directorships Held
by Trustee During the Past Five Years |
Daniel
Umland 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1993
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Assistant
Treasurer and Vice President |
Indefinite
Term: Since March 2024 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2021-present); Securities Specialist,
U.S. Bank, N.A. (2016-2021) |
N/A |
Eli
Bilderback 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1991
|
Assistant
Treasurer and Vice President |
Indefinite
Term; Since March 2024 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2022 -Present); Operations Analyst, U.S.
Bank, NA (2018 -2022) |
N/A |
Trustee
Qualifications
The
Board believes that each of the Trustees has the qualifications, experience,
attributes and skills appropriate to their continued service as Trustees of the
Trust in light of the Trust’s business and structure. The Trustees have
substantial business and professional backgrounds that indicate they have the
ability to critically review, evaluate and assess information provided to them.
Certain of these business and professional experiences are set forth in detail
in the table above. In addition, the Trustees have substantial board experience
and, in their service to the Trust, have gained substantial insight as to the
operation of the Trust. The Board annually conducts a “self-assessment” wherein
the effectiveness of the Board and the individual Trustees is
reviewed.
In
addition to the information provided in the table above, below is certain
additional information concerning each individual Trustee. The information
provided below, and in the table above, is not all-inclusive. Many of the
Trustees’ qualifications to serve on the Board involve intangible elements, such
as intelligence, integrity, work ethic, the ability to work together, the
ability to communicate effectively, the ability to exercise judgment, the
ability to ask incisive questions, and commitment to shareholder
interests.
Mr.
Kern’s trustee attributes include substantial industry experience, including
over 35 years of service with U.S. Bancorp Fund Services, LLC (the fund
accountant (“Fund Accountant”), Administrator, and Transfer Agent to the Trust)
where he managed business development and the mutual fund transfer agent
operation including investor services, account services, legal compliance,
document processing and systems support. He also served as a board member of
U.S. Bancorp Fund Services, LLC and previously served as a board member of
Quasar Distributors, LLC (principal underwriter of many of the Trust’s series).
The Board believes Mr. Kern’s experience, qualifications, attributes and skills
on an individual basis and in combination with those of the other Trustees lead
to the conclusion that he possesses the requisite skills and attributes as a
Trustee to carry out oversight responsibilities with respect to the
Trust.
Mr.
Massart’s trustee attributes include substantial industry experience, including
over two decades working with high net worth individuals, families, trusts and
retirement accounts to make strategic and tactical asset allocation decisions,
evaluate and select investment managers and manage client relationships. He is
currently Partner and Managing Director of Beacon Pointe Advisors, LLC.
Previously, he served as Chief Investment Strategist and lead member of the
investment management committee of the SEC registered investment advisory firm
he co-founded. He also previously served as Managing Director of Strong Private
Client and as a Manager of Wells Fargo Investments, LLC. The Board believes Mr.
Massart’s experience, qualifications, attributes and skills on an individual
basis and in combination with those of the other Trustees lead to the conclusion
that he possesses the requisite skills and attributes as a Trustee to carry out
oversight responsibilities with respect to the Trust.
Mr.
Rush’s trustee attributes include substantial industry experience, including
serving in several different senior executive roles at various global financial
services firms. He most recently served as Managing Director and Chief Financial
Officer of Robert W. Baird & Co. Incorporated and several other affiliated
entities and served as the Treasurer for Baird Funds. He also served as the
Chief Financial Officer for Fidelity Investments’ four broker-dealers and has
substantial experience with mutual fund and investment advisory organizations
and related businesses, including Vice President and Head of Compliance for
Fidelity Investments, a Vice President at Credit Suisse First Boston, a Manager
with Goldman Sachs, & Co. and a Senior Manager with Deloitte & Touche.
Mr. Rush has been determined to qualify as an Audit Committee Financial Expert
for the Trust. The Board believes Mr. Rush’s experience, qualifications,
attributes and skills on an individual basis and in combination with those of
the other Trustees lead to the conclusion that he possesses the requisite skills
and attributes as a Trustee and as the Chairman to carry out oversight
responsibilities with respect to the Trust.
Mr.
Swanson’s trustee attributes include substantial industry experience, including
over 35 years of senior management and marketing experience with over 30 years
dedicated to the financial services industry. He is currently the Founder and
Managing Principal of a marketing strategy boutique serving asset and wealth
management businesses. He has also served as Chief Operating Officer and Chief
Marketing Officer of Van Kampen Investments, President and Chief Executive
Officer of Scudder, Stevens & Clark, Canada, Ltd., Managing Director and
Head of Global Investment Products at Morgan Stanley, Director of Marketing for
Morgan Stanley Mutual Funds, Director of Marketing for Kemper Funds, and
Executive Vice President and Head of Distribution for Calamos Investments. The
Board believes Mr. Swanson’s experience, qualifications, attributes and skills
on an individual basis and in combination with those of the other Trustees lead
to the conclusion that he possesses the requisite skills and attributes as a
Trustee to carry out oversight responsibilities with respect to the
Trust.
This
discussion of the Trustees’ experience and qualifications is pursuant to SEC
requirements, does not constitute holding out the Board or any Trustee as having
special expertise, and shall not impose any greater responsibility or liability
on any such Trustee or the Board by reason thereof.
Trustee
and Management Ownership of Fund Shares
The
following table shows the dollar range of Fund shares and shares in all
portfolios of the Trust beneficially owned by the Trustees as of the calendar
year ended December 31, 2023:
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| |
|
Dollar
Range of Fund Shares Beneficially Owned (None, $1-$10,000,
$10,001-$50,000, $50,001-$100,000, Over $100,000) |
Name |
Managed
Income Fund |
Dynamic
Growth Fund |
Active
Advantage Fund |
Defender
Fund |
Aggregate
Dollar Range of Fund Shares in the Trust |
Independent
Trustees |
|
|
|
| |
David
A. Massart |
None |
None |
None |
None |
None |
Leonard
M. Rush |
None |
None |
None |
None |
None |
David
M. Swanson |
None |
None |
$1
- $10,000 |
None |
$50,001
- $100,000 |
Robert
J. Kern |
None |
None |
None |
None |
None |
As
of March 31, 2024, the Trustees and Officers of the Trust as a group owned less
than 1% of the outstanding shares of any fund in the Trust.
Board
Committees
Audit
Committee.
The Trust has an Audit Committee, which is comprised of all the Independent
Trustees. The Audit Committee reviews financial statements and other
audit-related matters for the Funds. The Audit Committee also holds discussions
with management and with the Funds’ independent registered public accounting
firm concerning the scope of the audit and the auditor’s independence. The Audit
Committee met twice with respect to the Funds during the Funds’ fiscal year
ended December 31, 2023.
Nominating
& Governance Committee.
The Trust has a Nominating & Governance Committee, which is comprised of all
the Independent Trustees. The Nominating & Governance Committee is
responsible for seeking and reviewing candidates for consideration as nominees
for the position of trustee and meets only as necessary.
The
Nominating & Governance Committee will consider nominees recommended by
shareholders for vacancies on the Board. Recommendations for consideration by
the Nominating & Governance Committee should be sent to the President of the
Trust in writing together with the appropriate biographical information
concerning each such proposed nominee, and such recommendation must comply with
the notice provisions set forth in the Trust’s Bylaws. In general, to comply
with such procedures, such nominations, together with all required information,
must be delivered to and received by the President of the Trust at the principal
executive office of the Trust not less than 120 days, and no more than 150 days,
prior to the shareholder meeting at which any such nominee would be voted on.
Shareholder recommendations for nominations to the Board will be accepted on an
ongoing basis. The Nominating & Governance Committee’s procedures with
respect to reviewing shareholder nominations will be disclosed as required by
applicable securities laws. The Nominating & Governance Committee met once
during the Funds’ fiscal year ended December 31, 2023.
Trustee
Compensation
The
Trustees each receive an annual retainer of $110,000. The Chairman of the Audit
Committee receives additional compensation of $14,000, the Chairman of the
Nominating & Governance Committee receives additional compensation of $8,000
and the Chairman of the Board of Trustees receives $12,500, each annually. The
Trustees each receive $8,000 for regularly scheduled meetings and $2,500 for
additional meetings. The following table sets forth the compensation received by
the Trustees for the Funds’ fiscal year ended December 31,
2023:
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| |
Name
of Person/Position |
Aggregate
Compensation from the: |
Pension
or Retirement Benefits Accrued as Part of Fund Expenses |
Estimated
Annual Benefits Upon Retirement |
Total
Compensation from the Funds and the Trust(2)
Paid
to Trustees |
Managed
Income Fund(1) |
Dynamic
Growth Fund(1) |
Active
Advantage Fund(1) |
Defender
Fund(1) |
Leonard
M. Rush(3) |
$5,558 |
$5,558 |
$5,558 |
$2,633 |
None |
None |
$176,500 |
David
A. Massart(4) |
$4,723 |
$4,723 |
$4,724 |
$2,219 |
None |
None |
$150,000 |
David
M. Swanson(5) |
$4,975 |
$4,975 |
$4,976 |
$2,344 |
None |
None |
$158,000 |
Robert
J. Kern(6) |
$4,723 |
$4,723 |
$4,724 |
$2,219 |
None |
None |
$150,000 |
(1)Trustees
fees and expenses are allocated among the Funds and any other series comprising
the Trust.
(2)The
Trust includes other portfolios in addition to the Funds.
(3)Chairman,
Independent Trustee and Audit Committee Chairman
(4)Independent
Trustee
(5)Independent
Trustee and Nominating & Governance Committee Chairman
(6)Independent
Trustee
Control
Persons and Principal Shareholders
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of a Fund. A control person is one who owns
beneficially or through controlled companies more than 25% of the voting
securities of a Fund or acknowledges the existence of control. A controlling
person possesses the ability to control the outcome of matters submitted for
shareholder vote by a Fund. The following tables list the shareholders
considered to be either a control person or a principal shareholder of each
class of each Fund as of March 31, 2024.
|
|
|
|
|
|
|
| |
Managed
Income Fund - Institutional Class |
Name
and Address
|
% Ownership |
Type
of
Ownership(1) |
National
Financial Services LLC 499 Washington Boulevard, 4th Floor Jersey
City, NJ 07310-2010 |
33.57% |
Record |
Charles
Schwab & Co., Inc. Special Custody Account FBO
Customers Attention Mutual Funds 211 Main Street San Francisco,
CA 94105-1901 |
32.55% |
Record |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City, NJ 07339-0002 |
16.60% |
Record |
LPL
Financial FBO Customer Accounts Attention Mutual Fund
Operations 4707 Executive Drive San Diego, California
92121-3091 |
10.89% |
Record |
|
|
|
|
|
|
|
| |
Managed
Income Fund - Class A |
Name
and Address
|
% Ownership |
Type
of
Ownership(1) |
Charles
Schwab & Co., Inc. Special Custody Account FBO
Customers Attention Mutual Funds 211 Main Street San Francisco,
CA 94105-1901 |
55.29% |
Record |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City, NJ 07339-0002 |
19.15% |
Record |
LPL
Financial FBO Customer Accounts Attention Mutual Fund
Operations 4707 Executive Drive San Diego, California
92121-3091 |
12.47% |
Record |
National
Financial Services LLC 499 Washington Boulevard, 4th Floor Jersey
City, NJ 07310-2010 |
7.15% |
Record |
|
|
|
|
|
|
|
| |
Managed
Income Fund - Class C |
Name
and Address
|
% Ownership |
Type
of
Ownership(1) |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City, NJ 07339-0002 |
36.15% |
Record |
National
Financial Services LLC 499 Washington Boulevard, 4th Floor Jersey
City, NJ 07310-2010 |
18.09% |
Record |
Charles
Schwab & Co., Inc. Special Custody Account FBO
Customers Attention Mutual Funds 211 Main Street San Francisco,
CA 94105-1901 |
15.36% |
Record |
LPL
Financial FBO Customer Accounts Attention Mutual Fund
Operations 4707 Executive Drive San Diego, California
92121-3091 |
11.18% |
Record |
|
|
|
|
|
|
|
| |
Dynamic
Growth Fund - Institutional Class |
Name
and Address
|
% Ownership |
Type
of
Ownership(1) |
Charles
Schwab & Co., Inc. Special Custody Account FBO
Customers Attention Mutual Funds 211 Main Street San Francisco,
CA 94105-1901 |
49.67% |
Record |
LPL
Financial FBO Customer Accounts Attention Mutual Fund
Operations 4707 Executive Drive San Diego, California
92121-3091 |
18.68% |
Record |
National
Financial Services LLC 499 Washington Boulevard, 4th Floor Jersey
City, NJ 07310-2010 |
15.36% |
Record |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City, NJ 07339-0002 |
12.80% |
Record |
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|
|
|
|
|
|
| |
Dynamic
Growth Fund - Class A |
Name
and Address
|
% Ownership |
Type
of
Ownership(1) |
Charles
Schwab & Co., Inc. Special Custody Account FBO
Customers Attention Mutual Funds 211 Main Street San Francisco,
CA 94105-1901 |
60.72% |
Record |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City, NJ 07339-0002 |
20.62% |
Record |
LPL
Financial FBO Customer Accounts Attention Mutual Fund
Operations 4707 Executive Drive San Diego, California
92121-3091 |
10.73% |
Record |
National
Financial Services LLC 499 Washington Boulevard, 4th Floor Jersey
City, NJ 07310-2010 |
6.09% |
Record |
|
|
|
|
|
|
|
| |
Dynamic
Growth Fund - Class C |
Name
and Address
|
% Ownership |
Type
of
Ownership(1) |
Axos
Clearing LLC 1200 Landmark Center 1299 Farnam Street, Suite
800 Omaha, NE 68102-1916 |
44.61% |
Record |
National
Financial Services LLC 499 Washington Boulevard, 4th Floor Jersey
City, NJ 07310-2010 |
20.98% |
Record |
LPL
Financial FBO Customer Accounts Attention Mutual Fund
Operations 4707 Executive Drive San Diego, California
92121-3091 |
20.26% |
Record |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City, NJ 07339-0002 |
12.62% |
Record |
|
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|
|
|
|
|
| |
Active
Advantage Fund - Institutional Class |
Name
and Address
|
% Ownership |
Type
of
Ownership(1) |
Charles
Schwab & Co., Inc. Special Custody Account FBO
Customers Attention Mutual Funds 211 Main Street San Francisco,
CA 94105-1901 |
54.31% |
Record |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City, NJ 07339-0002 |
22.74% |
Record |
National
Financial Services LLC 499 Washington Boulevard, 4th Floor Jersey
City, NJ 07310-2010 |
5.88% |
Record |
|
|
|
|
|
|
|
| |
Active
Advantage Fund - Class A |
Name
and Address
|
% Ownership |
Type
of
Ownership(1) |
Axos
Clearing LLC 1200 Landmark Center 1299 Farnam Street, Suite
800 Omaha, NE 68102-1916 |
60.94% |
Record |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City, NJ 07339-0002 |
38.82% |
Record |
|
|
|
|
|
|
|
| |
Active
Advantage Fund - Class C |
Name
and Address
|
% Ownership |
Type
of
Ownership(1) |
Axos
Clearing LLC 1200 Landmark Center 1299 Farnam Street, Suite
800 Omaha, NE 68102-1916 |
94.41% |
Record |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City, NJ 07339-0002 |
5.26% |
Record |
|
|
|
|
|
|
|
| |
Defender
Fund - Institutional Class |
Name
and Address
|
% Ownership |
Type
of
Ownership(1) |
Charles
Schwab & Co., Inc. Special Custody Account FBO
Customers Attention Mutual Funds 211 Main Street San Francisco,
CA 94105-1901 |
58.45% |
Record |
National
Financial Services LLC 499 Washington Boulevard, 4th Floor Jersey
City, NJ 07310-2010 |
39.62% |
Record |
(1)“Record”
ownership means the shareholder of record, or the exact name of the shareholder
on the account (e.g. “ABC Brokerage, Inc.”). “Beneficial” ownership refers to
the actual pecuniary, or financial, interest in the security (e.g. “Jane Doe
Shareholder”).
Investment
Adviser and Sub-Adviser
Investment
Adviser (All Funds)
Investment
advisory services are provided to the Funds by the Adviser, Kensington Asset
Management, LLC, pursuant to an investment advisory agreement (the “Advisory
Agreement”).
Pursuant
to the Advisory Agreement, the Adviser provides the Funds with investment
research and advice and furnishes the Funds with an investment program
consistent with the Funds’ investment objective and policies, subject to the
supervision of the Board. The Adviser determines which portfolio securities will
be purchased or sold, arranges for the placing of orders for the purchase or
sale of portfolio securities, selects brokers or dealers to place those orders,
maintains books and records with respect to the securities transactions and
reports to the Board on the Funds’ investments and performance. The Adviser is
solely responsible for making investment decisions on behalf of the Funds, but
under the Advisory Agreement may delegate certain of its responsibilities to a
sub-adviser and is thereby responsible for the oversight of such sub-adviser.
The Board will have sole responsibility for selecting, evaluating the
performance of, and replacing as necessary any of the service providers to the
Funds, including the Adviser.
After
an initial two-year period, the Advisory Agreement will continue in effect from
year to year, only if such continuance is specifically approved at least
annually by: (i) the Board or the vote of a majority of the outstanding voting
securities of the Funds; and (ii) the vote of a majority of the Independent
Trustees, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement is terminable without penalty by the Trust, on
behalf of a Fund, upon 60 days’ written notice to the Adviser, when authorized
by either: (i) a majority vote of each Fund’s shareholders (with respect to such
Fund); or (ii) by a vote of a majority of the Board or by the Adviser upon 60
days’ written notice to the Trust. The Advisory Agreement will automatically
terminate in the event of its “assignment,” as defined under the 1940 Act. The
Advisory Agreement provides that the Adviser under such agreement shall not be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution of portfolio
transactions for the Funds, except for willful misfeasance, bad faith or
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties thereunder.
In
consideration of the services provided by the Adviser pursuant to the Advisory
Agreement, the Adviser is entitled to receive from the Funds a management fee
computed daily and paid monthly, based on a percentage of each Fund’s average
annual net assets, as specified in the Prospectus. However, the Adviser may
voluntarily agree to reduce the management fees payable to it on a
month-to-month basis, including additional fees above and beyond any contractual
agreement the Adviser may have to reduce management fees and/or reimburse Fund
expenses.
The
Adviser also serves as the investment adviser to the Kensington Defender
Offshore Fund, a wholly-owned and controlled subsidiary of the Defender Fund
(the “Subsidiary”). The Adviser does not receive additional compensation for its
management of the Subsidiary.
Fund
Expenses. The
Funds are responsible for their own operating expenses. Pursuant to an Operating
Expenses Limitation Agreement between the Adviser and the Trust, on behalf of
the Funds, the Adviser has agreed to waive its management fees and pay the
Funds’ expenses, as specified in the Prospectus. Fees waived and expenses paid
by the Adviser may be recouped by the Adviser for a period of 36 months
following the month during which such fee waiver and expense payment occurred,
and the expense limit in effect at the time of recoupment. The Operating
Expenses Limitation Agreement is indefinite in term, but cannot be terminated
through at least April 30, 2025 for each Fund. Thereafter, the agreement may be
terminated at any time upon 60 days’ written notice by the Trust’s Board or the
Adviser.
The
following table sets forth the total advisory fees paid by each Fund for the
fiscal years ended December 31:
Managed
Income Fund
|
|
|
|
|
|
|
| |
| 2023 |
2022(1) |
Advisory
Fees Accrued |
$11,473,466 |
$6,476,925 |
Advisory
Fees Waived |
$(214,930) |
$(187,525) |
Advisory
Fees Recouped |
$0 |
$390 |
Total
Advisory Fees Paid to Adviser |
$11,258,536 |
$6,289,790 |
(1)For
the period of the date of the Reorganization as of the close of business June
24, 2022 through December 31, 2022.
Dynamic
Growth Fund
|
|
|
|
|
|
|
| |
| 2023 |
2022(1) |
Advisory
Fees Accrued |
$13,113,598 |
$5,563,377 |
Advisory
Fees Waived |
$(1,621) |
$(140,372) |
Advisory
Fees Recouped |
$139,052 |
$0 |
Total
Advisory Fees Paid to Adviser |
$13,251,029 |
$5,423,005 |
(1)For
the period of the date of the Reorganization as of the close of business June
24, 2022 through December 31, 2022.
Active
Advantage Fund
|
|
|
|
|
|
|
| |
| 2023 |
2022(1) |
Advisory
Fees Accrued |
$187,751 |
$83,940 |
Advisory
Fees Waived |
$(187,751) |
$(83,940) |
Advisory
Fees Recouped |
$0 |
$0 |
Total
Advisory Fees Paid to Adviser |
$0 |
$0 |
(1)Active
Advantage Fund commenced operations on March 23, 2022.
Defender
Fund
|
|
|
|
| |
|
2023(1) |
Advisory
Fees Accrued |
$136,405 |
Advisory
Fees Waived |
$(83,562) |
Advisory
Fees Recouped |
$4,332 |
Total
Advisory Fees Paid to Adviser |
$57,175 |
(1)Defender
Fund commenced operations on May 31, 2023.
The
total advisory fees paid by each Predecessor Fund prior to the Reorganization
during the fiscal periods ended December 31 are set forth in the following
tables. These amounts were paid to Advisors Preferred, LLC, investment adviser
to the Predecessor Funds. The Adviser to the Funds, Kensington Asset Management,
LLC, served as investment sub-adviser to the Predecessor Funds and was
compensated for these services by Advisors Preferred, LLC and not the
Predecessor Funds.
Managed
Income Predecessor Fund (1)
|
|
|
|
|
|
|
|
|
|
| |
|
2022(1) |
2021 |
2020 |
Advisory
Fees Accrued |
$5,245,989 |
$7,419,009 |
$2,019,495 |
Advisory
Fees Waived |
$— |
$— |
$— |
Advisory
Fees Recouped |
$— |
$— |
$32,842 |
Total
Advisory Fees Paid to Adviser |
$5,245,989 |
$7,419,009 |
$2,052,337 |
(1)For
the period of January 1, 2022 through the date of the Reorganization as of the
close of business June 24, 2022.
Dynamic
Growth Predecessor Fund (1)
|
|
|
|
|
|
|
|
|
|
| |
|
2022(2) |
2021 |
2020 |
Advisory
Fees Accrued |
$3,065,483 |
$2,828,517 |
$94,499 |
Advisory
Fees Waived |
$— |
$— |
$(35,854) |
Advisory
Fees Recouped |
$— |
$35,854 |
$— |
Total
Advisory Fees Paid to Adviser |
$5,245,989 |
$2,864,371 |
$58,645 |
(1)Dynamic
Growth Predecessor Fund commenced operations on October 23, 2020.
(2)For
the period of January 1, 2022 through the date of the Reorganization as of the
close of business June 24, 2022.
Sub-Adviser
(Defender Fund)
The
Adviser has engaged Liquid Strategies, LLC to serve as sub-adviser to the
Defender Fund. Liquid Strategies, LLC, subject to the supervision of the
Adviser, is responsible for the day-to-day management of the portion of the
Defender Fund’s portfolio allocated to it by the Adviser, including the
purchase,
retention,
and sale of securities. Liquid Strategies, LLC is a Delaware limited liability
company located at 3550 Lenox Road, Suite 2550, Atlanta, Georgia 30326. Liquid
Strategies, LLC is an SEC-registered investment adviser.
For
the period of May 31, 2023 to December 31, 2023, the Sub-Adviser was paid
$43,840.04 in sub-advisory fees.
The
Sub-Adviser also serves as the sub-adviser to the Subsidiary. The Sub-Adviser
does not receive additional compensation for its management of the
Subsidiary.
Portfolio
Managers
As
disclosed in the Prospectus, Bruce P. DeLaurentis, Patrick Sommerstad, Jason
Sim, and Jordan Flebotte are the portfolio managers to the Managed Income Fund,
Dynamic Growth Fund, and Active Advantage Fund, and Elio Chiarelli, Ph.D., Shawn
Gibson, and Adam Stewart, CFA are the portfolio managers of the Defender Fund
(each a “Portfolio Manager” and together the “Portfolio Managers”).
The
following table provides information regarding other accounts, excluding the
Funds, managed by the Portfolio Manager as of December 31,
2023:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Portfolio
Manager |
Account
Category |
Number
of Accounts |
Total
Assets in the Accounts |
#
of Accounts Paying a Performance Fee |
Total
Assets of Accounts Paying a Performance Fee |
Bruce
P. DeLaurentis |
Registered
investment companies |
0 |
$0 |
0 |
$0 |
Other
pooled investment vehicles |
0 |
$0 |
0 |
$0 |
Other
Accounts |
0 |
$0 |
0 |
$0 |
Patrick
Sommerstad |
Registered
investment companies |
0 |
$0 |
0 |
$0 |
Other
pooled investment vehicles |
0 |
$0 |
0 |
$0 |
Other
Accounts |
0 |
$0 |
0 |
$0 |
Jason
Sim |
Registered
investment companies |
0 |
$0 |
0 |
$0 |
Other
pooled investment vehicles |
0 |
$0 |
0 |
$0 |
Other
Accounts |
0 |
$0 |
0 |
$0 |
Jordan
Flebotte |
Registered
investment companies |
0 |
$0 |
0 |
$0 |
Other
pooled investment vehicles |
0 |
$0 |
0 |
$0 |
Other
Accounts |
0 |
$0 |
0 |
$0 |
Elio
Chiarelli, Ph.D |
Registered
investment companies |
0 |
$0 |
0 |
$0 |
Other
pooled investment vehicles |
0 |
$0 |
0 |
$0 |
Other
Accounts |
261 |
$53,661,200 |
0 |
$0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Portfolio
Manager |
Account
Category |
Number
of Accounts |
Total
Assets in the Accounts |
#
of Accounts Paying a Performance Fee |
Total
Assets of Accounts Paying a Performance Fee |
Shawn
Gibson |
Registered
investment companies |
7 |
$400,000,000 |
0 |
$0 |
Other
pooled investment vehicles |
0 |
$0 |
0 |
$0 |
Other
Accounts |
1 |
$98,000,000 |
0 |
$0 |
Adam
Stewart |
Registered
investment companies |
7 |
$400,000,000 |
0 |
$0 |
Other
pooled investment vehicles |
0 |
$0 |
0 |
$0 |
Other
Accounts |
1 |
$98,000,000 |
0 |
$0 |
The
Portfolio Managers’ management of “other accounts” may give rise to conflicts of
interest in connection with the management of a Fund’s investments, on the one
hand, and the investments of the other accounts, on the other. The other
accounts may have the same investment objective as the Funds. Therefore, a
potential conflict of interest may arise as a result of the identical investment
objectives, whereby the Portfolio Manager could favor one account over another.
Another potential conflict could include a Portfolio Manager’s knowledge about
the size, timing and possible market impact of Fund trades, whereby a Portfolio
Manager could use this information to the advantage of other accounts and to the
disadvantage of the Funds. However, the Adviser and Sub-Adviser have each
established policies and procedures to ensure that the purchase and sale of
securities among all accounts it manages are fairly and equitably
allocated.
Compensation
(Managed Income Fund, Dynamic Growth Fund, and Active Advantage
Fund)
The
compensation for Mr. DeLaurentis is based on the net income generated by the
Adviser and his relative ownership interest in the Adviser. The other Portfolio
Managers’ compensation includes a share of the advisory fee received by the
Adviser, and a portion of such compensation will be determined based on a Fund’s
Morningstar quartile ranking at each quarter end, with higher rankings resulting
in larger compensation amounts. Each Portfolio Manager is also entitled to
participate in the Adviser’s 401(k) retirement plan which is offered to all
employees of the Adviser.
Compensation
(Defender Fund)
The
Portfolio Managers of the Defender Fund will receive a blend of fixed salary,
discretionary bonus, and distributions from the Sub-Adviser to the extent the
portfolio manager has equity ownership in the Sub-Adviser. The Portfolio
Managers’ compensation is not directly based on the performance or assets of the
Defender Fund. Each Portfolio Manager of the Defender Fund is also entitled to
participate in the Sub-Adviser’s 401(k) retirement plan which is offered to all
employees of the Sub-Adviser.
The
following table indicates the dollar range of Fund shares beneficially owned by
each Portfolio Manager as of December 31, 2023.
|
|
|
|
|
|
|
| |
Portfolio
Manager |
Fund |
Dollar
Range of Shares Beneficially Owned (None, $1-$10,000; $10,001-$50,000;
$50,001-$100,000; $100,001 - $500,000; $500,001-$1,000,000; Over
$1,000,000) |
Bruce
P. DeLaurentis |
Managed
Income Fund |
$100,001
- $500,000 |
Dynamic
Growth Fund |
$50,001
- $100,000 |
Active
Advantage Fund |
None |
Patrick
Sommerstad |
Managed
Income Fund |
$10,001
- $50,000 |
Dynamic
Growth Fund |
$10,001
- $50,000 |
Active
Advantage Fund |
$10,001
- $50,000 |
Jason
Sim |
Managed
Income Fund |
$1
- $10,000 |
Dynamic
Growth Fund |
$1
- $10,000 |
Active
Advantage Fund |
$10,001
- $50,000 |
Jordan
Flebotte |
Managed
Income Fund |
None |
Dynamic
Growth Fund |
$50,001
- $100,000 |
Active
Advantage Fund |
$10,001
- $50,000 |
Elio
Chiarelli |
Defender
Fund |
$100,001
- $500,000 |
Shawn
Gibson |
Defender
Fund |
None |
Adam
Stewart |
Defender
Fund |
None |
Service
Providers
U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services
(“Fund Services”), located 615 East Michigan Street, Milwaukee, Wisconsin,
53202, acts as the Administrator, Fund Accountant and Transfer Agent for the
Funds. Pursuant to a Fund Servicing Agreement between the Trust and Fund
Services, Fund Services provides certain administrative services to the Funds,
including, among other responsibilities, portfolio accounting services, tax
accounting services and furnishing financial reports, coordinating the
negotiation of contracts and fees with, and the monitoring of performance and
billing of, the Fund's independent contractors and agents; preparation for
signature by an officer of the Trust of all documents required to be filed for
compliance by the Trust and the Fund with applicable laws and regulations;
arranging for the computation of performance data, including NAV per share and
yield; responding to shareholder inquiries; and arranging for the maintenance of
books and records of the Fund, and providing, at its own expense, office
facilities, equipment and personnel necessary to carry out its duties. In this
capacity, Fund Services does not have any responsibility or authority for the
management of the Funds, the determination of investment policy, or any matter
pertaining to the distribution of Fund shares. Pursuant to the Fund Servicing
Agreement, for its services, Fund Services receives from the Funds a fee
computed daily and payable monthly based on the Funds’ average daily net assets,
subject to an annual minimum fee.
The
following table shows the amount each Fund paid in administration and accounting
fees to Fund Services for the fiscal years ended December 31:
|
|
|
|
|
|
|
| |
| 2023 |
2022 |
Managed
Income Fund |
$378,556 |
$227,249(1) |
Dynamic
Growth Fund |
$431,507 |
$194,345(1) |
Active
Advantage Fund |
$16,427 |
$30,655(2) |
Defender
Fund(3) |
$14,351 |
N/A |
(1)For
the period of the date of the Reorganization as of the close of business June
24, 2022 through December 31, 2022.
(2)Active
Advantage Fund commenced operations on March 23, 2022.
(3)Defender
Fund commenced operations on May 31, 2023.
Prior
to the Reorganization, each Predecessor Fund paid administration fees, fund
accounting fees and transfer agent fees to Gemini Fund Services, LLC during the
fiscal periods ended December 31, as follows:
|
|
|
|
|
|
|
|
|
|
| |
|
2022(1) |
2021 |
2020 |
Managed
Income Predecessor Fund |
$350,152 |
$616,061 |
$252,051 |
Dynamic
Growth Predecessor Fund (2) |
$220,733 |
$260,756 |
$27,860 |
(1)For
the period of January 1, 2022 through the date of the Reorganization as of the
close of business June 24, 2022.
(2)Dynamic
Growth Predecessor Fund commenced operations on October 23, 2020.
Ultimus
Fund Solutions, LLC succeeded Gemini Fund Services, LLC on November 18,
2021.
Pursuant
to a custody agreement between the Trust and the Funds, U.S. Bank N.A., an
affiliate of Fund Services, serves as the custodian of the Funds’ assets (the
“Custodian”). For its services, the Custodian receives a monthly fee based on a
percentage of the Funds’ assets, in addition to certain transaction-based fees,
and is reimbursed for out-of-pocket expenses. The Custodian’s address is 1555
North RiverCenter Drive, Suite 302, Milwaukee, Wisconsin, 53212. The Custodian
holds the securities in the Funds’ portfolios and other assets for safekeeping.
The Custodian does not participate in decisions relating to the purchase and
sale of securities by the Funds. U.S. Bank and its affiliates may participate in
revenue sharing arrangements with service providers of mutual funds in which the
Funds may invest. The Custodian also serves as custodian for the Subsidiary
pursuant to a separate agreement.
Legal
Counsel
Stradley
Ronon Stevens & Young, LLP, 2005 Market Street, Suite 2600, Philadelphia,
Pennsylvania 19103, serves as counsel to the Trust and as independent legal
counsel to the Board.
Independent
Registered Public Accounting Firm
Cohen
& Company, Ltd., 342 North Water Street, Suite 830, Milwaukee, Wisconsin
53202, serves as the independent registered public accounting firm for the
Funds. Its services include auditing the Funds’ financial statements and
performing related tax services.
Distribution
of Fund Shares
The
Trust has entered into a distribution agreement (the “Distribution Agreement”)
with Quasar Distributors, LLC (the “Distributor”), 3 Canal Plaza, Suite 100,
Portland, Maine 04101, pursuant to which the Distributor acts as the Funds’
principal underwriter, provides certain administrative services, and promotes
and arranges for the sale of the Funds’ shares on a best efforts basis. The
offering of the Funds’ shares is continuous. The Distributor is a registered
broker-dealer and member of the Financial Industry Regulatory Authority, Inc.
(“FINRA”).
The
Distribution Agreement has an initial term of up to two years and will continue
in effect only if such continuance is specifically approved at least annually by
the Board or by vote of a majority of the Funds’ outstanding voting securities
and, in either case, by a majority of the Independent Trustees. The Distribution
Agreement is terminable without penalty by the Trust, on behalf of the Funds, on
60 days’ written notice when authorized either by a majority vote of a
Fund’s shareholders or by vote of a majority of the Board, including a majority
of the Trustees who are not “interested persons” (as defined under the
1940 Act) of the Trust, or by the Distributor on 60 days’ written
notice, and will automatically terminate in the event of its “assignment,” as
defined in the 1940 Act.
The
following tables show the total amount of underwriting commissions associated
with the sale of each Fund’s Class A Shares, as applicable, during the fiscal
periods ended December 31:
|
|
|
|
|
|
|
| |
Managed
Income Fund |
2023 |
2022(1) |
Total
Underwriting Commission |
$22,235 |
$41,551 |
Underwriting
Commission Retained by the Distributor |
$3,158 |
$5,794 |
(1)For
the period of the Fund’s Reorganization as of the close of business on June 24,
2022 through December 31, 2022.
|
|
|
|
|
|
|
| |
Dynamic
Growth Fund |
2023 |
2022(1) |
Total
Underwriting Commission |
$272,138 |
$83,108 |
Underwriting
Commission Retained by the Distributor |
$40,519 |
$12,017 |
(1)For
the period of the Fund’s Reorganization as of the close of business on June 24,
2022 through December 31, 2022.
|
|
|
|
|
|
|
| |
Active
Advantage Fund |
2023 |
2022(1) |
Total
Underwriting Commission |
$22,475 |
$5 |
Underwriting
Commission Retained by the Distributor |
$3,165 |
$1 |
(1)For
the period of the Fund’s commencement of operations on March 23, 2022 through
December 31, 2022.
Distribution
(Rule 12b-1) Plan
The
Funds have adopted a distribution plan for Class A shares and Class C shares
pursuant to Rule 12b-1 under the 1940 Act (the “12b-1 Plan”). Under the 12b-1
Plan, each Fund, as applicable, pays a fee to the Distributor for distribution
and/or shareholder services (the “Distribution and Servicing Fee”) at an annual
rate of 0.25% of the Fund’s average daily net assets of the Fund’s Class A
shares and 1.00% of the Fund’s average daily net assets of the Fund’s Class C
shares. The 12b-1 Plan provides that the Distributor may use all or any portion
of a Fund’s Distribution and Servicing Fee to finance any activity that is
principally intended to result in the sale of a Fund’s shares, subject to the
terms of the 12b-1 Plan, or to provide certain shareholder services. The 12b-1
Plan is intended to benefit each Fund by increasing its assets and thereby
reducing the Fund’s expense ratio.
The
Distribution and Servicing Fee is payable to the Distributor regardless of the
distribution-related expenses actually incurred. Because the Distribution and
Servicing Fee is not directly tied to expenses, the amount of distribution fees
paid by Class A and/or Class C shares during any year may be more or less than
actual expenses incurred pursuant to the 12b-1 Plan. For this reason, this type
of distribution fee arrangement is characterized by the staff of the SEC as a
“compensation” plan.
The
Distributor may use the Distribution and Servicing Fee to pay for services
covered by the 12b-1 Plan including, but not limited to, advertising;
compensating underwriters, dealers and selling personnel engaged in the
distribution of Fund shares; the printing and mailing of prospectuses,
statements of additional information, and reports; the printing and mailing of
sales literature pertaining to the Funds; and obtaining whatever information,
analyses, and reports with respect to marketing and promotional activities that
a Fund may, from time to time, deem advisable.
The
12b-1 Plan provides that it will continue from year to year upon approval by the
majority vote of the Board, including a majority of the Independent Trustees
cast in person at a meeting called for that purpose, provided that such trustees
have made a determination that there is a reasonable likelihood that the 12b-1
Plan will benefit each Fund and its shareholders. It is also required that the
Independent Trustees, select and nominate all other trustees who are not
“interested persons” of the Funds. The 12b-1 Plan and any related agreements may
not be amended to materially increase the amounts to be spent for distribution
expenses without approval of shareholders holding a majority of a Fund’s shares
outstanding. All material amendments to the 12b-1 Plan or any related agreements
must be approved by a vote of a majority of the Board and the Independent
Trustees, cast in person at a meeting called for the purpose of voting on any
such amendment.
The
12b-1 Plan requires that the Distributor provide to the Board, at least
quarterly, a written report on the amounts and purpose of any payment made under
the 12b-1 Plan. The Distributor is also required to furnish the Board with such
other information as may reasonably be requested in order to enable the Board to
make an informed determination of whether the 12b-1 Plan should be continued.
As
noted above, the 12b-1 Plan provides for the ability to use Fund assets to pay
financial intermediaries (including those that sponsor mutual fund supermarkets
(as discussed below) and affiliates of the Adviser), plan administrators, and
other service providers to finance any activity that is principally intended to
result in the sale of Fund shares (distribution services) and for the provision
of personal services to shareholders. The payments made by a Fund to financial
intermediaries are based primarily on the dollar amount of assets invested in
the Fund through the financial intermediaries. These financial intermediaries
may pay a portion of the payments that they receive from the Fund to their
investment professionals. In addition to the ongoing asset-based fees paid to
these financial intermediaries under the 12b-1 Plan, a Fund may, from time to
time, make payments under the 12b-1 Plan that help defray the expenses incurred
by these intermediaries for conducting training and educational meetings about
various aspects of the Fund for their employees. In addition, a Fund may make
payments under the 12b-1 Plan for exhibition space and otherwise help defray the
expenses these financial intermediaries incur in hosting client seminars where
the Funds are discussed.
In
addition, a Fund may participate in various “mutual fund supermarkets” in which
a mutual fund supermarket sponsor (usually a broker-dealer) offers many mutual
funds to the sponsor’s customers without charging the customers a sales charge.
In connection with its participation in such platforms, the Distributor may use
all or a portion of the Distribution and Servicing Fee to pay one or more
supermarket sponsors a negotiated fee for distributing the Fund’s shares. In
addition, in its discretion, the Adviser may pay additional fees to such
intermediaries from its own assets.
The
table below shows the allocation of distribution
(12b-1) fees
paid by each Fund during the fiscal year ended December 31,
2023.
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Managed
Income Fund |
Dynamic
Growth Fund |
Active
Advantage Fund |
Defender
Fund |
Advertising/Marketing |
— |
— |
— |
N/A |
Printing/Postage |
— |
— |
— |
N/A |
Payment
to distributor |
$29,367 |
$47,988 |
$3,313 |
N/A |
Payment
to dealers |
$203,361 |
$237,074 |
$1,173 |
N/A |
Compensation
to sales personnel |
— |
— |
— |
N/A |
Other |
— |
— |
— |
N/A |
Total |
$232,728 |
$285,062 |
$4,486 |
N/A |
Portfolio
Transactions and Brokerage
The
Adviser and the Sub-Adviser are referred collectively herein this section as the
“Adviser.”
The
Adviser determines which securities are to be purchased and sold by the Funds
and which broker-dealers are eligible to execute the Funds’ portfolio
transactions. Purchases and sales of securities on an exchange are effected
through brokers that charge a commission while purchases and sales of securities
in the OTC market will generally be executed directly with the primary
“market-maker” unless, in the opinion of the Adviser, a better price and
execution can otherwise be obtained by using a broker for the transaction.
Purchases and sales of portfolio securities that are fixed income securities
(for instance, money market instruments and bonds, notes and bills) usually are
principal transactions. In a principal transaction, the party from whom a Fund
purchases or to whom a Fund sells is acting on its own behalf (and not as the
agent of some other party, such as its customers). These securities normally are
purchased directly from the issuer or from an underwriter or market maker for
the securities. The price of securities purchased from underwriters includes a
disclosed fixed commission or concession paid by the issuer to the underwriter,
and prices of securities purchased from dealers serving as market makers
reflects the spread between the bid and asked price. The price of OTC securities
usually includes an undisclosed commission or markup.
Purchases
of portfolio securities for a Fund will be effected through broker-dealers
(including banks) that specialize in the types of securities that a Fund will be
holding, unless better executions are available elsewhere. Dealers usually act
as principal for their own accounts. Purchases from dealers will include a
spread between the bid and the asked price. If the execution and price offered
by more than one dealer are comparable, the order may be allocated to a dealer
that has provided research or other services as discussed below.
In
placing portfolio transactions, the Adviser will use reasonable efforts to
choose broker-dealers capable of providing the services necessary to obtain the
most favorable price and execution available. The full range and quality of
services, such as the size of the order, the difficulty of execution, the
operational facilities of the firm involved, the firm’s risk in positioning a
block of securities, and other factors available, will be considered in making
these determinations. In those instances where it is reasonably determined that
more than one broker-dealer can offer the services needed to obtain the most
favorable price and execution available, consideration may be given to those
broker-dealers that furnish or supply research and statistical information to
the Adviser that it may lawfully and appropriately use in its
investment
advisory capacities, as well as provide other brokerage services incidental to
execution services. Research and statistical information may include reports
that are common in the industry such as industry research reports and
periodicals, quotation systems, software for portfolio management and formal
databases. Typically, the research will be used to service all of the Adviser’s
accounts, although a particular client may not benefit from all the research
received on each occasion. The Adviser considers research information, which is
in addition to and not in lieu of the services required to be performed by it
under its Advisory Agreement with the Funds, to be useful in varying degrees,
but of indeterminable value.
While
it is the Adviser’s general policy to first seek to obtain the most favorable
price and execution available in selecting a broker-dealer to execute portfolio
transactions for a Fund, weight may also be given to the ability of a
broker-dealer to furnish brokerage and research services to the Funds or to the
Adviser, even if the specific services are not directly useful to the Funds and
may be useful to the Adviser in advising other clients. In negotiating
commissions with a broker or evaluating the spread to be paid to a dealer, a
Fund may therefore pay a higher commission or spread than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission or spread has been determined in good faith
by the Adviser to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker-dealer. The standard of reasonableness
is to be measured in light of the Adviser’s overall responsibilities to the
Funds.
Investment
decisions for the Funds are made independently from those of other client
accounts of the Adviser and its affiliates. Nevertheless, it is often the case
that identical securities will be acceptable for both the Funds and one or more
of such other client accounts. In such event, the position of a Fund and such
other client account(s) in the same issuer may vary and the length of time that
each may choose to hold its investment in the same issuer may likewise vary.
However, to the extent any of these client accounts seek to acquire the same
security as a Fund at the same time, a Fund may not be able to acquire as large
a portion of such security as it desires, or it may have to pay a higher price
or obtain a lower yield for such security. Similarly, a Fund may not be able to
obtain as high a price for, or as large an execution of, an order to sell any
particular security at the same time. If one or more of such client accounts
simultaneously purchases or sells the same security that a Fund is purchasing or
selling, each day’s transactions in such security will be allocated between a
Fund and all such client accounts in a manner deemed equitable by the Adviser,
taking into account the respective sizes of the accounts and the amount being
purchased or sold. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as the Funds
are concerned. In other cases, however, it is believed that the ability of a
Fund to participate in volume transactions may produce better executions for the
Funds. Notwithstanding the above, the Adviser may execute buy and sell orders
for accounts and take action in performance of its duties with respect to any of
its accounts that may differ from actions taken with respect to another account,
so long as the Adviser shall, to the extent practical, allocate investment
opportunities to accounts, including the Funds, over a period of time on a fair
and equitable basis and in accordance with applicable law.
Portfolio
transactions may be placed with broker-dealers who sell shares of the Funds
subject to rules adopted by FINRA and the SEC. Portfolio transactions may also
be placed with broker-dealers in which the Adviser has invested on behalf of the
Funds and/or client accounts.
The
following table sets forth the amount of brokerage commissions paid by each Fund
during the fiscal periods ended December 31:
|
|
|
|
|
|
|
| |
| 2023 |
2022 |
Managed
Income Fund |
$455,652(3) |
$210,840(1) |
Dynamic
Growth Fund |
$206,173(4) |
$67,874(1) |
Active
Advantage Fund |
$2,776 |
$3,331(2) |
Defender
Fund (5) |
$26,264 |
N/A |
(1)For
the period of the date of the Reorganization as of the close of business June
24, 2022 through December 31, 2022.
(2)Active
Advantage Fund commenced operations on March 23, 2022.
(3)Managed
Income Fund’s brokerage commissions increased in 2023 as a result of
increased
trading in 2023 compared to the previous year, resulting in larger net
commissions.
(4)Dynamic
Growth Fund’s brokerage commissions increased in 2023 as a result of
increased
trading in 2023 compared to the previous year, resulting in larger net
commissions.
(5)Defender
Fund commenced operations on May 31, 2023.
The
following table sets forth the amount of brokerage commissions paid by each
Predecessor Fund prior to the Reorganization during the indicated fiscal periods
ended December 31:
|
|
|
|
|
|
|
|
|
|
| |
|
2022(1) |
2021 |
2020 |
Managed
Income Predecessor Fund |
$107,700 |
$58,700 |
$6,632 |
Dynamic
Growth Predecessor Fund
(2) |
$164,481 |
$28,541 |
$20,731 |
(1)For
the period of January 1, 2022 through the date of the Reorganization as of the
close of business June 24, 2022.
(2)Dynamic
Growth Predecessor Fund commenced operations on October 23, 2020.
The
increase in brokerage commissions in 2021 for the Managed Income Predecessor
Fund was as a result of the Fund’s increase in asset size in 2021.
Portfolio
Turnover
A
Fund may sell a portfolio investment soon after its acquisition if the Adviser
believes that such a disposition is consistent with attaining the investment
objective of the Fund. A Fund’s investments may be sold for a variety of
reasons, such as a more favorable investment opportunity or other circumstances
bearing on the desirability of continuing to hold such investments. A high rate
of portfolio turnover (over 100%) may involve correspondingly greater
transaction costs, which must be borne directly by the Fund and ultimately by
its shareholders. High portfolio turnover may result in the realization of
substantial net capital gains. To the extent short-term capital gains are
realized, distributions attributable to such gains will be ordinary income for
federal income tax purposes.
Each
Fund’s portfolio turnover rate for the fiscal periods ended December 31, was as
follows:
|
|
|
|
|
|
|
| |
| 2023 |
2022 |
Managed
Income Fund |
600%(4) |
1,244%(1) |
Dynamic
Growth Fund |
1,100% |
1,127%(2) |
Active
Advantage Fund |
944%(4) |
1,515%(3) |
Defender
Fund |
182%(5) |
N/A |
(1)Managed
Income Predecessor Fund reorganized into the Managed Income Fund as of the close
of business on June 24, 2022.
(2)Dynamic
Growth Predecessor Fund reorganized into the Managed Income Fund as of the close
of business on June 24, 2022.
(3)Active
Advantage Fund commenced operations on March 23, 2022.
(4)Portfolio
turnover decreased in 2023 due to a decline in assets under management compared
to 2022.
(5)Defender
Fund commenced operations on May 31, 2023.
Code
of Ethics
The
Trust, the Adviser, and the Sub-Adviser have each adopted Codes of Ethics under
Rule 17j-1 of the 1940 Act. These codes permit, subject to certain conditions,
personnel of the Trust and Adviser to invest in securities that may be purchased
or held by a Fund.
Proxy
Voting Procedures
The
Board has adopted proxy voting policies and procedures (“Proxy Policies”)
wherein the Trust has delegated to the Adviser the responsibility for voting
proxies relating to portfolio securities held by the Funds as part of the
Adviser’s investment advisory services, subject to the supervision and oversight
of the Board. Notwithstanding this delegation of responsibilities, however, the
Funds retain the right to vote proxies relating to its portfolio securities. The
fundamental purpose of the Proxy Policies is to ensure that each vote will be in
a manner that reflects the best interest of the Funds and their shareholders,
taking into account the value of the Funds’ investments.
The
Adviser’s Proxy Voting Policies and Procedures
The
guiding principle by which the Adviser votes on all matters submitted to
security holders is the maximization of the ultimate economic value of its
clients’ holdings. The Adviser does not permit voting decisions to be influenced
in any manner that is contrary to, or dilutive of, the guiding principle set
forth above. It is the Adviser’s policy to avoid situations where there is any
conflict of interest or perceived conflict of interest affecting voting
decisions. Any conflicts of interest, regardless of whether actual or perceived,
will be addressed in accordance with these policies and procedures.
It
is the general policy of Adviser to vote on all matters presented to security
holders in any proxy, and these policies and procedures have been designed with
that in mind. However, the Adviser reserves the right to abstain on any
particular vote or otherwise withhold its vote on any matter if in the judgment
of the Adviser, the costs associated with voting such proxy outweigh the
benefits to clients or if the circumstances make such an abstention or
withholding otherwise advisable and in the best interest of the clients, in the
judgment of the Adviser. Each vote is cast on a case-by-case basis, taking into
consideration
the
Adviser’s contractual obligations to its clients and all other relevant facts
and circumstances at the time of the vote. The Adviser may vote proxies related
to the same security differently for each client.
For
clients that have delegated to the Adviser the discretionary power to vote the
securities held in their account, the Adviser does not generally accept any
subsequent directions on specific matters presented to security holders or
particular securities held in the account, regardless of whether such subsequent
directions are from the client itself or a third party. The Adviser views the
delegation of discretionary voting authority as an absolute choice for its
clients. The Adviser’s clients shall be responsible for notifying their
custodians of the name and address of the person or entity with voting
authority.
Where
the Adviser acts as investment adviser to a closed-end and/or open-end
registered investment company and is responsible for voting their proxies, such
proxies will be voted in accordance with any applicable investment restrictions
of the fund and, to the extent applicable, any proxy voting procedures or
resolutions or other instructions approved by an authorized person of the
fund.
Absent
any legal or regulatory requirement to the contrary, it is generally the policy
of the Adviser to maintain the confidentiality of the votes that it casts on
behalf of its clients. Any registered investment companies managed by the
Adviser disclose the votes cast on their behalf in accordance with all legal and
regulatory requirements. Any client of the Adviser can obtain details of how the
Adviser has voted the securities in its account by contacting the Adviser. The
Adviser does not, however, generally disclose the results of voting decisions to
third parties.
The
actual voting records relating to portfolio securities during the most recent
12-month period ended June 30 are available without charge, upon request, by
calling toll-free, 866-303-8623, or by accessing the SEC’s website at
www.sec.gov.
Anti-Money
Laundering Compliance Program
The
Trust has established an Anti-Money Laundering Compliance Program (the
“Program”) as required by the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA
PATRIOT Act”). To ensure compliance with this law, the Trust’s Program provides
for the development of internal practices, procedures and controls, designation
of anti-money laundering compliance officers, an ongoing training program and an
independent audit function to determine the effectiveness of the Program. Ms.
Deborah Ward has been designated as the Trust’s Anti-Money Laundering Compliance
Officer.
Procedures
to implement the Program include, but are not limited to: determining that the
Distributor and the Transfer Agent have established proper anti-money laundering
procedures; reporting suspicious and/or fraudulent activity checking shareholder
names against designated government lists, including Office of Foreign Asset
Control (“OFAC”), and a complete and thorough review of all new opening account
applications. The Funds will not transact business with any person or legal
entity whose identity and beneficial owners, if applicable, cannot be adequately
verified under the provisions of the USA PATRIOT Act.
As
a result of the Program, a Fund may be required to “freeze” the account of a
shareholder if the shareholder appears to be involved in suspicious activity or
if certain account information matches information on government lists of known
terrorists or other suspicious persons, or the Fund may be required to transfer
the account or proceeds of the account to a governmental agency.
Portfolio
Holdings Information
The
Trust, on behalf of the Funds, has adopted portfolio holdings disclosure
policies (“Portfolio Holdings Policies”) that govern the timing and
circumstances of disclosure of portfolio holdings of the Funds. Information
about a Fund’s portfolio holdings will not be distributed to any third party
except in accordance with these Portfolio Holdings Policies. The Board has
considered the circumstances under which a Fund’s portfolio holdings may be
disclosed under the Portfolio Holdings Policies. The Board has also considered
actual and potential material conflicts that could arise in such circumstances
between the interests of a Fund’s shareholders and the interests of the Adviser,
Distributor or any other affiliated person of the Funds. After due
consideration, the Board has determined that the Funds have a legitimate
business purpose for disclosing portfolio holdings to persons described in the
Portfolio Holdings Policies. The Board also has authorized its CCO to consider
and authorize dissemination of portfolio holdings information to additional
parties, after considering the best interests of the Funds’ shareholders and
potential conflicts of interest in making such disclosures.
The
Board exercises continuing oversight of the disclosure of the Funds’ portfolio
holdings by (1) overseeing the implementation and enforcement of the
Portfolio Holdings Policies, codes of ethics, and other relevant policies of the
Funds and their service providers by the CCO, (2) by considering reports and
recommendations by the CCO concerning any material compliance matters (as
defined in Rule 38a-1 under the 1940 Act), and (3) by considering whether to
approve any amendment to these Portfolio Holdings Policies. The Board reserves
the right to amend the Portfolio Holdings Policies at any time without prior
notice in its sole discretion.
Disclosure
of the Funds’ complete holdings is required to be made quarterly within 60 days
of the end of each fiscal quarter, in the annual and semi-annual reports to Fund
shareholders, and in the quarterly holdings report on Form N-PORT. These
reports will be made available, free of charge, on the EDGAR database on the
SEC’s website at www.sec.gov. In addition, the Funds’ complete holdings will be
made available on a calendar quarter end basis, either via a holdings schedule
or a shareholder report, with at least a sixty-day lag on the Funds' website,
www.kensingtonassetmanagement.com/funds/documents.
In
the event of a conflict between the interests of a Fund and its shareholders and
the interests of the Adviser or an affiliated person of the Adviser, the CCO of
the Adviser, in consultation with the Trust’s CCO, shall make a determination in
the best interests of the Funds and their shareholders, and shall report such
determination to the Board at the end of the quarter in which such determination
was made. Any employee of the Adviser who suspects a breach of this obligation
must report the matter immediately to the Adviser’s CCO or to his or her
supervisor.
In
addition, material non-public holdings information may be provided without a lag
as part of the normal investment activities of the Funds to each of the
following entities which, by explicit agreement or by virtue of their respective
duties to the Funds, are required to maintain the confidentiality of the
information disclosed: the Administrator; the Fund Accountant; the Custodian;
the Transfer Agent; the Funds’ independent registered public accounting firm;
counsel to the Funds or the Board (current parties are identified in this SAI);
broker-dealers (in connection with the purchase or sale of securities or
requests for price quotations or bids on one or more securities); and regulatory
authorities. Portfolio holdings information not publicly available with the SEC
or on the Funds’ web site may only be provided to additional third parties, in
accordance with the Portfolio Holdings Policies, when a Fund has a legitimate
business purpose, and the third party recipient is subject to a confidentiality
agreement. Such portfolio holdings disclosure must be approved under the
Portfolio Holdings Policies by the Trust’s CCO.
In
no event shall the Adviser, its affiliates or employees, or a Fund receive any
direct or indirect compensation or other consideration in connection with the
disclosure of information about the Funds’ portfolio holdings.
There
can be no assurance that the Portfolio Holdings Policies and these procedures
will protect a Fund from potential misuse of Fund information by individuals or
entities to which it is disclosed.
Determination
of Net Asset Value
The
NAV of the Funds’ shares will fluctuate and is determined by the Fund Accountant
as of the close of general trading on the New York Stock Exchange (the “NYSE”)
(generally 4:00 p.m., Eastern time) each business day. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that it will not be open on the following days: New
Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial
Day, Juneteenth National Independence Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, the NYSE may close on days not
included in that announcement.
The
NAV per share is computed by determining the “Net Assets” of each class and
dividing by the total number of shares outstanding of each class at such time.
The Net Assets of the Funds are calculated by (1) taking the value of all
assets, less liabilities, held by the Funds; and (2) subtracting “Accrued
Expenses.”
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Generally,
the Funds’ securities are valued each day at the last quoted sales price on each
security’s primary exchange. Securities traded or dealt in upon one or more
securities exchanges (whether domestic or foreign) for which market quotations
are readily available and not subject to restrictions against resale shall be
valued at the last quoted sales price on the primary exchange or, in the absence
of a sale on the primary exchange, at the mean between the current bid ask
prices on such exchanges. Securities primarily traded in the National
Association of Securities Dealers’ Automated Quotation System (“NASDAQ”)
National Market System for which market quotations are readily available shall
be valued using the NASDAQ Official Closing Price. Securities that are not
traded or dealt in any securities exchange (whether domestic or foreign) and for
which over-the-counter market quotations are readily available generally shall
be valued at the last sale price or, in the absence of a sale, at the mean
between the current bid and ask price on such over-the- counter market.
Fixed
income securities are valued at the mean of the bid and asked prices as
determined by an independent pricing service. Investments in other investment
companies, including money market funds, are valued at their NAV per share. ETFs
are valued at the last reported sale price on the exchange on which the security
is principally traded.
Futures
contracts are valued at the settlement price on the exchange on which they are
principally traded. For swaps, contract terms are agreed among the counterparty
and the Adviser on behalf of a Fund. Pricing services value total return swap
contracts using the closing price of the underlying benchmark that the contract
is tracking. Credit default swap contracts and interest rate swap contracts are
marked to market daily based on quotations as provided by an independent pricing
service.
If
market quotations are not readily available, securities will be valued at their
fair market value as determined using the “fair value” procedures approved by
the Board. Pursuant to Rule 2a-5 under the 1940 Act, the Adviser has been
designated by the Board as the valuation designee for the Funds and has been
delegated the responsibility for making good faith, fair value determinations
with respect to the Funds' portfolio securities. When market prices are not
readily available, or believed by the Adviser to be unreliable, a security or
other asset is valued at its fair value by the Adviser as determined under fair
value pricing procedures approved by the Board. The Board reviews, no less
frequently than annually, the adequacy of the policies and procedures of the
Fund and the effectiveness of their implementation. These fair value pricing
procedures will also be used to price a security when corporate events, events
in the securities market and/or world events cause the Adviser to believe that a
security’s last sale price may not reflect its actual market value. The intended
effect of using fair value pricing procedures is to ensure that each Fund is
accurately priced. The Board will regularly evaluate whether the Trust’s fair
value pricing procedures continue to be appropriate in light of the specific
circumstances of the Funds and the quality of prices obtained through the
application of such procedures.
Foreign
securities are generally valued in the same manner as the securities described
above. Foreign securities are priced in the local currencies as of the close of
their primary exchange or market or as of the close of trading on the NYSE,
whichever is earlier. Foreign currencies are translated into U.S. dollars at the
exchange rate as provided by a pricing service as of the close of trading on the
NYSE. If events materially affecting the value of a security in the Funds’
portfolio, particularly foreign securities, occur after the close of trading on
a foreign market but before the Fund prices its shares, the security will be
valued at fair value. For example, if trading in a portfolio security is halted
and does not resume before a Fund calculates its NAV, the Adviser may need to
price the security using the Fund’s fair value pricing guidelines. Without a
fair value price, short-term traders could take advantage of the arbitrage
opportunity and dilute the NAV of long-term investors. Fair valuation of a
Fund’s portfolio securities can serve to reduce arbitrage opportunities
available to short-term traders, but there is no assurance that fair value
pricing policies will prevent dilution of the Fund’s NAV by short term traders.
The determination of fair value involves subjective judgments. As a result,
using fair value to price a security may result in a price materially different
from the prices used by other mutual funds to determine NAV, or from the price
that may be realized upon the actual sale of the security.
Purchase
and Redemption of Fund Shares
Shares
of the Funds are sold in a continuous offering and shares may be purchased or
redeemed on any business day that the Funds calculate their NAV. The Funds may
also authorize one or more financial intermediaries to accept purchase and
redemption orders on its behalf (“Authorized Intermediaries”). Authorized
Intermediaries are authorized to designate other Authorized Intermediaries to
accept orders on the Funds’ behalf. An order is deemed to be received when the
Funds or an Authorized Intermediary accepts the order.
Orders
received by the Funds or an Authorized Intermediary by the close of trading on
the NYSE (generally 4:00 p.m., Eastern Time) on a business day will be effected
at the NAV per share determined as of the close of trading on the NYSE on that
day. Otherwise, the orders will be processed at the next determined
NAV.
Orders
received by financial intermediaries that are not Authorized Intermediaries will
be processed at the NAV next calculated after the Transfer Agent receives the
order from the financial intermediary.
Purchase
Requests Must be Received in Good Order
“Good
order” means that your purchase request includes:
•The
name of the Fund;
•The
class of shares to be purchased;
•The
dollar amount of shares to be purchased;
•Your
account application or investment stub; and
•A
check payable to the name of the Fund.
Shares
of the Funds have not been registered for sale outside of the United States. The
Funds generally do not sell shares to investors residing outside the United
States, even if they are United States citizens or lawful permanent residents,
except to investors with United States military APO or FPO addresses or in
certain other circumstances where the Chief Compliance Officer and Anti-Money
Laundering Officer for the Trust conclude that such sale is appropriate and is
not in contravention of United States law.
Redemption
Requests Must be Received in Good Order
Your
share price will be based on the next NAV per share calculated after the
Transfer Agent or an Authorized Intermediary receives your redemption request in
good order. A redemption request will be deemed in “good order” if it
includes:
•The
shareholder’s name;
•The
name of the Fund you are redeeming;
•The
class of shares to be redeemed;
•The
account number;
•The
share or dollar amount to be redeemed; and
•Signatures
by all shareholders on the account (with signature(s) guaranteed, if
applicable).
Unless
you instruct the Transfer Agent otherwise, redemption proceeds will be sent to
the address of record. The Funds will not be responsible for interest lost on
redemption amounts due to lost or misdirected mail.
A
signature guarantee of each owner is required in the following
situations:
•If
ownership is changed on your account;
•When
redemption proceeds are payable or sent to any person, address or bank account
not on record;
•When
a redemption is received by the Transfer Agent and the account address has
changed within the last 15 calendar days; or
•For
all redemptions in excess of $100,000 from any shareholder account where the
proceeds are requested to be sent by check.
Non-financial
transactions, including establishing or modifying certain services on an
account, may require a signature guarantee, signature verification from a
Signature Validation Program member, or other acceptable form of authentication
from a financial institution source. Signature guarantees, from either a
Medallion program member or a non-Medallion program member, can be obtained from
domestic banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations,
as well as from participants in the New York Stock Exchange Medallion Signature
Program and the Securities Transfer Agents Medallion Program (“STAMP”), but not
from a notary public.
The
Funds may elect in the future to limit eligible signature guarantors to
institutions that are members of a signature guarantee program. The Funds and
the Transfer Agent reserve the right to amend these standards at any time
without notice.
Redemption-In-Kind
Under
normal circumstances, the Funds do not intend to redeem shares in any form
except cash. The Trust, however, has filed a notice of election under Rule 18f-1
of the 1940 Act that allows a Fund to redeem in-kind redemption requests during
any 90-day period in excess of the lesser of $250,000 or 1% of the net assets of
a Fund, valued at the beginning of such period. If a Fund pays your redemption
proceeds by a distribution of securities, you could incur brokerage or other
charges in converting the securities to cash, and will bear any market risks
associated with such securities until they are converted into cash.
Cancellations
and Modifications
The
Funds will not accept a request to cancel or modify a written transaction once
processing has begun.
Tax
Matters
The
following discussion is a summary of certain U.S. federal income tax
considerations affecting the Funds and their shareholders. The discussion
reflects applicable U.S. federal income tax laws of the U.S. as of the date of
this SAI, which tax laws may be changed or subject to new interpretations by the
courts or the Internal Revenue Service (the “IRS”), possibly with retroactive
effect. No attempt is made to present a detailed explanation of all U.S. federal
income, estate or gift, or state, local or foreign tax concerns affecting the
Funds and their shareholders (including shareholders owning large positions in a
Fund). The discussion set forth herein does not constitute tax advice. Investors
are urged to consult their own tax advisers to determine the tax consequences to
them of investing in the Funds.
Each
series of the Trust is treated as a separate entity for federal income tax
purposes. Each Fund, a series of the Trust, intends to qualify and elect to be
treated as a RIC under Subchapter M of the Code, provided it complies with
all applicable requirements regarding the source of its income, diversification
of its assets and timing of distributions, as discussed below.
If
for any taxable year a Fund fails to qualify for the special federal income tax
treatment afforded to RICs, all of its taxable income will be subject to federal
income tax at the corporate income tax rate (without any deduction for
distributions to the Fund’s shareholders) and its income available for
distribution will be reduced.
As
long as each Fund meets certain requirements that govern the Fund’s source of
income, diversification of assets and distribution of earnings to its
shareholders, the Fund will not be subject to U.S. federal income tax on income
distributed (or treated as distributed, as described below) to its shareholders.
With respect to the source of income requirement, each Fund must derive in each
taxable year at least 90% of its gross income (including tax-exempt interest)
from (i) dividends, interest, payments with respect to certain securities loans,
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including but not limited to gains from options,
futures and forward contracts) derived with respect to its business of investing
in such shares, securities or currencies and (ii) net income derived from
interests in qualified publicly traded partnerships (“QPTP”). A QPTP is
generally defined as a publicly traded partnership under Section 7704 of the
Code, but does not include a publicly traded partnership if 90% or more of its
income is described in (i) above.
With
respect to the diversification of assets requirement, each Fund must diversify
its holdings so that, at the end of each quarter of each taxable year, (i) at
least 50% of the value of the Fund’s total assets is represented by cash and
cash items, U.S. government securities, the securities of other RICs and other
securities, with such other securities limited for purposes of such calculation,
in respect of any one issuer, to an amount not greater than 5% of the value of a
Fund’s total assets and not more than 10% of the outstanding voting securities
of such issuer at and (ii) not more than 25% of the value of a Fund’s total
assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other RICs), the securities (other
than the securities of other RICs) of any two or more issuers that a Fund
controls and that are determined to be engaged in the same, similar or related
trades or businesses, or the securities of one or more QPTPs.
In
addition, pursuant to the Code, a Fund may invest no more than 25% of its total
assets in the securities of MLPs and other entities treated as QPTPs. A Fund
will not be required to reduce a position due solely to market value
fluctuations in order to comply with the 25% limitation in publicly traded
partnerships, inclusive of MLP investments, but will not be able to purchase
additional MLP securities unless the Fund is in compliance with the restriction.
The
Funds’ policy is to distribute to its shareholders substantially all of its net
investment company taxable income and any net realized long-term capital gains
for each fiscal year in a manner that complies with the distribution
requirements of the Code, so that a Fund will not be subject to any federal
income or excise taxes based on net income. However, a Fund can give no
assurances that its anticipated distributions will be sufficient to eliminate
all taxes. If a Fund does not qualify as a RIC, it would be taxed as a
corporation and, in such case, it would be more beneficial for a shareholder to
directly own the Fund’s underlying investments rather than indirectly owning the
underlying investments through the Fund. If a Fund fails to distribute (or be
deemed to have distributed) by December 31 of each calendar year
(i) at least 98% of its ordinary income for such year, (ii) at least
98.2% of the excess of its realized capital gains over its realized capital
losses for the 12-month period ending on October 31 during such year and
(iii) any amounts from the prior calendar year that were not distributed
and on which the Fund paid no federal income tax, the Fund will be subject to a
4% excise tax.
Net
investment income consists of interest, dividends, and short-term capital gains,
less expenses. Net realized capital gains for a fiscal period are computed by
taking into account any capital loss carryforward of a Fund. As of December 31,
2023, the Funds’ most recent fiscal year end, the Active Advantage Fund, Managed
Income Fund and Dynamic Growth Fund had short-term capital loss carryovers of
$1,488,042, $109,137,966, and $12,966,191, respectively, and the Dynamic Growth
Fund had $47,654 in long-term capital loss carryovers, which may be carried over
for an unlimited period.
Distributions
of net investment income are taxable to shareholders as ordinary income. For
individual shareholders, a portion of the distributions paid by a Fund may
consist of qualified dividends eligible for taxation at the rate applicable to
long-term capital gains to the extent a Fund designates the amount distributed
as a qualified dividend and the shareholder meets certain holding period
requirements with respect to his or her Fund shares. In the case of corporate
shareholders, a portion of the distributions may qualify for the intercorporate
dividends-received deduction to the extent that a Fund designates the amount
distributed as eligible for deduction and the shareholder meets certain holding
period requirements with respect to its Fund shares. The aggregate amount so
designated to either individuals or corporate shareholders cannot, however,
exceed the aggregate amount of such dividends received by a Fund for its taxable
year. In view of the Funds’ investment policies, it is expected that part of the
distributions by a Fund may be eligible for the qualified dividend income
treatment for individual shareholders and the dividends-received deduction for
corporate shareholders. Any distributions to you in excess of a Fund’s
investment company taxable income and net capital gains will be treated by you,
first, as a tax-deferred return of capital, which is applied against and will
reduce the adjusted tax basis of your shares and, after such adjusted tax basis
is reduced to zero, will generally constitute capital gains.
Any
long-term capital gain distributions are taxable to shareholders as long-term
capital gains regardless of the length of time shares have been held. Net
capital gains distributions are not eligible for the qualified dividend income
treatment or the dividends-received deduction referred to in the previous
paragraph.
Any
distributions to you in excess of a Fund’s investment company taxable income and
net capital gains will be treated by you, first, as a tax-deferred return of
capital, which is applied against and will reduce the adjusted tax basis of your
shares and, after such adjusted tax basis is reduced to zero, will generally
constitute capital gains to you.
Under
2017 legislation commonly known as the Tax Cuts and Jobs Act (“TCJA”),
“qualified REIT dividends” (i.e., ordinary REIT dividends other than capital
gain dividends and portions of REIT dividends designated as qualified dividend
income) are treated as eligible for a 20% deduction by noncorporate taxpayers.
This deduction, if allowed in full, equates to a maximum effective tax rate of
29.6% (37% top rate applied to income after 20% deduction). A Fund may choose to
report the special character of “qualified REIT dividends” to the shareholder,
provided both the Fund and the shareholder meet certain holding period
requirements with respect to its shares. A noncorporate shareholder receiving
such dividends would treat them as eligible for the 20% deduction, provided the
RIC shares were held by the shareholder for more than 45 days during the 91-day
period beginning on the date that is 45 days before the date on which the shares
become ex-dividend with respect to such dividend. The amount of a RIC’s
dividends eligible for the 20% deduction for a taxable year is limited to the
excess of the RIC’s qualified REIT dividends for the taxable year over allocable
expenses.
Distributions
of any net investment income and net realized capital gains will be taxable as
described above, whether received in shares or in cash. Shareholders who choose
to receive distributions in the form of additional shares will have a cost basis
for federal income tax purposes in each share so received equal to the NAV of a
share on the reinvestment date. Distributions are generally taxable when
received. However, distributions declared in October, November or December to
shareholders of record on a date in such a month and paid the following January
are taxable as if received on December 31. Distributions are includable in
alternative minimum taxable income in computing a noncorporate shareholder’s
liability for the alternative minimum tax.
Investment
income received by a Fund from sources within foreign countries may be subject
to foreign income tax withheld at the source and the amount of tax withheld
generally will be treated as an expense of a Fund. The U.S. has entered into tax
treaties with many foreign countries that entitle the Fund to a reduced rate of,
or exemption from, tax on such income. Some countries require the filing of a
tax reclaim or other forms to receive the benefit of the reduced tax rate;
whether or when a Fund will receive the tax reclaim is within the control of the
individual country. Information required on these forms may not be available to
the Funds, such as shareholder information; therefore, the Funds may not receive
the reduced treaty rates or potential reclaims. Other countries have conflicting
and changing instructions and restrictive timing requirements which may cause
the Funds not to receive the reduced treaty rates or potential reclaims. Other
countries may subject capital gains realized by the Funds on sale or disposition
of securities of that country to taxation. It is impossible to determine the
effective rate of foreign tax in advance since the amount of the Funds’ assets
to be invested in various countries is not known.
A
redemption of Fund shares may result in recognition of a taxable gain or loss
and, if held as a capital asset, capital gain or loss. Any loss realized upon a
redemption of shares within six months from the date of their purchase will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gains received on those shares. Any loss
realized upon a redemption may be disallowed under certain wash sale rules to
the extent Fund shares are purchased (through reinvestment of distributions or
otherwise) within 30 days before or after the redemption.
The
Funds are required to report to you and the IRS annually on Form 1099-B the cost
basis of shares purchased or acquired. However, cost basis reporting is not
required for certain shareholders, including shareholders investing in the Funds
through a tax-advantaged retirement account, such as a 401(k) plan or an
individual retirement account. The Funds will calculate cost basis using the
Funds’ default method, unless you instruct the Funds to use a different
calculation method. For additional information regarding the Funds’ available
cost basis reporting methods, including its default method, please contact the
Funds. If you hold your Fund shares through a broker (or other nominee), please
contact that broker (nominee) with respect to reporting of cost basis and
available elections for your account.
Except
in the case of certain exempt shareholders, if a shareholder does not furnish a
Fund with its correct Taxpayer Identification Number and certain certifications
or the Funds receive notification from the Internal Revenue Service requiring
back-up withholding, the Funds are required by federal law to withhold federal
income tax from the shareholder’s distributions and redemption proceeds
currently at a rate of 24% for U.S. residents.
Gain
or loss recognized by the Funds on the sale or other disposition of portfolio
investments will be a capital gain or loss. Such capital gain and loss may be
long-term or short-term depending, in general, upon the length of time a
particular investment position is maintained and, in some cases, upon the nature
of the transaction. Property held for more than one year generally will be
eligible for long-term capital gain or loss treatment. The application of
certain rules described below may serve to alter the manner in which the holding
period for a security is determined or may otherwise affect the characterization
as long-term or short-term, and also the timing of the realization and/or
character, of certain gains or losses.
A
U.S. REIT is not subject to federal income tax on the income and gains it
distributes to shareholders. Dividends paid by a U.S. REIT, other than capital
gain distributions, will be taxable as ordinary income up to the amount of the
U.S. REIT’s current and accumulated earnings and profits. Capital gain dividends
paid by a U.S. REIT to the Funds will be treated as long-term capital gains by
the Funds and, in turn, may be distributed by a Fund to its shareholders as a
capital gain distribution. Because of certain noncash expenses, such as property
depreciation, an equity U.S. REIT’s cash flow may exceed its taxable income. The
equity U.S. REIT, and in turn the Funds, may distribute this excess cash to
shareholders in the form of a return of capital distribution. However, if a U.S.
REIT is operated in a manner that fails to qualify as a REIT, an investment in
the U.S. REIT would become subject to double taxation, meaning the taxable
income of the U.S. REIT would be subject to federal income tax at the corporate
income tax rate without any deduction for dividends paid to shareholders and the
dividends would be taxable to shareholders as ordinary income (or possibly as
qualified dividend income) to the extent of the REIT’s current and accumulated
earnings and profits.
While
non-U.S. REITs often use complex acquisition structures that seek to minimize
taxation in the source country, an investment by the Funds in a non-U.S. REIT
may subject the Funds, directly or indirectly, to corporate taxes, withholding
taxes, transfer taxes and other indirect taxes in the country in which the real
estate acquired by the non-U.S. REIT is located. The Funds’ pro rata share of
any such taxes will reduce the Funds’ return on its investment. The Funds’
investment in a non-U.S. REIT may be considered an investment in a PFIC, as
discussed below. Additionally, foreign withholding taxes on distributions from
the non-U.S. REIT may be reduced or eliminated under certain tax treaties. Also,
the Funds in certain limited circumstances may be required to file an income tax
return in the source country and pay tax on any gain realized from its
investment in the non-U.S. REIT under rules similar to those in the United
States which tax foreign persons on gain realized from dispositions of interests
in U.S. real estate.
Taxation
of the Subsidiary. The
Subsidiary is a controlled foreign corporation for U.S. federal income tax
purposes. The Defender Fund will generally be required to include in gross
income for U.S. federal income tax purposes all of the Subsidiary’s “subpart F
income,” which will be treated as ordinary income, whether or not such income is
actually distributed by the Subsidiary to the Defender Fund. Subpart F income
generally includes net gains from the disposition of stocks or securities, net
gains from transactions (including futures, forward and similar transactions) in
commodities and income received with respect to certain swaps and derivatives.
Previously taxed subpart F income will not, however, be included in the Defender
Fund’s income again when such income is distributed by a Subsidiary to the
Defender Fund. Any net losses incurred by the Subsidiary during a tax year will
not flow through to the Defender Fund and thus will not be available to offset
income or capital gain generated from the Defender Fund’s other
investments.
Investment
in taxable mortgage pools (excess inclusion income).
Under a Notice issued by the IRS, the Code and Treasury regulations to be
issued, a portion of the Funds’ income from a U.S. REIT that is attributable to
the REIT’s residual interest in a real estate mortgage investment conduit
(“REMIC”) or equity interests in a “taxable mortgage pool” (referred to in the
Code as an excess inclusion) will be subject to federal income tax in all
events. The excess inclusion income of a regulated investment company, such as
the Funds, will be allocated to shareholders of the regulated investment company
in proportion to the dividends received by such shareholders, with the same
consequences as if the shareholders held the related REMIC residual interest or,
if applicable, taxable mortgage pool directly. In general, excess inclusion
income allocated to shareholders (i) cannot be offset by net operating losses
(subject to a limited exception for certain thrift institutions), (ii) will
constitute unrelated business taxable income (“UBTI”) to entities (including
qualified pension plans, individual retirement accounts, 401(k)
plans,
Keogh plans or other tax-exempt entities) subject to tax on UBTI, thereby
potentially requiring such an entity that is allocated excess inclusion income,
and otherwise might not be required to file a tax return, to file a tax return
and pay tax on such income, and (iii) in the case of a foreign stockholder, will
not qualify for any reduction in U.S. federal withholding tax. In addition, if
at any time during any taxable year a “disqualified organization” (which
generally includes certain cooperatives, governmental entities, and tax-exempt
organizations not subject to UBTI) is a record holder of a share in a regulated
investment company, then the regulated investment company will be subject to a
tax equal to that portion of its excess inclusion income for the taxable year
that is allocable to the disqualified organization, multiplied by the corporate
income tax rate. The Notice imposes certain reporting requirements upon
regulated investment companies that have excess inclusion income. There can be
no assurance that the Fund will not allocate to shareholders excess inclusion
income.
These
rules are potentially applicable to a Fund with respect to any income it
receives from the equity interests of certain mortgage pooling vehicles, either
directly or, as is more likely, through an investment in a U.S.
REIT.
The
Funds’ transactions in foreign currencies, foreign currency-denominated debt
obligations and certain foreign currency options, futures contracts and forward
contracts (and similar instruments) may give rise to ordinary income or loss to
the extent such income or loss results from fluctuations in the value of the
foreign currency concerned. This treatment could increase or decrease a Fund’s
ordinary income distributions to you, and may cause some or all of the Fund’s
previously distributed income to be classified as a return of capital. In
certain cases, the Funds may make an election to treat such gain or loss as
capital.
While
securities are loaned out by a Fund, the Fund generally will receive from the
borrower amounts equal to any dividends or interest paid on the borrowed
securities. For federal income tax purposes, payments made “in lieu of”
dividends are not considered dividend income. These distributions will neither
qualify for the reduced rate of taxation for individuals on qualified dividends
nor the 50% dividends-received deduction for corporations.
The
Funds may invest in securities of foreign companies that may be classified under
the Code as a passive foreign investment company (“PFIC”). In general, a foreign
company is classified as a PFIC if at least one-half of its assets constitute
investment-type assets or 75% or more of its gross income is investment-type
income. When investing in PFIC securities, the Funds intend to mark-to-market
these securities under certain provisions of the Code and recognize any
unrealized gains as ordinary income at the end of the Funds’ fiscal and excise
tax years. Deductions for losses are allowable only to the extent of any current
or previously recognized gains. These gains (reduced by allowable losses) are
treated as ordinary income that the Funds are required to distribute, even
though it has not sold or received dividends from these securities. You should
also be aware that the designation of a foreign security as a PFIC security will
cause its income dividends to fall outside of the definition of qualified
foreign corporation dividends. These dividends generally will not qualify for
the reduced rate of taxation on qualified dividends when distributed to you by
the Fund. Foreign companies are not required to identify themselves as PFICs.
Due to various complexities in identifying PFICs, the Funds can give no
assurances that it will be able to identify portfolio securities in foreign
corporations that are PFICs in time for the Funds to make a mark-to-market
election. If the Funds are unable to identify an investment as a PFIC and thus
do not make a mark-to-market election, the Funds may be subject to U.S. federal
income tax on a portion of any “excess distribution” or gain from the
disposition of such shares even if such income is distributed as a taxable
dividend by the Funds to their shareholders. Additional charges in the nature of
interest may be imposed on the Funds in respect of deferred taxes arising from
such distributions or gains.
Foreign
taxpayers (including nonresident aliens) are generally subject to a flat
withholding rate, currently 30% on U.S. source income. This withholding rate may
be lower under the terms of a tax convention.
This
discussion and the related discussion in the Prospectus have been prepared by
Fund management, and counsel to the Funds has expressed no opinion in respect
thereof.
This
section is not intended to be a full discussion of federal tax laws and the
effect of such laws on you. There may be other federal, state, foreign or local
tax considerations to a particular investor. You are urged to consult your own
tax advisor.
Distributions
Each
Fund will receive income in the form of dividends and interest earned on its
investments in securities. This income, less the expenses incurred in its
operations, is a Fund’s net investment income, substantially all of which will
be distributed to the Fund’s shareholders.
The
amount of a Fund’s distribution is dependent upon the amount of net investment
income received by the Fund from its portfolio holdings, is not guaranteed, and
is subject to the discretion of the Board. The Funds do not pay “interest” or
guarantee any fixed rate of return on an investment in its shares.
A
Fund may also derive capital gains or losses in connection with sales or other
dispositions of its portfolio securities. Any net gain a Fund may realize from
transactions involving investments held less than the period required for
long-term capital gain or loss recognition or otherwise producing short-term
capital gains and losses (to the extent not offset by any capital loss
carryovers), although a distribution from capital gains, will be distributed to
shareholders with and as a part of the distributions of net investment income
giving rise to ordinary income. If during any year a Fund realizes a net gain on
transactions involving investments held for the period required for long-term
capital gain or loss recognition or otherwise producing long-term capital gains
and losses, the Fund will have a net long-term capital gain. After deduction of
the amount of any net short-term capital loss, the balance (to the extent not
offset by any capital losses carried over from the eight previous taxable years)
will be distributed and treated as long-term capital gains in the hands of the
shareholders regardless of the length of time a Fund’s shares may have been held
by the shareholders. For more information concerning applicable capital gains
tax rates, see your tax advisor.
Any
distribution paid by a Fund reduces that Fund’s NAV per share on the date paid
by the amount of the distribution per share. Accordingly, a distribution paid
shortly after a purchase of shares by a shareholder would represent, in
substance, a partial return of capital (to the extent it is paid on the shares
so purchased), even though it would be subject to income taxes.
Distributions
will be made in the form of additional shares of the Fund unless the shareholder
has otherwise indicated. Investors have the right to change their elections with
respect to the reinvestment of distributions by notifying the Transfer Agent in
writing or by telephone. However, any such change will be effective only as to
distributions for which the record date is five or more calendar days after the
Transfer Agent has received the written request.
Financial
Statements
The
Funds’ annual
reports
to shareholders for the fiscal year ended December 31, 2023 are separate
documents and the financial statements, accompanying notes and report of the
independent registered public accounting firm appearing therein, are
incorporated by reference into this SAI.