ck0000030126-20221231
RMB
INVESTORS TRUST
STATEMENT
OF ADDITIONAL INFORMATION
RMB
FUND
RMBHX
(Class A)
RMBJX
(Class C)
RMBGX
(Class I)
RMB
MENDON FINANCIAL SERVICES FUND
RMBKX
(Class A)
RMBNX
(Class C)
RMBLX
(Class I)
RMB
INTERNATIONAL FUND
(Investor
Class)(not available for purchase)
RMBTX
(Class I)
RMB
JAPAN FUND
(Investor
Class)(not available for purchase)
RMBPX
(Class I)
RMB
SMALL CAP FUND
(Investor
Class)(not available for purchase)
RMBBX
(Class I)
RMB
SMID CAP FUND
(Investor
Class)(not available for purchase)
RMBMX
(Class I)
May
1, 2023
This
Statement of Additional Information (“SAI”) is not a prospectus. It should be
read in conjunction with the corresponding prospectus for the above-listed Funds
dated May
1, 2023,
as supplemented and amended from time to time (the “Prospectus”), which is
incorporated by reference herein. The information in this SAI expands on
information contained in the Prospectus. The audited financial statements for
the above-listed funds for the fiscal year ended December
31, 2022
and the Report of the Independent Registered Public Accounting Firm thereon are
incorporated by reference into this SAI from the annual reports to shareholders
for the fiscal year ended December
31, 2022.
The Prospectus and annual reports can be obtained without charge on the Funds’
website at www.rmbfunds.com or by contacting either the dealer through whom you
purchased shares or the transfer agent at 1-800-462-2392.
TABLE
OF CONTENTS
RMB
INVESTORS TRUST
RMB
Investors Trust (the “Trust”), located at 115 S. LaSalle Street, 34th Floor,
Chicago, Illinois 60603, is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the “1940 Act”). The Trust
is comprised of six series, each of which is a separate portfolio of investments
with its own investment objective. This SAI relates to the RMB Fund, RMB Mendon
Financial Services Fund (the “Financial Services Fund”), RMB International Fund
(the “International Fund”), RMB Japan Fund (the “Japan Fund”), RMB Small Cap
Fund (the “Small Cap Fund”) and RMB SMID Cap Fund (the “SMID Cap Fund”) (each, a
“Fund” and collectively, the “Funds”).
The
Trust was organized as a Delaware statutory trust on August 20, 1998. The Trust
is the surviving entity of the reorganization of The Burnham Fund, Inc. (the
“Corporation”), a Maryland corporation, effected on April 30, 1999. Before the
reorganization, the Corporation was an open-end management investment company in
operation since 1961, consisting of a single series, The Burnham Fund, Inc.
On
July 1, 2016 the Trust changed its name to RMB Investors Trust following the
decision of the Trust’s Board of Trustees (the “Board” or the “Trustees”) to
approve RMB Capital Management, LLC (the “Adviser” or “RMB”) to serve as the
investment adviser to certain series of the Trust, effective July 1,
2016.
The
RMB Fund commenced operations in 1961, and prior to July 1, 2016, was known
as the Burnham Fund. The Financial Services Fund commenced operations on
June 7, 1999, and prior to July 1, 2016 was known as the Burnham
Financial Services Fund. The International Fund and Japan Fund, each commenced
operations on December 27, 2017.
The
Small Cap Fund and SMID Cap Fund commenced operations as series of the Trust
upon completion of the reorganization of each Fund’s predecessor fund,
IronBridge Small Cap Fund and IronBridge SMID Cap Fund, respectively, each a
series of IronBridge Funds, Inc., on June 21, 2019 (the “IronBridge
Reorganization”). The IronBridge Small Cap Fund commenced operations on August
30, 2002, and the IronBridge SMID Cap Fund commenced operations on December 31,
2004.
Diversification.
Each Fund is diversified as defined by the 1940 Act (see Fundamental Investment
Restriction 6
below).
This means that as to 75% of each Fund’s total assets, each Fund may not invest
more than 5% of its total assets in the securities of a single issuer or hold
more than 10% of the outstanding voting securities of a single issuer. Under
applicable federal securities laws, the diversification of a mutual fund’s
holdings is measured at the time the Fund purchases a security. However, if a
Fund purchases a security and holds it for a period of time, the security may
become a larger percentage of the Fund’s total assets due to movements in the
financial markets. If the market affects several securities held by a Fund, the
Fund may have a greater percentage of its assets invested in securities of fewer
issuers. A Fund may be subject to the risk that its performance may be hurt
disproportionately by the poor performance of relatively few securities despite
the Fund qualifying as a diversified fund under applicable federal
laws.
INVESTMENTS
AND RELATED RISKS
Each
Fund’s principal investment strategies and principal risks are described in the
Funds’ prospectus. The following supplements the information contained in the
prospectus concerning each Fund’s principal investment strategies and principal
risks. In addition, although not principal strategies of the Funds, the Funds
may invest in other types of securities and engage in other investment practices
as described in the prospectus or in this SAI. Unless otherwise indicated, each
Fund is permitted to invest in each of the investments listed below, or engage
in each of the investment techniques listed below consistent with the Funds’
investment goals, investment limitations, policies and strategies.
References
to the Adviser in this section and the section “Other Investment Practices and
Risks” below may include RMB and Mendon Capital Advisors Corp. (“Mendon”), the
sub-adviser to the Financial Services Fund. Unless noted otherwise, the
investment techniques below may be employed by each of the Funds.
EQUITY
INVESTMENTS
Common
Shares. Common
shares represent an equity (i.e.
ownership) interest in a company or other entity. This ownership interest often
gives a Fund the right to vote on measures affecting the company’s organization
and operations.
Although
common shares generally have a history of long-term growth in value, their
prices, particularly those of smaller capitalization companies, are often
volatile in the short-term.
Preferred
Shares. Preferred
shares represent a limited equity interest in a company or other entity and
frequently have debt-like features. Preferred shares are often entitled only to
dividends at a specified rate, and have a preference over common shares with
respect to dividends and on liquidation of assets. Preferred shares generally
have fewer voting rights than common shares. Because their dividends are often
fixed, the value of some preferred shares fluctuates inversely with changes in
interest rates.
Convertible
Securities. Convertible
securities are bonds, preferred shares and other securities that pay a fixed
rate of interest or dividends. However, they offer the buyer the additional
option of converting the security into common stock. The value of convertible
securities depends partially on interest rate changes and the credit quality of
the issuer. The value of convertible securities is also sensitive to company,
market and other economic news, and will change based on the price of the
underlying common stock. Convertible securities generally have less potential
for gain than common stock, but also less potential for loss, since their income
provides a cushion against the stock’s price declines. However, because the
buyer is also exposed to the risk and reward potential of the underlying stock,
convertible securities generally pay less income than similar non-convertible
securities.
Warrants
and Rights. Warrants
and rights are securities that permit, but not obligate, their holder to
purchase the underlying equity or fixed-income securities at a predetermined
price. Generally, warrants and rights do not carry with them the right to
receive dividends on or exercise voting rights concerning the underlying equity
securities. Further, they do not represent any rights in the assets of the
issuer. In addition, the value of warrants and rights do not necessarily change
with the value of the underlying securities, and they become worthless if they
are not exercised on or before their expiration date. As a result, an investment
in warrants or rights may entail greater investment risk than certain other
types of investments.
Short
Sale Risk.
The larger a Fund’s short position, the greater the potential for gain and loss.
If a security sold short increases in price, the Fund may have to cover its
short position at a higher price than the short sale price, resulting in a loss,
which can be unlimited. To borrow the security, the Fund also may be required to
pay a premium, which could increase the cost of the security sold short. The
amount of any gain will be decreased, and the amount of any loss increased, by
the amount of the premium, dividends, interest or expenses the Fund may be
required to pay in connection with the short sale. In addition, because a Fund’s
loss on a short sale arises from increases in the value of the security sold
short, such loss is theoretically unlimited.
Market
Risk. The
market price of a security or instrument may decline, sometimes rapidly or
unpredictably, due to general market conditions that are not specifically
related to a particular company, such as real or perceived adverse economic or
political conditions throughout the world, changes in the general outlook for
corporate earnings, changes in interest or currency rates or adverse investor
sentiment generally. Local, regional or global events such as war, acts of
terrorism, the spread of infectious illness or other public health issues,
recessions, natural disasters, or other events could have a significant impact
on a Fund and its investments. The market value of a security or instrument also
may decline because of factors that affect a particular sector, sub-sector, or
group of industries, such as labor shortages or increased production costs and
competitive conditions within an industry.
COVID-19
may continue to cause significant global economic and societal disruption as
further variants circulate. Future infectious disease outbreaks that may arise,
as well as actions taken in response by governmental authorities or other third
parties, may negatively impact the market. The 2022 Russian invasion of Ukraine
has, and other potential hostilities or geopolitical tensions may, negatively
impact the market. Inflation or financial crises, and governmental and central
bank responses to these events, may also negatively impact the market. These
market impacts would reduce the value of the Funds' investments, possibly
significantly.
Real
Estate Investment Trusts (“REITs”). REITs
are pooled investment vehicles that invest primarily in income producing real
estate or real estate related loans or interests. REITs are generally classified
as equity REITs, mortgage REITs or a combination of equity and mortgage REITs.
Equity REITs invest most of their assets directly in real property and derive
income primarily from the collection of rents. Equity REITs can also realize
capital gains by selling properties that have appreciated in value. Mortgage
REITs invest most of their assets in real estate mortgages and derive income
from
interest
payments. Like investment companies, REITs are not taxed on income distributed
to shareholders if they comply with several requirements of the Internal Revenue
Code of 1986, as amended (the “Code”). A Fund will indirectly bear its
proportionate share of any expenses (such as operating expenses and advisory
fees) paid by REITs in which it invests in addition to the expenses paid by the
Fund.
Risks
Associated with the Real Estate Industry. Although
a Fund that invests in REITs does not invest directly in real estate, it does
invest primarily in real estate equity securities and may concentrate its
investments in the real estate industry, and, therefore, an investment in the
Fund may be subject to certain risks associated with the direct ownership of
real estate and with the real estate industry in general. These risks include,
among others:
•possible
declines in the value of real estate;
•adverse
general or local economic conditions;
•possible
lack of availability of mortgage loans;
•overbuilding;
•extended
vacancies of properties;
•increases
in competition, property taxes and operating expenses;
•changes
in zoning or applicable tax law;
•costs
resulting from the clean-up of, and liability to third parties for damages
resulting from, environmental problems;
•casualty
or condemnation losses;
•uninsured
damages from floods, earthquakes or other natural disasters;
•limitations
on and variations in rents; and
•unfavorable
changes in interest rates.
In
addition, if a Fund has rental income or income from the disposition of real
property acquired as a result of a default on securities the Fund owns, the
receipt of such income may adversely affect its ability to retain its tax status
as a regulated investment company. Investments by a Fund in securities of
companies providing mortgage servicing will be subject to the risks associated
with refinancing and its impact on servicing rights.
Financial
Services Companies. The
Funds may invest in financial services companies. Some events may
disproportionately affect the financial services sector as a whole or a
particular industry in this sector. Financial services companies could fall out
of favor, causing a Fund to underperform funds that focus on other types of
stocks. Accordingly, a Fund may be subject to greater market volatility than a
fund that does not invest in financial services companies. Because the Financial
Services Fund focuses its investments on financial services companies, it may be
particularly susceptible to these risks.
In
addition, most financial services companies are subject to extensive
governmental regulation, which limits their activities and may (as with
insurance rate regulation) affect their ability to earn a profit from a given
line of business. Certain financial services businesses are subject to intense
competitive pressures, including market share and price competition.
In
the past, financial crises have resulted
in insolvency and the closure or acquisition of a number of financial
institutions, which
resulted in a total loss of shareholder value.
No assurance can be made that future financial crises will not severely impact
financial services companies.
Financial
services companies may also be particularly sensitive to government fiscal
policy and government actions taken in response to broader economic issues. For
example, in March 2023, a number of U.S. regional banks experienced financial
stress and, in two cases, failures. These events may have been precipitated by
the rapid rise in interest rates by the Federal Reserve and a resulting
deterioration in the balance sheets of the banks, which made them vulnerable to
runs. There can be no certainty that the actions taken by banking regulators to
limit the contagion of these events on the banking system or other financial
services companies will be effective. It is possible that additional banks or
other financial services companies will experience financial stress or fail,
which may affect adversely the banking system or other financial
services
companies. Any such adverse developments or concerns or rumors about any such
developments, as well as the continued impact of rising interest rates, may
reduce liquidity in the market generally or have other adverse effects on a Fund
or issuers in which the Funds invest.
Governmental
intervention in the operations of financial services companies and financial
markets may materially and adversely affect the companies in which a Fund
invests. The valuation of financial services companies has been and continues to
be subject to unprecedented volatility. Changing interest rates could reduce the
profitability of certain types of companies in the financial services sector.
For example, rising interest rates increase the cost of financing to, and may
reduce the profitability of, certain financial services companies.
Financial
services companies in foreign countries are subject to similar regulatory and
interest rate concerns. In particular, government regulation in certain foreign
countries may include controls on interest rates, credit availability, prices
and currency transfers. In some countries, foreign governments have taken steps
to nationalize the operations of banks and other financial services
companies.
In
addition, regulations of the U.S. Securities and Exchange Commission (the
“Commission” or the “SEC”) limit a Fund’s investments in the securities of
companies that derive more than 15% of their gross revenues from
securities-related activities.
Management
Risk.
The Funds are subject to management risk because they are actively managed
investment portfolios. The Adviser will apply its investment techniques and risk
analyses in making investment decisions for the Funds, but there is no guarantee
that its decisions will produce the intended result. A Fund’s management
strategy or security selection methods could prove less successful than
anticipated or unsuccessful. This risk is common for all actively managed funds.
Individual stocks selected by the adviser may decline in value or not increase
in value, even when the stock market in general is rising.
Large-Cap
Companies. The
Funds may invest in larger, more established companies that may be unable to
respond quickly to new competitive challenges, such as changes in consumer
tastes or innovative smaller competitors. Also, large-capitalization companies
are sometimes unable to attain the high growth rates of successful, smaller
companies, especially during extended periods of economic
expansion.
Small-
and Mid- Cap Companies. Investing
in small-capitalization or mid-capitalization companies generally involves
greater risks than investing in large-capitalization companies. Small- or
mid-cap companies may have limited product lines, markets or financial resources
or may depend on the expertise of a few people and may be subject to more abrupt
or erratic market movements than securities of larger, more established
companies or market averages in general. Many small capitalization companies may
be in the early stages of development. Since equity securities of smaller
companies may lack sufficient market liquidity and may not be regularly traded,
it may be difficult or impossible to sell securities at an advantageous time or
a desirable price.
Micro-Cap
Companies. A
Fund’s investments may be considered “micro-cap.” Micro-cap companies may be
less financially secure than large, mid or small capitalization companies.
Micro-cap companies may be in the early stage of development or newly formed
with limited markets or product lines. There may also be less public information
about micro-cap companies. In addition, micro-cap companies that rely on smaller
management teams may be vulnerable to key personnel losses. Micro-cap stock
prices also may be more volatile than large, mid or small cap stocks may have
lower trading volume and lower degree of liquidity which makes these securities
difficult to value and to sell. The securities of micro-cap companies may not be
traded daily. As a result, some of a Fund’s holdings may be considered or become
illiquid.
Investment
Companies. A
Fund may acquire securities of other registered investment companies to the
extent that such investments are consistent with its investment objective,
policies, strategies and restrictions and the limitations imposed by the 1940
Act. Investment companies may include mutual funds, closed-end funds,
exchange-traded funds (“ETFs”), business development companies and unit
investment trusts. A Fund will indirectly bear its proportionate share of any
management fees and other expenses paid by such funds. Like all equity
investments, these investments may go up or down in value.
Closed-End
Funds.
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 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 net asset value, 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 net asset value. The Fund may invest in shares of
closed-end funds that are trading at a discount to net asset value or at a
premium to net asset value. There can be no assurance that the market discount
on shares of any closed-end fund purchased by the Fund will ever decrease. In
fact, it is possible that this market discount may increase and the 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 net asset value of the Fund’s shares. Similarly, there can be no
assurance that any shares of a closed-end fund purchased by the 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 Fund.
Closed-end
funds may issue senior securities (including preferred stock and debt
obligations) for the purpose of leveraging the closed-end fund’s common shares
in an attempt to enhance the current return to such closed-end fund's common
shareholders. The 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 net asset value than an investment in shares of
investment companies without a leveraged capital structure.
Exchange-Traded
Funds (“ETFs”). The
Funds may invest in ETFs. ETFs are publicly-traded unit investment trusts,
open-end mutual funds, or depositary receipts that hold investment
portfolios which seek
to track
the performance and/or dividend yield of specific indices (i.e.,
passively managed)
or which
are actively managed.
Investments
in ETFs are generally subject to limits under the 1940 Act on investments in
other investment companies. ETF shareholders are subject to the same risks as
holders of other
investment
portfolios. ETFs are subject to certain additional risks, including: (1) the
risk that their prices may not correlate perfectly with changes in the
underlying index; and (2) the risk of possible trading halts due to market
conditions or other reasons that, in the view of the exchange upon which an ETF
trades, would make trading in the ETF inadvisable. An exchange-traded sector
fund may also be adversely affected by the performance of that specific sector
or group of industries on which it is based. Because ETFs trade on an exchange,
they may trade at a
premium or discount to their net
asset value per share (“NAV”). Additionally, the Fund will indirectly bear its
proportionate share of the expenses of the ETF.
For
purposes of evaluating whether at least 40% of the International Fund’s
investments are in companies located outside the U.S., investments in ETFs based
on foreign market indices are considered located outside the U.S.
Business
Development Companies (“BDCs”).
BDCs
are a type of closed-end fund regulated under the 1940 Act, which typically
invest in and lend to small-and medium-sized private companies that may lack
access to public equity markets for capital raising. Under the 1940 Act, BDCs
must invest at least 70% of the value of their total assets in certain asset
types, which are typically the securities of private U.S. businesses.
Additionally, BDCs must make available significant managerial assistance to the
issuers of such securities. BDCs are not taxed on income distributed to
shareholders, provided they qualify as a regulated investment company under the
Code. BDCs have expenses associated with their operations. Accordingly, the Fund
will indirectly bear its proportionate share of any management and other
expenses, and of any performance based fees, charged by the BDCs in which the
Fund invests.
Because
BDCs typically invest in small and medium-sized companies, a BDC’s portfolio is
subject to the risks inherent in investing in smaller companies, including that
portfolio companies may be dependent on a small number of products or services
and may be more adversely affected by poor economic or market conditions. Some
BDCs invest substantially, or even exclusively, in one sector or industry group
and therefore the BDC may be susceptible to adverse conditions and economic or
regulatory occurrences affecting the sector or industry group, which tends to
increase volatility and result in higher risk. Investments in BDCs are also
subject to management risk, including management’s ability to meet the BDC’s
investment objective, and management’s ability to manage the BDC’s portfolio
during periods of market turmoil and as investors’ perceptions regarding a BDC
or its underlying investments change. BDC shares are not redeemable at the
option of the BDC shareholder and, as with shares of other closed-end funds;
they may trade in the secondary market at a discount to their NAV.
FIXED
INCOME INVESTMENTS
Temporary
Defensive Investments. For
temporary and defensive purposes, each Fund may invest up to 100% of its total
assets in investment grade short-term fixed-income securities (including
short-term U.S. Government securities, money market instruments, including
negotiable certificates of deposit, non-negotiable fixed time deposits, bankers’
acceptances, commercial paper and floating rate notes) and repurchase
agreements. Each Fund may also hold significant amounts of its assets in cash,
subject to the applicable percentage limitations for short-term securities. A
Fund will not be achieving its investment objective to the extent it takes a
temporary defensive position.
General
Characteristics and Risks of Fixed-Income Securities. Bonds
and other fixed-income securities are used by issuers to borrow money from
investors. The issuer pays the investor a fixed or variable rate of interest,
and must repay the principal amount at maturity. Some fixed-income securities,
such as zero coupon bonds, do not pay current interest, but are purchased at a
discount from their face values. Fixed-income securities have varying degrees of
quality and varying maturities.
Credit
Ratings. In
general, the ratings of Moody’s Investors Service, Inc. (“Moody’s”), S&P
Global Ratings (“S&P”), and Fitch Ratings, Inc. (“Fitch Ratings”) represent
the opinions of these agencies as to the credit quality of the securities that
they rate. However, these ratings are relative and subjective and are not
absolute standards of quality. In addition, changes in these ratings may
significantly lag changes in an issuer’s creditworthiness. Changes by recognized
agencies in the rating of any fixed-income security or in the ability of the
issuer to make payments of interest and principal will also affect the value of
the security. See
Appendix A attached to this SAI for a description of the rating
categories.
After
its purchase by a Fund, an issue of securities may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither of these events will necessarily require the Adviser, on behalf of a
Fund, to sell the securities.
Changing
Fixed Income Market Conditions. In
response to past financial crises,
the U.S. government and the Board of Governors of the Federal Reserve System
(the “Federal Reserve”), as well as certain foreign governments and central
banks, took steps to support financial markets, including by keeping interest
rates at historically low levels and by purchasing large quantities of
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities on the open market (“Quantitative Easing”). This and other
government interventions may not work as intended, particularly if the efforts
are perceived by investors as being unlikely to achieve the desired results. In
response to escalating inflation, the Federal Reserve initiated a series of
rapid interest rate hikes beginning in 2022. The
Federal Reserve also reversed course on Quantitative Easing and began to divest
assets acquired as part of its Quantitative Easing program. These policy
changes, together with continued inflationary pressure, have heightened
volatility in the debt and equity markets and could cause the value of a Fund's
investments and share price to decline. It is uncertain when and if the Federal
Reserve will slow or reverse its current program in response to changing
economic conditions and how any such change would impact the Funds.
Lower
Rated/High Yield Fixed-Income Securities. The
Funds may also invest in debt securities of any maturity, duration or credit
quality, including lower rated high yield fixed-income securities, from any
government or corporate issuer, U.S. or foreign. Lower rated high yield
fixed-income securities are those rated below Baa3 by Moody’s, or below BBB- by
S&P or Fitch Ratings, or securities which are unrated and determined by the
Adviser to be of comparable quality. Lower rated securities are generally
referred to as high yield bonds or junk bonds. The risk of default and the price
volatility associated with it are greater for junk bonds than for bonds of
investment grade issuers. A Fund may invest in eligible unrated securities
which, in the opinion of the Adviser, offer comparable risks to those associated
with permissible rated securities.
Debt
obligations rated in the lower ratings categories, or which are unrated, involve
greater volatility of price and risk of loss of principal and income. In
addition, lower ratings reflect a greater possibility of an adverse change in
financial condition affecting the ability of the issuer to make payments of
interest and principal. The market price and liquidity of lower rated
fixed-income securities generally respond to short-term economic, corporate and
market developments more dramatically than do higher rated securities. These
developments are perceived to have a more direct relationship to the ability of
an issuer of lower rated securities to meet its ongoing debt
obligations.
Reduced
volume and liquidity in the high yield bond market, or the reduced availability
of market quotations, will make it more difficult to dispose of the bonds and
accurately value a Fund’s assets. The reduced availability of reliable,
objective pricing data may increase a Fund’s reliance on management’s judgment
in valuing high yield bonds. To the extent that a Fund invests in these
securities, the achievement of the Fund’s objective will be more dependent on
the Adviser’s judgment and analysis than it would otherwise be. In addition,
high yield securities in a Fund’s portfolio may be susceptible to adverse
publicity and investor perceptions, whether or not these perceptions are
justified by fundamental factors. In the past, economic downturns and increases
in interest rates have caused a higher incidence of default by the issuers of
lower rated securities and may do so in the future, particularly with respect to
highly leveraged issuers.
Corporate
Debt Securities. Investment
in U.S. dollar or foreign currency-denominated corporate debt securities of
domestic or foreign issuers is limited to corporate bonds, debentures, notes and
other similar corporate debt instruments, including convertible securities and
including corporate income-producing securities, which meet the minimum ratings
criteria. The Funds’ investments in corporate bonds will generally be of short
to medium-term maturities and, on average, will have a credit rating of
A.
Credit
Risk. Credit
risk relates to the ability of an issuer to pay interest and principal as they
become due. Generally, lower quality, higher yielding bonds are subject to more
credit risk than higher quality, lower yielding bonds. A default by the issuer
of, or a downgrade in the credit rating assigned to, a fixed-income security in
a Fund’s portfolio will reduce the value of the security.
Interest
Rate Risk. Interest
rate risk refers to the fluctuations in value of fixed-income securities
resulting solely from the relationship between the market value of outstanding
fixed-income securities and changes in interest rates. An increase in interest
rates will generally reduce the market value of fixed-income investments, and a
decline in interest rates will tend to increase their value. In addition, debt
securities with longer maturities, which tend to produce higher yields, are
subject to potentially greater capital appreciation and depreciation than
obligations with shorter maturities. Fluctuations in the market value of
fixed-income securities after their acquisition will not affect the cash
interest payable on those securities but will be reflected in the valuations of
those securities used to compute a Fund’s NAV. A wide variety of factors can
cause interest rates to rise (e.g.,
central
bank monetary policies, inflation rates, general economic conditions, etc.).
This is especially true under recent economic conditions in which interest rates
have been at historically low levels and inflation reached historically high
levels. The negative impact on fixed-income securities from interest rate
increases could be swift and significant.
LIBOR
Rate Risk. A
Fund may have investments in financial instruments that utilize the London
Interbank Offered Rate (“LIBOR”) as the reference or benchmark rate for variable
interest rate calculations (including variable or floating rate debt securities
or loans and derivatives such as interest rate futures or swaps). LIBOR is
intended to measure the rate generally at which banks can lend and borrow from
one another in the relevant currency on an unsecured basis. LIBOR was a common
benchmark interest rate index used to make adjustments to variable-rate debt
instruments, to determine interest rates for a variety of financial instruments
and borrowing arrangements and as reference rate in derivative contracts. A
Fund’s investments may pay interest at variable or floating rates based on
LIBOR, may be subject to interest caps or floors based on LIBOR or may otherwise
reference LIBOR as a reference rate to determine payment obligations or
financing terms.
In
the years following the 2008 financial crisis, the integrity of LIBOR was
increasingly questioned because several banks contributing to its calculation
were accused of rate manipulation and because of a general contraction in the
unsecured interbank lending market. As a result, regulators and financial
industry working groups in several jurisdictions have worked over the past
several years to identify alternative reference rates (“ARRs”) to replace LIBOR
and to assist with the transition to the new ARRs. On
December 16, 2022, the Fed adopted a final rule that identifies the
Secured Overnight Financing Rate (“SOFR”) as a replacement for USD LIBOR. SOFR
is a broad measure of the cost of overnight borrowing of cash through repurchase
agreements collateralized by U.S. Treasury securities that
will replace LIBOR in certain financial contracts after June 30,
2023.
In
connection with the LIBOR transition, the publication of all settings of British
Pound Sterling, Swiss Franc, Euro and Japanese Yen LIBOR, as well as the 1-week
and 2-month settings of U.S. Dollar (USD) LIBOR were phased out at the end of
2021. The remaining settings of USD LIBOR, the
1-, 3-, and 6- month setting of the USB LIBOR which
are the most widely used in financial markets, will continue to be published
through
June 2023 while
a synthetic US dollar LIBOR rate for these settings will continue to be
published through September 2024
to allow for an orderly transition away from these rates. Additionally, key
regulators instructed banking institutions to cease entering into new contracts
that reference these remaining USD LIBOR settings after December 31, 2021,
subject to certain limited exceptions.
There
remains uncertainty and risks relating to the continuing LIBOR transition and
its effects on a Fund and the instruments in which a Fund may invest. For
example, there can be no assurance that the composition or characteristics of
any ARRs or financial instruments in which a Fund invests that utilize ARRs will
be similar to or produce the same value or economic equivalence as LIBOR or that
these instruments will have the same volume or liquidity. Additionally, although
regulators have generally prohibited banking institutions from entering into new
contracts that reference those USD LIBOR settings that continue to exist, there
remains uncertainty and risks relating to certain “legacy” USD LIBOR instruments
that were issued or entered into before December 31, 2021 and the process by
which a replacement interest rate will be implemented into these instruments
when USD LIBOR is ultimately discontinued. While some “legacy” USD LIBOR
instruments may contemplate a scenario where LIBOR is no longer available by
providing for an alternative or “fallback” rate-setting methodology, there may
be significant uncertainty regarding the effectiveness of such alternative or
“fallback” methodologies to replicate USD LIBOR; other “legacy” USD LIBOR
instruments may not include such “fallback” rate-setting provisions at all. As a
result, the ongoing LIBOR transition might lead to increased volatility and
reduced liquidity in, or a reduction in the value of, “legacy” USD LIBOR
instruments held by a Fund; increased difficulty for borrowers associated with
these instruments to refinance, the proceeds of which are needed to repay a
Fund; or diminished effectiveness of any hedging strategies that a Fund may seek
to implement in connection with these instruments. All of the foregoing may
adversely affect a Fund’s performance or NAV.
Call
(Prepayment) Risk and Extension Risk. Call
risk is the risk that an issuer will pay principal on an obligation earlier than
scheduled or expected, which would accelerate cash flows from, and shorten the
average life and duration of, the security. This typically happens when interest
rates have declined, and a Fund will suffer from having to reinvest in lower
yielding securities.
Extension
risk is the risk that an issuer may pay principal on an obligation slower than
expected. This typically happens when interest rates have increased. Slower than
expected prepayments will have the effect of extending the average life and
duration of the obligation and possibly of a Fund’s fixed-income
portfolio.
Prepayments
that are faster or slower than expected may reduce the value of the affected
security.
Maturity
and Duration. The
effective maturity of an individual portfolio security in which a Fund invests
is defined as the period remaining until the earliest date when the Fund can
recover the principal amount of such security through mandatory redemption or
prepayment by the issuer, the exercise by the Fund of a put option, demand
feature or tender option granted by the issuer or a third party or the payment
of the principal on the stated maturity date. The effective maturity of variable
rate securities is calculated by reference to their coupon reset dates. Thus,
the effective maturity of a security may be substantially shorter than its final
stated maturity.
Duration
is a measure of a debt security’s price sensitivity taking into account expected
cash flows and prepayments under a wide range of interest rate scenarios. In
computing the duration of its portfolio, a Fund will have to estimate the
duration of obligations that are subject to prepayment or redemption by the
issuer taking into account the influence of interest rates on prepayments and
coupon flows. Each Fund may use various techniques to shorten or lengthen the
option-adjusted duration of its fixed-income portfolio, including the
acquisition of debt obligations at a premium or discount, and the use of
mortgage swaps and interest rate swaps, caps, floors and collars.
Bank
and Corporate Obligations. Commercial
paper represents short-term unsecured promissory notes issued in bearer form by
banks or bank holding companies, corporations and finance companies. The
commercial paper purchased by the Funds consists of direct obligations of
domestic or foreign issuers. Bank obligations in which the Funds may invest
include certificates of deposit, bankers’ acceptances and fixed time
deposits.
Certificates
of deposit are negotiable certificates issued against funds deposited in a
commercial bank for a definite period of time and earning a specified return.
Bankers’ acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are “accepted”
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the investor, but may be
subject to early withdrawal penalties that vary depending upon market conditions
and the remaining maturity of the obligation. There are no contractual
restrictions on the right to transfer a beneficial interest in a fixed time
deposit to a third party, although there is no market for such deposits. Bank
notes and bankers’ acceptances rank junior to domestic deposit liabilities of
the bank and equal to other senior, unsecured obligations of the bank. Bank
notes
are
not insured by the Federal Deposit Insurance Corporation (“FDIC”) or any other
insurer. Deposit notes are insured by the FDIC only to the extent of $250,000
per depositor per bank.
Repurchase
Agreements. The
Funds may enter into repurchase agreements with approved banks and
broker-dealers. In a repurchase agreement, a Fund purchases securities with the
understanding that they will be repurchased by the seller at a set price on a
set date. This allows a Fund to keep its assets at work but retain overnight
flexibility pending longer term investments.
Repurchase
agreements involve credit risk. For example, if a seller defaults, a Fund will
suffer a loss if the proceeds from the sale of the collateral are lower than the
repurchase price. If the seller becomes bankrupt, a Fund may be delayed or incur
additional costs to sell the collateral. To minimize risk, collateral must be
held with the Funds’ custodian and at least equal the market value of the
securities subject to the repurchase agreement plus any accrued interest.
Repurchase agreements collateralized entirely by cash or U.S. government
securities may be deemed to be fully collateralized pursuant to Rule 2a-7 under
the 1940 Act and may be deemed to be investments in cash or U.S. government
securities.
U.S.
Government Securities. U.S.
Government securities include U.S. Department of the Treasury (“Treasury”)
obligations and obligations issued or guaranteed by U.S. Government agencies,
instrumentalities or sponsored enterprises, which are supported by:
•the
full faith and credit of the Treasury (such as the Government National Mortgage
Association (“GNMA”));
•the
right of the issuer to borrow from the Treasury ( e.g.,
Federal
Home Loan Banks);
•the
discretionary authority of the U.S. Government to purchase certain obligations
of the issuer (e.g.,
Federal
National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage
Corporation (“FHLMC”)); or
•only
the credit of the agency and a perceived “moral obligation” of the U.S.
Government.
No
assurance can be given that the U.S. Government will provide financial support
to U.S. Government agencies, authorities, instrumentalities or sponsored
enterprises that are not supported by the full faith and credit of the United
States. Securities guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities include: (1)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. Government or any of its
agencies, authorities or instrumentalities; and (2) participations in loans made
to non-U.S. Governments or other entities that are so guaranteed, however
there is a risk that the U.S. Government fails to pay interest or principal on
U.S. Government obligations and such failure, or a perceived likelihood of such
failure, will negatively impact the value and credit rating of U.S. Government
obligations.
The secondary market for certain of these participations is limited and,
therefore, may be regarded as illiquid.
U.S.
Government securities also include Treasury receipts, zero coupon bonds,
Treasury inflation-indexed bonds, deferred interest securities and other
stripped U.S. Government securities. The interest and principal components of
stripped U.S. Government securities are traded independently. The most widely
recognized trading program for such securities is the Separate Trading of
Registered Interest and Principal of Securities Program. Treasury
inflation-indexed obligations provide a measure of protection against inflation
by adjusting the principal amount for inflation. The semi-annual interest
payments on these obligations are equal to a fixed percentage of the
inflation-adjusted principal amount.
Fannie
Mae and FHLMC have been operating under conservatorship, with the Federal
Housing Finance Administration (“FHFA”) acting as their conservator, since
September 2008. The entities are dependent upon the continued support of the
Treasury and FHFA in order to continue their business operations. These factors,
among others, could affect the future status and role of Fannie Mae and FHLMC
and the value of their debt and equity securities and the securities which they
guarantee.
Mortgage-Backed
Securities. Each
Fund may invest only in those mortgage-backed securities that meet its credit
quality and portfolio maturity requirements. Mortgage-backed securities
represent participation interests in pools of adjustable and fixed rate mortgage
loans secured by real property.
Unlike
conventional debt obligations, mortgage-backed securities provide monthly
payments derived from the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage
loans.
The mortgage loans underlying mortgage-backed securities are generally subject
to a greater rate of principal prepayments in a declining interest rate
environment and to a lesser rate of principal prepayments in an increasing
interest rate environment. Under certain interest rate and prepayment scenarios,
a Fund may fail to recover the full amount of its investment in mortgage-backed
securities notwithstanding any direct or indirect governmental or agency
guarantee. Since faster than expected prepayments must usually be invested in
lower yielding securities, mortgage-backed securities are less effective than
conventional bonds in “locking” in a specified interest rate. In a rising
interest rate environment, a declining prepayment rate may extend the average
life of many mortgage-backed securities. Extending the average life of a
mortgage-backed security reduces its value and increases the risk of
depreciation due to future increases in market interest rates.
A
Fund’s investments in mortgage-backed securities may include conventional
mortgage pass-through securities and certain classes of multiple class
collateralized mortgage obligations (“CMOs”). Mortgage pass-through securities
are fixed or adjustable rate mortgage-backed securities that 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 or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans. CMOs are issued
in multiple classes, each having different maturities, interest rates, payment
schedules and allocations of principal and interest on the underlying mortgages.
Senior CMO classes will typically have priority over residual CMO classes as to
the receipt of principal and/or interest payments on the underlying mortgages.
The CMO classes in which a Fund may invest include but are not limited to
sequential and parallel pay CMOs, including planned amortization class (“PAC”)
and target amortization class (“TAC”) securities. Sequential pay CMOs apply
payments of principal, including any prepayments, to each class of CMO in the
order of the final distribution date. Thus, no payment of principal is made on
any class until all other classes having an earlier final distribution date have
been paid in full. Parallel pay CMOs apply principal payments and prepayments to
two or more classes concurrently on a proportionate or disproportionate basis.
The simultaneous payments are taken into account in calculating the final
distribution date of each class. Each Fund may invest in the most junior classes
of CMOs, which involve the most interest rate, prepayment and extension
risk.
Different
types of mortgage-backed securities are subject to different combinations of
prepayment, extension, interest rate and other market risks. Conventional
mortgage pass through securities and sequential pay CMOs are subject to all of
these risks, but are typically not leveraged. PACs, TACs and other senior
classes of sequential and parallel pay CMOs involve less exposure to prepayment,
extension and interest rate risk than other mortgage-backed securities, provided
that prepayment rates remain within expected prepayment ranges or “collars.” To
the extent that the prepayment rates remain within these prepayment ranges, the
residual or support tranches of PAC and TAC CMOs assume the extra prepayment,
extension and interest rate risks associated with the underlying mortgage
assets.
Agency
Mortgage-Backed Securities. The
Funds may invest in mortgage-backed securities issued or guaranteed by the U.S.
Government, foreign governments or any of their agencies, instrumentalities or
sponsored enterprises. Agencies, instrumentalities or sponsored enterprises of
the U.S. Government include, but are not limited to, the GNMA, Fannie Mae and
FHLMC. GNMA securities are backed by the full faith and credit of the U.S.
Government, which means that the U.S. Government guarantees that the interest
and principal will be paid when due. Fannie Mae securities and FHLMC securities
are not backed by the full faith and credit of the U.S. Government; however,
these enterprises have the ability to obtain financing from the Treasury.
Although the U.S. Government has provided financial support to Fannie Mae and
FHLMC, no assurance can be given that the U.S. Government will provide financial
support in the future to securities not backed by the full faith and credit of
the U.S. Government. There are several types of agency mortgage securities
currently available, including, but not limited to, guaranteed mortgage
pass-through certificates and multiple class securities.
Privately-Issued
Mortgage-Backed Securities. Mortgage-backed
securities may also be issued by trusts or other entities formed or sponsored by
private originators of and institutional investors in mortgage loans and other
foreign or domestic non-governmental entities (or represent custodial
arrangements administered by such institutions). These private originators and
institutions include domestic and foreign savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. Privately issued mortgage-backed
securities are generally backed by pools of conventional (i.e.,
non-government
guaranteed or insured) mortgage loans.
These
mortgage-backed securities are not guaranteed by an entity having the credit
standing of a U.S. Government agency. In order to receive a high quality rating,
they normally are structured with one or more types of “credit enhancement.”
These
credit enhancements fall generally into two categories: (1) liquidity protection
and (2) protection against losses resulting after default by a borrower and
liquidation of the collateral. Liquidity protection refers to the providing of
cash advances to holders of mortgage-backed securities when a borrower on an
underlying mortgage fails to make its monthly payment on time. Protection
against losses resulting after default and liquidation is designed to cover
losses resulting when, for example, the proceeds of a foreclosure sale are
insufficient to cover the outstanding amount on the mortgage. This protection
may be provided through guarantees, insurance policies or letters of credit,
through various means of structuring the transaction or through a combination of
such approaches.
Mortgage
securities issued by non-government entities may be subject to greater credit
risk than those issued by government entities. The performance of
privately-issued mortgage securities may depend on the integrity and competence
of the institutions that originate the underlying mortgages, yet investors in
these mortgage securities may have only limited access to information enabling
investors to evaluate the practices of these mortgage originators. In order to
prevent defaults by troubled mortgage borrowers, the sponsors of mortgage
securities may have to renegotiate and investors in mortgage securities may have
to accept less favorable interest rates or other terms on the mortgages
underlying these securities.
Unanticipated
mortgage defaults or renegotiations of mortgage terms are likely to depress the
prices of related mortgage securities. Although mortgage securities may be
supported by some form of government or private guarantee and/or insurance,
there is no assurance that private guarantors or insurers will meet their
obligations. Guarantees, insurance and other forms of credit enhancement
supporting mortgage securities may also be insufficient to cover all losses on
underlying mortgages if mortgage borrowers default at a greater than expected
rate.
Asset-Backed
Securities. Asset-backed
securities represent individual interests in pools of consumer loans, home
equity loans, trade receivables, credit card receivables, and other debt and are
similar in structure to mortgage-backed securities. The assets are securitized
either in a pass-through structure (similar to a mortgage pass-through
structure) or in a pay-through structure (similar to a CMO structure).
Asset-backed securities may be subject to more rapid repayment than their stated
maturity date would indicate as a result of the pass-through of prepayments of
principal on the underlying loans. During periods of declining interest rates,
prepayment of certain types of loans underlying asset-backed securities can be
expected to accelerate. Accordingly, a Fund’s ability to maintain positions in
these securities will be affected by reductions in the principal amount of the
securities resulting from prepayments, and the Fund must reinvest the returned
principal at prevailing interest rates, which may be lower. Asset-backed
securities may also be subject to extension risk during periods of rising
interest rates.
Asset-backed
securities entail certain risks not presented by mortgage-backed securities. The
collateral underlying asset-backed securities may be less effective as security
for payments than real estate collateral. Debtors may have the right to set off
certain amounts owed on the credit cards or other obligations underlying the
asset-backed security, or the debt holder may not have a first (or proper)
security interest in all of the obligations backing the receivable because of
the nature of the receivable or state or federal laws protecting the debtor.
Certain collateral may be difficult to locate in the event of default, and
recoveries on depreciated or damaged collateral may not fully cover payments due
on these securities. A Fund may invest in any type of asset-backed security if
the Adviser determines that the security is consistent with the Fund’s
investment objective and policies.
Floating
Rate/Variable Rate Notes. Some
notes purchased by a Fund may have variable or floating interest rates. Variable
rates are adjustable at stated periodic intervals; floating rates are
automatically adjusted according to a specified market rate for such
investments, such as the percentage of the prime rate of a bank, or the 91-day
U.S. Treasury Bill rate. These obligations may be secured by bank letters of
credit or other support arrangements. If a security would not satisfy a Fund’s
credit quality standards without such a credit support, the entity providing a
bank letter or line of credit, guarantee or loan commitment must meet a Fund’s
credit quality standards.
The
absence of an active secondary market for certain variable and floating rate
notes could make it difficult for a Fund to dispose of the instruments, and a
Fund could suffer a loss if the issuer defaults or there are periods during
which the Fund is not entitled to exercise its demand rights. Variable and
floating rate instruments held by a Fund will be subject to the Fund’s
limitation on investments in illiquid securities if a reliable trading market
for the instruments does not exist, and the Fund cannot demand payment of the
principal amount of such instruments within seven days.
Structured
Securities. Structured
securities include notes, bonds or debentures that provide for the payment of
principal of and/or interest in amounts determined by reference to changes in
the value of specific currencies, interest rates,
commodities,
indices or other financial indicators (the “Reference”) or the relative change
in two or more References. The interest rate or the principal amount payable
upon maturity or redemption may be increased or decreased depending upon changes
in the applicable Reference. The terms of structured securities may provide that
in certain circumstances no principal is due at maturity and, therefore, may
result in the loss of the Fund’s investment. Structured securities may be
positively or negatively indexed, so that appreciation of the Reference may
produce an increase or decrease in the interest rate or value of the security at
maturity. In addition, the change in interest rate or the value of the security
at maturity may be a multiple of the change in the value of the Reference.
Consequently, leveraged structured securities entail a greater degree of market
risk than other types of debt obligations. Structured securities may also be
more volatile, less liquid and more difficult to accurately price than less
complex fixed-income investments.
Pay-In-Kind,
Delayed Payment and Zero Coupon Bonds. These
securities are generally issued at a discount from their face value because cash
interest payments are typically postponed until maturity or after a stated
period. The amount of the discount rate varies depending on such factors as the
time remaining until maturity, prevailing interest rates, the security’s
liquidity and the issuer’s credit quality. These securities also may take the
form of debt securities that have been stripped of their interest payments. The
market prices of pay-in-kind, delayed payment and zero coupon bonds generally
are more volatile than the market prices of securities that pay interest
periodically and in cash, and are likely to respond more to changes in interest
rates than interest-bearing securities having similar maturities and credit
quality. A Fund generally accrues income on securities that are issued at a
discount and/or do not make current cash payments of interest for tax and
accounting purposes. This income is required to be distributed to shareholders.
A Fund’s investments in pay-in-kind, delayed payment and zero coupon bonds may
require the Fund to sell portfolio securities to generate sufficient cash to
satisfy its income distribution requirements.
FOREIGN
SECURITIES
Each
Fund may invest in the securities of corporate and governmental issuers located
in or doing business in a foreign country (“foreign issuers”). A company is
considered to be located in or doing business in a foreign country if it
satisfies at least one of the following criteria: (i) the equity securities of
the company are traded principally on stock exchanges in one or more foreign
countries; (ii) it derives 50% or more of its total revenue from goods produced,
sales made or services performed in one or more foreign countries; (iii) it
maintains 50% or more of its assets in one or more foreign countries; (iv) it is
organized under the laws of a foreign country; or (v) its principal executive
offices are located in a foreign country.
ADRs,
EDRs, IDRs and GDRs. American
Depositary Receipts (“ADRs”) (sponsored or unsponsored) are receipts typically
issued by a U.S. bank, trust company or other entity and evidence ownership of
the underlying foreign securities. Most ADRs are traded on a U.S. stock
exchange. Issuers of unsponsored ADRs are not contractually obligated to
disclose material information in the U.S., so there may not be a correlation
between this information and the market value of the unsponsored ADR. European
Depositary Receipts (“EDRs”) and International Depositary Receipts (“IDRs”) are
receipts typically issued by a European bank or trust company evidencing
ownership of the underlying foreign securities. Global Depositary Receipts
(“GDRs”) are receipts issued by either a U.S. or non-U.S. banking institution
evidencing ownership of the underlying foreign securities.
Sovereign
Debt Obligations. Investment
in sovereign debt obligations involves special risks not present in domestic
corporate debt obligations. The issuer of the sovereign debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal or interest when due, and a Fund may have limited recourse in
the event of a default. During periods of economic uncertainty, the market
prices of sovereign debt, and a Fund’s NAV, may be more volatile than prices of
U.S.
corporate debt
obligations. In the past, certain emerging market countries have encountered
difficulties in servicing their debt obligations, withheld payments of principal
and interest and declared moratoria on the payment of principal and interest on
their sovereign debts.
A
sovereign debtor’s willingness or ability to repay principal and pay interest in
a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor’s policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multilateral agencies and other entities
to reduce principal and interest arrearages on their debt. The failure of a
sovereign debtor to implement economic policies or repay principal or interest
when due may result in the cancellation of third-party commitments to lend funds
to the sovereign debtor, which may further impair such debtor’s ability or
willingness to service its debts.
Obligations
of Supranational Entities. Each
Fund may invest in obligations of supranational entities designated or supported
by governmental entities to promote economic reconstruction or development and
of international banking institutions and related government agencies. Examples
include the International Bank for Reconstruction and Development (the World
Bank), the Asian Development Bank and the Inter-American Development Bank. Each
supranational entity’s lending activities are limited to a percentage of its
total capital (including “callable capital” contributed by its governmental
members at the entity’s call), reserves and net income. Participating
governments may not be able or willing to honor their commitments to make
capital contributions to a supranational entity.
Risks
of Foreign Securities. Investments
in foreign securities may involve a greater degree of risk than securities of
U.S. issuers. There is generally less publicly available information about
foreign companies in the form of reports and ratings similar to those published
about issuers in the United States. Also, foreign issuers are generally not
subject to uniform accounting, auditing and financial reporting requirements
comparable to those applicable to U.S. issuers.
To
the extent that a Fund’s foreign securities are denominated in currencies other
than the U.S. dollar, changes in foreign currency exchange rates will affect the
Fund’s NAV, the value of dividends and interest earned, gains and losses
realized on the sale of securities, and any net investment income and gains that
the Fund distributes to shareholders. Securities transactions in some foreign
markets may not be settled promptly so that a Fund’s foreign investments may be
less liquid and subject to the risk of fluctuating currency exchange rates
pending settlement.
Foreign
securities may be purchased on over-the-counter markets or exchanges located in
the countries where an issuer’s securities are principally traded. Many foreign
markets are not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than U.S.
markets. Securities of some foreign issuers are less liquid and more volatile
than securities of comparable U.S. issuers. Fixed commissions on foreign
exchanges are generally higher than negotiated commissions on U.S. exchanges,
although a Fund will endeavor to achieve the most favorable net results on its
portfolio transactions. There is generally less government supervision and
regulation of securities exchanges, brokers and listed issuers in foreign
countries than in the United States. In certain foreign countries, there is the
possibility of adverse changes in investment or exchange control regulations,
expropriation, nationalization or confiscatory taxation, limitations on the
removal of assets of a Fund from a country, political or social instability, or
diplomatic developments. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in terms of growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Dividends, interest, and, in
some cases, capital gains earned by a Fund on certain foreign securities may be
subject to foreign taxes, thus reducing the net amount of income or gains
available for distribution to the Fund’s shareholders.
The
above risks may be intensified for investments in emerging markets or countries
with limited or developing capital markets. These countries are located in the
Asia-Pacific region, Eastern Europe, Latin and South America and Africa.
Security prices in these markets can be significantly more volatile than in more
developed countries, reflecting the greater uncertainties of investing in less
established markets and economies. Political, legal and economic structures in
many of these emerging market countries may be undergoing significant evolution
and rapid development, and they may lack the social, political, legal and
economic stability characteristic of more developed countries. Emerging market
countries may have failed in the past to recognize private property rights. They
may have relatively unstable governments, present the risk of nationalization of
businesses, restrictions on foreign ownership, or prohibitions on repatriation
of assets, and may have less protection of property rights than more developed
countries. Their economies may be predominantly based on only a few industries,
may be highly vulnerable to changes in local or global trade conditions, and may
suffer from extreme and volatile debt burdens or inflation rates. Local
securities markets may trade a small number of securities and may be unable to
respond effectively to increases in trading volume, potentially making prompt
liquidation of substantial holdings difficult or impossible at times. A Fund may
be required to establish special custodial or other arrangements before making
certain investments in these countries. Securities of issuers located in these
countries may have limited marketability and may be subject to more abrupt or
erratic price movements. Sanctions and other intergovernmental actions may be
undertaken against an emerging market country, which may result in the
devaluation of the country’s currency, a downgrade in the country’s credit
rating, and a decline in the value and liquidity of the country’s securities.
Sanctions could result in the immediate freeze of securities issued by an
emerging market company or government, impairing the ability of a Fund to buy,
sell, receive or deliver these securities.
Currency
Risk. Foreign
securities usually are denominated and traded in foreign currencies, while each
Fund values its assets in U.S. dollars. The exchange rates between foreign
currencies and the U.S. dollar fluctuate continuously. As a result, a Fund’s
performance will be affected by its direct or indirect exposure, which may
include exposure through U.S. dollar denominated depositary receipts and
participation certificates, to a particular currency due to favorable or
unfavorable changes in currency exchange rates relative to the U.S. dollar.
Currency exchange rates fluctuate significantly for many reasons, including
changes in supply and demand in the currency exchange markets, actual or
perceived changes in interest rates, intervention (or the failure to intervene)
by U.S. or foreign governments, central banks, or supranational agencies such as
the International Monetary Fund and currency controls or other political and
economic developments in the U.S. or abroad.
A
Fund’s direct or indirect exposure to a particular currency may be hedged to
mitigate currency volatility or because the Fund believes a currency is
overvalued. There can be no guarantee that any hedging activity will be
successful. Hedging activity and/or use of forward foreign currency exchange
contracts may mitigate the risk of loss from changes in currency exchange rates,
but also may reduce or limit the opportunity for gain and involves the risk that
the contracting party will not fulfill its contractual obligation to deliver the
currency contracted for at the agreed upon price to the Fund. The success of any
hedging strategy is highly uncertain, and a Fund may be required to buy or sell
additional currency on the spot market (and bear the expense of such
transaction) if the Adviser’s predictions regarding the movement of foreign
currency or securities markets prove inaccurate.
Risk
of Investing in the European Union.
Some of the Funds may invest in securities in the European market. A Fund’s
performance will be affected by political, social and economic conditions in
Europe, such as growth of the economic output (the gross national product), the
rate of inflation, the rate at which capital is reinvested into European
economies, the success of governmental actions to reduce budget deficits, the
resource self-sufficiency of European countries and interest and monetary
exchange rates between European countries. European financial markets may
experience volatility due to concerns about high government debt levels, credit
rating downgrades, rising unemployment, the future of the euro as a common
currency, possible restructuring of government debt and other government
measures responding to those concerns, and fiscal and monetary controls imposed
on member countries of the European Union.
On
January 31, 2020, the United Kingdom (“UK”) ceased to be a member of the
European Union (“EU”) and the EU-UK Withdrawal Agreement came into force
(i.e.,
“Brexit”). Following a transition period, the United Kingdom’s post-Brexit trade
agreement with the EU passed into law in December 2020 and went into effect on
January 1, 2021. There is significant market uncertainty regarding Brexit’s
ramifications. The range and potential implications of possible political,
regulatory, economic, and market outcomes cannot be fully known but could be
significant, potentially resulting in increased volatility and illiquidity and
lower economic growth for companies that rely significantly on Europe for their
business activities and revenues. The UK has one of the largest economies in
Europe and is a major trading partner with the other EU countries and the United
States. Brexit may create additional and substantial economic stresses for the
UK, including a contraction of the UK’s economy, decreased trade, capital
outflows, devaluation of the British pound, as well as a decrease in business
and consumer spending and investment. The negative impact on not only the UK and
European economies but also the broader global economy could be significant.
Brexit also may cause other EU member states to contemplate departing the EU,
which would likely perpetuate political and economic instability in the region
and cause additional market disruption in global financial markets.
Risks
of Investing in Asia.
The value of the Japan Fund’s assets may be adversely affected by political,
economic, social, and religious instability; inadequate investor protection;
changes in laws or regulations of countries within the Asian region (including
countries in which the Fund invests, as well as the broader region);
international relations with other nations; natural disasters; corruption and
military activity. The Asian region, and particularly China, Japan and South
Korea, may be adversely affected by political, military, economic and other
factors related to North Korea. In addition, China’s long-running conflict over
Taiwan, border disputes with many of its neighbors and historically strained
relations with Japan could adversely impact economies in the region. The
economies of many Asian countries differ from the economies of more developed
countries in many respects, such as rate of growth, inflation, capital
reinvestment, resource self-sufficiency, financial system stability, the
national balance of payments position and sensitivity to changes in global
trade. Asian markets are particularly susceptible to restrictions on global
funds. Deflationary factors could also reemerge in certain Asian markets, the
potential effects of which are difficult to forecast. While certain Asian
governments will have the ability to offset deflationary conditions through
fiscal or budgetary measures, others will lack the capacity to do so. Certain
Asian countries are highly dependent upon and may be affected by developments in
the U.S., Europe, and other Asian economies. Global economic conditions, and
international trade, affecting Asian economies and companies could deteriorate
as a result of political instability and uncertainty, and politically motivated
actions, in the U.S. and Europe, as well as increased tensions with certain
nations such as Russia.
Risks
Associated with Japan.
The Japanese economy continues to emerge from a prolonged economic downturn.
Japan’s economic growth rate has remained relatively low. The economy is
characterized by an aging demographic, declining population, large government
debt and highly regulated labor market. Economic growth is dependent on domestic
consumption, deregulation and consistent government policy. International trade,
particularly with the U.S., also impacts growth and adverse economic conditions
in the U.S. or other such trade partners may affect Japan. Any restrictions on
global trade are likely
to have a significant adverse
effect on the country. Japan also has a growing economic relationship with China
and other Southeast Asian countries, and thus Japan’s economy may also be
affected by economic, political, or social instability in those countries
(whether resulting from local or global events).
Risks
Associated with Russian Invasion of Ukraine.
In late February 2022, Russian military forces invaded Ukraine, significantly
amplifying already existing geopolitical tensions among Russia, Ukraine, Europe,
NATO, and the West. Russia’s invasion, the responses of countries and political
bodies to Russia’s actions, and the potential for wider conflict may increase
financial market volatility and could have severe adverse effects on regional
and global economic markets, including the markets for certain securities and
commodities such as oil and natural gas. Following Russia’s actions, various
countries, including the U.S., Canada, the United Kingdom, Germany, and France,
as well as the European Union, issued broad-ranging economic sanctions against
Russia. A number of large corporations and U.S. states have also announced plans
to divest interests or otherwise curtail business dealings with certain Russian
businesses.
The
imposition of these current sanctions (and potential further sanctions in
response to continued Russian military activity) and other actions undertaken by
countries and businesses may adversely impact various sectors of the Russian
economy, including but not limited to, the financials, energy, metals and
mining, engineering, and defense and defense-related materials sectors. Such
actions also may result in the decline of the value and liquidity of Russian
securities, a weakening of the ruble, and could impair the ability of a Fund to
buy, sell, receive, or deliver those securities. Moreover, the measures could
adversely affect global financial and energy markets and thereby negatively
affect the value of a Fund's investments beyond any direct exposure to Russian
issuers or those of adjoining geographic regions. In response to sanctions, the
Russian Central Bank raised its interest rates and banned sales of local
securities by foreigners. Russia may take additional counter measures or
retaliatory actions, which may further impair the value and liquidity of Russian
securities. Such actions could, for example, include restricting gas exports to
other countries, seizure of U.S. and European residents' assets, or undertaking
or provoking other military conflict elsewhere in Europe, any of which could
exacerbate negative consequences on global financial markets and the economy.
The conflict between Russia and Ukraine is currently unpredictable and has the
potential to result in broadened military actions. The duration of ongoing
hostilities and corresponding sanctions and related events cannot be predicted
and may result in a negative impact on performance and the value of Fund
investments, particularly as it relates to Russia exposure.
ILLIQUID
AND RESTRICTED SECURITIES
A
Fund may purchase securities that are not registered (“restricted securities”)
under the Securities Act of 1933, as amended (the “1933 Act”), including
commercial paper issued in reliance on Section 4(a)(2) of the 1933 Act, or Rule
144A securities (Rule 144A securities are unregistered securities sold by
private companies to qualified institutional buyers through a broker-dealer), as
well as private placements issued under Regulation S, and, therefore, are
restricted as to their resale. However, a Fund will not invest more than 15% of
its net assets in illiquid investments. If it is determined that the securities
are liquid, they will not be subject to the 15% limit in illiquid investments.
The practice of investing in restricted securities could have the effect of
decreasing the level of liquidity in the Fund if sufficient numbers of qualified
institutional buyers are not interested in purchasing these restricted
securities. The Japan Fund will also limit its investment in all restricted
securities (liquid and illiquid), including Rule 144A securities, to 15% of its
total assets (see
Investment Restrictions - Non-Fundamental Investment Restrictions
(below)).
Illiquid
investments are investments that the Adviser reasonably expects cannot be sold
or disposed of in current market conditions within seven calendar days or less
without the sale or disposition significantly changing the market value of the
investment. If a Fund holds illiquid investments it may be unable to quickly
sell them or may be able to sell them only at a price below current value.
Illiquid investments may be more difficult to value.
DERIVATIVE
INSTRUMENTS
General.
The
Funds may, but are not required to, invest in derivative instruments, which are
commonly defined as financial instruments whose performance and value are
derived, at least in part, from another source, such as the performance of an
underlying asset, security or index. The Funds’ transactions in derivative
instruments may include:
i.the
purchase and writing of options on securities (including index options) and
options on foreign currencies;
ii.the
purchase and sale of futures contracts based on financial, interest rate and
securities indices, equity securities or fixed-income securities;
and
iii.entering
into forward contracts, swaps and swap related products, such as equity index,
interest rate or currency swaps, and related caps, collars, floors and
swaptions.
The
success of transactions in derivative instruments depends on an Adviser’s
judgment as to their potential risks and rewards. Use of these instruments
exposes a Fund to additional investment risks and transaction costs. If an
Adviser incorrectly analyzes market conditions or does not employ the
appropriate strategy with these instruments, the Fund’s return could be lower
than if derivative instruments had not been used. Additional risks inherent in
the use of derivative instruments include: adverse movements in the prices of
securities or currencies and the possible absence of a liquid secondary market
for any particular instrument. A Fund could experience losses if the prices of
its derivative positions correlate poorly with those of its other investments.
The loss from investing in derivative instruments is potentially unlimited.
Each
Fund may invest in derivatives for hedging purposes, to enhance returns, as a
substitute for purchasing or selling securities, to maintain liquidity or in
anticipation of changes in the composition of its portfolio holdings. The risks
and policies of various types of derivative investments in which the Funds may
invest are described in greater detail below.
Under
Rule 18f-4 each Fund limits the notional amount of its derivatives transactions
to 10% or less of its net assets in order to qualify as a “limited derivatives
user” and has
adopted and implemented policies
and procedures reasonably designed to manage the Fund's derivatives risks.
Options
on Securities and Securities Indices. A
Fund may purchase and write (sell) call and put options on any securities in
which it may invest or on any securities index containing securities in which it
may invest. These options may be listed on securities exchanges or traded in the
over-the-counter market. A Fund may write covered put and call options and
purchase put and call options to enhance total return, as a substitute for the
purchase or sale of securities, or to protect against declines in the value of
portfolio securities and against increases in the cost of securities to be
acquired.
Writing
Covered Options. A
call option on securities written by a Fund obligates the Fund to sell specified
securities to the holder of the option at a specified price if the option is
exercised at any time before the expiration date. A put option on securities
written by a Fund obligates the Fund to purchase specified securities from the
option holder at a specified price if the option is exercised at any time before
the expiration date. Options on securities indices are similar to options on
securities, except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Writing covered call options may
deprive a Fund of the opportunity to profit from an increase in the market price
of the securities in its portfolio. Writing covered put options may deprive a
Fund of the opportunity to profit from a decrease in the market price of the
securities to be acquired for its portfolio.
A
Fund may terminate its obligations under an exchange-traded call or put option
by purchasing an option identical to the one it has written. Obligations under
over-the-counter options may be terminated only by entering into an offsetting
transaction with the counterparty to the option. These purchases are referred to
as “closing purchase transactions.”
Purchasing
Options. A
Fund would normally purchase call options in anticipation of an increase, or put
options in anticipation of a decrease (“protective puts”) in the market value of
securities of the type in which it may invest. A Fund may also sell call and put
options to close out its purchased options.
The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities at a specified price during the option period.
A Fund would ordinarily realize a gain on the purchase of a call option if,
during the option period, the value of such securities exceeded the sum of the
exercise price, the premium paid and transaction costs; otherwise the Fund would
realize either no gain or a loss on the purchase of the call
option.
The
purchase of a put option would entitle a Fund, in exchange for the premium paid,
to sell specified securities at a specified price during the option period. The
purchase of protective puts is designed to offset or hedge against a decline in
the market value of a Fund’s portfolio securities. Put options may also be
purchased by a Fund for the purpose of affirmatively benefiting from a decline
in the price of securities which it does not own. A Fund would ordinarily
realize a gain if, during the option period, the value of the underlying
securities decreased below the exercise price sufficiently to cover the premium
and transaction costs; otherwise the Fund would realize either no gain or a loss
on the purchase of the put option. Gains and losses on the purchase of put
options may be offset by countervailing changes in the value of the Fund’s
portfolio securities.
A
Fund’s options transactions will be subject to limitations established by each
of the exchanges, boards of trade or other trading facilities on which such
options are traded. These limitations govern the maximum number of options in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or through one or more
brokers. Thus, the number of options which a Fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
the Adviser. An exchange, board of trade or other trading facility may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
Risks
Associated with Options Transactions. There
is no assurance that a liquid secondary market on a domestic or foreign options
exchange will exist for any particular exchange-traded option or at any
particular time. If a Fund is unable to effect a closing purchase transaction
with respect to covered options it has written, the Fund will not be able to
sell the underlying securities until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it would have to exercise the options in order to
realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities.
Reasons
for the absence of a liquid secondary market on an exchange include the
following: (1) there may be insufficient trading interest in certain options;
(2) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (4) unusual or unforeseen circumstances may interrupt normal operations
on an exchange; (5) the facilities of an exchange or the Options Clearing
Corporation may not at all times be adequate to handle current trading volume;
or (6) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options). If trading were discontinued, the
secondary market on that exchange (or in that class or series of options) would
cease to exist. However, outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their
terms.
A
Fund’s ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The
Adviser will determine the liquidity of each over-the-counter option in
accordance with guidelines adopted by the Trustees.
The
writing and purchase of options is a highly specialized activity that involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. The successful use of options depends in part
on the Adviser’s ability to predict future price fluctuations and, for hedging
transactions, the degree of correlation between the options and securities
markets. Imperfect correlation between the options and securities markets may
detract from their effectiveness. In addition to the other risks associated with
options described herein, a Fund may suffer a loss if it is unsuccessful in
employing an options strategy and the Fund’s total return may be less than if it
had not engaged in the options transaction.
Futures
Contracts and Options on Futures Contracts.
A Fund may use interest rate, foreign currency or index futures contracts, as
specified for that Fund in the Prospectus or if permitted by its investment
restrictions. An interest rate, foreign currency or index futures contract
provides for the future sale by one party and purchase by another party of a
specified
quantity
of a financial instrument, foreign currency or the cash value of an index at a
specified price and time. A futures contract on an index is an agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index contract was
originally written. Although the value of an index might be a function of the
value of certain specified securities, no physical delivery of these securities
is made.
A
Fund may purchase and write call and put options on futures. Options on futures
possess many of the same characteristics as options on securities and indexes
(discussed above). An option on a futures contract gives the holder the right,
in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.
Each
Fund will use futures contracts and options on futures contracts in accordance
with the rules of the Commodity Futures Trading Commission (“CFTC”). For
example, a Fund might use futures contracts to hedge against anticipated changes
in interest rates that might adversely affect either the value of the Fund’s
securities or the price of the securities which the Fund intends to purchase. A
Fund’s hedging activities may include sales of futures contracts as an offset
against the effect of expected increases in interest rates, and purchases of
futures contracts as an offset against the effect of expected declines in
interest rates. Although other techniques could be used to reduce that Fund’s
exposure to interest rate fluctuations, the Fund may be able to hedge its
exposure more effectively and perhaps at a lower cost by using futures contracts
and options on futures contracts. Pursuant to CFTC Rule 4.5, the Adviser has
filed a notice of exclusion from registration as a commodity pool operator in
respect of each Fund. On February 9, 2012, the CFTC adopted rule amendments that
modify the criteria for claiming the CFTC Rule 4.5 exclusion from registration
and regulation as a commodity pool operator. The Adviser intends to limit each
Fund’s use of commodity interests so as to remain eligible for the exclusion.
Limitations
on Use of Futures and Options Thereon.
A Fund that may use futures and futures options will only enter into futures
contracts and futures options which are standardized and traded on a U.S. or
foreign exchange, board of trade, or similar entity, or quoted on an automated
quotation system.
When
a purchase or sale of a futures contract is made by a Fund, the Fund is required
to deposit with its custodian (or broker, if legally permitted) a specified
amount of cash, U.S. government securities or other securities (“initial
margin”). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. Margin requirements on foreign exchanges may be different than U.S.
exchanges. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each Fund expects to earn interest income on its initial margin
deposits. A futures contract held by a Fund is valued at the official price of
the exchange on which it is traded. Each day a Fund pays or receives cash,
called “variation margin,” equal to the daily change in value of the futures
contract. This process is known as “marking to market.” Variation margin does
not represent a borrowing or loan by a Fund but is instead a settlement between
the Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will
mark-to-market its open futures positions.
A
Fund is also required to deposit and maintain margin with respect to put and
call options on futures contracts written by it. Such margin deposits will vary
depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Although
some futures contracts call for making or taking delivery of the underlying
securities or commodities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). Closing out a
futures contract sale is effected by purchasing a futures contract for the same
aggregate amount of the specific type of financial instrument or commodity with
the same delivery date. If an offsetting purchase price is less than the
original sale price, a Fund realizes a capital gain, or if it is more, a Fund
realizes a capital loss. Conversely, if an offsetting sale price is more than
the original purchase price, a Fund realizes a capital gain, or if it is less, a
Fund realizes a capital loss. The transaction costs must also be included in
these calculations.
When
selling a call option on a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) assets determined to be liquid
by the Adviser in accordance with the procedures established by the Board that,
when added to the amounts deposited with a futures commission merchant as
margin, equal the total market value of the futures contract underlying the call
option. Alternatively, the Fund may cover its position by entering into a long
position in the same futures contract at a price no higher than the strike price
of the call option, by owning the instruments underlying the futures contract,
or by holding a separate call option permitting the Fund to purchase the same
futures contract at a price not higher than the strike price of the call option
sold by the Fund.
When
selling a put option on a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) assets determined to be liquid
by the Adviser in accordance with the procedures established by the Board that
equal the purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
The
requirements for qualification as a regulated investment company for federal
income tax purposes also may limit the extent to which a Fund may enter into
futures, futures options and forward contracts.
Risk
Factors in Futures Transactions and Options Thereon.
Investment in futures contracts involves the risk of imperfect correlation
between movements in the price of the futures contract and the price of the
security being hedged. The hedge will not be fully effective when there is
imperfect correlation between the movements in the prices of two financial
instruments. For example, if the price of the futures contract moves more than
the price of the hedged security, a Fund will experience either a loss or gain
on the futures contract which is not completely offset by movements in the price
of the hedged securities. To compensate for imperfect correlations, the Fund may
purchase or sell futures contracts in a greater dollar amount than the hedged
securities if the volatility of the hedged securities is historically greater
than the volatility of the futures contracts. Conversely, the Fund may purchase
or sell fewer futures contracts if the volatility of the price of the hedged
securities is historically less than that of the futures contracts.
The
particular securities comprising the index underlying the index financial
futures contract may vary from the securities held by a Fund. As a result, the
Fund’s ability to hedge effectively all or a portion of the value of its
securities through the use of such financial futures contracts will depend in
part on the degree to which price movements in the index underlying the
financial futures contract correlate with the price movements of the securities
held by the Fund. The correlation may be affected by disparities in the Fund’s
investments as compared to those comprising the index and general economic or
political factors. In addition, the correlation between movements in the value
of the index may be subject to change over time as additions to and deletions
from the index alter its structure. The trading of futures contracts also is
subject to certain market risks, such as inadequate trading activity, which
could at times make it difficult or impossible to liquidate existing positions.
Each
Fund expects to liquidate a majority of the futures contracts it enters into
through offsetting transactions on the applicable contract market. There can be
no assurance, however, that a liquid secondary market will exist for any
particular futures contract at any specific time. Thus, it may not be possible
to close out a futures position. In the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may be
required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability to
close out futures positions also could have an adverse impact on the Fund’s
ability to hedge effectively its investments. The liquidity of a secondary
market in a futures contract may be adversely affected by “daily price
fluctuation limits” established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. Prices have in the past moved beyond the daily limit on a number of
consecutive trading days. A Fund will enter into a futures position only if, in
the judgment of the Adviser, there appears to be an actively traded secondary
market for such futures contracts.
The
successful use of transactions in futures and related options also depends on
the ability of the Adviser to forecast correctly the direction and extent of
interest rate movements within a given time frame. To the extent interest rates
remain stable during the period in which a futures contract or option is held by
a Fund or such rates move in a direction opposite to that anticipated, the Fund
may realize a loss on a hedging transaction which is not fully or partially
offset by an increase in
the
value of portfolio securities. As a result, the Fund’s total return for such
period may be less than if it had not engaged in the hedging transaction.
Because
of low initial margin deposits made upon the opening of a futures position,
futures transactions involve substantial leverage. As a result, relatively small
movements in the price of the futures contracts can result in substantial
unrealized gains or losses. There is also the risk of loss by a Fund of margin
deposits in the event of the bankruptcy of a broker with whom the Fund has an
open position in a financial futures contract.
The
amount of risk a Fund assumes when it purchases an option on a futures contract
is the premium paid for the option plus related transaction costs. In addition
to the correlation risks discussed above, the purchase of an option on a futures
contract also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased.
Risks
of Potential Government Regulation of Derivatives. Future
regulatory developments could impact the Funds’ ability to invest in certain
derivatives. It is possible that government regulation of various types of
derivative instruments, including futures, options and swap agreements, may
limit or prevent the Funds from using such instruments as a part of their
investment strategies, and could ultimately prevent a Fund from being able to
achieve its investment objective. In December 2015, the SEC proposed a new rule
to regulate the use of derivatives by registered investment companies, such as
the Funds. If the rule goes into effect as proposed, it could affect the Funds’
investments in derivatives. It is impossible to fully predict the effects of
past, present or future legislation and regulation in this area, but the effects
could be substantial and adverse. It is possible that legislative and regulatory
activity could limit or restrict the ability of the Funds to use certain
derivatives as a part of their investment strategies and could alter, perhaps to
a material extent, the nature of an investment in a Fund or the ability of a
Fund to continue to implement its investment strategies.
The
futures, options and swaps markets are subject to comprehensive statutes,
regulations, and margin requirements. In addition, the SEC, CFTC and the
exchanges are authorized to take extraordinary actions in the event of a market
emergency, including, for example, the implementation or reduction of
speculative position limits, the implementation of higher margin requirements,
the establishment of daily price limits and the suspension of trading. The
regulation of futures, options and swaps transactions in the United States is a
changing area of law and is subject to modification by government and judicial
action.
In
particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”) was signed into law on July 21, 2010. The Dodd-Frank Act has
changed the way in which the U.S. financial system is supervised and regulated.
Title VII of the Dodd-Frank Act sets forth a legislative framework for OTC
derivatives, including financial instruments, such as swaps, in which a Fund may
invest. Title VII of the Dodd-Frank Act made broad changes to the OTC
derivatives market, grants significant authority to the SEC, the CFTC, and other
federal regulators to regulate OTC derivatives and market participants, and
requires clearing and exchange trading of many OTC derivatives transactions. The
CFTC and the SEC finalized the definition of “swap” and “security-based swap”
and provided parameters around which contracts will be subject to further
regulation under the Dodd-Frank Act. Provisions in the Dodd-Frank Act include
new capital and margin requirements and the mandatory use of clearinghouse
mechanisms for many OTC derivative transactions. The CFTC, SEC and other federal
regulators have been tasked with developing the rules and regulations enacting
the provisions of the Dodd-Frank Act. While certain of the rules are now
effective, other rules are not yet final, so it is not possible at this time to
gauge the exact nature and scope of the impact of the Dodd-Frank Act on the
Fund. Since 2010, and most notably in 2015 and 2016, comprehensive legislation
has been proposed that is intended to pare back some of the provisions of the
Dodd-Frank Act.
Hedging
and Other Strategies. Hedging
is an attempt to establish with more certainty than would otherwise be possible
the effective price or rate of return on portfolio securities or securities that
a Fund proposes to acquire. When interest rates are rising or securities prices
are falling, a Fund can seek to offset a decline in the value of its current
portfolio securities through the sale of futures contracts. When interest rates
are falling or securities prices are rising, a Fund, through the purchase of
futures contracts, can attempt to secure better rates or prices than might later
be available in the market when it effects anticipated purchases.
A
Fund may, for example, take a “short” position in the futures market by selling
futures contracts in an attempt to hedge against an anticipated rise in interest
rates or a decline in market prices that would adversely affect the value of the
Fund’s portfolio securities. These futures contracts may include contracts for
the future delivery of securities held by the Fund or securities with
characteristics similar to those of the Fund’s portfolio
securities.
If,
in the opinion of the Adviser, there is a sufficient degree of correlation
between price trends for a Fund’s portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Fund may also enter into such futures contracts as part of its hedging strategy.
Although under some circumstances prices of securities in a Fund’s portfolio may
be more or less volatile than prices of these futures contracts, the Adviser
will attempt to estimate the extent of this volatility difference based on
historical patterns and compensate for any differential by having the Fund enter
into a greater or lesser number of futures contracts or by attempting to achieve
only a partial hedge against price changes affecting the Fund’s portfolio
securities.
When
a short hedging position is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in
the value of a Fund’s portfolio securities would be substantially offset by a
decline in the value of the futures position.
On
other occasions, a Fund may take a “long” position by purchasing futures
contracts. This would be done, for example, when the Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash but
expects the prices then available in the applicable market to be less favorable
than prices that are currently available. The Fund may also purchase futures
contracts as a substitute for transactions in securities, to alter the
investment characteristics of portfolio securities or to gain or increase its
exposure to a particular securities market.
Foreign
Currency Transactions. A
Fund’s foreign currency exchange transactions may be conducted on a spot
(i.e.,
cash)
basis at the spot rate for purchasing or selling currency prevailing in the
foreign exchange market. A Fund may also enter into forward foreign currency
exchange contracts to enhance return, to hedge against fluctuations in currency
exchange rates affecting a particular transaction or portfolio position, or as a
substitute for the purchase or sale of a currency or assets denominated in that
currency. Forward contracts are agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the contract.
Transaction hedging is the purchase or sale of forward foreign currency
contracts with respect to specific receivables or payables of a Fund accruing in
connection with the purchase and sale of its portfolio securities quoted or
denominated in the same or related foreign currencies. Portfolio hedging is the
use of forward foreign currency contracts to offset portfolio security positions
denominated or quoted in the same or related foreign currencies. A Fund may
elect to hedge less than all of its foreign currency portfolio positions if
deemed appropriate by the Adviser.
Hedging
against a decline in the value of a currency does not eliminate fluctuations in
the prices of portfolio securities or prevent losses if the prices of such
securities decline. These transactions also preclude the opportunity for
currency gains if the value of the hedged currency rises. Moreover, it may not
be possible for the Fund to hedge against a devaluation that is so generally
expected that the Fund is not able to contract to sell the currency at a price
above the devaluation level it anticipates.
The
cost to a Fund of engaging in foreign currency transactions varies with such
factors as the currency involved, the length of the contract period and the
market conditions then prevailing. Since transactions in foreign currency are
usually conducted on a principal basis, no fees or commissions are
involved.
Foreign
Currency Options. Each
Fund may purchase or sell (write) call and put options on currency. A foreign
currency option provides the option buyer with the right to buy or sell a stated
amount of foreign currency at the exercise price on a specified date or during
the option period. The owner of a call option has the right, but not the
obligation, to buy the currency. Conversely, the owner of a put option has the
right, but not the obligation, to sell the currency. When the option is
exercised, the seller of the option is obligated to fulfill the terms of the
written option. However, either the seller or the buyer may, in the secondary
market, close its position during the option period at any time before
expiration.
A
purchased call option on a foreign currency generally rises in value if the
underlying currency appreciates in value. A purchased put option on a foreign
currency generally rises in value if the underlying currency depreciates in
value. Although purchasing a foreign currency option can protect a Fund against
an adverse movement in the value of a foreign currency, the option will not
limit changes in the value of such currency. For example, if a Fund was holding
securities denominated in a foreign currency that was appreciating and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, the Fund would not have to exercise its put option. Likewise, a Fund
might enter into a contract to purchase a security denominated in foreign
currency and, in conjunction with that purchase, might purchase a foreign
currency call option to hedge against a rise in value of the currency. If the
value of the currency instead depreciated
between
the date of purchase and the settlement date, the Fund would not have to
exercise its call. Instead, the Fund could acquire in the spot market the amount
of foreign currency needed for settlement.
Special
Risks Associated with Foreign Currency Options. Buyers
and sellers of foreign currency options are subject to the same risks that apply
to options generally. In addition, there are certain additional risks associated
with foreign currency options. The markets in foreign currency options are
relatively thin, and a Fund’s ability to establish and close out positions on
such options is subject to the maintenance of a liquid secondary market. A Fund
will not purchase or write such options unless and until, in the opinion of the
Adviser, the market for them has developed sufficiently to ensure that the risks
in connection with such options are not greater than the risks in connection
with the underlying currency. Nevertheless, there can be no assurance that a
liquid secondary market will exist for a particular option at any specific time.
In addition, options on foreign currencies are affected by most of the same
factors that influence foreign exchange rates and investments
generally.
The
value of a foreign currency option depends upon the value of the underlying
currency relative to the U.S. dollar. As a result, the price of the option
position may vary with changes in the value of either or both currencies and may
have no relationship to the investment performance of a foreign security.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
There
is no systematic reporting of last sale information for foreign currencies or
any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Available quotation
information is generally representative of very large transactions in the
interbank market and thus may not reflect relatively smaller transactions
(i.e.,
less
than $1 million) where rates may be less favorable. The interbank market in
foreign currencies is a global, around-the-clock market. To the extent that the
U.S. currency option markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options markets until
they reopen.
Foreign
Currency Futures Transactions. By
using foreign currency futures contracts and options on such contracts, a Fund
may be able to achieve many of the same objectives as it would through the use
of forward foreign currency exchange contracts. A Fund may sometimes be able to
achieve these objectives more effectively and at a lower cost by using futures
transactions instead of forward foreign currency exchange
contracts.
The
sale of a foreign currency futures contract creates an obligation by a Fund, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a specified price. The purchase of a currency futures
contract creates an obligation by a Fund, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Currency futures contracts are
closed out by entering into an offsetting purchase or sale transaction for the
same aggregate amount of currency and delivery date. If the sale price of a
currency futures contract exceeds the price of the offsetting purchase, the Fund
realizes a gain. If the sale price is less than the offsetting purchase price,
the Fund realizes a loss. If the purchase price of a currency futures contract
is less than the offsetting sale price, the Fund realizes a gain. If the
purchase price of a currency futures contract exceeds the offsetting sale price,
the Fund realizes a loss.
Special
Risks Associated with Foreign Currency Futures Contracts and Related Options.
Buyers
and sellers of foreign currency futures contracts and related options are
subject to the same risks that apply to the use of futures generally. In
addition, the risks associated with foreign currency futures contracts and
options on futures are similar to those associated with options on foreign
currencies, as described above.
U.S.
Dollar Denominated Securities of Non-U.S. Companies.
Each Fund may invest without limit in U.S. dollar-denominated securities of
non-U.S. companies but may invest only up to 15% of its total assets in
non-dollar-denominated securities of non-U.S. companies.
Swaps,
Caps, Floors, Collars and Swaptions. As
one way of managing its exposure to different types of investments, a Fund may
enter into interest rate swaps, currency swaps, and other types of swap
agreements such as caps, collars, floors and swaptions. In a typical interest
rate swap, one party agrees to make regular payments equal to a floating
interest rate
times
a “notional principal amount,” in return for payments equal to a fixed rate
times the same notional amount, for a specified period of time. If a swap
agreement provides for payment in different currencies, the parties might agree
to exchange the notional principal amount as well. Swaps may also depend on
other prices or rates, such as the value of an index or mortgage prepayment
rates.
In
a typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor. A swaption is an option to buy or sell a swap
position.
Swap
agreements will tend to shift a Fund’s investment exposure from one type of
investment to another. For example, if the Fund agreed to exchange payments in
dollars for payments in a foreign currency, the swap agreement would tend to
decrease the Fund’s exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund’s investments and its
share price and yield.
Swap
agreements are sophisticated risk management instruments that typically require
a small cash investment relative to the magnitude of risks assumed. As a result,
swaps can be highly volatile and may have a considerable impact on a Fund’s
performance. Swap agreements are subject to credit risks related to the
counterparty’s ability to perform, and may decline in value if the
counterparty’s creditworthiness deteriorates. A Fund may also suffer losses if
it is unable to terminate outstanding swap agreements or reduce its exposure
through offsetting transactions.
Forward
Commitments, When-Issued Securities and Delayed Delivery Transactions.
The
Funds may purchase or sell securities on a when-issued or delayed delivery basis
and make contracts to purchase or sell securities for a set price at a set date
beyond customary settlement time. A Fund will engage in when-issued purchases of
securities in order to obtain what is considered to be an advantageous price and
yield at the time of purchase. Securities purchased or sold on a when-issued,
delayed delivery or forward commitment basis involve a risk of loss if the
security to be purchased declines in value, or a security to be sold increases
in value, before the settlement date. The failure of the issuer or other party
to consummate the transaction may result in a Fund’s losing the opportunity to
obtain an advantageous price. Although a Fund usually intends to acquire the
underlying securities, the Fund may dispose of such securities before
settlement. For purposes of determining a Fund’s average dollar-weighted
maturity, the maturity of when-issued or forward commitment securities will be
calculated from the commitment date.
Short
Sales. Short
sales are transactions in which a Fund sells a security it does not own in
anticipation of a decline in the value of that security. To complete such a
transaction, the Fund must borrow the security from a broker or other
institution to make delivery to the buyer. The Fund then is obligated to replace
the security borrowed by purchasing it at the market price at or prior to the
time of replacement. The price at such time may be more or less than the price
at which the security was sold by the Fund. As a result, there is no limit to
the potential loss on a short sale. Until the security is replaced, the Fund is
required to pay the broker from which it borrowed the security an amount equal
to any dividends or interest that accrue during the period of the loan. Short
sale dividends are treated as an expense and can increase a fund’s total expense
ratio although no cash is received or paid by the Fund. To compensate the
broker, the Fund also may be required to pay a premium, which would increase the
cost of the security sold. The net proceeds of the short sale will be retained
by the broker (or by the Fund’s custodian in a special custody account), to the
extent necessary to meet margin requirements, until the short position is closed
out.
The
Fund will incur a loss as a result of the short sale if the price of the
security sold short 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 security declines in price between those dates. An increase in the value of
a security sold short by the Fund over the price at which it was sold short will
result in a loss to the Fund, and there can be no assurance that the Fund will
be able to close out the position at any particular time or at an acceptable
price. Although the Fund’s gain is limited to the amount at which it sold a
security short, its potential loss is unlimited. Depending on arrangements made
with brokers, the Fund may not receive any payments (including interest) on
collateral deposited with them. The Fund will not make a short sale if, after
giving effect to such sale, the market value of all securities sold short
exceeds 100% of the value of the Fund’s net assets.
While
the Fund is short a security, it is subject to the risk that the security’s
lender will terminate the loan at a time when the Fund is unable to borrow the
same security from another lender. If this happened, the Fund would have to buy
replacement shares immediately at the stock’s then current market price or “buy
in” by paying the lender an amount equal to the cost of purchasing the security
to close out the short position.
The
Fund will also incur transaction costs in effecting short sales. Short sales
involve other costs. The Fund must repay to the lender any dividends or interest
that accrue while it is holding a security sold short. To borrow the security,
the Fund also may be required to pay a premium. The amount of any gain for the
Fund resulting from a short sale will be decreased and the amount of any loss
will be increased, by the amount of premiums, dividends, interest or expenses
the Fund may be required to pay in connection with a short sale.
OTHER
INVESTMENT PRACTICES AND RISKS
Active
Management. The
Funds are actively managed investment portfolios. The Adviser will apply its
investment techniques and risk analyses in making investment decisions for the
Funds, but there is no guarantee that its decisions will produce the intended
result. The management strategy or securities selection methods the Adviser uses
in managing the Fund could prove less successful than anticipated or could be
unsuccessful. This risk is common for all actively managed funds.
ESG
Evaluation. As
part of the Adviser’s investment process for the Small Cap Fund and SMID Cap
Fund, the investment team evaluates the general and industry-specific ESG
factors that the Adviser believes to be the most financially material to a
company’s short-, medium-, and long-term enterprise value at any given time. The
Adviser’s proprietary ESG evaluation process seeks to identify ESG factors that
the Adviser believes will materially contribute to or detract from a company’s
financial performance.
Incorporation
of ESG factors into a Fund’s investment process may cause the Fund to make
different investments, and result in different exposures to various issuers,
than funds that do not incorporate such considerations into their strategy or
investment processes. The Adviser’s ESG considerations may also result in a
greater emphasis on long-term performance, which may result in the Fund forgoing
shorter-term opportunities to buy certain securities when it might otherwise be
advantageous to do so, or selling securities for ESG-related reasons when it
might not otherwise be advantageous to do so. This may affect the Fund’s
performance depending on whether certain investments are in or out of favor, and
the Fund’s investment performance could be different compared to funds that do
not incorporate ESG considerations.
There
are significant differences in interpretations of what it means for a company to
meet ESG criteria. The Adviser’s assessment of a company may differ from that of
other funds advised by different advisers, and the Adviser’s assessment of a
company’s ESG factors could change over time. As a result, stocks selected by
the Adviser may not reflect the beliefs and values of any particular investor.
When evaluating an issuer, the Adviser is dependent on information or data
obtained through voluntary or third-party reporting that may be incomplete,
inaccurate, or unavailable, which could cause the Adviser to incorrectly assess
an issuer’s ESG practices. Because ESG factor analysis is used as one part of
the Adviser’s overall investment process, a Fund may still invest in securities
of issuers that many or all market participants view as having an unfavorable
ESG profile.
Securities
Lending. During
the fiscal year ended December
31, 2022, the
Funds did not engage in securities lending. The Funds may lend portfolio
securities to certain creditworthy borrowers in U.S. and non-U.S. markets. The
borrowers provide collateral that is marked to market daily in an amount at
least equal to 102% of the current market value of the securities loaned. The
Funds may terminate a loan at any time and obtain the securities loaned. A Fund
receives the value of any interest or cash or non-cash distributions paid on the
loaned securities. A Fund cannot vote proxies for securities on loan, but may
recall loans to vote proxies if a material issue affecting the Fund’s economic
interest in the investment is to be voted upon. Distributions received on loaned
securities in lieu of dividend payments (i.e., substitute payments) would not be
considered qualified dividend income.
With
respect to loans that are collateralized by cash, the borrower may be entitled
to receive a fee based on the amount of cash collateral. A Fund is compensated
by the difference between the amount earned on the reinvestment of cash
collateral and the fee paid to the borrower. In the case of collateral other
than cash, a Fund is compensated by a fee paid by the borrower equal to a
percentage of the market value of the loaned securities. Any cash collateral may
be reinvested in certain short-term instruments either directly on behalf of
each lending the Fund or through one or more joint accounts or money market
funds, which may include those managed by the Adviser.
Securities
lending involves exposure to certain risks, including operational risk (i.e.,
the risk of losses resulting from problems in the settlement and accounting
process—especially so in certain international markets such as Taiwan), “gap”
risk (i.e., the risk of a mismatch between the return on cash collateral
reinvestments and the fees a Fund has agreed to pay a borrower), risk of loss of
collateral, credit, legal, counterparty and market risk. A Fund is also exposed
to the risk of losses in the event a borrower does not return the Fund’s
securities as agreed. For example, delays in recovery of lent securities may
cause a Fund to lose the opportunity to sell the securities at a desirable
price. If management has knowledge that a material event will occur affecting an
investment on loan, the Trustees would be obligated to call such loan in time to
vote such proxies.
When
a Fund lends portfolio securities, there is a risk that the borrower may fail to
return the securities, that the securities will not be returned in time for the
Funds to exercise their voting rights, or that the Funds’ securities lending
agent does not learn of an impending vote and therefore does not initiate a
recall of the lent securities on the Funds’ behalf. As a result, a Fund may
incur a loss or, in the event of a borrower’s bankruptcy, may be delayed in, or
prevented from, liquidating the collateral. The Fund will bear any losses
incurred from the investment of the collateral it receives. Any gain or loss in
the market price of the securities loaned that might occur during the term of
the loan would belong to the Fund.
Cyber
Security Risk. The
Funds and their service providers may be prone to operational and information
security risks resulting from breaches in cyber security. A breach in cyber
security refers to both intentional and unintentional events that may cause a
Fund to lose proprietary information, suffer data corruption, or lose
operational capacity. Breaches in cyber security include, among other behaviors,
stealing or corrupting data maintained online or digitally, denial of service
attacks on websites, the unauthorized release of confidential information,
ransomware, or various other forms of cyber-attacks. Cyber security breaches
affecting a Fund or its Adviser, custodian, transfer agent, intermediaries and
other third-party service providers may adversely impact the Fund. For instance,
cyber security breaches may interfere with the processing of shareholder
transactions, impact a Fund’s ability to calculate its NAVs, cause the release
of private shareholder information or confidential business information, impede
trading, subject a Fund to regulatory fines or financial losses and/or cause
reputational damage. The Funds may also incur additional costs for cyber
security risk management purposes. Similar types of cyber security risks are
also present for issuers of securities in which a Fund may invest, which could
result in material adverse consequences for such issuers and may cause the
Fund’s investment in such companies to lose value.
Information
Technology Sector Risk.
Information technology companies face intense competition, both domestically and
internationally, which may have an adverse effect on profit margins. Like other
technology companies, information technology companies may have limited product
lines, markets, financial resources or personnel. The products of information
technology companies may face product obsolescence due to rapid technological
developments and frequent new product introduction, unpredictable changes in
growth rates and competition for the services of qualified personnel. Technology
companies and companies that rely heavily on technology, especially those of
smaller, less-seasoned companies, tend to be more volatile than the overall
market. Companies in the information technology sector are heavily dependent on
patent and intellectual property rights. The loss or impairment of these rights
may adversely affect the profitability of these companies. Finally, while all
companies may be susceptible to network security breaches, certain companies in
the information technology sector may be particular targets of hacking and
potential theft of proprietary or consumer information or disruptions in
service, which could have a material adverse effect on their businesses. These
risks are heightened for information technology companies in foreign markets.
IPO
Risks. The
Funds may invest in Initial Public Offerings (“IPOs”). An IPO is when a company
(called the issuer) issues common stock or shares to the public for the first
time. Such securities are often issued by smaller, younger companies seeking
capital but can also be done by large privately-owned companies looking to trade
publicly.
The
purchase of IPO shares may involve high transaction costs and may involve the
risk that the market value of IPO shares will fluctuate considerably due to
factors such as the absence of a prior public market, unseasoned trading, the
small number of shares available for trading and limited information about the
issuer. IPO shares are subject to market risk and liquidity risk. When the
Fund’s asset base is small, a significant portion of the fund’s performance
could be attributable to investments in IPOs because such investments would have
a magnified impact on the fund. As the Fund’s assets grow, the effect of the
Fund’s investments in IPOs on the Fund’s performance probably will decline,
which could reduce the Fund’s performance.
Special
Situations Risk. Securities
of companies that are involved in an initial public offering or a major
corporate event, such as a business consolidation or restructuring, may be
exposed to heightened risk because of the high degree of uncertainty that can be
associated with such events. Securities issued in initial public offerings often
are issued by companies that are in the early stages of development, have a
history of little or no revenues and may operate at a loss following the
offering. It is possible that there will be no active trading market for the
securities after the offering, and that the market price of the securities may
be subject to significant and unpredictable fluctuations. Initial public
offerings are subject to many of the same risks as investing in companies with
smaller market capitalizations. To the extent the Fund determines to invest in
initial public offerings, it may not be able to invest to the extent desired,
because, for example, only a small portion (if any) of the securities being
offered in an initial public offering are available to the Fund.
The
investment performance of the Fund during periods when it is unable to invest
significantly or at all in initial public offerings may be lower than during
periods when the Fund is able to do so. Securities purchased in initial public
offerings which are sold within 12 months after purchase may result in increased
short-term capital gains, which will be taxable to the Fund’s shareholders as
ordinary income. Certain “special situation” investments are investments in
securities or other instruments that are determined to be illiquid or lacking a
readily ascertainable fair value.
Liquidity
Risk. Liquidity
risk exists when particular investments are difficult to sell. In addition,
liquid investments may become illiquid after purchase by the Fund, particularly
during periods of market turmoil. When a Fund holds illiquid investments, the
portfolio may be harder to value, especially in changing markets, and if the
Fund is forced to sell these investments to meet redemption requests or for
other cash needs, the Fund may suffer a loss. In addition, when there is
illiquidity in the market for an investment, a Fund, due to limitations on
illiquid investments, may be unable to achieve its desired level of exposure to
a certain sector.
Large
Shareholder Purchase and Redemption Risk. The
Funds may experience adverse effects when certain large shareholders purchase or
redeem large amounts of shares of the Funds. Such large shareholder redemptions
may cause a Fund to sell its securities or invest additional cash, as the case
may be, at times when it would not otherwise do so, which may negatively impact
the Fund’s NAV and liquidity. Redemptions of a large number of shares also may
increase transaction and other costs or have adverse tax consequences for
shareholders of the Fund by requiring a sale of portfolio securities. Similarly,
large share purchases may adversely affect a Fund’s performance to the extent
that the Fund is delayed in investing new cash and is required to maintain a
larger cash position than it ordinarily would. In addition, a large redemption
could result in a Fund’s current expenses being allocated over a smaller asset
base, leading to an increase in the Fund’s expense ratio. However, this risk may
be limited to the extent that the Adviser and a Fund have entered into a fee
waiver and/or expense limitation arrangement.
Reverse
Repurchase Agreements. The
Funds may enter reverse repurchase agreements whereby a Fund sells portfolio
assets with an agreement to repurchase the assets at a later date at a set
price. A Fund continues to receive principal and interest payments on these
securities. The Funds rely on Rule 18f-4(d)(1)(i) of the 1940 Act with
respect to reverse repurchase agreement transactions,
and maintain cash or liquid securities, having a value at least equal to the
repurchase price of
the agreement,
plus accrued interest.
Reverse
repurchase agreements involve the risk that the value of the securities sold by
a Fund may decline below the price of the securities the Fund is obligated to
repurchase. Reverse repurchase agreements are borrowings by a Fund and are
subject to its investment restrictions on borrowing.
Short-Term
Trading and Portfolio Turnover. Short-term
trading means the purchase and subsequent sale of a security after it has been
held for a relatively brief period of time. A Fund may engage in short-term
trading in response to stock market conditions, changes in interest rates or
other economic trends and developments, or to take advantage of yield
disparities between various fixed-income securities in order to realize capital
gains or enhance income. Short-term trading may have the effect of increasing a
Fund’s portfolio turnover rate. A high rate of portfolio turnover involves
correspondingly higher brokerage costs that must be borne directly by the Fund
and thus indirectly by the shareholders, reducing the shareholders’ return.
Short-term trading may also increase the amount of taxable gains that must be
distributed to shareholders. The
following table sets forth each Fund’s portfolio turnover rate for each of the
two most recently completed fiscal years ended December 31:
|
|
|
|
|
|
|
|
|
|
| |
| 2022 |
2021 |
|
| |
RMB
Fund |
18% |
12% |
|
| |
Financial
Services Fund |
42% |
70% |
|
| |
International
Fund |
30% |
21% |
|
| |
Japan
Fund |
32% |
18% |
|
| |
Small
Cap Fund |
15% |
7% |
|
| |
SMID
Cap Fund |
4% |
9% |
|
| |
INVESTMENT
RESTRICTIONS
FUNDAMENTAL
INVESTMENT RESTRICTIONS
The
following investment restrictions are considered fundamental, which means they
may be changed with respect to a Fund only with the approval of the holders of a
majority of that Fund’s outstanding voting securities, defined under the 1940
Act as the lesser of: (1) 67% or more of that Fund’s voting securities present
at a meeting if the holders of more than 50% of that Fund’s outstanding voting
securities are present or represented by proxy, or (2) more than 50% of that
Fund’s outstanding voting securities.
1.A
Fund may not borrow money or issue senior securities, except to the extent
permitted by the 1940 Act.
2.A
Fund may not make loans to other persons, except loans of securities not
exceeding one-third of the Fund’s total assets, investments in debt obligations
and transactions in repurchase agreements.
3.A
Fund may not purchase, sell or invest in real estate, but, subject to its other
investment policies and restrictions, may invest in securities of companies that
deal in real estate or are engaged in the real estate business. These companies
include real estate investment trusts and securities secured by real estate or
interests in real estate. A Fund may hold and sell real estate acquired through
default, liquidation or other distribution of an interest in real estate as a
result of the Fund’s ownership of securities.
4.A
Fund may not invest in commodities or commodity futures contracts, except for
transactions in financial derivative contracts, such as forward currency
contracts; financial futures contracts and options on financial futures
contracts; options on securities, currencies and financial indices; and swaps,
caps, floors, collars and swaptions.
5.A
Fund may not underwrite securities of other issuers, except insofar as a Fund
may be deemed an underwriter under the 1933 Act when selling portfolio
securities.
6.The
RMB Fund, the Financial Services Fund, International Fund, Japan Fund, Small Cap
Fund, and SMID Cap Fund with respect to 75% of its total assets, may not invest
more than 5% of such Fund’s total assets in the securities of any single issuer,
or own more than 10% of the outstanding voting securities of any one issuer, in
each case other than: (1) securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; or (2) securities of other
investment companies.
7.The
RMB Fund, Small Cap Fund and SMID Cap Fund will not concentrate more than 25% of
the value of its total assets in any one industry.
8.A
Fund (except for the RMB Fund, Small Cap Fund and SMID Cap Fund) shall not
invest more than 25% of its total assets, taken at market value, in the
securities of issuers in any particular industry or group of industries
(excluding the U.S. Government and its agencies and instrumentalities) except
that the Financial Services Fund will, during normal market conditions, invest
at least 25% of its total assets in the financial services sector, a group of
industries that includes regional and money center banks, insurance companies,
home, auto and other specialty finance companies, securities brokerage firms and
electronic trading networks, investment management and advisory firms, publicly
traded, government-sponsored financial intermediaries, such as Fannie Mae or
FHLMC, thrift and savings banks, financial conglomerates, foreign financial
services companies, electronic transaction processors for financial
services
companies, real estate investment trusts, depository institutions and any
company that derives at least 50% of its revenues from doing business with
financial services companies, such as financial software companies.
9.The
Small Cap Fund and SMID Cap Fund may, notwithstanding any other fundamental
investment policy or restriction, invest all of its assets in the securities of
a single open-end management investment company with substantially the same
fundamental investment objective, policies and restrictions as the
Fund.
With
respect to Fundamental Investment Restriction 1, the 1940 Act currently permits
each Fund to borrow from banks in an amount that may not exceed 33 1/3% of the
value of the Fund’s total assets at the time of borrowing. In the event that a
Fund’s borrowings exceed 33 1/3% of the value of the Fund’s total assets, the
Fund will be required to reduce the amount of its borrowings as promptly as
practicable, but in no event later than three business days.
NON-FUNDAMENTAL
INVESTMENT RESTRICTIONS
The
following restrictions are non-fundamental and may be modified by the Trustees
without shareholder approval. Each Fund may change the policies described below
upon 60 days’ notice to shareholders.
1.A
Fund may not acquire any illiquid investment if, immediately after the
acquisition, the Fund would have invested more than 15% of its net assets in
illiquid securities.
2.A
Fund may invest in other investment companies, including any closed-end or
open-end investment company, hedge fund or unregistered investment company, as
permitted by the 1940 Act or by such exemptions as may be granted by the
Commission by any rule, regulation or order.
3.A
Fund may not invest in a company for the purpose of exercising control or
management of the company.
4.Under
normal conditions, the Financial Services Fund will invest at least 80% of its
net assets (plus any borrowings for investment purposes) in stocks of U.S.
companies in the financial services sector; under normal conditions, the Japan
Fund will invest at least 80% of its net assets (plus any borrowings for
investment purposes) in equity securities of Japanese companies; under normal
market conditions, the Small Cap Fund will invest at least 80% of its net assets
(plus borrowings for investment purposes) in equity securities of U.S. companies
with small market capitalizations; and, under normal market conditions, the SMID
Cap Fund will invest at least 80% of its net assets (plus any borrowings for
investment purposes) in equity securities of companies with small-to-medium
market capitalizations.
5.The
Japan Fund will limit its investments in restricted securities, including Rule
144A securities, to 15% of its total assets.
For
purposes of non-fundamental investment restriction 1. (above), an illiquid
investment is any investment that a Fund reasonably expects cannot be sold or
disposed of in current market conditions in seven calendar days or less without
the sale or disposition significantly changing the market value of the
investment.
Except
with respect to 300% asset coverage for borrowing required by the 1940 Act,
whenever any investment restriction states a maximum percentage of a Fund’s
assets that may be invested in any security, such percentage limitation will be
applied only at the time the Fund acquires such security and will not be
violated by subsequent increases in value relative to other assets held by the
Fund.
A
sector of issuers in different industries is not considered to be an industry,
except as stated above with respect to the Financial Services Fund.
DISCLOSURE
OF PORTFOLIO HOLDINGS
It
is the general policy of the Trust and each Fund that neither the Funds nor
their service providers may selectively disclose a Fund’s portfolio holdings
information to any current or potential investor in the Funds, including
individuals, institutions and financial intermediaries, in advance of the date
such information is disclosed publicly by the Fund(s).
The
Board has adopted policies and procedures relating to disclosure of a Fund’s
portfolio securities. These policies and procedures are designed to provide a
framework for disclosing information regarding portfolio holdings, portfolio
composition or other portfolio characteristics consistent with applicable
regulations of the federal securities laws and general principles of fiduciary
duty relating to Fund shareholders.
The
Funds, like other typical mutual funds, rely on various service providers
(including the Adviser) and other affiliated and/or unaffiliated entities, to
perform all services relating to the Funds’ operations. Some services, such as
custody, fund audits, proxy voting, compliance testing, and pricing of portfolio
securities, require that the service provider have almost continuous access to
information about a Fund’s current portfolio holdings. Other service providers,
such as lawyers and accountants, are permitted to review information about a
Fund’s current portfolio holdings on a periodic basis. In addition, if a Fund
wants to sell certain securities in its portfolio, the Fund will have to
identify those securities to the broker handling the sale. It is the Trust’s
policy to grant access to portfolio information in the above and other
appropriate circumstances only to the extent necessary so that the provider may
perform its services relating to the Funds’ operations and the provider is
subject to a duty of confidentiality, including a duty not to trade on the
non-public information.
In
addition, the Trust permits disclosure of non-public portfolio holdings
information to third parties in limited circumstances where the Trust or a
service provider has a legitimate business purpose for doing so and the
recipients are subject to a duty of confidentiality, including a duty not to
trade on the non-public information.
It
is also the policy of the Trust that none of the Funds or their service
providers may enter into any arrangements pursuant to which they will receive
compensation or other consideration directly or indirectly in return for the
disclosure of non-public information about a Fund’s portfolio
holdings.
Periodic
Public Disclosure
The
full portfolio holdings of each Fund are filed quarterly with the Commission
within the time periods prescribed by rules of the Commission. Further,
information regarding each Fund’s portfolio holdings is provided to shareholders
on a semi-annual basis in accordance with, and within the time periods
prescribed by, rules of the Commission.
The
Funds’ portfolio holdings are published monthly, with approximately a 30-day
lag, on the Funds’ website. This policy is described in the Funds’ current
Prospectus and may be discontinued by the Trust without notice. The Trust
considers a Fund’s portfolio holdings not to be confidential on the next day
after its portfolio holdings are published on the Funds’ website.
In
certain instances, a Fund’s month-end portfolio holdings may be disclosed
earlier than 30 days after the end of a month to certain third-parties under the
following conditions: (i) for legitimate business purposes; and (ii) no adverse
impact is anticipated to Fund shareholders. In addition, each Fund’s month-end
top 10 holdings reports may be made available by the seventh calendar
day after month-end.
Disclosure
of Holdings to Analytical Companies
The
Funds’ portfolio holdings generally are sent to certain analytical companies
(e.g.,
Morningstar, Bloomberg, Broadridge, S&P, Thomson Financial, etc.) and
investment consultants either monthly or quarterly on the next business day
after a complete set of holdings is available on the Funds’
website.
Disclosure
of Individual Portfolio Holdings
From
time to time, employees of the Adviser or Sub-Adviser may express their views
orally or in writing on securities held in the Funds with the public, media,
current or prospective shareholders of the Funds, investment
consultants/advisers and/or rating/ranking firms. The securities may be ones
that were purchased or sold since the Funds’ most recent month-end portfolio
holdings and may not yet be disclosed on the Funds’ website. In these
situations, the confirmation of whether a stock is held in a Fund and its
portfolio weighting as of a specific date must follow the public disclosure
procedures as described above, including prompt public disclosure following such
confirmation.
Disclosure
of Holdings to Service Providers and Other Parties
The
Funds’ portfolio holdings are disclosed to service providers on an on-going
basis in the performance of their contractual duties. These providers include,
but are not limited to, the Funds’ custodian, fund accountant, fund
administrator, printing companies, public accounting firm and attorneys.
Holdings are disclosed to service providers that perform operational services
for all of the accounts managed by the Adviser, including the Funds, which
include back office services, portfolio accounting and performance systems
services, proxy voting services and analytical and trading systems. Employees of
the Adviser (as applicable) also may have frequent access to portfolio holdings.
The frequency of disclosure to these parties varies and may be as frequently as
intra-day with no lag.
Various
broker/dealer and other parties involved in the trading and settlement process
have access to Fund portfolio information when a Fund is buying and selling
securities for its portfolio.
Non-public
disclosure of the Funds’ portfolio holdings will only be made to service
providers and other parties who are under a duty of confidentiality to the
Funds, whether by explicit written agreement or by virtue of their duties to the
Funds. The Trust and the Adviser will make reasonable efforts to obtain written
confidentiality agreements and prohibitions on trading based on knowledge of the
Funds’ portfolio holdings with the service providers and other parties who
receive the Funds’ portfolio holdings information prior to the holdings being
made public. Employees of the Adviser are subject to their respective employer’s
code of ethics, but the improper use of Fund portfolio holdings by other parties
is possible, notwithstanding contractual and confidentiality
obligations.
Board
Oversight of Disclosure of Fund Portfolio Holdings
Exceptions
to these policies may be granted only by the Board, the Trust’s President,
Treasurer, Secretary, Senior Vice President or Chief Compliance Officer (“CCO”)
upon a determination that the release of information (1) would be appropriate
for legitimate business purposes and (2) is not anticipated to adversely affect
Fund shareholders. Any such disclosures of Fund portfolio holdings shall be
disclosed to the Board at its next regular meeting.
Notwithstanding
anything herein to the contrary, the Board and an appropriate officer of the
Trust, or the Trust’s President or CCO may, on a case-by-case basis, impose
additional restrictions on the dissemination of portfolio information beyond
those found in these disclosure policies. (For example, the Funds may determine
to not provide purchase and sale information with respect to Funds that invest
in less liquid securities.)
There
is no assurance that the Trust’s disclosure policies will protect the Funds from
potential misuse of holdings information by individuals in possession of that
information.
SERVICES
FOR SHAREHOLDERS
SHAREHOLDER
ACCOUNTS
When
an investor initially purchases shares, an account will be opened on the books
of the Trust by the transfer agent. The investor appoints the transfer agent as
agent to receive all dividends and distributions and to automatically reinvest
them in additional shares of the same class of shares. Distributions or
dividends are reinvested at a price equal to the NAV of these shares as of the
ex-dividend date.
Shareholders
who do not want automatic dividend and distribution reinvestment should check
the appropriate box of the new account application or notify the transfer agent
and, ten business days after receipt of such notice, all dividends and
distributions will be paid by check.
PURCHASE
AND REDEMPTION OF SHARES
PURCHASE
OF SHARES
The
RMB Fund and the Financial Services Fund currently offer Class A, Class C and
Class I shares. The International Fund, Japan Fund, Small Cap Fund and SMID Cap
Fund currently offer Class I shares. The Trustees and officers reserve
the
right to change or waive a Fund’s minimum investment requirements and to reject
any order to purchase shares (including purchases by exchange) when in their
judgment the rejection is in a Fund’s best interest.
Investor
Class shares of the International Fund, Japan Fund, Small Cap Fund and SMID Cap
Fund are not currently being offered. Please see the Prospectus for further
information regarding whether a Fund is currently offering shares of a
particular class.
INITIAL
SALES CHARGES ON CLASS A SHARES
Class
A shares are offered at a price equal to their NAV plus a sales charge, which is
imposed at the time of purchase. The sales charges applicable to purchases of
Class A shares of the RMB Fund and the Financial Services Fund are described in
the Funds’ current prospectus. Up to 100% of the sales charge may be re-allowed
to dealers who achieve certain levels of sales or who have rendered coordinated
sales support efforts. These dealers may be deemed underwriters. Other dealers
will receive the following compensation:
|
|
|
|
| |
Amount
Invested |
Dealer
Concession as a % of Offering Price of Shares Purchased |
Less
than $50,000 |
4.50% |
$50,000
but less than $100,000 |
4.00% |
$100,000
but less than $250,000 |
3.50% |
$250,000
but less than $500,000 |
2.75% |
$500,000
but less than $1,000,000 |
1.75% |
$1,000,000
or more |
0.00% |
OBTAINING
A REDUCED SALES CHARGE FOR CLASS A SHARES
Methods
of obtaining a reduced sales charge referred to in the Funds’ prospectus are
described in more detail below. Sales charges may be waived for Trustees and
certain affiliated persons of the Funds. Please see Appendix A in the Funds’
prospectus for a description of variations in sales charges and waivers for Fund
shares purchased through Raymond James, Janney Montgomery Scott, Oppenheimer
& Co., Robert W. Baird & Co. and
Ameriprise Financial.
Purchases
of Class A Shares of $1 Million or More.
On purchases by a single purchaser aggregating $1 million or more, the investor
will not pay an initial sales charge.
Rights
of Accumulation.
If an investor, the investor’s spouse or any children under the age of 21
already hold shares of any Fund, the investor may qualify for a reduced sales
charge on its purchase of additional Class A shares. If the value of the shares
the investor currently holds in any Fund, plus the amount the investor wishes to
purchase is $50,000 or more, the sales charge on the Class A shares being
purchased will be at the rate applicable to the total aggregate amount. The
Fund’s policy is to give investors the lowest commission rate possible under the
sales charge structure. To receive a reduction in your Class A initial sales
charge, you must let your financial adviser or shareholder services know at the
time you purchase shares that you qualify for such a reduction. You may be asked
by your financial adviser or shareholder services to provide account statements
or other information regarding related accounts of you or your immediate family
in order to verify your eligibility for a reduced sales charge, including, where
applicable, information about accounts opened with a different financial
adviser.
Certain
brokers or financial advisers may not offer these programs or may impose
conditions or fees to use these programs. You should consult with your broker or
your financial adviser prior to purchasing a Fund’s shares. Rights of
accumulation may be amended or terminated at any time as to all purchases
occurring thereafter.
Letter
of Intent.
If an investor intends to purchase Class A shares valued at $50,000 or more
during a 13-month period, the investor may make the purchases under a Letter of
Intent so that the initial Class A shares purchased qualify for the reduced
sales charge applicable to the aggregate amount of the investor’s projected
purchase. The investor’s initial purchase must be at least 5% of the intended
purchase. Purchases made within 90 days before the signing of the Letter of
Intent
may be included in such total amount and will be valued on the date of the
Letter of Intent. The Letter of Intent will not impose a binding obligation to
buy or sell shares on either the purchaser or the Fund.
During
the period of the Letter of Intent, the transfer agent will hold shares
representing 3% of the intended purchase in escrow to provide payment of
additional sales charges that may have to be paid if the total amount purchased
under the Letter of Intent is reduced. If the total Class A shares covered by
the Letter of Intent are not purchased by
the end of the period covered by the Letter of Intent,
a sales
charge adjustment
is made to
reflect the sales charge applicable to the
actual amount invested within the period, and
the applicable amount of shares
held in escrow will
be used to pay the sales charge adjustment and the remaining escrowed shares
will be released to the
account of the investor. A Letter of Intent can be amended: (a) during the
13-month period if the purchaser files an amended Letter of Intent with the same
expiration date as the original; and (b) automatically after the end of the
period, if the total purchases of Class A shares credited to the Letter of
Intent qualify for an additional reduction in the sales charge. For more
information concerning the Letter of Intent, see the application form or contact
the Fund’s transfer agent at 1-800-462-2392.
Ongoing
Charges and Fees.
Class A shares for the RMB Fund and the Financial Services Fund are subject to
an annual Rule 12b-1 distribution and shareholder services fee of 0.25%
(discussed below under “12b-1 Distribution Plan”). Class A shares have lower
minimum investment thresholds than the Class I shares.
CLASS
C SHARE PURCHASES
Class
C shares are sold at the NAV next determined after receipt of an investor’s
purchase order, with a maximum purchase order of $500,000. Class C shares are
not subject to an initial sales charge but may be subject to a contingent
deferred sales charge (“CDSC”) upon redemption. Brokers that initiate and are
responsible for purchases of such Class C shares of that Fund may receive an
up-front commission at the time of sale of up to 1.00% of the purchase price of
Class C shares of the Fund. Class C shares do not convert into any other class
of shares.
If
Class C shares of a Fund are redeemed less
than
one year after a purchase, a 1% CDSC will be charged by calculating a percentage
on the NAV of the shares redeemed at the time of purchase or sale, whichever is
lower. The CDSC will be deducted from the redemption proceeds otherwise payable
to the shareholder. In the case of Class C shares, 12b-1 fees, together with the
CDSC, are used to finance the costs of up-front commissions paid to dealers and
investment representatives.
Ongoing
Charges and Fees.
Class C shares for the RMB Fund and the Financial Services Fund are subject to
an annual Rule 12b-1 fee of 0.75% and shareholder service fee of 0.25%. Class C
shares have lower minimum investment thresholds than the Class I
shares.
INVESTOR
CLASS SHARES
Investor
Class shares, if offered in the future, will be sold at the NAV next determined
after receipt of an investor’s purchase order. Investor Class shares are not
subject to an initial sales charge and are not subject to a CDSC upon
redemption. Investor Class shares are subject to an annual Rule 12b-1
distribution and shareholder services fee of 0.25% (discussed below under “12b-1
Distribution Plan”). Investor Class shares have lower minimum investment
thresholds than the Class I shares.
CLASS
I SHARE PURCHASES
Class
I shares are sold at the NAV next determined after receipt of an investor’s
purchase order. Class I shares are not subject to an initial sales charge, a
CDSC upon redemption, or a Rule 12b-1 fee. Class I shares do not convert into
any other class of shares.
EXEMPTIONS
FROM CDSC
No
CDSC will be imposed on Class I shares. No CDSC will be imposed on Class C
shares in the following instances:
(a)redemptions
of shares or amounts representing increases in the value of an account above the
net cost of the investment due to increases in the NAV; and
(b)redemptions
of shares acquired through reinvestment of income, dividends or capital gains
distributions.
The
CDSC will be waived for redemptions of Class C shares in connection
with:
•distributions
to participants or beneficiaries of plans qualified under Section 401(a) of the
Code or from custodial accounts under Code Section 403(b)(7), individual
retirement accounts (“IRAs”) under Code Section 408(a), deferred compensation
plans under Code Section 457 and other employee benefit plans
(“plans”);
•withdrawals
under an automatic withdrawal plan where the annual withdrawal does not exceed
10% of the opening value of the account (only for Class C shares);
and
•redemptions
following the death or disability of a shareholder.
In
determining whether the CDSC on Class C shares is payable, it is assumed that
shares not subject to a CDSC are redeemed first and that other shares are then
redeemed in the order purchased.
Please
see Appendix A in the Funds’ prospectus for a description of variations in sales
charges and waivers for Fund shares purchased through Raymond James, Janney
Montgomery Scott, Oppenheimer & Co., Robert W. Baird & Co.
and Ameriprise Financial.
REDEMPTION
OF SHARES
Investors
in the Funds may redeem shares on any day the Funds are open for business —
normally when the New York Stock Exchange (“NYSE”) is open — using the proper
procedures described below. See “Net Asset Value” for a list of the days on
which the NYSE will be closed.
1.Through
Participating Dealers Or Other Financial Intermediaries. If an investor’s
account has been established by a participating dealer or other financial
intermediary, the investor should contact their financial adviser or financial
intermediary to assist the investor with the redemption. Requests received by a
financial adviser or financial intermediary before the close of the NYSE and
transmitted to the transfer agent by its close of business that day will receive
that day’s NAV.
2.Redemption
Directly through the Transfer Agent. Redemption requests sent by mail to the
transfer agent will receive the NAV of the shares being redeemed that is next
determined after the request is received in “good form.” “Good form” means that
the request is signed in the name in which the account is registered and the
signature is guaranteed by a guarantor who participates in the medallion
signature guarantee program. Eligible guarantors include member firms of a
national securities exchange, certain banks and savings associations and, credit
unions, as defined by the Federal Deposit Insurance Act. An investor should
verify with the transfer agent that the institution is an acceptable (eligible)
guarantor before signing. The transfer agent reserves the right to request
additional confirmation from guarantor institutions, on a case by case basis, to
establish eligibility. A
guarantee from a notary public is not acceptable.
Redemption requests for $50,000 or less (whether written or telephonic), which
are payable to the registered owner at the legal address of record do not
require an additional medallion signature guarantee at the time of
redemption.
3.Redemption
by Telephone. Unless an investor has elected otherwise on its new account
application, redemption requests may be made by telephone with the transfer
agent for amounts of up to $50,000. The investor or its financial professional
can sell shares of the Fund by calling 1-800-462-2392. Please press 1 and follow
the automated menu to speak with a customer service representative of the Fund.
A check will be mailed to the investor on the following business
day.
Redemption
requests by a corporation, trust fiduciary, executor or administrator (if the
name and title of the individual(s) authorizing such redemption is not shown in
the account registration) must be accompanied by a copy of the resolution or
other legal documentation appointing the authorized individual, signed and
certified within the prior 60 days. The investor may obtain from the transfer
agent, forms of resolutions and other documentation, which have been prepared in
advance to help shareholders comply with the Funds’ procedures.
The
Funds do not charge for their services in connection with the redemption of Fund
shares, but upon prior notice may charge for such services in the future. Other
securities firms may charge their clients a fee for their services in effecting
redemptions of shares of the Funds.
Terms
of Redemptions.
The amount of your redemption proceeds will be based on the NAV next computed
after the transfer agent receives the redemption request in proper form. Payment
for the redemption normally will be mailed to the shareholder, except as
provided below. A shareholder’s redemption proceeds will normally be mailed or
wired the day after the redemption is processed. If the shareholder purchased
shares by check, the payment of redemption proceeds may be delayed until the
purchase check has cleared, which may take fifteen or more days. This potential
delay can be avoided by purchasing shares with federal funds or a certified
check.
Beneficial
owners of shares held of record in the name of the participating dealer or other
financial intermediary may redeem their shares only through that firm. The right
of redemption may be suspended or the date of payment postponed under certain
emergency or extraordinary situations, such as suspension of trading on the New
York Stock Exchange (“NYSE”), or when trading in the markets a Fund normally
uses is restricted or an emergency exists, as determined by the Commission, so
that disposal of a Fund’s assets or determination of its NAV is not reasonably
practicable, or for such other periods as the Commission by order may
permit.
Each
Fund reserves the right to redeem a shareholder’s account if its value, due to
redemptions and not as a result of a decline in market value, is less than the
minimum initial investment amount applicable to such share class and account
type. The affected Fund will give the shareholder 60 days’ notice to increase
the account value to the minimum purchase amount. Redemption proceeds will be
mailed in accordance with the procedures described above.
Redemptions
in Kind.
Although the Funds would not normally do so, each Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities, as prescribed by the Trustees. When the shareholder sells portfolio
securities received in this fashion, a brokerage charge will be incurred and the
shareholder may be subject to tax on any appreciation of such securities. The
Funds will value securities distributed in an in kind redemption at the same
value as is used in determining NAV.
During
periods of distressed market conditions, when a significant portion of a Fund’s
portfolio may be comprised of less-liquid investments, a Fund may be more likely
to pay redemption proceeds by giving you securities. Redemptions in kind are
taxable for federal income tax purposes in the same manner as redemptions for
cash.
Purchases,
Redemptions or Exchanges Through Authorized Broker-Dealers or Investment
Professionals. Dealers
may charge their customers a processing or service fee in connection with the
purchase or redemption of Fund shares. The amount and applicability of such a
fee is determined and disclosed to its customers by each individual dealer.
Processing or service fees typically are fixed, nominal dollar amounts and are
in addition to the sales and other charges described in the current Prospectus
and this SAI. Your dealer will provide you with specific information about any
processing or service fees that you may be charged.
REINSTATEMENT
PRIVILEGE (CLASS A and CLASS C SHARES)
A
shareholder of Class A or Class C shares who has redeemed such shares and has
not previously exercised the reinstatement privilege may reinvest any portion or
all of the redemption proceeds in Class A shares at NAV (without a front-end
sales charge), provided that such reinstatement occurs within 120 calendar days
after such redemption and the account meets the investment requirements as
described in the prospectus for the Funds’ Class A shares. This privilege may be
modified or terminated at any time by the Funds.
In
order to use this privilege, the shareholder must clearly indicate by written
request to the applicable Fund that the purchase represents a reinvestment of
proceeds from previously redeemed Class A or Class C shares. If a shareholder
realizes a gain on a redemption of shares, this gain is taxable for federal
income tax purposes even if all of such proceeds are reinvested. If a
shareholder incurs a loss on a redemption and reinvests the proceeds in the same
Fund, part or all of such loss may not be currently deductible for such tax
purposes. See “Federal Income Taxes” below.
The
reinstatement privilege may be used by each shareholder only once, regardless of
the number of shares redeemed or repurchased. However,
the privilege may be used without limit in connection with transactions for the
sole purpose of transferring a shareholder’s interest in a Fund to his or her
IRA or other tax-qualified retirement plan account.
NET
ASSET VALUE
Each
Fund determines the
NAV
per
share of
each class on each business day as of the close of regular trading (generally
4:00 p.m. Eastern time) on the NYSE by dividing the Fund’s net assets
attributable to that class by the number of its shares of that class outstanding
and
rounding to the nearest cent. For purposes of determining NAV, expenses of the
classes of a Fund are accrued daily and taken into account..
If the NYSE closes early, the Funds accelerate the determination of NAV to the
closing time.
The NAV will not be calculated on days on which the NYSE is closed for trading.
The NYSE is closed on the following holidays: 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.
Each
Fund values the securities in its portfolio on the basis of official closing or
last reported sale prices on the security’s primary exchange, the mean of the
closing or last reported bid and ask prices for the security, or valuations
provided by independent pricing services. If
market quotations for a portfolio holding are unavailable, or deemed by the
Adviser to be unreliable, the portfolio holding shall be fair valued by the
Adviser, as the “valuation designee” approved by the Board pursuant to Rule 2a-5
under the 1940 Act, in accordance with valuation procedures approved by the
Board. When fair value pricing is employed, the value of the portfolio holding
used to calculate the Funds’ NAV may differ from quoted or official closing
prices. Due to the subjective and variable nature of fair value pricing, it is
possible that the value determined for a particular investment may be materially
different from the value realized upon its sale. The Adviser’s role with respect
to fair valuation may present certain conflicts of interest given the impact
valuations can have on Fund performance and the Adviser’s asset-based
fees.
Exchange-Listed
Equities and Funds and Depositary Receipts
The
market value of an equity security, exchange-traded fund (e.g., ETF or
closed-end fund), or depositary receipt (e.g., ADR or GDR) traded on a national
stock exchange (other than Nasdaq Global Markets, Nasdaq Select Market and the
Nasdaq Capital Markets (together, “Nasdaq”)) is the last reported sale price on
the exchange on which the security trades on the valuation date. If there is no
such last sale reported, the security is valued at the mean between the last bid
and asked prices on the exchange.
The
market value of a security traded on Nasdaq is the Nasdaq Official Closing Price
(or “NOCP”) on the valuation date. The NOCP is determined by Nasdaq to be the
last reported sale price, unless the last sale price is above or below the last
reported bid and asked prices. If the last reported bid and asked prices are
above the last sale price, the last reported bid is used; conversely, if the
last reported bid and asked prices are below the last sale price, the last
reported asked price serves as the NOCP. If no last sales price is reported, the
security is valued at the mean between the closing bid and closing asked prices
on the market on which the security trades.
Over-the-Counter
Securities
Securities
traded over-the-counter (“OTC”) are valued at the last reported sale in the OTC
market on which the security trades, such as the OTC Bulletin Board, Pink OTC
Markets, Inc. or other recognized OTC market, on the valuation date. If no last
sale is reported, the security is valued at the mean between the closing bid and
the closing asked prices on the market on which the security
trades.
Foreign
Securities
Foreign
securities (which are principally traded in markets other than the U.S.) are
valued based upon the last reported sale price on the primary exchange or market
on which they trade as of the close of business of such exchange or market
immediately preceding the time of determining the Fund’s NAV. Any Fund assets or
liabilities initially valued in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing foreign currency exchange market
rates. For portfolio holdings which trade in markets that close prior to the
close of trading on the NYSE, which is generally 4:00 p.m., Eastern time, a fair
value price provided by an Adviser-approved pricing service (“Pricing Service”)
is generally used in order to capture events occurring after the applicable
foreign exchange closes that may affect the value of certain portfolio holdings
traded on that foreign exchange.
Options
Options
traded on an exchange are valued at the last reported sale price. If no sales
are reported on a particular business day, the average of the highest bid and
lowest asked quotations across the exchanges on which the option is traded is
used.
Open-end
Registered Investment Companies (excluding ETFs and Closed-End
Funds)
Shares
of open-end registered investment companies (“funds”) are valued using their
respective NAVs. If a fund’s NAV is not available, the last reported NAV of the
fund may be used for one day.
Fixed-Income
Securities
Fixed-income
securities, including bonds, notes, debentures, certificates of deposit, and
commercial paper, generally are valued at the evaluated mean between the closing
bid and closing asked prices provided by the Pricing Service. Pricing Services
generally take into account appropriate factors such as institutional-sized
trading in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics, and other market data and may provide a
price determined by a matrix pricing method or other analytical pricing models.
FEDERAL
INCOME TAXES
The
following summarizes certain additional federal income tax considerations
generally affecting the Funds and their shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussions here and in
the Prospectus are not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisers with specific reference to
their own tax situations, including the application of state, local and foreign
tax laws.
The
discussions of the federal income tax consequences in the Prospectus and this
SAI are based on the Internal Revenue Code of 1986, as amended (previously
defined as the “Code”), and the regulations issued under it, and court decisions
and administrative interpretations, as in effect on the date of this SAI. Future
legislative or administrative changes or court decisions may significantly alter
the statements included herein, and any such changes or decisions may be
retroactive.
Each
Fund is treated as a separate corporation for U.S. federal income tax purposes.
Each Fund has elected, qualified, and intends to continue to qualify for each
taxable year as a “regulated investment company” under Subchapter M of Subtitle
A, Chapter 1, of the Code. As such, each Fund intends to comply with the
requirements of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets. If each Fund meets all
such requirements, each Fund will not be subject to U.S. federal income tax on
its investment company taxable income and net capital gain (the excess of net
long-term capital gain over net short-term capital loss) that is distributed to
shareholders in accordance with the timing and other requirements of the Code.
If a Fund did not qualify as a regulated investment company, it would be treated
as a U.S. corporation subject to U.S. federal income tax, thereby subjecting any
income earned by the Fund to tax at the corporate level, and when such income is
distributed to a further tax at the shareholder level.
Each
Fund will be subject to a 4% non-deductible U.S. federal excise tax on a portion
of its undistributed ordinary income and capital gain net income if it fails to
meet certain distribution requirements with respect to each calendar year. Each
Fund intends under normal circumstances to seek to avoid liability for such tax
by satisfying such distribution requirements.
In
order to qualify as a regulated investment company under the Code, each Fund
must, among other things: (i) derive at least 90% of its gross income for each
taxable year from dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, other income (including gains from options, futures and
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies, and net income derived from interests in
qualified publicly traded partnerships (as defined in Section 851(h) of the
Code) (the “90% income test”); and (ii) diversify its holdings so that, at the
end of each quarter of each taxable year: (a) at least 50% of the value of the
Fund’s total assets is represented by (1) cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and (2) other
securities, with such other securities limited in respect to any one issuer to
an amount not greater than 5% of the value of the Fund’s total assets and to not
more than 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of the Fund’s total assets is invested in (1) the
securities (other than U.S. Government securities and securities of other
regulated investment companies) of any one issuer, (2) the securities (other
than securities of other regulated investment companies) of two or more issuers
that the Fund controls and that are engaged in the same, similar, or related
trades or businesses, or (3) the securities of one or more qualified publicly
traded partnerships. For the purposes of the 90% income test, the character of
income earned by certain entities in which a Fund invests that are not treated
as corporations (e.g.,
partnerships,
other than qualified publicly traded partnerships, or trusts) for U.S. federal
income tax purposes will generally pass through to such Fund. Consequently, a
Fund may be required to limit its equity investments in such entities that earn
fee income, rental income or other non-
qualifying
income. The requirements for qualification as a regulated investment company may
also significantly limit the extent to which a Fund may invest in certain other
investments.
If
a Fund qualifies as a regulated investment company and properly distributes to
its shareholders each taxable year an amount equal to or exceeding the sum of:
(i) 90% of its “investment company taxable income” as that term is defined in
the Code (which includes, among other things, dividends, taxable interest, and
the excess of any net short-term capital gains over net long-term capital
losses, as reduced by certain deductible expenses) without regard to the
deduction for dividends paid; and (ii) 90% of the excess of its gross tax-exempt
interest, if any, over certain disallowed deductions, the Fund generally will be
relieved of U.S. federal income tax on any income of the Fund, including “net
capital gain” (the excess of net long-term capital gain over net short-term
capital loss), distributed to shareholders. However, if a Fund meets such
distribution requirements, but chooses to retain some portion of its investment
company taxable income or net capital gain, it generally will be subject to U.S.
federal income tax at regular corporate rates on the amount retained. Each Fund
intends to distribute at least annually all or substantially all of its
investment company taxable income, net tax-exempt interest, and net capital
gain.
For
U.S. federal income tax purposes, a Fund is generally permitted to carry forward
a net capital loss in any taxable year to offset its own capital gains, if any.
These amounts are available to be carried forward to offset future capital gains
to the extent permitted by the Code and applicable tax regulations. As of
December
31, 2022,
the following Fund had capital loss carryforwards in the amounts indicated
below:
|
|
|
|
| |
Fund |
Amount |
International
Fund |
$30,136,795
short-term $4,026,746 long-term (not subject to
expiration) |
For
U.S. federal income tax purposes, all distributions are taxable to a shareholder
whether paid in cash or in shares, except as discussed below. Distributions from
a Fund’s investment company taxable income are taxable either as ordinary income
or, if so reported by a Fund in written statements furnished to its shareholders
and certain other conditions are met, as “qualified dividend income,” as that
term is defined in Section 1(h)(11)(B) of the Code, taxable to individual and
other non-corporate shareholders at long-term capital gain rates. The maximum
individual rate applicable to qualified dividend income and long-term capital
gains is currently 20%, plus the Medicare tax discussed below. Distributions
from a Fund’s net capital gain, if any, are taxable to a Fund’s shareholders as
long-term capital gains for U.S. federal income tax purposes without regard to
the length of time a shareholder has held shares of the Fund.
An
additional 3.8% Medicare tax is imposed on certain net investment income
(including ordinary dividends and capital gain distributions received from a
Fund and net gains from redemptions or other taxable dispositions of Fund
shares) of individual shareholders, estates and trusts to the extent that such
person’s “modified adjusted gross income” (in the case of an individual) or
“adjusted gross income” (in the case of an estate or trust) exceeds certain
threshold amounts.
Dividend
income distributed to individual and other non-corporate shareholders will
generally be taxed at long-term capital gain rates to the extent that such
dividends are attributable to qualified dividend income from a Fund’s
investments in U.S. companies and certain qualified foreign corporations,
provided that certain holding period and other requirements are met by both the
Fund and the shareholder. A foreign corporation generally is treated as a
qualified foreign corporation if it is incorporated in a possession of the
United States or it is eligible for the benefits of certain income tax treaties
with the United States. A foreign corporation that does not meet such
requirements will be treated as qualifying with respect to dividends paid by it
if the stock with respect to which the dividends are paid is readily tradable on
an established securities market in the United States. Dividends received by a
Fund from passive foreign investment companies will not qualify for long-term
capital gain rates.
A
dividend that is attributable to qualified dividend income of a Fund that is
paid by the Fund to an individual or other non-corporate shareholder will not be
taxable as qualified dividend income to such shareholder if: (1) the dividend is
received with respect to any share of the Fund held for fewer than 61 days
during the 121-day period beginning on the date which is 60 days before the date
on which such share became ex-dividend with respect to such dividend, (2) to the
extent that the shareholder is under an obligation (whether pursuant to a short
sale or otherwise) to make related payments with respect to positions in
substantially similar or related property, or (3) the shareholder elects to have
the dividend treated as investment income for purposes of the limitation on
deductibility of investment interest.
Distributions
by a Fund in excess of its current and accumulated earnings and profits will be
treated as a return of capital to the extent of (and in reduction of) the
shareholder’s tax basis in its shares and any such amount in excess of that
basis will be treated as gain from the sale of shares, as discussed below.
Because a return of capital distribution reduces the basis of a shareholder’s
shares, a return of capital distribution may result in a higher capital gain or
lower capital loss when the shares are sold. The U.S. federal income tax status
of all distributions will be reported to shareholders annually.
For
taxable years beginning after December 31, 2017 and before January 1, 2026,
qualified REIT dividends (i.e., REIT dividends other than capital gain dividends
and portions of REIT dividends designated as qualified dividend income) are
eligible for a 20% federal income tax deduction in the case of individuals,
trusts and estates. A Fund that receives qualified REIT dividends may elect to
pass the special character of this income through to its shareholders. To be
eligible to treat distributions from a Fund as qualified REIT dividends, a
shareholder must hold shares of the Fund for more than 45 days during the 91-day
period beginning on the date that is 45 days before the date on which the shares
become ex dividend with respect to such dividend and the shareholder must not be
under an obligation (whether pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property. If a Fund does not elect to pass the special character of this income
through to shareholders or if a shareholder does not satisfy the above holding
period requirements, the shareholder will not be entitled to the 20% deduction
for the shareholder’s share of the Fund’s qualified REIT dividend income while
direct investors in REITs may be entitled to the deduction.
Any
dividend declared by a Fund in October, November or December to shareholders of
record during one of those months and paid the following January will be treated
for U.S. federal income tax purposes as received by shareholders on
December 31 of the year in which it is declared. In addition, certain other
distributions made after the close of a taxable year of a Fund may be “spilled
back” and treated as paid by the Fund (except for purposes of the 4% excise tax)
during such taxable year. In such case, shareholders generally will be treated
as having received such dividends in the taxable year in which the distributions
were actually made.
Certain
distributions reported by a Fund as section 163(j) interest dividends may be
treated as interest income by shareholders for purposes of the interest expense
limitations under Code section 163(j). Such treatment by a shareholder is
generally subject to holding period requirements and other potential
limitations, although the holding period requirements are generally not
applicable to dividends declared by money market funds and certain other funds
that declare dividends daily and pay such dividends on a monthly or more
frequent basis. The amount that a Fund is eligible to report as a section 163(j)
dividend for a tax year is generally limited to the excess of the Fund’s
business interest income over the sum of the Fund’s (i) business interest
expense and (ii) other deductions properly allocable to the Fund’s business
interest income. A Fund may choose not to designate section 163(j) interest
dividends.
Options
written or purchased and futures contracts entered into by a Fund on certain
securities, indices and foreign currencies, as well as certain forward foreign
currency contracts, may cause a Fund to recognize gains or losses from
marking-to-market even though those options may not have lapsed, been closed
out, sold, or exercised, or those futures or forward contracts may not have been
performed, sold or closed out. The tax rules applicable to these contracts may
affect the characterization of some capital gains and losses realized by a Fund
as long-term or short-term. Additionally, a Fund may be required to recognize
gain if an option, futures contract, forward contract, short sale, swap or other
transaction that is not subject to the mark-to-market rules is treated as a
“constructive sale” of an “appreciated financial position” held by a Fund under
Section 1259 of the Code. Any net mark-to-market gains and/or gains from
constructive sales may also have to be distributed to satisfy the distribution
requirements referred to above even though a Fund may receive no corresponding
cash amounts, possibly requiring the disposition of Fund securities or borrowing
to obtain the necessary cash. Losses on certain options, futures or forward
contracts, swaps and/or offsetting positions (Fund securities or other positions
with respect to which a Fund’s risk of loss is substantially diminished by one
or more options, futures or forward contracts) may also be deferred under the
tax straddle rules of the Code, which may also affect the characterization of
capital gains or losses from straddle positions and certain successor positions
as long-term or short-term. Certain tax elections may be available that would
enable a Fund to ameliorate some adverse effects of the tax rules described in
this paragraph. The tax rules applicable to options, futures, forward contracts,
swaps, straddles, caps, floors, collars and swaptions may affect the amount,
timing and character of the Fund’s income and gains or losses and hence of its
distributions to shareholders.
If
a Fund invests in certain pay-in-kind securities, zero coupon securities,
deferred interest securities or, in general, any other securities with original
issue discount (or with market discount if the Fund elects to include market
discount in income currently), the Fund must accrue income on such investments
for each taxable year, which generally will be prior to
the
receipt of the corresponding cash payments. However, each Fund must distribute
to shareholders, at least annually, all or substantially all of its investment
company taxable income (determined without regard to the deduction for dividends
paid), including such accrued income, to avoid federal income and excise taxes.
Therefore, a Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy these distribution requirements.
Each
Fund may also acquire market discount bonds. A market discount bond is a
security acquired in the secondary market at a price below its redemption value
(or its adjusted issue price if it is also an original issue discount bond). If
a Fund invests in a market discount bond, it will be required to treat any gain
recognized on the disposition of such market discount bond as ordinary income
(instead of capital gain) to the extent of the accrued market discount unless
the Fund elects to include the market discount in income as it accrues.
A
Fund’s investment in lower-rated or unrated debt securities may present issues
for the Fund if the issuers of these securities default on their obligations
because the federal income tax consequences to a holder of such securities are
not certain.
Generally,
the character of the income or capital gains that a Fund receives from another
investment company will pass through to the Fund’s shareholders as long as the
Fund and the other investment company each qualify as regulated investment
companies. However, to the extent that another investment company that qualifies
as a regulated investment company realizes net losses on its investments for a
given taxable year, a Fund will not be able to recognize its share of those
losses until it disposes of shares of such investment company. Moreover, even
when a Fund does make such a disposition, a portion of its loss may be
recognized as a long-term capital loss. As a result of the foregoing rules, and
certain other special rules, it is possible that the amounts of net investment
income and net capital gains that a Fund will be required to distribute to
shareholders will be greater than such amounts would have been had the Fund
invested directly in the securities held by the investment companies in which it
invests, rather than investing in shares of the investment companies. For
similar reasons, the character of distributions from a Fund (e.g., long-term
capital gain, qualified dividend income, etc.) will not necessarily be the same
as it would have been had the Fund invested directly in the securities held by
the investment companies in which it invests.
A
Fund’s investments in REIT equity securities may result in the Fund’s receipt of
cash in excess of the REIT’s earnings; if the Fund distributes these amounts,
these distributions could constitute a return of capital to the Fund’s
shareholders for federal income tax purposes. Investments in REIT equity
securities also may require a Fund to accrue and distribute income not yet
received. To generate sufficient cash to make the requisite distributions, a
Fund may be required to sell securities in its portfolio (including when it is
not advantageous to do so) that it otherwise would have continued to hold.
Dividends received by a Fund from a REIT will not qualify for the corporate
dividends received deduction and generally will not constitute qualified
dividend income.
Under
a notice issued by the Internal Revenue Service (the “IRS”), a portion of a
Fund’s income from residual interests in real estate mortgage investment
conduits (“REMICs”) or from a REIT (or other pass-through entity) that is
attributable to the REIT’s residual interest in a REMIC or an equity interest in
a taxable mortgage pool (referred to in the Code as an “excess inclusion”) will
be subject to federal income tax in all events. This notice also provides that
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 or taxable mortgage
pool interest 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 a qualified pension
plan, an individual retirement account, a 401(k) plan, a Keogh plan or other
tax-exempt entity) 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 federal income tax return, to file a tax return and pay tax
on such income, and (iii) in the case of a non-U.S. shareholder, 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” (as defined by
the Code) 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 highest federal income tax rate
imposed on corporations.
Foreign
exchange gains and losses realized by a Fund in connection with certain
transactions involving foreign currency-denominated debt securities, certain
options and futures contracts relating to foreign currency, foreign currency
forward
contracts,
foreign currencies, or payables or receivables denominated in a foreign currency
are subject to Section 988 of the Code, which generally causes such gain and
loss to be treated as ordinary income or loss and may affect the amount, timing
and character of distributions to shareholders.
Each
Fund may be subject to withholding and other taxes imposed by foreign countries,
including taxes on interest, dividends and capital gains, with respect to its
investments in such countries. Tax conventions between certain countries and the
U.S. may reduce or eliminate such taxes in some cases. Investors in a Fund would
be entitled to claim U.S. foreign tax credits with respect to such taxes,
subject to certain holding period requirements and other provisions and
limitations contained in the Code, only if more than 50% of the value of the
applicable Fund’s total assets at the close of the taxable year were to consist
of stock or securities of foreign corporations and the Fund were to file an
election with the IRS. Because the investments of the Funds are such that each
Fund expects that it generally will not meet this 50% requirement, shareholders
of each Fund generally will not directly take into account the foreign taxes, if
any, paid by that Fund and will not be entitled to any related tax credits. Such
taxes will reduce the amounts these Funds would otherwise have available to
distribute. A Fund generally may deduct any foreign taxes that are not passed
through to its shareholders in computing its income that must be distributed to
shareholders to avoid Fund-level tax.
If
a Fund acquires any equity interest (including, under Treasury regulations that
may be promulgated in the future, an option to acquire stock such as is inherent
in a convertible bond) in certain foreign corporations that receive at least 75%
of their annual gross income from passive sources (such as interest, dividends,
certain rents and royalties, or capital gains) or that hold at least 50% of
their assets in investments producing such passive income (“passive foreign
investment companies”), the Fund could be subject to U.S. federal income tax and
additional interest charges on “excess distributions” actually or constructively
received from such companies or on gain from the sale of stock in such
companies, even if all income or gain actually realized is timely distributed by
a Fund to its shareholders. The Fund will not be able to pass through to its
shareholders any credit for such a tax. Elections may generally be available to
ameliorate these adverse tax consequences, but any such elections could require
the Fund to recognize taxable income or gain (subject to tax distribution
requirements) without the concurrent receipt of cash. These investments could
also result in the treatment of associated capital gains as ordinary income. The
Funds may limit and/or manage stock holdings, if any, in passive foreign
investment companies to minimize each Fund’s tax liability or maximize its
return from these investments.
Dividends
received by a Fund, if any, from U.S. domestic corporations in respect of any
shares of the stock of such corporations with a holding period in an unleveraged
position of at least 46 days (91 days in the case of certain preferred stock),
extending before and after the ex-dividend dates and distributed and reported by
the Fund in written statements furnished to its shareholders (except for capital
gain dividends received from a regulated investment company) may be eligible for
the 50% dividends received deduction generally available to a corporation under
the Code. Corporate shareholders must meet the minimum holding period
requirements referred to above with respect to their shares of the applicable
Fund, taking into account any holding period reductions from certain hedging or
other transactions or positions that diminish their risk of loss with respect to
Fund shares, in order to qualify for the deduction and, if they borrow to
acquire, or otherwise incur debt attributable to, such shares, they may be
denied a portion of the dividends-received deduction. Any corporate shareholder
should consult its tax adviser regarding the possibility that its basis in its
Fund shares may be reduced, for U.S. federal income tax purposes, by reason of
“extraordinary dividends” received with respect to the shares, and, to the
extent such basis would be reduced below zero, current recognition of income
would be required.
Upon
a redemption of shares of a Fund (including a systematic withdrawal), an
exchange of shares in a Fund for shares of another Fund of the Trust or any
other disposition of shares of a Fund in a transaction that is treated as a sale
for U.S. federal income tax purposes, a shareholder that is subject to U.S.
federal income tax generally will realize a taxable gain or loss on the
difference between the redemption proceeds and the shareholder’s tax basis in
his, her or its shares. Such gain or loss will generally be treated as capital
gain or loss if the shares are capital assets in the shareholder’s hands.
Generally, a shareholder will recognize long-term capital gain or loss if the
shares were held by the shareholder for over twelve months at the time of their
redemption, exchange or other disposition and, if not held for such period,
short-term capital gain or loss. Any loss realized by a shareholder upon the
redemption, exchange or other disposition of shares with a tax holding period of
six months or less will be treated as a long-term capital loss to the extent of
any amounts treated as distributions of long-term capital gain with respect to
such shares. Shareholders should consult their own tax advisers regarding their
particular circumstances to determine whether a disposition of Fund shares is
properly treated as a sale for U.S. federal income tax purposes, as is assumed
in the foregoing discussion.
In
addition, if Class A shares or Class C shares that have been held for less than
91 days, (1) are redeemed and reinvested prior to January 31 of the calendar
year following the year such shares were redeemed in Class A shares of a Fund at
NAV pursuant to the reinstatement privilege, or (2) Class A shares are exchanged
for Class A shares in another Fund at NAV pursuant to the exchange privilege,
all or a portion of the sales charge paid on the shares that are redeemed or
exchanged will, for purposes of computing tax gain or loss on the redemption or
exchange, not be included in their tax basis of such shares under the Code to
the extent a sales charge that would otherwise apply to the shares received is
reduced pursuant to the reinstatement or exchange privilege. In either case, the
portion of the sales charge not included in the tax basis of the shares redeemed
or surrendered in an exchange is included in the tax basis of the shares
acquired in the reinvestment or exchange.
Any
loss realized on a redemption or other disposition of shares may be disallowed
under “wash sale” rules to the extent the shares disposed of are replaced with
other investments in the same Fund (including those made pursuant to
reinvestment of dividends and/or capital gain distributions) or other
substantially identical securities within a period of 61 days beginning
30 days before and ending 30 days after a redemption or other disposition
of the shares. In such a case, the disallowed portion of any loss generally
would be included in the U.S. federal income tax basis of the shares acquired.
Withdrawals under the automatic withdrawal plan involve redemptions of shares,
which are subject to the tax rules described above. Additionally, reinvesting
pursuant to the reinstatement privilege does not eliminate the possible
recognition of gain or loss upon the initial redemption of Fund shares but may
require application of some of these tax rules (e.g.,
the
wash sale rules).
Under
Treasury regulations, if a shareholder recognizes a loss with respect to a
Fund’s shares of $2 million or more for an individual shareholder, or $10
million or more for a corporate shareholder, in any single taxable year (or
greater amounts over a combination of years), the shareholder must file with the
IRS a disclosure statement on Form 8886. A shareholder who fails to make the
required disclosure to the IRS may be subject to substantial penalties. The fact
that a loss is reportable under these regulations does not affect the legal
determination of whether or not the taxpayer’s treatment of the loss is proper.
Shareholders should consult with their tax advisers to determine the
applicability of these regulations in light of their individual
circumstances.
Shareholders
that are exempt from U.S. federal income tax, such as retirement plans that are
qualified under Section 401 of the Code, generally are not subject to U.S.
federal income tax on Fund dividends or distributions or on sales of Fund shares
or exchanges of shares in a Fund for shares of another Fund of the Trust unless
the acquisition of the Fund shares was debt financed. A plan participant whose
retirement plan invests in a Fund generally also is not taxed on Fund dividends
or distributions received by the plan or on sales or exchanges of Fund shares by
the plan for U.S. federal income tax purposes. However, distributions to plan
participants from a retirement plan account (other than certain distributions
from a Roth IRA or Coverdell education savings account) generally are taxable as
ordinary income and different tax treatment, including penalties on certain
excess contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders and plan participants
should consult their tax advisers for more information.
The
foregoing discussion relates solely to U.S. federal income tax consequences for
shareholders who are U.S. persons (i.e.,
U.S.
citizens or residents and U.S. corporations, trusts or estates) and who are
subject to U.S. federal income tax and hold their shares as capital assets.
Except as otherwise provided, the discussion does not address special tax rules
applicable to certain classes of investors, such as tax-exempt or tax-advantaged
plans, accounts or entities, insurance companies, securities dealers and
financial institutions. If a partnership holds shares of a Fund, the U.S.
federal income tax treatment of a partner will generally depend upon the status
of the partner and the activities of the partnership. The foregoing discussion
may not be applicable to an investor who is a partner in a partnership holding
shares of a Fund. Such investors should consult their own tax adviser regarding
the tax consequences of acquiring, owning and disposing of shares of a
Fund.
Dividends,
capital gain distributions, and ownership of or gains realized on the redemption
(including an exchange of shares in a Fund for shares of another Fund of the
Trust) of Fund shares may also be subject to state and local taxes. A state
income (and possibly local income and/or intangible property) tax exemption is
generally available to the extent, if any, a Fund’s distributions are derived
from interest on (or, in the case of intangible property taxes, the value of its
assets is attributable to) investments in certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. Shareholders should consult their
tax advisers regarding the applicable requirements in their particular states,
as well as the U.S. federal, and any other state, local or
foreign,
tax consequences of ownership of shares of, and receipt of distributions from, a
Fund in their particular circumstances.
Shareholders
may be subject to a current 24% backup withholding on reportable payments,
including dividends, capital gain distributions, and the proceeds of redemptions
(and exchanges) of shares, if they fail to furnish the Funds with their correct
taxpayer identification number and certain certifications. A Fund may also be
required to withhold if it receives notice from the IRS or a broker that the
number provided is incorrect or backup withholding is applicable as a result of
previous underreporting of interest or dividend income.
Non-U.S.
investors (i.e.,
nonresident
aliens, foreign corporations and other foreign investors) may be subject to
different U.S. federal income tax treatment. These investors may be subject to a
withholding tax at the rate of 30% (or a lower rate under an applicable tax
treaty) on dividends from a Fund. However, the Funds will generally not be
required to withhold tax on any amounts paid to a non-U.S. investor with respect
to dividends attributable to “qualified short-term gain” (i.e., the excess of
net short-term capital gain over net long-term capital loss) designated as such
by the Fund and dividends attributable to certain U.S. source interest income
that would not be subject to federal withholding tax if earned directly by a
non-U.S. person, provided such amounts are properly designated by the Fund. A
Fund may choose not to designate such amounts. Non-U.S. investors will generally
not be subject to U.S. tax on gains realized on the sale or redemption of shares
in a Fund or on exchanges of shares in a Fund for shares of another Fund of the
Trust, except that a nonresident alien individual who is present in the United
States for 183 days or more in a calendar year will be taxable on such gains and
on capital gain dividends from a Fund.
In
contrast, if a non-U.S. investor conducts a trade or business in the United
States and an investment in a Fund is effectively connected with that trade or
business, then the non-U.S. investor’s income from the Fund will generally be
subject to U.S. federal income tax at graduated rates in a manner similar to the
income of a U.S. person.
Each
Fund will generally be required to withhold 30% tax on certain payments to
foreign entities that do not meet specified information reporting requirements
under the Foreign Account Tax Compliance Act or fail to provide the Fund with an
effective IRS Form W-8.
Special
rules apply to foreign persons who receive distributions from a Fund that are
attributable to gain from “United States real property interests” (“USRPIs”).
The Code defines USRPIs to include direct holdings of U.S. real property and any
interest (other than an interest solely as a creditor) in a “United States real
property holding corporation” or a former United States real property holding
corporation. The Code defines a United States real property holding corporation
as any corporation whose USRPIs make up 50% or more of the fair market value of
its USRPIs, its interests in real property located outside the United States,
plus any other assets it uses in a trade or business. In general, if a Fund is a
United States real property holding corporation (determined without regard to
certain exceptions), distributions by the Fund that are attributable to (a)
gains realized on the disposition of USPRIs by the Fund and (b) distributions
received by the Fund from a lower-tier regulated investment company or REIT that
the Fund is required to treat as USRPI gain in its hands will retain their
character as gains realized from USRPIs in the hands of the foreign persons and
will be subject to U.S. federal withholding tax. In addition, such distributions
could result in the foreign shareholder being required to file a U.S. tax return
and pay tax on the distributions at regular U.S. federal income tax rates. The
consequences to a non-U.S. shareholder, including the rate of such withholding
and character of such distributions (e.g., ordinary income or USRPI gain) will
vary depending on the extent of the non-U.S. shareholder’s current and past
ownership of a Fund.
In
addition, if a Fund is a United States real property holding corporation or
former United States real property holding corporation, the Fund may be required
to withhold U.S. tax upon a redemption of shares by a greater-than-5%
shareholder that is a foreign person, and that shareholder would be required to
file a U.S. income tax return for the year of the disposition of the USRPI and
pay any additional tax due on the gain. However, no such withholding is
generally required with respect to amounts paid in redemption of shares of a
fund if the fund is a domestically controlled qualified investment entity, or,
in certain other limited cases, if a fund (whether or not domestically
controlled) holds substantial investments in regulated investment companies that
are domestically controlled qualified investment entities.
Non-U.S.
investors should consult their tax advisers regarding the tax treatment
described above and the application of foreign taxes to an investment in the
Funds.
The
Funds may be subject to state or local taxes in any jurisdiction where the Funds
may be deemed to be doing business. In addition, in those states or localities
that have income tax laws, the treatment of a Fund and its shareholders under
such laws may differ from their treatment under U.S. federal income tax laws,
and an investment in the Fund may have tax consequences for shareholders
different from those of a direct investment in the Fund’s portfolio securities.
Shareholders should consult their own tax advisers concerning these
matters.
TRUST
GOVERNANCE
THE
BOARD
The
following table provides basic information about the Trustees, including their
names, the date each was first elected or appointed to office, the principal
business occupations of each during at least the last five years and other
directorships held. Each Trustee serves a term of unlimited duration. The
mailing address of each Trustee and officer for purposes of Trust business is
c/o RMB Investors Trust, 115 S. LaSalle Street, 34th Floor, Chicago, Illinois
60603.
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Name,
Address and Age |
Position
Held with the Funds |
Term
of Office and Time Served |
Principal
Occupation During the Past 5 Years |
Number
of Portfolios in Fund Complex Overseen by Trustee |
Other
Directorships held by Trustee |
INDEPENDENT
TRUSTEES |
MARGARET
M. EISEN (1953) |
Trustee
and Chair |
since
2013 |
Formerly,
Trustee, Smith College, 2012-2016; Chief Investment Officer, EAM
International LLC (finance and asset management), 2003- 2013; and Managing
Director, CFA Institute, 2005-2008. |
6 |
Board
of Trustees, Columbia Acorn Trust (6 series) and Wanger Advisors Trust (3
series) (2002-Present); formerly, Board Member, IronBridge Funds, Inc.
(2017-2019). |
PETER
BORISH (1959) |
Trustee |
since
2015 |
President,
Computer Trading Corporation (financial consulting firm), since
1995. |
6 |
None. |
JAMES
SNYDER (1947) |
Trustee |
since
2019 |
Private
investor, manages a family foundation and serves on corporate and
not-for-profit boards. Retired from Northern Trust since
2001.
|
6 |
Lead
Independent Director, Frontier Funds, Inc. (6 series) (2002-2022); Board
Member, IronBridge Funds, Inc. (2010 - 2019).
|
BOARD
STRUCTURE
The
direction and supervision of the Trust is the responsibility of the Board. The
Board establishes each Fund’s policies and oversees and reviews the management
of each Fund. The Board reviews the services provided by the Adviser, Mendon and
U.S. Bancorp Fund Services, LLC doing business as U.S. Bank Global Fund Services
(the “Administrator” or “Fund Services”) to ensure that each Fund’s general
investment policies and programs are being carried out and administrative
services are being provided to the Funds in a satisfactory manner. Fund Services
serves as the administrator for all of the Funds.
The
Board is comprised of three Trustees (the “Independent Trustees”), none of whom
is considered an “interested person” of
the Trust as
defined in the 1940 Act (an “Interested Trustee”). The Board has appointed Ms.
Eisen as its Chair. Each Trustee serves until a successor is elected, the
Trustee resigns or is removed, the Trust terminates, or reaching the Trust’s
mandatory retirement age for Independent Trustees (or any extension thereof).
The Board may grant one or more extensions of service of up to 12 months to
Independent Trustees who have reached the age of retirement. The Trustees
appoint their own successors, provided that at least two-thirds of the Trustees,
after such appointment, have been elected by the Trust’s shareholders.
Shareholders may remove a Trustee, with or without cause, upon the vote of
two-thirds of the
Trust’s
outstanding shares at any meeting called for that purpose. A Trustee may be
removed with or without cause by a written instrument signed by a majority of
the Trustees.
The
Trustees annually evaluate the performance of the Board, which evaluation
includes considering the effectiveness of the Board’s committee structure. The
Board believes that its leadership structure is appropriate in light of the
asset size of the Trust, the number of Funds offered by the Trust, the nature of
its business, and is consistent with industry practices. In particular, the
Board believes that having all Independent Trustees is appropriate and in the
best interests of Fund shareholders. The Board believes the existing structure
enables it to exercise effective oversight over the Funds and their
operations.
COMMITTEES
The
Board has established two standing committees: the Audit Committee and the
Nominating Committee. Each committee is chaired by and comprised solely of
Independent Trustees.
The
Audit Committee of the Board consists of Ms. Eisen and Messrs. Borish and
Snyder, each an Independent Trustee. Ms. Eisen is the chair of the Audit
Committee and is the designated Audit Committee Financial Expert. The Audit
Committee reviews the scope and results of the Trust’s annual audit with the
Trust’s independent registered public accounting firm and recommends the
engagement of such accounting firm. The Audit Committee oversees the Funds'
risks by, among other things, meeting with the Funds' internal auditors and
overseeing the Funds' Disclosure Controls and Procedures. The Audit Committee
reviews Fund valuation matters as it deems appropriate and consistent with the
Board’s responsibilities in this regard. The Audit Committee met two times
during the fiscal year ended December 31,
2022.
The
Nominating Committee of the Board consists of Ms. Eisen and Messrs. Borish and
Snyder, each an Independent Trustee. Mr. Borish is chair of the Nominating
Committee. The Nominating Committee is responsible for considering candidates
for election to the Board in the event a position is vacated or created. The
Nominating Committee meets as necessary. The Nominating Committee did not meet
during the fiscal year ended December 31,
2022.
While the Nominating Committee will consider candidates timely recommended by
shareholders to serve as a trustee, the Nominating Committee may only act upon
such recommendations if there is a vacancy on the Board or the Nominating
Committee determines that the selection of a new or additional Independent
Trustee is in the best interests of the Trust. Any recommendation should be
submitted in writing to the Secretary of the Trust, c/o RMB Capital Management,
LLC, 115 S. LaSalle Street, 34th Floor, Chicago, Illinois 60603. Any submission
should include at a minimum the following information: as to each individual
proposed for election or re-election as an Independent Trustee, the name, age,
business address, residence address and principal occupation or employment of
such individual, the class, series and number of shares of stock of the Trust
that are beneficially owned by such individual, the date such shares were
acquired and the investment intent of such acquisition, whether such shareholder
believes such individual is, or is not, an “interested
person” (as defined in the 1940 Act) of the Trust,
and information regarding such individual that is sufficient, in the discretion
of the Nominating Committee, to make such determination. In a case where the
Trust is holding a meeting of shareholders, any such submission, in order to be
considered for inclusion in the Trust’s proxy statement, should be submitted
within a reasonable time before the Trust begins to print and mail its proxy
statement. In the event that a vacancy arises or a change in Board membership is
determined to be advisable, the Nominating Committee will, in addition to any
timely submitted shareholder recommendations, consider candidates identified by
other means, including candidates proposed by members of the Nominating
Committee or other Independent Trustees. The
Nominating Committee is under no obligation to nominate candidates recommended
by shareholders. The
Trust’s charter for the Nominating Committee specifically precludes
discrimination against nominees on the basis of age, race, religion, national
origin, sex, sexual orientation, disability, or any other basis proscribed by
law.
RISK
OVERSIGHT
As
part of its responsibilities for oversight of the Trust and the Funds, the Board
oversees risk management of each Fund’s investment program and business affairs.
Day-to-day risk management functions are subsumed within the responsibilities of
the Funds’ Adviser and other service providers (depending on the nature of the
risk). The Funds are subject to a number of risks, including investment,
compliance, valuation, and operational risks. The Board interacts with and
reviews reports from the Adviser, the independent registered public accounting
firm for the Funds and the Administrator regarding risks faced by the Funds and
the service providers’ risk functions. The Board performs its oversight
responsibilities as part of its Board and Committee activities. The Board has
delegated to the Audit Committee oversight responsibility of the integrity
of
the Trust’s financial statements, the Trust’s compliance with legal and
regulatory requirements as they relate to the financial statements, the
independent auditor’s qualifications and independence, the Trust’s internal
controls over financial reporting, the Trust’s disclosure controls and
procedures and the Trust’s Code of Business Conduct and Ethics pursuant to the
Sarbanes-Oxley Act of 2002. The Audit Committee reports areas of concern, if
any, to the Board for discussion and action.
The
Board has approved the Trust’s compliance program and appointed the Trust’s CCO,
who is responsible for testing the compliance procedures of the Trust and
certain of its service providers. Senior management of the Adviser and the CCO
report at least quarterly to the Board regarding compliance matters relating to
the Trust, and the CCO annually assesses (and reports to the Board regarding)
the operation of the Trust’s compliance program. The Independent Trustees also
regularly meet outside the presence of management and have engaged independent
legal counsel to assist them in performing their oversight
responsibilities.
QUALIFICATIONS
AND EXPERIENCE OF TRUSTEES AND NOMINEES
The
Board believes that each Trustee’s experience, qualifications, attributes or
skills on an individual basis and in combination with those of the other
Trustees lead to the conclusion that each Trustee should serve in such capacity.
Among other attributes common to all Trustees are their ability to review
critically, evaluate, question and discuss information provided to them, to
interact effectively with the Adviser, other service providers, counsel and the
independent registered public accounting firm, to exercise effective business
judgment in the performance of their duties, and to represent the interests of
all the shareholders. A Trustee’s ability to perform the duties effectively may
have been attained through educational background or professional training;
business, consulting or academic positions; experience from service as a Trustee
of the Trust, or in various roles at public companies, private entities or other
organizations; and/or other life experiences. In addition to these shared
characteristics, set forth below is a brief discussion of the specific
qualifications, attributes or skills of each Trustee that support the conclusion
that each person is qualified to serve as a Trustee.
Mr.
Borish
has served as an Independent Trustee on the Board since 2015. His relevant
experience includes over 30 years of experience with financial, regulatory and
investment matters, including as a founder, chief executive officer and trader
for multiple hedge fund firms as well as a trading coach. Mr. Borish has
experience with board functions through his position on the boards of various
charitable organizations and as a result of his service as an Independent
Trustee since 2015.
Ms.
Eisen
has served as an Independent Trustee on the Board since 2013. Her relevant
experience includes experience with financial, regulatory and investment matters
as a result of her position as a managing director with responsibility for
multibillion dollar portfolios of equities, both public and private, at two of
the largest corporate pension funds in the United States. She also acquired such
experience through her position as a managing director of the CFA Institute,
which sets standards for measuring competence and integrity in the fields of
portfolio management and investment analysis. Ms. Eisen has experience with
board functions through her former position as a director of a public operating
company, her service as an independent trustee on the boards of other registered
investment companies since 2002, and her service as an Independent Trustee of
the Trust since 2013.
Mr.
Snyder
has served as an Independent Trustee on the Board since 2019. His relevant
experience includes experience with financial, regulatory and investment matters
as a result of holding
various
positions with The Northern Trust Company and its affiliates, including
Executive Vice President and Vice Chairman and Chief Investment Officer of
Northern Trust Global Investments and has earned the right to use the Chartered
Financial Analyst (CFA) designation. In addition, Mr. Snyder was a director of
Frontier Funds, Inc., another registered investment company which previously
included the predecessors of the Small Cap Fund and SMID Cap Fund from
2002-2022.
SECURITY
AND OTHER INTERESTS
The
table below sets forth the dollar range of equity securities beneficially owned
by each Trustee in all registered investment companies overseen by the Trustee
within the Trust’s family of investment companies, as defined in Form N‑1A
under the 1940 Act, as of December
31, 2022.
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Name
of Trustee
|
Dollar
Range of Equity Securities in the Funds* |
Aggregate
Dollar Range of Equity Securities in All Registered Investment Companies
Overseen by Trustee in Family of Investment Companies1 |
INDEPENDENT
TRUSTEES |
| |
Peter
F. Borish |
RMB
Fund – None Financial Services Fund – None International Fund –
None Japan Fund – None Small Cap Fund – None SMID Cap Fund –
None |
None |
|
| |
Margaret
M. Eisen |
RMB
Fund – None Financial Services Fund – None International Fund –
None Japan Fund – None Small Cap Fund – None SMID Cap Fund –
None |
None |
|
| |
James
Snyder |
RMB
Fund – None Financial Services Fund – None International Fund –
None Japan Fund – None Small Cap Fund – Over $100,000 SMID Cap
Fund – None
|
Over
$100,000 |
* Securities
“beneficially owned” as defined by rules promulgated under the Securities
Exchange Act of 1934, as amended (the “1934 Act”), include direct and or
indirect ownership of securities where the Trustee’s economic interest is tied
to the securities, the Trustee can exert voting power and where the Trustee has
authority to sell the securities. The dollar ranges are: None, $1-$10,000,
$10,001-$50,000, $50,001-$100,000 and over $100,000.
1 As
of December
31, 2022,
the RMB family of Funds consisted of the six Funds disclosed in this
SAI.
For
the two-year period ended December
31, 2022, none
of the Independent Trustees, or their immediate family members, owned,
beneficially or of record, any securities in the Adviser or principal
underwriter of the Trust, or in a person (other than a registered investment
company) directly or indirectly controlling, controlled by or under common
control with the Adviser or principal underwriter of the Trust.
COMPENSATION
OF TRUSTEES AND OFFICERS
Officers
affiliated with the Adviser are not compensated by the Trust for their services.
The Trust typically pays the Independent Trustees an annual retainer,
supplemental compensation for Board and Audit Committee Chair positions and a
per-meeting fee and reimburses them for their expenses associated with
attendance at meetings. The table below sets forth the aggregate amount of
compensation paid to each Independent Trustee by the Trust for the fiscal year
ended December
31,
2022,
and excludes reimbursed expenses (e.g., out of pocket expenses incurred in
attending Board and applicable Committee meetings).
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| Aggregate
Compensation From |
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Name
of Person, Position |
RMB Fund |
Finan-cial Services
Fund |
|
| Inter-national
Fund |
Japan Fund |
Small
Cap Fund |
SMID
Cap Fund |
| Pension
or Retirement Benefits Accrued |
Total Compensation from
Trust and Fund Complex |
INDEPENDENT
TRUSTEES |
Peter
F. Borish |
$11,522 |
$24,706 |
|
| $26,229 |
$3,311 |
$11,298 |
$20,934 |
| N/A |
$98,000 |
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Margaret
M. Eisen |
$15,064 |
$32,235 |
|
| $34,258 |
$4,337 |
$14,748 |
$27,358 |
| N/A |
$128,000 |
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|
| |
James
Snyder |
$11,522 |
$24,706 |
|
| $26,229 |
$3,311 |
$11,298 |
$20,934 |
| N/A |
$98,000 |
Total |
$38,108 |
$81,647 |
|
| $86,716 |
$10,959 |
$37,344 |
$69,226 |
| N/A |
$324,000 |
OFFICERS
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| |
Name,
Address and Age |
Position
Held with the Funds |
Term
of Office and Time Served |
Principal
Occupation During the Past 5 Years |
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| |
OFFICERS |
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| |
CHRISTOPHER
M. GRAFF (1973) |
President |
since
2019 |
Co-Chief
Investment Officer of the Adviser (since 2018); Managing Director of Asset
Management of the Adviser (since 2011). |
|
MAHER
A. HARB (1968) |
Chief
Financial Officer and Treasurer
|
since
2016 |
Chief
Financial Officer of the Adviser, since 2008. |
|
JOSEPH
D. MCDERMOTT (1969) |
Chief
Compliance Officer
|
since
2023 |
Chief
Compliance Officer of the Adviser (2022-present); Managing Director,
Alaric Compliance Services, LLC (2019-2022); Chief Compliance Officer, THL
Credit Senior Loan Fund (2018-2019); Compliance Manager, THL Credit Senior
Loan Strategies, LLC (2018-2019); Chief Compliance Officer, Aviva
Investors Americas LLC (2015-2018); Chief Compliance Officer, Aviva
Investors Canada Inc. (2016-2018). |
|
FRANK
A. PASSANTINO (1964) |
First
Vice President, Assistant Secretary and Anti-Money Laundering Compliance
Officer
|
since
1990 |
Manager
of Mutual Funds Operations of the Adviser (since 2016); First Vice
President, Burnham Asset Management Corporation (funds’ former investment
adviser) (1990-2016); and First Vice President, Burnham Securities, Inc.
(1990- 2016). |
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| |
LAURA
A. FLENTYE (1969) |
Senior
Vice President and Secretary
|
since
2017
|
Chief
Administrative Officer since 2018; Vice President, Business
Administration, of the Adviser (2017); Chief Operating Officer and Chief
Compliance Officer, Cupps Capital Management, LLC (2000-2016). |
|
PORTFOLIO
MANAGERS
Other
Accounts Managed
The
following table provides information about funds and accounts, other than the
Funds, for which the Funds’ portfolio managers were primarily responsible for
the day-to-day portfolio management as of December
31, 2022.
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| Number
of Other Accounts Managed and Total Assets by Account Type |
| Number
of Other Accounts and Total Assets for Which Advisory Fee is
Performance Based |
Name
of
Portfolio
Manager |
Registered Investment
Companies |
| Other Pooled Investment Vehicles |
| Other
Accounts |
| Registered Investment
Companies |
| Other Pooled Investment
Vehicles |
| Other
Accounts |
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| |
RMB
Fund |
|
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| |
Todd
Griesbach |
None |
| None |
| 1,594
accounts with $931,474,338 in assets. |
| None |
| None |
| None |
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| |
Financial
Services Fund |
|
|
|
|
|
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|
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| |
Anton
V. Schutz |
None |
| 1
account with $13,919,288 in assets. |
| 1
account with $13,914,894 in assets. |
| None |
| None |
| None |
Dan
GoldFarb |
None |
| 1
account with $13,919,288 in assets. |
| 1
account with $13,914,894 in assets. |
| None |
| None |
| None |
|
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| |
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International
Fund |
|
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| |
Masa
Hosomizu |
None |
| 1
account with $26,385,807 in assets. |
| 134
accounts with $389,703,968 in assets. |
| None |
| None |
| None |
Jim
Plumb |
None |
| None |
| 134
accounts with $389,703,968 in assets. |
| None |
| None |
| None |
|
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|
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| |
Japan
Fund |
|
|
|
|
|
|
|
|
|
| |
Masa
Hosomizu |
|
| 1
account with $26,385,807 in assets. |
| 134
accounts with $389,703,968 in assets. |
|
|
|
|
| |
IIhwa
Lee |
None |
| 1
account with $26,358,807 in assets. |
| None |
| None |
| None |
| None |
|
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|
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|
|
| |
Small
Cap Fund and SMID Cap Fund |
|
|
|
|
|
|
|
|
|
| |
Christopher
C. Faber |
None |
| None |
| 708
accounts with $340,405,883 |
| None |
| None |
| None |
Description
of Compensation
The
Adviser’s investment team, including the Funds’ portfolio managers, is
compensated in various forms, which typically includes the following: (i) a
base salary, (ii) individual bonus, and (iii) profit sharing.
Compensation is used to reward, attract and retain high quality investment
professionals.
Fixed
salaries and individual bonuses for investment professionals are determined by
the Adviser’s compensation committee, using tools which may include annual
evaluations, compensation surveys, and feedback from other employees.
The
amount of the individual bonus is determined by a mix of quantitative and
qualitative measures related largely to (i) the performance of the specific
funds and accounts managed by the individual and (ii) the individual’s
contributions to the investment process and overall teamwork. For these
purposes, fund and account pre-tax performance is evaluated on an absolute basis
and in relation to a benchmark over one- and three-year periods. Each Fund’s
applicable benchmark is provided below. The individual bonus is not based on a
pre-determined percentage of the Adviser’s revenues or net income.
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| |
Fund |
Benchmark |
RMB
Fund |
S&P
500®
Index Total Return |
Financial
Services Fund |
NASDAQ
Bank Index |
International
Fund |
MSCI
Europe, Australasia and Far East (EAFE) Index |
Japan
Fund |
MSCI
Japan Index |
Small
Cap Fund |
Russell
2000®
Index |
SMID
Cap Fund |
Russell
2500TM
Index |
The
investment team may also receive profit sharing. The Adviser believes that
profit sharing will be a significant factor in ensuring a motivated and stable
employee base going forward. The Adviser believes that the combination of
competitive salaries, individual bonuses, and profit sharing provides the
Adviser with a demonstrable advantage in the retention and motivation of
employees.
The
Adviser believes that its compensation structure/levels are more attractive than
the industry norm, which is illustrated by the firm’s lower-than-industry-norm
investment personnel turnover. The Adviser believes that overall its
compensation structure/levels is aligned with the interests of the Funds’
shareholders.
Financial
Services Fund –
Pursuant to the sub-advisory agreement, the Adviser has hired Mendon to provide
investment advisory services to the Financial Services Fund. For the
sub-advisory services provided to the Fund, the Adviser (and not the Fund) pays
Mendon at the rates set forth in the sub-advisory agreement. Mr. Anton Schutz,
the President of Mendon, has had primary day-to-day responsibility for the
Fund’s portfolio since inception. As a controlling shareholder of Mendon, Mr.
Schutz receives a percentage of Mendon’s profits. Mendon's other portfolio
managers are compensated with a base salary plus a performance bonus tied to the
absolute level of return for the Financial Services Fund and a relative return
against an appropriate benchmark, such as the NASDAQ Bank Index.
Potential
Conflicts of Interest
References
in this section to the Adviser include RMB and Mendon.
When
a portfolio manager is responsible for the management of more than one account,
the potential arises for the portfolio manager to favor one account over
another. The side-by-side management of a Fund, separate accounts, proprietary
accounts and pooled investment vehicles may raise potential conflicts of
interest relating to the allocation of investment opportunities and the
aggregation and allocation of trades. In addition, certain trading practices
such as cross trading between a Fund and another account raise conflicts of
interest. The principal types of potential conflicts of interest that may arise
are discussed below. Although the Trust and the Adviser have adopted procedures
that they believe are reasonably designed to detect and prevent violations of
the federal securities laws and to mitigate the potential for conflicts of
interest to affect portfolio management decisions, there can be no assurance
that all conflicts will be identified or that all procedures will be effective
in mitigating the potential for such risks. Generally, the risks of such
conflicts of interests are increased to the extent that a portfolio manager has
a financial incentive to favor one account over another.
•A
portfolio manager could favor one account over another in allocating new
investment opportunities that have limited supply, such as IPOs and private
placements. If, for example, an IPO that was expected to appreciate in value
significantly shortly after the offering was allocated to a single account, that
account may be expected to have better investment performance than other
accounts that did not receive an allocation of the IPO.
•A
portfolio manager could favor one account over another in the order in which
trades for the accounts are placed. If a portfolio manager determines to
purchase a security for more than one account in an aggregate amount that
may
influence the market price of the security, accounts that purchased or sold the
security first may receive a more favorable price than accounts that made
subsequent transactions. The less liquid the market for the security or the
greater the percentage that the proposed aggregate purchases or sales represent
of average daily trading volume, the greater the potential for accounts that
make subsequent purchases or sales to receive a less favorable price. When a
portfolio manager intends to trade the same security on the same day for more
than one account, the trades typically are “bunched,” which means that the
trades for the individual accounts are aggregated and each account receives the
same price. There are some types of accounts as to which bunching may not be
possible for contractual reasons (such as directed brokerage arrangements).
Circumstances may also arise where the trader believes that bunching the orders
may not result in the best possible price. Where those accounts or circumstances
are involved, the portfolio manager will place the order in a manner intended to
result in as favorable a price as possible for such client.
•A
portfolio manager could favor an account if the portfolio manager’s compensation
is tied to the performance of that account to a greater degree than other
accounts managed by the portfolio manager. If, for example, the portfolio
manager receives a bonus based upon the performance of certain accounts relative
to a benchmark while other accounts are disregarded for this purpose, the
portfolio manager will have a financial incentive to seek to have the accounts
that determine the portfolio manager’s bonus achieve the best possible
performance to the possible detriment of other accounts. Similarly, if the
Adviser receives a performance-based advisory fee, the portfolio manager may
favor that account, whether or not the performance of that account directly
determines the portfolio manager’s compensation.
•A
portfolio manager could favor an account if the portfolio manager has a
beneficial interest in the account, in order to benefit a large client or to
compensate a client that had poor returns. For example, if the portfolio manager
held an interest in an investment partnership that was one of the accounts
managed by the portfolio manager, the portfolio manager would have an economic
incentive to favor the account in which the portfolio manager held an
interest.
If
the different accounts have materially and potentially conflicting investment
objectives or strategies, a conflict of interest could arise. For example, if a
portfolio manager purchases a security for one account and sells the same
security short for another account, such trading pattern may disadvantage either
the account that is long or short. In making portfolio manager assignments, the
Trust and the Adviser seek to avoid such potentially conflicting situations.
However, where a portfolio manager is responsible for accounts with differing
investment objectives and policies, it is possible that the portfolio manager
will conclude that it is in the best interest of one account to sell a portfolio
security while another account continues to hold or increase the holding in such
security.
Mendon:
The portfolio managers of the Financial Services Fund manage other pooled
investment vehicles that have investment objectives and strategies similar to
those of the Financial Services Fund, including vehicles that employ leveraged
trading. As discussed above, potential conflicts of interest arise from such
side-by-side management.
Certain
portfolio managers of Mendon who serve as portfolio managers of the Financial
Services Fund also serve as executives, portfolios managers and indirect owners
or control persons of another investment adviser that manages venture capital
products. While this adviser may offer different products in the future, its
primary venture capital strategy (“Venture Fund”) currently involves investing
in venture stage financial technology companies primarily focused on serving
incumbent U.S. banks and financial institutions, including with respect to: (1)
data and analytics; (2) payments; (3) core banking; (4) risk and compliance; and
(5) automation. Although the investment strategy of the Venture Fund differs
from the investment strategies and objectives of the Financial Services Fund,
conflicts of interest exist with respect to the management of the Venture Fund
or future products. Certain of the conflicts of interest include:
•Portfolio
companies of the Financial Services Fund are investors in the Venture Fund and
may be investors in future venture capital products. Further, subject to
regulations covering affiliated transactions under the Act, portfolio companies
of the Financial Services Fund may co-invest with the Venture Fund in portfolio
companies of the Venture Fund or other venture capital products. As a result,
Mendon has an incentive to allocate Financial Services Fund capital to portfolio
companies that are actual or potential investors in the Venture Fund or
portfolio companies of the Venture Fund or other venture capital products.
•A
portfolio manager of the Financial Services Fund could spend a substantial
portion of their business time and attention on the Venture Fund or other
venture capital products versus the Financial Services Fund. The performance of
the Financial Services Fund could suffer as a result of such obligations.
Mendon
has adopted policies and procedures that it believes are reasonably designed to
mitigate these conflicts of interest. These include compliance monitoring and
certification by Mendon’s Chief Compliance Officer covering: the existence of
any material conflicts of interest involving the Financial Services Fund with
respect to the Venture Fund or any portfolio company of the Venture Fund or
other venture capital products; certain restrictions on ownership by the
Financial Services Fund of more than 5% of the outstanding voting securities of
its portfolio companies; and assurances that the purchase and sale of portfolio
companies of the Financial Services Fund have not been influenced by the status
of such companies as investors in the Venture Fund or other venture capital
products. The Financial Services Fund is also prohibited from investing in any
of the portfolio investments of the Venture Fund or other venture capital
products.
As
discussed above, there can be no assurance that all conflicts will be identified
or that Mendon’s procedures will be effective in mitigating the potential for
such risks.
Ownership
of Securities
The
following table sets forth the dollar range of equity securities of the Funds
beneficially owned by each portfolio manager as of December
31, 2022.
|
|
|
|
| |
| Dollar
Range of Fund Shares Beneficially Owned |
RMB
Fund |
|
Todd
Griesbach |
None |
Financial
Services Fund |
|
Anton
Schutz |
$100,001
- $500,000 |
Dan
GoldFarb |
None |
| |
International
Fund |
|
Masa
Hosomizu |
$50,001
- $100,000 |
Jim
Plumb |
$10,001
- $50,000 |
Japan
Fund |
|
Masa
Hosomizu |
$50,001
- $100,000 |
IIhwa
Lee |
None |
Small
Cap Fund |
|
Christopher
C. Faber |
Over
$1,000,000 |
SMID
Cap Fund |
|
Christopher
C. Faber |
Over
$1,000,000 |
CONTROL
PERSONS AND PRINCIPAL SHAREHOLDERS
As
of April
1, 2023, the
Trustees and Officers as a group owned approximately less than 1% of the
outstanding shares of each class of each of the Funds.
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 company or acknowledges the existence of control. Shareholders
with a controlling interest could affect the outcome of voting or the direction
of management of the Fund. As of
April 3, 2023,
the following shareholders were considered to be either a control person or
principal shareholder of the Funds.
Control
Persons of the Funds
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
Jurisdiction
in which Shareholder is Organized |
Parent
Company of the Shareholder |
Percent
of Fund’s Outstanding Shares Owned |
Financial
Services Fund Class A Shares: |
|
| |
Charles
Schwab & Co., Inc. Attn: Mutual Funds 101 Montgomery
Street San Francisco, CA 94104-4122 |
DE |
The
Charles Schwab Corporation |
31.50% |
Small
Cap Fund Class I Shares: |
|
| |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105 |
DE |
The
Charles Schwab Corporation |
34.14% |
Principal
Holders of the Funds
|
|
|
|
|
|
|
| |
Name
and Address |
Percent
of Fund’s Outstanding Shares Owned |
Ownership
Type |
RMB
Fund Class A Shares: |
| |
Gerard
F. Sullivan & Ann M. Sullivan, JT TEN c/o RMB 115 S. LaSalle
Street, 34th Floor Chicago, IL 60603 |
5.67% |
R |
|
| |
RMB
Fund Class C Shares: |
| |
UBS
Financial Services Inc. FBO Susan B. Bauer c/o RMB |
13.33% |
B |
LPL
Financial FBO Customer Accounts Attn: Mutual Fund Operations 4707
Executive Drive San Diego, CA 92121-3091 |
9.54% |
R |
Wells
Fargo Clearing Services LLC 2801 Market Street St. Louis, MO
63103 |
7.53% |
R |
UBS
Financial Services Inc. FBO Wehman Res Fam Tr/Ann Marie & John
Wehman & U/W/O John M. Wehman c/o RMB |
5.72% |
R |
RMB
Fund Class I Shares: |
| |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105 |
14.59% |
R |
National
Financial Services LLC 499 Washington Blvd. Jersey City, NJ
07310 |
6.48% |
R |
Financial
Services Fund Class A Shares: |
| |
Wells
Fargo Clearing Services LLC 2801 Market Street St. Louis, MO
63103 |
5.02% |
R |
|
| |
|
| |
Financial
Services Fund Class C Shares: |
| |
Wells
Fargo Clearing Services LLC 2801 Market Street St. Louis, MO
63103 |
9.90% |
R |
|
|
|
|
|
|
|
| |
Name
and Address |
Percent
of Fund’s Outstanding Shares Owned |
Ownership
Type |
Raymond
James Omnibus For Mutual Funds Attn: Courtney Waller 880
Carillon Parkway St. Petersburg, FL 33716 |
7.52% |
R |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105 |
5.44% |
R |
Financial
Services Fund Class I Shares: |
| |
Raymond
James Omnibus For Mutual Funds Attn: Courtney Waller 880
Carillon Parkway St. Petersburg, FL 33716 |
24.70% |
R |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105 |
9.91% |
R |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105 |
5.13% |
R |
International
Fund Class I Shares:
|
| |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105 |
11.21% |
R |
Japan
Fund Class I Shares: |
| |
|
| |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105 |
9.42% |
R |
Small
Cap Fund Class I Shares: |
| |
|
| |
|
| |
CAPINCO
c/o US Bank NA 1555 North RiverCenter Drive, Suite 302 Milwaukee, WI
53212 |
8.91% |
R |
Citi
Private Bank NJ Newport Office Center 480 Washington Boulevard, 15th
Floor Jersey City, NJ 07310-2053 |
5.03% |
R |
SMID
Cap Fund Class I Shares:
|
| |
National
Financial Services LLC 499 Washington Boulevard Jersey City, NJ
07310-1995 |
23.41% |
R |
National
Financial Services LLC 499 Washington Boulevard Jersey City, NJ
07310-1995 |
12.76% |
R |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105 |
12.51% |
R |
|
| |
Merrill
Lynch Pierce Fenner & Smith FBO Its Customers 4800 Deer Lake
Drive E Jacksonville, FL 32246-6484 |
8.66% |
R |
National
Financial Services LLC 499 Washington Boulevard Jersey City, NJ
07310-1995 |
6.53% |
R |
JP
Morgan Securities LLC FBO 582-37885-17 4 Chase Metrotech
Center Brooklyn, NY 11245-0001 |
5.81% |
R |
Citi
Private Bank NJ Newport Office Center 480 Washington Boulevard, 15th
Floor Jersey City, NJ 07310-2053 |
5.73% |
R |
B
- Shareholder is the “Beneficial” owner, meaning that the name listed refers to
the actual pecuniary, or financial, interest in the security.
R
- Shareholder is the owner of “Record,” meaning that the name listed is the name
of the shareholder on the account.
INVESTMENT
MANAGEMENT AND OTHER SERVICES
INVESTMENT
ADVISER
RMB,
located at 115 S. LaSalle Street, 34th Floor, Chicago, Illinois 60603 is the
investment adviser to the Funds. The Adviser is an independent diversified
financial services firm with approximately
$9.5 billion in regulatory assets under management, as of March 31,
2023,
that provides advisory and investment services to individuals, institutions, and
employers, utilizing both internally and externally managed investment products.
The Adviser was organized in 2005 and is a wholly-owned subsidiary of RMB
Capital Holdings LLC, a holding company organized under Delaware law in
2012.
Compensation
Information
Each
Fund has entered into an investment advisory contract (the “Advisory Agreement”)
with the Adviser, pursuant to which the Adviser will: (a) furnish continuously
an investment program for the Fund and determine, subject to the overall
supervision and review of the Trustees, which investments should be purchased,
held, sold or exchanged, or select a sub-adviser to carry out this
responsibility, and (b) supervise all aspects of the Fund’s investment
operations except those which are delegated to an administrator, custodian,
transfer agent or other agent. The Funds bear all costs of their organization
and operation that are not specifically required to be borne by another service
provider.
As
compensation for its services under the Advisory Agreement, each Fund pays the
Adviser monthly a fee based on a stated percentage of the average daily net
assets of the Fund as follows:
|
|
|
|
| |
FUND
NAME |
ANNUAL
ADVISORY FEE (% of average daily net assets) |
| |
RMB
Fund |
0.60% |
Financial
Services Fund |
0.75% |
International
Fund |
0.75% |
Japan
Fund |
0.90% |
Small
Cap Fund |
0.85% |
SMID
Cap Fund |
0.70% |
The
tables below provide the fees earned by the Adviser with respect to the Fund
indicated for the fiscal years ended December 31. Each table also provides the
advisory fees waived, expenses reimbursed, and the related fee and expense
recoupments pursuant to the Expense Limitation Agreement as described in more
detail below under “Expense Limitation Agreement.”
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
RMB
Fund: |
|
|
|
|
| |
| 2022 |
2021 |
2020 |
|
| |
Adviser
Fees Earned |
$701,484 |
$802,612 |
$605,534 |
|
| |
Fees
and Expenses Waived, Reimbursed, and Recouped |
$0 |
$0 |
$0 |
|
| |
Total
Fees Paid by Fund to Adviser |
$701,484 |
$802,612 |
$605,534 |
|
| |
Financial
Services Fund: |
|
|
|
|
| |
| 2022 |
2021 |
2020 |
|
| |
Adviser
Fees Earned |
$1,909,270 |
$2,020,319 |
$1,631,848 |
|
| |
Fees
and Expenses Waived, Reimbursed, and Recouped |
$0 |
$0 |
$0 |
|
| |
Total
Fees Paid by Fund to Adviser |
$1,909,270 |
$2,020,319 |
$1,631,848 |
|
| |
International
Fund: |
|
|
|
|
| |
| 2022 |
2021 |
2020 |
|
| |
Adviser
Fees Earned |
$2,028,981 |
$2,195,596 |
$1,563,092 |
|
| |
Fees
and Expenses Waived, Reimbursed, and Recouped |
$0 |
$0 |
$0 |
|
| |
Total
Fees Paid by Fund to Adviser |
$2,028,981 |
$2,195,596 |
$1,563,092 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Japan
Fund: |
|
|
|
|
| |
| 2022 |
2021 |
2020 |
|
| |
Adviser
Fees Earned |
$291,476 |
$474,186 |
$592,912 |
|
| |
Fees
and Expenses Waived, Reimbursed |
$(108,303) |
$(41,579) |
$(20,598) |
|
| |
Fees
and Expenses Recouped |
$0 |
$162 |
$6,269 |
|
| |
Total
Fees Paid by Fund to Adviser |
$183,173 |
$432,769 |
$578,583 |
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
| |
Small
Cap Fund: |
|
|
|
|
|
| |
| 2022 |
2021 |
2020 |
|
|
| |
Adviser
Fees Earned |
$982,834 |
$1,147,574 |
$917,926 |
|
|
| |
Fees
and Expenses Waived, Reimbursed, and Recouped |
$(209,754) |
$(152,691) |
$(182,479) |
|
|
| |
Total
Fees Paid by Fund to Adviser |
$773,080 |
$994,883 |
$735,447 |
|
|
| |
|
|
|
|
|
|
| |
SMID
Cap Fund: |
|
|
|
| |
| 2022 |
2021 |
2020 |
|
|
| |
Adviser
Fees Earned |
$1,402,004 |
$1,871,469 |
$1,239,547 |
|
|
| |
Fees
and Expenses Waived, Reimbursed and Recouped |
$(229,454) |
$(107,893) |
$(159,722) |
|
|
| |
Total
Fees Paid by Fund to Adviser |
$1,172,550 |
$1,763,576 |
$1,079,825 |
|
|
| |
Expense
Limitation Agreement
From
time to time, the Adviser may reduce its fee or make other arrangements to limit
a Fund’s expenses to a specified percentage of average daily net assets. For
each Fund, the Adviser has contractually agreed to waive all or a portion of its
management fees and reimburse other expenses to the extent required so that each
Fund’s Total Annual Fund Operating Expenses do not exceed amounts specified for
each share class. The table below sets forth the expense limits agreed to by the
Adviser for each Fund and share class, as a percentage of the Fund’s average
daily net assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Limit
on Total Annual Fund Operating Expenses |
| RMB
Fund |
Financial Services Fund |
Inter-national Fund |
Japan
Fund |
Small
Cap Fund |
SMID
Cap Fund |
|
|
|
|
|
| |
Class
A |
1.59% |
1.80% |
N/A |
N/A |
N/A |
N/A |
Class
C |
2.34% |
2.55% |
N/A |
N/A |
N/A |
N/A |
Class
I |
1.34% |
1.55% |
1.15% |
1.30% |
0.95% |
0.80% |
Investor
Class |
N/A |
N/A |
1.40% |
1.55% |
1.20% |
1.05% |
The
Adviser’s expense waiver and reimbursement obligations under the agreement are
determined monthly, based on each Fund’s annualized expenses for the month. The
Expense Limitation Agreement will remain in effect through April
30, 2024,
for each Fund unless its continuance is approved by all parties to the
agreement, and cannot be terminated prior to said date without the approval of
the Board. There can be no assurance that the Expense Limitation Agreement will
be continued, or that any other similar agreement will be effective, after the
termination of the Expense Limitation Agreement.
The
expense limits will not apply to interest charges on borrowings, taxes,
brokerage commissions, dealer spreads and other transaction costs, expenditures
that are capitalized in accordance with generally accepted accounting
principles, “Acquired Fund” (as defined in Form N-1A under the 1940 Act) fees
and expenses, short sale dividends, extraordinary expenses not incurred in the
ordinary course of a Fund’s business ( e.g.,
litigation
and indemnification), and any other costs and expenses that may be approved by
the Board. Extraordinary expenses are expenses that are unusual or are expected
to recur infrequently, and may include, but are not limited to: (i) expenses of
the reorganization, restructuring or merger of a Fund, including the acquisition
of all the assets of a Fund or the acquisition by a Fund of another fund’s
assets, (ii) expenses of substantially rewriting and reformatting a Fund’s
disclosure documents, (iii) expenses of holding and soliciting proxies for a
shareholder meeting to consider and vote upon changes to a Fund’s investment
policies and restrictions,
charter
documents or other fundamental matters, and (iv) expenses of converting to a new
custodian, transfer agent or other service provider.
The
Adviser may recoup from a Fund fees and expenses waived and reimbursed by the
Adviser pursuant to the Expense Limitation Agreement for a period of three years
following the date on which the wavier or reimbursement occurred, provided that
such recoupment does not cause the Fund to exceed the expense limits in effect
at the time of the waiver/reimbursement or recoupment.
Additional
Information
Securities
held by the Funds may also be held by other investment advisory clients for
which the Adviser or its affiliates provide investment advice. Because of
different investment objectives or other factors, a particular security may be
bought for one or more RMB Investors Trust’s mutual funds, including the Funds,
or clients when one or more are selling the same security. If opportunities for
purchase or sale of securities by the Adviser for the Funds or for other
investment advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective Funds or clients in a manner deemed equitable to all of them. To the
extent that transactions on behalf of more than one client of the Adviser or its
affiliates may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price.
Pursuant
to the Advisory Agreement, the Adviser is not liable to the Funds or their
shareholders for any error of judgment or mistake of law or for any loss
suffered by the Funds in connection with the matters to which the Advisory
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Adviser in the performance of its duties
or from reckless disregard by the Adviser of its obligations and duties under
the Advisory Agreement. In addition, the Advisory Agreement includes a mutual
indemnity for the benefit of the Funds and the Adviser.
Under
the Advisory Agreement, the Trust and the Funds may use the name “RMB” or any
name derived from or similar to it only for so long as the Advisory Agreement or
any extension, renewal or amendment thereof remains in effect. If the Advisory
Agreement is no longer in effect, the Trust and the Funds (to the extent that
they lawfully can) will cease to use such a name or any other name indicating
that it is advised by or otherwise connected with the Adviser.
Marketing
and Support Payments
The
Adviser, out of its own resources and without additional cost to the Funds or
their shareholders, may provide additional cash payments or other compensation
to certain financial intermediaries who sell shares of the Funds. Such payments
are in addition to upfront sales commissions paid by the Adviser and Rule 12b-1
distribution fees and service fees paid by the Funds (as applicable), and may be
divided into categories as follows:
Support
Payments.
Payments may be made by the Adviser to certain financial intermediaries in
connection with the eligibility of the Funds to be offered in certain programs
and/or in connection with meetings between Fund representatives and financial
intermediaries and their sales representatives. Such meetings may be held for
various purposes, including providing education and training about the Funds and
other general financial topics to assist financial intermediaries’ sales
representatives in making informed recommendations to, and decisions on behalf
of, their clients.
Entertainment,
Conferences and Events.
The Adviser also may pay cash or non-cash compensation to sales representatives
of financial intermediaries in the form of (i) occasional gifts; (ii) occasional
meals, tickets or other entertainment; and/or (iii) sponsorship support for the
financial intermediary’s client seminars and cooperative advertising. In
addition, the Adviser may pay for exhibit space or sponsorships at regional or
national events of financial intermediaries.
Certain
Service Fees.
Certain service fees charged by financial intermediaries, such as
sub-administration, subtransfer agency and other shareholder services fees,
which exceed the amounts payable pursuant to the Funds’ Distribution Plan (as
described in this SAI), are paid by the Adviser.
The
prospect of receiving, or the receipt of, additional payments or other
compensation as described above by financial intermediaries may provide such
intermediaries and/or their salespersons with an incentive to favor sales of
shares of the Funds, and other mutual funds whose affiliates make similar
compensation available, over sale of shares of mutual funds
(or
non-mutual fund investments) not making such payments. You may wish to take such
payment arrangements into account when considering and evaluating any
recommendations relating to Fund shares.
THE
SUB-ADVISER
The
Adviser has engaged the services of Mendon to provide portfolio management
services to the Financial Services Fund. For its sub-advisory services to the
Fund, the Adviser pays Mendon a sub-advisory fee expressed as an annual
percentage of the Fund’s average daily net assets equal to 0.375%. The Fund is
not responsible for the payment of sub-advisory fees.
Mendon’s
principal office is located at 31 Ocean Reef Drive, Suite C101 #249, Key Largo,
Florida 33037. Mendon is a corporation organized in the state of Delaware.
Mendon is a registered investment adviser and has been providing investment
advisory services that focus on the financial services industry to private and
public investment companies since 1996. For
the fiscal years ended December 31, 2022, 2021, and 2020, Mendon was paid
$954,635, $1,010,159 and $815,924, respectively, for its service as sub-adviser
to the Financial Services Fund.
THE
INVESTMENT ADVISER AND SUB-ADVISER
Codes
of Ethics. To
mitigate the possibility that a Fund will be adversely affected by personal
trading of employees, the Funds, Adviser and Mendon have each adopted a code of
ethics under Rule 17j-1 under the 1940 Act. These codes contain policies
restricting securities trading in personal trading accounts of Trustees and
others who normally come into possession of information about Fund portfolio
transactions. These codes of ethics permit personnel subject to the codes to
invest in securities, including securities that may be purchased or held by the
Funds. The foregoing description is qualified in its entirety by the Code of
Ethics, a copy of which has been filed with the SEC.
Proxy
Voting Procedures. The
Board has delegated proxy voting authority to the Adviser, subject to the
supervision of the Board. The Adviser votes all proxies on behalf of the Funds,
or may in some instances determine to not vote a proxy, in accordance with the
Adviser’s proxy voting policies, which address, among other things, conflicts of
interest that may arise between the interests of the Adviser and its affiliates
and the interests of the Trust, and also sets forth the Adviser’s procedures for
voting proxies.
The
Adviser’s proxy voting policies provide that the Adviser will vote proxies with
respect to client securities in a manner consistent with the best interest of
its clients. The Adviser has engaged Institutional Shareholder Services, Inc.
(“ISS”), a third party proxy voting agent, to research proxy proposals, provide
vote recommendations and vote proxies on behalf of the Adviser on frequent proxy
proposals, such as routine matters, shareholder rights, anti-takeover matters,
proxy contests, capital structure, and executive and director compensation,
unless client interests or instructions require otherwise. The Adviser believes
that most conflicts of interest that may otherwise arise have been mitigated by
the engagement of ISS to vote proxies on behalf of the Funds. However, should a
conflict of interest between the Adviser and the Funds’ interests arise, the
Adviser, with the input of its Proxy Committee, will determine whether or not
the Adviser may vote the proxy, whether legal counsel should be consulted
regarding the conflict and voting the proxy.
Each
Fund is required to annually file Form N-PX, which lists the Fund’s complete
proxy voting record for the 12-month period ending June 30th of each year. Once
filed, the Fund’s proxy voting record will be available without charge, upon
request, by calling toll-free 1-800-462-2392 and on the SEC’s website at
www.sec.gov.
ADMINISTRATOR
U.S.
Bancorp Fund Services, LLC doing business as U.S. Bank Global Fund Services
(previously defined as “Fund Services”), located at 615 East Michigan Street,
Milwaukee, Wisconsin 53202, serves as the Administrator to the Funds pursuant to
an administration agreement (the “Fund Services Administration Agreement”).
Pursuant to the Fund Services Administration Agreement, Fund Services provides
certain services to the Funds including, among other responsibilities,
facilitating
the Funds' payment of Fund expenses upon authorization from the Trust;
monitoring the Funds' compliance with certain 1940 Act requirements and
preparing and filing federal and state regulatory filings; preparing financial
and tax reports; arranging
for the computation of performance data, including NAV and yield; responding to
shareholder inquiries; facilitating
preparation for Board and Committee meetings, maintaining certain books and
records of the Funds; 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
Fund, the determination of investment policy, or for any matter pertaining to
the distribution of the Fund’s shares.
Pursuant
to the Fund Services Administration Agreement, as compensation for its services,
Fund Services receives from the Funds, a fee based on each Fund’s current
average daily net assets, subject to a minimum annual fee. Fund Services also is
entitled to certain out-of-pocket expenses. Fund Services also acts as fund
accountant under a separate agreement.
The
table below sets forth the administration fees paid by the Funds for the fiscal
years ended 2022,
2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Amount
Paid to Fund Services |
| 2022 |
2021 |
2020 |
|
|
| |
RMB
Fund |
$65,757 |
$68,910 |
$60,529 |
|
|
| |
Financial
Services Fund |
$68,980 |
$76,232 |
$58,127 |
|
|
| |
International
Fund |
$69,482 |
$77,391 |
$61,404 |
|
|
| |
Japan
Fund |
$64,329 |
$65,262 |
$61,223 |
|
|
| |
Small
Cap Fund |
$65,718 |
$69,140 |
$60,822 |
|
|
| |
SMID
Cap Fund |
$68,026 |
$75,863 |
$60,704 |
|
|
| |
DISTRIBUTOR
Distribution
Agreement. Foreside
Fund Services, LLC is the distributor (also known as the principal underwriter)
of the shares of the Funds effective beginning February 16, 2016 and is located
at Three Canal Plaza, Suite 100, Portland, Maine 04101 (the “Distributor”). The
Distributor is a registered broker-dealer and is a member of the Financial
Industry Regulatory Authority (“FINRA”). The Distributor is not affiliated with
the Trust, the Adviser, or any other service provider for the
Funds.
Under
a Distribution Agreement with the Trust (the “Distribution Agreement”), the
Distributor acts as the agent of the Trust in connection with the continuous
offering of shares of the Funds. The Distributor continually distributes shares
of the Funds on a best efforts basis. The Distributor has no obligation to sell
any specific quantity of Fund shares. The Distributor and its officers have no
role in determining the investment policies or which securities are to be
purchased or sold by the Trust.
The
Distributor may enter into agreements with selected broker-dealers, banks or
other financial intermediaries for distribution of shares of the Funds. With
respect to certain financial intermediaries and related fund “supermarket”
platform arrangements, the Funds and/or the Adviser, rather than the
Distributor, typically enter into such agreements. These financial
intermediaries may charge a fee for their services and may receive shareholder
service or other fees from parties other than the Distributor. These financial
intermediaries may otherwise act as processing agents and are responsible for
promptly transmitting purchase, redemption and other requests to the
Fund.
Investors
who purchase shares through financial intermediaries will be subject to the
procedures of those intermediaries through which they purchase shares, which may
include charges, investment minimums, cutoff times and other restrictions in
addition to, or different from, those listed herein. Information concerning any
charges or services will be provided to customers by the financial intermediary
through which they purchase shares. Investors purchasing shares of a Fund
through financial intermediaries should acquaint themselves with their financial
intermediary’s procedures and should read the applicable prospectus in
conjunction with any materials and information provided by their financial
intermediary. The financial intermediary, and not its customers, will be the
shareholder of record, although customers may have the right to vote shares
depending upon their arrangement with the financial intermediary. The
Distributor does not receive compensation from the Funds for its distribution
services except the distribution/service fees with respect to the shares of
those classes for which a Rule 12b-1 distribution plan is effective. The Adviser
pays the Distributor an additional fee for certain distribution-related
services.
The
Distribution Agreement has an initial term of up to two years and will continue
in effect only if such continuance is specifically approved at least annually by
the Board or by vote of a majority of the Fund’s outstanding voting securities
in accordance with the 1940 Act. The Distribution Agreement is terminable
without penalty by the Trust on behalf of a Fund
on
no less than 60 days’ written notice when authorized either by a vote of a
majority of the outstanding voting securities of the Fund or by vote of a
majority of the members of the Board who are not “interested persons” (as
defined in the 1940 Act) of the Trust and have no direct or indirect financial
interest in the operation of the Distribution Agreement, or by the Distributor,
and will automatically terminate in the event of its “assignment” (as defined in
the 1940 Act). The Distribution Agreement provides that the Distributor shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the performance of the Distributor’s
obligations and duties under the Distribution Agreement, except a loss resulting
from the Distributor’s willful misfeasance, bad faith or gross negligence in the
performance of such duties and obligations, or by reason of its reckless
disregard thereof.
The
table below sets forth both the aggregate amounts of sales charges paid by
shareholders and the amounts retained by the Distributor for the fiscal year
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Aggregate
Dollar Amount Paid |
|
|
| |
| 2022 |
2021 |
2020 |
|
|
| |
|
|
|
|
|
|
| |
RMB
Fund |
$224,528 |
$255,002 |
$203,144 |
|
|
| |
Financial
Services Fund |
$456,235 |
$509,626 |
$392,738 |
|
|
| |
International
Fund |
$0 |
$0 |
$0 |
|
|
| |
Japan
Fund |
$0 |
$0 |
$0 |
|
|
| |
Small
Cap Fund |
$0 |
$0 |
$0 |
|
|
| |
SMID
Cap Fund |
$0 |
$0 |
$0 |
|
|
| |
Amount
Retained by Distributor |
RMB
Fund |
$141,358 |
$48,275 |
$46,084 |
|
|
| |
Financial
Services Fund |
$49,193 |
$4,539 |
$28,006 |
|
|
| |
International
Fund |
$0 |
$0 |
$0 |
|
|
| |
Japan
Fund |
$0 |
$0 |
$0 |
|
|
| |
Small
Cap Fund |
$0 |
$0 |
$0 |
|
|
| |
SMID
Cap Fund |
$0 |
$0 |
$0 |
|
|
| |
Rule
12b-1 Distribution Plan.
The Trust has adopted a distribution plan for the Class A and Class C shares of
RMB Fund and the Financial Services Fund, and the Investor Class shares of the
International Fund and Japan Fund, (the “Plan”) in accordance with Rule 12b-1
under the 1940 Act. Class I shares are not subject to the Plan. The Plan is a
compensation plan, which means that the amount of payments under the Plan is not
linked to the Distributor’s expenditures. Pursuant to the Plan, each Fund pays
the Distributor for distribution services and expenses primarily intended to
result in the sale of Class A, Class C and Investor Class shares or to provide
services to holders of Class A, Class C and Investor Class shares, provided the
categories of expenses for which payment is made are approved by the Board.
Under the Plan, the Trust shall pay to the Distributor a distribution and/or
shareholder service fee at the rate of: up to 0.25% per annum of the average
daily NAV of the Class A shares of the RMB Fund and the Financial Services Fund;
and up to 0.25% per annum of the average daily NAV of the Investor Class shares
of the International Fund and Japan Fund. Under the Plan, the Trust shall pay to
the Distributor a distribution fee at the rate of up to 0.75% per annum of the
average daily NAV of the Class C shares of the RMB Fund and Financial Services
Fund and a shareholder service fee at a rate of 0.25% per annum of the average
daily NAV of the Class C shares of the RMB Fund and Financial Services
Fund.
The
Plan provides that the distribution and/or shareholder service fees permitted
under the Plan paid by Class A, Class C and Investor Class shares of the
applicable Funds may be used by the Distributor to furnish, or cause or
encourage others to furnish, services and incentives in connection with the
promotion, offering and sale of each Fund’s Class A, Class C, and
Investor
Class Shares, and where suitable and appropriate, the retention of each Fund’s
Class A, Class C, and Investor Class Shares by the respective Fund’s
shareholders. Such amounts may be spent by the Distributor, in its discretion,
on, among other things: compensation to and expenses (including overhead and
telephone expenses) of account executives or of other broker-dealers who engage
in or support the distribution of each Fund’s Class A, Class C and Investor
Class shares; printing of prospectus and reports for prospective shareholders;
advertising; preparation, printing and distribution of sales literature;
allowances to other broker-dealers; and distribution expenses incurred in
connection with the distribution of shares of a corresponding class of any Fund
or other open-end, registered investment company which sells all or
substantially all of its assets to a Fund or which merges or otherwise combines
with a Fund. A report of the amounts expended under the Plan is submitted to and
approved by the Trustees each quarter. Because of the Plan, long-term
shareholders may pay more over time than the economic equivalent of the maximum
sales charge permitted by FINRA regarding investment companies.
Pursuant
to the Distribution Agreement, amounts retained by the Distributor are not held
for profit at the Distributor, but instead are used to pay for and/or reimburse
the Adviser for distribution related expenditures.
The
Adviser is entitled to retain all fees related to the Plan for the first 12
months on any investment in Class C shares to recoup its expenses with respect
to the payment of up-front commissions for Class C shares. Financial
intermediaries will become eligible for compensation under the Plan beginning in
the 13th month following the purchase of Class C shares, although the
Distributor or Adviser may, pursuant to a written agreement between the
Distributor or Adviser and a particular financial intermediary, pay such
financial intermediary these fees prior to the 13th month following the purchase
of Class C shares. Up-front payments to broker-dealers or financial advisors are
financed solely by the Adviser and are not financed by investors or the Fund.
The Adviser also receives any contingent deferred sales charges paid with
respect to Class C shares.
General.
The fees paid under the Plan are calculated and accrued daily and paid monthly
or at such other longer intervals as the Board shall determine. The Plan is
subject to annual approval by the Trustees. The Plan is terminable at any time
by vote of the Trustees or by vote of a majority of the shares of the applicable
class or Fund. Pursuant to the Plan, a new Trustee who is not an interested
person (as defined under the 1940 Act) must be nominated by existing Trustees
who are not interested persons.
If
a Plan is terminated (or not renewed) with respect to any one or more classes or
Funds, the Plan may continue in effect with respect to a class or Fund as to
which it has not been terminated (or has been renewed).
The
Independent Trustees and Trust Officers have no direct or indirect financial
interest in the operation of the Plan or related agreements. The Plan was
adopted because of its anticipated benefits to the Funds. These anticipated
benefits include: increased promotion and distribution of each Fund’s shares, an
enhancement in each Fund’s ability to maintain accounts and improve asset
retention, increased stability of net assets for the Funds, increased stability
in each Fund’s positions, and greater flexibility in achieving investment
objectives. The costs of any joint distribution activities between the Funds
will be allocated among the Funds in proportion to their net
assets.
For
the fiscal year ended December
31, 2022,
the Funds paid fees for each principal type of activity under their Rule 12b-1
Plan according to the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
RMB
Fund
(Classes
A & C) |
Financial
Services
Fund
(Classes
A & C) |
International
Fund
(Investor
Class)* |
Japan
Fund
(Investor
Class)* |
Small
Cap
Fund
(Investor
Class)* |
SMID
Cap
Fund
(Investor
Class)* |
Marketing
and Advertising |
$0 |
$0 |
N/A |
N/A |
N/A |
N/A |
Printing
and Mailing of Prospectuses |
$0 |
$0 |
N/A |
N/A |
N/A |
N/A |
Underwriter
Compensation |
$0 |
$0 |
N/A |
N/A |
N/A |
N/A |
Broker-Dealer
Compensation |
$63,744 |
$370,294 |
N/A |
N/A |
N/A |
N/A |
Sales
Personnel Compensation |
$67,700 |
$41,287 |
N/A |
N/A |
N/A |
N/A |
Interest,
Carrying, or other Financing Charges |
$0 |
$0 |
N/A |
N/A |
N/A |
N/A |
_______________
*The
Investor Class shares for each of the International Fund, Japan Fund, Small Cap
Fund and SMID Cap Fund are not currently available for purchase.
As
stated above, the Plan is a compensation plan, and for the fiscal year ended
December
31, 2022,
the Distributor was
paid $137,737 in fees from the
Funds in
excess of expenses paid by the Distributor.
As of December 31, 2022, the Distributor's remaining balance of Plan fees
received from the Funds in excess of expenses paid by the Distributor pursuant
to the Plan was $190,551.
CUSTODIAN
U.S.
Bank National Association is the custodian of all securities and cash of the
Funds (the “Custodian”) pursuant to a custody agreement between the Custodian
and the Trust. The Custodian attends to the collection of principal and income
and payment for and collection of proceeds of securities bought and sold by the
Trust. The Custodian also serves as the Funds' delegated foreign custody
manager, pursuant to Rule 17f-5 under the 1940 Act. The Custodian’s address is
1555 N. RiverCenter Drive, Suite 302, Milwaukee, Wisconsin 53212. The Custodian
does not participate in decisions relating to the purchase and sale of
securities by the Funds. Fund Services and the Custodian are affiliated entities
under the common control of U.S. Bancorp.
TRANSFER
AGENT AND DIVIDEND PAYING AGENT
BNY
Mellon Asset Servicing, located at 500
Ross Street, 154-0520, Pittsburgh, Pennsylvania 15262,
is the transfer and dividend paying agent for the Trust. Its compensation is
based on schedules agreed on by the Trust and the transfer agent.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Tait,
Weller & Baker LLP, located at Two Liberty Place, 50 South 16th Street,
Suite 2900, Philadelphia, Pennsylvania 19102, is the independent registered
public accounting firm for the Trust. In addition to reporting annually on the
financial statements of the Trust, the firm provides other audit, tax and
related services.
SHARES
OF BENEFICIAL INTEREST
DESCRIPTION
OF THE TRUST’S SHARES
The
Trust is a statutory trust organized on August 20, 1998 under Delaware law. The
Trustees are responsible for the management and supervision of the Funds. The
Trust’s Agreement and Declaration of Trust, as amended and restated (the
“Declaration of Trust”) permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest of the Funds, with a par value
of $0.10 per share or such other amount as the Trustees may establish. Under the
Declaration of Trust, the Trustees have the authority to create and classify
shares of beneficial interest in separate series, without further action by
shareholders. As of the date of this SAI, the Trustees have authorized shares
only of the Funds offered in this SAI. Additional series may be added in the
future. The Declaration of Trust also authorizes the Trustees to classify and
reclassify the shares of the Funds, or any other series of the Trust, into one
or more classes.
Each
share of a Fund represents an equal proportionate interest in the assets
belonging to that Fund. When issued, shares are fully paid and non- assessable.
In the event of liquidation of a Fund, shareholders are entitled to share
pro-rata in the net assets of the Fund available for distribution to such
shareholders. Shares of a Fund are freely transferable and have no preemptive,
subscription or conversion rights.
In
accordance with the provisions of the Declaration of Trust, the Trustees have
initially determined that shares entitle their holders to one vote per share on
any matter on which such shares are entitled to vote. The Trustees may determine
in the future, without the vote or consent of shareholders, that each dollar of
net asset value (number of shares owned times NAV) will be entitled to one vote
on any matter on which such shares are entitled to vote.
Unless
otherwise required by the 1940 Act or the Declaration of Trust, the Funds have
no intention of holding annual meetings of shareholders. Shareholders may remove
a Trustee by the affirmative vote of at least two-thirds of the Trust’s
outstanding shares. At any time that less than a majority of the Trustees
holding office were elected by the shareholders, the Trustees will call a
special meeting of shareholders for the purpose of electing
Trustees.
Under
Delaware law, shareholders of a Delaware statutory trust are protected from
liability for acts or obligations of the Trust to the same extent as
shareholders of a private, for-profit Delaware corporation. In addition, the
Declaration of Trust expressly provides that the Trust has been organized under
Delaware law and that the Declaration of Trust will be governed by Delaware law.
It is possible that the Trust might become a party to an action in another state
whose courts refused to apply Delaware law, in which case the Trust’s
shareholders could be subject to personal liability.
To
guard against this risk, the Declaration of Trust:
i.contains
an express disclaimer of shareholder liability for acts or obligations of the
Trust and provides that notice of this disclaimer may be given in each
agreement, obligation and instrument entered into or executed by the Trust or
its Trustees;
ii.provides
for the indemnification out of Trust or Fund property of any shareholders held
personally liable for any obligations of the Trust or of the Fund;
and
iii.provides
that the Trust shall, upon request, assume the defense of any claim made against
any shareholder for any act or obligation of the Trust and satisfy any judgment
thereon.
Thus,
the risk of a shareholder incurring financial loss beyond his or her investment
because of shareholder liability with respect to a Fund is limited to
circumstances in which all of the following factors are present: (1) a court
refused to apply Delaware law; (2) the liability arose under tort law or, if
not, no contractual limitation of liability was in effect; and (3) the Fund
itself would be unable to meet its obligations. In light of Delaware law, the
nature of the Trust’s business and the nature of its assets, we believe the risk
of personal liability to a shareholder is remote.
The
Declaration of Trust further provides that the Trust will indemnify each of its
Trustees and officers against liabilities and expenses reasonably incurred by
them, in connection with, or arising out of, any action, suit or proceeding,
threatened against or otherwise involving the Trustee or officer, directly or
indirectly, by reason of being or having been a Trustee or officer of the Trust.
The Declaration of Trust does not authorize the Trust or any Fund to indemnify
any Trustee or officer against any liability to which he or she would otherwise
be subject by reason of or for willful misfeasance, bad faith, gross negligence
or reckless disregard of such person’s duties.
BROKERAGE
Subject
to policies established by the Board and applicable rules, the Adviser and
Mendon are responsible for the execution of portfolio transactions and the
allocation of brokerage transactions for the Funds. In executing portfolio
transactions, the Adviser and Mendon will seek to obtain the best price and most
favorable execution for the Funds, taking into account such factors as the price
(including the applicable brokerage commission or dealer spread), size of the
order, difficulty of execution and operational facilities of the firm involved.
While the Adviser and Mendon generally seek reasonably competitive commission
rates, payment of the lowest commission or spread is not necessarily consistent
with obtaining the best price and execution in particular
transactions.
When
one or more brokers is believed capable of providing the best combination of
price and execution, the Adviser or Mendon may select a broker based upon
brokerage or research services provided to the Adviser or Mendon if a good faith
determination is made that the commission is reasonable in relation to the
services provided.
Section
28(e) of the 1934 Act permits an investment adviser, under certain
circumstances, to cause a fund to pay a broker or dealer a commission for
effecting a transaction in excess of the amount of commission another broker or
dealer would have charged for effecting the transaction in recognition of the
value of brokerage and research services provided by the broker or dealer.
Brokerage and research services include: (1) furnishing advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; (2) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts; and (3) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody).
To
the extent research services may be a factor in selecting brokers, such services
may be in written form or through direct contact with individuals and may
include information as to particular companies and securities as well as market,
economic,
or institutional areas and information which assists in the valuation and
pricing of investments. Examples of research-oriented services for which the
Adviser might utilize Fund commissions include research reports and other
information on the economy, industries, sectors, groups of securities,
individual companies, statistical information, political developments, technical
market action, pricing and appraisal services, credit analysis, risk measurement
analysis, performance and other analysis. The Adviser may use research services
furnished by brokers in servicing all client accounts and not all services may
necessarily be used in connection with the account that paid commissions to the
broker providing such services. Information so received by the Adviser will be
in addition to and not in lieu of the services required to be performed by the
Adviser under their investment advisory agreement with the Funds. Any advisory
or other fees paid to the Adviser are not reduced as a result of the receipt of
research services.
In
some cases, the Adviser may receive services from a broker that have both a
“research” and a “non-research” use. These services may include such matters as
trade execution services, general economic and market reviews, industry and
company reviews, evaluations of investments, recommendations as to the purchase
and sale of investments, trade magazines, company financial data, market data,
pricing services, quotation services, and news services utilized by the
Adviser’s investment professionals. When received, the Adviser makes a good
faith allocation, under all the circumstances, between the research and
non-research uses of the service. The percentage of the service that is used for
research purposes may be paid for with client commissions, while the Adviser
will use its own funds to pay for the percentage of the service that is used for
non-research purposes. In making this good faith allocation, the Adviser faces a
potential conflict of interest, but the Adviser believes that its allocation
procedures are reasonably designed to ensure that they appropriately allocate
the anticipated use of such services to their research and non-research uses.
The management fee paid by each Fund is not reduced because the Adviser may
receive these services even though the Adviser might otherwise be required to
purchase some of these services for cash.
No
transactions may be effected by a Fund with the Distributor acting as principal
for its own account. Over-the-counter purchases and sales normally are made with
principal market makers except where, in management’s opinion, better executions
are available elsewhere. Transactions in securities on a securities exchange are
generally effected as agency transactions with brokers who receive compensation
for their services. U.S. Government and debt securities are traded primarily in
the over-the-counter market. Certain equity securities also may be traded in the
over-the-counter market. Transactions in the over-the-counter market are
generally effected as principal transactions with dealers. However, transactions
in the over-the-counter market may also be effected as agency transactions, such
as through an electronic communications network (“ECN”) or an alternative
trading system (“ATS”). The cost of transactions in securities in the
over-the-counter market, whether effected through dealers, ECNs, ATSs or
otherwise, may include dealer spreads, brokerage commissions, commission
equivalent charges or a combination thereof.
The
broker commissions paid by each Fund for the last three fiscal years are set
forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Brokerage
Commissions Paid |
| 2022 |
2021 |
2020 |
|
|
| |
RMB
Fund |
$13,042 |
$11,604 |
$32,372 |
|
|
| |
Financial
Services Fund |
$234,310 |
$359,523 |
$753,237 |
|
|
| |
International
Fund |
$166,269 |
$144,744 |
$227,154 |
|
|
| |
Japan
Fund |
$29,756 |
$38,596 |
$106,326 |
|
|
| |
Small
Cap Fund |
$27,894 |
$20,078 |
$40,140 |
|
|
| |
SMID
Cap Fund |
$39,015 |
$19,799 |
$40,195 |
|
|
| |
During
the fiscal year ended December
31, 2022, the
following amounts of brokerage commissions for each Fund were paid to brokers
for third-party research:
|
|
|
|
| |
Fund |
Related
Commissions for Third-Party Research |
RMB
Fund |
$478 |
Financial
Services Fund |
$17,859 |
International
Fund |
$0 |
Japan
Fund |
$0 |
Small
Cap Fund |
$0 |
SMID
Cap Fund |
$0 |
Each
Fund may at times invest in securities of its regular broker-dealers or the
parent of its regular broker-dealers. As of
December
31, 2022,
the following Funds held securities of their regular broker-dealers or the
parent of their regular broker-
dealers.
|
|
|
|
|
|
|
| |
Fund |
Security |
Amount |
RMB
Fund |
Morgan
Stanley |
$2,355,564 |
|
Financial
Services Fund |
Wells
Fargo & Co. |
$2,064,500 |
|
Japan
Fund |
Mitsubishi
UFJ Financial Group, Inc. |
$1,953,604 |
|
Small
Cap Fund |
Stifel
Financial Corp. |
$1,744,563 |
|
FINANCIAL
STATEMENTS
The
Funds’ audited financial statements for the fiscal year ended December
31, 2022
are included in the Trust’s Annual Report to Shareholders dated December
31, 2022.
You can obtain a copy of the Trust’s Annual Report dated December
31, 2022 by
writing or calling the Adviser at the address or telephone number set forth on
the cover of this SAI. The Funds’ audited financial statements and the report of
the independent registered public accounting firm thereon included in the Annual
Reports are incorporated by reference into this SAI by reference to the Annual
Reports as filed with the Commission on March
6, 2023.
APPENDIX
A
DESCRIPTION
OF SECURITIES RATINGS
Short-Term
Credit Ratings
An
S&P
Global Ratings
short-term
issue credit rating is a forward-looking opinion about the creditworthiness of
an obligor with respect to a specific financial obligation having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by
S&P Global Ratings
for short-term issues:
“A-1”
– A short-term obligation rated “A-1” is rated in the highest category by
S&P
Global Ratings
that the obligor’s capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor’s capacity to meet its financial
commitment on these obligations is extremely strong.
“A-2”
– A short-term obligation rated “A-2” is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor’s capacity to meet
its financial commitments on the obligation is satisfactory.
“A-3”
– A short-term obligation rated “A-3” exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to weaken
an obligor’s capacity to meet its financial commitments on the
obligation.
“B”
– A short-term obligation rated “B” is regarded as vulnerable and has
significant speculative characteristics. The obligor currently has the capacity
to meet its financial commitments; however, it faces major ongoing uncertainties
that could lead to the obligor’s inadequate capacity to meet its financial
commitments.
“C”
– A short-term obligation rated “C” is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitments on the obligation.
“D”
– A short-term obligation rated “D” is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the “D” rating category is used
when payments on an obligation are not made on the date due, unless S&P
Global Ratings believes
that such payments will be made within any stated grace period. However, any
stated grace period longer than five business days will be treated as five
business days. The “D” rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action and where default on an obligation is
a virtual certainty, for example due to automatic stay provisions. A rating on
an obligation is lowered to “D” if it is subject to a distressed debt
restructuring.
Local
Currency and Foreign Currency Risks – S&P
Global Ratings’
issuer credit ratings make a distinction between foreign currency ratings and
local currency ratings. A
foreign currency rating on an issuer can differ from the local currency rating
on it when the obligor has a different capacity to meet its obligations
denominated in its local currency versus obligations denominated in a foreign
currency.
Moody’s
Investors Service (“Moody’s”) short-term
ratings are forward-looking opinions of the relative credit risks of financial
obligations with an original maturity of thirteen months or less and reflect
both on the likelihood of a default on contractually promised payments
and
the expected financial loss suffered in the event of default.
Moody’s
employs the following designations to indicate the relative repayment ability of
rated issuers:
“P-1”
– Issuers (or supporting institutions) rated Prime-1 have a superior ability to
repay short-term debt obligations.
“P-2”
– Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
“P-3”
– Issuers (or supporting institutions) rated Prime-3 have an acceptable ability
to repay short-term obligations.
“NP”
– Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
Fitch,
Inc. / Fitch Ratings Ltd. (“Fitch”) short-term
issuer or obligation rating is based in all cases on the short-term
vulnerability to default of the rated entity and relates to the capacity to meet
financial obligations in accordance with the documentation governing the
relevant obligation. Short-term deposit ratings may be adjusted for loss
severity. Short-term ratings are assigned to obligations whose initial maturity
is viewed as “short-term” based on market convention (a
long-term rating can also be used to rate an issue with short
maturity).
Typically, this means up to 13 months for corporate, sovereign and structured
obligations, and up to 36 months for obligations in U.S. public finance markets.
The following summarizes the rating categories used by Fitch for short-term
obligations:
“F1”
– Highest short-term credit quality. Indicates the strongest intrinsic capacity
for timely payment of financial commitments; may have an added “+” to denote any
exceptionally strong credit feature.
“F2”
– Good short-term credit quality. Good intrinsic capacity for timely payment of
financial commitments.
“F3”
– Fair short-term credit quality. The intrinsic capacity for timely payment of
financial commitments is adequate.
“B”
– Speculative short-term credit quality. Minimal capacity for timely payment of
financial commitments, plus heightened vulnerability to near term adverse
changes in financial and economic conditions.
“C”
– High short-term default risk. Default
is a real possibility.
“RD”
– Restricted Default. Indicates an entity that has defaulted on one or more of
its financial commitments, although it continues to meet other financial
obligations. Typically applicable to entity ratings only.
“D”
– Default. Indicates a broad-based default event for an entity, or the default
of a short-term obligation.
The
DBRS®
Ratings Limited (“DBRS”) short-term
debt rating scale provides an opinion on the risk that an issuer will not meet
its short-term financial obligations in a timely manner. Ratings are based on
quantitative and qualitative considerations relevant to the issuer and the
relative ranking of claims. The R-1 and R-2 rating categories are further
denoted by the sub-categories “(high)”, “(middle)”, and “(low)”.
The
following summarizes the ratings used by DBRS for commercial paper and
short-term debt:
“R-1
(high)” - Highest credit quality. The capacity for the payment of short-term
financial obligations as they fall due is exceptionally high. Unlikely to be
adversely affected by future events.
“R-1
(middle)” – Superior credit quality. The capacity for the payment of short-term
financial obligations as they fall due is very high. Differs from “R-1 (high)”
by a relatively modest degree. Unlikely to be significantly vulnerable to future
events.
“R-1
(low)” – Good credit quality. The capacity for the payment of short-term
financial obligations as they fall due is substantial. Overall strength is not
as favorable as higher rating categories. May be vulnerable to future events,
but qualifying negative factors are considered manageable.
“R-2
(high)” – Upper end of adequate credit quality. The capacity for the payment of
short-term financial obligations as they fall due is acceptable. May be
vulnerable to future events.
“R-2
(middle)” – Adequate credit quality. The capacity for the payment of short- term
financial obligations as they fall due is acceptable. May be vulnerable to
future events or may be exposed to other factors that could reduce credit
quality.
“R-2
(low)” – Lower end of adequate credit quality. The capacity for the payment of
short-term financial obligations as they fall due is acceptable. May be
vulnerable to future events. A number of challenges are present that could
affect the issuer’s ability to meet such obligations.
“R-3”
– Lowest end of adequate credit quality. There is a capacity for the payment of
short-term financial obligations as they fall due. May be vulnerable to future
events and the certainty of meeting such obligations could be impacted by a
variety of developments.
“R-4”
– Speculative credit quality. The capacity for the payment of short-term
financial obligations as they fall due is uncertain.
“R-5”
– Highly speculative credit quality. There is a high level of uncertainty as to
the capacity to meet short-term financial obligations as they fall
due.
“D”
– When the issuer has filed under any applicable bankruptcy, insolvency or
winding up statute or there is a failure to satisfy an obligation after the
exhaustion of grace periods, a downgrade to “D” may occur. DBRS may also use
“SD” (Selective Default) in cases where only some securities are impacted, such
as the case of a distressed exchange.
Long-Term
Credit Ratings
The
following summarizes the ratings used by
S&P
Global Ratings
for
long-term issues:
“AAA”
– An obligation rated “AAA” has the highest rating assigned by S&P
Global Ratings.
The obligor’s capacity to meet its financial commitment on the obligation is
extremely strong.
“AA”
– An obligation rated “AA” differs from the highest-rated obligations only to a
small degree. The obligor’s capacity to meet its financial commitment on the
obligation is very strong.
“A”
– An obligation rated “A” is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor’s capacity to meet its financial
commitment on the obligation is still strong.
“BBB”
– An obligation rated “BBB” exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to weaken
the obligor’s capacity to meet its financial commitment on the
obligation.
“BB,”
“B,” “CCC,” “CC” and “C” – Obligations rated “BB,” “B,” “CCC,” “CC” and “C” are
regarded as having significant speculative characteristics. “BB” indicates the
least degree of speculation and “C” the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
“BB”
– An obligation rated “BB” is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor’s inadequate capacity to meet its financial commitment on the
obligation.
“B”
– An obligation rated “B” is more vulnerable to nonpayment than obligations
rated “BB”, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor’s capacity or willingness to meet its
financial commitment on the obligation.
“CCC”
– An obligation rated “CCC” is currently vulnerable to nonpayment and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitments on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the
obligation.
“CC”
– An obligation rated “CC” is currently highly vulnerable to nonpayment. The
“CC” rating is used when a default has not yet occurred, but S&P
Global Ratings
expects default to be a virtual certainty, regardless of the anticipated time to
default.
“C”
– An obligation rated “C” is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority or lower ultimate
recovery compared to obligations that are rated higher.
“D”
– An obligation rated “D” is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the “D” rating category is used when payments on
an obligation are not made on the date due, unless S&P
Global Ratings
believes that such payments will be made within five business days in the
absence of a stated grace period or within the earlier of
the
stated grace period or 30 calendar days. The “D” rating also will be used upon
the filing of a bankruptcy petition or the taking of similar action and where
default on an obligation is a virtual certainty, for example due to automatic
stay provisions. An obligation’s rating is lowered to “D” if it is subject to a
distressed exchange offer.
Plus
(+) or minus (-) – The ratings from “AA” to “CCC” may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within the
major rating categories.
“NR”
– This indicates that no rating has been requested, or that there is
insufficient information on which to base a rating, or that S&P
Global Ratings
does not rate a particular obligation as a matter of policy.
Local
Currency and Foreign Currency Risks - S&P
Global Ratings’
issuer credit ratings make a distinction between foreign currency ratings and
local currency ratings. An issuer’s foreign currency rating will differ from its
local currency rating when the obligor has a different capacity to meet its
obligations denominated in its local currency, vs. obligations denominated in a
foreign currency.
Moody’s
long-term
ratings are forward-looking opinions of the relative credit risks of financial
obligations with an original maturity of one year or more. Such ratings reflect
both the likelihood of default on contractually promised payments and the
expected financial loss suffered in the event of default. The following
summarizes the ratings used by Moody’s for long-term debt:
“Aaa”
– Obligations rated “Aaa” are judged to be of the highest quality, subject to
the lowest level of credit risk.
“Aa”
– Obligations rated “Aa” are judged to be of high quality and are subject to
very low credit risk.
“A”
– Obligations rated “A” are judged to be upper-medium grade and are subject to
low credit risk.
“Baa”
– Obligations rated “Baa” are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative
characteristics.
“Ba”
– Obligations rated “Ba” are judged to be speculative and are subject to
substantial credit risk.
“B”
– Obligations rated “B” are considered speculative and are subject to high
credit risk.
“Caa”
– Obligations rated “Caa” are judged to be speculative of poor standing and are
subject to very high credit risk.
“Ca”
– Obligations rated “Ca” are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
“C”
– Obligations rated “C” are the lowest rated and are typically in default, with
little prospect for recovery of principal and interest.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from “Aa” through “Caa.” The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category. Additionally, a “(hyb)” indicator is
appended to all ratings of hybrid securities issued by banks, insurers, finance
companies, and securities firms. By their terms, hybrid securities allow for the
omission of scheduled dividends, interest, or principal payments, which can
potentially result in impairment if such an omission occurs. Hybrid securities
may also be subject to contractually allowable write-downs of principal that
could result in impairment. Together with the hybrid indicator, the long-term
obligation rating assigned to a hybrid security is an expression of the relative
credit risk associated with that security.
The
following summarizes long-term ratings used by Fitch
:
“AAA”
– Highest credit quality. “AAA” ratings denote the lowest expectation of credit
risk. They are assigned only in cases of exceptionally strong capacity for
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
“AA”
– Very high credit quality. “AA” ratings denote expectations of very low credit
risk. They indicate very strong capacity for payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable
events.
“A”
– High credit quality. “A” ratings denote expectations of low credit risk. The
capacity for payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to adverse business or economic
conditions than is the case for higher ratings.
“BBB”
– Good credit quality. “BBB” ratings indicate that expectations of credit risk
are currently low. The capacity for payment of financial commitments is
considered adequate but adverse business or economic conditions are more likely
to impair this capacity.
“BB”
– Speculative. “BB” ratings indicate that there is an elevated vulnerability to
credit risk, particularly in the event of adverse changes in business or
economic conditions over time; however, business or financial alternatives may
be available to allow financial commitments to be met.
“B”
– Highly speculative. “B” ratings indicate that material credit risk is present.
“CCC”
– Substantial credit risk. A “CCC” rating indicates that substantial credit risk
is present.
“CC”
– Very high levels of credit risk. A “CC” rating indicates very high levels of
credit risk.
“C”
– Near default. A “C” rating indicates exceptionally high levels of credit
risk.
Corporate
Finance defaulted obligations typically are not assigned “RD” or “D” ratings,
but are instead rated in the “CCC” to “C” rating categories, depending upon
their recovery prospects and other relevant characteristics. This approach
better aligns obligations that have comparable overall expected loss but varying
vulnerability to default and loss.
The
DBRS
long-term
rating scale provides an opinion on the risk of default. That is, the risk that
an issuer will fail to satisfy its financial obligations in accordance with the
terms under which an obligation has been issued. Ratings are based on
quantitative and qualitative considerations relevant to the issuer, and the
relative ranking of claims. All rating categories other than AAA and D also
contain subcategories “(high)” and “(low)”. The absence of either a “(high)” or
“(low)” designation indicates the rating is in the middle of the category. The
following summarizes the ratings used by DBRS for long-term debt:
“AAA”
– Highest credit quality. The capacity for the payment of financial obligations
is exceptionally high and unlikely to be adversely affected by future
events.
“AA”
– Superior credit quality. The capacity for the payment of financial obligations
is considered high. Credit quality differs from “AAA” only to a small degree.
Unlikely to be significantly vulnerable to future events.
“A”
– Good credit quality. The capacity for the payment of financial obligations is
substantial, but of lesser credit quality than “AA.” May be vulnerable to future
events, but qualifying negative factors are considered manageable.
“BBB”
– Adequate credit quality. The capacity for the payment of financial obligations
is considered acceptable. May be vulnerable to future events.
“BB”
–
Speculative,
non-investment grade credit quality. The capacity for the payment of financial
obligations is uncertain. Vulnerable to future events.
“B”
– Highly speculative credit quality. There is a high level of uncertainty as to
the capacity to meet financial obligations.
“CCC”,
“CC” and “C” – Very highly speculative credit quality. In danger of defaulting
on financial obligations. There is little difference between these three
categories, although “CC” and “C” ratings are normally applied to obligations
that are seen as highly likely to default, or subordinated to obligations rated
in the “CCC” to “B” range. Obligations in respect of which default has not
technically taken place but is considered inevitable may be rated in the “C”
category.
“D”
–
When
the issuer has filed under any applicable bankruptcy, insolvency or winding up
statute or there is a failure to satisfy an obligation after the exhaustion of
grace periods, a downgrade to “D” may occur. DBRS may also use “SD” (Selective
Default) in cases where only some securities are impacted, such as the case of a
distressed exchange.
Municipal
Note Ratings
An
S&P Global Ratings U.S.
municipal note rating reflects
S&P Global Ratings’
opinion about the liquidity factors and market access risks unique to the notes.
Notes due in three years or less will likely receive a note rating. Notes with
an original maturity of more than three years will most likely receive a
long-term debt rating. In determining which type of rating, if any, to assign,
S&P
Global Ratings’
analysis will review the following considerations:
•Amortization
schedule - the larger the final maturity relative to other maturities, the more
likely it will be treated as a note; and
•Source
of payment - the more dependent the issue is on the market for its refinancing,
the more likely it will be treated as a note.
Municipal
Short-Term Note rating symbols are as follows:
“SP-1”
– Strong capacity to pay principal and interest. An issue determined to possess
a very strong capacity to pay debt service is given a plus (+)
designation.
“SP-2”
– Satisfactory capacity to pay principal and interest, with some vulnerability
to adverse financial and economic changes over the term of the
notes.
“SP-3”
– Speculative capacity to pay principal and interest.
“D”
– ‘D’ is assigned upon failure to pay the note when due, completion of a
distressed exchange offer, or the filing of a bankruptcy petition or the taking
of similar action and where default on an obligation is a virtual certainty, for
example due to automatic stay provisions.
Moody’s
uses
the Municipal Investment Grade (“MIG”) scale to rate U.S. municipal bond
anticipation notes of up to three years maturity. Municipal notes rated on the
MIG scale may be secured by either pledged revenues or proceeds of a take-out
financing received prior to note maturity. MIG ratings expire at the maturity of
the obligation, and the issuer’s long-term rating is only one consideration in
assigning the MIG rating. MIG ratings are divided into three levels – “MIG-1”
through “MIG-3” while speculative grade short-term obligations are designated
“SG”. The following summarizes the ratings used by Moody’s for short-term
municipal obligations:
“MIG-1”
– This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
“MIG-2”
– This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group.
“MIG-3”
– This designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market access for refinancing is likely to be less
well-established.
“SG”
– This designation denotes speculative-grade credit quality. Debt instruments in
this category may lack sufficient margins of protection.
In
the case of variable rate demand obligations (“VRDOs”), a two-component rating
is assigned: a long or short-term debt rating and a demand obligation rating.
The first element represents Moody’s evaluation of risk associated with
scheduled principal and interest payments. The second element represents Moody’s
evaluation of risk associated with the ability to receive purchase price upon
demand (“demand feature”). The second element uses a rating from a variation of
the MIG rating scale called the Variable Municipal Investment Grade (“VMIG”)
scale. VMIG ratings of demand obligations with
unconditional
liquidity support are mapped from the short-term debt rating (or counterparty
assessment) of the support provider, or the underlying obligor in the absence of
third party liquidity support, with VMIG 1 corresponding to P-1, VMIG 2 to P-2,
VMIG 3 to P-3 and SG to not prime. For example, the VMIG rating for an
industrial revenue bond with Company XYZ as the underlying obligor would
normally have the same numerical modifier as Company XYZ’s prime rating.
Transitions of VMIG ratings of demand obligations with conditional liquidity
support, as shown in the diagram below, differ from transitions on the Prime
scale to reflect the risk that external liquidity support will terminate if the
issuer’s long-term rating drops below investment grade.
“VMIG-1”
– This designation denotes superior credit quality. Excellent protection is
afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase
price upon demand.
“VMIG-2”
– This designation denotes strong credit quality. Good protection is afforded by
the strong short-term credit strength of the liquidity provider and structural
and legal protections that ensure the timely payment of purchase price upon
demand.
“VMIG-3”
– This designation denotes acceptable credit quality. Adequate protection is
afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
“SG”
– This designation denotes speculative-grade credit quality. Demand features
rated in this category may be supported by a liquidity provider that does not
have an investment grade short-term rating or may lack the structural and/or
legal protections necessary to ensure the timely payment of purchase price upon
demand.
About
Credit Ratings
An
S&P
Global Ratings
issue
credit rating is a forward-looking opinion about the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated. The opinion reflects Standard & Poor’s
view of the obligor’s capacity and willingness to meet its financial commitments
as they come due, and may assess terms, such as collateral security and
subordination, which could affect ultimate payment in the event of
default.
Moody’s
credit
ratings must be construed solely as statements of opinion and not statements of
fact or recommendations to purchase, sell or hold any securities.
Fitch’s
credit
ratings provide an opinion on the relative ability of an entity to meet
financial commitments, such as interest, preferred dividends, repayment of
principal, insurance claims or counterparty obligations. Fitch credit ratings
are used by investors as indications of the likelihood of receiving the money
owed to them in accordance with the terms on which they invested. Fitch’s credit
ratings cover the global spectrum of corporate, sovereign (including
supranational and sub-national), financial, bank, insurance, municipal and other
public finance entities and the securities or other obligations they issue, as
well as structured finance securities backed by receivables or other financial
assets.
Credit
ratings provided by DBRS
are
forward-looking opinions about credit risk which reflect the creditworthiness of
an issuer, rated entity, and/or security. Credit ratings are not statements of
fact. They include subjective considerations and involve expectations for future
performance that cannot be guaranteed. To the extent that future events and
economic conditions do not match expectations, credit ratings assigned to
issuers and/or securities can change. Credit ratings are also based on approved
and applicable methodologies, models and criteria (“Methodologies”), which are
periodically updated and when material changes are deemed necessary for a wide
variety of potential reasons, this may also lead to rating changes.
Credit
ratings typically provide an opinion on the risk that investors may not be
repaid in accordance with the terms under which the obligation was issued. In
some cases, credit ratings may also include consideration for the relative
ranking of claims and recovery, should default occur. Credit ratings are meant
to provide opinions on relative measures of risk and are not based on
expectations of any specific default probability, nor are they meant to predict
such.
The
data and information on which DBRS bases its opinions is not audited or verified
by DBRS, although DBRS conducts a reasonableness review of information received
and relied upon in accordance with its Methodologies and policies.
DBRS
uses rating symbols as a concise method of expressing its opinion to the
market.