ck0001261788-20220630
Fulcrum
Diversified Absolute Return Fund
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| Super
Institutional Class |
FARYX |
| Institutional
Class |
FARIX |
| Advisor
Class* |
FARAX
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*
As of the date of this Statement of Additional Information, the Advisor Class is
closed and holds no assets,
but
may accept new investments in the future.
STATEMENT
OF ADDITIONAL INFORMATION
October
31, 2022
c/o
U.S. Bank Global Fund Services
P.O.
Box 701
Milwaukee,
Wisconsin 53201-0701
855-538-5278
This
Statement of Additional Information (“SAI”) is not a prospectus and it should be
read in conjunction with the Prospectus dated October 31, 2022, as may be
revised, for the Fulcrum Diversified Absolute Return Fund (the “Fund”), a series
of Trust for Advised Portfolios (the “Trust”). Fulcrum Asset Management
LLP
(the
“Adviser”) serves as the Fund’s investment adviser. The Fund's financial
statements for the fiscal year ended June 30, 2022, are incorporated herein by
reference to the Fund's annual report.
A copy of the Prospectus and/or the Fund's annual report may be obtained by
contacting the Fund at the address or telephone number above or by visiting the
Fund’s website at www.fulcrumassetfunds.com.
TABLE
OF CONTENTS
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APPENDIX A - DESCRIPTION OF
SECURITIES RATINGS |
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THE
TRUST
The
Trust is a Delaware statutory trust organized under the laws of the State of
Delaware on August 28, 2003, and is registered with the U.S.
Securities and Exchange Commission (the “SEC”) as an open-end management
investment company. Between August 28, 2003 and May 31, 2005, the Trust was
named “Lotsoff Capital Management Equity Trust.” Between June 1, 2005 and
November 30, 2011, the Trust was named “Lotsoff Capital Management Investment
Trust.” Between December 1, 2011 and January 30, 2013, the Trust was named
“Ziegler Lotsoff Capital Management Investment Trust.” Between January 31, 2013
and January 29, 2014, the Trust was named “Ziegler Capital Management Investment
Trust.”
The
Trust’s Agreement and Declaration of Trust (the “Declaration of Trust”) permits
the Trust’s Board of Trustees (the “Board” or the “Trustees”) to issue an
unlimited number of full and fractional shares of beneficial interest, no par
value per share, which may be issued in any number of series. The Trust consists
of various series that represent separate investment portfolios. The Board may
from time to time issue other series, the assets and liabilities of which will
be separate and distinct from any other series. This SAI relates only to the
Fund.
Registration
with the SEC does not involve supervision of the management or policies of the
Fund. The Prospectus of the Fund and this SAI omit certain of the information
contained in the Registration Statement filed with the SEC. Copies of such
information may be obtained from the SEC upon payment of the prescribed fee or
may be accessed free of charge at the SEC’s website at www.sec.gov.
INVESTMENT
POLICIES
The
discussion below supplements information contained in the Fund’s Prospectus as
to the permitted investments, investment policies and risks of the
Fund.
Investment
in the Subsidiary
The
Fund may invest up to 25% of its assets in a wholly-owned and controlled Cayman
Islands subsidiary (the “Subsidiary”). It is expected that the Subsidiary will
invest primarily in commodity futures and options and other commodity-linked
derivative instruments. In addition, the Subsidiary may also invest in financial
futures, options and swaps, fixed income securities and structured notes,
including those that are not registered pursuant to the Investment Company Act
of 1940 (the “1940 Act”), and other investments intended to serve as margin or
collateral for the Subsidiary’s derivatives positions. As a result, the Fund may
be considered to be investing indirectly in these investments through its
Subsidiary. For that reason, and for the sake of convenience, references in this
SAI to the Fund may also include the Subsidiary. The Subsidiary’s key financial
information is presented with that of the Fund in the form of consolidated
financial statements included in the Fund’s annual and semi-annual reports to
shareholders. Copies of the reports are provided without charge upon
request.
The
Subsidiary is a company organized under the laws of the Cayman Islands, whose
registered office is located at the offices of Maples and Calder, PO Box 309,
Ugland House, Grand Cayman, KY1-1104, Cayman Islands, Cayman Islands. The
Subsidiary’s affairs are overseen by its own board of directors consisting of
three directors, one of which is not an interested person of the Subsidiary and
the Fund, and therefore, is an independent director.
The
Subsidiary has entered into a separate contract with the Adviser for the
management of the Subsidiary’s portfolio pursuant to which the Subsidiary pays
the Adviser a management fee for its services. The Adviser has contractually
agreed to waive the management fee it receives from the Fund in an amount equal
to the management fee paid to the Adviser by the Subsidiary. As a result, the
Fund's investment in the Subsidiary will not result in the Fund paying
duplicative management fees. The Subsidiary will bear the fees and expenses
incurred in connection with the custody, transfer agency, and audit services
that it receives, which are specific to the Subsidiary and its operations and
not duplicative of services provided to the Fund. The Fund expects that the
expenses borne by its Subsidiary will not be material in relation to the value
of the Fund’s assets. Please refer to the section in this SAI titled
“Distributions and Tax Information” for information about certain tax aspects of
the Fund’s investment in the Subsidiary.
The
Subsidiary is not registered as an investment company under the 1940 Act, and as
a result, the Fund, as the sole shareholder of the Subsidiary, will not have all
of the protections offered to investors in registered investment
companies.
As noted elsewhere in this SAI, however, the Subsidiary has agreed to be subject
to certain provisions of the 1940 Act that further investor protection. Most
notably, the Subsidiary has agreed to comply with the 1940 Act's restrictions
under Section 17 related to custody and Section 18 related to leverage and
borrowing. In addition, because the Fund wholly owns and controls the
Subsidiary, and the Fund and the Subsidiary are each managed by the Adviser, it
is unlikely that the Subsidiary will take action contrary to the interests of
the Fund or the Fund's shareholders. The Board has oversight responsibility for
the investment activities of the Fund, including its investment in the
Subsidiary, and the Fund’s role as the sole shareholder of the Subsidiary. Also,
in managing the Subsidiary’s portfolio, the Adviser will be subject to the same
fundamental and certain other investment restrictions (except for the
restriction on the purchase and sale of commodities and commodities contracts
applicable to the Fund) and will follow substantially the same compliance
policies and procedures as the Fund to the extent they are applicable to the
activities of the Subsidiary.
The
Commodity Futures Trading Commission (the “CFTC”) regulates the trading of
commodity interests, including commodity futures contracts, options on commodity
futures, and swaps (which includes cash-settled currency forwards and swaps).
The Subsidiary and the Fund are considered commodity pools by the CFTC subject
to compliance with applicable provisions of the Commodity Exchange Act and CFTC
regulations, and the Adviser is subject to CFTC regulation as a commodity pool
operator (a “CPO”) of the Subsidiary and Fund. As a result, the Fund is
subject to regulation by both the SEC and the CFTC, which could increase
compliance costs of the Subsidiary and the Fund. The Adviser relies on the
“substituted compliance” regulatory scheme, whereby compliance with certain SEC
rules will result in deemed compliance with certain CFTC rules with respect to
disclosure and reporting requirements. As a result, the Adviser’s, Fund’s,
and Subsidiary’s newly required compliance with applicable Commodity Exchange
Act provisions and CFTC regulations has not, to date, materially adversely
affected the operation or financial performance of the Fund and the
Subsidiary. However, the CFTC’s regulation of registered investment
companies is still a developing area of regulation, and as such, the Fund is
subject to the risk that new regulations adopted by the CFTC in the future may
adversely affect the operations and financial performance of the Fund and the
Subsidiary and ultimately, the ability of each to achieve their respective
investment objectives. If the Fund or the Subsidiary was to experience
difficulty in implementing their respective investment strategies or achieving
their respective investment objectives, the Board may determine to reorganize or
close the Fund and/or the Subsidiary or to materially change the Fund’s
investment objective and strategies.
Changes
in the laws of the United States and/or the Cayman Islands, under which the Fund
and the Subsidiary are organized, could result in the inability of the Fund
and/or the Subsidiary to operate as described in this SAI and could negatively
affect the Fund and their shareholders. For example, the Cayman Islands do not
currently impose any income, corporate or capital gains tax, estate duty,
inheritance tax, gift tax or withholding tax on the Subsidiary. If Cayman
Islands law changes such that the Subsidiary must pay Cayman Islands taxes, Fund
shareholders would likely suffer decreased investment returns.
Diversification
The
Fund is diversified under applicable federal securities laws. This means that as
to 75% of its total assets (1) no more than 5% may be invested in the
securities of a single issuer, and (2) it may not hold more than 10% of the
outstanding voting securities of a single issuer. However, the diversification
of a mutual fund’s holdings is measured at the time the fund purchases a
security and if the 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 the Fund, the Fund may have a greater percentage of its assets invested
in securities of fewer issuers. Accordingly, the Fund is subject to the risk
that its performance may be hurt disproportionately by the poor performance of
relatively few securities despite qualifying as a diversified fund.
Percentage
Limitations
Whenever
an investment policy or limitation states a maximum percentage of the Fund’s
assets that may be invested in any security or other asset, or sets forth a
policy regarding quality standards, such standard or percentage limitation will
be determined immediately after and as a result of the Fund’s acquisition or
sale of such
security
or other asset. Accordingly, except with respect to borrowing and illiquid
securities, any subsequent change in values, net assets or other circumstances
will not be considered in determining whether an investment complies with the
Fund’s investment policies and limitations. In addition, if a bankruptcy or
other extraordinary event occurs concerning a particular investment by the Fund,
the Fund may receive stock, real estate or other investments that the Fund would
not, or could not buy. If this happens the Fund would sell such investments as
soon as practicable while trying to maximize the return to its
shareholders.
The
Fund may invest in the following types of investments, each of which is subject
to certain risks, as discussed below:
Arbitrage
Employing
arbitrage and alternative strategies has the risk that anticipated opportunities
do not play out as planned, resulting in potentially reduced returns or losses
to the Fund as it unwinds failed trades.
Commodities
Exposure
to the commodities markets may subject the Fund to greater volatility than
investments in traditional securities. The value of commodity-linked derivative
investments may be affected by changes in overall market movements, commodity
index volatility, changes in interest rates, or sectors affecting a particular
industry or commodity, such as drought, floods, weather, embargoes, tariffs and
international economic, political and regulatory developments.
Counterparty
The
Fund will be subject to credit risk with respect to the counterparties to the
derivative contracts (whether a clearing corporation in the case of
exchange-traded instruments or another third party in the case of
over-the-counter instruments) and other instruments entered into directly by the
Fund or held by special purpose or structured vehicles in which the Fund
invests. If a counterparty becomes bankrupt or insolvent or otherwise fails to
perform its obligations to the Fund due to financial difficulties, the Fund may
experience significant losses or delays in obtaining any recovery (including
recovery of any collateral it has provided to the counterparty) in a
dissolution, assignment for the benefit of creditors, liquidation, winding-up,
bankruptcy or other analogous proceeding. In addition, in the event of the
bankruptcy or insolvency of a counterparty to a derivative transaction, the
derivative transaction would typically be terminated at its fair market value.
If the Fund is owed this fair market value in the termination of the derivative
transaction and its claim is unsecured, the Fund will likely be treated as a
general creditor of such counterparty, and may not have any claim with respect
to any underlying security or asset. The Fund may obtain only a limited
recovery, or no recovery, in such circumstances. Counterparty risk with respect
to certain exchange-traded and over-the-counter derivatives may be further
complicated by U.S. financial reform legislation.
Credit
Credit
risk refers to the possibility that the issuer of a security or the issuer of
the reference asset of a derivative instrument will not be able to make
principal and interest payments when due. Changes in an issuer’s credit rating
or the market’s perception of an issuer’s creditworthiness may also affect the
value of the Fund’s investment in that issuer. Securities rated in the four
highest categories by the rating agencies are considered investment grade but
they may also have some speculative characteristics. Investment grade ratings do
not guarantee that bonds will not lose value.
Derivatives
Some
of the instruments in which the Fund may invest may be referred to as
“derivatives,” because their value “derives” from the value of an underlying
asset, reference rate or index. These instruments include futures contracts,
forward interest rate contracts, swaps and similar instruments. The market value
of derivative instruments and securities sometimes may be more volatile than
those of other instruments and each type of derivative instrument may have its
own special risks.
Some
over-the-counter derivative instruments may expose the Fund to the credit risk
of its counterparty. In the event the counterparty to such a derivative
instrument becomes insolvent, the Fund potentially could lose all or a large
portion of its investment in the derivative instrument.
Investing
for hedging purposes or to increase the Fund’s return may result in certain
additional transaction costs that may reduce the Fund’s performance. In
addition, when used for hedging purposes, no assurance can be given that each
derivative position will achieve a close correlation with the security or
currency that is the subject of the hedge, or that a particular derivative
position will be available when sought by the Adviser. While hedging strategies
involving derivatives can reduce the risk of loss, they can also reduce the
opportunity for gain or even result in losses by offsetting favorable price
movements in other Fund investments. Use of derivatives and other forms of
leverage by the Fund may require the Fund to liquidate portfolio positions when
it may not be advantageous to do so to satisfy its obligations or to meet
segregation requirements. Increases and decreases in the value of the Fund’s
portfolio may be magnified when the Fund uses leverage.
Certain
derivatives may create a risk of loss greater than the amount
invested.
Rule
18f-4 under the 1940 Act (the “Derivatives Rule”) provides a comprehensive
framework for the Fund’s use of derivatives. The Derivatives Rule requires
registered investment companies that enter into derivatives transactions and
certain other transactions that create future payment or delivery obligations
to, among other things, (i) comply with a value-at-risk (“VaR”) leverage limit,
and (ii) adopt and implement a comprehensive written derivatives risk management
program. These and other requirements apply unless the Fund qualifies as a
“limited derivatives user,” which the Derivatives Rule defines as a fund that
limits its derivatives exposure to 10% of its net assets. Complying with the
Derivatives Rule may increase the cost of the Fund’s investments and cost of
doing business, which could adversely affect investors. The Derivatives Rule may
not be effective to limit the Fund’s risk of loss. In particular, measurements
of VaR rely on historical data and may not accurately measure the degree of risk
reflected in the Fund’s derivatives or other investments. Other potentially
adverse regulatory obligations can develop suddenly and without
notice.
Forward
Contracts.
The Fund may invest in forward contracts for investment or hedging purposes. A
forward contract involves a negotiated obligation to purchase or sell a specific
asset at a future date (with or without delivery required), which may be any
fixed number of days from the date of the contract agreed upon by the parties,
at a price set at the time of the contract. Risks associated with forwards
include: (i) there may be an imperfect correlation between the movement in
prices of forward contracts and the securities underlying them; (ii) there may
not be a liquid market for forwards; and (iii) forwards may be difficult to
accurately value. Forwards are also subject to credit risk, liquidity risk and
leverage risk, each of which is further described elsewhere in this
section.
The
Fund may engage in non-deliverable forward transactions. A non-deliverable
forward transaction is a transaction that represents an agreement between the
Fund and a counterparty (usually a commercial bank) to buy or sell a specified
(notional) amount of a particular currency at an agreed-upon foreign exchange
rate on an agreed-upon future date. The non-deliverable forward transaction
position is closed using a fixing rate, as defined by the central bank in the
country of the currency being traded, that is generally publicly stated within
one or two days prior to the settlement date. Unlike other currency
transactions, there is no physical delivery of the currency on the settlement of
a non-deliverable forward transaction. Rather, the Fund and the counterparty
agree to net the settlement by making a payment in U.S. dollars or another fully
convertible currency that represents any differential between the foreign
exchange rate agreed upon at the inception of the non-deliverable forward
agreement and the actual exchange rate on the agreed upon future date. Thus, the
actual gain or loss of a given non-deliverable forward transaction is calculated
by multiplying the transaction's notional amount by the difference between the
agreed upon forward exchange rate and the actual exchange rate when the
transaction is completed. Under definitions adopted by the CFTC and SEC,
many non-deliverable foreign currency forwards are regulated as swaps for
certain purposes, including determination of whether such instruments need to be
exchange-traded and centrally cleared. These changes are expected to reduce
counterparty/credit risk as compared to bi-laterally negotiated
contracts.
Open
positions in forwards will be covered by the segregation or “earmarking” of
assets determined to be liquid, and are marked to market daily, if required by
the 1940 Act.
Futures
Contracts.
The Fund may purchase interest rate and Treasury futures contracts (“financial
futures”). Interest rate futures contracts obligate the long or short holder to
take or make delivery of a specified quantity of a financial instrument during a
specified future period at a specified price. Financial futures are typically
cash settled or alternatively, may be physically settled on
occasion.
There
are special risks associated with entering into financial futures contracts. The
skills needed to use financial futures contracts effectively are different from
those needed to select the Fund’s fixed income investments. There may be an
imperfect correlation between the price movements of financial futures contracts
and the price movements of the securities in which the Fund invests. There is
also a risk that the Fund will be unable to close a futures position when
desired because there is no liquid secondary market for it.
The
risk of loss in trading financial futures can be substantial due to the low
margin deposits required and the extremely high degree of leverage involved in
futures pricing. Relatively small price movements in a financial futures
contract could have an immediate and substantial impact, which may be favorable
or unfavorable to the Fund. It is possible for a price-related loss to exceed
the amount of the Fund’s margin deposit.
Although
some financial futures contracts by their terms call for the actual delivery or
acquisition of securities at expiration, in most cases the contractual
commitment is closed out before expiration. The offsetting of a contractual
obligation is accomplished by purchasing (or selling as the case may be) on a
commodities or futures exchange an identical financial futures contract calling
for delivery in the same month. Such a transaction, if effected through a member
of an exchange, cancels the obligation to make or take delivery of the
securities. The Fund will incur brokerage fees when it purchases or sells
financial futures contracts, and will be required to maintain margin deposits.
If a liquid secondary market does not exist when the Fund wishes to close out a
financial futures contract, it will not be able to do so and will continue to be
required to make daily cash payments of variation margin in the event of adverse
price movements. There is no assurance that the Fund will be able to enter into
closing transactions.
The
Fund may enter into futures contracts on other underlying assets or indexes,
including physical commodities and indexes of physical commodities.
At
any time prior to expiration of a futures contract, the Fund may seek to close
the position by taking an opposite position which would typically operate to
terminate the Fund’s position in the futures contract. A final determination of
any variation margin is then made, additional cash is required to be paid by or
released to the Fund and the Fund realizes a loss or gain.
When
purchasing a futures contract, the Fund will maintain with its custodian (and
mark-to-market on a daily basis) assets determined to be liquid that, when added
to the amounts deposited with a futures commission merchant as margin, are equal
to the market value of the futures contract. Alternatively, the Fund may “cover”
its position by purchasing a put option on the same futures contract with a
strike price as high or higher than the price of the contract held by the
Fund. When selling a futures contract, the Fund will maintain with its
custodian (and mark-to-market on a daily basis) assets determined to be liquid
that are equal to the market value of the futures contract. Alternatively, the
Fund may “cover” its position by owning the instruments underlying the futures
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Fund to purchase
the same futures contract at a price no higher than the price of the contract
written by the Fund (or at a higher price if the difference is maintained in
liquid assets with the custodian).
With
respect to futures contracts that are not legally required to cash settle, the
Fund may cover the open position by setting aside or “earmarking” liquid assets
in an amount equal to the notional value of the futures contract. With respect
to futures that are required to cash settle, however, the Fund is permitted to
set aside or “earmark” liquid assets in an amount equal to the Fund’s daily
marked-to-market (net) obligation, if any, rather than the notional value of the
futures contract. By setting aside or “earmarking” assets equal to only its
net obligation
under
cash-settled futures, the Fund will have the ability to utilize these contracts
to a greater extent than if the Fund were required to segregate or “earmark”
assets equal to the full notional value of the futures contract.
Interest
Rate or Financial Futures Contracts.
The Fund may invest in interest rate or financial futures contracts. Bond prices
are established in both the cash market and the futures market. In the cash
market, bonds are purchased and sold with payment for the full purchase price of
the bond being made in cash, generally within five business days after the
trade. In the futures market, a contract is made to purchase or sell a bond in
the future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have generally tended to move in the
aggregate in concert with cash market prices, and the prices have maintained
fairly predictable relationships.
The
sale of an interest rate or financial futures contract by the Fund would create
an obligation by the Fund, as seller, to deliver the specific type of financial
instrument called for in the contract at a specific future time for a specified
price. A futures contract purchased by the Fund would create an obligation by
the Fund, as purchaser, to take delivery of the specific type of financial
instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until at or near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Although
interest rate or financial futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without delivery of securities. Closing out of a
futures contract sale is effected by the Fund’s entering into a futures contract
purchase for the same aggregate amount of the specific type of financial
instrument and the same delivery date. If the price in the sale exceeds the
price in the offsetting purchase, the Fund is paid the difference and thus
realizes a gain. If the offsetting purchase price exceeds the sale price, the
Fund pays the difference and realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the Fund’s entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain, and if the purchase price exceeds the offsetting sale price,
the Fund realizes a loss.
The
exchange typically guarantees performance under contract provisions through a
clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts may be traded in an auction
environment on the floor of an exchange, such as the Chicago Mercantile
Exchange. A public market now exists in domestic futures contracts covering
various financial instruments including long-term United States Treasury bonds
and notes, Government National Mortgage Association (“GNMA”) modified
pass-through mortgage-backed securities, three-month United States Treasury
bills, and 90-day commercial paper. The Fund may trade in any futures contract
for which there exists a public market, including, without limitation, the
foregoing instruments. International interest rate futures contracts are traded
on various international exchanges. Engaging in futures contracts on
international exchanges may involve additional risks, including varying
regulatory standards and supervision, fewer laws to protect investors, greater
counterparty risk, greater transaction costs, greater volatility, and less
liquidity, which could make it difficult for the fund to transact.
Interest
Rate and Total Return Swaps.
The Fund may purchase interest rate swaps which are typically subject to
exchange trading and clearing requirements. The Fund may use interest rate swaps
to increase or decrease exposure to a particular interest rate or rates, which
may result in the Fund experiencing a gain or loss depending on whether the
interest rates increased or decreased during the term of the agreement. For
temporary, defensive purposes only, the Fund may also engage in total return
swaps, in which payments made by the Fund or the counterparty are based on the
total return of a particular reference asset or assets (such as a fixed income
security, a combination of securities, or an index). The value of the Fund’s
swap positions would increase or decrease depending on the changes in value of
the underlying rates, currency values, volatility or other indices or measures.
Caps and floors have an effect similar to buying or writing options. Depending
on how they are used, swaps may increase or decrease the overall volatility of
the Fund’s investments and its share price. The Fund’s ability to engage in
certain swap transactions may be limited by tax considerations.
The
Fund’s ability to realize a profit from over-the-counter transactions will
depend on the ability of the financial institutions with which it enters into
the transactions to meet their obligations to the Fund. If a counterparty’s
creditworthiness
declines, the value of the agreement would be likely to decline, potentially
resulting in losses. If a default occurs by the other party to such transaction,
the Fund will have contractual remedies pursuant to the agreements related to
the transaction, which may be limited by applicable law in the case of a
counterparty’s insolvency. Under certain circumstances, suitable transactions
may not be available to the Fund, or the Fund may be unable to close out its
position under such transactions at the same time, or at the same price, as if
it had purchased comparable publicly traded securities. Over-the-counter swaps
carry counterparty risks that cannot be fully anticipated. Also, because, in
some cases, swap transactions involve a contract between the two parties, such
swap investments can be extremely illiquid, as it is uncertain as to whether
another counterparty would wish to take assignment of the rights under the swap
at a price acceptable to the Fund.
The
Fund may enter into swaps that would calculate the obligations of the parties to
the agreement on a “net basis.” Consequently, the Fund’s current obligations (or
rights) under a swap will generally be equal only to the net amount to be paid
or received under the agreement based on the relative values of the positions
held by each party to the agreement (the “net amount”). The Fund’s
current obligations under a swap will be accrued daily (offset against any
amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the segregation or “earmarking” of assets
determined to be liquid. The Fund’s swaps will be segregated in order to ensure
that that Fund has assets available to satisfy its obligations under a
swap.
Credit
Default Swaps.
The Fund may purchase credit default swaps. A credit default swap is an
agreement between the Fund and a counterparty that enables the Fund to buy or
sell protection against a credit event related to a particular issuer. One
party, acting as a protection buyer, makes periodic payments, which may be based
on, among other things, a fixed or floating rate of interest, to the other
party, a protection seller, in exchange for a promise by the protection seller
to make a payment to the protection buyer if a negative credit event (such as a
delinquent payment or default) occurs with respect to a referenced bond or group
of bonds. Credit default swaps may also be structured based on the debt of a
basket of issuers, rather than a single issuer, and may be customized with
respect to the default event that triggers purchase or other factors, or
defaults by a particular combination of issuers within the basket, may trigger a
payment obligation. As a credit protection seller in a credit default swap, the
Fund would be required to pay the par (or other agreed-upon) value of a
referenced debt obligation to the counterparty following certain negative credit
events as to a specified third-party debtor, such as default by a U.S. or
non-U.S. corporate issuer on its debt obligations. In return for its obligation,
the Fund would receive from the counterparty a periodic stream of payments,
which may be based on, among other things, a fixed or floating rate of interest,
over the term of the contract provided that no event of default has occurred. If
no default occurs, the Fund would keep the stream of payments, and would have no
payment obligations to the counterparty. The Fund may sell credit protection in
order to earn additional income and/or to take a synthetic long position in the
underlying security or basket of securities.
The
Fund may enter into credit default swaps as a protection buyer in order to hedge
against the risk of default on the debt of a particular issuer or basket of
issuers or attempt to profit from a deterioration or perceived deterioration in
the creditworthiness of the particular issuer(s) (also known as buying credit
protection). This would involve the risk that the investment may expire
worthless and would only generate gain in the event of an actual default by the
issuer(s) of the underlying obligation(s) (or, as applicable, a credit downgrade
or other indication of financial instability). It would also involve the risk
that the seller may fail to satisfy its payment obligations to the Fund. The
purchase of credit default swaps involves costs, which will reduce the Fund’s
return.
Credit
default swaps involve a number of special risks. A protection seller may have to
pay out amounts following a negative credit event greater than the value of the
reference obligation delivered to it by its counterparty and the amount of
periodic payments previously received by it from the counterparty. When the Fund
acts as a seller of a credit default swap, it is exposed to, among other things,
leverage risk because if an event of default occurs the seller must pay the
buyer the full notional value of the reference obligation. While certain types
of credit default swaps are subject to clearing requirements, each party to an
over-the-counter credit default swap is subject to the credit risk of its
counterparty (the risk that its counterparty may be unwilling or unable to
perform its obligations on the swap as they come due). The value of the credit
default swap to each party will change based on changes in the actual or
perceived creditworthiness of the underlying issuer.
A
protection buyer may lose its investment and recover nothing should an event of
default not occur. The Fund may seek to realize gains on its credit default swap
positions, or limit losses on its positions, by selling those positions in the
secondary market. There can be no assurance that a liquid secondary market will
exist at any given time for any particular credit default swap or for credit
default swaps generally.
The
market for credit default swaps has become more volatile in recent years as the
creditworthiness of certain counterparties has been questioned and/or
downgraded. The parties to a credit default swap may be required to post
collateral to each other, and the Fund may need to post collateral to a
clearinghouse for cleared credit default swaps. If the Fund posts initial or
periodic collateral to a counterparty, it may not be able to recover that
collateral from the counterparty in accordance with the terms of the swap. In
addition, if the Fund receives collateral from its counterparty, it may be
delayed or prevented from realizing on the collateral in the event of the
insolvency or bankruptcy of the counterparty. The Fund may exit its obligations
under a credit default swap only by terminating the contract and paying
applicable breakage fees, or by entering into an offsetting credit default swap
position, which may cause the Fund to incur more losses.
The
Fund’s obligations under a credit default swap will be accrued daily (offset
against any amounts owing to the Fund). In connection with credit default
swaps in which the Fund is the buyer, the Fund will segregate or “earmark” cash
or assets determined to be liquid, or enter into certain offsetting positions,
with a value at least equal to the Fund’s exposure (any accrued but unpaid net
amounts owed by the Fund to any counterparty), on a marked-to-market basis. In
connection with credit default swaps in which the Fund is the seller, the Fund
will segregate or “earmark” cash or assets determined to be liquid, or enter
into offsetting positions, with a value at least equal to the full notional
amount of the swap (minus any amounts owed to the Fund). Such segregation
or “earmarking” seeks to ensure that the Fund has assets available to satisfy
its obligations with respect to the transaction and will limit any potential
leveraging of the Fund’s portfolio. However, such segregation or
“earmarking” will not limit the Fund’s exposure to loss.
Emerging
Markets
The
Fund may also invest in developing or emerging market securities. The
considerations noted above regarding the risk of investing in foreign securities
are generally more significant for investments in emerging or developing
countries, such as countries in Eastern Europe, Latin America, South America or
Southeast Asia. These countries may have relatively unstable governments and
securities markets in which only a small number of securities trade. Markets of
developing or emerging countries may generally be more volatile than markets of
developed countries. Investment in these markets may involve significantly
greater risks, as well as the potential for greater gains.
Equity
Securities
All
investments in equity securities are subject to market risks that may cause
their prices to fluctuate over time. Historically, the equity markets have
moved in cycles and the value of the securities in the Fund’s portfolio may
fluctuate substantially from day to day. Owning an equity security can also
subject the Fund to the risk that the issuer may discontinue paying
dividends.
Common
Stocks. A
common stock represents a proportionate share of the ownership of a company and
its value is based on the success of the company’s business, any income paid to
stockholders, the value of its assets, and general market conditions. In
addition to the general risks set forth above, investments in common stocks are
subject to the risk that in the event a company in which the Fund invests is
liquidated, the holders of preferred stock and creditors of that company will be
paid in full before any payments are made to the Fund as a holder of common
stock. It is possible that all assets of that company will be exhausted before
any payments are made to the Fund.
Convertible
Securities. The
Fund may invest in convertible securities. Traditional convertible securities
include corporate bonds, notes and preferred stocks that may be converted into
or exchanged for common stock, and other securities that also provide an
opportunity for equity participation. These securities are convertible either at
a stated price or a stated rate (that is, for a specific number of shares of
common stock or other security). As with other fixed income securities, the
price of a convertible security generally varies inversely with interest rates.
While providing a fixed income stream, a convertible security also affords the
investor an opportunity, through its
conversion
feature, to participate in the capital appreciation of the common stock into
which it is convertible. As the market price of the underlying common stock
declines, convertible securities tend to trade increasingly on a yield basis and
so may not experience market value declines to the same extent as the underlying
common stock. When the market price of the underlying common stock increases,
the price of a convertible security tends to rise as a reflection of higher
yield or capital appreciation. In such situations, the Fund may have to pay more
for a convertible security than the value of the underlying common
stock.
Initial
Public Offerings.
The Fund may purchase shares in initial public offerings (“IPOs”). Because IPO
shares frequently are volatile in price, the Fund may hold IPO shares for a very
short period of time. This may increase the turnover of the Fund’s portfolio and
may lead to increased expenses to the Fund, such as brokerage commissions and
transaction costs. By selling shares, the Fund may realize taxable capital gains
that it will subsequently distribute to shareholders. Investing in IPOs
increases risk because IPO shares are frequently volatile in price. As a result,
their performance can be more volatile and they face greater risk of business
failure, which could increase the volatility of the Fund’s
portfolio.
Preferred
Stock. Preferred
stocks are equity securities that often pay dividends at a specific rate and
have a preference over common stocks in dividend payments and liquidation of
assets. A preferred stock has a blend of the characteristics of a bond and
common stock. It can offer the higher yield of a bond and has priority over
common stock in equity ownership, but does not have the seniority of a bond and,
unlike common stock, its participation in the issuer’s growth may be limited.
Although the dividend is set at a fixed annual rate, in some circumstances it
can be changed or omitted by the issuer.
Rights
and Warrants. The
Fund may invest in rights and warrants. A right is a privilege granted to
existing shareholders of a corporation to subscribe to shares of a new issue of
common stock and it is issued at a predetermined price in proportion to the
number of shares already owned. Rights normally have a short life, usually two
to four weeks, are freely transferable and entitle the holder to buy the new
common stock at a lower price than the current market. Warrants are options to
purchase equity securities at a specific price for a specific period of time.
They do not represent ownership of the securities, but only the right to buy
them. Hence, warrants have no voting rights, pay no dividends and have no rights
with respect to the assets of the corporation issuing them. The value of
warrants is derived solely from capital appreciation of the underlying equity
securities. Warrants differ from call options in that the underlying corporation
issues warrants, whereas call options may be written by anyone.
An
investment in rights and warrants may entail greater risks than certain other
types of investments. Generally, rights and warrants do not carry the right to
receive dividends or exercise voting rights with respect to the underlying
securities, and they do not represent any rights in the assets of the issuer. In
addition, although their value is influenced by the value of the underlying
security, their value does not necessarily change with the value of the
underlying securities, and they cease to have value if they are not exercised on
or before their expiration date. Investing in rights and warrants increases the
potential profit or loss to be realized from the investment as compared with
investing the same amount in the underlying securities.
Exchange
Traded Notes (“ETNs”)
The
Fund may gain exposure to the commodities markets through investments in ETNs,
the value of which may be influenced by, among other things, time to maturity,
level of supply and demand for the ETN, volatility and lack of liquidity in
underlying markets, the performance of the reference instrument, changes in the
issuer’s credit rating and economic, legal, political or geographic events that
affect the reference instrument. An ETN that is tied to a reference instrument,
such as a commodities based index, may not replicate the performance of the
reference instrument.
Foreign
Investments
The
Fund may make investments in securities of non-U.S. issuers (“foreign
securities”).
Such
securities
include
Depositary Receipts (“DRs”), which are American Depositary Receipts (“ADRs”),
European Depositary Receipts (“EDRs”), Global Depositary Receipts (“GDRs”) or
other forms of DRs. DRs are receipts typically issued in
connection
with a U.S. or foreign bank or trust company which evidence ownership of
underlying securities issued by a non-U.S. company.
ADRs
are depositary receipts for foreign securities denominated in U.S. dollars and
traded on U.S. securities markets. These securities may not necessarily be
denominated in the same currency as the securities for which they may be
exchanged. These are certificates evidencing ownership of shares of a
foreign-based issuer held in trust by a bank or similar financial institutions.
Designed for use in U.S. securities markets, ADRs are alternatives to the
purchase of the underlying securities in their national market and currencies.
ADRs may be purchased through “sponsored” or “unsponsored” facilities. A
sponsored facility is established jointly by the issuer of the underlying
security and a depositary, whereas a depositary may establish an unsponsored
facility without participation by the issuer of the depositary security. Holders
of unsponsored depositary receipts generally bear all the costs of such
facilities and the depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited security or to pass through voting rights to the holders of such
receipts of the deposited securities.
Investments
in foreign securities involve certain inherent risks, including the
following:
Political
and Economic Factors.
Individual economies of certain countries may differ favorably or unfavorably
from the United States’ economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency,
diversification and balance of payments position. The internal politics of
certain foreign countries may not be as stable as those of the United States.
Governments in certain foreign countries also continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could include restrictions on
foreign investment, nationalization, expropriation of goods or imposition of
taxes, and could have a significant effect on market prices of securities and
payment of interest. The economies of many foreign countries are heavily
dependent upon international trade and are accordingly affected by the trade
policies and economic conditions of their trading partners. Enactment by these
trading partners of protectionist trade legislation could have a significant
adverse effect upon the securities markets of such countries.
Legal
and Regulatory Matters.
Certain foreign countries may have less supervision of securities markets,
brokers and issuers of securities, and less financial information available to
issuers, than is available in the United States.
Currency
Fluctuations.
A change in the value of any foreign currency against the U.S. dollar will
result in a corresponding change in the U.S. dollar value of an ADR’s underlying
portfolio securities denominated in that currency. Such changes will affect the
Fund to the extent that the Fund is invested in ADRs comprised of foreign
securities.
Foreign
Taxes.
The interest and dividends payable to the Fund on certain of the Fund’s foreign
securities may be subject to foreign taxes or withholding, thus reducing the net
amount of income available for distribution to Fund shareholders. The Fund may
not be eligible to pass through to its shareholders any tax credits or
deductions with respect to such foreign taxes or withholding.
Hedging
Transactions
The
Adviser employs various hedging techniques. The success of the Fund’s hedging
strategy will be subject to the Adviser’s ability to correctly assess the degree
of correlation between the performance of the instruments used in the hedging
strategy and the performance of the investments in the portfolio being
hedged.
Since
the characteristics of many securities change as markets change or time passes,
the success of the Fund’s hedging strategy will also be subject to the Adviser’s
ability to continually recalculate, readjust, and execute hedges in an efficient
and timely manner. For a variety of reasons, the Adviser may not seek to
establish a perfect correlation between such hedging instruments and the
portfolio holdings being hedged. Such imperfect correlation may prevent the Fund
from achieving the intended hedge or expose the Fund to risk of loss. In
addition, it is not possible to hedge fully or perfectly against any risk, and
hedging entails its own costs.
Private
Investments
Private
Placement and Restricted Securities. The
Fund may invest in securities that are purchased in private placements and,
accordingly, are subject to restrictions on resale as a matter of contract or
under federal securities laws. Because there may be relatively few potential
purchasers for such investments, especially under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund could find it more difficult to sell such securities when the
Adviser believes it advisable to do so or may be able to sell such securities
only at prices lower than if such securities were more widely held. At times, it
may also be more difficult to determine the fair value of such securities for
purposes of computing the Fund’s net asset value (“NAV”).
While
such private placements may offer attractive opportunities for investment not
otherwise available on the open market, the securities so purchased are often
restricted securities, i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933 (the “Securities Act”) or the availability of an
exemption from registration (such as Rules 144 or 144A), or which are not
readily marketable because they are subject to other legal or contractual delays
in or restrictions on resale.
The
absence of a trading market can make it difficult to ascertain a market value
for illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for the Fund to sell them promptly at an acceptable price. The Fund
may have to bear the extra expense of registering such securities for resale and
the risk of substantial delay in effecting such registration. In addition,
market quotations are less readily available. The judgment of the Adviser may at
times play a greater role in valuing these securities than in the case of
publicly traded securities.
Generally
speaking, restricted securities may be sold only to qualified institutional
buyers, or in a privately negotiated transaction to a limited number of
purchasers, or in limited quantities after they have been held for a specified
period of time and other conditions are met pursuant to an exemption from
registration, or in a public offering for which a registration statement is in
effect under the Securities Act. The Fund may be deemed to be an underwriter for
purposes of the Securities Act when selling restricted securities to the public,
and in such event the Fund may be liable to purchasers of such securities if the
registration statement prepared by the issuer, or the Prospectuses forming a
part of it, is materially inaccurate or misleading.
Redeemable
Securities. Certain
securities held by the Fund may permit the issuer at its option to call or
redeem its securities. If an issuer were to redeem securities held by the Fund
during a time of declining interest rates, the Fund may not be able to reinvest
the proceeds in securities providing the same investment return as the
securities redeemed.
Hybrid
Securities
The
Fund may acquire hybrid securities. A third party may create a hybrid security
by combining an income-producing debt security (“income producing component”)
and the right to receive payment based on the change in the price of an equity
security (“equity component”). The income-producing component is achieved by
investing in non-convertible, income-producing securities such as bonds,
preferred stocks and money market instruments, which may be represented by
derivative instruments. The equity component is achieved by investing in
securities or instruments such as cash-settled warrants to receive a payment
based on whether the price of a common stock surpasses a certain exercise price.
A hybrid security comprises two or more separate securities, each with its own
market value. Therefore, the market value of a hybrid security is the sum of the
values of its income-producing component and its equity component.
Structured
Investments.
A structured investment is a security having a return tied to an underlying
index or other security or asset class. Structured investments generally are
individually negotiated agreements and may be traded over-the-counter.
Structured investments are organized and operated to restructure the investment
characteristics of the underlying security. This restructuring involves the
deposit with or purchase by an entity, such as a corporation or trust, or
specified instruments (such as commercial bank loans) and the issuance by that
entity or one or more classes of securities (“structured securities”) backed by,
or representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued structured
securities
to create securities with different investment characteristics, such as varying
maturities, payment priorities and interest rate provisions, and the extent of
such payments made with respect to structured securities is dependent on the
extent of the cash flow on the underlying instruments. Because structured
securities typically involve no credit enhancement, their credit risk generally
will be equivalent to that of the underlying instruments. Investments in
structured securities are generally of a class of structured securities that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated structured securities typically have higher yields and present
greater risks than unsubordinated structured securities. Structured securities
are typically sold in private placement transactions, and there currently is no
active trading market for structured securities. Investments in government and
government-related and restructured debt instruments are subject to special
risks, including the inability or unwillingness to repay principal and interest,
requests to reschedule or restructure outstanding debt and requests to extend
additional loan amounts.
Investment
in Other Investment Companies
As
with other investments, investments in other investment companies, including
exchange traded funds (“ETFs”), are subject to market and selection risk. In
addition, if the Fund acquires shares of investment companies, shareholders bear
both their proportionate share of expenses in the Fund (including management and
advisory fees) and, indirectly, the expenses of the investment companies. ETFs
are investment companies whose shares are bought and sold on a securities
exchange. An ETF holds a portfolio of securities designed to track a particular
market segment or index. The Fund could purchase an ETF to temporarily gain
exposure to a portion of the U.S. or foreign market while awaiting an
opportunity to purchase securities directly. The risks of owning an ETF
generally reflect the risks of owning the underlying securities or commodities
they are designed to track, although lack of liquidity in an ETF could result in
it being more volatile than the underlying portfolio of securities or
commodities and ETFs have management fees that increase their costs versus the
costs of owning the underlying securities directly.
The
Fund may also invest in money market mutual funds. An investment in a money
market mutual fund is not insured or guaranteed by a Federal Deposit Insurance
Corporation or any other government agency. Although such funds seek to preserve
the value of the Fund’s investment at $1.00 per share, it is possible to lose
money by investing in a money market mutual fund.
Management
If
the Fund’s investment committee members make poor investment decisions, it will
negatively affect the Fund’s investment performance.
Momentum
Style
Investing
in or having exposure to securities with positive momentum entails investing in
securities that have had above-average recent returns. These securities may be
more volatile than a broad cross-section of securities. In addition, there may
be periods when the momentum style is out of favor, and during which the
investment performance of a fund using a momentum strategy may
suffer.
Mortgage-Backed
Securities
The
Fund may invest in securities that directly or indirectly represent
participations in, or are collateralized by, payable from, mortgage loans
secured by real property (“Mortgage-Backed Securities”).
Mortgage-Backed
Securities represent direct or indirect participations in, or are secured by and
payable from, mortgage loans secured by real property, and include single- and
multi-class pass-through securities and collateralized mortgage obligations
(“CMOs”). Such securities may be issued or guaranteed by U.S. Government
agencies or instrumentalities, such as GNMA, commonly known as “Ginnie Mae,”
Federal National Mortgage Association (“FNMA”), commonly known as “Fannie Mae,”
Federal Home Loan Mortgage Corporation (“FHLMC”), commonly known as “Freddie
Mae,” or by private issuers, generally originators and investors in mortgage
loans, including savings associations, mortgage bankers, commercial banks,
investment bankers and special purpose entities (collectively, “private
lenders”).
Mortgage-backed
securities issued by private lenders may be supported by pools of mortgage loans
or other mortgage-backed securities that are guaranteed, directly or indirectly,
by the U.S. Government or one of its agencies or instrumentalities, or they may
be issued without any governmental guarantee of the underlying mortgage assets
but with some form of non-governmental credit enhancement. Until 2008, FNMA
and FHLMC were government-sponsored corporations owned entirely by private
stockholders. In September 2008, at the direction of the U.S. Department of
the Treasury, FNMA and FHLMC were placed into conservatorship under the Federal
Housing Finance Agency (“FHFA”). The U.S. Government also took steps to
provide additional financial support to FNMA and FHLMC. No assurance can be
given that the U.S. Treasury initiatives with respect to FNMA and FHLMC will be
successful.
Investing
in mortgage-backed securities involves certain unique risks in addition to those
generally associated with investing in fixed income securities and in the real
estate industry in general. These unique risks include the failure of a party to
meet its commitments under the related operative documents, adverse interest
rate changes and the effects of prepayments on mortgage cash flows.
Mortgage-backed securities are “pass-through” securities, meaning that principal
and interest payments made by the borrower on the underlying mortgages are
passed through to the Fund. The value of mortgage-backed securities, like that
of traditional fixed income securities, typically increases when interest rates
fall and decreases when interest rates rise. However, mortgage-backed securities
differ from traditional fixed income securities because of their potential for
prepayment without penalty. The price paid by the Fund for its mortgage-backed
securities, the yield the Fund expects to receive from such securities and the
average life of the securities are based on a number of factors, including the
anticipated rate of prepayment of the underlying mortgages. In a period of
declining interest rates, borrowers may prepay the underlying mortgages more
quickly than anticipated, thereby reducing the yield to maturity and the average
life of the mortgage-backed securities. Moreover, when the Fund reinvests the
proceeds of a prepayment in these circumstances, it will likely receive a rate
of interest that is lower than the rate on the security that was
prepaid.
Municipal
Securities
The
Fund may invest in municipal securities. Municipal securities are issued by the
states, territories and possessions of the United States, their political
subdivisions (such as cities, counties and towns) and various authorities (such
as public housing or redevelopment authorities), instrumentalities, public
corporations and special districts (such as water, sewer or sanitary districts)
of the states, territories, and possessions of the United States or their
political subdivisions. In addition, municipal securities include securities
issued by or on behalf of public authorities to finance various privately
operated facilities, such as industrial development bonds, that are backed only
by the assets and revenues of the non-governmental user (such as hospitals and
airports).
Municipal
securities are issued to obtain funds for a variety of public purposes,
including general financing for state and local governments, or financing for
specific projects or public facilities. Municipal securities are classified as
general obligation or revenue bonds or notes. General obligation securities are
secured by the issuer’s pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue securities are payable from
revenue derived from a particular facility, class of facilities, or the proceeds
of a special excise tax or other specific revenue source, but not from the
issuer’s general taxing power. Private activity bonds and industrial revenue
bonds do not carry the pledge of the credit of the issuing municipality, but
generally are guaranteed by the corporate entity on whose behalf they are
issued.
Municipal
leases are entered into by state and local governments and authorities to
acquire equipment and facilities such as fire and sanitation vehicles,
telecommunications equipment, and other assets. Municipal leases (which normally
provide for title to the leased assets to pass eventually to the government
issuer) have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt-issuance limitations of many state constitutions and
statutes are deemed to be inapplicable because of the inclusion in many leases
or contracts of “non-appropriation” clauses that provide that the governmental
issuer has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis.
Shareholders
should note that, although interest paid on municipal securities is generally
exempt from regular federal income tax, the Fund does not anticipate holding
municipal securities or shares of other regulated investment companies in
sufficient quantities to qualify to pay exempt-interest dividends. As a result,
distributions by the Fund to its shareholders are expected to be treated for
federal income tax purposes as ordinary dividends without regard to the
character in the hands of the Fund of any interest that it receives on municipal
securities.
Short
Sales
The
Fund enters into a short sale by selling a security it has borrowed (typically
from a broker or other institution). If the market price of a security increases
after the Fund borrows the security, the Fund will suffer a (potentially
unlimited) loss when it replaces the borrowed security at the higher price. In
certain cases, purchasing a security to cover a short position can itself cause
the price of the security to rise further, thereby exacerbating the loss. In
addition, the Fund may not always be able to borrow the security at a particular
time or at an acceptable price. The Fund may also take a short position in a
derivative instrument, such as a future, forward or swap. A short position in a
derivative instrument involves the risk of a theoretically unlimited increase in
the value of the underlying instrument. Short sales also involve transaction and
other costs that will reduce potential Fund gains and increase potential Fund
losses.
Real
Estate Investment Trusts
A
U.S. real estate investment trust (“REIT”) is a corporation, or a business trust
that would otherwise be taxed as a corporation, which meets certain definitional
requirements of the Internal Revenue Code of 1986 (the “Code”). The Code permits
a qualifying REIT to deduct dividends paid, thereby effectively eliminating
corporate level federal income tax. To meet the definitional requirements of the
Code, a REIT must, among other things, invest substantially all of its assets in
interests in real estate (including mortgages and other REITs) or cash and
government securities, derive most of its income from rents from real property
or interest on loans secured by mortgages on real property, and distribute to
shareholders annually a substantial portion of its otherwise taxable
income.
REITs
are characterized as equity REITs, mortgage REITs, and hybrid REITs. Equity
REITs, which may include operating or finance companies, own real estate
directly and the value of, and income earned by, the REITs depend upon the
income of the underlying properties and the rental income they earn. Equity
REITs also can realize capital gains (or losses) by selling properties that have
appreciated (or depreciated) in value. Mortgage REITs can make construction,
development or long-term mortgage loans and are sensitive to the credit quality
of the borrower. Mortgage REITs derive their income from interest payments on
such loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs, generally by holding both ownership interests and mortgage interests in
real estate. The value of securities issued by REITs are affected by tax and
regulatory requirements and by perceptions of management skill. They also are
subject to heavy cash flow dependency, defaults by borrowers or tenants,
self-liquidation and the possibility of failing to qualify for the favorable
U.S. federal income tax status generally available to REITs under the Code or to
maintain exemption from the 1940 Act.
When
the Fund invests in REITs, it is subject to risks principally associated with
investing in real estate: (1) possible declines in the value of real estate, (2)
adverse general and local economic conditions, (3) possible lack of availability
of mortgage funds, (4) changes in interest rates, and (5) environmental
problems. In addition, real estate investment trusts are subject to other risks
related specifically to their structure and focus: (a) dependency upon
management skills; (b) limited diversification; (c) the risks of locating and
managing financing for projects; (d) heavy cash flow dependency; (e) possible
default by borrowers; (f) the costs and potential losses of self-liquidation of
one or more holdings; (g) the possibility of failing to maintain exemptions from
securities registration; (h) duplicative fees; and in many cases, relatively
small market capitalization, which may result in less market liquidity and
greater price volatility.
Short-Term,
Temporary, and Cash Investments
In
response to adverse market, economic, political or other conditions, the Fund
may assume a temporary defensive position and invest, without limitation, in
high quality fixed income securities, money market
instruments,
and money market mutual funds, cash or prime quality cash equivalents, in such
amounts as the Adviser deems appropriate under the circumstances, including when
the Adviser believes the Fund needs to retain cash. During such times, the Fund
may not achieve its investment objectives.
The
Fund may invest in any of the following securities and instruments:
Bank
Certificates of Deposit, Bankers’ Acceptances and Time Deposits.
The Fund may acquire certificates of deposit, bankers’ acceptances and 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.
Certificates of deposit and bankers’ acceptances acquired by the Fund will be
dollar denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government. If the Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred by a fund that invests only in
debt obligations of U.S. domestic issuers. See “Foreign Securities” above. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these
securities.
Domestic
banks and foreign banks are subject to different governmental regulations with
respect to the amount and types of loans which may be made and interest rates
which may be charged. In addition, the profitability of the banking industry
depends largely upon the availability and cost of funds for the purpose of
financing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possible
financial difficulties of borrowers play an important part in the operations of
the banking industry.
As
a result of federal and state laws and regulations, domestic banks are, among
other things, required to maintain specified levels of reserves, limited in the
amount which they can loan to a single borrower, and subject to other
regulations designed to promote financial soundness. However, such laws and
regulations do not necessarily apply to foreign bank obligations that the Fund
may acquire.
In
addition to purchasing certificates of deposit and bankers’ acceptances, to the
extent permitted under its investment objectives and policies stated above and
in its Prospectus, the Fund may make interest bearing time or other interest
bearing deposits in commercial or savings banks. Time deposits are
non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
Savings
Association Obligations. The
Fund may invest in certificates of deposit (interest bearing time deposits)
issued by savings banks or savings and loan associations that have capital,
surplus and undivided profits in excess of $100 million, based on latest
published reports, or less than $100 million if the principal amount of such
obligations is fully insured by the U.S. Government.
Commercial
Paper, Short Term Notes and Other Corporate Obligations. The
Fund may invest a portion of its assets in commercial paper and short term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short term notes will normally have
maturities of less than nine months and fixed rates of return, although such
instruments may have maturities of up to one year.
Commercial
paper and short term notes will consist of issues rated at the time of purchase
“A-2” or higher by Standard & Poor’s (“S&P”), “Prime-1” by Moody’s
Investors Service, Inc. (“Moody’s”), or similarly rated by another nationally
recognized statistical rating organization or, if unrated, will be determined by
the Adviser to be of comparable quality. These rating symbols are described in
Appendix
A.
Illiquid
Investments and Restricted Securities
The
Fund may not acquire an illiquid investment if, immediately after the
acquisition, the Fund would have invested more than 15% of its net assets in
illiquid investments. An illiquid investment is any investment that the Fund
reasonably expects cannot be sold or disposed of in current market conditions in
seven calendar days or less without the sale or disposition significantly
changing the market value of the investment. If illiquid investments exceed 15%
of the Fund’s net assets, certain remedial actions will be taken as required by
Rule 22e-4 under the 1940 Act and the Fund’s policies and
procedures.
Restricted
securities are securities subject to legal or contractual restrictions on their
resale, such as private placements. Such restrictions might prevent the sale of
restricted securities at a time when the sale would otherwise be desirable.
Under SEC regulations, certain restricted securities acquired through private
placements can be traded freely among qualified purchasers. While restricted
securities are generally classified as illiquid, the SEC has stated that an
investment company’s board of directors, or its investment adviser acting under
authority delegated by the board, may determine that a security eligible for
trading under this rule is “liquid.” The Fund intends to rely on this rule, to
the extent appropriate, to deem specific securities acquired through private
placement as “liquid.” The Board has delegated to the Adviser, pursuant to
guidelines established by the Board, the responsibility for determining whether
a particular security eligible for trading under this rule is “liquid.”
Investing in these restricted securities could have the effect of increasing the
Fund’s illiquidity if qualified purchasers become, for a time, uninterested in
buying these securities.
Restricted
securities may be sold only (1) pursuant to SEC Rule 144A or another exemption,
(2) in privately negotiated transactions or (3) in public offerings with respect
to which a registration statement is in effect under the Securities Act. Rule
144A securities, although not registered in the U.S., may be sold to qualified
institutional buyers in accordance with Rule 144A under the Securities Act. As
noted above, the Adviser, acting pursuant to guidelines established by the
Board, may determine that some Rule 144A securities are liquid. Where
registration is required, the Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a restricted
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Illiquid
investments may be difficult to value, and the Fund may have difficulty
disposing of such investments promptly. The Fund does not consider non-U.S.
securities to be restricted if they can be freely sold in the principal markets
in which they are traded, even if they are not registered for sale in the
U.S.
Borrowing
Though
the Fund does not currently intend to borrow money, the Fund is authorized to
borrow money from banks from time to time for temporary, extraordinary or
emergency purposes or for clearance of transactions, and not for the purpose of
leveraging its investments, in amounts not to exceed at any time 33 1/3% of the
value of its total assets at the time of such borrowings, as allowed under the
1940 Act. The use of borrowing by the Fund involves special risk considerations
that may not be associated with other funds having similar objectives and
policies. Since substantially all of the Fund’s assets fluctuate in value, while
the interest obligation resulting from a borrowing will be fixed by the terms of
the Fund’s agreement with its lender, the NAV per share of the Fund will tend to
increase more when its portfolio securities increase in value and to decrease
more when its portfolio assets decrease in value than would otherwise be the
case if the Fund did not borrow. In addition, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds. Under adverse market conditions, the
Fund might have to sell portfolio securities to meet interest or principal
payments at a time when fundamental investment considerations would not favor
such sales.
Cyber
Security
Investment
companies, such as the Fund, and their service providers may be subject to
operational and information security risks resulting from cyber-attacks.
Cyber-attacks include, among other behaviors, stealing or corrupting data
maintained online or digitally, denial of service attacks on websites, the
unauthorized release of
confidential
information or various other forms of cyber security breaches. Cyber-attacks
affecting the Fund or the Adviser, custodian, transfer agent, intermediaries and
other third-party service providers may adversely impact the Fund. For instance,
cyber-attacks may interfere with the processing of shareholder transactions,
impact the Fund’s ability to calculate its net asset value, cause the release of
private shareholder information or confidential company information, impede
trading, subject the Fund to regulatory fines or financial losses, and cause
reputational damage. The Fund may also incur additional costs for cyber security
risk management purposes. Similar types of cyber security risks are also present
for issuers of securities in which the Fund invests, which could result in
material adverse consequences for such issuers, and may cause the Fund’s
investment in such portfolio companies to lose value.
INVESTMENT
RESTRICTIONS
Fundamental
Investment Policies
The
Trust (on behalf of the Fund) has adopted the following restrictions as
fundamental policies, which may not be changed without the affirmative vote of
the holders of a “majority of the Fund’s outstanding voting securities” as
defined in the 1940 Act. Under the 1940 Act, the “vote of the holders of a
majority of the outstanding voting securities” means the vote of the holders of
the lesser of (i) 67% of the shares of the Fund represented at a meeting at
which the holders of more than 50% of its outstanding shares are represented or
(ii) more than 50% of the outstanding shares of the Fund.
The
Fund’s fundamental policies are as follows:
(1)The
Fund may not borrow money except as permitted by (i) the 1940 Act, or
interpretations or modifications by the SEC, SEC staff or other authority of
competent jurisdiction, or (ii) exemptive or other relief or permission
from the SEC, SEC staff or other authority of competent
jurisdiction.
(2)The
Fund may not engage in the business of underwriting the securities of other
issuers except as permitted by (i) the 1940 Act, or interpretations or
modifications by the SEC, SEC staff or other authority of competent
jurisdiction, or (ii) exemptive or other relief or permission from the SEC,
SEC staff or other authority of competent jurisdiction.
(3)The
Fund may lend money or other assets to the extent permitted by (i) the 1940
Act, or interpretations or modifications by the SEC, SEC staff or other
authority of competent jurisdiction or (ii) exemptive or other relief or
permission from the SEC, SEC staff or other authority of competent
jurisdiction.
(4)The
Fund may not issue senior securities except as permitted by (i) the 1940
Act, or interpretations or modifications by the SEC, SEC staff or other
authority of competent jurisdiction, or (ii) exemptive or other relief or
permission from the SEC, SEC staff or other authority of competent
jurisdiction.
(5)The
Fund may not purchase or sell real estate except as permitted by (i) the
1940 Act, or interpretations or modifications by the SEC, SEC staff or other
authority of competent jurisdiction, or (ii) exemptive or other relief or
permission from the SEC, SEC staff or other authority of competent
jurisdiction.
(6)The
Fund may purchase or sell commodities or contracts related to commodities in
compliance with any applicable provisions of the federal securities or
commodities laws.
(7)The
Fund may not invest more than 25% of the market value of its total assets in the
securities of companies engaged in any one industry. (Does not apply to
investments in the securities of other investment companies or securities of the
U.S. Government, its agencies or instrumentalities.)
(8)With
respect to 75% of its total assets, the Fund may not invest more than 5% of its
total assets in securities of a single issuer or hold more than 10% of the
voting securities of such issuer. (Does not apply to investments in the
securities of other investment companies or securities of the U.S. Government,
its agencies or instrumentalities.)
Additional
Information about Fundamental Investment Policies
The
following provides additional information about the Fund’s fundamental
investment policies. This information does not form part of the Fund’s
fundamental investment policies.
With
respect to the fundamental policy relating to borrowing money set forth in (1)
above, the 1940 Act permits a fund to borrow money in amounts of up to one-third
of the fund’s total assets from banks for any purpose, and to borrow up to 5% of
the fund’s total assets from banks or other lenders for temporary purposes. To
limit the risks attendant to borrowing, the 1940 Act requires a fund to maintain
at all times an “asset coverage” of at least 300% of the amount of its
borrowings. Asset coverage means the ratio that the value of the fund’s total
assets, minus liabilities other than borrowings, bears to the aggregate amount
of all borrowings. Borrowing money to increase a fund’s investment portfolio is
known as “leveraging.” Borrowing, especially when used for leverage, may cause
the value of a fund’s shares to be more volatile than if the fund did not
borrow. This is because borrowing tends to magnify the effect of any increase or
decrease in the value of a fund’s portfolio holdings. Borrowed money thus
creates an opportunity for greater gains, but also greater losses. To repay
borrowings, a fund may have to sell securities at a time and at a price that is
unfavorable to the fund. There also are costs associated with borrowing money,
and these costs would offset and could eliminate a fund’s net investment income
in any given period. The policy in (1) above will be interpreted to permit the
Fund to engage in trading practices and investments that may be considered to be
borrowing to the extent permitted by the 1940 Act. The Fund may elect to treat
reverse repurchase agreements as (i) borrowings subject to the asset coverage
requirements of Section 18 of the 1940 Act or (ii) derivatives transactions for
purposes of Rule 18f-4 under the 1940 Act including, as applicable, the
value-at-risk (“VaR”) based limit on leverage risk. Short-term credits necessary
for the settlement of securities transactions and arrangements with respect to
securities lending will not be considered to be borrowings under the policy.
With
respect to the fundamental policy relating to underwriting set forth in
(2) above, the 1940 Act does not prohibit a fund from engaging in the
underwriting business or from underwriting the securities of other issuers; in
fact, the 1940 Act permits a fund to have underwriting commitments of up to 25%
of its assets under certain circumstances. Those circumstances currently are
that the amount of a fund’s underwriting commitments, when added to the value of
the fund’s investments in issuers where the fund owns more than 10% of the
outstanding voting securities of those issuers, cannot exceed the 25% cap. A
fund engaging in transactions involving the acquisition or disposition of
portfolio securities may be considered to be an underwriter under the Securities
Act. Under the Securities Act, an underwriter may be liable for material
omissions or misstatements in an issuer’s registration statement or prospectus.
Securities purchased from an issuer and not registered for sale under the
Securities Act are considered restricted securities. There may be a limited
market for these securities. If these securities are registered under the
Securities Act, they may then be eligible for sale but participating in the sale
may subject the seller to underwriter liability. These risks could apply to a
fund investing in restricted securities. Although it is not believed that the
application of the Securities Act provisions described above would cause a fund
to be engaged in the business of underwriting, the policy in (2) above will
be interpreted not to prevent the Fund from engaging in transactions involving
the acquisition or disposition of portfolio securities, regardless of whether
the Fund may be considered to be an underwriter under the Securities
Act.
With
respect to the fundamental policy relating to lending set forth in
(3) above, the 1940 Act does not prohibit a fund from making loans;
however, SEC staff interpretations currently prohibit funds from lending more
than one-third of their total assets, except through the purchase of debt
obligations or the use of repurchase agreements. (A repurchase agreement is an
agreement to purchase a security, coupled with an agreement to sell that
security back to the original seller on an agreed-upon date at a price that
reflects current interest rates. The SEC frequently treats repurchase agreements
as loans.) While lending securities may be a source of income to a fund, as with
other extensions of credit, there are risks of delay in recovery or even loss of
rights in the underlying securities should the borrower fail financially.
However, loans would be made only when the Adviser believes the income justifies
the attendant risks. In addition, collateral arrangements with respect to
options, forward currency and futures transactions and other derivative
instruments, as well as delays in the settlement of securities transactions,
will not be considered loans.
With
respect to the fundamental policy relating to issuing senior securities set
forth in (4) above, “senior securities” are defined as fund obligations that
have a priority over the fund’s shares with respect to the payment of dividends
or the distribution of fund assets. The 1940 Act prohibits a fund from issuing
senior securities except that the fund may borrow money in amounts of up to
one-third of the fund’s total assets from banks for any purpose. A fund also may
borrow up to 5% of the fund’s total assets from banks or other lenders for
temporary purposes, and these borrowings are not considered senior securities.
The issuance of senior securities by a fund can increase the speculative
character of the fund’s outstanding shares through leveraging. Leveraging of a
fund’s portfolio through the issuance of senior securities magnifies the
potential for gain or loss on monies, because even though the fund’s net assets
remain the same, the total risk to investors is increased. Certain types of
transactions involve a commitment by a fund to deliver money or securities in
the future, including transactions in when-issued, forward settling, and
non-standard settlement cycle securities. Such transactions would be deemed not
to involve a senior security (i.e., it will not be considered a derivatives
transaction or subject to asset segregation requirements), provided that (i) the
fund intends to physically settle the transaction and (ii) the transaction will
settle within 35 days of its trade date. If such a transaction were considered
to be a derivatives transaction, it would be subject to the requirements of Rule
18f-4 under the 1940 Act. The policy in (4) above will be interpreted not to
prevent collateral arrangements with respect to swaps, options, forward or
futures contracts or other derivatives, or the posting of initial or variation
margin.
With
respect to the fundamental policy relating to real estate set forth in
(5) above, the 1940 Act does not prohibit a fund from owning real estate.
Investing in real estate may involve risks, including that real estate is
generally considered illiquid and may be difficult to value and sell. Owners of
real estate may be subject to various liabilities, including environmental
liabilities. The policy in (5) above will be interpreted not to prevent the
Fund from investing in real estate-related companies, companies whose businesses
consist in whole or in part of investing in real estate, instruments (like
mortgages) that are secured by real estate or interests therein, or real estate
investment trust securities.
With
respect to the fundamental policy relating to commodities set forth in
(6) above, the 1940 Act does not prohibit a fund from owning commodities,
whether physical commodities and contracts related to physical commodities (such
as oil or grains and related futures contracts), or financial commodities and
contracts related to financial commodities (such as currencies and, possibly,
currency futures). If a fund were to invest in a physical commodity or a
physical commodity-related instrument, the fund would be subject to the
additional risks of the particular physical commodity and its related market.
The value of commodities and commodity-related instruments may be extremely
volatile and may be affected either directly or indirectly by a variety of
factors. There also may be storage charges and risks of loss associated with
physical commodities. The policy in (6) above will be interpreted to permit
investments in exchange traded funds that invest in physical and/or financial
commodities.
With
respect to the fundamental policy relating to concentration set forth in (7)
above, the 1940 Act does not define what constitutes “concentration” in an
industry. The SEC staff has taken the position that investment of more than 25%
of a fund’s total assets in one or more issuers conducting their principal
activities in the same industry or group of industries constitutes
concentration. It is possible that interpretations of concentration could change
in the future. A fund that invests a significant percentage of its total assets
in a single industry may be particularly susceptible to adverse events affecting
that industry and may be more risky than a fund that does not concentrate in an
industry. The policy in (7) above will be interpreted to refer to concentration
as that term may be interpreted from time to time. The policy also will be
interpreted to permit investment without limit in the following: securities of
the U.S. Government and its agencies or instrumentalities; and repurchase
agreements collateralized by any such obligations. Accordingly, issuers of the
foregoing securities will not be considered to be members of any industry. The
policy also will be interpreted to give broad authority to the Fund as to how to
classify issuers within or among industries. When identifying industries for
purposes of its concentration policy, the Fund may rely upon available industry
classifications. The Fund will consider both the borrower and the
institution selling a loan participation as an issuer for purposes of the Fund’s
concentration policy.
The
Fund’s fundamental policies are written and will be interpreted broadly. For
example, the policies will be interpreted to refer to the 1940 Act and the
related rules as they are in effect from time to time, and to
interpretations
and modifications of or relating to the 1940 Act by the SEC and others as they
are given from time to time. When a policy provides that an investment practice
may be conducted as permitted by the 1940 Act, the policy will be interpreted to
mean either that the 1940 Act expressly permits the practice or that the 1940
Act does not prohibit the practice. In complying with its fundamental and
non-fundamental investment restrictions, the Fund will aggregate its direct
investments with the Subsidiary’s investments when testing for compliance with
each investment restriction of the Fund.
Non-Fundamental
Investment Policies
The
Fund observes the following policy, which is not deemed fundamental and may be
changed without shareholder approval. The Fund may not invest in any issuer for
purposes of exercising control or management.
PORTFOLIO
TURNOVER
Although
the Fund generally will not invest for short-term trading purposes, portfolio
securities may be sold without regard to the length of time they have been held
when, in the opinion of the Adviser, investment considerations warrant such
action. Portfolio turnover rate is calculated by dividing (1) the lesser of
purchases or sales of portfolio securities for the fiscal year by (2) the
monthly average of the value of portfolio securities owned during the fiscal
year. A 100% turnover rate would occur if all the securities in the Fund’s
portfolio, with the exception of securities whose maturities at the time of
acquisition were one year or less, were sold and either repurchased or replaced
within one year. A high rate of portfolio turnover (100% or more) generally
leads to higher transaction costs and generally reflects a greater number of
taxable transactions. High portfolio turnover may result in larger amounts of
short-term capital gains which, when distributed to shareholders, are generally
taxed at ordinary income tax rates.
Following
are the portfolio turnover rates for the fiscal years indicated
below:
|
|
|
|
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| |
| Fiscal
year ended June 30, 2022 |
Fiscal
year ended June 30, 2021 |
| 129% |
140%1 |
1
The
portfolio turnover ratio for the year ended June 30, 2021 has been restated to
reflect the inclusion of cash equivalents transactions deemed long-term
investments.
PORTFOLIO
HOLDINGS POLICY
The
Fund maintains portfolio holdings disclosure policies that govern the timing and
circumstances of disclosure to shareholders and third parties of information
regarding the portfolio investments held by the Fund. These portfolio holdings
disclosure policies have been approved by the Board. Disclosure of the Fund’s
complete holdings is required to be made quarterly within 60 days of the end of
each fiscal quarter in the annual report and semi-annual report to Fund
shareholders and as an exhibit to its reports on Form N-PORT. These reports are
available, free of charge, on the EDGAR database on the SEC’s website at
www.sec.gov.
Portfolio
holdings information posted on the Fund’s website may be provided separately to
any person, commencing on the day after it is first published on the Fund’s
website. Shareholders can access the Fund’s website at www.fulcrumassetfunds.com
for additional information about the Fund, including, without limitation, the
periodic disclosure of its portfolio holdings.
Pursuant
to the Trust’s portfolio holdings disclosure policies, non-public information
about the Fund’s portfolio holdings generally is not distributed to any person,
unless by explicit agreement or by virtue of their respective duties to the
Fund, such persons are required to maintain the confidentiality of the
information disclosed and have a duty not to trade on non-public information.
Examples of disclosure by the Trust include instances in which:
The
disclosure is required pursuant to a regulatory request, court order or is
legally required in the context of other legal proceedings;
•The
disclosure is made to a mutual fund rating and/or ranking organization, or
person performing similar functions;
•The
disclosure is made to internal parties involved in the investment process,
administration, operation or custody of the Fund, including, but not limited to
the Fund’s administrator, U.S. Bancorp Fund Services, LLC, doing business as
U.S. Bank Global Fund Services (“Global Fund Services”) and the Trust’s Board of
Trustees, attorneys, auditors or independent registered public accounting
firm;
•The
disclosure is made: (a) in connection with a quarterly, semi-annual or annual
report that is available to the public; or (b) relates to information that is
otherwise available to the public; or
•The
disclosure is made with the prior written approval of either the Trust’s Chief
Compliance Officer or his or her designee.
Certain
of the persons listed above receive information about the Fund’s portfolio
holdings on an ongoing basis without lag as part of the normal investment
activities of the Fund. The Fund believes that these third parties have
legitimate objectives in requesting such portfolio holdings information and
operate in the best interest of the Fund’s shareholders. These persons include
internal parties involved in the investment process, administration, operation
or custody of the Fund, specifically: Fund Services; the Trust’s Board; and the
Trust’s attorneys and independent registered public accounting firm (Morgan,
Lewis & Bockius LLP and BBD, LLP, respectively), all of which typically
receive such information after it is generated. In no event shall the Adviser,
its affiliates or employees, the Fund, or any other party receive any direct or
indirect compensation in connection with the disclosure of information about the
Fund’s holdings.
Any
disclosures to additional parties not described above is made with the prior
written approval of either the Trust’s Chief Compliance Officer or his or her
designee, pursuant to the Trust’s Policy on Disclosure of Portfolio
Holdings.
The
Chief Compliance Officer or designated officer of the Trust will approve the
furnishing of non-public portfolio holdings to a third party only if they
consider the furnishing of such information to be in the best interest of the
Fund and its shareholders and if no material conflict of interest exists
regarding such disclosure between shareholders interest and those of the
Adviser, the distributor (defined below) or any affiliated person of the Fund.
No consideration may be received by the Fund, the Adviser, any affiliate of the
Adviser or their employees in connection with the disclosure of portfolio
holdings information. The Board receives and reviews annually a list of the
persons who receive non-public portfolio holdings information and the purpose
for which it is furnished.
MANAGEMENT
The
overall management of the Trust’s business and affairs is invested with its
Board. The Board approves all significant agreements between the Trust and
persons or companies furnishing services to it, including the agreements with
the Adviser and the Trust’s administrator, custodian and transfer agent, each as
discussed below. The day-to-day operations of the Trust are delegated to its
officers, subject to the Fund’s investment objective, strategies and policies
and to the general supervision of the Board. The Trustees and officers of the
Trust, their ages, birth dates, and positions with the Trust, terms of office
with the Trust and length of time served, their business addresses and principal
occupations during the past five years and other directorships held are set
forth in the table below.
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|
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|
|
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|
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|
|
| |
Name,
Address
and Age |
Position(s)
Held with Trust |
Term
of Office(1)
and
Length of Time Served |
Principal
Occupation(s)
During Past 5 Years |
Number
of Portfolios in Fund Complex(2)
Overseen by Trustee |
Other
Directorships(3)Held
During Past 5 Years
by
Trustee |
|
Independent
Trustees(4) |
|
|
| |
Harry
E. Resis
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1945 |
Trustee |
Since
2012 |
Private
investor. Previously served as Director of US Fixed Income for Henderson
Global Investors |
1 |
None |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name,
Address
and Age |
Position(s)
Held with Trust |
Term
of Office(1)
and
Length of Time Served |
Principal
Occupation(s)
During Past 5 Years |
Number
of Portfolios in Fund Complex(2)
Overseen by Trustee |
Other
Directorships(3)Held
During Past 5 Years
by
Trustee |
Brian
S. Ferrie
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1958 |
Trustee |
Since
2020 |
Chief
Compliance Officer, Treasurer, The Jensen Quality Growth Fund (2004 to
2020); Treasurer, Jensen Investment Management (2003 to 2020) |
1 |
None |
Wan-Chong
Kung
615 E. Michigan Street
Milwaukee, WI 53202
Year of birth:
1960 |
Trustee |
Since
2020 |
Senior
Fund Manager, Nuveen Asset Management (FAF Advisors/First American Funds)
(2011 to 2019) |
1 |
Federal
Home Loan Bank of Des Moines (February 2022 to present) |
|
Interested
Trustee(5) |
|
|
|
| |
Christopher
E. Kashmerick
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1974 |
Trustee |
Since
2018 |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (2011 to
present) |
1 |
None |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Name,
Address and Age |
Position(s)
Held with Trust |
Term
of Office(1)
and
Length of Time Served |
Principal
Occupation(s)
During Past 5 Years |
| Officers |
|
| |
Russell
B. Simon
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1980 |
President
and Principal Executive Officer |
Since
2022 |
Vice
President, U.S. Bancorp Fund Services, LLC (2011 to
present) |
Jack
Huntington
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1970 |
Vice
President, Chief Compliance Officer and AML Officer |
Since
2022 |
Vice
President, U.S. Bancorp Fund Services, LLC (2022 to present); Director and
Fund Chief Compliance Officer, Foreside Fund Officer Services, LLC (2015
to 2022) |
Eric
C. McCormick
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1971 |
Treasurer
and Principal Financial Officer |
Since
2022 |
Vice
President, U.S. Bancorp Fund Services, LLC (2005 to present) |
Scott
A. Resnick
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1983 |
Secretary |
Since
2019 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (2018 to present);
Associate, Legal & Compliance, PIMCO (2012 to
2018) |
(1)Each
Trustee serves an indefinite term; however, under the terms of the Board’s
retirement policy, a Trustee shall retire at the end of the calendar year in
which he or she reaches the age of 75 (this policy does not apply to any Trustee
serving at the time the policy was adopted). Each officer serves an indefinite
term until the election of a successor.
(2)The
Trust is comprised of numerous series managed by unaffiliated investment
advisers. The term “Fund Complex” applies only to the Fund. The Fund does not
hold itself out as related to any other series within the Trust for purposes of
investment and investor services, nor does it share the same investment advisor
with any other series of the Trust.
(3)“Other
Directorships Held” includes only directorships of companies required to
register or file reports with the SEC under the Securities Exchange Act of 1934,
as amended, (that is, “public companies”) or other investment companies
registered under the 1940 Act.
(4)The
Trustees of the Trust who are not “interested persons” of the Trust as defined
under the 1940 Act (“Independent Trustees”).
(5)Mr.
Kashmerick is an “interested person” of the Trust as defined by the 1940 Act.
Mr. Kashmerick is an interested Trustee of the Trust by virtue of the fact that
he is an interested person of U.S. Bancorp Fund Services, LLC, the Fund’s
administrator, fund accountant, and transfer agent.
Additional
Information Concerning the Board of Trustees
Board
Leadership Structure
The
Board has general oversight responsibility with respect to the operation of the
Trust and the Fund. The Board has engaged the Adviser to manage the Fund and is
responsible for overseeing the Adviser and other service providers to the Trust
and the Fund in accordance with the provisions of the 1940 Act and other
applicable laws. The Board has established an Audit Committee to assist the
Board in performing its oversight responsibilities.
The
Trust does not have a lead independent trustee. The Chairman of the Board is an
“interested person” of the Trust as defined by the 1940 Act.
The
Trust has determined that its leadership structure is appropriate in light of,
among other factors, the asset size and nature of the Trust, the arrangements
for the conduct of the Trust’s operations, the number of Trustees, and the
responsibilities of the Board.
Board
Oversight of Risk
Through
its direct oversight role, and indirectly through the Audit Committee, and
officers of the Fund and service providers, the Board performs a risk oversight
function for the Fund. To effectively perform its risk oversight function, the
Board, among other things, performs the following activities: receives and
reviews reports related to the performance and operations of the Fund; reviews
and approves, as applicable, the compliance policies and procedures of the Fund;
approves the Fund’s principal investment policies; adopts policies and
procedures designed to deter market timing; meets with representatives of
various service providers, including the Adviser, to review and discuss the
activities of the Fund and to provide direction with respect thereto; and
appoints a chief compliance officer of the Fund who oversees the implementation
and testing of the Fund’s compliance program and reports to the Board regarding
compliance matters for the Fund and its service providers.
The
Trust has an Audit Committee, which plays a significant role in the risk
oversight of the Fund as it meets periodically with the auditors of the Fund.
The Board also meets quarterly with the Fund’s chief compliance
officer.
Not
all risks that may affect the Fund can be identified nor can controls be
developed to eliminate or mitigate their occurrence or effects. It may not be
practical or cost effective to eliminate or mitigate certain risks, the
processes and controls employed to address certain risks may be limited in their
effectiveness, and some risks are simply beyond the reasonable control of the,
the Adviser or other service providers. Moreover, it is necessary to bear
certain risks (such as investment-related risks) to achieve the Fund’s goals. As
a result of the foregoing and other factors, the Fund’s ability to manage risk
is subject to substantial limitations.
Trust
Committees
The
Trust has two standing committees: the Audit Committee, which also serves as the
Qualified Legal Compliance Committee (“QLCC”), and the Governance and Nominating
Committee (the “Nominating Committee”).
The
Audit Committee, comprised entirely of the Independent Trustees, is chaired by
Mr. Ferrie. The primary functions of the Audit Committee are to select the
independent registered public accounting firm to be retained to perform the
annual audit of the Fund, to review the results of the audit, to review the
Fund’s internal controls, to approve in advance all permissible non-audit
services performed by the independent auditors and to review certain other
matters relating to the Fund’s independent registered public accounting firm and
financial records. In
its
role as the QLCC, its function is to receive reports from an attorney retained
by the Trust of evidence of a material violation by the Trust or by any officer,
director, employee or agent of the Trust. During the fiscal year ended June 30,
2022, the Audit Committee met three times in regards to the Fund.
The
Nominating Committee, comprised entirely of the Independent Trustees, is
responsible for seeking and reviewing candidates for consideration as nominees
for Trustees and meets only as necessary. The Nominating Committee will
consider nominees nominated by shareholders. Recommendations by
shareholders for consideration by the Nominating Committee should be sent to the
President of the Trust in writing together with the appropriate biographical
information concerning each such proposed Nominee, and such recommendation must
comply with the notice provisions set forth in the Trust By-Laws. In
general, to comply with such procedures, such nominations, together with all
required biographical information, must be delivered to and received by the
President of the Trust at the principal executive offices of the Trust not later
than 120 days and no more than 150 days prior to the shareholder meeting at
which any such nominee would be voted on. During the fiscal year ended June 30,
2022, the Nominating Committee did not meet in regards to the Fund.
The
Board has designated the Adviser to perform fair value determinations (the
“Valuation Designee”). The Valuation Designee is subject to Board oversight and
certain reporting and other requirements designed to facilitate the Board's
ability to effectively oversee the Valuation Designee's fair value
determinations.
Board
Oversight of Risk Management
As
part of its oversight function, the Board receives and reviews various risk
management reports and assessments and discusses these matters with appropriate
management and other personnel. Because risk management is a broad concept
comprised of many elements (such as, for example, investment risk, issuer and
counterparty risk, compliance risk, operational risks, business continuity
risks, etc.) the oversight of different types of risks is handled in different
ways.
Information
about Each Trustee’s Qualification, Experience, Attributes or
Skills
In
addition to the information provided in the table above, below is certain
additional information concerning each particular Trustee and certain of their
Trustee Attributes. The information provided below, and in the table above, is
not all-inclusive. Many Trustee attributes involve intangible elements, such as
intelligence, integrity, work ethic, the ability to work together, the ability
to communicate effectively, the ability to exercise judgment, the ability to ask
incisive questions, and commitment to shareholder interests. In conducting its
annual self-assessment, the Board has determined that the Trustees have the
appropriate attributes and experience to continue to serve effectively as
Trustees of the Trust.
Harry
E. Resis’ background in fixed income securities analysis, with an emphasis on
high yield securities, provides him with a practical knowledge of the underlying
markets and strategies used by funds in the Trust that will be useful to the
Board in their analysis and oversight of the funds.
Brian
S. Ferrie’s experience in finance and compliance in the mutual fund industry
gives him a strong understanding of the regulatory requirements of operating a
mutual fund. He also understands the complex nature of the financial
requirements, both from a regulatory and operational perspective, of managing a
mutual fund. Mr. Ferrie’s background and experience provide a unique perspective
to the Board.
Wan-Chong
Kung’s experience managing fixed income mutual funds, with specific experience
in commodities provides a diverse point-of-view for the Board. Ms. Kung also has
unique experience in education as she advises student-managed bond and equity
funds.
Christopher
E. Kashmerick has substantial mutual fund operations and shareholder servicing
experience through his position as Senior Vice President of U.S. Bank Global
Fund Services, and he brings more than 18 years of mutual fund and investment
management experience, which makes him a valuable resource to the Board as they
contemplate various fund and shareholder servicing needs.
Each
of the Trustees takes a conservative and thoughtful approach to addressing
issues facing the Fund. The combination of skills and attributes discussed above
led to the conclusion that each of Messrs. Resis, Ferrie, Kashmerick, and Ms.
Kung should serve as a trustee.
Trustee
Ownership of Fund Shares and Other Interests
No
Trustee owned shares of the Fund as of the calendar year ended December 31,
2021.
As
of December 31, 2021, neither the Independent Trustees nor members of their
immediate family, own securities beneficially or of record in the Adviser, the
Distributor, as defined below, or an affiliate of the Adviser or Distributor.
Accordingly, neither the Independent Trustees nor members of their immediate
family, have direct or indirect interest, the value of which exceeds $120,000,
in the Adviser, the Distributor or any of their affiliates. In addition, during
the two most recently completed calendar years, neither the Independent Trustees
nor members of their immediate families have conducted any transactions (or
series of transactions) in which the amount involved exceeds $120,000 and to
which the Adviser, the Distributor or any affiliate thereof was a
party.
Compensation
Set
forth below is the compensation received by the Independent Trustees from the
Fund for the fiscal year ended June 30, 2022. The Independent Trustees receive
an annual retainer of $56,000 per year and a per meeting fee of $1,000 for each
regular and special meeting of the Board attended, allocated among each of the
various portfolios comprising the Trust. The Trustees also receive reimbursement
from the Trust for expenses incurred in connection with attendance at meetings.
The Trust has no pension or retirement plan. No other entity affiliated with the
Trust pays any compensation to the Trustees.
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| Aggregate
Compensation from the Fund |
Pension
or Retirement Benefits Accrued as Part of Fund Expenses |
Annual
Benefits Upon Retirement |
Total
Compensation from Fund Complex Paid to Trustees(1) |
| Name
of Independent Trustee |
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| |
|
John
C. Chrystal(2) |
$3,695 |
None |
None |
$3,695 |
| Harry
E. Resis |
$3,632 |
None |
None |
$3,632 |
| Brian
S. Ferrie |
$3,695 |
None |
None |
$3,695 |
| Wan-Chong
Kung |
$3,695 |
None |
None |
$3,695 |
| Name
of Interested Trustee |
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| |
| Christopher
E. Kashmerick |
$0 |
None |
None |
$0 |
(1)There
are currently multiple portfolios comprising the Trust. The term “Fund Complex”
applies only to the Fund. For the fiscal year ended June 30, 2022, aggregate
Independent Trustees’ fees paid by the Trust were in the amount of
$239,000.
(2)John
C. Chrystal retired from the Board of Trustees as of the close of business on
August 26, 2022.
CODES
OF ETHICS
The
Trust and the Adviser have each adopted separate Codes of Ethics under Rule
17j-1 of the 1940 Act. These Codes permit, subject to certain conditions, access
persons of the Adviser to invest in securities that may be purchased or held by
the Fund.
PROXY
VOTING POLICIES AND PROCEDURES
The
Board has adopted Proxy Voting Policies and Procedures (the “Policies”) on
behalf of the Trust, which delegates the responsibility for voting proxies to
the Adviser, subject to the Board’s continuing oversight. The Policies require
that the Adviser vote proxies received in a manner consistent with the best
interests of the Fund and its shareholders. The Policies also require the
Adviser to present to the Board, at least annually, the Adviser’s Policies and a
record of each proxy voted by the Adviser on behalf of the Fund, including a
report on the resolution of all proxies identified by the Adviser as involving a
conflict of interest.
A
copy of the Adviser’s policies and procedures used to determine how to vote
proxies related to portfolio securities can be found in Appendix
B.
The
Trust is required to file a Form N-PX, with the Fund’s complete proxy voting
record for the 12 months ended June 30, no later than August 31 of each year.
The Fund’s proxy voting record will be available without charge, upon request,
by calling toll-free 855-538-5278 and on the SEC’s website at
www.sec.gov.
CONTROL
PERSONS AND PRINCIPAL SHAREHOLDERS
A
principal shareholder is any person who owns of record or beneficially 5% or
more of any class of the Fund’s outstanding securities. 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 September 30, 2022, the following shareholders were considered to be
principal shareholders.
Super
Institutional Class
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Name
and Address |
%
Ownership |
Type
of Ownership |
Capinco
c/o
US Bank NA
PO Box 1787
Milwaukee, WI 53201-1787 |
67.78% |
Record |
Charles
Schwab & Co, Inc.
Special Custody A/C FBO Customers
ATTN: Mutual
Funds
211 Main St
San Francisco, CA 94105-1901 |
24.02% |
Record |
National
Financial Services LLC
200 Liberty St
New York, NY
10281-1003 |
7.95% |
Record |
Institutional
Class
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Name
and Address |
%
Ownership |
Type
of Ownership |
Charles
Schwab & Co, Inc.
Special Custody A/C FBO Customers
ATTN: Mutual
Funds
211 Main St
San Francisco, CA 94105-1901 |
48% |
Record |
National
Financial Services LLC
200 Liberty St
New York, NY
10281-1003 |
25% |
Record |
TD
Ameritrade Inc
FBO Our Customers
PO Box 2226
Omaha, NE
68103-2226 |
9.95% |
Record |
UBS
WM USA
0O0 11011 6100
SPEC CDY A/C EBOC UBSFSI
1000 Harbor
Blvd
Weehawken, NJ 07086-6761 |
9.21% |
Record |
As
of September 30, 2022, the Trustees and Officers of the Trust, as a group,
beneficially owned less than 1% of the outstanding shares of any class of the
Fund.
THE
FUND’S INVESTMENT ADVISER
Fulcrum
Asset Management LLP, Marble Arch House, 66 Seymour Street, London W1H 5BT
United Kingdom, serves as investment adviser to the Fund pursuant to an
investment advisory agreement (the “Advisory Agreement”) with the Trust. Andrew
Stevens and Gavyn Davies each own 40% of the Adviser, with the remaining 20%
owned by a group of employees of the Adviser.
In
consideration of the services to be provided by the Adviser pursuant to the
Advisory Agreement, the Adviser is entitled to receive from the Fund an
investment advisory fee computed daily and payable monthly, based on a rate
equal to 0.90% of the Fund’s average daily net assets.
The
following tables describe the advisory fees paid to the Adviser by the Fund
during the fiscal years indicated.
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| Advisory
Fees Accrued |
Advisory
Fees Waived |
Net
Advisory Fees Paid |
| Fiscal
year ended June 30, 2022 |
$1,032,314 |
($323,321) |
$708,993 |
| Fiscal
year ended June 30, 2021 |
$1,152,368 |
($244,854) |
$907,514 |
| Fiscal
year ended June 30, 2020 |
$1,653,459 |
($181,991) |
$1,471,468 |
After
its initial terms, the Advisory Agreement continues in effect for successive
annual periods so long as such continuation is specifically approved at least
annually by the vote of (1) the Board (or a majority of the outstanding
shares of the Fund), and (2) a majority of the Trustees who are not
interested persons of any party to the Advisory Agreement, in each case, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated at any time, without penalty, by either
party to the Advisory Agreement upon a 60-day written notice and is
automatically terminated in the event of its “assignment,” as defined in the
1940 Act.
In
addition to the management fees payable to the Adviser, the Fund is responsible
for its own operating expenses, including: fees and expenses incurred in
connection with the issuance, registration and transfer of its shares; brokerage
and commission expenses; all expenses of transfer, receipt, safekeeping,
servicing and accounting for the cash, securities and other property of the
Trust for the benefit of the Fund including all fees and expenses of its
custodian and accounting services agent; interest charges on any borrowings;
costs and expenses of pricing and calculating its daily NAV per share and of
maintaining its books of account required under the 1940 Act; taxes, if any; a
pro rata portion of expenditures in connection with meetings of the Fund’s
shareholders and the Trust’s Board that are properly payable by the Fund;
salaries and expenses of officers and fees and expenses of members of the Board
or members of any advisory board or committee who are not members of, affiliated
with or interested persons of the Adviser or administrator; insurance premiums
on property or personnel of the Fund which inure to their benefit, including
liability and fidelity bond insurance; the cost of preparing and printing
reports, proxy statements, prospectuses and the statement of additional
information of the Fund or other communications for distribution to existing
shareholders; legal counsel, auditing and accounting fees; trade association
membership dues (including membership dues in the Investment Company Institute
allocable to the Fund); fees and expenses (including legal fees) of registering
and maintaining registration of its shares for sale under federal and applicable
state and foreign securities laws; all expenses of maintaining shareholder
accounts, including all charges for transfer, shareholder recordkeeping,
dividend disbursing, redemption, and other agents for the benefit of the Fund,
if any; and all other charges and costs of its operation plus any extraordinary
and non-recurring expenses, except as otherwise prescribed in the Advisory
Agreement.
Though
the Fund is responsible for its own operating expenses, the Adviser has
contractually agreed to waive a portion or all of the management fees payable to
it by the Fund and/or to pay Fund operating expenses to the extent necessary in
order to limit the total annual Fund operating expenses to 1.05%, 1.05% and
1.30% of average daily net assets of the Super Institutional Class,
Institutional Class and Advisor Class shares, respectively (excluding
shareholder servicing fees, acquired fund fees and expenses, taxes, interest
expense, dividends on securities sold short and extraordinary expenses). If any
excluded expenses are incurred, the Fund’s total annual operating expenses will
be higher than the Expense Caps. Any such waivers made by the Adviser in its
management fees or payment of expenses which are the Fund’s obligation are
subject to recoupment by the Adviser from the Fund, if so requested by the
Adviser, in subsequent fiscal years if the aggregate amount actually paid by the
Fund toward the operating expenses for such fiscal year (taking into account the
recoupment) does not exceed the applicable limitation on Fund expenses. The
Adviser may request recoupment of previously waived fees and paid expenses from
the Fund within three years from the date they were waived or paid, subject to
the
Expense
Caps at the time of waiver/payment or the Expense Caps at the time of
recoupment, whichever is lower. Any such recoupment is also contingent upon the
Board’s subsequent review and ratification of the recouped amounts. Such
recoupment may not be paid prior to the Fund’s payment of current ordinary
operating expenses.
INVESTMENT
COMMITTEE
Investment
Committee
The
Adviser has established an Investment Committee (the “Committee”) that is
jointly and
primarily responsible for the day-to-day management of the Fund’s portfolio. The
Committee currently is
comprised of Gavyn Davies, Andrew Stevens, Suhail Shaikh, CFA, Andrew Bevan,
PhD, and Nabeel Abdoula, CFA. In addition to the Fund, the Committee managed the
following other accounts for the Adviser as of June 30, 2022:
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Type
of Accounts |
Total
Number
of Accounts |
Total
Assets of Accounts |
Total
Number of Accounts
for which Advisory Fee
is Based on
Performance |
Total
Assets
in Accounts
for which Advisory Fee
is Based on
Performance |
| Registered
Investment Companies |
1 |
$158,626,232 |
0 |
$0 |
| Other
Pooled Investment Vehicles |
21 |
$3,620,314,672 |
0 |
$763,217,448 |
| Other
Accounts |
6 |
$2,088,446,738 |
2 |
$847,003,255 |
Material
Conflicts of Interest.
The
Adviser has a conflicts of interest policy and maintains a register of any
potential conflicts which is reviewed on a regular basis. To date it has not
identified any of material concern that should be particularly
highlighted.
The
Adviser has substantial incentives to see that the assets of the Fund appreciate
in value, and merely because an actual or potential conflict of interest exists
does not mean that it will be acted upon to the detriment of the
Fund.
Certain
inherent conflicts of interest arise from the fact that Adviser will provide
investment management services to the Fund and may, in the future, carry on
investment activities for other clients, including other investment funds and
client accounts in which the Fund will not have any interest (such other
clients, funds and accounts, "Other Accounts"). The respective investment
programs of the Fund and Other Accounts may or may not be substantially similar.
The Adviser may give advice and recommend securities to Other Accounts which may
differ from advice given to, or securities recommended or bought for the Fund,
even though their investment objectives may be the same or similar. The Adviser
will devote as much of their time to the activities of the Fund as it deems
necessary and appropriate. The Adviser is not restricted from forming additional
investment funds, from entering into other investment advisory relationships or
from engaging in other business activities, even though such activities may be
in competition with the Fund and/or may involve substantial time and resources
of the Adviser. These activities could be viewed as creating a conflict of
interest in that the time and effort of the partners of the Adviser and their
officers and employees will not be devoted exclusively to the business of the
Fund.
The
Adviser furthermore recognizes that conflicts of interest may arise as the
result of its investment activities. For instance, from time to time, directors,
officers, employees or their related persons (collectively referred to as
"Employees") of the Adviser may wish to engage directly or indirectly in a
personal investment in securities that the Adviser has bought or sold on behalf
of clients. The Adviser maintains a personal account dealing policy and asks
staff to sign quarterly declarations to confirm that they have acted in
accordance with the policy and disclosed all personal account dealing
accounts.
Other
present and future activities of the Adviser may give rise to additional
conflicts of interest. In the event that a conflict of interest arises, the
Adviser will attempt to resolve such conflicts in a fair and equitable manner.
To address potential conflicts of interest, the Adviser has adopted various
policies and procedures to provide for equitable treatment of trading activity
and to ensure that investment opportunities are allocated in a fair and
appropriate manner. In addition, the Investment Adviser has adopted a Code of
Ethics that recognizes the
Adviser's
obligation to treat all of its clients, including the Fund, fairly and
equitably. These policies, procedures and the Code of Ethics are designed to
restrict the portfolio manager from favoring one client over another. There is
no guarantee that the policies, procedures and the Code of Ethics will be
successful in every instance.
The
foregoing does not purport to be a complete list of all potential conflicts of
interest involved in an investment in the Fund.
Compensation.
All
members of the Advisers staff are compensated based on a salary and
discretionary annual bonus. The latter is based on performance of the Adviser
and the individual over a calendar year. Annual reviews and business plans are
prepared for each business unit and individual. Success against this business
plan is evaluated as part of the review process; this is an important
determinant of year end compensation.
Fulcrum
has a deferral program in place relating to bonus compensation for key partners
and employees. This deferral will vest over a three year period and there will
be suitable alignments of contracts through investment in internally managed
funds.
Key
members of the portfolio management team (including research) and business teams
own equity in the Adviser. In aggregate, 20% of the total equity will ultimately
be allocated to non-founder members of the team; approximately two thirds of
this has been allocated to date.
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| As
of June 30, 2022 |
| Investment
Committee Member |
Dollar
Range of Equity Securities Beneficially Owned in the Fund |
| Gavyn
Davies |
Over
$1,000,000 |
| Andrew
Stevens |
None |
| Suhail
Shaikh |
None |
| Andrew
Bevan |
None |
| Nabeel
Abdoula |
None |
OTHER
SERVICE PROVIDERS
Fund
Administrator, Transfer Agent and Fund Accountant
Pursuant
to an administration agreement (the “Administration Agreement”), U.S. Bank
Global Fund Services (“Global Fund Services”), 615 East Michigan Street,
Milwaukee, Wisconsin 53202, serves as the administrator and fund accountant to
the Fund. Global Fund Services provides certain services to the Fund including,
among other responsibilities, coordinating the negotiation of contracts and fees
with, and the monitoring of performance and billing of, the Fund’s independent
contractors and agents; preparation for signature by an officer of the Trust of
all documents required to be filed for compliance by the Trust and the Fund with
applicable laws and regulations, excluding those of the securities laws of
various states; arranging for the computation of performance data, including NAV
per share and yield; responding to shareholder inquiries; and arranging for the
maintenance of books and records of the Fund, and providing, at its own expense,
office facilities, equipment and personnel necessary to carry out its duties. In
this capacity, Global Fund Services does not have any responsibility or
authority for the management of the Fund, the determination of investment
policy, or for any matter pertaining to the distribution of Fund
shares.
Pursuant
to the Administration Agreement, Global Fund Services receives a portion of fees
from the Fund as part of a bundled-fee agreement for services performed as
administrator and fund accountant and separately as the transfer agent and
dividend disbursing agent. Additionally, Global Fund Services provides Chief
Compliance Officer services to the Trust under a separate agreement. The cost
for the Chief Compliance Officer’s services is charged to the Fund and approved
by the Board annually.
The
following table describes the fee paid by the Fund to Global Fund Services
during the
fiscal years indicated.
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| Administration
Fees |
| Fiscal
year ended June 30, 2022 |
$200,505 |
| Fiscal
year ended June 30, 2021 |
$190,740 |
| Fiscal
year ended June 30, 2020 |
$227,361 |
Custodian
Pursuant
to a custody agreement between the Trust and U.S. Bank National Association,
located at 1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212
(the “Custodian”), the Custodian serves as the custodian of the Fund’s assets,
holds the Fund’s portfolio securities in safekeeping, and keeps all necessary
records and documents relating to its duties. The Custodian is compensated with
an asset-based fee plus transaction fees and is reimbursed for out-of-pocket
expenses.
The
Custodian and Global Fund Services do not participate in decisions relating to
the purchase and sale of securities by the Fund. Global Fund Services, the
Custodian, and the Transfer Agent are affiliated entities under the common
control of U.S. Bancorp. The Custodian and its affiliates may participate in
revenue sharing arrangements with the service providers of mutual funds in which
the Fund may invest. The Custodian also serves as custodian for the
Subsidiary.
Independent
Registered Public Accounting Firm
BBD,
LLP, 1835 Market Street, 3rd
Floor, Philadelphia, Pennsylvania 19103, serves as the independent registered
public accounting firm for the Fund, whose services include auditing the Fund’s
financial statements and the performance of related tax services.
Legal
Counsel
Morgan,
Lewis & Bockius LLP, 1111 Pennsylvania Avenue NW, Washington, DC 20004,
serves as legal counsel to the Trust.
Maples
and Calder, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman
Islands,
serves as legal counsel to the Subsidiary.
EXECUTION
OF PORTFOLIO TRANSACTIONS
Pursuant
to the Advisory Agreement, the Adviser determines which securities are to be
purchased and sold by the Fund and which broker-dealers are eligible to execute
the Fund’s portfolio transactions. Purchases and sales of securities in the
over-the-counter market will generally be executed directly with a
“market-maker” unless, in the opinion of the Adviser, a better price and
execution can otherwise be obtained by using a broker for the
transaction.
Purchases
of portfolio securities for the Fund also may be made directly from issuers or
from underwriters. Where possible, purchase and sale transactions will be
effected through dealers (including banks) which specialize in the types of
securities which the Fund will be holding, unless better executions are
available elsewhere. Dealers and underwriters usually act as principal for their
own accounts. Purchases from underwriters will include a concession paid by the
issuer to the underwriter and purchases from dealers will include the spread
between the bid and the asked price. If the execution and price offered by more
than one dealer or underwriter are comparable, the order may be allocated to a
dealer or underwriter that has provided research or other services as discussed
below.
In
placing portfolio transactions, the Adviser will seek best execution. The full
range and quality of services available will be considered in making these
determinations, such as the size of the order, the difficulty of execution, the
operational facilities of the Adviser involved, the Adviser’s risk in
positioning a block of securities and other factors. The Adviser does not engage
in soft dollar arrangements with any broker dealers.
Investment
decisions for the Fund are made independently from those of other client
accounts or mutual funds managed or advised by the Adviser. Nevertheless, it is
possible that at times identical securities will be acceptable for both the Fund
and one or more of such client accounts or mutual funds. In such event, the
position of the Fund
and
such client account(s) or mutual funds in the same issuer may vary and the
length of time that each may choose to hold its investment in the same issuer
may likewise vary. However, to the extent any of these client accounts or mutual
funds seek to acquire the same security as the Fund at the same time, the Fund
may not be able to acquire as large a portion of such security as it desires, or
it may have to pay a higher price or obtain a lower yield for such security.
Similarly, the Fund may not be able to obtain as high a price for, or as large
an execution of, an order to sell any particular security at the same time. If
one or more of such client accounts or mutual funds simultaneously purchases or
sells the same security that the Fund is purchasing or selling, each day’s
transactions in such security will be allocated between the Fund and all such
client accounts or mutual funds in a manner deemed equitable by the Adviser,
taking into account the respective sizes of the accounts and the amount of cash
available for investment, the investment objective of the account, and the ease
with which a client’s appropriate amount can be bought, as well as the liquidity
and volatility of the account and the urgency involved in making an investment
decision for the client. It is recognized that in some cases this system could
have a detrimental effect on the price or value of the security insofar as the
Fund is concerned. In other cases, however, it is believed that the ability of
the Fund to participate in volume transactions may produce better executions for
the Fund.
The
following table describes the brokerage commissions paid by the Fund during the
fiscal years indicated.
|
|
|
|
|
| |
|
| Brokerage
Commissions |
| Fiscal
year ended June 30, 2022 |
$129,402 |
| Fiscal
year ended June 30, 2021 |
$128,842 |
| Fiscal
year ended June 30, 2020 |
$142,758 |
As
of June 30, 2022, the Fund owned equity securities of its regular broker/dealers
or their parent companies as follows:
|
|
|
|
|
|
|
|
|
|
|
| |
| Entity |
Value
of Holdings |
| J.P.
Morgan Chase |
$79,840 |
| Wells
Fargo |
$38,387 |
| Morgan
Stanley & Co. Inc. |
$33,238 |
For
the fiscal year ended June 30, 2022, the Fund did not pay any commissions on
brokerage transactions directed to brokers pursuant to an agreement or
understanding whereby the broker provides research or other brokerage services
to the Adviser; and, the Fund did not pay any brokerage commissions to any
registered broker-dealer affiliates of the Fund, the Adviser, or the
Distributor.
GENERAL
INFORMATION
The
Declaration of Trust permits the Trustees to issue an unlimited number of full
and fractional shares of beneficial interest and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in the Fund. Each share represents an interest
in the Fund proportionately equal to the interest of each other share. Upon the
Fund’s liquidation, all shareholders would share pro rata in the net assets of
the Fund available for distribution to shareholders.
With
respect to the Fund, the Trust may offer more than one class of shares. The
Trust reserves the right to create and issue additional series or classes. Each
share of a series or class represents an equal proportionate interest in that
series or class with each other share of that series or class. The Fund offers
three share classes – Super Institutional Class, Institutional Class and Advisor
Class shares.
The
Trust is not required to hold annual meetings of shareholders but will hold
special meetings of shareholders of a series or class when, in the judgment of
the Trustees, it is necessary or desirable to submit matters for a shareholder
vote. Shareholders have, under certain circumstances, the right to communicate
with other shareholders in connection with requesting a meeting of shareholders
for the purpose of removing one or more Trustees. Shareholders also have, in
certain circumstances, the right to remove one or more Trustees without a
meeting. No material amendment may be made to the Declaration of Trust without
the affirmative vote of the holders of a majority of the outstanding shares of
each portfolio affected by the amendment. The Declaration of
Trust
provides that, at any meeting of shareholders of the Trust or of any series or
class, a Shareholder Servicing Agent may vote any shares as to which such
Shareholder Servicing Agent is the agent of record and which are not represented
in person or by proxy at the meeting, proportionately in accordance with the
votes cast by holders of all shares of that portfolio otherwise represented at
the meeting in person or by proxy as to which such Shareholder Servicing Agent
is the agent of record. Any shares so voted by a Shareholder Servicing Agent
will be deemed represented at the meeting for purposes of quorum requirements.
Any series or class may be terminated (i) upon the merger or consolidation
with, or the sale or disposition of all or substantially all of its assets to,
another entity, if approved by the vote of the holders of two thirds of its
outstanding shares, except that if the Board recommends such merger,
consolidation or sale or disposition of assets, the approval by vote of the
holders of a majority of the series’ or class’ outstanding shares will be
sufficient, or (ii) by the vote of the holders of a majority of its
outstanding shares, or (iii) by the Board by written notice to the series’
or class’ shareholders. Unless each series and class is so terminated, the Trust
will continue indefinitely.
The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The
Declaration of Trust does not require the issuance of stock certificates. If
stock certificates are issued, they must be returned by the registered owners
prior to the transfer or redemption of shares represented by such
certificates.
Rule
18f-2 under the 1940 Act provides that as to any investment company which has
two or more series outstanding and as to any matter required to be submitted to
shareholder vote, such matter is not deemed to have been effectively acted upon
unless approved by the holders of a “majority” (as defined in the Rule) of the
voting securities of each series affected by the matter. Such separate voting
requirements do not apply to the election of Trustees or the ratification of the
selection of accountants. The Rule contains special provisions for cases in
which an advisory contract is approved by one or more, but not all, series. A
change in investment policy may go into effect as to one or more series whose
holders so approve the change even though the required vote is not obtained as
to the holders of other affected series.
ADDITIONAL
PURCHASE AND REDEMPTION INFORMATION
The
information provided below supplements the information contained in the
Prospectus regarding the purchase and redemption of Fund shares.
How
to Buy Shares
You
may purchase shares of the Fund from securities brokers, dealers or financial
intermediaries (collectively, “Financial Intermediaries”). Investors should
contact their Financial Intermediary directly for appropriate instructions, as
well as information pertaining to accounts and any service or transaction fees
that may be charged. The Fund may enter into arrangements with certain Financial
Intermediaries whereby such Financial Intermediaries are authorized to accept
your order on behalf of the Fund. If you transmit your order to these Financial
Intermediaries before the close of regular trading (generally 4:00 p.m., Eastern
Time) on a day that the New York Stock Exchange (the “NYSE”) is open for
business, shares will be purchased at the appropriate per share price next
computed after it is received by the Financial Intermediary. Investors should
check with their Financial Intermediary to determine if it participates in these
arrangements.
The
public offering price of Fund shares is the NAV per share. Shares are purchased
at the public offering price next determined after the Transfer Agent receives
your order in good order (i.e.,
the purchase request includes the name of the Fund; the dollar amount of shares
to be purchased; your account application or investment stub; and a check
payable to Fulcrum Diversified Absolute Return Fund. In most cases, in order to
receive that day’s public offering price, the Transfer Agent must receive your
order in good order before the close of regular trading on the NYSE, normally
4:00 p.m., Eastern Time.
The
Trust reserves the right in its sole discretion (i) to suspend the
continued offering of the Fund’s shares and (ii) to reject purchase orders
in whole or in part when in the judgment of the Adviser or the Distributor such
rejection is in the best interest of the Fund. The Adviser has the right to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts or under circumstances where certain economies can be
achieved in sales of the Fund’s shares.
In
addition to cash purchases, Fund shares may be purchased by tendering payment
in-kind in the form of shares of stock, bonds or other securities. Any
securities used to buy Fund shares must be readily marketable, their acquisition
consistent with the Fund’s objective and otherwise acceptable to the Adviser and
the Board.
How
to Sell Shares and Delivery of Redemption Proceeds
You
can sell your Fund shares any day the NYSE is open for regular trading, either
directly to the Fund or through your Financial Intermediary.
The
Fund typically sends the redemption proceeds on the next business day (a day
when the NYSE is open for normal business) after the redemption request is
received in good order and prior to market close, regardless of whether the
redemption proceeds are sent via check, wire, or ACH transfer. While not
expected, payment of redemption proceeds may take up to seven days. As
authorized by SEC rules, the Fund may suspend the right of redemption or
postpone the date of payment during any period when (a) trading on the NYSE
is restricted as determined by the SEC or the NYSE is closed for other than
weekends and holidays; (b) an emergency exists as determined by the SEC
making disposal of portfolio securities or valuation of net assets of the Fund
not reasonably practicable; or (c) for such other period as the SEC may
permit for the protection of the Fund’s shareholders.
The
value of shares on redemption or repurchase may be more or less than the
investor’s cost, depending upon the market value of the Fund’s portfolio
securities at the time of redemption or repurchase.
Telephone
Redemptions
Shareholders
with telephone transaction privileges established on their account may redeem
Fund shares by telephone. Upon receipt of any instructions or inquiries by
telephone from the shareholder, the Fund or its authorized agents may carry out
the instructions and/or respond to the inquiry consistent with the shareholder’s
previously established account service options. For joint accounts, instructions
or inquiries from either party will be carried out without prior notice to the
other account owners. In acting upon telephone instructions, the Fund and its
agents use procedures that are reasonably designed to ensure that such
instructions are genuine. These include recording all telephone calls, requiring
pertinent information about the account and sending written confirmation of each
transaction to the registered owner.
Fund
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If Fund Services fails to employ
reasonable procedures, the Fund and Fund Services may be liable for any losses
due to unauthorized or fraudulent instructions. If these procedures are
followed, however, to the extent permitted by applicable law, neither the Fund
nor its agents will be liable for any loss, liability, cost or expense arising
out of any redemption request, including any fraudulent or unauthorized request.
For additional information, contact Fund Services.
Redemptions
In-Kind
The
Fund has reserved the right to pay the redemption price of its shares, either
totally or partially, by a distribution in-kind of portfolio securities (instead
of cash). The securities so distributed would be valued at the same amount as
that assigned to them in calculating the NAV per share for the shares being
sold. If a shareholder receives a distribution in-kind, the shareholder could
incur brokerage or other charges in converting the securities to
cash.
In
the unlikely event the Fund were to elect to make an in-kind redemption, the
Fund expects that it would follow the normal protocol of making such
distribution by way of a pro rata distribution based on its entire portfolio. If
the Fund held illiquid securities, such distribution may contain a pro rata
portion of such illiquid securities or the Fund may determine, based on a
materiality assessment, not to include illiquid securities in the in-kind
redemption.
The Fund does not anticipate that it would ever selectively distribute a greater
than pro rata portion of any illiquid securities to satisfy a redemption
request. If such securities are included in the distribution, shareholders may
not be able to liquidate such securities and may be required to hold such
securities indefinitely. Shareholders’ ability to liquidate such securities
distributed in-kind may be restricted by resale limitations or substantial
restrictions on transfer imposed by the issuers of the securities or by law.
Shareholders may only be able to liquidate such securities distributed in-kind
at a substantial discount from their value, and there may be higher brokerage
costs associated with any subsequent disposition of these securities by the
recipient.
DETERMINATION
OF SHARE PRICE
The
NAV of the Fund is determined as of the close of regular trading on the NYSE
(generally 4:00 p.m., Eastern Time), each day the NYSE is open for trading. The
NYSE annually announces the days on which it will not be open for trading. It is
expected that the NYSE will not be open for trading on the following holidays:
New Year’s Day, Martin Luther King, Jr. Day, Washington’s Birthday/Presidents’
Day, Good Friday, Memorial Day, Juneteenth National Independence Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
NAV
per Fund share is computed by dividing the value of the net assets of the Fund
(i.e., the value of its total assets less total liabilities) by the total number
of Fund shares outstanding, rounded to the nearest cent. Expenses and fees,
including the management fees, are accrued daily and taken into account for
purposes of determining net asset value. The NAV of the Fund is calculated by
the Custodian and determined at the close of the regular trading session on the
New York Stock Exchange (the “NYSE”) (ordinarily 4:00 p.m. Eastern time) on each
day that such exchange is open, provided that fixed-income assets may be valued
as of the announced closing time for trading in fixed-income instruments on any
day that the Securities Industry and Financial Markets Association (“SIFMA”)
announces an early closing time.
In
calculating the Fund’s NAV per Fund share, the Fund’s investments are valued
using readily available market quotations, which generally means a reliable
valuation obtained from an exchange or other market, or fair value as determined
by an independent pricing service and evaluated by the Adviser. In the case of
shares of other funds that are not traded on an exchange, a market valuation
means such fund’s published NAV per share. The Adviser may use various pricing
services when necessary, or discontinue the use of any pricing service, as
approved by the Board, from time to time. Any assets or liabilities denominated
in currencies other than the U.S. dollar are converted into U.S. dollars at the
current market rates on the date of valuation as quoted by one or more
sources.
Securities
primarily traded in the NASDAQ Global Market®
for which market quotations are readily available shall be valued using the
NASDAQ®
Official Closing Price (“NOCP”). If the NOCP is not available, such securities
shall be valued at the last sale price on the day of valuation, or if there has
been no sale on such day, at the mean between the bid and asked prices. OTC
securities which are not traded in the NASDAQ Global Market®
shall be valued at the most recent sales price. Securities and assets for which
market quotations are not readily available (including restricted securities
which are subject to limitations as to their sale) are valued at fair value as
determined in good faith under procedures approved by or under the direction of
the Board.
Short-term
debt obligations with remaining maturities in excess of 60 days are valued at
current market prices.
The
Fund’s securities, including ADRs, EDRs and GDRs, which are traded on securities
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any reported sales, at the mean between the last
available bid and asked price. Securities that are traded on more than one
exchange are valued on the exchange determined by the Adviser to be the primary
market.
In
the case of foreign securities, the occurrence of certain events after the close
of foreign markets, but prior to the time the Fund’s NAV is calculated (such as
a significant surge or decline in the U.S. or other markets) often will result
in an adjustment to the trading prices of foreign securities when foreign
markets open on the following business day. If such events occur, the Fund will
value foreign securities at fair value, taking into account such events, in
calculating the NAV. In such cases, use of fair valuation can reduce an
investor’s ability to seek to profit by estimating the Fund’s NAV in advance of
the time the NAV is calculated. The Adviser anticipates that
the
Fund’s portfolio holdings will be fair valued only if market quotations for
those holdings are considered unreliable or are unavailable.
An
option that is written or purchased by the Fund shall be valued using composite
pricing via the National Best Bid and Offer quotes. Composite pricing looks at
the last trade on the exchange where the option is traded. If there are no
trades for an option on a given business day, as of closing, the Fund will value
the option at the mean of the highest bid price and lowest ask price across the
exchanges where the option is traded. For options where market quotations are
not readily available, fair value shall be determined by the Fund’s Adviser with
oversight by the Board.
All
other assets of the Fund are valued in such manner as the Board in good faith
deems appropriate to reflect their fair value.
DISTRIBUTIONS
AND TAX INFORMATION
Distributions
Dividends
from net investment income and distributions from net profits from the sale of
securities are generally made annually. Also, the Fund typically distributes any
undistributed net investment income on or about December 31 of each year. Any
net capital gains realized through the period ended October 31 of each year will
also be distributed by December 31 of each year.
Each
distribution by the Fund is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, the Fund will issue to
each shareholder a statement of the federal income tax status of all
distributions.
Tax
Information
The
following is only a summary of certain additional U.S. federal income tax
considerations generally affecting the Fund and its shareholders that is
intended to supplement the discussion contained in the Fund’s prospectus. No
attempt is made to present a detailed explanation of the tax treatment of the
Fund or its shareholders, and the discussion here and in the Fund’s prospectus
is not intended as a substitute for careful tax planning.
The
following general discussion of certain federal income tax consequences is based
on the Code and the regulations issued thereunder as in effect on the date of
this SAI. New legislation, as well as administrative changes or court decisions,
may significantly change the conclusions expressed herein, and may have a
retroactive effect with respect to the transactions contemplated
herein.
Qualification
as a Regulated Investment Company. The
Fund has elected, and intends to qualify each year, to be treated as a regulated
investment company (“RIC”) under Subchapter M of the Code. To qualify as a RIC,
the Fund must, among other things: (a) derive at least 90% of its gross income
in each taxable year from dividends, interest, payments with respect to certain
securities loans, and gains from the sale or other disposition of stock or
securities or foreign currencies, or other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to
its business of investing in such stock, securities or currencies, and net
income derived from interests in “qualified publicly traded partnerships”
(i.e.,
partnerships that are traded on an established securities market or tradable on
a secondary market, other than partnerships that derive 90% of their income from
interest, dividends, capital gains, and other traditionally permitted mutual
fund income); and (b) diversify its holdings so that, at the end of each quarter
of the Fund’s taxable year, (i) at least 50% of the market value of the Fund’s
assets is represented by cash, securities of other RICs, U.S. government
securities and other securities, with such other securities limited, in respect
of any one issuer, to an amount not greater than 5% of the Fund’s assets and not
greater than 10% of the outstanding voting securities of such issuer and (ii)
not more than 25% of the value of its assets is invested,
including
through corporations in which the Fund owns a 20% or more voting stock interest,
in the securities (other than U.S. government securities or securities of RICs)
of any one issuer, in the securities (other than the securities of other RICs)
of any two or more issuers that the Fund controls and that are determined to be
engaged in the same or similar trades or businesses or related trades or
businesses, or in the securities of one or more “qualified publicly traded
partnerships.”
As
a RIC, the Fund will not be subject to U.S. federal income tax on the portion of
its taxable investment income and capital gains that it timely distributes to
its shareholders, provided that it satisfies a minimum distribution requirement.
To satisfy the minimum distribution requirement, the Fund must distribute to its
shareholders at least the sum of (i) 90% of its “investment company taxable
income” (i.e.,
generally, its taxable income other than its net capital gain, computed without
regard to the dividends paid deduction, plus or minus certain other
adjustments), and (ii) 90% of its net tax-exempt income for the taxable year.
The Fund will be subject to income tax at the regular corporate tax rate on any
taxable income or gains that it does not distribute to its shareholders. The
Fund’s policy is to distribute to its shareholders all of its investment company
taxable income (computed without regard to the dividends paid deduction) and any
net realized long-term capital gains for each fiscal year in a manner that
complies with the distribution requirements of the Code, so that the Fund will
not be subject to any federal income or excise taxes. However, the Fund can give
no assurances that distributions will be sufficient to eliminate all taxes.
If,
for any taxable year, the Fund were to fail to qualify as a RIC under the Code
or were to fail to meet the distribution requirement, it would be taxed in the
same manner as an ordinary corporation at the corporate tax rate (currently 21%)
and distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, in the event of a failure to qualify,
the Fund’s distributions, to the extent derived from the Fund’s current and
accumulated earnings and profits, including any distributions of net long-term
capital gains, would be taxable to shareholders as ordinary dividend income for
federal income tax purposes. However, such dividends would be eligible, subject
to any generally applicable limitations, (i) to be treated as qualified dividend
income in the case of non-corporate shareholders and (ii) for the dividends
received deduction in the case of corporate shareholders. Moreover, if the Fund
were to fail to qualify as a RIC in any year, it would be required to pay out
its earnings and profits accumulated in that year in order to qualify again as a
RIC. Under certain circumstances, the Fund may cure a failure to qualify as a
RIC, but in order to do so the Fund may incur significant Fund-level taxes and
may be forced to dispose of certain assets. If the Fund failed to qualify as a
RIC for a period greater than two taxable years, the Fund would generally be
required to recognize, and would generally be subject to a corporate level tax
with respect to, any net built-in gains with respect to certain of its assets
upon a disposition of such assets within five years of qualifying as a RIC in a
subsequent year.
The
Fund may elect to treat part or all of any “qualified late year loss” as if it
had been incurred in the succeeding taxable year in determining the Fund’s
taxable income, net capital gain, net short-term capital gain, and earnings and
profits. The effect of this election is to treat any such “qualified late year
loss” as if it had been incurred in the succeeding taxable year in
characterizing Fund distributions for any calendar year. A “qualified late year
loss” generally includes net capital loss, net long-term capital loss, or net
short-term capital loss incurred after October 31 of the current taxable year
(commonly referred to as “post-October losses”) and certain other late-year
losses.
If
the Fund has a “net capital loss” (that is, capital losses in excess of capital
gains) for a taxable year the excess of the Fund’s net short-term capital losses
over its net long-term capital gains is treated as a short-term capital loss
arising on the first day of the Fund's next taxable year, and the excess (if
any) of the Fund’s net long-term capital losses over its net short-term capital
gains is treated as a long-term capital loss arising on the first day of the
Fund’s next taxable year. Those net capital losses can be carried forward
indefinitely to offset capital gains, if any, in years following the year of the
loss. Under certain circumstances, the Fund may elect to treat certain losses as
though they were incurred on the first day of the taxable year following the
taxable year in which they were actually incurred.
Federal
Excise Tax. The
Fund will be subject to a nondeductible 4% federal excise tax to the extent it
fails to distribute by the end of the calendar year at least the sum of (i) 98%
of its ordinary income for such year, (ii) 98.2% of its capital gain net income
(the excess of short- and long-term capital gains over short- and long-term
capital losses) for the one-year period ending on October 31 of such year, and
(iii) any retained amount from the prior calendar year on which the Fund or
shareholders paid no federal income tax. The Fund intends to make sufficient
distributions to avoid liability for federal excise tax, but can make no
assurances that such tax will be completely eliminated.
Distributions
to Shareholders. The
Fund receives income generally in the form of dividends and interest on
investments. This income, plus net short-term capital gains, if any, less
expenses incurred in the operation of the Fund, constitutes the Fund’s net
investment income from which dividends may be paid to you. Net realized capital
gains for a fiscal period are computed by taking into account any capital loss
carryforward of the Fund. Taxable dividends and distributions are subject to tax
whether you receive them in cash or in additional shares.
Distributions
of net investment income, including distributions of net short-term capital
gains are taxable to shareholders as ordinary income or, for non-corporate
shareholders, as qualified dividend income. Distributions from the Fund’s net
capital gain (i.e.,
the excess of the Fund’s net long-term capital gains over its net short-term
capital losses) are taxable to shareholders as long-term capital gains
regardless of the length of time shares have been held. In general, to the
extent that the Fund receives qualified dividend income, the Fund may report a
portion of the dividends it pays as qualified dividend income, which for
non-corporate shareholders is subject to U.S. federal income tax rates of up to
20%. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (i.e.,
foreign corporations incorporated in a possession of the United States or in
certain countries with a comprehensive tax treaty with the United States, and
foreign corporations if the stock with respect to which the dividend was paid is
readily tradable on an established securities market in the United States). A
dividend will not be treated as qualified dividend income to the extent that (i)
the shareholder has not held the shares on which the dividend was paid for more
than 60 days during the 121-day period that begins on the date that is 60 days
before the date on which the shares become “ex-dividend” with respect to such
dividend, (ii) the shareholder is under an obligation (whether pursuant to a
short sale or otherwise) to make related payments with respect to substantially
similar or related property, or (iii) the shareholder elects to treat such
dividend as investment income under section 163(d)(4)(B) of the Code. The
holding period requirements described in this paragraph apply to shareholders’
investments in the Fund and to the Fund’s investments in underlying
dividend-paying stocks. Distributions received by the Fund from another RIC will
be treated as qualified dividend income only to the extent so reported by such
other RIC. If 95% or more of the Fund’s gross income (calculated without taking
into account net capital gain derived from sales or other dispositions of stock
or securities) consists of qualified dividend income, the Fund may report all
distributions of such income as qualified dividend income. Certain of the Fund’s
investment strategy may limit its ability to report distributions eligible to be
treated as qualified dividend income.
Dividends
paid by the Fund that are attributable to dividends received by the Fund from
domestic corporations may qualify for the dividends received deduction for
corporate shareholders of the Fund.
Certain of the Fund’s investment strategies may limit its ability to make
distributions eligible for the dividends received deduction.
There
is no requirement that the Fund take into consideration any tax implications
when implementing its investment strategy. If the Fund’s distributions exceed
its earnings and profits, all or a portion of the distributions may be treated
as a return of capital to shareholders. A return of capital distribution
generally will not be taxable but will reduce each shareholder’s tax basis,
resulting in a higher capital gain or lower capital loss when the shares on
which the distribution was received are sold. After a shareholder’s tax basis in
the shares has been reduced to zero, distributions in excess of earnings and
profits will be treated as gain from the sale of the shareholder’s shares.
Each
shareholder who receives taxable distributions in the form of additional shares
will be treated for U.S. federal income tax purposes as if receiving a
distribution in an amount equal to the amount of money that the shareholder
would have received if he or she had instead elected to receive cash
distributions. The shareholder’s aggregate tax basis in shares of the Fund will
be increased by such amount.
A
dividend or distribution received shortly after the purchase of shares reduces
the NAV of the shares by the amount of the dividend or distribution and,
although in effect a return of capital, will be taxable to the shareholder. If
the NAV of shares were reduced below the shareholder's cost by dividends or
distributions representing gains realized on sales of securities, such dividends
or distributions would be a return of investment though taxable to the
shareholder in the same manner as other dividends or distributions. This is
known as “buying a dividend” and should be avoided by taxable
investors.
A
dividend or other distribution by the Fund is generally treated under the Code
as received by the shareholders at the time the dividend or distribution is
made. However, distributions declared in October, November or December to
shareholders of record on a date in such a month and paid the following January
are taxable as if received on December 31. Under this rule, therefore, a
shareholder may be taxed in one year on dividends or distributions actually
received in January of the following year.
Shareholders
should note that the Fund may make taxable distributions of income and capital
gains even when share values have declined.
The
Fund (or its administrative agent) will inform you of the amount of your
ordinary income dividends, qualified dividend income and capital gain
distributions, if any, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held your shares for a full year, the Fund may designate and distribute to
you, as ordinary income, qualified dividend income or capital gain, a percentage
of income that is not equal to the actual amount of such income earned during
the period of your investment in the Fund.
A
RIC that receives business interest income may pass through its net business
interest income for purposes of the tax rules applicable to the interest expense
limitations under Section 163(j) of the Code. A RIC’s total “Section 163(j)
Interest Dividend” for a tax year is limited to the excess of the RIC’s business
interest income over the sum of its business interest expense and its other
deductions properly allocable to its business interest income. A RIC may, in its
discretion, designate all or a portion of ordinary dividends as Section 163(j)
Interest Dividends, which would allow the recipient shareholder to treat the
designated portion of such dividends as interest income for purposes of
determining such shareholder’s interest expense deduction limitation under
Section 163(j). This can potentially increase the amount of a shareholder’s
interest expense deductible under Section 163(j). In general, to be eligible to
treat a Section 163(j) Interest Dividend as interest income, you must have held
your shares in the Fund for more than 180 days during the 361-day period
beginning on the date that is 180 days before the date on which the share
becomes ex-dividend with respect to such dividend. Section 163(j) Interest
Dividends, if so designated by the Fund, will be reported to your financial
intermediary or otherwise in accordance with the requirements specified by the
Internal Revenue Service (“IRS”).
Sales,
Exchanges or Redemptions. Any
gain or loss recognized on a sale, exchange or redemption of shares of the
Fund
by
a shareholder who hold Fund shares as a capital asset will generally, for
individual shareholders, be treated as a long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise will be treated
as a short-term capital gain or loss.
A
shareholder may recognize a taxable gain or loss on a redemption of Fund shares.
Any loss realized upon redemption of shares within six months from the date of
their purchase will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gains during such six
month period. Any loss realized upon a redemption may be disallowed under
certain wash sale rules to the extent shares of the Fund are purchased (through
reinvestment of distributions or otherwise) within 30 days before or after the
redemption.
A
3.8% tax generally applies to all or a portion of the net investment income of a
shareholder who is an individual and not a nonresident alien for federal income
tax purposes and who has adjusted gross income (subject to certain adjustments)
that exceeds a threshold amount ($250,000 if married filing jointly or if
considered a “surviving spouse” for federal income tax purposes, $125,000 if
married filing separately, and $200,000 in other cases). This 3.8% tax also
applies to all or a portion of the undistributed net investment income of
certain shareholders that are estates and trusts. For these purposes, dividends,
interest and certain capital gains (among other categories of income) are
generally taken into account in computing a shareholder’s net investment income.
Under
the Code, the Fund will be required to report to the IRS all distributions of
taxable income and capital gains as well as gross proceeds from the redemption
of Fund shares, except in the case of exempt recipient shareholders, which
includes most corporations. The Fund will also be required to report tax basis
information for such shares and indicate whether these shares had a short-term
or long-term holding period. If a shareholder has a different basis for
different shares of the Fund in the same account (e.g.,
if a shareholder purchased shares in the same account at different times for
different prices), the Fund calculates the basis of the shares sold using its
default
method
unless the shareholder has properly elected to use a different method. The
Fund’s default method for calculating basis is first-in, first-out (“FIFO”). A
shareholder may elect, on an account-by-account basis, to use a method other
than FIFO by following procedures established by the Fund or its administrative
agent. If such an election is made on or prior to the date of the first
redemption of shares in the account and on or prior to the date that is one year
after the shareholder receives notice of the Fund’s default method, the new
election will generally apply as if the FIFO method had never been in effect for
such account. Shareholders should consult their tax advisers concerning the tax
consequences of applying Fund’s default method or electing another method of
basis calculation. Shareholders also should carefully review any cost basis
information provided to them and make any additional basis, holding period or
other adjustments that are required when reporting these amounts on their
federal income tax returns.
Tax
Treatment of Complex Securities.
The Fund may invest in complex securities and these investments may be subject
to numerous special and complex tax rules. These rules could affect the Fund’s
ability to qualify as a RIC, affect whether gains and losses recognized by the
Fund are treated as ordinary income or capital gain, accelerate the recognition
of income to the Fund and/or defer the Fund’s ability to recognize losses, and,
in limited cases, subject the Fund to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the amount,
timing or character of the income distributed to you by the Fund.
The
Fund may invest in, or hold, debt obligations that are in the lowest rating
categories or that are unrated, including debt obligations of issuers not
currently paying interest or that are in default. Investments in debt
obligations that are at risk of or are in default present special tax issues for
the Fund. Federal income tax rules are not entirely clear about issues such as
when the Fund may cease to accrue interest, original issue discount or market
discount, when and to what extent deductions may be taken for bad debts or
worthless securities, how payments received on obligations in default should be
allocated between principal and interest and whether certain exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the Fund, in the event it invests in or holds such securities, in
order to seek to ensure that it distributes sufficient income to preserve its
status as a RIC and does not become subject to U.S. federal income or excise
tax.
Any
security or other position entered into or held by the Fund that substantially
diminishes the Fund’s risk of loss from any other position held by the Fund may
constitute a “straddle” for federal income tax purposes. In general, straddles
are subject to certain rules that may affect the amount, character and timing of
the Fund’s gains and losses with respect to straddle positions by requiring,
among other things, that the loss realized on disposition of one position of a
straddle be deferred until gain is realized on disposition of the offsetting
position; that the Fund’s holding period in certain straddle positions not begin
until the straddle is terminated (possibly resulting in the gain being treated
as short-term capital gain rather than long-term capital gain); and that losses
recognized with respect to certain straddle positions, which would otherwise
constitute short-term capital losses, be treated as long-term capital losses.
Different elections are available to the Fund that may mitigate the effects of
the straddle rules.
The
Fund is required for federal income tax purposes to mark-to-market and recognize
as income for each taxable year its net unrealized gains and losses on certain
futures and options contracts that are subject to Section 1256 of the Code
(“Section 1256 Contracts”) as of the end of the year, as well as those actually
realized during the year. Gain or loss from Section 1256 Contracts on
broad-based indexes required to be marked-to-market will be 60% long-term and
40% short-term capital gain or loss. Application of this rule may alter the
timing and character of distributions to shareholders. The Fund may be required
to defer the recognition of losses on Section 1256 Contracts to the extent of
any unrecognized gains on offsetting positions held by such Fund. These
provisions may also require the Fund to mark-to-market certain types of
positions in its portfolio (i.e., treat them as if they were closed out), which
may cause the Fund to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy the Distribution Requirement and
for avoiding the excise tax discussed above. Accordingly, in order to avoid
certain income and excise taxes, the Fund may be required to liquidate its
investments at a time when the investment adviser might not otherwise have
chosen to do so.
The
Fund’s transactions in foreign currencies and forward currency contracts will be
subject to special provisions of the Code that, among other things, may affect
the character of gains and losses realized by the Fund (i.e., may
affect
whether gains or losses are ordinary or capital), accelerate recognition of
income to the Fund and defer losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also may require the Fund to mark-to-market certain types of positions in its
portfolio (i.e., treat them as if they were closed out) which may cause the Fund
to recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the Distribution Requirement and for avoiding the
excise tax described above. The Fund intends to monitor its transactions,
intends to make the appropriate tax elections, and intends to make the
appropriate entries in their books and records when it acquires any foreign
currency or forward foreign currency contract in order to mitigate the effect of
these rules so as to prevent disqualification of the Fund as a RIC and minimize
the imposition of income and excise taxes. Accordingly, in order to avoid
certain income and excise taxes, the Fund may be required to liquidate its
investments at a time when the investment advisor might not otherwise have
chosen to do so.
The
U.S. Treasury Department has authority to issue regulations that would exclude
foreign currency gains from the Qualifying Income Test described above if such
gains are not directly related to the Fund’s business of investing in stock or
securities (or options and futures with respect to stock or securities).
Accordingly, regulations may be issued in the future that could treat some or
all of the Fund’s non-U.S. currency gains as non-qualifying income, thereby
potentially jeopardizing the Fund’s status as a RIC for all years to which the
regulations are applicable.
Any
market discount recognized on a bond is taxable as ordinary income. A market
discount bond is a bond acquired in the secondary market at a price below
redemption value or adjusted issue price if issued with original issue discount.
Absent an election by the Fund to include the market discount in income as it
accrues, gain on the Fund’s disposition of such an obligation will be treated as
ordinary income rather than capital gain to the extent of the accrued market
discount.
The
Fund may invest in U.S. REITs. Investments in REIT equity securities may require
the Fund to accrue and distribute income not yet received. To generate
sufficient cash to make the requisite distributions, the Fund may be required to
sell securities in its portfolio (including when it is not advantageous to do
so) that it otherwise would have continued to hold. The Fund’s investments in
REIT equity securities may at other times result in the Fund’s receipt of cash
in excess of the REIT’s earnings; if the Fund distributes these amounts, these
distributions could constitute a return of capital to shareholders for federal
income tax purposes. Dividends paid by a REIT, other than capital gain
distributions, will be taxable as ordinary income up to the amount of the REIT’s
current and accumulated earnings and profits. Capital gain dividends paid by a
REIT to the Fund will be treated as long-term capital gains by the Fund and, in
turn, may be distributed by the Fund to its shareholders as a capital gain
distribution. Dividends received by the Fund from a REIT generally will not
constitute qualified dividend income or qualify for the dividends received
deduction. If a REIT is operated in a manner such that it fails to qualify as a
REIT, an investment in the REIT would become subject to double taxation, meaning
the taxable income of the REIT would be subject to federal income tax at the
regular corporate rate without any deduction for dividends paid to shareholders
and the dividends would be taxable to shareholders as ordinary income (or
possibly as qualified dividend income) to the extent of the REIT’s current and
accumulated earnings and profits.
“Qualified
REIT dividends” (i.e.,
ordinary REIT dividends other than capital gain dividends and portions of REIT
dividends designated as qualified dividend income eligible for capital gain tax
rates) are eligible for a 20% deduction by non-corporate taxpayers. This
deduction, if allowed in full, equates to a maximum effective tax rate of 29.6%
(37% top rate applied to income after 20% deduction). Distributions by the Fund
to its shareholders that are attributable to qualified REIT dividends received
by the Fund and which the Fund properly reports as “section 199A dividends,” are
treated as “qualified REIT dividends” in the hands of non-corporate
shareholders. A section 199A dividend is treated as a qualified REIT dividend
only if the shareholder receiving such dividend holds the dividend-paying RIC
shares for at least 46 days of the 91-day period beginning 45 days before the
shares become ex-dividend, and is not under an obligation to make related
payments with respect to a position in substantially similar or related
property. The Fund is permitted to report such part of its dividends as section
199A dividends as are eligible, but is not required to do so.
REITs
in which the Fund invests often do not provide complete and final tax
information to the Fund until after the time that the Fund issues a tax
reporting statement. As a result, the Fund may at times find it necessary to
reclassify the amount and character of its distributions to you after it issues
your tax reporting statement. When such reclassification is necessary, the Fund
(or its administrative agent) will send you a corrected, final Form 1099-DIV to
reflect the reclassified information. If you receive a corrected Form 1099-DIV,
use the information on this corrected form, and not the information on the
previously issued tax reporting statement, in completing your tax
returns.
Certain
of the Fund’s investments when made directly (including commodity-related
investments and certain other non-security based derivatives) may generate
income that is not qualifying income for purposes of the 90% test described
above. The Fund’s investment in the Subsidiary is expected to provide the Fund
with exposure to the commodities markets within the limitations of the federal
tax requirements of Subchapter M of the Code. The “Subpart F” income (defined in
Section 951 of the Code to include passive income, including from
commodity-linked derivatives) of the Fund attributable to its investment in the
Subsidiary is “qualifying income” to the Fund to the extent that such income is
derived with respect to the Fund’s business of investing in stock, securities or
currencies. The Fund expects its “Subpart F” income attributable to its
investment in the Subsidiary to be treated as “qualifying income.” The Advisor
intends to conduct the Fund’s investments in the Subsidiary in a manner
consistent with the terms and conditions of applicable Code regulations, and
will monitor the Fund's investments in the Subsidiary to ensure that no more
than 25% of the Fund’s assets are invested in the Subsidiary.
To
the extent the Fund directly invests in commodity-linked derivative instruments
and other similar instruments it may be subject to the risk that such
instruments will not generate qualifying income and may compromise the Fund’s
ability to qualify as a RIC. The Fund may be unable to determine the percentage
of qualifying income it has derived for a taxable year until after year-end, may
generate more non-qualifying income than anticipated or may be unable to
generate qualifying income in a particular taxable year at levels sufficient to
limit its non-qualifying income to 10% of its gross income. If the Fund were to
fail to meet the qualifying income test for qualification as a RIC, it would be
taxed in the same manner as an ordinary corporation, and distributions to its
shareholders would not be deductible by the Fund in computing its taxable
income, unless certain relief provisions are available (which would generally
require the Fund to pay certain Fund-level taxes). In addition, the Fund may
determine not to make an investment that it otherwise would have made, or may
dispose of an investment it otherwise would have retained, in an effort to meet
the 90% qualifying income test described above.
A
U.S. person, including the Fund, who owns (directly or indirectly) 10% or more
of the total combined voting power of all classes of stock of 10% or more of the
total value of shares of all classes of stock of a foreign corporation is a
“United States Shareholder” for purposes of the controlled foreign corporation
(“CFC”) provisions of the Code. A CFC is a foreign corporation that, on any day
of its taxable year, is owned (directly, indirectly, or constructively) more
than 50% (measured by voting power or value) by U.S. Shareholders. The Fund
expects that the Subsidiary will be treated as a CFC and that, under the CFC
rules, the Fund will be treated as a “United States shareholder” of the
Subsidiary. As a “United States shareholder” of the Subsidiary, the Fund will be
required to include in its gross income the Subsidiary’s “Subpart F income”
(described below) and any global intangible low-taxed income (“GILTI”) for the
CFC’s taxable year ending within the Fund’s taxable year regardless of whether
corresponding cash amounts are distributed to the Fund in a given year. “Subpart
F income” generally includes interest, original issue discount, dividends, net
gains from the disposition of stocks or securities, receipts with respect to
securities loans and net payments received with respect to equity swaps and
similar derivatives. “Subpart F income” also includes the excess of gains over
losses from transactions (including futures, forward and similar transactions)
in any commodities. The “Subpart F income” of the Fund attributable to its
investment in the Subsidiary is “qualifying income” to the Fund for purposes of
the 90% test described above to the extent that such income is derived with
respect to such Fund’s business of investing in stock, securities or currencies.
GILTI generally includes the active operating profits of the CFC, reduced by a
deemed return on the tax basis of the CFC’s depreciable tangible
assets.
Subpart
F income and GILTI are treated as ordinary income, regardless of the character
of the CFC’s underlying income. Net losses incurred by a CFC during a tax year
do not flow through to the Fund and thus will not be available to offset income
or capital gain generated from the Fund’s other investments. In addition, net
losses
incurred
by a CFC during a tax year generally cannot be carried forward by the CFC to
offset gains realized by it in subsequent taxable years. To the extent the Fund
invests in the Subsidiary and recognizes “Subpart F” income or GILTI in excess
of actual cash distributions from the Subsidiary, if any, it may be required to
sell assets (including when it is not advantageous to do so) to generate the
cash necessary to distribute as dividends to its shareholders all of its income
and gains and therefore to eliminate any tax liability at the Fund level.
“Subpart F” income also includes the excess of gains over losses from
transactions (including futures, forward and other similar transactions) in
commodities.
The
Fund’s recognition of any “Subpart F” income or GILTI from an investment in the
Subsidiary will increase the Fund’s tax basis in the Subsidiary. Distributions
by the Subsidiary to the Fund, including in redemption of the Subsidiary’s
shares, will be tax free, to the extent of the Subsidiary’s previously
undistributed “Subpart F” income or GILTI, and will correspondingly reduce the
Fund’s tax basis in the Subsidiary, and any distributions in excess of the
Fund’s tax basis in the Subsidiary will be treated as realized gain. Any losses
with respect to the Fund’s shares of the Subsidiary will not be currently
recognized. The Fund’s investment in the Subsidiary will potentially have the
effect of accelerating the Fund’s recognition of income and causing its income
to be treated as ordinary income, regardless of the character of the
Subsidiary’s income. If a net loss is realized by the Subsidiary, such loss is
generally not available to offset the income earned by the Fund. In addition,
the net losses incurred during a taxable year by the Subsidiary cannot be
carried forward by the Subsidiary to offset gains realized by it in subsequent
taxable years. The Fund will not receive any credit in respect of any non-U.S.
tax borne by the Subsidiary.
In
general, each “U.S. Shareholder” is required to file IRS Form 5471 with its U.S.
federal income tax (or information) returns providing information about its
ownership of the CFC. In addition, a “U.S. Shareholder” may in certain
circumstances be required to report a disposition of shares in the CFC by
attaching IRS Form 5471 to its U.S. federal income tax (or information) return
that it would normally file for the taxable year in which the disposition
occurs. In general, these filing requirements will apply to investors of the
Fund if the investor is a U.S. person who owns directly, indirectly or
constructively (within the meaning of Sections 958(a) and (b) of the Code) 10%
or more of the total combined voting power of all classes of voting stock or 10%
or more of the total value of shares of all classes of stock of a foreign
corporation that is a CFC for an uninterrupted period of thirty (30) days or
more during any tax year of the foreign corporation, and who owned that stock on
the last day of that year.
A
foreign corporation, such as the Subsidiary, is generally not subject to U.S.
federal income taxation on a net income basis unless it is deemed to be engaged
in a U.S. trade or business. A foreign corporation generally will not be treated
as engaged in a U.S. trade or business if it only trades in stocks, securities
and certain commodities through a resident broker, commission agent, custodian
or other independent agent. The Fund expects that the Subsidiary will fall
within this exception and therefore will not be subject to tax on a net income
basis in the U.S. If, however, the Subsidiary were to engage in activities
outside of the exception, then the Subsidiary might be subject to tax on its net
income that is effectively connected with the conduct of a trade or business in
the U.S.
The
Subsidiary may be subject to a 30% withholding tax, even if it is not deemed to
be engaged in a U.S. trade or business, if it realizes certain types of income
from U.S. sources. The Fund does not expect the Subsidiary will earn income that
will be subject to the 30% withholding tax.
If
the Fund acquires any equity interest in certain foreign corporations (i) 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 (ii)
where at least 50% of the corporation’s assets (computed based on average fair
market value) either produce or are held for the production of passive income
(“passive foreign investment companies”), the Fund could be subject to U.S.
federal income tax and additional interest charges on “excess distributions”
received from such companies or on gain from the sale of stock in such
companies, even if all income or gain actually received by the Fund is timely
distributed to its shareholders. The Fund would not be able to pass through to
its shareholders any credit or deduction for such a tax. A “qualified electing
fund” election or a “mark to market” election may be available that would
ameliorate these adverse tax consequences, but such elections could require the
Fund to recognize taxable income or gain (subject to the distribution
requirements applicable to RICs, as described above)
without
the concurrent receipt of cash. Amounts included in income each year by the Fund
arising from a “qualified electing fund” election, will be “qualifying income”
for purposes of the 90% test (as described above) even if not distributed to the
Fund, if the Fund derives such income from its business of investing in stock,
securities or currencies. Gains from the sale of stock of passive foreign
investment companies may also be treated as ordinary income. In order for the
Fund to make a qualified electing fund election with respect to a passive
foreign investment company, the passive foreign investment company would have to
agree to provide certain tax information to the Fund on an annual basis, which
it might not agree to do. The Fund may limit and/or manage its holdings in
passive foreign investment companies to limit its tax liability or maximize its
return from these investments.
Foreign
Taxes.
The Fund may be subject to foreign withholding taxes on dividends and interest
earned with respect to securities of foreign corporations. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes in
some cases.
If
more than 50% of the value of the Fund’s total assets at the close of any
taxable year consist of stock or securities of foreign corporations, the Fund
may file an election with the IRS that may enable shareholders, in effect, to
receive either the benefit of a foreign tax credit, or a deduction from such
taxes, with respect to any foreign and U.S. possessions income taxes paid by the
Fund, subject to certain limitations. Pursuant to the election, the Fund will
treat those taxes as dividends paid to its shareholders. Each such shareholder
will be required to include a proportionate share of those taxes in gross income
as income received from a foreign source and must treat the amount so included
as if the shareholder had paid the foreign tax directly. The shareholder may
then either deduct the taxes deemed paid by him or her in computing his or her
taxable income or, alternatively, use the foregoing information in calculating
any foreign tax credit they may be entitled to use against the shareholders’
federal income tax. If the Fund makes the election, the Fund (or its
administrative agent) will report annually to their shareholders the respective
amounts per share of the Fund’s income from sources within, and taxes paid to,
foreign countries and U.S. possessions. If the Fund does not hold sufficient
foreign securities to meet the above threshold, then shareholders will not be
entitled to claim a credit or further deduction with respect to foreign taxes
paid by the Fund.
A
shareholder’s ability to claim a foreign tax credit or deduction in respect of
foreign taxes paid by the Fund may be subject to certain limitations imposed by
the Code, which may result in a shareholder not receiving a full credit or
deduction (if any) for the amount of such taxes. In particular, shareholders
must hold their Fund shares (without protection from risk of loss) on the
ex-dividend date and for at least 15 additional days during the 30-day period
surrounding the ex-dividend date to be eligible to claim a foreign tax credit
with respect to a given dividend. Shareholders who do not itemize on their
federal income tax returns may claim a credit (but no deduction) for such
foreign taxes. Even if the Fund were eligible to make such an election for a
given year, it may determine not to do so. Shareholders that are not subject to
U.S. federal income tax, and those who invest in the Fund through tax-advantaged
accounts (including those who invest through individual retirement accounts or
other tax-advantaged retirement plans), generally will receive no benefit from
any tax credit or deduction passed through by the Fund.
Tax
Shelter Reporting Regulations.
Under Treasury regulations, if a shareholder recognizes a loss with respect to
the Fund’s shares of $2 million or more for an individual shareholder, or $10
million or more for a corporate shareholder, in any single year (or certain
greater amounts over a combination of years), the shareholder must file with the
IRS a disclosure statement on IRS Form 8886. Direct shareholders of portfolio
securities are in many cases excepted from this reporting requirement, but under
current guidance, shareholders of a RIC are not excepted. A shareholder who
fails to make the required disclosure to the IRS may be subject to adverse tax
consequences, including substantial penalties. The fact that a loss is
reportable under these regulations does not affect the legal determination of
whether the taxpayer’s treatment of the loss is proper. Shareholders should
consult their tax advisors to determine the applicability of these regulations
in light of their individual circumstances.
Backup
Withholding.
Pursuant to the backup withholding provisions of the Code, distributions of any
taxable income and capital gains and proceeds from the redemption of Fund shares
may be subject to withholding of
federal
income tax at the current rate of 24% in the case of non-exempt shareholders who
fail to furnish the Fund with their taxpayer identification numbers or with
required certifications regarding their status under the federal income tax law,
or if the IRS notifies the Fund that such backup withholding is required. If the
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in additional shares, will be reduced by the
amounts required to be withheld. Corporate and other exempt shareholders should
provide the Fund with their taxpayer identification numbers or certify their
exempt status in order to avoid possible erroneous application of backup
withholding. Backup withholding is not an additional tax and any amounts
withheld may be credited against a shareholder’s ultimate federal income tax
liability if proper documentation is provided. The Fund reserves the right to
refuse to open an account for any person failing to provide a certified taxpayer
identification number.
The
foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts and estates.
Non-U.S.
Investors. Any
non-U.S.
investors in the Fund may be subject to U.S. withholding and estate tax and are
encouraged to consult their tax advisors prior to investing in the Fund. Foreign
shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) are generally subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from taxable ordinary income.
The Fund may, under certain circumstances, report all or a portion of a dividend
as an “interest-related dividend” or a “short-term capital gain dividend,” which
would generally be exempt from this 30% U.S. withholding tax, provided
certain other requirements are met. Short-term capital gain dividends received
by a nonresident alien individual who is present in the U.S. for a period or
periods aggregating 183 days or more during the taxable year are not exempt from
this 30% withholding tax. Gains realized by foreign shareholders from the sale
or other disposition of shares of the Fund generally are not subject to U.S.
taxation, unless the recipient is an individual who is physically present in the
U.S. for 183 days or more per year. Foreign shareholders who fail to provide an
applicable IRS form may be subject to backup withholding on certain payments
from the Fund. Backup withholding will not be applied to payments that are
subject to the 30% (or lower applicable treaty rate) withholding tax described
in this paragraph. Different tax consequences may result if the foreign
shareholder is engaged in a trade or business within the United States. In
addition, the tax consequences to a foreign shareholder entitled to claim the
benefits of a tax treaty may be different than those described
above.
Under
legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act),
the Fund is required to withhold 30% of certain ordinary dividends it pays to
shareholders that fail to meet prescribed information reporting or certification
requirements. In general, no such withholding will be required with respect to a
U.S. person or non-U.S. person that timely provides the certifications required
by the Fund or its agent on a valid IRS Form W-9 or applicable series of IRS
Form W-8, respectively. Shareholders potentially subject to withholding include
foreign financial institutions (“FFIs”), such as non-U.S. investment funds, and
non-financial foreign entities (“NFFEs”). To avoid withholding under FATCA, an
FFI generally must enter into an information sharing agreement with the IRS in
which it agrees to report certain identifying information (including name,
address, and taxpayer identification number) with respect to its U.S. account
holders (which, in the case of an entity shareholder, may include its direct and
indirect U.S. owners), and an NFFE generally must identify and provide other
required information to the Fund or other withholding agent regarding its U.S.
owners, if any. Such non-U.S. shareholders also may fall into certain exempt,
excepted or deemed compliant categories as established by regulations and other
guidance. A non-U.S. shareholder resident or doing business in a country that
has entered into an intergovernmental agreement with the U.S. to implement FATCA
will be exempt from FATCA withholding provided that the shareholder and the
applicable foreign government comply with the terms of the agreement. The Fund
will not pay any additional amounts in respect to any amounts withheld.
A
non-U.S. entity that invests in the Fund will need to provide the Fund with
documentation properly certifying the entity’s status under FATCA in order to
avoid FATCA withholding. Non-U.S. investors in the Fund should consult their tax
advisors in this regard.
Tax-Exempt
Shareholders.
Certain tax-exempt shareholders, including qualified pension plans, individual
retirement accounts, salary deferral arrangements, 401(k)s, and other tax-exempt
entities, generally are exempt from federal income taxation except with respect
to their unrelated business taxable income (“UBTI”). Tax-exempt entities are not
permitted to offset losses from one trade or business against the income or gain
of another trade or business. Certain net losses incurred prior to January 1,
2018 are permitted to offset gain and income created by an unrelated trade or
business, if otherwise available. Under current law, the Fund generally serves
to block UBTI from being realized by its tax-exempt shareholders. However,
notwithstanding the foregoing, a tax-exempt shareholder could realize UBTI by
virtue of an investment in the Fund where, for example: (i) the Fund invests in
residual interests of Real Estate Mortgage Investment Conduits (“REMICs”), (ii)
the Fund invests in a REIT that is a taxable mortgage pool (“TMP”) or that has a
subsidiary that is a TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are strongly
encouraged to consult their tax advisors regarding these issues.
The
Fund’s shares held in a tax-qualified retirement account will generally not be
subject to federal taxation on income and capital gains distributions from the
Fund until a shareholder begins receiving payments from their retirement
account. Because each shareholder’s tax situation is different, shareholders
should consult their tax advisors with specific reference to their own tax
situations, including their state, local, and foreign tax liabilities.
This
discussion and the related discussion in the Prospectus have been prepared by
Fund management. The information above is only a summary of some of the federal
income tax considerations generally affecting the Fund and its shareholders. No
attempt has been made to discuss individual tax consequences and this discussion
should not be construed as applicable to all shareholders’ tax situations.
Investors
should consult their own tax advisors to determine the suitability of the Fund
and the applicability of any federal, state, local or foreign taxation.
DISTRIBUTION
AGREEMENT
The
Trust has entered into a Distribution Agreement (the “Distribution Agreement”)
with Quasar Distributors, LLC, a wholly-owned broker-dealer subsidiary of
Foreside Financial Group, LLC, located at 111 E. Kilbourn, Suite 2200,
Milwaukee, Wisconsin 53202 (the “Distributor”), pursuant to which the
Distributor serves as the Fund’s distributor, provides certain administration
services and promotes and arranges for the sale of Fund shares. The offering of
the Fund’s shares is continuous. The Distributor, Fund Services, and the
Custodian are all affiliated companies. The Distributor is a registered
broker-dealer and member of FINRA.
The
Distribution Agreement has an initial term of up to two years and will continue
in effect only if such continuance is specifically approved at least annually by
the Board or by vote of a majority of the Fund’s outstanding voting securities
and, in either case, by a majority of the Trustees who are not parties to the
Distribution Agreement or “interested persons” (as defined in the 1940 Act) of
any such party. The Distribution Agreement is terminable without penalty by the
Trust on behalf of the Fund on 60 days’ written notice when authorized either by
a majority vote of the Fund’s shareholders or by vote of a majority of the
Board, including a majority of the Trustees who are not “interested persons” (as
defined in the 1940 Act) of the Trust, or by the Distributor on 60 days’ written
notice, and will automatically terminate in the event of its “assignment” (as
defined in the 1940 Act).
RULE
12b-1 DISTRIBUTION AND SERVICE PLAN
The
Fund has adopted a Distribution Plan pursuant to Rule 12b-1 (“12b-1 Plan”)
under the 1940 Act under which the Fund’s Advisor Class shares pay the
Distributor an amount which is accrued daily and paid quarterly, at an annual
rate of up to 0.25% of the average daily net assets of the Fund’s Advisor Class.
Amounts paid under the 12b-1 Plan, by the Fund, are paid to the Distributor to
reimburse it for costs of the services it provides and the expenses it bears in
the distribution of the Fund’s shares, including overhead and telephone
expenses; printing and distribution of prospectuses and reports used in
connection with the offering of the Fund’s shares to prospective
investors;
and preparation, printing and distribution of sales literature and advertising
materials. Such fee is paid to the Distributor each year only to the extent of
such costs and expenses of the Distributor under the 12b-1 Plan actually
incurred in that year. In addition, payments to the Distributor under the 12b-1
Plan reimburse the Distributor for payments it makes to selected dealers and
administrators which have entered into Service Agreements with the Distributor
of periodic fees for services provided to shareholders of the Fund. The services
provided by selected dealers pursuant to the 12b-1 Plan are primarily designed
to promote the sale of shares of the Fund and include the furnishing of office
space and equipment, telephone facilities, personnel and assistance to the Fund
in servicing such shareholders. The services provided by the administrators
pursuant to the 12b-1 Plan are designed to provide support services to the Fund
and include establishing and maintaining shareholders’ accounts and records,
processing purchase and redemption transactions, answering routine client
inquiries regarding the Fund and providing other services to the Fund as may be
required.
Under
the 12b-1 Plan, the Trustees will be furnished quarterly with information
detailing the amount of expenses paid under the Plan and the purposes for which
payments were made. The 12b-1 Plan may be terminated at any time by vote of a
majority of the Trustees of the Trust who are not interested persons.
Continuation of the 12b-1 Plan is considered by such Trustees no less frequently
than annually. With the exception of the Distributor and the Adviser, in their
capacities as the Fund’s principal underwriter and distribution coordinator,
respectively, no interested person has or had a direct or indirect financial
interest in the 12b-1 Plan or any related agreement.
While
there is no assurance that the expenditures of the Fund’s assets to finance
distribution of shares will have the anticipated results, the Board believes
there is a reasonable likelihood that one or more of such benefits will result,
and because the Board is in a position to monitor the distribution expenses, it
is able to determine the benefit of such expenditures in deciding whether to
continue the 12b-1 Plan.
Any
material amendment to the 12b-1 Plan must be approved by the Board, including a
majority of the Independent Trustees, or by a vote of a “majority” (as defined
in the 1940 Act) of the outstanding voting securities of the applicable class or
classes. The 12b-1 Plan may be terminated, with respect to a class or classes of
the Fund, without penalty at any time: (1) by vote of a majority of the
Board, including a majority of the Independent Trustees; or (2) by a vote
of a “majority” (as defined in the 1940 Act) of the outstanding voting
securities of the applicable class or classes.
SHAREHOLDING
SERVICING PLAN
Pursuant
to a Shareholder Service Plan adopted by the Trust, the Adviser is authorized to
provide, or arrange for others to provide personal shareholder services relating
to the servicing and maintenance of shareholder accounts not otherwise provided
to the Fund (“Shareholder Servicing Activities”). Under the Shareholder Service
Plan, the Adviser may enter into shareholder service agreements with securities
broker-dealers and other securities professionals (“Service Organizations”) who
provide Shareholder Servicing Activities for their clients invested in the Fund.
Shareholder Servicing Fees are accrued daily, payments are calculated monthly
and the Fund may make such payments monthly, at an annual rate of up to 0.10%
and up to 0.15% of the average daily net assets of the Fund’s Institutional and
Advisor Class shares, respectively. In the event that payments to the Adviser
during a fiscal year exceed the amounts expended (or accrued, in the case of
payments to Service Organizations) during such fiscal year, the Adviser will
promptly refund to the Fund any such excess amount.
Shareholder
Servicing Activities shall include one or more of the following:
(1) establishing and maintaining accounts and records relating for
shareholders of the Fund; (2) aggregating and processing orders involving
the shares of the Fund; (3) processing dividend and other distribution
payments from the Fund on behalf of shareholders; (4) providing information
to shareholders as to their ownership of Fund shares or about other aspects of
the operations of the Fund; (5) preparing tax reports or forms on behalf of
shareholders; (6) forwarding communications from the Fund to shareholders;
(7) assisting shareholders in changing the Fund’s records as to their
addresses, dividend options, account registrations or other data;
(8) providing sub-accounting with respect to shares beneficially owned by
shareholders, or the information to the Fund necessary for sub-accounting;
(9) responding to shareholder inquiries relating to the services performed;
(10) providing shareholders with a service that invests the assets of their
accounts in shares pursuant to specific or pre-authorized instructions; and
(11) providing
such other similar services as the Adviser may reasonably request to the extent
the Service Organization is permitted to do so under applicable statutes, rules
or regulations.
The
following table describes the shareholder servicing plan fees paid by the Fund
during the fiscal years indicated.
|
|
|
|
|
|
|
|
| |
|
| Shareholder
Servicing Plan |
| Fiscal
year ended June 30, 2022 |
$0 |
| Fiscal
year ended June 30, 2021 |
$0 |
| Fiscal
year ended June 30, 2020 |
$965 |
Sub-Accounting
Service Fees
In
addition to the fees that the Fund may pay to its Transfer Agent, the Board has
authorized the Fund to pay service fees, at the annual rate of up to 0.15% of
applicable average net assets or $20 per account, to intermediaries such as
banks, broker-dealers, financial advisers or other financial institutions for
sub‑administration, sub-transfer agency, recordkeeping (collectively,
“sub-accounting services”) and other shareholder services associated with
shareholders whose shares are held of record in omnibus, networked, or other
group accounts or accounts traded through registered securities clearing agents.
Unless the Fund has adopted a specific shareholder servicing plan, which is
broken out as a separate expense, a sub-accounting fee paid by the Fund is
included in the total amount of “Other Expenses” listed in the Fund’s Fees and
Expenses table in the Prospectus.
MARKETING
AND SUPPORT PAYMENTS
The
Adviser, out of its own resources and without additional cost to the Fund or its
shareholders, may provide additional cash payments or other compensation to
certain financial intermediaries who sell shares of the Fund. Such payments may
be divided into categories as follows:
Support
Payments.
Payments may be made by the Adviser to certain financial intermediaries in
connection with the eligibility of the Fund to be offered in certain programs
and/or in connection with meetings between the Fund’s representatives and
financial intermediaries and its sales representatives. Such meetings may be
held for various purposes, including providing education and training about the
Fund and other general financial topics to assist financial intermediaries’
sales representatives in making informed recommendations to, and decisions on
behalf of, their clients.
Entertainment,
Conferences and Events.
The Adviser also may pay cash or non-cash compensation to sales representatives
of financial intermediaries in the form of (i) occasional gifts;
(ii) occasional meals, tickets or other entertainments; and/or
(iii) sponsorship support for the financial intermediary’s client seminars
and cooperative advertising. In addition, the Adviser pays for exhibit space or
sponsorships at regional or national events of financial
intermediaries.
The
prospect of receiving, or the receipt of additional payments or other
compensation as described above by financial intermediaries may provide such
intermediaries and/or their salespersons with an incentive to favor sales of
shares of the Fund, and other mutual funds whose affiliates make similar
compensation available, over sale of shares of mutual funds (or non-mutual fund
investments) not making such payments. You may wish to take such payment
arrangements into account when considering and evaluating any recommendations
relating to the Fund shares.
ANTI-MONEY
LAUNDERING PROGRAM
The
Trust has established an Anti-Money Laundering Program (the “Program”) as
required by the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”). In
order to ensure compliance with this law, the Trust’s Program provides for the
development of internal practices, procedures and controls, designation of
anti-money laundering compliance officers, an ongoing training program and an
independent audit function to determine the effectiveness of the
Program.
Procedures
to implement the Program include, but are not limited to, determining that the
Fund’s Distributor and Transfer Agent have established proper anti-money
laundering procedures, reporting suspicious and/or fraudulent activity, checking
shareholder names against designated government lists, including Office of
Foreign Asset Control (“OFAC”), and a complete and thorough review of all new
opening account applications. The Trust will not transact business with any
person or legal entity whose identity and beneficial owners, if applicable,
cannot be adequately verified under the provisions of the USA PATRIOT
Act.
FINANCIAL
STATEMENTS
The
Fund’s annual report
to shareholders for the fiscal year ended June 30, 2022, is a separate document
and the financial statements, accompanying notes and report of the independent
registered public accounting firm appearing therein are incorporated by
reference into this SAI. You can obtain the annual report without charge on the
SEC’s website at www.sec.gov, upon written request, or request by telephone at
855-538-5278.
Appendix
A
DESCRIPTION
OF SECURITIES RATINGS
Short-Term
Credit Ratings
A
Standard
& Poor’s
short-term issue credit rating is a forward-looking opinion about the
creditworthiness of an obligor with respect to a specific financial obligation
having an original maturity of no more than 365 days. The following summarizes
the rating categories used by Standard & Poor’s for short-term
issues:
“A-1”
– A short-term obligation rated “A-1” is rated in the highest category and
indicates that the obligor’s capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor’s capacity to meet its
financial commitment on these obligations is extremely strong.
“A-2”
– A short-term obligation rated “A-2” is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor’s capacity to meet
its financial commitment on the obligation is satisfactory.
“A-3”
– A short-term obligation rated “A-3” exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
“B”
– A short-term obligation rated “B” is regarded as vulnerable and has
significant speculative characteristics. The obligor currently has the capacity
to meet its financial commitments; however, it faces major ongoing uncertainties
which could lead to the obligor’s inadequate capacity to meet its financial
commitments.
“C”
– A short-term obligation rated “C” is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
“D”
– A short-term obligation rated “D” is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the “D” rating category is used
when payments on an obligation are not made on the date due, unless Standard
& Poor’s believes that such payments will be made within any stated grace
period. However, any stated grace period longer than five business days will be
treated as five business days. The “D” rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action and where default on
an obligation is a virtual certainty, for example due to automatic stay
provisions. An obligation’s rating is lowered to “D” if it is subject to a
distressed exchange offer.
Local
Currency and Foreign Currency Risks – Standard & Poor’s issuer credit
ratings make a distinction between foreign currency ratings and local currency
ratings. An issuer’s foreign currency rating will differ from its local currency
rating when the obligor has a different capacity to meet its obligations
denominated in its local currency, vs. obligations denominated in a foreign
currency.
Moody’s
Investors Service (“Moody’s”)
short-term ratings are forward-looking opinions of the relative credit risks of
financial obligations with an original maturity of thirteen months or less and
reflect the likelihood of a default on contractually promised payments. Ratings
may be assigned to issuers, short-term programs or to individual short-term debt
instruments.
Moody’s
employs the following designations to indicate the relative repayment ability of
rated issuers:
“P-1”
– Issuers (or supporting institutions) rated Prime-1 have a superior ability to
repay short-term debt obligations.
“P-2”
– Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
“P-3”
– Issuers (or supporting institutions) rated Prime-3 have an acceptable ability
to repay short-term obligations.
“NP”
– Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
Fitch,
Inc. / Fitch Ratings Ltd. (“Fitch”)
short-term issuer or obligation rating is based in all cases on the short-term
vulnerability to default of the rated entity or security stream and relates to
the capacity to meet financial obligations in accordance with the documentation
governing the relevant obligation. Short-term ratings are assigned to
obligations whose initial maturity is viewed as “short-term” based on market
convention. Typically, this means up to 13 months for corporate, sovereign and
structured obligations, and up to 36 months for obligations in U.S. public
finance markets. The following summarizes the rating categories used by Fitch
for short-term obligations:
“F1”
– Securities possess the highest short-term credit quality. This designation
indicates the strongest intrinsic capacity for timely payment of financial
commitments; may have an added “+” to denote any exceptionally strong credit
feature.
“F2”
– Securities possess good short-term credit quality. This designation indicates
good intrinsic capacity for timely payment of financial
commitments.
“F3”
– Securities possess fair short-term credit quality. This designation indicates
that the intrinsic capacity for timely payment of financial commitments is
adequate.
“B”
– Securities possess speculative short-term credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
heightened vulnerability to near term adverse changes in financial and economic
conditions.
“C”
– Securities possess high short-term default risk. Default is a real
possibility.
“RD”
– Restricted default. Indicates an entity that has defaulted on one or more of
its financial commitments, although it continues to meet other financial
obligations. Typically applicable to entity ratings only.
“D”
– Default. Indicates a broad-based default event for an entity, or the default
of a short-term obligation.
The
DBRS®
Ratings Limited (“DBRS”)
short-term debt rating scale provides an opinion on the risk that an issuer will
not meet its short-term financial obligations in a timely manner. Ratings are
based on quantitative and qualitative considerations relevant to the issuer and
the relative ranking of claims. The R-1 and R-2 rating categories are further
denoted by the sub-categories “(high)”, “(middle)”, and “(low)”.
The
following summarizes the ratings used by DBRS for commercial paper and
short-term debt:
“R-1
(high)”
-
Short-term
debt rated “R-1 (high)” is of the highest credit quality. The capacity for the
payment of short-term financial obligations as they fall due is exceptionally
high. Unlikely to be adversely affected by future events.
“R-1
(middle)” – Short-term debt rated “R-1 (middle)” is of superior credit quality.
The capacity for the payment of short-term financial obligations as they fall
due is very high. Differs from “R-1 (high)” by a relatively modest degree.
Unlikely to be significantly vulnerable to future events.
“R-1
(low)” – Short-term debt rated “R-1 (low)” is of good credit quality. The
capacity for the payment of short-term financial obligations as they fall due is
substantial. Overall strength is not as favorable as higher rating categories.
May be vulnerable to future events, but qualifying negative factors are
considered manageable.
“R-2
(high)” – Short-term debt rated “R-2 (high)” is considered to be at the upper
end of adequate credit quality. The capacity for the payment of short-term
financial obligations as they fall due is acceptable. May be vulnerable to
future events.
“R-2
(middle)” – Short-term debt rated “R-2 (middle)” is considered to be of adequate
credit quality. The capacity for the payment of short-term financial obligations
as they fall due is acceptable. May be vulnerable to future events or may be
exposed to other factors that could reduce credit quality.
“R-2
(low)” – Short-term debt rated “R-2 (low)” is considered to be at the lower end
of adequate credit quality. The capacity for the payment of short-term financial
obligations as they fall due is acceptable. May be vulnerable to future events.
A number of challenges are present that could affect the issuer’s ability to
meet such obligations.
“R-3”
– Short-term debt rated “R-3” is considered to be at the lowest end of adequate
credit quality. There is a capacity for the payment of short-term financial
obligations as they fall due. May be vulnerable to future events and the
certainty of meeting such obligations could be impacted by a variety of
developments.
“R-4”
– Short-term debt rated “R-4” is considered to be of speculative credit quality.
The capacity for the payment of short-term financial obligations as they fall
due is uncertain.
“R-5”
– Short-term debt rated “R-5” is considered to be of highly speculative credit
quality. There is a high level of uncertainty as to the capacity to meet
short-term financial obligations as they fall due.
“D”
– Short-term debt rated “D” is assigned when the issuer has filed under any
applicable bankruptcy, insolvency or winding up statute or there is a failure to
satisfy an obligation after the exhaustion of grace periods, a downgrade to “D”
may occur. DBRS may also use “SD” (Selective Default) in cases where only some
securities are impacted, such as the case of a “distressed
exchange”.
Long-Term
Credit Ratings
The
following summarizes the ratings used by Standard
& Poor’s
for long-term issues:
“AAA”
– An obligation rated “AAA” has the highest rating assigned by Standard &
Poor’s. The obligor’s capacity to meet its financial commitment on the
obligation is extremely strong.
“AA”
– An obligation rated “AA” differs from the highest-rated obligations only to a
small degree. The obligor’s capacity to meet its financial commitment on the
obligation is very strong.
“A”
– An obligation rated “A” is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor’s capacity to meet its financial
commitment on the obligation is still strong.
“BBB”
– An obligation rated “BBB” exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
“BB,”
“B,” “CCC,” “CC” and “C” – Obligations rated “BB,” “B,” “CCC,” “CC” and “C” are
regarded as having significant speculative characteristics. “BB” indicates the
least degree of speculation and “C” the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
“BB”
– An obligation rated “BB” is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor’s inadequate capacity to meet its financial commitment on the
obligation.
“B”
– An obligation rated “B” is more vulnerable to nonpayment than obligations
rated “BB”, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor’s capacity or willingness to meet its
financial commitment on the obligation.
“CCC”
– An obligation rated “CCC” is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the
obligation.
“CC”
– An obligation rated “CC” is currently highly vulnerable to nonpayment. The
“CC” rating is used when a default has not yet occurred, but Standard &
Poor’s expects default to be a virtual certainty, regardless of the anticipated
time to default.
“C”
– An obligation rated “C” is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority or lower ultimate
recovery compared to obligations that are rated higher.
“D”
– An obligation rated “D” is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the “D” rating category is used when payments on
an obligation are not made on the date due, unless Standard & Poor’s
believes that such payments will be made within five business days in the
absence of a stated grace period or within the earlier of the stated grace
period or 30 calendar days. The “D” rating also will be used upon the filing of
a bankruptcy petition or the taking of similar action and where default on an
obligation is a virtual certainty, for example due to automatic stay provisions.
An obligation’s rating is lowered to “D” if it is subject to a distressed
exchange offer.
Plus
(+) or minus (-) – The ratings from “AA” to “CCC” may be modified by the
addition of a plus (+) or minus (-) sign to show relative standing within the
major rating categories.
“NR”
– This indicates that no rating has been requested, or that there is
insufficient information on which to base a rating, or that Standard &
Poor’s does not rate a particular obligation as a matter of policy.
Local
Currency and Foreign Currency Risks - Standard & Poor’s issuer credit
ratings make a distinction between foreign currency ratings and local currency
ratings. An issuer’s foreign currency rating will differ from its local currency
rating when the obligor has a different capacity to meet its obligations
denominated in its local currency, vs. obligations denominated in a foreign
currency.
Moody’s
long-term ratings are forward-looking opinions of the relative credit risks of
financial obligations with an original maturity of one year or more. Such
ratings reflect both the likelihood of default on contractually promised
payments and the expected financial loss suffered in the event of default. The
following summarizes the ratings used by Moody’s for long-term
debt:
“Aaa”
– Obligations rated “Aaa” are judged to be of the highest quality, subject to
the lowest level of credit risk.
“Aa”
– Obligations rated “Aa” are judged to be of high quality and are subject to
very low credit risk.
“A”
– Obligations rated “A” are judged to be upper-medium grade and are subject to
low credit risk.
“Baa”
– Obligations rated “Baa” are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative characteristics.
“Ba”
– Obligations rated “Ba” are judged to be speculative and are subject to
substantial credit risk.
“B”
– Obligations rated “B” are considered speculative and are subject to high
credit risk.
“Caa”
– Obligations rated “Caa” are judged to be speculative of poor standing and are
subject to very high credit risk.
“Ca”
– Obligations rated “Ca” are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
“C”
– Obligations rated “C” are the lowest rated and are typically in default, with
little prospect for recovery of principal or interest.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from “Aa” through “Caa.” The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
The
following summarizes long-term ratings used by Fitch:
“AAA”
– Securities considered to be of the highest credit quality. “AAA” ratings
denote the lowest expectation of credit risk. They are assigned only in cases of
exceptionally strong capacity for payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable
events.
“AA”
– Securities considered to be of very high credit quality. “AA” ratings denote
expectations of very low credit risk. They indicate very strong capacity for
payment of financial commitments. This capacity is not significantly vulnerable
to foreseeable events.
“A”
– Securities considered to be of high credit quality. “A” ratings denote
expectations of low credit risk. The capacity for payment of financial
commitments is considered strong. This capacity may, nevertheless, be more
vulnerable to adverse business or economic conditions than is the case for
higher ratings.
“BBB”
– Securities considered to be of good credit quality. “BBB” ratings indicate
that expectations of credit risk are currently low. The capacity for payment of
financial commitments is considered adequate but adverse business or economic
conditions are more likely to impair this capacity.
“BB”
– Securities considered to be speculative. “BB” ratings indicate that there is
an elevated vulnerability to credit risk, particularly in the event of adverse
changes in business or economic conditions over time; however, business or
financial alternatives may be available to allow financial commitments to be
met.
“B”
– Securities considered to be highly speculative. “B” ratings indicate that
material credit risk is present.
“CCC”
– A “CCC” rating indicates that substantial credit risk is present.
“CC”
– A “CC” rating indicates very high levels of credit risk.
“C”
– A “C” rating indicates exceptionally high levels of credit risk.
Defaulted
obligations typically are not assigned “RD” or “D” ratings, but are instead
rated in the “B” to “C” rating categories, depending upon their recovery
prospects and other relevant characteristics. Fitch believes that this approach
better aligns obligations that have comparable overall expected loss but varying
vulnerability to default and loss.
Plus
(+) or minus (-) may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the “AAA” obligation
rating category, or to corporate finance obligation ratings in the categories
below “CCC”.
The
DBRS
long-term rating scale provides an opinion on the risk of default. That is, the
risk that an issuer will fail to satisfy its financial obligations in accordance
with the terms under which an obligation has been issued. Ratings are based on
quantitative and qualitative considerations relevant to the issuer, and the
relative ranking of claims. All rating categories other than AAA and D also
contain subcategories “(high)” and “(low)”. The absence of either a “(high)” or
“(low)” designation indicates the rating is in the middle of the category. The
following summarizes the ratings used by DBRS for long-term debt:
“AAA”
- Long-term
debt rated “AAA” is of the highest credit quality. The capacity for the payment
of financial obligations is exceptionally high and unlikely to be adversely
affected by future events.
“AA”
– Long-term debt rated “AA” is of superior credit quality. The capacity for the
payment of financial obligations is considered high. Credit quality differs from
“AAA” only to a small degree. Unlikely to be significantly vulnerable to future
events.
“A”
– Long-term debt rated “A” is of good credit quality. The capacity for the
payment of financial obligations is substantial, but of lesser credit quality
than “AA.” May be vulnerable to future events, but qualifying negative factors
are considered manageable.
“BBB”
– Long-term debt rated “BBB” is of adequate credit quality. The capacity for the
payment of financial obligations is considered acceptable. May be vulnerable to
future events.
“BB”
–
Long-term
debt rated “BB” is of speculative, non-investment grade credit quality. The
capacity for the payment of financial obligations is uncertain. Vulnerable to
future events.
“B”
– Long-term debt rated “B” is of highly speculative credit quality. There is a
high level of uncertainty as to the capacity to meet financial
obligations.
“CCC”,
“CC” and “C” – Long-term debt rated in any of these categories is of very highly
speculative credit quality. In danger of defaulting on financial obligations.
There is little difference between these three categories, although “CC” and “C”
ratings are normally applied to obligations that are seen as highly likely to
default, or subordinated to obligations rated in the “CCC” to “B” range.
Obligations in respect of which default has not technically taken place but is
considered inevitable may be rated in the “C” category.
“D”
– A
security rated “D” is assigned when the issuer has filed under any applicable
bankruptcy, insolvency or winding up statute or there is a failure to satisfy an
obligation after the exhaustion of grace periods, a downgrade to “D” may occur.
DBRS may also use “SD” (Selective Default) in cases where only some securities
are impacted, such as the case of a “distressed exchange”.
Municipal
Note Ratings
A
Standard
& Poor’s
U.S. municipal note rating reflects Standard & Poor’s opinion about the
liquidity factors and market access risks unique to the notes. Notes due in
three years or less will likely receive a note rating. Notes with an original
maturity of more than three years will most likely receive a long-term debt
rating. In determining which type of rating, if any, to assign, Standard &
Poor’s analysis will review the following considerations:
•Amortization
schedule - the larger the final maturity relative to other maturities, the more
likely it will be treated as a note; and
•Source
of payment - the more dependent the issue is on the market for its refinancing,
the more likely it will be treated as a note.
Municipal
Short-Term Note rating symbols are as follows:
“SP-1”
– A municipal note rated “SP-1” exhibits a strong capacity to pay principal and
interest. An issue determined to possess a very strong capacity to pay debt
service is given a plus (+) designation.
“SP-2”
– A municipal note rated “SP-2” exhibits a satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
“SP-3”
– A municipal note rated “SP-3” exhibits a speculative capacity to pay principal
and interest.
Moody’s
uses the Municipal Investment Grade (“MIG”) scale to rate U.S. municipal bond
anticipation notes of up to three years maturity. Municipal notes rated on the
MIG scale may be secured by either pledged revenues or proceeds of a take-out
financing received prior to note maturity. MIG ratings expire at the maturity of
the obligation, and the issuer’s long-term rating is only one consideration in
assigning the MIG rating. MIG ratings are divided into three levels – “MIG-1”
through “MIG-3” while speculative grade short-term obligations are designated
“SG”. The following summarizes the ratings used by Moody’s for short-term
municipal obligations:
“MIG-1”
– This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
“MIG-2”
– This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group.
“MIG-3”
– This designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market access for refinancing is likely to be less
well-established.
“SG”
– This designation denotes speculative-grade credit quality. Debt instruments in
this category may lack sufficient margins of protection.
“NR”
– Is assigned to an unrated obligation.
In
the case of variable rate demand obligations (“VRDOs”), a two-component rating
is assigned: a long or short-term debt rating and a demand obligation rating.
The first element represents Moody’s evaluation of risk associated with
scheduled principal and interest payments. The second element represents Moody’s
evaluation of risk associated with the ability to receive purchase price upon
demand (“demand feature”). The second element
uses
a rating from a variation of the MIG rating scale called the Variable Municipal
Investment Grade or “VMIG” scale. The rating transitions on the VMIG scale
differ from those on the Prime scale to reflect the risk that external liquidity
support generally will terminate if the issuer’s long-term rating drops below
investment grade.
VMIG
rating expirations are a function of each issue’s specific structural or credit
features.
“VMIG-1”
– This designation denotes superior credit quality. Excellent protection is
afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase
price upon demand.
“VMIG-2”
– This designation denotes strong credit quality. Good protection is afforded by
the strong short-term credit strength of the liquidity provider and structural
and legal protections that ensure the timely payment of purchase price upon
demand.
“VMIG-3”
– This designation denotes acceptable credit quality. Adequate protection is
afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
“SG”
– This designation denotes speculative-grade credit quality. Demand features
rated in this category may be supported by a liquidity provider that does not
have an investment grade short-term rating or may lack the structural and/or
legal protections necessary to ensure the timely payment of purchase price upon
demand.
“NR”
– Is assigned to an unrated obligation.
About
Credit Ratings
A
Standard
& Poor’s
issue credit rating is a forward-looking opinion about the creditworthiness of
an obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated. The opinion reflects Standard & Poor’s
view of the obligor’s capacity and willingness to meet its financial commitments
as they come due, and may assess terms, such as collateral security and
subordination, which could affect ultimate payment in the event of
default.
Moody’s
credit ratings must be construed solely as statements of opinion and not
statements of fact or recommendations to purchase, sell or hold any
securities.
Fitch’s
credit
ratings provide an opinion on the relative ability of an entity to meet
financial commitments, such as interest, preferred dividends, repayment of
principal, insurance claims or counterparty obligations. Fitch credit ratings
are used by investors as indications of the likelihood of receiving the money
owed to them in accordance with the terms on which they invested. Fitch’s credit
ratings cover the global spectrum of corporate, sovereign (including
supranational and sub-national), financial, bank, insurance, municipal and other
public finance entities and the securities or other obligations they issue, as
well as structured finance securities backed by receivables or other financial
assets.
DBRS
credit ratings are opinions based on the quantitative and qualitative analysis
of information sourced and received by DBRS, which information is not audited or
verified by DBRS. Ratings are not buy, hold or sell recommendations and they do
not address the market price of a security. Ratings may be upgraded, downgraded,
placed under review, confirmed and discontinued.
Appendix
B
Fulcrum
Diversified Absolute Return Fund
Proxy
Voting Policy
In
accordance with Rule 206(4)-6 under the Advisers Act and the Stewardship Code,
it is the policy of the Firm to vote all proxies in the best interests of its
clients. The Compliance Officer is responsible for ensuring adherence to this
policy.
The
Firm has a commitment to evaluate and to vote proxy in what it believes is the
best interests of its clients. The Firm will generally vote proxy proposals,
amendments, consents or resolutions relating to client securities, including
interests in private investment funds, if any, on a case-by-case basis and in
accordance with the following guidelines:
a.Support
a current management initiative if the Firm’s view of the issuer’s management is
favourable;
b.Vote
to change the management structure of an issuer if it would increase shareholder
value;
c.Vote
against management if there is a clear conflict between the issuer’s management
and shareholder interest;
d.In
some cases, even if the Firm supports an issuer’s management, there may be some
corporate governance issues that the Firm believes should be subject to
shareholder approval; and/or
e.May
abstain from voting proxies when it is determined that the cost of voting the
proxy exceeds the expected benefit to our clients.
The
investment committee members will receive all proxies and will determine how to
vote each such proxy. On making a decision, the investment committee members
will instruct the Compliance Officer on how to vote. It is the responsibility of
the Compliance Officer to either vote the shares or to instruct the prime broker
of the Firm’s voting decision in order to update the client’s proxy voting
record. The Compliance Officer is to ensure that the voting of all proxies is
done in a timely manner and to monitor the effectiveness of these
policies.
The
Compliance Officer will maintain the following records:
•A
record of each proxy received (if it’s in e-mail form from the prime broker, a
copy of the e-mail).
•A
record of each proxy executed and the reason behind the voting decision if such
decision was inconsistent with the general guidelines above.
•A
record of each proxy abstained and the reason behind the
abstention.
•All
documents which were material to the voting decision including documents which
were created by the investment committee members (e.g.
spreadsheets).
•Written
requests from an investor for information on how the Firm voted proxies and it’s
response to any request (oral or written) from the investor for such proxy
voting information.
•A
written record of all disclosures, resolutions and determination of proxy vote
arising from a conflict of interest.
The
Compliance Officer will maintain such records for a period of 5 years, the first
2 years in the office and the additional 3 years in an easily accessible
place.
