Each Fund is a separate investment portfolio or
series of Hennessy Funds Trust (the “Trust”), a Delaware statutory trust
organized on September 17, 1992. The Trust is an open-end, management investment
company registered under the Investment Company Act of 1940, and the
regulations, rules, and guidance issued by the SEC thereunder (the “1940 Act”). The Trust is comprised of
seventeen series, including the 16 Funds. The Funds are advised by Hennessy
Advisors, Inc. (the “Investment
Manager”) and include the following:
DOMESTIC
EQUITY
• |
Hennessy Cornerstone Growth Fund (the “Cornerstone Growth
Fund”) |
• |
Hennessy Focus Fund (the “Focus
Fund”) |
• |
Hennessy Cornerstone Mid Cap 30 Fund (the “Cornerstone Mid Cap 30
Fund”) |
• |
Hennessy Cornerstone Large Growth Fund (the “Cornerstone Large Growth
Fund”) |
• |
Hennessy Cornerstone Value Fund (the “Cornerstone Value
Fund”) |
MULTI‑ASSET
• |
Hennessy Total Return Fund (the “Total Return
Fund”) |
• |
Hennessy Equity and Income Fund (the “Equity and Income
Fund”) |
• |
Hennessy Balanced Fund (the “Balanced
Fund”) |
SECTOR
& SPECIALTY
• |
Hennessy Energy Transition Fund (the “Energy Transition
Fund”) |
• |
Hennessy Midstream Fund (the “Midstream
Fund”) |
• |
Hennessy Gas Utility Fund (the “Gas Utility
Fund”) |
• |
Hennessy Japan Fund (the “Japan
Fund”) |
• |
Hennessy Japan Small Cap Fund (the “Japan Small Cap
Fund”) |
• |
Hennessy Large Cap Financial Fund (the “Large Cap Financial
Fund”) |
• |
Hennessy Small Cap Financial Fund (the “Small Cap Financial
Fund”) |
• |
Hennessy Technology Fund (the “Technology
Fund”) |
Each Fund identified below is a successor to a
series of Hennessy Mutual Funds, Inc., a Maryland corporation (“HMFI”), Hennessy SPARX Funds Trust, a
Massachusetts business trust (“HSFT”), or The
Hennessy Funds, Inc., a
Maryland corporation (“HFI”),
pursuant to a reorganization that took place after the close of business on
February 28, 2014:
• |
The Cornerstone Growth Fund is the successor to the Hennessy
Cornerstone Growth Fund, a series of HMFI; |
• |
The Cornerstone Mid Cap 30 Fund is the successor to the Hennessy
Cornerstone Mid Cap 30 Fund, a series of
HMFI; |
• |
The Cornerstone Value Fund is the successor to the Hennessy
Cornerstone Value Fund, a series of HMFI; |
• |
The Total Return Fund is the successor to the Hennessy Total Return
Fund, a series of HFI; |
• |
The Balanced Fund is the successor to the Hennessy Balanced Fund, a
series of HFI; |
• |
The Japan Fund is the successor to the Hennessy Japan Fund, a series
of HSFT; and |
• |
The Japan Small Cap Fund is the successor to the Hennessy Japan Small
Cap Fund, a series of HSFT. |
Prior to February 28, 2014, each of the above
successor Funds had no investment operations. In connection with the
reorganization, holders of Investor Class shares of the predecessor funds listed
above (collectively, the “Predecessor
Hennessy Funds”) received Investor Class shares of the successor Funds,
and holders of Institutional Class shares of the Predecessor Hennessy Funds
received Institutional Class shares of the successor Funds. Each successor Fund
is the accounting and performance information successor of the corresponding
Predecessor Hennessy Fund.
Each of the Energy Transition Fund and the
Midstream Fund is the successor to the BP Capital TwinLine Energy Fund and
the BP Capital TwinLine MLP Fund (together, the “Predecessor BP Funds”),
respectively, pursuant to a reorganization that became effective after the close
of business on October 26, 2018. Prior to that date, neither the Energy
Transition Fund nor the Midstream Fund had any investment operations. Each
Predecessor BP Fund was managed by BP Capital Fund Advisors, LLC and had
substantially similar investment objectives and strategies as its applicable
successor Fund. In connection with the reorganization, holders of Class A shares
of each Predecessor BP Fund received Investor Class shares of the applicable
successor Fund, and holders of Class I shares of each Predecessor BP Fund
received Institutional Class shares of the applicable successor Fund identified.
Each successor Fund is the accounting and performance information successor of
the corresponding Predecessor BP Fund. Prior to the reorganization, the
Predecessor BP Funds had a fiscal year end of November 30. In connection
with the reorganization, the fiscal year end changed to October 31.
Each Predecessor Hennessy Fund and Predecessor BP
Fund is referenced in this SAI as the applicable current Fund, even though any
reference to any such Fund on or prior to February 28, 2014, and October
26, 2018, respectively, actually refers to that Fund’s predecessor.
The chart below identifies which Funds have
diversified portfolios and which Funds have non‑diversified portfolios:
Diversified
Portfolio |
|
Non-Diversified
Portfolio |
Cornerstone
Growth Fund |
|
Focus
Fund |
Cornerstone
Mid Cap 30 Fund |
|
Total
Return Fund |
Cornerstone
Large Growth Fund |
|
Balanced
Fund |
Cornerstone
Value Fund |
|
Midstream
Fund |
Equity
and Income Fund |
|
Large
Cap Financial Fund |
Energy
Transition Fund |
|
Small
Cap Financial Fund |
Gas
Utility Fund |
|
|
Japan
Fund |
|
|
Japan
Small Cap Fund |
|
|
Technology
Fund |
|
|
Although the Energy Transition Fund and the Japan
Fund have diversified portfolios, they each employ a relatively concentrated
investment strategy and may hold securities of fewer issuers than other
diversified funds.
Other than the Total Return Fund and the Balanced
Fund, each Fund offers both Investor Class shares and Institutional Class shares
(each, a “Class”). Investor
Class shares and Institutional Class shares represent an interest in the same
assets of a Fund, have the same rights, and are identical in all material
respects, except that (i) Investor Class shares bear distribution fees,
while Institutional Class shares are not subject to such fees,
(ii) Investor Class shares bear shareholder servicing fees payable to the
Investment Manager, while Institutional Class shares are not subject to such
fees, (iii) Institutional Class shares are available only to shareholders
who invest directly in a Fund or who invest through a broker-dealer, financial
institution, or servicing agent that has entered into appropriate arrangements
with a Fund and provides services to the Fund, (iv) Institutional Class
shares have a higher minimum initial investment, and (v) the Board of
Trustees may elect to have certain expenses specific to Investor Class shares or
Institutional Class shares be borne solely by the Class to which such expenses
are attributable, but any expenses not specifically allocated to Investor Class
shares or Institutional Class shares are allocated to each such Class on the
basis of the net asset value (sometimes referred to as “NAV”) of that Class in relation to the
NAV of the applicable Fund. The Board of Trustees may classify and reclassify
the shares of the Funds into additional classes of shares at a future
date.
FUNDAMENTAL POLICIES
The investment restrictions set forth below are
fundamental policies of each Fund that cannot be changed without the approval of
the holders of the lesser of (i) 67% or more of the Fund’s shares present
or
represented at a meeting
of shareholders at which holders of more than 50% of the Fund’s outstanding
shares are present or represented or (ii) more than 50% of the outstanding
shares of the Fund:
Senior Securities
All Funds other than the Gas Fund may issue
senior securities to the extent permitted by the 1940 Act. The Gas Fund may not
issue senior securities.
Borrowing
Each Fund may borrow money as permitted by the
1940 Act, subject to any additional restrictions described below.
For the Total Return Fund, the Energy Transition
Fund, the Midstream Fund, the Japan Fund, and the Japan Small Cap Fund, there
are no additional restrictions.
Each Fund other those specified above may borrow
money to facilitate redemptions and may borrow an amount up to 33‑1/3% of its
total assets (except that the percentage limitation is 10% for the Balanced Fund
and 30% for the Gas Fund). In addition, the Cornerstone Growth Fund, the
Cornerstone Mid Cap 30 Fund, the Cornerstone Large Growth Fund, and the
Cornerstone Value Fund may also borrow money for other extraordinary or
emergency purposes.
The Balanced Fund and the Gas Fund may not
purchase any portfolio securities while borrowed amounts remain
outstanding.
Underwriting
Except to the extent the Fund may be deemed to be
an underwriter under the Securities Act of 1933, as amended (the “1933 Act”), when selling portfolio
securities or selling its own shares, no Fund may act as an underwriter.
Industry Concentration
No Fund other than the Energy Transition Fund,
the Midstream Fund, the Gas Fund, the Large Cap Financial Fund, the Small Cap
Financial Fund, and the Technology Fund may make an investment in any one
industry if such investment would cause the aggregate value of the Fund’s
investment in such industry to equal or exceed 25% of the Fund’s net assets.
This policy does not apply to U.S. Treasury securities, which are obligations
issued or guaranteed by the U.S. government, and U.S. government agency and
instrumentality obligations (collectively with U.S. Treasury securities, “U.S. Government Securities”),
certificates of deposit, and bankers’ acceptances. Certain of these instruments
are described in greater detail under the “DESCRIPTION OF CERTAIN INSTRUMENTS”
section of this SAI.
None of the Energy Transition Fund, the Midstream
Fund, the Gas Fund, the Large Cap Financial Fund, the Small Cap Financial Fund,
or the Technology Fund may purchase the securities of any issuer if, as a
result, less than 25% of the Fund’s assets would be invested in the securities
of issuers principally engaged in (i) with respect to the Energy Transition
Fund and the Midstream Fund, the energy industry, (ii) with respect to the
Gas Fund, the utilities industry, (iii) with respect to the Large Cap
Financial Fund and the Small Cap Financial Fund, financial services companies
(including information technology companies that concentrate in financial
services), and (iv) with respect to the Technology Fund, the Information
Technology sector. For the Energy Transition Fund and the Midstream Fund, this
restriction is on a total assets basis. For
the Gas Fund, the Large
Cap Financial Fund, the Small Cap Financial Fund, and the Technology Fund, this
restriction is on a net assets basis.
For the Japan Fund and the Japan Small Cap Fund,
the percentage of assets invested in an industry is determined by reference to
the 33 industry groups of the Securities Identification Code Committee, which
are adopted by the various stock exchanges in Japan, including the Tokyo Stock
Exchange and the JASDAQ Securities Exchange.
Issuer Concentration
Subject to the exceptions noted below, no Fund
may purchase securities of any one issuer (except U.S. Government
Securities) if, as a result, at the time of purchase more than 5% of the Fund’s
total assets would be invested in such issuer or the Fund would own or hold 10%
or more of the outstanding voting securities of that issuer.
For each non‑diversified Fund, up to 50% of the
total assets of the Fund may be invested without regard to this
restriction.
For each diversified Fund other than the Gas
Fund, up to 25% of the total assets of the Fund may be invested without regard
to this restriction.
For the Gas Fund, there are no exceptions.
Real Estate
No Fund may purchase or sell real estate unless
acquired as a result of ownership of securities or other instruments (although a
Fund may invest in securities or other instruments secured by real estate or
securities of companies engaged in the real estate business).
In addition, (i) the Cornerstone Growth Fund may
not purchase securities secured by real estate or issued by companies that
invest in real estate and (ii) the Total Return Fund and the Balanced Fund may
not invest in the securities of real estate limited partnerships.
Commodities
No Fund may buy or sell commodities. Other than
the Gas Fund, no Fund may purchase or sell commodity contracts (but this does
not prevent a Fund from purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities).
Loans
None of the Cornerstone Growth Fund, the
Cornerstone Mid Cap 30 Fund, the Cornerstone Large Growth Fund, the
Cornerstone Value Fund, the Total Return Fund, the Balanced Fund, the Energy
Transition Fund, or the Midstream Fund may make loans. This limitation does not
apply to (i) securities lending (except that the Total Return Fund and the
Balanced Fund may not lend securities), (ii) repurchase agreements to the
extent the entry into a repurchase agreement is deemed to be a loan, or
(iii) the purchase of debt securities or other debt instruments.
None of the Focus Fund, the Equity and Income
Fund, the Large Cap Financial Fund, the Small Cap Financial Fund, or the
Technology Fund may lend any security or make any other loan if, as a result,
more than 33-1/3% of its total assets would be lent to other parties. This
limitation does not apply to (i) repurchase
agreements to the extent
the entry into a repurchase agreement is deemed to be a loan and (ii) the
purchase of debt securities or other debt instruments.
The Gas Fund may not make loans. This restriction
does not apply to repurchase agreements provided the Gas Fund maintains
collateral equal to at least 100% of the value of the borrowed security and the
instrument is marked to market daily.
Control Investments
The Total Return Fund and the Balanced Fund may
not make investments for the purpose of exercising control or management of any
company.
Margin
None of the Cornerstone Growth Fund, the
Cornerstone Mid Cap 30 Fund, the Cornerstone Large Growth Fund, the
Cornerstone Value Fund, the Total Return Fund, the Balanced Fund, the Japan
Fund, and the Japan Small Cap Fund may purchase securities on margin (other than
short‑term credit necessary for clearance of Fund transactions), except that
each such Fund other than the Total Return Fund and the Balanced Fund may use
options or futures strategies and may make margin deposits in connection with
its use of options, futures contracts, and options on futures contracts. A short
sale is not deemed to be a margin purchase.
The Gas Fund may not purchase securities on
margin.
Oil, Gas, or Mineral
Interests
None of the Total Return Fund, the Balanced Fund,
the Japan Fund, or the Japan Small Cap Fund may purchase or sell any interest in
any oil, gas, or other mineral exploration or development program, including any
oil, gas, or mineral lease.
The Gas Fund may not purchase the securities of
any issuer if, as a result, more than 25% of its total assets would be invested
in oil, gas, or other mineral leases.
Pledges
None of the Cornerstone Growth Fund, the
Cornerstone Mid Cap 30 Fund, the Cornerstone Large Growth Fund, or the
Cornerstone Value Fund may pledge its assets other than to secure borrowings or
in connection with hedging transactions, short‑sales, when‑issued and forward
commitment transactions, and similar investment strategies (to the extent the
Fund’s investment policies permit such strategies). For purposes of this
restriction, the deposit of initial or maintenance margin in connection with
futures contracts is not deemed a pledge of the assets of the Fund.
Neither the Total Return Fund nor the Balanced
Fund may pledge its assets, except to secure permitted borrowings.
Restricted Securities
The Gas Fund may not purchase or sell restricted
securities.
Short Sales
None of the Total Return Fund, the Balanced Fund,
or the Gas Fund may make short sales of securities or maintain a short
position.
OTHER INVESTMENT RESTRICTIONS
The following investment restrictions and
operating policies of each Fund may be changed by the Board of Trustees without
shareholder approval.
Borrowing
The Cornerstone Growth Fund may not purchase any
portfolio securities while borrowed amounts remain outstanding.
Naming Rule
Each of the Cornerstone Mid Cap 30 Fund, the
Cornerstone Large Growth Fund, the Equity and Income Fund, the Energy Transition
Fund, the Midstream Fund, the Gas Fund, the Japan Fund, the Japan Small Cap
Fund, the Large Cap Financial Fund, the Small Cap Financial Fund, and the
Technology Fund normally invests at least 80% of the value of its net assets,
plus the amount of any borrowings for investment purposes, in the particular
type of investment suggested by the Fund’s name.
If the Board of Trustees were to change this
non-fundamental policy for any of the Cornerstone Mid Cap 30 Fund, the
Cornerstone Large Growth Fund, the Japan Fund, or the Japan Small Cap Fund, the
Fund must provide 60 days’ prior written notice to the shareholders before
implementing the change. Any such notice must be in plain English in a separate
written document containing the following prominent statement in boldface type:
“Important Notice Regarding Change in Investment Policy.” If the notice is
included with other communications to shareholders, the aforementioned statement
must also be included on the envelope in which the notice is delivered.
Securities Lending
The Cornerstone Growth Fund may not lend its
portfolio securities.
Affiliate Investments
None of the Cornerstone Growth Fund, the
Cornerstone Mid Cap 30 Fund, the Cornerstone Large Growth Fund, the Cornerstone
Value Fund, the Total Return Fund, or the Balanced Fund may acquire or retain
any security issued by a company whose officer or director is also an officer or
Trustee of the Funds or an officer, director, or other affiliated person of the
Investment Manager.
Control Investments
None of the Cornerstone Growth Fund, the
Cornerstone Mid Cap 30 Fund, the Cornerstone Large Growth Fund, the Cornerstone
Value Fund, the Japan Fund, and the Japan Small Cap Fund may make investments
for the purpose of exercising control or management of any company.
Derivatives
No Fund may enter into derivatives transactions,
as defined in Rule 18f‑4(a) under the 1940 Act. However, a Fund may enter
into reverse repurchase agreements or similar financing transactions, pursuant
to
Rule 18f‑4(d)(i), as
long as such Fund complies with the asset coverage requirements of
Section 18 of the 1940 Act, and combines the aggregate amount of
indebtedness associated with all reverse repurchase agreements or similar
financing transactions with the aggregate amount of any other senior securities
representing indebtedness when calculating the asset coverage ratio.
Illiquid Securities
No Fund may invest in illiquid securities if at
the time of acquisition more than 15% of such Fund’s net assets would be
invested in such securities. Illiquid securities are securities that a Fund
reasonably expects cannot be sold, disposed of, or reversed in seven calendar
days or less under current market conditions without such sale, disposition, or
reversal significantly changing the market value of the investment. If a Fund
exceeds the limitation on illiquid securities other than by a change in market
values, the Fund must report the condition to the Board of Trustees and, when
required by Rule 22e-4 of the 1940 Act, to the SEC.
Securities that may be resold in accordance with
Rule 144A under the 1933 Act (“Rule 144A”), securities offered
pursuant to Section 4(a)(2) of the 1933 Act, and securities otherwise subject to
restrictions on resale under the 1933 Act are not deemed illiquid solely by
reason of being unregistered. The Investment Manager determines the liquidity of
a particular security based on the trading markets for the specific security and
other factors.
Investment Company
Securities
Pursuant to Section 12(d)(1) of the 1940
Act, no Fund may invest more than 10% of its assets in shares of investment
companies. A Fund may invest up to 5% of its assets in any one investment
company, as long as no investment represents more than 3% of the voting stock of
an acquired investment company.
Rule 12d1‑4 provides an exemption from Section 12(d)(1) that allows a
Fund to invest all of its assets in other registered funds, including
exchange‑traded funds, if the Fund satisfies certain conditions specified in the
Rule, including, among other conditions, that the Fund and its advisory group
will not control (individually or in the aggregate) an acquired fund
(e.g., hold more than 25% of the outstanding voting securities of an
acquired fund that is a registered open-end management investment
company).
Length of Operations
Neither the Total Return Fund nor the Balanced
Fund may invest in securities of any issuer that has a record of less than three
years of continuous operation, including the operation of any predecessor
business of a company that came into existence as a result of a merger,
consolidation, reorganization, or purchase of substantially all of the assets of
such predecessor business.
Margin
None of the Focus Fund, the Equity and Income
Fund, the Large Cap Financial Fund, the Small Cap Financial Fund, or the
Technology Fund may purchase securities on margin (except for short‑term credit
necessary for clearance of Fund transactions), except that each such Fund may
use options or futures strategies and may make margin deposits in connection
with its use of options, futures contracts, and options on futures contracts. A
short sale is not deemed to be a margin purchase.
Oil, Gas, or Mineral
Interests
The Cornerstone Growth Fund may not purchase any
interest in any oil, gas, or other mineral exploration or development
program.
Options and Warrants
The Cornerstone Growth Fund may not use options
on futures strategies.
The Gas Fund may not invest in warrants.
Ownership of Other Investment
Companies
No Fund may purchase the securities of other
investment companies except to the extent such purchases are permitted by the
1940 Act.
Pledges
Neither the Japan Fund nor the Japan Small Cap
Fund may pledge its assets other than to secure permitted borrowings, to the
extent related to the purchase of securities on a forward commitment,
when‑issued, or delayed-delivery basis, or to the extent related to the deposit
of assets in escrow in connection with writing covered put and call options and
collateral and initial or variation margin arrangements with respect to
permitted transactions.
Puts or Calls
None of the Cornerstone Growth Fund, the
Cornerstone Mid Cap 30 Fund, the Cornerstone Large Growth Fund, and the
Cornerstone Value Fund may write, purchase, or sell puts, call straddles, or
spreads, or combinations thereof, except as otherwise permitted in the Fund
Prospectus and this SAI.
Real Estate
The Cornerstone Growth Fund may not purchase
securities secured by real estate or issued by companies that invest in real
estate.
Restricted Securities
The Cornerstone Growth Fund may not purchase or
sell restricted securities.
Reverse Repurchase
Agreements
The Energy Transition Fund and the Midstream Fund
may each invest a maximum of 10% of its total assets in reverse repurchase
agreements.
Short‑Term Investments
None of the Cornerstone Growth Fund, the
Cornerstone Mid Cap 30 Fund, the Cornerstone Large Growth Fund, the Cornerstone
Value Fund, the Total Return Fund, or the Balanced Fund may generally use
investments in cash or short‑term securities for temporary defensive positions.
The portfolio managers do not expect assets invested in cash or liquid
short‑term securities to exceed 5% of any such Fund’s total assets other than
during rebalance periods or when subscription or redemption activity is
excessive.
The Focus Fund, the Equity and Income Fund, the
Energy Transition Fund, the Midstream Fund, the Gas Fund, the Japan Fund, the
Japan Small Cap Fund, the Large Cap Financial Fund, the Small Cap Financial
Fund, and the Technology Fund may each hold up to 100% of its total assets in
cash and short‑term obligations.
The Energy Transition Fund and the Midstream Fund
may each acquire certificates of deposit, bankers’ acceptances, and time
deposits in U.S. dollar or foreign currencies, but such short-term
instruments must, 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, unless the principal amount of
such bank obligations are fully insured by the U.S. government.
Short Sales
None of the Cornerstone Growth Fund, the
Cornerstone Mid Cap 30 Fund, the Cornerstone Large Growth Fund, or the
Cornerstone Value Fund may make short sales of securities or maintain a short
position, except to the extent permitted by the 1940 Act.
GENERAL
The policies and limitations listed above
supplement those set forth in the Fund Prospectus. Unless otherwise noted,
whenever an investment policy or limitation states a maximum percentage of a
Fund’s assets that may be invested in any security or other asset or sets forth
a policy regarding quality standards, such percentage limitation or standard
applies to each Fund on an individual basis and is determined immediately after
and as a result of the Fund’s acquisition of such security or other asset except
in the case of borrowing (or other activities that may be deemed to result in
the issuance of a senior security under the 1940 Act). Accordingly, any
subsequent change in values, net assets, or other circumstances is not
considered when determining whether an investment complies with the Fund’s
investment policies and limitations. If the value of a Fund’s holdings of
illiquid securities at any time were to exceed the percentage limitation
applicable at the time of acquisition due to subsequent fluctuations in value or
other reasons, the Board of Trustees would consider what actions, if any, are
appropriate to maintain adequate liquidity.
The Fund Prospectus describes the principal
investment strategies and risks of the Funds. This section expands on that
discussion and also describes non-principal investment strategies and risks of
the Funds.
INVESTMENT CONSIDERATIONS APPLICABLE TO ALL
FUNDS
Certain investment strategies and risks are
applicable to all Funds. Such strategies and risks are set forth below.
Cash and Short-Term
Securities
Cash and short-term instruments include
high‑grade instruments such as variable amount master demand notes, commercial
paper, short‑term notes, certificates of deposit, bankers’ acceptances,
repurchase agreements that mature in less than seven days, money market
instruments, U.S. Treasury securities, and U.S. government agency and
instrumentality obligations. Certain of these instruments are described in
greater detail under the “DESCRIPTION OF CERTAIN INSTRUMENTS” section of this
SAI. Generally, these securities offer less potential for gains than other types
of securities. With respect to money market mutual funds, in addition to the
advisory fees and other expenses the Fund bears directly in connection with
their own operations, as a shareholder of another investment company, the Fund
bears its pro rata portion of the other investment company’s advisory fees and
other expenses, and such fees and other expenses are borne indirectly by the
Fund’s shareholders.
To the extent that the Fund’s assets are invested
in cash and short‑term obligations for temporary defensive purposes, such assets
would not be invested so as to meet the Fund’s investment objective.
Cybersecurity
With the increased use of technologies such as
mobile devices and web‑based or cloud applications, along with the dependence on
the Internet and computer systems to conduct business, the Fund is susceptible
to operational, information security, and related risks. Cybersecurity incidents
can result from deliberate attacks or unintentional events (arising from
external or internal sources), and may cause the Fund to lose proprietary
information, suffer data corruption, suffer physical damage to a computer or
network system, or lose operational capacity. Cybersecurity attacks include, but
are not limited to, infection by malicious software, such as malware or computer
viruses, or gaining unauthorized access to digital systems, networks, or devices
that are used to service the Fund’s operations (e.g., through hacking, phishing,
or malicious software coding) or other means for purposes of misappropriating
assets or sensitive information, corrupting data, or causing operational
disruption. Cybersecurity attacks may also be carried out in a manner that does
not require gaining unauthorized access, such as causing denial-of-service
attacks on the Fund’s website (i.e., efforts to make network services
unavailable to intended users). In addition, authorized persons could
inadvertently or intentionally release confidential or proprietary information
stored on the Fund’s systems.
Cybersecurity incidents affecting the Fund, the
Investment Manager, the sub-advisors, and other service providers to the Fund
(including, but not limited to, the Fund’s accountant, custodian, transfer
agent, and financial intermediaries) have the ability to disrupt business
operations, potentially resulting in financial losses to both the Fund and its
shareholders, interfere with the Fund’s ability to calculate its NAV, impede
trading, render Fund shareholders unable to transact business and the Fund
unable to process transactions (including fulfillment of subscriptions and
redemptions), cause violations of applicable privacy and other laws (including
the release of private shareholder information), and result in breach
notification and credit monitoring costs, regulatory fines, penalties,
litigation costs, reputational damage, reimbursement or other compensation
costs, forensic investigation and remediation costs, and additional compliance
costs. Similar adverse consequences could result from cybersecurity incidents
affecting issuers of securities in which the Fund invests, counterparties with
which the Fund engages in transactions, governmental and other regulatory
authorities, exchange and other financial market operators, banks, brokers,
dealers, insurance companies, and other financial institutions (including
financial intermediaries and other service providers).
Exclusion from Commodity Pool
Operator Definition
The Investment Manager has claimed an exclusion
from the definition of commodity pool operator (“CPO”) under the Commodity Exchange Act
(“CEA”) and the rules of the
Commodity Futures Trading Commission, a U.S. government agency (the “CFTC”). As a result, the Investment
Manager is not subject to CFTC registration or regulation as a CPO with respect
to the Fund. The Investment Manager relies on a related exclusion from the
definition of “commodity trading advisor” under the CEA and the rules of the
CFTC with respect to the Fund.
The terms of the CPO exclusion require the Fund,
among other things, to adhere to certain limits on its investments in commodity
interests. Commodity interests include commodity futures, commodity options, and
swaps, which in turn include non-deliverable currency forward contracts. Because
the Investment Manager and the Fund intends to comply with the terms of the CPO
exclusion, in the future the Fund may need to adjust its investment strategies,
consistent with its investment goal, to limit its investments in these types of
instruments. No Fund is intended as a vehicle for trading in the commodity
futures, commodity options, or swaps markets. The CFTC has neither reviewed nor
approved the Investment Manager’s or the Fund’s reliance on these exclusions,
the Fund’s investment strategies, or this SAI.
Generally, the exclusion from CPO regulation on
which the Investment Manager relies requires the Fund to meet one of the
following tests for its commodity interest positions, other than positions
entered into for bona fide hedging purposes (as defined in the rules of the
CFTC): (i) the aggregate initial margin and premiums required to establish
the Fund’s positions in commodity interests may not exceed 5% of the liquidation
value of the Fund’s portfolio (after taking into account unrealized profits and
unrealized losses on any such positions); or (ii) the aggregate net
notional value of the Fund’s commodity interest positions, determined at the
time the most recent such position was established, may not exceed 100% of the
liquidation value of the Fund’s portfolio (after taking into account unrealized
profits and unrealized losses on any such positions). In addition to meeting one
of these trading limitations, no Fund may be marketed as a commodity pool or
otherwise as a vehicle for trading in the commodity futures, commodity options,
or swaps markets. If, in the future, the Fund can no longer satisfy these
requirements, the Investment Manager may need to withdraw its notice claiming an
exclusion from the definition of a CPO. If the Investment Manager were required
to do that and could not find another exemption, then the Investment Manager
would be subject to registration and regulation as a CPO in accordance with CFTC
rules that apply to CPOs of registered investment companies. Generally, these
rules allow for substituted compliance with CFTC disclosure and shareholder
reporting requirements based on the Investment Manager’s compliance with
comparable SEC requirements. However, in the event the Investment Manager had to
register as a CPO, the Fund might incur additional compliance and other expenses
as a result of CFTC regulations governing commodity pools and CPOs.
Global Events
A rise in protectionist trade policies, the
possibility of a national or global recession, risks associated with pandemic
and epidemic diseases, trade tensions, the possibility of changes to some
international trade agreements, political events, and continuing political
tension and armed conflicts may adversely impact financial markets and the
broader economy. For example, ongoing armed conflicts between Ukraine and Russia
in Europe and among Israel, Hamas, and other militant groups in the Middle East
have caused and could continue to cause significant market disruptions and
volatility with the markets in Europe and the Middle East, and have had negative
impacts on markets in the United States. These events could also have negative
effects on a Fund’s investments that cannot be foreseen at the present time. As
global systems, economies and financial markets are increasingly interconnected,
events that once had only local impact are now more likely to have regional or
even global effects. Events that occur in one country, region or financial
market will, more frequently, adversely impact issuers in other countries,
regions, or markets. These impacts can be exacerbated by failures of governments
and societies to adequately respond to an emerging event or threat. Investors
will be negatively impacted if the value of their portfolio holdings decreases
as a result of such events, if these events adversely impact the operations and
effectiveness of the Investment Manager or a sub‑advisor, as applicable, or key
service providers or if these events disrupt systems and processes necessary or
beneficial to the management of accounts. These events may negatively impact
broad segments of businesses and populations and could have a significant and
rapid negative impact on the performance of a Fund’s investments, increase a
Fund’s volatility, or exacerbate pre‑existing risks to a Fund.
Market and Regulatory
Events in the financial markets and economy may
cause volatility and uncertainty and affect performance. Such adverse effect on
performance could include a decline in the value and liquidity of securities
held by the Fund, unusually high and unanticipated levels of redemptions, an
increase in portfolio turnover, a decrease in NAV, and an increase in Fund
expenses. It may also be unusually difficult to identify both investment risks
and opportunities, in which case investment objectives may not be met. Market
events may affect a single issuer, industry, sector, or the market as a whole.
Traditionally liquid investments may experience periods of diminished liquidity.
During a general downturn in the financial markets, multiple asset classes may
decline in value and the Fund may lose value, regardless of the individual
results of the
securities and other
instruments in which the Fund invests. It is impossible to predict whether or
for how long such market events may continue, particularly if they are
unprecedented, unforeseen, or widespread.
Governmental and regulatory actions, including
tax law changes, may also impair portfolio management and have unexpected or
adverse consequences on particular markets, strategies, or investments. Policy
and legislative changes in the United States and in other countries affect many
aspects of financial regulation and may contribute to decreased liquidity and
increased volatility in the financial markets. The impact of these changes on
the markets, and the practical implications for market participants, may not be
fully known for some time. In addition, economies and financial markets
throughout the world are increasingly interconnected. As a result, whether or
not the Fund invests in securities of issuers located in, or with significant
exposure to, countries experiencing economic and financial difficulties, the
value and liquidity of the Fund’s investments may decrease.
Privacy and Data
Protection
The Fund is subject to a variety of continuously
evolving laws and regulations regarding privacy, data protection, and data
security, including laws and regulations governing the collection, storage,
handling, use, disclosure, transfer, and security of personal data. In light of
recent broad-based cybersecurity attacks, legislators and regulators continue to
propose and enact new and more robust privacy‑related laws including, but not
limited to, the Arkansas Social Media Safety Act, the California Consumer
Privacy Act, as amended by the California Privacy Rights Act, the Colorado
Privacy Act, the Connecticut Data Privacy Act, the Illinois Biometric
Information Privacy Act, the New York State Department of Financial Services
Cybersecurity Requirements for Financial Services Companies, the Texas Capture
or Use of Biometric Identifiers Act, the Utah Consumer Privacy Act, and the
Virginia Consumer Data Protection Act, all of which give data privacy rights to
their respective residents (including, in California, a private right of action
in the event of a data breach resulting from a failure to implement and maintain
reasonable security procedures and practices) and impose significant obligations
on controllers and processors of consumer data. Any failure by the Fund to
comply with their privacy policies or applicable privacy‑related laws could
result in legal or regulatory proceedings against the Fund by governmental
authorities, third‑party vendors, or others, which could adversely affect the
Fund. The interpretation of existing privacy‑related laws and the various
regulators’ approaches to their enforcement continue to evolve over time. The
Fund faces the risk that these laws may be interpreted and applied in
conflicting ways in different jurisdictions or in a manner that is not
consistent with the Fund’s current privacy policies or that regulators may enact
new unclear privacy‑related laws.
INVESTMENT CONSIDERATIONS APPLICABLE TO SPECIFIC
FUNDS
Certain investment strategies and risks are
applicable only to specific Funds. The tables below indicate which of the
investment strategies and risks described in this section are relevant to each
Fund (identified by Investor Class ticker).
Strategy
or Risk |
HFCGX |
HFCSX |
HFMDX |
HFLGX |
HFCVX |
HDOGX |
HEIFX |
HBFBX |
Asset‑Backed and
Mortgage‑Backed Securities |
|
X |
|
|
|
|
X |
|
Borrowing for
Investment Purposes |
|
|
|
|
|
X |
|
|
Convertible
Securities |
|
X |
|
|
|
|
X |
|
Dow Jones Industrial
Average Concentration |
|
|
|
|
|
X |
|
X |
Foreign Issuers –
American Depositary
Receipts and
Certain Other Foreign Issuers |
X |
X |
|
|
X |
|
X |
|
Foreign Issuers –
Japan |
|
|
|
|
|
|
|
|
Foreign Issuers –
United Kingdom |
|
X |
|
|
|
|
|
|
Fund
Structure |
|
|
|
|
|
|
|
|
Illiquid and
Restricted Securities |
|
X |
|
|
|
|
X |
|
Indexed
Securities |
|
X |
|
|
|
|
X |
|
IPOs |
|
X |
|
|
|
|
|
|
Investment Company
Securities |
|
X |
|
|
|
|
X |
|
Junk Bonds |
|
X |
|
|
|
|
X |
|
LEAPs |
|
X |
|
|
|
|
|
|
Loans and Other Debt
Instruments |
|
X |
|
|
|
|
X |
|
LIBOR
Transition |
|
|
|
|
|
|
X |
|
MLPs |
|
X |
|
|
|
|
X |
|
Preferred
Stock |
|
X |
|
|
|
|
X |
|
REITs and Related
Structures |
|
X |
|
|
|
|
X |
|
Reverse Repurchase
Agreements |
|
X |
|
|
|
X |
|
|
Simultaneous
Investments |
|
X |
|
|
|
|
X |
|
SPACs |
|
X |
|
|
|
|
|
|
Tax Estimation and
NAV |
|
|
|
|
|
|
|
|
U.S. Government
Securities |
|
X |
|
|
|
X |
X |
X |
Variable or Floating
Rate Securities |
|
X |
|
|
|
|
X |
|
Warrants |
|
X |
|
|
|
|
X |
|
Strategy
or Risk |
HNRGX |
HMSFX |
GASFX |
HJPNX |
HJPSX |
HLFNX |
HSFNX |
HTECX |
Asset‑Backed and
Mortgage‑Backed Securities |
X |
X |
|
X |
X |
X |
X |
|
Borrowing for
Investment Purposes |
|
|
|
|
|
|
|
|
Convertible
Securities |
X |
X |
|
X |
X |
X |
X |
|
Dow Jones Industrial
Average Concentration |
|
|
|
|
|
|
|
|
Foreign Issuers –
American Depositary
Receipts and
Certain Other Foreign Issuers |
X |
X |
X |
|
|
X |
X |
X |
Foreign Issuers –
Japan |
|
|
|
X |
X |
|
|
|
Foreign Issuers –
United Kingdom |
|
|
|
|
|
|
|
|
Fund
Structure |
|
X |
|
|
|
|
|
|
Illiquid and
Restricted Securities |
X |
X |
X |
X |
X |
X |
X |
|
Indexed
Securities |
X |
X |
X |
X |
X |
X |
X |
|
IPOs |
|
|
|
|
|
X |
X |
|
Investment Company
Securities |
X |
X |
X |
X |
X |
X |
X |
|
Junk Bonds |
X |
X |
|
|
|
|
|
|
LEAPs |
|
|
|
|
|
|
|
|
Loans and Other Debt
Instruments |
X |
X |
|
|
|
X |
X |
|
LIBOR
Transition |
|
|
|
|
|
X |
X |
|
MLPs |
X |
X |
X |
|
|
|
|
|
Preferred
Stock |
X |
X |
|
X |
X |
X |
X |
|
REITs and Related
Structures |
|
|
|
X |
X |
X |
X |
|
Reverse Repurchase
Agreements |
|
|
|
|
|
|
|
|
Simultaneous
Investments |
|
|
|
X |
X |
|
|
|
SPACs |
|
|
|
|
|
X |
X |
|
Tax Estimation and
NAV |
|
X |
|
|
|
|
|
|
U.S. Government
Securities |
X |
X |
|
X |
X |
X |
X |
|
Variable or Floating
Rate Securities |
|
|
|
|
|
|
|
|
Warrants |
X |
X |
|
X |
X |
X |
X |
|
EXPLANATION OF INVESTMENT CONSIDERATIONS
APPLICABLE TO SPECIFIC FUNDS
Asset-Backed and
Mortgage‑Backed Securities
Asset-Backed Securities
Asset-backed securities are securities backed by
pools of loans, installment sale contracts, credit card or other receivables, or
other assets. Asset-backed securities are pass-through securities, meaning that
principal and interest payments made by the borrower on the underlying assets
(such as credit card receivables) are passed through to the Fund. The value of
asset-backed securities, like that of traditional fixed‑income securities,
typically increases when interest rates fall and decreases when interest rates
rise. However, asset-backed securities differ from traditional fixed-income
securities because of their potential for prepayment. The price paid by the Fund
for its asset-backed securities, the yield the Fund expects to receive from such
securities, and the average life of the securities are based in part on the
anticipated rate of prepayment of the underlying assets. In periods of declining
interest rates, borrowers may prepay the underlying assets more quickly than
anticipated, thereby reducing the yield and average life of the
asset‑backed securities.
Moreover, when the Fund reinvests the proceeds of a prepayment in these
circumstances, it is likely to receive a rate of interest that is lower than the
rate on the security that was prepaid. If the Fund purchases asset‑backed
securities at a premium, prepayments may result in a loss of some or all of such
premium. If the Fund buys such securities at a discount, both scheduled payments
and unscheduled prepayments increase current and total returns, and unscheduled
prepayments also accelerate the recognition of income which, when distributed to
shareholders, is taxable as ordinary income. As a result, when interest rates
decline, the value of an asset‑backed security with prepayment features may not
increase as much as that of other fixed-income securities. In periods of rising
interest rates, prepayments of the underlying assets may occur at a slower than
expected rate, creating maturity extension risk. This particular risk may
effectively change a security that was considered short-term or
intermediate-term at the time of its purchase into a longer‑term security. Since
the value of longer-term securities generally fluctuates more widely in response
to changes in interest rates than the value of shorter-term securities, maturity
extension risk would likely increase the volatility of the Fund.
Payment of principal and interest may be largely
dependent on the cash flows generated by the assets backing the securities, and,
in certain cases, supported by letters of credit, surety bonds, or other credit
enhancements. The value of asset‑backed securities may also be affected by the
creditworthiness of the servicing agent for the pool, the originator of the
loans or receivables, or any financial institution providing the credit
support.
In general, the collateral supporting
asset-backed securities is of shorter maturity than the collateral supporting
mortgage loans and is less likely to experience substantial prepayments.
However, asset-backed securities are not backed by any governmental
agency.
Mortgage-Backed Securities
Mortgage‑backed securities represent pools of
mortgage loans assembled for sale to investors by various governmental agencies
or government‑related organizations, including Ginnie Mae, Fannie Mae, and
Freddie Mac. Mortgage‑backed securities directly or indirectly represent
participations in, are collateralized by, or are payable from mortgage loans
secured by real property.
As with other debt securities, mortgage-backed
securities are subject to credit risk and interest rate risk. However, the yield
and maturity characteristics of mortgage-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may normally be prepaid at any time because the underlying
mortgage loans generally may be prepaid at any time. The relationship between
prepayments and interest rates may give some mortgage-backed securities less
potential for growth in value than conventional fixed-income securities with
comparable maturities. For example, in periods of rising interest rates, the
value of a mortgage‑backed security may decrease and its duration may be
lengthened because borrowers may prepay mortgages more slowly than originally
expected. However, though the value of a mortgage‑backed security may decline
when interest rates rise, the converse is not necessarily true because in
periods of falling interest rates, the rate of prepayments tends to increase.
During such periods, the reinvestment of prepayment proceeds by the Fund
generally is at lower rates than the rates that were carried by the obligations
that have been prepaid. Because of these and other reasons, a mortgage‑backed
security’s total return, maturity, and duration may be difficult to predict
precisely.
The ability of borrowers to repay mortgage loans
underlying mortgage-backed securities typically depends on the future
availability of financing and the stability of real estate values. The U.S.
residential real estate market has experienced significant upheaval in the past.
During such upheaval, among other things, the value of residential real estate
decreased significantly. These significant decreases affected the value of
mortgage-backed securities because payments of principal and interest on
residential mortgages varied due to foreclosures, job losses, and other factors.
As a result of these conditions, mortgage-backed securities lost
value. Such upheaval of
the real estate market may occur again in the future. If borrowers are not able
or willing to pay the principal balance on the loans, there is a high likelihood
that payments on the related mortgage-related securities may not be made.
Certain borrowers on underlying mortgages may become subject to bankruptcy
proceedings, in which case the value of the mortgage‑backed securities may
decline. Rating agencies previously have placed on credit watch or downgraded
the ratings of a large number of mortgage-related securities and may continue to
do so in the future. If a mortgage-related security in which the Fund is
invested is placed on credit watch or downgraded, the value of the security may
decline and the Fund may experience losses.
Borrowing for Investment
Purposes
Borrowing for investment is known as leveraging.
Leveraging investments by purchasing securities with borrowed money is a
speculative technique that increases investment risk but may also increase
investment return. When it leverages its investments, the NAV per share of the
Fund increases more when the Fund’s portfolio assets increase in value and
decreases more when the Fund’s portfolio assets decrease in value than would
otherwise be the case. Moreover, interest costs on borrowings may fluctuate with
changing market rates of interest and may partially offset or exceed the returns
on the borrowed funds. Under adverse conditions, the Fund might have to sell
portfolio securities to meet interest or principal payments at a time when
investment considerations would not favor such sales. The Fund intends to use
leverage whenever it is able to borrow on terms considered by its investment
adviser to be reasonable.
The Fund’s ability to borrow money is limited by
its investment policies and limitations and by the 1940 Act. If the Fund no
longer meets such limitations as a result of market fluctuations or for other
reasons, the Fund may be required to sell some of its portfolio holdings within
three days (excluding Sundays and holidays) to reduce the debt, even though it
may be disadvantageous from an investment standpoint to sell securities at that
time.
Convertible Securities
Convertible securities are hybrid securities that
combine the investment characteristics of bonds and common stocks. Convertible
securities typically consist of debt securities or preferred stock that may be
converted on a voluntary or mandatory basis within a specified period, normally
for the entire life of the security, into a certain amount of common stock or
other equity security of the same or a different issuer at a predetermined
price. Convertible securities also include debt securities with warrants or
common stock attached and derivatives combining the features of debt securities
and equity securities. Other convertible securities may become available in the
future. Convertible securities involve risks similar to those of both fixed
income and equity securities. In a corporation’s capital structure, convertible
securities are senior to common stock but are usually subordinate to senior debt
obligations of the issuer.
The market value of a convertible security is a
function of its investment value and its conversion value. A security’s
investment value represents the value of the security without its conversion
feature (i.e., a nonconvertible debt security). The investment value may be
determined by reference to its credit quality and the current value of its yield
to maturity or probable call date. At any given time, investment value is
dependent upon such factors as the general level of interest rates, the yield of
similar nonconvertible securities, the financial strength of the issuer, and the
seniority of the security in the issuer’s capital structure. A security’s
conversion value is determined by multiplying the number of shares the holder is
entitled to receive upon conversion or exchange by the current price of the
underlying security. If the conversion value of a convertible security is
significantly below its investment value, the convertible security trades like
nonconvertible debt or preferred stock and its market value is not influenced
greatly by fluctuations in the market price of the underlying security. In that
circumstance, the convertible security takes on the characteristics of a bond,
and its price moves in the opposite direction from interest rates. Conversely,
if the
conversion value of a
convertible security is near or above its investment value, the market value of
the convertible security is more heavily influenced by fluctuations in the
market price of the underlying security. In that case, the convertible
security’s price may be as volatile as that of common stock. Because both
interest rates and market movements can influence its value, a convertible
security generally is not as sensitive to interest rates as a similar debt
security, nor is it as sensitive to changes in share price as its underlying
equity security. Convertible securities are often rated below investment grade
or are not rated, and they are generally subject to a high degree of credit
risk.
Although all markets are prone to change over
time, the generally high rate at which convertible securities are retired
(through mandatory or scheduled conversions by issuers or through voluntary
redemptions by holders) and replaced with newly issued convertible securities
may cause the convertible securities market to change more rapidly than other
markets. For example, a concentration of available convertible securities in a
few economic sectors could elevate the sensitivity of the convertible securities
market to the volatility of the equity markets and to the specific risks of
those sectors. Moreover, convertible securities with innovative structures, such
as mandatory-conversion securities and equity-linked securities, have increased
the sensitivity of the convertible securities market to the volatility of the
equity markets and to the special risks of those innovations, which may include
risks different from, and possibly greater than, those associated with
traditional convertible securities. A convertible security may be subject to
redemption at the option of the issuer at a price set in the governing
instrument of the convertible security. If a convertible security held by the
Fund is subject to such redemption option and is called for redemption, the Fund
must allow the issuer to redeem the security, convert it into the underlying
common stock, or sell the security to a third party.
Certain convertible securities that may offer
higher income than the common stocks into which they are convertible.
Convertible securities may consist of bonds, notes, debentures, and preferred
stocks that may be converted or exchanged at a stated or determinable exchange
ratio into underlying shares of common stock. The Fund may be required to permit
the issuer of a convertible security to redeem the security, convert it into the
underlying common stock, or sell it to a third party. Thus, the Fund may not be
able to control whether the issuer of a convertible security chooses to convert
that security. If the issuer chooses to do so, this action could have an adverse
effect on the Fund’s ability to achieve its investment objectives.
Dow Jones Industrial Average
Concentration
The Fund concentrates its investments in stocks
in the Dow Jones Industrial Average (the “DJIA”). The DJIA consists of the
following 30 common stocks:
Company |
|
Exchange |
|
Symbol |
|
Industry |
3M
Company |
|
NYSE |
|
MMM |
|
Industrial
Conglomerates |
American
Express Company |
|
NYSE |
|
AXP |
|
Consumer
Finance |
Amgen,
Inc. |
|
Nasdaq |
|
AMGN |
|
Biotechnology |
Apple,
Inc. |
|
Nasdaq |
|
AAPL |
|
Technology,
Hardware, Storage & Peripherals |
Boeing
Company |
|
NYSE |
|
BA |
|
Aerospace &
Defense |
Caterpillar,
Inc. |
|
NYSE |
|
CAT |
|
Machinery |
Chevron
Corporation |
|
NYSE |
|
CVX |
|
Oil, Gas &
Consumable Fuels |
Cisco
Systems, Inc. |
|
Nasdaq |
|
CSCO |
|
Communications
Equipment |
Coca-Cola
Company |
|
NYSE |
|
KO |
|
Beverages |
Dow,
Inc. |
|
NYSE |
|
DOW |
|
Oil, Gas &
Consumable Fuels |
Goldman
Sachs Group, Inc. |
|
NYSE |
|
GS |
|
Capital
Markets |
Company |
|
Exchange |
|
Symbol |
|
Industry |
Home
Depot, Inc. |
|
NYSE |
|
HD |
|
Specialty
Retail |
Honeywell
International, Inc. |
|
Nasdaq |
|
HON |
|
Industrial
Conglomerates |
Intel
Corporation |
|
Nasdaq |
|
INTC |
|
Semiconductors &
Semiconductor Equipment |
International
Business Machines Corporation |
|
NYSE |
|
IBM |
|
IT
Services |
Johnson
& Johnson |
|
NYSE |
|
JNJ |
|
Pharmaceuticals |
JPMorgan
Chase & Co. |
|
NYSE |
|
JPM |
|
Banks |
McDonald’s
Corporation |
|
NYSE |
|
MCD |
|
Hotels, Restaurants
& Leisure |
Merck
& Co., Inc. |
|
NYSE |
|
MRK |
|
Pharmaceuticals |
Microsoft
Corporation |
|
Nasdaq |
|
MSFT |
|
Software |
Nike,
Inc. |
|
NYSE |
|
NKE |
|
Textiles, Apparel
& Luxury Goods |
Procter
& Gamble Company |
|
NYSE |
|
PG |
|
Household
Products |
Salesforce.com |
|
NYSE |
|
CRM |
|
Software |
Travelers
Companies, Inc. |
|
NYSE |
|
TRV |
|
Insurance |
UnitedHealth
Group Incorporated |
|
NYSE |
|
UNH |
|
Health Care
Providers & Services |
Verizon
Communications, Inc. |
|
NYSE |
|
VZ |
|
Diversified
Telecommunication Services |
Visa,
Inc. |
|
NYSE |
|
V |
|
IT
Services |
Walgreens
Boots Alliance, Inc. |
|
Nasdaq |
|
WBA |
|
Food & Staples
Retailing |
Walmart,
Inc. |
|
NYSE |
|
WMT |
|
Food & Staples
Retailing |
Walt
Disney Company |
|
NYSE |
|
DIS |
|
Entertainment |
The DJIA is the property of Dow Jones &
Company, Inc., which is not affiliated with the Fund or the Investment Manager.
Dow Jones & Company, Inc. has not participated in any way in the creation of
the Fund or in the selection of stocks included in the Fund and has not approved
any information included in this SAI. From time to time, Dow Jones &
Company, Inc. changes the stocks comprising the DJIA, although such changes are
infrequent.
The investment strategy of the Fund is unlikely
to be affected by the requirement that it not concentrate its investments, since
currently no more than three companies in the DJIA are engaged primarily in any
one industry. Similarly, the Fund’s investment strategy is unlikely to be
materially affected by the requirement that it meet the diversification
requirements of the Internal Revenue Code of 1986, as amended (the “Code”), since the Fund has
approximately 50% of its assets invested in U.S. Treasury securities and the
remainder of its assets divided among at least 10 stocks. However, the
diversification requirement for the Fund may preclude it from effecting a
purchase otherwise dictated by its investment strategy. Finally, because of the
requirements of the 1940 Act, the Fund may not invest more than 5% of its total
assets in the common stock of any issuer that derives more than 15% of its
revenues from securities-related activities. From time to time, this requirement
may preclude the Fund from effecting a purchase otherwise dictated by its
investment strategy.
Foreign Issuers – American
Depositary Receipts and Certain Other Foreign Issuers
The Fund may invest in foreign companies (i)
whose securities are listed on U.S. national securities exchanges or
(ii) through American Depository Receipts (“ADRs”), which are
U.S. dollar‑denominated securities of foreign issuers listed on U.S.
national securities exchanges.
Investing in foreign companies may include the
risk of substantial price volatility or reduced liquidity as a result of
political and economic instability or policy and legislative changes in the
foreign country and the risk of reduced earnings potential due to significantly
higher levels of taxation than U.S. companies, including potentially
confiscatory levels of taxation.
ADRs are U.S. dollar-denominated securities of
foreign issuers that are designed for use in U.S. securities markets and
are typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. Many ADRs are not registered with the SEC, and the
issuers of such securities are not subject to SEC reporting requirements.
Accordingly, there may be less publicly available information concerning such
issuers than is available concerning U.S. companies.
The Fund may be required to pay foreign
withholding or other taxes on the securities of certain foreign companies or on
certain ADRs that it owns, but investors may or may not be able to deduct their
pro rata share of such taxes in computing their taxable income or take such
shares as a credit against their U.S. federal income tax. See the “CERTAIN
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES” section of this SAI.
ADRs may be sponsored by the foreign issuer or
may be unsponsored. Unsponsored ADRs are organized independently and without the
cooperation of the foreign issuer of the underlying securities. Unsponsored ADRs
are offered by companies that are not prepared to meet either the reporting or
accounting standards of the United States. While readily exchangeable with stock
in local markets, unsponsored ADRs may be less liquid than sponsored ADRs.
Additionally, there generally is less publicly available information with
respect to unsponsored ADRs.
Foreign Issuers – Japan
Securities markets in Japan may operate
differently than those in the United States and present different risks.
Securities trading volume and liquidity may be less than in U.S. markets and, at
times, market price volatility may be greater.
Because evidences of ownership of the investments
by the Fund generally is held outside the United States, the Fund is subject to
additional risks that include possible adverse political, social, and economic
developments, or adoption of governmental laws or restrictions that might
adversely affect securities holdings of investors located outside Japan, whether
related to currency or otherwise. Moreover, the portfolio securities of the Fund
may trade on days when the Fund does not calculate NAV and thus affect the
Fund’s NAVs on days when investors have no access to the Fund.
Foreign Issuers – United
Kingdom
The Fund may invest in foreign companies traded
on foreign exchanges, including the London Stock Exchange. While the United
Kingdom (the “UK”) and the
European Union (the “EU”) have
entered into a preliminary trade agreement, the EU-UK Trade and Cooperation
Agreement, in connection with the UK’s withdrawal from the EU, many aspects of
the EU‑UK trade relationship remain subject to further negotiation. There
therefore remains considerable uncertainty relating to the potential ongoing
consequences of the UK’s withdrawal from the EU. The impact on the UK and
European economies and the broader global economy could be significant,
resulting in increased volatility and illiquidity, currency fluctuations,
impacts on arrangements for trading and on other existing cross-border
cooperation arrangements (whether economic, tax, fiscal, legal, regulatory, or
otherwise), and in potentially lower growth for companies in the UK, Europe, and
globally, which could have an adverse effect on the value of a Fund’s
investments. If one or more other countries were to exit the European Union or
abandon the use of the euro as a currency, the value of investments tied to
those countries or the euro could decline significantly and unpredictably.
Fund Structure
Unlike traditional mutual funds that are
structured as RICs for U.S. federal income tax purposes, the Fund is taxable as
a regular corporation, or C corporation, for U.S. federal income tax purposes.
This means the Fund generally is subject to U.S. federal income tax on its
taxable income at the rates applicable to corporations (currently a maximum rate
of 21%) and also is subject to state and local income taxes.
Illiquid and Restricted
Securities
Illiquid securities are those securities that the
Fund reasonably expects cannot be sold, disposed of, or reversed in seven
calendar days or less under current market conditions without such sale,
disposition, or reversal significantly changing the market value of the
investment. In determining the liquidity of the Fund’s investments, the
Investment Manager may consider various factors, including (i) the
frequency of trades and quotations, (ii) the number of dealers and
prospective purchasers in the marketplace, (iii) dealer undertakings to
make a market, (iv) the nature of the security (including any demand or
tender features), and (v) the nature of the marketplace for trades
(including the ability to assign or offset the Fund’s rights and obligations
relating to the investment).
Restricted securities may be sold only in
privately negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the 1933 Act. 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 such Fund may be permitted to sell a 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.
A large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
securities sold in private placements, repurchase agreements, commercial paper,
foreign securities, and corporate bonds and notes. These instruments are often
restricted securities because the securities are sold in transactions not
requiring registration. Institutional investors generally do not seek to sell
these instruments to the general public, but instead often depend either on an
efficient institutional market in which such unregistered securities can be
readily resold or on an issuer’s ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
Rule 144A establishes a safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance, and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the Financial Industry Regulatory Authority. An insufficient number of
qualified buyers interested in purchasing Rule 144A-eligible restricted
securities held by the Fund, however, could affect adversely the marketability
of securities of such Fund, and the Fund might be unable to dispose of such
securities promptly or at favorable prices.
The Board of Trustees has delegated the function
of making day‑to‑day determinations of liquidity to the Investment Manager
pursuant to guidelines approved by the Board of Trustees. The Investment Manager
takes into account a number of factors in reaching liquidity decisions,
including, but not limited to, (i) the frequency of trades for the
security, (ii) the number of dealers that make quotes for the security,
(iii) the number of dealers that have undertaken to make a market in the
security, (iv) the number of other potential purchasers, and (v) the
nature of the security and how trading is effected (e.g., the time needed to
sell the security, how bids are solicited, and the mechanics of transfer). The
Investment Manager monitors the
liquidity of restricted
securities in the Fund and reports periodically on such decisions to the Board
of Trustees.
The Board of Trustees approved a written
liquidity risk management program to assess investment liquidity pursuant to
Rule 22e-4 of the 1940 Act and designated a committee comprising four of the
Investment Manager’s employees to serve as the administrator of the program. No
less than annually, the Board of Trustees must review a written report prepared
by the administrator that addresses the operation of the liquidity risk
management program and assesses its adequacy and effectiveness.
Indexed Securities
Indexed securities are securities whose prices
are indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate‑term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers.
The performance of indexed securities depends to
a great extent on the performance of the security, currency, or other instrument
to which they are indexed, and performance may also be influenced by interest
rate changes in the United States and abroad. At the same time, indexed
securities are subject to the credit risks associated with the issuer of the
security, and their values may decline substantially if the issuer’s
creditworthiness deteriorates. Recent issuers of indexed securities have
included banks, corporations, and certain U.S. government agencies. Indexed
securities may be more volatile than the underlying instruments and may be
considered illiquid.
IPOs
An initial public offering (“IPO”) is a company’s first offering of
stock to the public. Shares are given a market value reflecting the company’s
assets and expectations for future growth. IPO securities typically are sold
when the portfolio managers believe their market price has reached full value
and may be sold shortly after purchase.
Purchasing IPO shares subjects the Fund to market
risk and liquidity risk. The market value of IPO shares fluctuates considerably
due to facts such as the absence of a prior public market, unseasoned trading,
the small number of shares available for trading, and limited public information
about the issuer. As a result, the Fund’s investments in IPOs may increase
portfolio turnover, which increases brokerage and administrative costs and may
result in taxable distributions to shareholders. Further, the purchase of IPO
shares by the Fund may involve high transaction costs. When the Fund’s asset
base is small, a significant portion of the Fund’s performance could be
attributable to investments in IPOs because such investments would have a
magnified impact on the Fund.
Investment Company
Securities
Investment companies, which are professionally
managed portfolios, include other open-end investment companies, closed-end
investment companies, unit investment trusts, exchange‑traded investment
companies (“ETFs”), and
exchange-traded notes (“ETNs”)
which may be organized as either open-end investment companies or unit
investment trusts.
As a shareholder of another investment company,
the Fund would bear, along with other shareholders, its pro rata portion of the
investment company’s expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that the Fund incurs directly in
connection with its own operations. Shareholders would also be exposed to the
risks associated not only with the investments of the Fund but also with the
portfolio investments of the underlying investment companies. Other investment
companies may have different investment policies than those of the Fund. Under
certain circumstances, an open-end investment company in which the Fund invests
may determine to make payment of a redemption by the Fund in whole or in part by
a distribution in kind of securities from its portfolio instead of in cash. As a
result, the Fund may hold such securities until the portfolio managers determine
it is appropriate to dispose of them. Such disposition imposes additional costs
on the Fund. Certain types of investment companies, such as closed-end
investment companies, issue a fixed number of shares that typically trade on a
stock exchange or over the counter at a premium or discount to their NAV. Others
are continuously offered at NAV but also may be traded on the secondary
market.
Investments in closed-end investment companies
are subject to various risks, including (i) reliance on management’s
ability to meet the closed-end investment company’s investment objective and to
manage the closed-end investment company portfolio, (ii) fluctuation in the
NAV of closed-end investment company shares compared to the changes in the value
of the underlying securities that the closed-end investment company owns, and
(iii) bearing a pro rata share of the management fees and expenses of each
underlying closed-end investment company, which results in the Fund’s
shareholders being subject to higher expenses than if such shareholder invested
directly in the closed-end investment company.
ETFs are pooled investment vehicles that commonly
seek to track the performance of specific indices. ETFs may be organized as
open-end investment companies or as unit investment trusts. Their shares are
listed on stock exchanges and can be traded throughout the day at
market-determined prices. The price of ETF shares is based on (but not
necessarily identical to) the value of the securities held by the ETF.
Accordingly, the level of risk involved in the purchase or sale of ETF shares is
similar to the risk involved in the purchase or sale of traditional common
stocks, with the exception that the pricing mechanism for ETF shares is based on
a basket of stocks. Disruptions in the markets for the securities underlying ETF
shares purchased or sold by the Fund could result in losses on such shares. ETFs
are subject to the following risks that do not apply to non‑exchange traded
funds: (i) in most cases, ETF shares are not individually redeemable, and
therefore the liquidity of ETF shares generally depends on the existence of a
secondary trading market; (ii) an ETF’s shares may trade at a market price
that is above or below such shares’ NAV; (iii) an active trading market for an
ETF’s shares may not develop or be maintained; (iv) an ETF may utilize high
leverage ratios; or (v) trading of an ETF’s shares may be halted if the listing
exchange’s officials deem such action appropriate, the shares are delisted from
the exchange, or the activation of market-wide “circuit breakers” (which are
tied to large decreases in stock prices) halts stock trading generally.
An investment in an ETN involves risks, including
possible loss of principal. ETNs are unsecured debt securities issued by a bank
that are linked to the total return of a market index. Risks of investing in
ETNs also include limited portfolio diversification, uncertain principal
payment, and illiquidity. Additionally, the investor fee reduces the amount of
return on maturity or at redemption, and as a result, the investor may receive
less than the principal amount at maturity or upon redemption, even if the value
of the relevant index has increased.
Junk Bonds
Lower-rated debt securities, commonly referred to
as junk bonds (those rated below the fourth‑highest grade by a nationally
recognized statistical ratings organization and unrated securities judged by the
portfolio managers to be of equivalent quality), have poor protection with
respect to the payment of interest and repayment of principal, or that may be in
default. These securities are often considered to be
speculative and involve
greater risk of loss or price changes due to changes in the issuer’s capacity to
pay. The market prices of lower-rated debt securities may fluctuate more than
those of higher-rated debt securities and may decline significantly in periods
of general economic difficulty, which may follow periods of rising interest
rates.
The market for lower-rated debt securities may be
thinner and less active than that for higher-rated debt securities, which can
adversely affect the prices at which the former are sold. If market quotations
are not available, lower-rated debt securities are valued in accordance with
procedures established by the Board of Trustees, including the use of outside
pricing services. Judgment plays a greater role in valuing high-yield corporate
debt securities than is the case for securities for which more external sources
for quotations and last‑sale information are available. Adverse publicity and
changing investor perceptions may affect the ability of outside pricing services
to value lower-rated debt securities and the Fund’s ability to sell these
securities.
Since the risk of default is higher for
lower-rated debt securities, the portfolio managers’ research and credit
analysis are an especially important part of managing securities of this type
held by the Fund. In considering investments for the Fund, the portfolio
managers attempt to identify those issuers of high‑yielding debt securities
whose financial conditions are adequate to meet future obligations, have
improved, or are expected to improve in the future. The analysis focuses on
relative values based on such factors as interest or dividend coverage, asset
coverage, earnings prospects, and the experience and managerial strength of the
issuer.
LEAPs
LEAPs are long-term call options that allow
holders the opportunity to participate in the underlying securities’
appreciation in excess of a specified strike price without receiving payments
equivalent to any cash dividends declared on the underlying securities. A LEAP
holder is entitled to receive a specified number of shares of the underlying
stock upon payment of the exercise price, and therefore the LEAP is exercisable
at any time the price of the underlying stock is above the strike price.
However, if at expiration the price of the underlying stock is at or below the
strike price, the LEAP expires and is worthless.
Loans and Other Debt
Instruments
Loans or other direct debt instruments are
interests in amounts owed by a corporate, governmental, or other borrower to
another party. They may represent amounts owed to lenders or lending syndicates
(loans and loan participation), to suppliers of goods or services (trade claims
or other receivables), or to other parties. Direct debt instruments involve a
risk of loss in case of default or insolvency of the borrower and may offer less
legal protection to the Fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. Direct debt instruments may also include
standby financing commitments that obligate the Fund to supply additional cash
to the borrower on demand.
LIBOR Transition
The Funds may have been exposed to financial
instruments that were tied to the London Interbank Offered Rate (“LIBOR”). Until recently, LIBOR was
used as a benchmark or reference rate for various commercial and financial
contracts, including corporate and municipal bonds, bank loans, asset-backed and
mortgage-related securities, interest rate swaps, and other derivatives.
The administrator of LIBOR has phased out LIBOR
such that since June 30, 2023, the overnight, 1‑month, 3‑month, 6‑month,
and 12‑month U.S. dollar LIBOR settings have ceased to be published or
representative. All other
LIBOR settings and certain other interbank offered rates, such as the Euro
Overnight Index Average, ceased to be published or representative after
December 31, 2021.
Actions by regulators have resulted in the
establishment of alternative reference rates to LIBOR in most major currencies.
The U.S. Federal Reserve, based on the recommendations of the New York Federal
Reserve’s Alternative Reference Rate Committee (comprised of major derivative
market participants and their regulators), has begun publishing a Secured
Overnight Financing Rate (“SOFR”), which has replaced U.S. dollar
LIBOR. Market participants generally have adopted alternative rates such as SOFR
or otherwise amended such financial instruments to include fallback provisions
and other measures that contemplated the discontinuation of LIBOR. To facilitate
the transition of legacy derivatives contracts referencing LIBOR, the
International SWAPs and Derivatives Association, Inc. (ISDA) launched a protocol
to incorporate fallback provisions. Notwithstanding the foregoing actions, there
still remains uncertainty regarding successor reference rate methodologies and
there is no assurance that the composition or characteristics of any alternative
reference rate will be similar to or produce the same value or economic
equivalence as LIBOR or that instruments using an alternative rate will have the
same volume or liquidity as did LIBOR prior to its discontinuance or
unavailability.
The transition process away from LIBOR could lead
to increased volatility and illiquidity in markets for instruments whose terms
previously relied on LIBOR. It could also lead to a reduction in the value of
some LIBOR‑based investments and reduce the effectiveness of new hedges placed
against existing LIBOR‑based instruments.
MLPs
MLPs are entities that are taxed as a partnership
under the Code and that has interests (or units) that are traded on securities
exchanges like shares of corporate stock. A typical MLP consists of a general
partner and limited partners, but some entities receiving partnership taxation
treatment under the Code are established as limited liability companies. The
general partner manages the partnership, has an ownership stake in the
partnership (typically a 2% general partner equity interest and additional
common units and subordinated units), and in many cases is eligible to receive
an incentive distribution. The limited partners provide capital to the
partnership, have a limited (if any) role in the operation and management of the
partnership, and are entitled to receive cash distributions with respect to
their units. An MLP typically pays an established minimum quarterly distribution
to common unitholders, as provided under the terms of its partnership agreement.
To qualify as an MLP for U.S. federal income tax purposes, an entity must
receive at least 90% of its income from qualifying sources such as interest,
dividends, real estate rents, the sale or disposition of real property, certain
mineral or natural resources activities, the transportation or storage of
certain fuels, and, in certain circumstances, commodities or futures, forwards,
and options with respect to commodities, and the sale or other disposition of
capital assets held for the production of such income.
Investing in MLPs involves various risks.
Firstly, holders of an MLP’s units are exposed to a remote possibility of
liability for all of the obligations of such MLP in the event that a court
determines that the rights of the unitholders to take certain action under the
limited partnership agreement would constitute control of the MLP’s business or
if a court or governmental agency determines that the MLP is conducting business
in a state without complying with the limited partnership statute of that state.
Secondly, certain MLPs depend on their parent or sponsor entities for the
majority of their revenues. If their parent or sponsor entities were to fail to
make such payments or satisfy their obligations, the revenues and cash flows of
such MLPs and the ability of such MLPs to make distributions to unitholders,
such as the Fund, would be adversely affected. Additionally, much of the benefit
that the Fund may derive from its investments in equity securities of MLPs is
because MLPs are treated as partnerships for U.S. federal income tax purposes.
Partnerships do not pay U.S. federal income tax at the partnership level.
Rather, each partner is allocated a share of the partnership’s income, gains,
losses, deductions, and expenses and pays taxes on those amounts.
A change in current tax
law or a change in the underlying business mix of a given MLP could result in
such MLP being treated as a corporation for U.S. federal income tax purposes,
which means the MLP would be required to pay U.S. federal income tax (as well as
state and local income taxes) on its taxable income. This would reduce the
amount of cash available for distribution by the MLP and could reduce the value
of the Fund’s investment in the MLP and lower income to the Fund. Finally, to
the extent a distribution received by the Fund from an MLP is treated as a
return of capital, the Fund’s adjusted tax basis in the interests of the MLP
would be reduced, which could increase the Fund’s tax liability upon the sale of
the interests in the MLP or upon subsequent distributions in respect of such
interests.
REITs and Related
Structures
U.S. real estate investment trusts (“REITs”) and companies with similar
characteristics to REITs have a structure in which revenue consists primarily of
rent derived from owned, income-producing real estate properties, dividend
distributions as a percentage of taxable net income are high (generally greater
than 80%), debt levels are generally conservative, and income derived from
development activities is generally limited. A number of countries have created
REIT-like regimes, which allow real estate investment companies to benefit from
flow‑through tax treatment, including Australia (since 1985), Japan (since
2000), South Korea (since 2001), Singapore (since 2002), and Hong Kong (since
2003).
One example of a REIT-like regime is a Japan real
estate investment trust (“J-REITs”). A J-REIT is an investment
vehicle with real estate in Japan as its underlying assets. Income is generated
by rents and sale proceeds and distributed to investors in the form of
dividends. The J-REIT investment vehicle was modeled on U.S. REITs. Like the
U.S. REIT, distributions paid to investors are, under qualifying conditions,
deductible from the J-REITs taxable income, thereby providing a tax-efficient
flow-through investment vehicle for investors. Typically, J-REITs are a special
purpose corporation established for the purpose of investing in and managing
real estate assets where the corporation uses investors’ money and third-party
funding to buy real estate, in return for which investors receive investment
certificates carrying ownership rights, including dividend entitlement. These
certificates can be bought and sold on the Japanese stock exchange where they
are listed. Although the corporation is technically responsible for owning and
managing the real estate properties, in reality this function is sub‑contracted
to a third-party manager. The values of securities issued by J-REITs are
affected by the Japan real estate market, real estate yields, and interest rates
and tax and regulatory requirements and by perceptions of management skill. Some
J-REITs are heavily concentrated in specific types of properties, such as office
buildings, and are particularly susceptible to developments affecting these
types of properties.
Reverse Repurchase
Agreements
A reverse repurchase agreement allows the Fund to
borrow funds for temporary purposes. Pursuant to such agreements, the Fund sells
portfolio securities to financial institutions such as banks and broker‑dealers
and agree to repurchase the securities at the mutually agreed-upon date and
price. The Fund intends to enter into reverse repurchase agreements only to
avoid otherwise selling securities during unfavorable market conditions to meet
redemptions.
Certain trading practices and investments, such
as reverse repurchase agreements, may be considered to be borrowings or involve
leverage and thus are subject to the 1940 Act restrictions. In accordance with
Rule 18f‑4 under the 1940 Act, when a Fund engages in reverse repurchase
agreements and similar financing transactions, the Fund may either
(i) maintain asset coverage of at least 300% with respect to such
transactions and any other borrowings in the aggregate, or (ii) treat such
transactions as “derivatives transactions” and comply with Rule 18f‑4 with
respect to such transactions.
Reverse repurchase agreements involve the risk
that the market value of the securities sold by the Fund may decline below the
price at which the Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowing by the Fund under the 1940
Act.
Simultaneous
Investments
Certain inherent conflicts of interest may arise
from the fact that a sub‑advisor to the Fund or its affiliates may carry on
substantial investment activities (including activities that employ
substantially similar strategies as the Fund) for other client accounts,
discretionary accounts, and other pooled investment vehicles, for their own
accounts, and for others. Investment decisions for the Fund are made
independently from other Funds and from those decisions made for other clients
advised by the sub‑advisor or its affiliates, and the Fund has no interest in
the investment activities of such other clients. If, however, such other Fund or
clients desire to invest in, or dispose of, the same securities as the Fund,
available investments or opportunities for sales are allocated equitably to
each. In some cases, this procedure may adversely affect the size of the
position obtained for or disposed of by the Fund or the price paid or received
by the Fund. In addition, when purchases or sales of the same security for the
Fund and other client accounts managed by the sub‑advisor occur
contemporaneously, the purchase or sale orders may be aggregated in order to
obtain any price advantages available to large denomination purchases and sales.
The Fund, together with the other Fund and clients advised by the portfolio
managers and affiliates of the sub‑advisor, may own large positions the size of
which, depending on market conditions, may affect adversely the Fund’s ability
to dispose of some or all of its positions should it desire to do so.
SPACs
A special purpose acquisition vehicle
(“SPAC”), a type of company
known as a blank-check company, is a publicly traded company that raises
investment capital through an IPO for the purpose of acquiring an existing
company. The shares of a SPAC are typically issued in units that
include one share of common stock and one right or warrant (or partial right or
warrant) conveying the right to purchase additional shares or partial shares. At
a specified time following the SPAC’s IPO (generally between one and two
months), the rights and warrants may be separated from the common stock at the
election of the holder, after which they become freely tradeable. After going
public and until an acquisition is completed, a SPAC holds the proceeds of
its IPO (less a portion retained to cover expenses) in trust and generally
invests them in U.S. Government Securities, money market securities, and cash.
If a SPAC does not complete an acquisition within a specified period
after going public, the SPAC is dissolved and the invested funds are
returned to the SPAC’s shareholders (less certain permitted expenses), and any
rights or warrants issued by the SPAC expire.
Because SPACs are blank‑check companies
without an operating history or ongoing business other than seeking
acquisitions, the value of their securities is particularly dependent on the
ability of the entity’s management to identify and complete a profitable
acquisition. Some SPACs may pursue acquisitions only within certain industries
or regions, which may increase the volatility of their prices. In addition, the
securities issued by a SPAC, which are typically traded in the
over-the-counter market, may be considered illiquid or be subject to
restrictions on resale.
Tax Estimation and NAV
Because the Fund is taxed as a corporation, in
calculating the Fund’s NAV, the Fund accounts for, among other things, its
current taxes and deferred tax liability and deferred tax asset balances. The
Fund accrues a deferred income tax liability balance, at the then-effective
statutory U.S. federal income tax rate (currently 21%) plus an estimated state
and local income tax rate, for its future tax liability associated with the
capital appreciation of its investments and the distributions received by the
Fund on interests of MLPs
(and other entities that
have economic characteristics similar to MLPs) considered to be return of
capital and for any net operating gains. Any deferred tax liability balance
would reduce the Fund’s NAV. The Fund may also accrue a deferred tax asset
balance, which reflects an estimate of the Fund’s future tax benefit associated
with net operating losses and unrealized losses. Any deferred tax asset balance
would increase the Fund’s NAV. To the extent the Fund has a deferred tax asset
balance, consideration is given as to whether or not a valuation allowance,
which would offset the value of some or all of the deferred tax asset balance,
is required. The Fund relies to some extent on information provided by MLPs (and
other entities that have economic characteristics similar to MLPs), which may
not be provided to the Fund on a timely basis, to estimate current taxes and
deferred tax liability and asset balances for purposes of financial statement
reporting and determining its NAV. The daily estimate of the Fund’s current
taxes and deferred tax liability and asset balances used to calculate the Fund’s
NAV could vary dramatically from the Fund’s actual tax liability or benefit,
and, as a result, the determination of the Fund’s actual tax liability or
benefit may have a material impact on the Fund’s NAV. From time to time, the
Fund may modify its estimates or assumptions regarding its current taxes and
deferred tax liability and asset balances as new information becomes available,
which may have a material impact on the Fund’s NAV. Shareholders who redeem
their shares at an NAV that is based on estimates of the Fund’s current taxes
and deferred tax liability and asset balances may benefit at the expense of
remaining shareholders (or remaining shareholders may benefit at the expense of
redeeming shareholders) if the estimates are later revised or ultimately differ
from the Fund’s actual current taxes and tax liability and asset balances.
U.S. Government
Securities
Certain U.S. Government Securities, including
U.S. Treasury securities and U.S. government agency and instrumentality
securities, are described in greater detail under the “DESCRIPTION OF CERTAIN
INSTRUMENTS” section of this SAI. The U.S. government is considered to be
the best credit-rated issuer in the debt markets. Since U.S. Treasury
securities are direct obligations of the U.S. government, they are
considered to have minimal credit risk. While most other government-sponsored
securities are not direct obligations of the U.S. government (although some are
guaranteed by the U.S. government), they also offer little credit risk.
However, market and interest risk relating to U.S. Government Securities
still may affect the Fund. For example, debt securities with longer maturities
tend to produce higher yields and generally are subject to potentially greater
capital appreciation and depreciation than obligations with shorter maturities
and lower yields. The market value of U.S. Government Securities generally
varies inversely with changes in market interest rates. An increase in interest
rates, therefore, generally would reduce the market value of any U.S. Government
Security held by the Fund, while a decline in interest rates generally would
increase the market value of such investment.
Variable or Floating Rate
Securities
Variable or floating rate securities provide for
periodic adjustments of the interest rate paid. Variable rate securities provide
for a specific periodic adjustment in the interest rate, while floating rate
securities have interest rates that change whenever there is a change in a
designated benchmark rate. Some variable or floating rate securities have put
features.
Warrants
Investments in warrants are pure speculation in
that they have no voting rights, pay no dividends, and have no rights with
respect to the assets of the corporation issuing them. Warrants are options to
purchase equity securities at a specific price valid for a specific period of
time. They do not represent ownership of the securities, but only the right to
buy them. Warrants differ from call options in that warrants are issued by the
issuer of the security that may be purchased on their exercise, whereas call
options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the
underlying securities.
Warrants involve the risk that the Fund could lose the purchase value of the
warrant if the warrant is not exercised prior to its expiration. They also
involve the risk that the effective price paid for the warrant added to the
subscription price of the related security may be greater than the value of the
subscribed security’s market price.
DISCUSSION OF GAS UTILITY FUND INDEX
METHODOLOGY
The American Gas Association Stock Index (the
“AGA Stock Index”) consists of
the publicly traded members of the American Gas Association (“AGA”) whose securities are traded on a
U.S. stock exchange, excluding treasury stock. While the securities of the
approximately 50 companies included in the AGA Stock Index are domestic U.S.
securities, they may include domestic securities of foreign companies, such as
ADRs, EDRs, or GDRs. These companies engage to varying degrees in the
distribution or transmission of natural gas. ScottMadden, Inc. (“ScottMadden”) performs the
computations required to produce the AGA Stock Index pursuant to a contractual
agreement between AGA and ScottMadden. AGA has the ultimate responsibility to
ensure that ScottMadden performs its calculations in accordance with AGA’s
Administrative Services Agreement with the Fund.
The AGA Stock Index is computed at least monthly
by multiplying the number of outstanding shares of common stock of each AGA
member company by the closing market price per share at the AGA Stock Index
date. This product then is multiplied by the percentage of each company’s assets
devoted to natural gas distribution and transmission or, when this information
is not available, by the percentage of property, plant, and equipment (“PP&E”) devoted to natural gas
distribution and transmission. The result reflects the natural gas component of
the company’s asset base and is called such company’s “gas market capitalization
value.” The total of all AGA Stock Index companies’ gas market capitalization
values is called the “industry’s gas market capitalization value.” To determine
each company’s stock percentage within the AGA Stock Index, the company’s gas
market capitalization value is divided by the industry’s gas market
capitalization value. In computing the AGA Stock Index, individual stocks are
limited to no more than 5% of the AGA Stock Index, meaning that any
representation in the AGA Stock Index exceeding 5% is reallocated. The Fund’s
portfolio managers seek to purchase sufficient shares of each company’s stock
such that its proportion of the Fund’s assets substantially equal that stock’s
proportion of the AGA Stock Index. As market conditions dictate and as
significant shareholder purchases and redemptions occur, the portfolio managers
buy or sell stocks to maintain holdings of each stock to reflect proper
weightings within the AGA Stock Index. The gas market capitalization value for
each company is recalculated at least annually.
In both rising and falling markets, the Fund
attempts to achieve a correlation of monthly returns with the AGA Stock Index of
approximately 95% or better. A correlation of 100% means the total return of the
Fund’s assets would increase and decrease at exactly the same rate as the total
return of the AGA Stock Index. For fiscal year 2023, the Gas Utility Fund
achieved a correlation with the AGA Stock Index of 99.9% after expenses. Since
the AGA Stock Index weightings change in very small amounts during the trading
day, to track the AGA Stock Index exactly, the portfolio managers would need to
make continual small adjustments and would need to purchase and sell every stock
within the AGA Stock Index as contributions and redemptions to the Fund were
made. To minimize brokerage and transaction expenses, the portfolio managers
compare the actual composition of the Fund to the theoretical target daily and
typically makes adjustments to the holdings of any single stock at least weekly
whenever the actual proportion of that stock in the Fund varies by more than
0.5% of the weighting of that stock in the AGA Stock Index. The percentage of
each stock holding is based on the Fund’s NAV. For example, if Stock A
represented 3% of the total weighting in the AGA Stock Index at the close of
business, an adjustment to the holdings of Stock A would be made if the
value of Stock A were greater than 3.5% or less than 2.5% of the net assets.
Adjustments may be made at other times when these tolerances are not exceeded if
the adjustment can be made without incurring, in the portfolio managers’ view,
unreasonable transaction expenses.
MANAGEMENT INFORMATION
The business and affairs of the Funds are managed
under the direction of the Board of Trustees of the Trust, and the Board of
Trustees elects the officers of the Trust (“Officers”). From time to time, the
Board of Trustees also has appointed advisers to the Board of Trustees (“Advisers”) with the intention of
having qualified individuals serve in an advisory capacity to garner experience
in the investment fund and asset management industry and be considered as
potential Trustees in the future. There are currently two Advisers, Brian
Alexander and A.J. Hennessy. As Advisers, Mr. Alexander and Mr. A.J.
Hennessy attend meetings of the Board of Trustees and act as non‑voting
participants. Information pertaining to the Trustees, Advisers, and the Officers
of the Trust is set forth below. The Trustees and Officers serve until their
successors are duly elected and qualified or until their earlier death,
resignation, or removal. Each Trustee oversees all 16 Funds covered by this SAI,
as well as the Hennessy Stance ESG ETF. The Hennessy Stance ESG ETF is covered
in a different Statement of Additional Information. Unless otherwise indicated,
the address of all persons listed below is 7250 Redwood Boulevard,
Suite 200, Novato, CA 94945.
Name, Year of Birth,
and Position Held
with the Trust |
|
Start Date of
Service |
|
Principal
Occupation(s) During Past Five Years |
|
Other Directorships
Held Outside of Fund
Complex During Past
Five Years |
Disinterested
Trustees (1) and
Disinterested Advisers |
|
|
J.
Dennis DeSousa 1936 Trustee |
|
January 1996 |
|
Mr. DeSousa is a real estate investor. |
|
None. |
Robert
T. Doyle 1947 Trustee |
|
January 1996 |
|
Mr. Doyle is retired. He served as the Sheriff of Marin County,
California from 1996 to June 2022. |
|
None. |
Doug
Franklin 1964 Trustee |
|
March 2016 as an Adviser to the Board of Trustees and
June 2023 as a Trustee |
|
Mr. Franklin is a retired insurance industry executive. From
1987 through 2015, he was employed by the Allianz-Fireman’s Fund Insurance
Company in various positions, including as its Chief Actuary and Chief
Risk Officer. |
|
None. |
Claire
Garvie 1974 Trustee |
|
December 2015 as an Adviser to the Board of Trustees and
December 2021 as a Trustee |
|
Ms. Garvie is a founder of Kiosk and has served as its Chief
Operating Officer since 2004. Kiosk is a full‑service marketing agency
with offices in the San Francisco Bay Area and Liverpool, UK and staff
across nine states in the U.S. |
|
None. |
Gerald
P. Richardson 1945 Trustee |
|
May 2004 |
|
Mr. Richardson is an independent consultant in the securities
industry. |
|
None. |
Name, Year of Birth,
and Position Held
with the Trust |
|
Start Date of
Service |
|
Principal
Occupation(s) During Past Five Years |
|
Other Directorships
Held Outside of Fund
Complex During Past
Five Years |
Brian
Alexander 1981 Adviser
to the Board of Trustees |
|
March 2015 |
|
Mr. Alexander has served as the Chief Operating Officer of Solis
Mammography since March 2023. Prior to that, he worked for the
Sutter Health organization from 2011 in various positions. He served as
the Chief Executive Officer of the North Valley Hospital Area from 2021 to
March 2023. From 2018 to 2021, he served as the Chief Executive
Officer of Sutter Roseville Medical Center. From 2016 through 2018, he
served as the Vice President of Strategy for the Sutter Health Valley
Area, which includes 11 hospitals, 13 ambulatory surgery centers,
16,000 employees, and 1,900 physicians. |
|
None. |
|
|
|
|
|
|
|
Interested
Trustee and Interested Adviser (2) |
|
|
Neil J.
Hennessy 1956 Chairman
of the Board, Chief Market Strategist, Portfolio Manager, and
President |
|
January 1996 as a Trustee and June 2008 as an Officer |
|
Mr. Neil Hennessy has been employed by Hennessy Advisors, Inc. since
1989 and currently serves as its Chairman and Chief Executive
Officer. |
|
Hennessy Advisors, Inc. |
A.J.
Hennessy 1986 Adviser
to the Board of Trustees and Vice President, Corporate Development and
Operations |
|
December 2022 |
|
Mr. A.J. Hennessy has been employed by Hennessy Advisors, Inc.
since 2011. |
|
None. |
Name, Year of Birth,
and Position Held with
the Trust |
|
Start Date of
Service |
|
Principal Occupation(s)
During Past Five Years |
Officers |
|
|
|
|
Teresa
M. Nilsen 1966 Executive
Vice President and Treasurer |
|
January 1996 |
|
Ms. Nilsen has been employed by Hennessy Advisors, Inc. since 1989
and currently serves as its President, Chief Operating Officer, and
Secretary. |
Daniel
B. Steadman 1956 Executive
Vice President and Secretary |
|
March 2000 |
|
Mr. Steadman has been employed by Hennessy Advisors, Inc. since 2000
and currently serves as its Executive Vice President. |
Brian
Carlson 1972 Senior
Vice President and Head of Distribution |
|
December 2013 |
|
Mr. Carlson has been employed by Hennessy Advisors, Inc. since
December 2013 and currently serves as its Chief Compliance Officer
and Senior Vice President. |
David
Ellison (3) 1958 Senior
Vice President and Portfolio Manager |
|
October 2012 |
|
Mr. Ellison has been employed by Hennessy Advisors, Inc. since
October 2012. He has served as a Portfolio Manager of the Hennessy
Large Cap Financial Fund and the Hennessy Small Cap Financial Fund since
their inception. Mr. Ellison also served as a Portfolio Manager of
the Hennessy Technology Fund from its inception until February 2017.
Mr. Ellison served as Director, CIO, and President of FBR Fund
Advisers, Inc. from December 1999 to October 2012. |
Jennifer
Emerson
(4) 1977 Senior
Vice President and Chief Compliance Officer |
|
June 2013 |
|
Ms. Emerson has been employed by Hennessy Advisors, Inc. as its
General Counsel since June 2013.
|
Ryan
Kelley (5) 1972 Senior
Vice President, Chief Investment Officer, and Portfolio
Manager |
|
March 2013 |
|
Mr. Kelley has been employed by Hennessy Advisors, Inc. since
October 2012. He has served as Chief Investment Officer of the
Hennessy Funds since March 2021 and has served as a Portfolio Manager of
the Hennessy Gas Utility Fund, the Hennessy Large Cap Financial Fund, and
the Hennessy Small Cap Financial Fund since October 2014. Mr. Kelley
served as Co‑Portfolio Manager of these same funds from March 2013
through September 2014 and as a Portfolio Analyst for the Hennessy Funds
from October 2012 through February 2013. He has also served as a
Portfolio Manager of the Hennessy Cornerstone Growth Fund, the Hennessy
Cornerstone Mid Cap 30 Fund, the Hennessy Cornerstone Large Growth Fund,
and the Hennessy Cornerstone Value Fund since February 2017 and as a
Portfolio Manager of the Hennessy Total Return Fund, the Hennessy Balanced
Fund, and the Hennessy Technology Fund since May 2018. He previously
served as Co‑Portfolio Manager of the Hennessy Technology Fund from
February 2017 until May 2018. Mr. Kelley served as Portfolio
Manager of FBR Fund Advisers, Inc. from January 2008 to
October 2012. |
Name,
Year of Birth,
and
Position Held with
the
Trust |
|
Start Date of Service |
|
Principal Occupation(s) During Past Five
Years |
L.
Joshua Wein (5) 1973 Vice
President and Portfolio Manager |
|
September 2018 |
|
Mr. Wein has been employed by Hennessy Advisors, Inc. since 2018. He
has served as Portfolio Manager of the Hennessy Cornerstone Growth Fund,
the Hennessy Cornerstone Mid Cap 30 Fund, the Hennessy Cornerstone Large
Growth Fund, the Hennessy Cornerstone Value Fund, Hennessy Total Return
Fund, the Hennessy Balanced Fund, the Hennessy Gas Utility Fund, and the
Hennessy Technology Fund since February 2021, and as the Co-Portfolio
Manager of these Funds since February 2019. He served as a Senior Analyst
of those same Funds from September 2018 through February 2019. He
also has served as a Portfolio Manager of the Hennessy Energy Transition
Fund and the Hennessy Midstream Fund since January 2022. Mr. Wein served
as Director of Alternative Investments and Co‑Portfolio Manager at
Sterling Capital Management from 2008 to 2018. |
_______________
(1) |
The Funds have determined that Mr. Alexander, Mr. DeSousa,
Mr. Doyle, Mr. Franklin, Ms. Garvie, and
Mr. Richardson are not interested persons, as defined in the 1940
Act, of the Investment Manager or of any predecessor investment adviser
for purposes of Section 15(f) of the
1940 Act. |
(2) |
Each of Neil J. Hennessy and A.J. Hennessy is considered an
interested person, as defined in the 1940 Act, because he is an officer of
the Trust. |
(3) |
The address of this officer is 101 Federal Street, Suite 1615B,
Boston, MA 02110. |
(4) |
The address of this officer is 4800 Bee Caves Road, Suite 100,
Austin, TX 78746. |
(5) |
The address of this officer is 1340 Environ Way, Chapel Hill, NC
27517. |
Pursuant to the terms of the Management
Agreements (as defined below) with the Trust, the Investment Manager, on behalf
of the Funds, pays the compensation of all Officers (other than all or a portion
of the salaries and benefits of the Funds’ compliance officers) and Trustees who
are affiliated persons of the Investment Manager.
TRUSTEE AND ADVISER QUALIFICATIONS
Neil J. Hennessy has been a Trustee and
portfolio manager of the Hennessy Funds for many years. His experience and
skills as a portfolio manager, as well as his familiarity with the investment
strategies utilized by the Investment Manager and with the Cornerstone series of
the Hennessy Funds’ portfolios, led to the conclusion that he should serve as a
Trustee. J. Dennis DeSousa’s experience as a real estate investor has honed
his understanding of financial statements and the issues that confront
businesses, and his diligent and thoughtful service as a Trustee for over
25 years has provided him with a solid understanding of the investment fund
industry. Serving as a sheriff for over 26 years before retiring,
Robert T. Doyle honed his organizational and problem solving skills, making
him a valuable resource when addressing issues that confront the Hennessy Funds.
Further, Mr. Doyle’s diligent and thoughtful service as a Trustee for over
25 years has provided him with a detailed understanding of the investment
fund industry. Doug Franklin was employed by the Allianz-Fireman’s Fund (FFIC)
for 28 years, where he rose through the company to senior leadership, including
positions as Chief Actuary and Chief Risk Officer before retiring in 2015. His
considerable leadership experience and ability to grasp complex issues makes him
a valuable resource to the Board of Trustees. Claire Garvie is the founder and
Chief Operations Officer of Kiosk, an internet marketing and services firm, and
brings over 20 years of experience leading successful marketing programs for
firms
like Sony, Delta Airlines,
and many others. Kiosk was founded in 2004 and has offices in the San Francisco
Bay Area and Liverpool, UK, as well as staff across nine states in the U.S. Her
vast experience in digital marketing makes her a valuable addition to the Board
of Trustees. As the chief executive officer of a company,
Gerald P. Richardson gained familiarity with financial statements and
developed a deep understanding of the demands of operating a business and
addressing the issues that confront businesses. Further, Mr. Richardson’s
experience in the securities industry as a consultant and his diligent and
thoughtful service as a Trustee for nearly two decades makes him a valuable
resource to the Board of Trustees. Mr. DeSousa, Mr. Doyle,
Mr. Franklin, Ms. Garvie, and Mr. Richardson take conservative
and thoughtful approaches to addressing issues facing the Hennessy Funds. The
combination of skills and attributes discussed above led to the conclusion that
Mr. DeSousa, Mr. Doyle, Mr. Franklin, Ms. Garvie, and
Mr. Richardson should serve as Trustees.
With over 15 years of experience in the complex
healthcare industry, Brian Alexander’s leadership roles at Solis Mammography and
in various senior positions within the Sutter Health organization have required
significant management, administrative, and customer service expertise, which
makes him a valuable resource as an Adviser to the Board of Trustees.
A.J. Hennessy has worked for the Investment Manager for over 12 years. His
primary focus is business development, researching acquisition opportunities,
fostering connections in the industry, and helping to initiate and complete
strategic transactions for the firm. He is integral in supporting the sales and
distribution team, including overseeing a CRM (client relationship management)
software system. A.J. Hennessy is also very active in the community and
currently serves on the boards of several charitable organizations. His
experience in the investment fund industry and his community leadership makes
him a valuable resource as an Adviser to the Board of Trustees.
BOARD LEADERSHIP STRUCTURE
The Board of Trustees has general oversight
responsibility with respect to the operation of the Hennessy Funds. The Board of
Trustees has engaged the Investment Manager to manage the Hennessy Funds and is
responsible for overseeing the Investment Manager and other service providers to
the Hennessy Funds in accordance with the provisions of the 1940 Act and other
applicable laws. The Board of Trustees has established an Audit Committee to
assist the Board of Trustees in performing its oversight responsibilities.
Neil J. Hennessy serves as the Chairman of the
Board of Trustees. The Hennessy Funds do not have a lead disinterested Trustee.
The small size of the Board of Trustees, consisting of one interested Trustee
and five disinterested Trustees, facilitates open discussion and significant
involvement by all of the Trustees without the need for a lead disinterested
Trustee. Mr. Neil Hennessy’s in-depth knowledge of the Hennessy Funds and their
operations enables him to effectively set board agendas and ensure appropriate
processes and relationships are established with both the Investment Manager and
the Board of Trustees, while the business acumen and many years of experience in
the investment fund industry serving as Trustees or Advisers of the Hennessy
Funds of Mr. DeSousa, Mr. Doyle, Mr. Franklin, Ms. Garvie,
and Mr. Richardson, enables them to effectively and accurately assess the
information being provided to the Board of Trustees to ensure that they are
appropriately fulfilling their fiduciary duties to the Hennessy Funds and their
shareholders. In light of these factors, the Trust has determined that its
leadership structure is appropriate.
BOARD OVERSIGHT OF RISK
The Board of Trustees performs a risk oversight
function for the Hennessy Funds directly through its oversight role and
indirectly through the Audit Committee, officers of the Hennessy Funds, and
service providers to the Hennessy Funds. To effectively perform its risk
oversight function, the Board of Trustees performs the following activities,
among other things: (i) receives and reviews reports related to the
performance and operations of the Hennessy Funds; (ii) reviews and
approves, as applicable, the compliance
policies and procedures of
the Hennessy Funds; (iii) approves the Hennessy Funds’ principal investment
policies; (iv) meets with representatives of various service providers,
including the Investment Manager and the independent registered public
accounting firm of the Hennessy Funds, to review and discuss the activities of
the Hennessy Funds and to provide direction with respect thereto; and
(v) appoints a chief compliance officer of the Hennessy Funds who oversees
the implementation and testing of the Hennessy Funds’ compliance program and
reports to the Board of Trustees regarding compliance matters for the Hennessy
Funds and their service providers.
The Hennessy Funds have an Audit Committee, which
is discussed in greater detail below. The Audit Committee plays a significant
role in the risk oversight of the Hennessy Funds as they meet annually with the
independent registered public accounting firm of the Hennessy Funds (the “Auditor”) to discuss, among other
things, financial risk, including internal controls over financial reporting.
From time to time upon request, the Audit Committee meets with the Funds’ chief
compliance officer and Fund counsel.
BOARD
COMMITTEES
The Audit Committee of the Board of Trustees
comprises Mr. DeSousa, Mr. Doyle (Chair), Ms. Garvie, and
Mr. Richardson. The primary functions of the Audit Committee are to
recommend to the Board of Trustees the independent registered public accounting
firm to be retained to perform the annual audit, to review the results of the
audit, to review the Funds’ internal controls, and to review certain other
matters relating to the Funds’ independent registered public accounting firm and
financial records. The Audit Committee met twice during fiscal year 2023.
In overseeing the Auditor, the Audit Committee
(i) reviews the Auditor’s independence from the Funds and management, and
from the Investment Manager, (ii) reviews periodically the level of fees
approved for payment to the Auditor and the pre‑approved non-audit services it
has provided to the Funds to ensure their compatibility with the Auditor’s
independence, (iii) reviews the Auditor’s performance, qualifications and
quality control procedures, (iv) reviews the scope of and overall plans for
the annual audit, (v) reviews the Auditor’s performance, qualifications and
quality control procedures, (vi) consults with management and the Auditors
with respect to the Funds’ processes for risk assessment and risk management,
(vii) reviews with management the scope and effectiveness of the Funds’
disclosure controls and procedures, including for purposes of evaluating the
accuracy and fair presentation of the company’s financial statements in
connection with certifications made by the chief executive officer and chief
financial officer, and (viii) reviews significant legal developments and
the Funds’ processes for monitoring compliance with law as it relates to the
financial statements and related disclosure.
BOARD AND OTHER INTERESTED PERSONS
COMPENSATION
The Trust pays Trustees who are not interested
persons of the Funds (each, a “Disinterested Trustee”) and Advisers
who are not interested persons of the Funds (each, a “Disinterested Adviser”) fees for their
service. During fiscal year 2023, each Disinterested Trustee received a fee of
$16,000 and each Disinterested Adviser received a fee of $5,000 for each meeting
of the Board of Trustees attended, in each case allocated equally across all
Funds. The Trust may also reimburse Trustees and Advisers for travel expenses
incurred in order to attend meetings of the Board of Trustees.
The table below sets forth the compensation paid
by the Trust to each Trustee for service as a Trustee, to each Adviser for
service as an Adviser, and to each officer or affiliated person who received
aggregate compensation
from the Trust exceeding $60,000, in each case for the 12 months ended
October 31, 2023.
Name
of Person |
|
Aggregate
Compensation
from
the Trust |
|
Pension
or
Retirement
Benefits
Accrued
as
Part
of Fund
Expenses |
|
Estimated
Annual
Benefits
upon
Retirement |
|
Total Compensation from
the Trust (1) |
Disinterested
Trustees and Disinterested Advisers |
|
|
J.
Dennis DeSousa |
|
$ 64,000 |
|
— |
|
— |
|
$ 64,000 |
Robert
T. Doyle |
|
$ 64,000 |
|
— |
|
— |
|
$ 64,000 |
Doug
Franklin (2) |
|
$ 42,000 |
|
— |
|
— |
|
$ 42,000 |
Claire
Garvie |
|
$ 64,000 |
|
— |
|
— |
|
$ 64,000 |
Gerald
P. Richardson |
|
$ 64,000 |
|
— |
|
— |
|
$ 64,000 |
Brian
Alexander |
|
$ 15,000 |
|
— |
|
— |
|
$ 15,000 |
Interested
Persons (3) |
|
|
|
|
|
|
Neil
J. Hennessy |
|
— |
|
— |
|
— |
|
— |
A.J.
Hennessy (4) |
|
— |
|
— |
|
— |
|
— |
Jennifer
Emerson |
|
$
275,992 (5) |
|
— |
|
— |
|
$ 275,992 |
_______________
(1) The
Trust is comprised of the Hennessy Funds covered in this SAI and the
Hennessy Stance ESG ETF. The Hennessy Stance ESG ETF is covered in a
different Statement of Additional Information. |
(2) Mr. Franklin
served as an Adviser until he was appointed as a Trustee in
June 2023. |
(3) Each
of Neil J. Hennessy and A.J. Hennessy is considered an interested person,
as defined in the 1940 Act, because he is an officer of the
Trust. |
(4) A.J.
Hennessy was appointed as an Adviser in December 2022. |
(5) This
amount includes $244,706 in salary and $31,286 in benefits (health and
life insurance premiums and payroll expenses). |
Because the Investment Manager, the sub-advisors,
and Fund Services (as defined below under “THE ADMINISTRATOR”) perform
substantially all of the services necessary for the operation of the Funds, the
Funds do not require any employees. Other than the Funds’ compliance officer, no
officer, director, or employee of the Investment Manager, any sub‑advisor, or
Fund Services receives any compensation from the Trust for acting as a Trustee
or Officer.
As of January 31, 2024, the 15 Officers,
Trustees, and Advisers of the Hennessy Funds as a group owned an aggregate of
less than 1% of (i) the outstanding Investor Class shares of each Fund,
except for the Balanced Fund (1.2%) and the Technology Fund (2.5%), and (ii) the
outstanding Institutional Class shares of each Fund, except for the Cornerstone
Large Growth Fund (1.3%), the Cornerstone Value Fund (3.0%), the Energy
Transition Fund (3.2%), the Large Cap Financial Fund (2.5%), the Small Cap
Financial Fund (3.3%), and the Technology Fund (8.6%).
No person is deemed to “control” any of the
Funds, as that term is defined in the 1940 Act, because no Fund knows of any
person who owns beneficially or through controlled companies more than 25% of a
Fund’s shares, who acknowledges the existence of control, or who was deemed to
control based on an adjudication that has become final under Section 2(a)(9) of
the 1940 Act. The Funds do not control any person.
As of January 31, 2024, the shareholders listed
in the table below, referred to as principal shareholders, owned more than 5% of
the outstanding voting securities of the Funds. All principal shareholders are
owners of record unless otherwise indicated with an asterisk, which denotes
beneficial ownership.
|
Investor
Class |
Institutional
Class |
Shares |
Percentage |
Shares |
Percentage |
Cornerstone
Growth Fund |
|
|
|
|
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
1,967,727 |
33.61% |
181,902 |
18.76% |
National
Financial Services LLC
For
Exclusive Benefit of Our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
774,776 |
13.23% |
146,758 |
15.14% |
Pershing
LLC
For
Benefit of its Customers
1
Pershing Plaza
Jersey
City, NJ 07399-0002 |
— |
— |
189,615 |
19.56% |
Wells
Fargo Clearing Services LLC
1
North Jefferson Avenue
Saint
Louis, MO 63103-2287 |
— |
— |
90,212 |
9.31% |
Focus
Fund |
|
|
|
|
National
Financial Services LLC
For
Exclusive Benefit of Our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
3,539,887 |
40.62% |
1,243,608 |
18.55% |
|
Investor
Class |
Institutional
Class |
Shares |
Percentage |
Shares |
Percentage |
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
2,364,147 |
27.13% |
1,174,878 |
17.53% |
Saxon
& Co.
PO
Box 94597
Cleveland,
OH 44101-4597 |
— |
— |
1,778,921 |
26.54% |
American
Enterprise Investment Services Inc.
707 2nd
Avenue South
Minneapolis,
MN 55402-2405 |
— |
— |
441,575 |
6.59% |
Wells
Fargo Clearing Services LLC
1
North Jefferson Avenue
Saint
Louis, MO 63103-2287 |
— |
— |
398,337 |
5.94% |
Cornerstone
Mid Cap 30 Fund |
|
|
|
|
National
Financial Services LLC
For
Exclusive Benefit of Our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
7,891,126 |
43.72% |
5,283,715 |
27.03% |
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
6,027,551 |
33.39% |
7,605,537 |
38.91% |
LPL
Financial
Omnibus
Customer Account
4707
Executive Drive
San
Diego, CA 92121-3091 |
— |
— |
1,518,060 |
7.77% |
Pershing
LLC
For
Benefit of its Customers
1
Pershing Plaza
Jersey
City, NJ 07399-0002 |
— |
— |
1,167,187 |
5.97% |
Cornerstone
Large Growth Fund |
|
|
|
|
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
1,926,761 |
16.90% |
200,928 |
12.54% |
|
Investor
Class |
Institutional
Class |
Shares |
Percentage |
Shares |
Percentage |
National
Financial Services LLC
For
Exclusive Benefit of Our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
1,381,972 |
12.12% |
326,887 |
20.40% |
Pershing
LLC
For
Benefit of its Customers
1
Pershing Plaza
Jersey
City, NJ 07399-0002 |
— |
— |
114,958 |
7.17% |
Cornerstone
Value Fund |
|
|
|
|
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
1,805,103 |
13.44% |
103,933 |
26.81% |
National
Financial Services LLC
For
Exclusive Benefit of Our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
1,068,185 |
7.95% |
86,841 |
22.40% |
LPL
Financial
Omnibus
Customer Account
4707
Executive Drive
San
Diego, CA 92121-3091 |
— |
— |
45,389 |
11.71% |
Sandeep
Jain*
Frankfort,
IL 60423-1058 |
— |
— |
32,208 |
8.31% |
Pershing
LLC
For
Benefit of its Customers
1
Pershing Plaza
Jersey
City, NJ 07399-0002 |
— |
— |
20,705 |
5.34% |
Total
Return Fund |
|
|
|
|
National
Financial Services LLC
For
Exclusive Benefit of Our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
424,005 |
11.06% |
— |
— |
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
420,214 |
10.96% |
— |
— |
|
Investor
Class |
Institutional
Class |
Shares |
Percentage |
Shares |
Percentage |
Equity
and Income Fund |
|
|
|
|
National
Financial Services LLC
For
Exclusive Benefit of Our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
1,187,080 |
48.06% |
310,438 |
12.34% |
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
406,509 |
16.46% |
301,358 |
11.98% |
UBS WM
USA
Exclusive
Benefit of Customers
1000
Harbor Boulevard
Weehawken,
NJ 07086-6761 |
— |
— |
348,970 |
13.87% |
Merrill
Lynch Pierce Fenner & Smith, Inc.
For the
Sole Benefit of its Customers
4800
Deer Lake Drive East
Jacksonville,
FL 32246-6484 |
— |
— |
327,725 |
13.03% |
LPL
Financial
Omnibus
Customer Account
4707
Executive Drive
San
Diego, CA 92121-3091 |
— |
— |
194,462 |
7.73% |
Wells
Fargo Clearing Services LLC
1
North Jefferson Avenue
Saint
Louis, MO 63103-2287 |
— |
— |
162,507 |
6.46% |
Pershing
LLC
For
Benefit of its Customers
1
Pershing Plaza
Jersey
City, NJ 07399-0002 |
— |
— |
143,227 |
5.69% |
Balanced
Fund |
|
|
|
|
LPL
Financial
Omnibus
Customer Account
4707
Executive Drive
San
Diego, CA 92121-3091 |
364,451 |
24.89% |
— |
— |
NOVA-RO
Corporation*
PO
Box 1195
Novato,
CA 94948-1195 |
221,984 |
15.16% |
— |
— |
Lovi
Family Living Trust*
Leo
Lovi & Lorraine Lovi
Redwood
City, CA 94061-3920 |
112,203 |
7.66% |
— |
— |
|
Investor
Class |
Institutional
Class |
Shares |
Percentage |
Shares |
Percentage |
National
Financial Services LLC
For
Exclusive Benefit of Our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
75,268 |
5.14% |
— |
— |
Energy
Transition Fund |
|
|
|
|
National
Financial Services LLC
For
Exclusive Benefit of Our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
81,220 |
26.34% |
54,520 |
18.27% |
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
71,787 |
23.28% |
— |
— |
UBS WM
USA
Exclusive
Benefit of Customers
1000
Harbor Boulevard
Weehawken,
NJ 07086-6761 |
61,644 |
19.99% |
92,701 |
31.07% |
LPL
Financial
Omnibus
Customer Account
4707
Executive Drive
San
Diego, CA 92121-3091 |
27,535 |
8.93% |
17,584 |
5.89% |
Pershing
LLC
For
Benefit of its Customers
1
Pershing Plaza
Jersey
City, NJ 07399-0002 |
— |
— |
61,494 |
20.61% |
Midstream
Fund |
|
|
|
|
National
Financial Services LLC
For
Exclusive Benefit of Our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
1,184,990 |
69.93% |
— |
— |
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
348,434 |
20.56% |
2,435,787 |
67.98% |
|
Investor
Class |
Institutional
Class |
Shares |
Percentage |
Shares |
Percentage |
LPL
Financial
Omnibus
Customer Account
4707
Executive Drive
San
Diego, CA 92121-3091 |
— |
— |
320,419 |
8.94% |
Pershing
LLC
For
Benefit of its Customers
1
Pershing Plaza
Jersey
City, NJ 07399-0002 |
— |
— |
272,131 |
7.59% |
UBS WM
USA
Exclusive
Benefit of Customers
1000
Harbor Boulevard
Weehawken,
NJ 07086-6761 |
— |
— |
218,772 |
6.11% |
Gas
Utility Fund |
|
|
|
|
National
Financial Services LLC
For
Exclusive Benefit of Our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
5,718,643 |
33.75% |
619,112 |
30.70% |
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
3,525,906 |
20.81% |
329,010 |
16.32% |
Pershing
LLC
For
Benefit of its Customers
1
Pershing Plaza
Jersey
City, NJ 07399-0002 |
— |
— |
286,727 |
14.22% |
LPL
Financial
Omnibus
Customer Account
4707
Executive Drive
San
Diego, CA 92121-3091 |
— |
— |
154,356 |
7.65% |
Wells
Fargo Clearing Services LLC
1
North Jefferson Avenue
Saint
Louis, MO 63103-2287 |
— |
— |
101,268 |
5.02% |
Japan
Fund |
|
|
|
|
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
583,947 |
44.61% |
584,258 |
7.71% |
|
Investor
Class |
Institutional
Class |
Shares |
Percentage |
Shares |
Percentage |
National
Financial Services LLC
For
Exclusive Benefit of Our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
399,083 |
30.49% |
461,704 |
6.10% |
Morgan
Stanley Smith Barney LLC
Custody
Account for the Exclusive Benefit of Customers
1
New York Plaza, Floor 12
New
York, NY 10004-1932 |
93,013 |
7.11% |
4,447,031 |
58.71% |
American
Enterprise Investment Services Inc.
707 2nd
Avenue South
Minneapolis,
MN 55402-2405 |
— |
— |
805,859 |
10.64% |
Japan
Small Cap Fund |
|
|
|
|
National
Financial Services LLC
For
Exclusive Benefit of Our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
933,455 |
45.09% |
470,198 |
9.50% |
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
730,623 |
35.29% |
— |
— |
American
Enterprise Investment Services Inc.
707 2nd
Avenue South
Minneapolis,
MN 55402-2405 |
— |
— |
1,860,426 |
37.58% |
Interactive
Brokers LLC
2
Pickwick Plaza, Suite 202
Greenwich,
CT 06830-5576 |
— |
— |
1,208,952 |
24.42% |
Morgan
Stanley Smith Barney LLC
Custody
Account for the Exclusive Benefit of Customers
1
New York Plaza Floor 12
New
York, NY 10004-1932 |
— |
— |
525,958 |
10.63% |
UBS WM
USA
Exclusive
Benefit of Customers
1000
Harbor Boulevard
Weehawken,
NJ 07086-6761 |
— |
— |
467,769 |
9.45% |
|
Investor
Class |
Institutional
Class |
Shares |
Percentage |
Shares |
Percentage |
Large
Cap Financial Fund |
|
|
|
|
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
414,463 |
47.51% |
72,721 |
19.56% |
National
Financial Services LLC
For
Exclusive Benefit of our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
177,891 |
20.39% |
51,098 |
13.74% |
Wells
Fargo Clearing Services LLC
1
North Jefferson Avenue
Saint
Louis, MO 63103-2287 |
— |
— |
87,654 |
23.58% |
American
Enterprise Investment Services Inc.
707 2nd
Avenue South
Minneapolis,
MN 55402-2405 |
— |
— |
63,806 |
18.37% |
UBS WM
USA
Exclusive
Benefit of Customers
1000
Harbor Boulevard
Weehawken,
NJ 07086-6761 |
— |
— |
23,756 |
6.39% |
Small
Cap Financial Fund |
|
|
|
|
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
1,058,349 |
38.91% |
61,106 |
11.41% |
National
Financial Services LLC
For
Exclusive Benefit of our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
769,742 |
28.30% |
101,926 |
19.03% |
Pershing
LLC
For
Benefit of its Customers
1
Pershing Plaza
Jersey
City, NJ 07399-0002 |
— |
— |
106,543 |
19.89% |
Wells
Fargo Clearing Services LLC
1
North Jefferson Avenue
Saint
Louis, MO 63103-2287 |
— |
— |
62,125 |
11.60% |
|
Investor
Class |
Institutional
Class |
Shares |
Percentage |
Shares |
Percentage |
LPL
Financial
Omnibus
Customer Account
4707
Executive Drive
San
Diego, CA 92121-3091 |
— |
— |
32,871 |
6.14% |
Technology
Fund |
|
|
|
|
National
Financial Services LLC
For
Exclusive Benefit of our Customers
Attn:
Mutual Funds Dept. 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
48,020 |
19.37% |
50,351 |
45.78% |
Charles
Schwab & Co. Inc.
Special
Custody Account for the Benefit of Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901 |
44,497 |
17.95% |
— |
— |
Morgan
Stanley Smith Barney LLC
Custody
Account for the Exclusive Benefit of Customers
1
New York Plaza Floor 12
New
York, NY 10004-1932 |
23,898 |
9.64% |
— |
— |
Vicki
Hornstein*
New
York, NY 10028-4398 |
16,318 |
6.58% |
— |
— |
David
S. Niekerk*
Las
Vegas, NV 89148-4360 |
— |
— |
13,847 |
12.59% |
William
R. Rawlinson Jr. & Betty Lou Rawlinson Trust*
Fairfield,
CA 94533-9742 |
— |
— |
6,232 |
5.67% |
The tables below sets forth, as of
December 31, 2023, the dollar range of equity securities beneficially owned
by each Trustee and Adviser in each Fund and in the family of investment
companies overseen by the Trustees, which includes the Funds and the Hennessy
Stance ESG ETF. None of the Disinterested Trustees or Disinterested Advisers,
nor any member of their immediate families, owns shares of the Investment
Manager, the sub‑advisors, or companies, other than registered investment
companies, controlled by or under common control with the Investment Manager or
the sub‑advisors.
|
Dollar
Range of Equity Securities in the |
Name
of Trustee
|
Cornerstone Growth
Fund |
|
Focus
Fund
|
|
Cornerstone
Mid Cap 30
Fund |
|
Cornerstone
Large
Growth
Fund |
|
Cornerstone
Value
Fund |
Disinterested
Trustees and Disinterested Advisers |
|
|
|
|
|
|
J.
Dennis DeSousa |
$1-$10,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
Robert
T. Doyle |
$50,001-$100,000 |
|
$50,001-$100,000 |
|
$50,001-$100,000 |
|
$50,001-$100,000 |
|
$50,001-$100,000 |
Doug
Franklin |
None |
|
None |
|
None |
|
None |
|
None |
Claire
Garvie |
None |
|
None |
|
None |
|
None |
|
None |
Gerald
P. Richardson |
Over
$100,000 |
|
None |
|
Over
$100,000 |
|
None |
|
$50,001-$100,000 |
Brian
Alexander |
None |
|
None |
|
None |
|
$10,001-$50,000 |
|
None |
Interested
Persons (1) |
|
|
|
|
|
|
|
|
|
Neil
J. Hennessy |
$50,001-$100,000 |
|
$50,001-$100,000 |
|
Over
$100,000 |
|
$50,001-$100,000 |
|
$50,001-$100,000 |
A.J.
Hennessy |
$10,001-$50,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
Dollar
Range of Equity Securities in the |
Name
of Trustee
|
Total
Return Fund
|
|
Equity
and Income Fund |
|
Balanced
Fund
|
|
Energy
Transition
Fund |
|
Midstream
Fund
|
Disinterested
Trustees and Disinterested Advisers |
|
|
|
|
|
|
J.
Dennis DeSousa |
$10,001-$50,000 |
|
$1-$10,000 |
|
None |
|
$1-$10,000 |
|
$1-$10,000 |
Robert
T. Doyle |
$10,001-$50,000 |
|
$1-$10,000 |
|
$1-$10,000 |
|
None |
|
None |
Doug
Franklin |
None |
|
None |
|
None |
|
None |
|
None |
Claire
Garvie |
None |
|
None |
|
None |
|
None |
|
None |
Gerald
P. Richardson |
$1-$10,000 |
|
None |
|
$1-$10,000 |
|
None |
|
None |
Brian
Alexander |
None |
|
None |
|
None |
|
None |
|
None |
Interested
Persons (1) |
|
|
|
|
|
|
|
|
|
Neil
J. Hennessy |
$50,001-$100,000 |
|
$50,001-$100,000 |
|
Over
$100,000 |
|
$50,001-$100,000 |
|
$50,001-$100,000 |
A.J.
Hennessy |
None |
|
None |
|
None |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
Dollar
Range of Equity Securities in the |
Name
of Trustee
|
Gas
Utility Fund
|
|
Japan
Fund
|
|
Japan Small
Cap Fund |
|
Large
Cap
Financial
Fund |
|
Small
Cap
Financial
Fund |
Disinterested
Trustees and Disinterested Advisers |
|
|
|
|
|
|
J.
Dennis DeSousa |
$1-$10,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
Robert
T. Doyle |
$1-$10,000 |
|
$1-$10,000 |
|
$1-$10,000 |
|
$1-$10,000 |
|
$10,001-$50,000 |
Doug
Franklin |
None |
|
None |
|
None |
|
None |
|
None |
Claire
Garvie |
None |
|
None |
|
None |
|
None |
|
None |
Gerald
P. Richardson |
None |
|
None |
|
None |
|
None |
|
None |
Brian
Alexander |
None |
|
None |
|
None |
|
$10,001-$50,000 |
|
None |
Interested
Persons (1) |
|
|
|
|
|
|
|
|
|
Neil
J. Hennessy |
$50,001-$100,000 |
|
$50,001-$100,000 |
|
$50,001-$100,000 |
|
$50,001-$100,000 |
|
$50,001-$100,000 |
A.J.
Hennessy |
$10,001-$50,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
|
|
|
Name
of Trustee
|
|
Dollar
Range of
Equity
Securities in the Technology Fund |
|
Dollar
Range of Equity Securities in
All
Registered Investment
Companies
Overseen by Trustee in
Family
of Investment Companies (2) |
|
Disinterested
Trustees and Disinterested Advisers |
|
J.
Dennis DeSousa |
|
$10,001-$50,000 |
|
Over
$100,000 |
|
Robert
T. Doyle |
|
$50,001-$100,000 |
|
Over
$100,000 |
|
Doug
Franklin |
|
None |
|
None |
|
Claire
Garvie |
|
None |
|
None |
|
Gerald
P. Richardson |
|
$10,001-$50,000 |
|
Over
$100,000 |
|
Brian
Alexander |
|
None |
|
$10,001-$50,000 |
|
Interested
Persons (1) |
|
|
|
|
Neil
J. Hennessy |
|
$50,001-$100,000 |
|
Over
$100,000 |
|
A.J.
Hennessy |
|
$10,001-$50,000 |
|
Over
$100,000 |
|
______________________________ |
(1) |
Each of Neil J. Hennessy and A.J. Hennessy is
considered an interested person, as defined in the 1940 Act, because he is
an officer of the Trust. |
(2)
|
The Hennessy Funds covered in this SAI and the
Hennessy Stance ESG ETF are the only funds in the fund complex. The
Hennessy Stance ESG ETF is covered in a different Statement of Additional
Information. |
THE INVESTMENT MANAGER
The investment manager of the Funds is Hennessy
Advisors, Inc. The Investment Manager acts as the investment manager of each
Fund pursuant to management agreements with the Trust (collectively, the “Management Agreements”). The
Investment Manager furnishes continuous investment advisory services and
management to the Funds. The Investment Manager is controlled by Neil J.
Hennessy, who currently owns approximately 26.5% of the outstanding voting
securities of the Investment Manager.
Under the Management Agreements, the Investment
Manager is entitled to an investment advisory fee in respect of each Fund,
computed daily and payable monthly, at the annual rate of each Fund’s average
daily net assets as shown below:
Cornerstone Growth
Fund |
|
0.74% |
|
Focus Fund |
|
0.90% |
|
Cornerstone Mid
Cap 30 Fund |
|
0.74% |
|
Cornerstone Large
Growth Fund |
|
0.74% |
|
Cornerstone Value
Fund |
|
0.74% |
|
Total Return
Fund |
|
0.60% |
|
Equity and Income
Fund |
|
0.80% |
|
Balanced Fund |
|
0.60% |
|
Energy Transition
Fund |
|
1.25% |
|
Midstream Fund |
|
1.10% |
|
Gas Utility
Fund |
|
0.40% |
|
Japan Fund |
|
0.80% |
|
Japan Small Cap
Fund |
|
0.80% |
|
Large Cap Financial
Fund |
|
0.90% |
|
Small Cap Financial
Fund |
|
0.90% |
|
Technology
Fund |
|
0.74% |
|
Pursuant to the Management Agreements, the
Investment Manager is responsible for investment management of each Fund’s
portfolio, subject to general oversight by the Board of Trustees, and provides
the Funds with office space. In addition, the Investment Manager is obligated to
keep certain books and records of the Funds. In connection therewith, the
Investment Manager furnishes each Fund with those ordinary clerical and
bookkeeping services that are not being furnished by the Funds’ custodian,
administrator, or transfer agent.
Under the terms of the Management Agreements,
each Fund bears all expenses incurred in its operation that are not specifically
assumed by the Investment Manager, Fund Services, or the Distributor (as defined
below), other than pursuant to the 12b-1 plan for each Fund. General expenses of
the Funds not readily identifiable as belonging to one of the Funds are
allocated among the Funds by or under the direction of the Board of Trustees in
such manner as the Board of Trustees determines to be fair and equitable.
Expenses borne by each Fund include, but are not limited to, the following (or
the Fund’s allocated share of the following): (i) the cost (including
brokerage commissions, if any) of securities purchased or sold by the
Fund and any losses incurred in connection therewith; (ii) investment
management fees; (iii) organizational expenses; (iv) filing fees and
expenses relating to the registration and qualification of the Trust or the
shares of a Fund under federal or state securities laws and maintenance of such
registrations and qualifications; (v) fees and expenses payable to
Disinterested Trustees and Disinterested Advisers; (vi) taxes (including
any income or franchise taxes) and governmental fees; (vii) costs of any
liability, trustees’ and officers’ insurance, and fidelity bonds;
(viii) legal, accounting, and auditing expenses; (ix) charges of the
custodian, transfer agent, and other agents; (x) expenses of setting in
type and providing a camera-ready copy of the Fund Prospectus and supplements
thereto, expenses of setting in type and printing or otherwise reproducing
statements of additional information and supplements thereto, and reports and
proxy materials for existing shareholders; (xi) any extraordinary expenses
(including fees and disbursements of counsel) incurred by the Trust or the Fund;
(xii) fees, voluntary assessments, and other expenses incurred in
connection with membership in investment company organizations; (xiii) a
portion of the salaries of the Funds’ compliance officers; and (xiv) costs
of meetings of shareholders. The Investment Manager may voluntarily waive its
management fee or subsidize other Fund expenses. This may have the effect of
increasing a Fund’s return.
Under the Management Agreements, the Investment
Manager is not liable for any error of judgment or mistake of law or for any
loss suffered by the Trust or any Fund in connection with the performance of the
Management Agreements, except a loss resulting from willful misfeasance, bad
faith, or gross negligence on the part of the Investment Manager in the
performance of its duties or from reckless disregard of its duties and
obligations thereunder.
Each Management Agreement has an initial term of
two years and may be renewed from year to year thereafter so long as such
continuance is specifically approved at least annually in accordance with the
requirements of the 1940 Act. Each Management Agreement provides that it
terminates in the event of its assignment (as defined in the 1940 Act). The
Management Agreements may be terminated by the Trust with respect to a Fund or
by the Investment Manager upon 60 days’ prior written notice.
The Investment Manager reimburses the Cornerstone
Growth Fund and the Cornerstone Value Fund to the extent that the aggregate
annual operating expenses of such Funds (for both Investor Class and
Institutional Class shares), including the investment advisory fee, exceeds the
expense limitations applicable to either of these Funds imposed by applicable
state securities laws or regulations thereunder, as such limitations may be
raised or lowered from time to time.
The Investment Manager reimburses the Cornerstone
Large Growth Fund to the extent that the aggregate annual total expenses of the
Fund (for both Investor Class and Institutional Class shares), including the
investment advisory fee but excluding all federal, state, and local taxes,
interest, brokerage commissions, and other costs incurred in connection with the
purchase or sale of securities and extraordinary items in any year, exceeds that
percentage of the average NAV of the Fund for such year, as determined by
valuations made as of the close of each business day, which is the most
restrictive percentage provided by the state laws of the various states in which
Investor Class or Institutional Class shares, as applicable, of the Fund are
qualified for sale.
The Investment Manager reimburses the Total
Return Fund and the Balanced Fund to the extent that the aggregate annual total
expenses of Investor Class shares of such Funds, including the investment
advisory fee and the administration fee but excluding any interest, taxes,
brokerage fees and commissions, distribution fees, and extraordinary expenses,
exceeds that percentage of the average net assets of either of such Fund for
such year, as determined by valuations made as of the close of each business
day, which is either (i) the most restrictive percentage provided by the
state laws of the various states in which Investor Class shares of such Funds
are qualified for sale or (ii) if the states in which Investor Class shares
of such Funds are qualified for sale impose no such restrictions, 3%.
Effective October 26, 2018, the Investment
Manager agreed in writing to waive a portion of its investment advisory fees and
assume certain expenses of Investor Class shares and Institutional Class shares
of the Midstream Fund to the extent annual fund operating expenses exceed 1.75%
and 1.50%, respectively, of the average daily net assets (excluding all federal,
state, and local taxes, interest, brokerage commissions, dividend and interest
expenses on short sales, extraordinary items, and acquired fund fees and
expenses (as defined in Form N‑1A under the 1940 Act or any successor form
thereto) and other expenses incurred in connection with the purchase and sale of
securities) of such Fund until October 25, 2020, and the Investment Manager has
since agreed in writing to extend the waiver until February 28, 2025, at
which time the contractual arrangement automatically terminates (and it may not
be terminated prior to that date).
Effective February 28, 2017, the Investment
Manager agreed in writing to waive a portion of its investment advisory fees and
assume certain expenses of Investor Class shares and Institutional Class shares
of the Technology Fund to the extent annual fund operating expenses exceed 0.98%
of the average daily net assets (excluding all federal, state, and local taxes,
interest, brokerage commissions, 12b‑1 fees, shareholder servicing fees payable
to the Investment Manager, acquired fund fees and expenses and other costs
incurred in connection with the purchase and sale of securities, and
extraordinary items) of such Fund until February 28, 2018, and the
Investment Manager has since agreed in writing to extend the waiver until
February 28, 2025, at which time the contractual arrangement automatically
terminates (and it may not be terminated prior to that date).
From December 1, 2017, through November 30, 2019,
the Investment Manager agreed in writing to waive a portion of its investment
advisory fees and assume certain expenses of Investor Class shares and
Institutional Class shares of the Cornerstone Large Growth Fund to the extent
that the aggregate annual operating expenses exceeded 1.29% and 0.98%,
respectively, of the average daily net assets (excluding all federal, state and
local taxes, interest, brokerage commissions, acquired fund fees and expenses
and other costs incurred in connection with the purchase and sale of securities,
and extraordinary items) of such Fund.
If the accrued expenses of the Fund exceeds the
expense limitation, the Fund creates an account receivable from the Investment
Manager for such excess. In such a situation, the monthly payment of the
Investment Manager’s fee is reduced by the amount of such excess (and if the
amount of such excess in any month is greater than the monthly payment of the
Investment Manager’s fee, the Investment Manager pays the Fund the amount of
such difference), subject to monthly adjustment during the remainder of the
Fund’s fiscal year if accrued expenses fall below this limit. The Investment
Manager may recoup from the Fund any expenses waived or reimbursed for three
years after such expenses are incurred, including for the three years following
the expiration of the expense limitation agreement, if such recoupment can be
achieved within the expense limits and any expense limits in place at the time
of recoupment.
During fiscal years 2023, 2022, and 2021, the
Funds listed below paid the following investment advisory fees to the Investment
Manager:
|
Fiscal Year
Ended October 31,
2023 |
Fiscal Year
Ended October 31,
2022 |
Fiscal Year
Ended October 31,
2021 |
Cornerstone Growth
Fund |
$ |
1,232,434 |
$ |
1,197,953 |
$ |
1,220,726 |
Focus Fund |
$ |
6,067,912 |
$ |
8,586,390 |
$ |
10,333,814 |
Cornerstone Mid
Cap 30 Fund |
$ |
3,415,249 |
$ |
2,779,195 |
$ |
2,912,632 |
Cornerstone Value
Fund |
$ |
2,108,250 |
$ |
2,113,590 |
$ |
1,820,137 |
Total Return
Fund |
$ |
313,920 |
$ |
321,805 |
$ |
334,063 |
Equity and Income
Fund |
$ |
652,474 |
$ |
828,962 |
$ |
959,345 |
|
Fiscal Year
Ended October 31,
2023 |
Fiscal Year
Ended October 31,
2022 |
Fiscal Year
Ended October 31,
2021 |
Balanced Fund |
$ |
74,697 |
$ |
81,772 |
$ |
79,894 |
Energy Transition
Fund |
$ |
257,907 |
$ |
255,316 |
$ |
135,718 |
Gas Utility
Fund |
$ |
2,005,569 |
$ |
2,265,385 |
$ |
2,144,490 |
Japan Fund |
$ |
2,288,901 |
$ |
4,320,459 |
$ |
6,809,086 |
Japan Small Cap
Fund |
$ |
824,948 |
$ |
719,729 |
$ |
792,514 |
Large Cap Financial
Fund |
$ |
336,344 |
$ |
518,101 |
$ |
568,729 |
Small Cap Financial
Fund |
$ |
743,349 |
$ |
1,188,941 |
$ |
1,150,465 |
During fiscal year 2023, the Funds listed below
paid investment advisory fees to the Investment Manager and received fee waivers
and reimbursements of expenses as set forth below:
|
Gross Advisory Fees |
Advisory Fee (Waivers)/Recoupment |
Net Advisory Fees |
Expense Reimbursements |
Cornerstone Large Growth Fund |
$ |
997,824 |
$ |
— |
$ |
997,824 |
$ |
— |
Midstream Fund |
$ |
530,344 |
$ |
(19,311) |
$ |
511,033 |
$ |
— |
Technology
Fund |
$ |
44,596 |
$ |
(44,596) |
$ |
— |
$ |
(53,565) |
During fiscal year 2022, the Funds listed below
paid investment advisory fees to the Investment Manager and received fee waivers
and reimbursements of expenses as set forth below:
|
Gross Advisory Fees |
Advisory Fee (Waivers)/Recoupment |
Net Advisory Fees |
Expense Reimbursements |
Cornerstone Large Growth Fund |
$ |
1,077,348 |
$ |
3,947 |
$ |
1,081,295 |
$ |
— |
Midstream Fund |
$ |
460,970 |
$ |
(24,688) |
$ |
436,282 |
$ |
— |
Technology
Fund |
$ |
47,434 |
$ |
(47,434) |
$ |
— |
$ |
(49,316) |
During fiscal year 2021, the Funds listed below
paid investment advisory fees to the Investment Manager and received fee waivers
and reimbursements of expenses as set forth below:
|
Gross Advisory Fees |
Advisory Fee (Waivers)/Recoupment |
Net Advisory Fees |
Expense Reimbursements |
Cornerstone Large Growth Fund |
$ |
1,120,334 |
$ |
4,527 |
$ |
1,124,861 |
$ |
— |
Midstream Fund |
$ |
361,154 |
$ |
(36,069) |
$ |
325,085 |
$ |
— |
Technology
Fund |
$ |
58,160 |
$ |
(58,160) |
$ |
— |
$ |
(41,595) |
SUB-ADVISORS
The Investment Manager has delegated the
day-to-day management of the portfolio composition of the Focus Fund, the Equity
and Income Fund, the Japan Fund, and the Japan Small Cap Fund to sub‑advisors
and has entered into a sub-advisory agreement with each sub‑advisor. Pursuant to
the sub‑advisory agreements, the sub-advisors make specific portfolio
investments in accordance with the applicable Fund’s investment objective and
the sub-advisor’s investment approach and strategies.
The Investment Manager employs the sub‑advisors
and may terminate them subject to prior approval by the Board of Trustees.
Pursuant to the 1940 Act, employing a new sub‑advisor requires prior approval of
the applicable Fund’s shareholders. The Trust may request an SEC order exempting
a Fund from such requirements, but there can be no assurance that, if requested,
such an order would be granted. Selection and retention criteria for a
sub-advisor include the following: (i) historical performance records;
(ii) consistent performance in the context of the markets;
(iii) organizational stability and reputation; (iv) quality and depth
of investment personnel; and (v) ability to apply a consistent approach.
Different sub‑advisors may not necessarily exhibit all of the criteria to the
same degree. Sub-advisors are paid by the Investment Manager, not by the
sub‑advised Funds. Each sub-advisor’s activities are subject to general
supervision by the Investment Manager and the Board of Trustees. Although the
Investment Manager and the Board of Trustees do not evaluate the investment
merits of a sub-advisor’s specific securities selections, they do review the
performance of each sub-advisor relative to the selection criteria.
Broad Run Investment
Management, LLC (Focus Fund)
The Investment Manager has delegated the
day-to-day management of the portfolio composition of the Focus Fund to Broad
Run Investment Management, LLC (“Broad
Run”) and has entered into a sub‑advisory agreement with Broad Run (the
“Broad Run Sub‑Advisory
Agreement”). Broad Run is an investment adviser registered under the
Investment Advisers Act of 1940, as amended (the “Advisers Act”) and is wholly owned by
David S. Rainey, Brian E. Macauley, and Ira M. Rothberg. Pursuant to
the Broad Run Sub-Advisory Agreement, Broad Run makes specific portfolio
investments in accordance with the Focus Fund’s investment objective and Broad
Run’s investment approach and strategies. In consideration thereof, the
Investment Manager (not the Fund) pays Broad Run monthly at an annual rate of
0.29% of the average daily net assets of the Fund.
The Broad Run Sub-Advisory Agreement may be
terminated by either party at any time without the payment of any penalty upon
giving 60 days’ prior written notice to the other party. In addition, it
terminates automatically if it is assigned.
The Broad Run Sub-Advisory Agreement provides
that, absent willful misfeasance, bad faith, gross negligence, or reckless
disregard of its obligations, Broad Run is not liable to the Investment Manager
for any act or omission in the course of, or connected with, rendering services
under the Broad Run Sub‑Advisory Agreement or for any losses that may be
sustained in the purchase, holding, or sale of any security. The Broad Run
Sub‑Advisory Agreement also provides that Broad Run is free to render similar
services to others and to engage in other activities, as long as the services
rendered under the sub‑advisory agreement are not impaired.
FCI Advisors (Equity and
Income Fund – Fixed Income Allocation)
The Investment Manager has delegated the
day-to-day management of the portfolio composition of the fixed income
allocation of the Equity and Income Fund to FCI Advisors and has entered into a
sub‑advisory agreement with FCI Advisors (the “FCI Sub‑Advisory Agreement”). FCI
Advisors is an investment adviser registered under the Advisers Act and was
founded in 1966. FCI Advisors’ ultimate
parent company is MTC Holding Corporation, which is a holding company that
is majority owned by Bradley A. Bergman, a Director of FCI Advisors and the
President and Director of MTC Holding Corporation. Pursuant to the FCI
Sub‑Advisory Agreement, FCI Advisors makes specific portfolio investments in
accordance with the Equity and Income Fund’s investment objectives and FCI
Advisors’ investment approach and strategies. In consideration thereof, the
Investment Manager (not the Fund) pays FCI Advisors monthly at an annual rate of
0.27% of the average daily net assets of the Fund in its fixed income
allocation.
The FCI Sub‑Advisory Agreement may be terminated
by either party at any time without the payment of any penalty upon giving 60
days’ prior written notice to the other party. In addition, the
FCI Sub‑Advisory Agreement terminates automatically if it is
assigned.
The FCI Sub‑Advisory Agreement provides that,
absent willful misfeasance, bad faith, gross negligence, or reckless disregard
of its obligations, FCI Advisors is not liable to the Investment Manager for any
act or omission in the course of, or connected with, rendering services under
the sub‑advisory agreement or for any losses that may be sustained in the
purchase, holding, or sale of any security. The FCI Sub‑Advisory Agreement
also provides that FCI Advisors is free to render similar services to others and
to engage in other activities, as long as the services rendered under the
sub‑advisory agreement are not impaired.
The London Company of
Virginia, LLC (Equity and Income Fund – Equity Allocation)
The Investment Manager has delegated the
day-to-day management of the portfolio composition of the equity allocation of
the Equity and Income Fund to The London Company of Virginia, LLC (“The London Company”) and has entered
into a sub‑advisory agreement with The London Company (“The London Company Sub‑Advisory
Agreement”). The London Company is an investment adviser registered under
the Advisers Act and was founded by Stephen M. Goddard, CFA, in 1994. The London
Company is currently majority employee‑owned. Pursuant to The London Company
Sub‑Advisory Agreement, The London Company makes specific portfolio investments
for the equity allocation of the Equity and Income Fund in accordance with the
Fund’s investment objective and The London Company’s investment approach and
strategies. In consideration thereof, the Investment Manager (not the Fund) pays
The London Company monthly at an annual rate of 0.33% of the average daily net
assets of the Fund in its equity allocation.
The London Company Sub‑Advisory Agreement may be
terminated by either party at any time without the payment of any penalty upon
giving 60 days’ prior written notice to the other party. In addition, it
terminates automatically if it is assigned.
The London Company Sub‑Advisory Agreement
provides that, absent willful misfeasance, bad faith, gross negligence, or
reckless disregard of its obligations, The London Company is not liable to the
Investment Manager for any act or omission in the course of, or connected with,
rendering services under the sub‑advisory agreement or for any losses that may
be sustained in the purchase, holding, or sale of any security. The London
Company Sub‑Advisory Agreement also provides that The London Company is free to
render similar services to others and to engage in other activities, as long as
the services rendered under the sub‑advisory agreement are not impaired.
SPARX Asset Management Co.,
Ltd. (Japan Fund and Japan Small Cap Fund)
The Investment Manager has delegated the
day-to-day management of the portfolio composition of the Japan Fund and the
Japan Small Cap Fund to SPARX Japan and has entered into a sub‑advisory
agreement with SPARX Japan for both such Funds (the “SPARX Japan Sub‑Advisory Agreement”).
SPARX Japan is an investment adviser registered under the Advisers Act that was
founded in 1989 and is
headquartered in Tokyo. SPARX Japan is also registered with the Japanese
authority to conduct the investment management business, the investment advisory
and agency business, and the second financial instruments business. In addition,
SPARX Japan performs various investment and research functions and performs
investment advisory activities and fund administration for its Japanese and
international clients in the area of Japanese equity investment. SPARX Japan is
a wholly owned subsidiary of SPARX Group Co., Ltd. (“SPARX Group”). SPARX Group is a
publicly listed company traded on the JASDAQ securities exchange, which is
controlled by majority shareholder and Chairman, Mr. Shuhei Abe. Pursuant to the
SPARX Japan Sub‑Advisory Agreement, SPARX Japan makes specific portfolio
investments in accordance with the Japan Fund’s or the Japan Small Cap Fund’s
investment objectives, as applicable, and SPARX Japan’s investment approach and
strategies. In consideration thereof, the Investment Manager (not the Funds)
pays SPARX Japan monthly at an annual rate equal to 0.35% of the first $500
million of the average daily net assets of each Fund, 0.40% of the next $500
million of the average daily net assets of each Fund, and 0.42% of the average
daily net assets of each Fund in excess of $1 billion.
The SPARX Japan Sub-Advisory Agreement may be
terminated by either party (i) at any time without the payment of any penalty
upon giving 60 days’ prior written notice to the other party or (ii) if
such party provides written notice to the other party that the other party is in
material breach of the sub-advisory agreement, unless the other party cures such
breach within 30 days following receipt of such written notice. In addition, it
terminates automatically if it is assigned.
The SPARX Japan Sub-Advisory Agreement provides
that SPARX Japan is not liable to the Investment Manager for, and the Investment
Manager may not take any action against SPARX Japan or hold SPARX Japan liable
for, any error of judgment or mistake of law or for any loss suffered by the
Japan Fund or the Japan Small Cap Fund (including, without limitation, by reason
of the purchase, sale, or retention of any security) in connection with the
performance of SPARX Japan’s duties under the sub‑advisory agreement, except for
a loss resulting from willful misfeasance, bad faith or gross negligence on the
part of SPARX Japan in the performance of its duties under the sub‑advisory
agreement, or by reason of its reckless disregard of its obligations and duties
under the sub‑advisory agreement. The SPARX Japan Sub-Advisory Agreement also
provides that SPARX Japan and its officers, directors, and employees are not
prohibited from engaging in any other business activity or from rendering
services to any other person, or from serving as partners, officers, directors,
trustees, or employees of any other firm or corporation.
In addition to entering into the SPARX Japan
Sub-Advisory Agreement, the Investment Manager and SPARX Japan have entered into
an arrangement that requires certain payments by the Investment Manager (and not
by the Funds) in the event of the termination of SPARX Japan as sub-advisor.
Specifically, if the Investment Manager terminates the SPARX Japan Sub-Advisory
Agreement with respect to either or both of the Japan Fund and the Japan Small
Cap Fund without providing SPARX Japan with at least 60 calendar days’
advance written notice of such termination, then the Investment Manager owes
SPARX Japan sub-advisory fees as if such agreement had continued to be in effect
for an additional 60 full calendar days after the date SPARX Japan received
written notice of its termination. Such additional fees are calculated based on
the aggregate NAV of the applicable Fund as of the close of business on the
business day immediately preceding the termination date.
THE PORTFOLIO MANAGERS
Funds Advised Solely by the
Manager:
• |
Cornerstone Growth
Fund |
• |
Cornerstone Mid Cap 30
Fund |
• |
Cornerstone Large
Growth Fund |
• |
Large Cap Financial
Fund |
• |
Small Cap Financial
Fund |
The portfolio managers of each of the Funds
listed above may have responsibility for the day-to-day management of other
Funds within the Hennessy Funds complex, but they do not manage any other
accounts as of October 31, 2023.
The portfolio managers of a Fund are often
responsible for managing other Funds and may be responsible for accounts other
than the Funds in the future. The side-by-side management of the Funds and other
accounts may raise potential conflicts of interest due to the interest held by
the Investment Manager or one of its affiliates in an account and certain
trading practices used by the portfolio managers (for example, cross trades
between the Funds and another account and allocation of aggregated trades). The
Investment Manager has developed policies and procedures reasonably designed to
mitigate those conflicts. In particular, the Investment Manager has adopted
policies limiting the ability of portfolio managers to cross securities between
Funds and policies designed to ensure the fair allocation of securities
purchased on an aggregated basis.
The portfolio managers are compensated in various
forms. The following table outlines the forms of compensation paid to the
portfolio managers as of October 31, 2023:
Form of
Compensation |
Source of
Compensation |
Method Used to
Determine Compensation (Including Any Differences in Method Between
Account Types) |
Salary |
Investment Manager |
On an annual basis, the Board of Directors of the Investment Manager
determines Mr. Neil Hennessy’s salary, and such amount remains fixed
throughout the year. The Investment Manager’s executive management team
determines the salaries of the remaining portfolio managers. Salaries are
not based on the performance of the Funds or on the value of the assets
held in the Funds’ portfolios. |
Form of
Compensation |
Source of
Compensation |
Method Used to
Determine Compensation (Including Any Differences in Method Between
Account Types) |
Performance Bonus |
Investment Manager |
The Board of Directors of the Investment Manager has contractually
granted to Mr. Neil Hennessy a performance bonus, payable quarterly,
equal to 6.5% of the Investment Manager’s pre-tax profit, as computed for
financial reporting purposes in accordance with generally accepted
accounting principles subject to certain exceptions as set forth in his
employment agreement. Each of Mr. Cook, Mr. Kelley, and
Mr. Wein is eligible for a discretionary bonus each year, the amount
of which is determined by the Investment Manager’s executive management
team and may be based on the Investment Manager’s pre‑tax profit or other
performance criteria. |
Asset‑Based Fees |
Investment Manager |
Mr. Ellison receives a performance bonus, payable quarterly,
based on the average net assets for the applicable quarter of the Large
Cap Financial Fund and the Small Cap Financial Fund. |
Equity Awards |
Investment Manager |
Each portfolio manager is eligible for grants of restricted stock
units that typically vest over a four‑year period. The amount of the
equity pool in total is set subjectively based on the Investment Manager’s
budget limitations for future years. The quantities are adjusted based on
the fair value of the equity at the date of grant, which determines the
total cost to the Investment Manager. The equity awards are granted
annually, if at all, after the compensation committee of the Board of
Directors of the Investment Manager completes its annual review of the
Investment Manager’s executive officers. |
Company 401(k) Contributions |
Investment Manager |
Each portfolio manager is eligible for a 401(k) contribution by the
Investment Manager. The 401(k) contribution by the Investment Manager is
optional from year to year and is not based on performance or goal
achievement. The percentage level of the contribution is subjective and is
determined annually by the Investment Manager’s executive management team
and approved by the compensation committee of the Board of Directors of
the Investment Manager with respect to the executive officers of the
Investment Manager. |
The following tables set forth the dollar range
of equity securities of each Fund beneficially owned by its portfolio managers
as of October 31, 2023:
|
|
Dollar Range of Equity
Securities in the: |
Name of Portfolio
Manager |
|
Cornerstone Growth
Fund |
|
Cornerstone Mid
Cap 30 Fund |
|
Cornerstone Large
Growth Fund |
|
Cornerstone Value
Fund |
Neil J.
Hennessy |
|
$50,001-$100,000 |
|
$100,001-$500,000 |
|
$50,001-$100,000 |
|
$50,001-$100,000 |
Benton D. Cook |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
David H.
Ellison |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
Ryan C. Kelley |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
L. Joshua Wein |
|
None |
|
None |
|
None |
|
None |
|
|
Dollar Range of Equity
Securities in the: |
Name of Portfolio
Manager |
|
Total Return
Fund
|
|
Balanced
Fund
|
|
Energy Transition
Fund |
|
Midstream
Fund
|
Neil J.
Hennessy |
|
$50,001-$100,000 |
|
$100,001-$500,000 |
|
N/A |
|
N/A |
Benton D. Cook |
|
N/A |
|
N/A |
|
$50,001-$100,000 |
|
None |
David H.
Ellison |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
Ryan C. Kelley |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
N/A |
|
N/A |
L. Joshua Wein |
|
None |
|
None |
|
$10,001-$50,000 |
|
$10,001-$50,000 |
|
|
Dollar Range of Equity
Securities in the: |
Name of Portfolio
Manager |
|
Gas Utility
Fund
|
|
Large Cap Financial
Fund |
|
Small Cap Financial
Fund |
|
Technology
Fund
|
Neil J.
Hennessy |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
Benton D. Cook |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
David H.
Ellison |
|
N/A |
|
None |
|
None |
|
N/A |
Ryan C. Kelley |
|
$50,001-$100,000 |
|
$50,001-$100,000 |
|
$10,001-$50,000 |
|
$50,001-$100,000 |
L. Joshua Wein |
|
$10,001-$50,000 |
|
N/A |
|
N/A |
|
$10,001-$50,000 |
Sub-Advised Funds
Broad
Run Investment Management, LLC (Focus Fund)
Broad Run is the sole sub-advisor to the Focus
Fund. The portfolio managers of the Focus Fund may have responsibility for
accounts other than the Focus Fund. Information regarding the accounts managed
by each portfolio manager as of October 31, 2023, other than the Focus
Fund, is set forth below.
|
|
Number of Other
Accounts Managed and Total
Assets by Account
Type* |
|
Number of Accounts and
Total Assets for
Which Advisory Fee Is
Performance‑Based* |
Name
of Portfolio Manager
|
|
Registered
Investment Companies
|
|
Other
Pooled
Investment
Vehicles |
|
Other
Accounts |
|
Registered
Investment Companies
|
|
Other
Pooled
Investment
Vehicles |
|
Other
Accounts |
David S. Rainey |
|
0 $0 |
|
1
$4.18 million |
|
180 $195.5 million |
|
0 $0 |
|
0 $0 |
|
0 $0 |
Brian E. Macauley |
|
0 $0 |
|
1
$4.18 million |
|
180 $195.5 million |
|
0 $0 |
|
0 $0 |
|
0 $0 |
Ira M. Rothberg |
|
0 $0 |
|
1
$4.18 million |
|
180 $195.5 million |
|
0 $0 |
|
0 $0 |
|
0 $0 |
|
* |
If an account has a co-portfolio manager, the total number of
accounts and assets have been allocated to each respective manager.
Therefore, some accounts and assets have been counted
twice. |
The Focus Fund investments and the investments of
other accounts managed by Broad Run are not likely to experience any material
conflict of interest. Broad Run employs a trade rotation policy to ensure that
all accounts managed by Broad Run are handled in a fair and equitable manner by
each portfolio manager. Broad Run also maintains a detailed compliance manual
designed to address any potential conflicts of interest.
The portfolio managers for the Focus Fund receive
an annual salary plus distributions based on firm profitability.
As of October 31, 2023, each of David S.
Rainey and Ira M. Rothberg owned $500,001 to $1,000,000 in shares of the Focus
Fund and Brian E. Macauley owned $100,001 to $500,000 in shares of the Focus
Fund.
The
London Company of Virginia, LLC (Equity and Income Fund – equity
allocation)
The London Company is the sub-advisor for the
equity allocation of the Equity and Income Fund. The portfolio managers of the
equity allocation of the Equity and Income Fund may have responsibility for
accounts other than the Equity and Income Fund. Information regarding the
accounts managed by each portfolio manager as of October 31, 2023, other
than the Equity and Income Fund, is set forth below.
|
|
Number of Other
Accounts Managed and
Total Assets by Account
Type* |
|
Number of Accounts and
Total Assets for
Which Advisory Fee Is
Performance‑Based* |
Name
of Portfolio Manager
|
|
Registered
Investment Companies
|
|
Other
Pooled
Investment
Vehicles |
|
Other
Accounts |
|
Registered
Investment Companies
|
|
Other
Pooled
Investment
Vehicles |
|
Other
Accounts |
Stephen M. Goddard |
|
4 $6.2 billion |
|
0 $0 |
|
627 $7.6 billion |
|
0 $0 |
|
0 $0 |
|
2 $8.7 million |
Jonathan T. Moody |
|
4 $6.2 billion |
|
0 $0 |
|
627 $7.6 billion |
|
0 $0 |
|
0 $0 |
|
0 $0 |
J. Brian Campbell |
|
4 $6.2 billion |
|
0 $0 |
|
627 $7.6 billion |
|
0 $0 |
|
0 $0 |
|
0 $0 |
Samuel D. Hutchings |
|
4 $6.2 billion |
|
0 $0 |
|
627 $7.6 billion |
|
0 $0 |
|
0 $0 |
|
0 $0 |
Mark DeVaul |
|
4 $6.2 billion |
|
0 $0 |
|
627 $7.6 billion |
|
0 $0 |
|
0 $0 |
|
0 $0 |
|
* |
If an account has a co-portfolio manager, the total number of
accounts and assets have been allocated to each respective manager.
Therefore, some accounts and assets have been counted
twice. |
Actual or potential conflicts of interest may
arise when the portfolio manager has management responsibilities for more than
one client account including and not limited to the execution and allocation of
investment opportunities, use of soft dollars and other brokerage practices, and
personal securities trading. The London Company has adopted policies and
procedures it believes are reasonably designed to address such conflicts. The
London Company employs a trade rotation policy to ensure that all accounts
managed by it are handled in a fair and equitable manner by each portfolio
manager. The London Company also maintains a detailed compliance manual designed
to address any potential conflicts of interest.
Each portfolio manager receives an annual salary
and a year-end bonus based on firm performance and overall contribution to The
London Company. No specific benchmark is used to determine the amount of bonuses
paid to employees. Bonuses are measured using a general assessment of stock and
portfolio performance compared to relevant benchmarks, which include the S&P
500, Russell 1000®,
and Russell 2000®
Indices (on a pre-tax basis over a three-year to five-year period) relative to
the market capitalization, stock sector and objective of the portfolios being
managed. Portfolio managers also have the potential to become owners of The
London Company after a reasonable tenure with the firm.
As of October 31, 2023, Stephen M. Goddard owned
over $1 million in shares of the Equity and Income Fund, and none of the other
portfolio managers owned shares of the Equity and Income Fund.
FCI
Advisors (Equity and Income Fund – fixed income allocation)
FCI Advisors is the sub-advisor for the
fixed income allocation of the Equity and Income Fund. The portfolio managers of
the fixed income allocation of the Equity and Income Fund may have
responsibility for
accounts other than the Equity and Income Fund. Information regarding the
accounts managed by each portfolio manager as of October 31, 2023, other
than the Equity and Income Fund, is set forth below.
|
|
Number of Other
Accounts Managed and Total
Assets by Account
Type* |
|
Number of Accounts and
Total Assets for
Which Advisory Fee Is
Performance‑Based* |
Name
of Portfolio Manager
|
|
Registered
Investment Companies
|
|
Other
Pooled
Investment
Vehicles |
|
Other
Accounts |
|
Registered
Investment Companies
|
|
Other
Pooled
Investment
Vehicles |
|
Other
Accounts |
Gary B. Cloud |
|
0 $0 |
|
0 $0 |
|
22 $671.62 million |
|
0 $0 |
|
0 $0 |
|
0 $0 |
Peter G. Greig |
|
0 $0 |
|
0 $0 |
|
536 $532.44 million |
|
0 $0 |
|
0 $0 |
|
0 $0 |
|
* |
If an account has a co-portfolio manager, the total number of
accounts and assets have been allocated to each respective manager.
Therefore, some accounts and assets have been counted
twice. |
With respect to potential conflicts of interest,
to the extent that the Equity and Income Fund and another client of FCI Advisors
seek to acquire the same security at about the same time, the Equity and Income
Fund may not be able to acquire as large a position in such security as it
desires, or it may have to pay a higher price for the security. Similarly, the
Equity and Income Fund may not be able to obtain as large an execution of an
order to sell or as high a price for any particular portfolio security if the
other client desires to sell the same portfolio security at the same time. On
the other hand, if the same securities are bought or sold at the same time by
more than one client, the resulting participation in volume transactions could
produce better executions for the Equity and Income Fund. In the event that more
than one client wants to purchase or sell the same security on a given date, the
purchases and sales normally would be made by random client selection. FCI
Advisors maintains a detailed trading policy manual designed to address these
conflicts of interest.
Each portfolio manager is compensated for his
services by FCI Advisors. Each portfolio manager’s compensation consists of a
fixed base salary, a performance-based bonus, and the right to participate in
FCI Advisors’ profit sharing and 401(k) plan. Each portfolio manager is
eligible to receive an annual bonus from FCI Advisors. The annual performance
based bonus is calculated 15% based on client retention and other bonus
considerations and 85% based on the performance of FCI Advisors’ fixed income
composites compared to the appropriate Bloomberg Capital Indices. Performance is
calculated for the prior calendar year on a pre-tax basis. Senior portfolio
managers have an opportunity to be shareholders of the privately held holding
company, MTC Holding, the parent company of FCI Advisors.
As of October 31, 2023, neither portfolio manager
owned shares of the Equity and Income Fund.
SPARX
Asset Management Co., Ltd. (Japan Fund and Japan Small Cap Fund)
SPARX Japan is the sole sub-advisor to the Japan
Fund and the Japan Small Cap Fund. The portfolio managers of the Japan Fund and
the Japan Small Cap Fund may have responsibility for accounts other than such
Funds. Information regarding the accounts managed by each portfolio manager as
of October 31, 2023, other than the Japan Fund and the Japan Small Cap
Fund, is set forth below.
|
|
Number of Other
Accounts Managed and Total
Assets by Account
Type* |
|
Number of Accounts and
Total Assets for
Which Advisory Fee Is
Performance‑Based* |
Name
of Portfolio Manager
|
|
Registered
Investment Companies
|
|
Other
Pooled
Investment
Vehicles |
|
Other
Accounts |
|
Registered
Investment Companies
|
|
Other
Pooled
Investment
Vehicles |
|
Other
Accounts |
Takenari Okumura |
|
0 $0 |
|
2 $192 million |
|
0 $0 |
|
0 $0 |
|
1 $96 million |
|
$0 $0 |
Masakazu Takeda |
|
0 $0 |
|
6 $2.8 billion |
|
4 $730 million |
|
0 $0 |
|
0 $0 |
|
0 $0 |
Tadahiro Fujimura |
|
0 $0 |
|
2 $119 million |
|
3 $1.0 billion |
|
0 $0 |
|
1 $106 million |
|
0 $0 |
Angus Lee |
|
0 $0 |
|
1 $9 million |
|
0 $0 |
|
0 $0 |
|
0 $0 |
|
$0 $0 |
Kohei Matsui |
|
0 $0 |
|
0 $0 |
|
0 $0 |
|
0 $0 |
|
0 $0 |
|
$0 $0 |
|
* |
If an account has a co-portfolio manager, the total number of
accounts and assets have been allocated to each respective manager.
Therefore, some accounts and assets have been counted
twice. |
The portfolio managers of the Japan Fund and the
Japan Small Cap Fund manage multiple accounts for a diverse client base,
including institutional investors, banking and thrift institutions, pension and
profit sharing plans, businesses, private investment partnerships and companies,
and sophisticated, high net worth individuals. SPARX Japan has a fiduciary
obligation to recognize potential conflicts of interest and manage them
carefully through appropriate policies, procedures, and oversight. Although the
potential for conflicts of interest exist when an investment adviser and
portfolio managers manage other accounts with similar investment objectives and
strategies as the Japan Fund or the Japan Small Cap Fund (“Similar Accounts”), SPARX Japan has
procedures in place that are designed to ensure that all accounts are treated
fairly and that the Funds are not disadvantaged, including procedures regarding
trade allocations and conflicting trades (e.g., long and short positions in the same
security, as described below), which include internal review processes and
oversight by independent third parties. In addition, the Japan Fund and Japan
Small Cap Fund, as series of a registered investment company, are subject to
different regulations than certain of the Similar Accounts, and, consequently,
may not be permitted to engage in all the investment techniques or transactions,
or to engage in such techniques or transactions to the same degree, as the
Similar Accounts.
Potential conflicts of interest may arise because
of SPARX Japan’s side-by-side management of the Japan Fund, the Japan Small Cap
Fund, and Similar Accounts, including hedge funds (where SPARX Japan receives
performance-based fees). For example, conflicts of interest may arise with both
the aggregation and allocation of securities transactions and allocation of
limited investment opportunities, as SPARX Japan may be perceived as causing
accounts it manages to participate in an offering to increase SPARX Japan’s
overall allocation of securities in that offering, or to increase SPARX Japan’s
ability to participate in future offerings by the same underwriter or issuer.
Allocations of bunched trades, particularly trade orders that were only
partially filled due to limited availability, and allocation of investment
opportunities generally, could raise a potential conflict of interest, as SPARX
Japan may have an incentive to allocate securities that are expected
to increase in value to preferred accounts. IPOs, in particular, are
frequently of very limited availability. Additionally, portfolio managers may be
perceived to have a conflict of interest because of the multiple Similar
Accounts that they are managing on behalf of SPARX Japan in addition to the
Japan Fund and the Japan Small Cap Fund. Although SPARX Japan does not track
each individual portfolio manager’s time dedicated to each account, SPARX Japan
periodically reviews each portfolio manager’s overall responsibilities to ensure
that they are able to allocate the necessary time and resources to manage
effectively the Japan Fund and the Japan Small Cap Fund. In addition, SPARX
Japan could be viewed as having a conflict of interest to the extent that SPARX
Japan or the portfolios managers have a materially larger investment in a
Similar Account than their investment in the Japan Fund or the Japan Small Cap
Fund.
A potential conflict of interest may be perceived
to arise if transactions in one account closely follow related transactions in a
different account, such as when a purchase increases the value of securities
previously purchased by the other account, or when a sale in one account lowers
the sale price received in a sale by a second account. Certain hedge funds
managed by SPARX Japan may also be permitted to sell securities short. When
SPARX Japan engages in short sales of securities of the type in which the Japan
Fund or the Japan Small Cap Fund invests, SPARX Japan could be seen as harming
the performance of the Japan Fund or the Japan Small Cap Fund for the benefit of
the account engaging in short sales if the short sales contribute to the fall in
the market value of the securities. As described above, SPARX Japan has
procedures in place to address these conflicts. SPARX Japan’s trading policies
and procedures attempt to follow established best practices and to address,
where necessary, the challenges SPARX Japan faces in managing specifically the
Japan Fund, the Japan Small Cap Fund, and the Similar Accounts.
SPARX Japan’s portfolio managers are generally
responsible for managing multiple types of accounts that may, or may not, have
similar investment objectives, strategies, risks, and fees to those managed on
behalf of the Japan Fund and the Japan Small Cap Fund. Portfolio managers
responsible for managing the Funds may also manage sub-advised registered
investment companies, collective investment trusts, unregistered funds, or other
pooled investment vehicles and separate accounts.
SPARX Japan compensates portfolio managers by a
competitive salary and bonus structure, which is determined both quantitatively
and qualitatively. The compensation package for the portfolio managers of the
Japan Fund and the Japan Small Cap Fund consists of a salary and incentive bonus
comprising cash and equity in SPARX Japan’s parent company. Various factors are
considered in the determination of a portfolio manager’s compensation. Portfolio
managers are compensated on the performance of the aggregate group of portfolios
managed by them rather than for a specific fund or account. All of the
portfolios managed by a portfolio manager are comprehensively evaluated to
determine his positive and consistent performance contribution over time.
Further factors include the amount of assets in the portfolios as well as
qualitative aspects that reinforce SPARX Japan’s investment philosophy such as
leadership, teamwork, and commitment.
In determining the incentive bonus, consideration
is given to the portfolio manager’s quantitative performance, as measured by his
ability to make investment decisions that contribute to total returns, by
comparison to a predetermined benchmark (for the Japan Fund and the Japan Small
Cap Fund, as set forth in the Fund Prospectus) over the current fiscal year and
the longer-term performance (three-year, five-year, or ten-year, as applicable),
as well as performance relative to peers. In addition, the portfolio manager’s
bonus can be influenced by subjective measurement of his ability to help others
make investment decisions. The executive management team of the SPARX Group has
discretion to determine the size of the portfolio manager’s bonus. As a result,
the percentage of compensation of salary and bonus vary.
The portfolio managers of the Japan Fund and the
Japan Small Cap Fund also have the opportunity to participate in the SPARX Japan
equity program, which awards stock or stock options to those individuals
who have been identified as key contributors as well as future leaders of
SPARX Japan. The awards generally vest over three-year to five-year
periods.
As of October 31, 2023, Messrs. Takeda, Lee,
and Matsui did not own shares of the Japan Fund and Messrs. Okumura and Fujimura
did not own shares of the Japan Small Cap Fund.
THE ADMINISTRATOR
U.S. Bancorp Fund Services, LLC, d/b/a U.S. Bank
Global Fund Services (“Fund
Services”), 615 East Michigan Street, Milwaukee, Wisconsin 53202,
provides administration services to the Funds pursuant to a Fund Administration
Servicing Agreement with the Trust (the “Administration Agreement”). The
Administration Agreement provides that Fund Services must furnish the Funds with
various administrative services including, but not limited to, (i) the
preparation and coordination of reports to the Board of Trustees,
(ii) preparation and filing of securities and other regulatory filings
(including state securities filings), (iii) marketing materials, tax
returns and shareholder reports, (iv) review and payment of Fund expenses,
(v) monitoring and oversight of the activities of the Funds’ other
servicing agents (i.e., transfer
agent, custodian, accountants, etc.), (vi) maintaining books and records of
the Funds, and (vii) administering shareholder accounts. Under the
Administration Agreement, Fund Services is required to exercise reasonable care
and is not liable for any error of judgment or mistake of law or for any loss
suffered by the Funds in connection with its performance as administrator,
except a loss resulting from willful misfeasance, bad faith, or negligence on
the part of Fund Services in the performance of its duties under the
Administration Agreement. The Administration Agreement remains in effect until
terminated by either party. It may be terminated at any time, without the
payment of any penalty, by the Board of Trustees upon 90 days’ prior
written notice to Fund Services, or by Fund Services upon 90 days’ prior written
notice to the Trust.
For all services provided pursuant to the
Administration Agreement, the Fund Accounting Servicing Agreement (see below),
the Custodian Agreement (see below), and the Transfer Agent Agreement (see
below), Fund Services and its affiliates receive from the Funds an annual fee,
payable monthly, based on the average daily net assets of all of the Funds.
Subject to certain fee waivers, the annual fee for the 16 Funds covered by
this SAI is equal to 0.10% of the first $2 billion of the aggregate average
daily net assets, 0.07% of the next $2 billion, 0.06% of the next $2 billion,
0.05% of the next $1 billion, 0.04% of the next $3 billion, and 0.03% of
the aggregate average daily net assets in excess of $10 billion, subject to a
minimum annual fee for all 16 Funds of $600,000.
During fiscal years 2023, 2022, and 2021, Fund
Services received the following amounts in administration fees from the
Funds:
|
Fiscal Year
Ended October 31,
2023 |
Fiscal Year
Ended October 31,
2022 |
Fiscal Year
Ended October 31,
2021 |
Cornerstone Growth
Fund |
$ |
163,019 |
$ |
191,675 |
$ |
192,483 |
Focus Fund |
$ |
638,712 |
$ |
1,068,471 |
$ |
1,265,170 |
Cornerstone Mid
Cap 30 Fund |
$ |
433,690 |
$ |
429,912 |
$ |
441,039 |
Cornerstone Large
Growth Fund |
$ |
134,324 |
$ |
173,218 |
$ |
177,858 |
Cornerstone Value
Fund |
$ |
270,200 |
$ |
330,192 |
$ |
280,217 |
Total Return
Fund |
$ |
59,808 |
$ |
71,616 |
$ |
72,976 |
Equity and Income
Fund |
$ |
87,437 |
$ |
128,779 |
$ |
144,351 |
|
Fiscal Year
Ended October 31,
2023 |
Fiscal Year
Ended October 31,
2022 |
Fiscal Year
Ended October 31,
2021 |
Balanced Fund |
$ |
23,939 |
$ |
27,143 |
$ |
26,789 |
Energy Transition
Fund |
$ |
— |
$ |
— |
$ |
— |
Midstream Fund |
$ |
— |
$ |
— |
$ |
— |
Gas Utility
Fund |
$ |
475,622 |
$ |
642,113 |
$ |
596,226 |
Japan Fund |
$ |
273,192 |
$ |
610,229 |
$ |
942,421 |
Japan Small Cap
Fund |
$ |
105,681 |
$ |
112,336 |
$ |
119,757 |
Large Cap Financial
Fund |
$ |
46,217 |
$ |
76,387 |
$ |
80,947 |
Small Cap Financial
Fund |
$ |
86,804 |
$ |
159,143 |
$ |
151,103 |
Technology
Fund |
$ |
— |
$ |
— |
$ |
— |
The American Gas Association provides
administrative services to the Gas Utility Fund pursuant to an Administrative
Services Agreement between the Gas Utility Fund and AGA. These administrative
services include overseeing the calculation of the AGA Stock Index. ScottMadden
performs the actual computations required to produce the AGA Stock Index and
receives a fee for such calculations pursuant to a contractual arrangement with
AGA. AGA does not furnish other securities advice to the Gas Utility Fund or the
Investment Manager or make recommendations regarding the purchase or sale of
securities by the Gas Utility Fund. Under the terms of an agreement approved by
the Board of Trustees, AGA provides the Investment Manager with current
information regarding the common stock composition of the AGA Stock Index no
less than quarterly but may supply such information more frequently. In
addition, AGA provides the Gas Utility Fund with information on the natural gas
industry. The Gas Utility Fund pays AGA in its capacity as administrator a fee
at an annual rate of 0.04% of the average daily net assets of the Gas Utility
Fund.
During fiscal years 2023, 2022, and 2021, the Gas
Utility Fund paid the following administration fees to AGA:
|
Fiscal Year
Ended October 31,
2023 |
Fiscal Year
Ended October 31,
2022 |
Fiscal Year
Ended October 31,
2021 |
|
|
$ |
200,557 |
$ |
226,539 |
$ |
214,449 |
|
ACCOUNTING SERVICES AGREEMENT
Fund Services also provides fund accounting
services to the Funds pursuant to a Fund Accounting Servicing Agreement with the
Trust (the “Fund Accounting Servicing
Agreement”). For its accounting services, Fund Services and its
affiliates are entitled to receive annual fees, payable monthly, based on the
fee schedule set forth above under “THE ADMINISTRATOR.”
TRANSFER AGENT AND CUSTODIAN
Fund Services provides transfer agency services
to Funds pursuant to a Transfer Agent Agreement with the Trust (the “Transfer Agent Agreement”). Under the
Transfer Agent Agreement, Fund Services has agreed to issue and redeem shares of
each Fund, make dividend and other distributions to shareholders of each Fund,
respond to correspondence by Fund shareholders and others relating to its
duties, maintain shareholder accounts, and make periodic reports to the
Funds.
U.S. Bank, National Association (the “Custodian”), Custody Operations, 1555
North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212, serves as
custodian for the Funds pursuant to a Custodian Agreement with the Trust (the
“Custodian Agreement”). The
Custodian and Fund Services are affiliates of each other. Under the Custodian
Agreement, the Custodian is responsible for, among other things, receipt of and
disbursement of funds from the Funds’ accounts, establishment of segregated
accounts as necessary, and transfer, exchange, and delivery of Fund portfolio
securities.
THE DISTRIBUTOR
Quasar Distributors, LLC (the “Distributor”), 111 East Kilbourn
Avenue, Suite 2200, Milwaukee, Wisconsin 53202, serves as the distributor for
the Funds pursuant to a distribution agreement with the Trust.
CODE OF ETHICS
The Trust and the Investment Manager have adopted
a Code of Ethics pursuant to Rule 17j‑1 under the 1940 Act (“Rule 17j-1”). Such Code of Ethics
permits Access Persons (as defined in Rule 17j‑1) of the Trust and the
Investment Manager to invest in securities, including securities that may be
purchased or held by the Funds, subject to receiving pre‑clearance of any
personal securities transactions in securities other than direct obligations of
the U.S. government, bankers’ acceptances, bank certificates of deposit,
commercial paper, and high‑quality short‑term debt instruments, including
repurchase agreements, and shares issued by open‑end registered investment
companies. With certain exceptions, such Code of Ethics generally prohibits the
purchase or sale of securities if the Access Person of the Trust or Investment
Manager knows at the time of such purchase or sale that the security is being
considered for purchase or sale by a Fund or is being purchased or sold by a
Fund. While Foreside Financial Group, LLC, on behalf of the Distributor and its
affiliates, has adopted a code of ethics that is compliant with Rule 17j-1,
Foreside Financial Group, LLC and the Distributor are not required to adopt a
code of ethics pursuant to Rule 17j-1, in reliance on the exemption found in
Rule 17j-1(c)(3).
Each sub‑advisor has adopted a Code of Ethics
pursuant to Rule 17j‑1 that permits Access Persons of the sub‑advisor to invest
in securities, including securities that may be purchased or held by the Funds,
subject to following the procedures set forth in the personal securities
transactions policy of the sub‑advisor.
PROXY VOTING POLICY
Information on how the Funds voted proxies during
the most recent 12-month period ended June 30 is available on the Funds’
website, without charge, at www.hennessyfunds.com or the website of the SEC at
http://www.sec.gov.
Funds Advised Solely by the
Manager:
• |
Cornerstone Growth
Fund |
• |
Cornerstone Mid Cap 30
Fund |
• |
Cornerstone Large
Growth Fund |
• |
Large Cap Financial
Fund |
• |
Small Cap Financial
Fund |
When the Funds listed above vote proxies relating
to securities that they own, they follow the Wall Street Rule, which means that
they vote in accordance with management’s recommendation. The portfolio managers
of such Funds believe that following the Wall Street Rule is consistent with the
economic best interests of the Funds’ investors. A Fund may not exercise voting
authority on matters where the cost of voting would be high, such as with some
foreign securities, or where the benefit to the Fund would be low, such as when
casting a vote would not reasonably be expected to have a material effect on the
value of the Fund’s investment.
There may be instances where the interests of the
Investment Manager may conflict, or appear to conflict, with the interests of
one of the Funds. In such instances, the Investment Manager follows the same
policy and votes in accordance with the Wall Street Rule.
Sub-Advised Funds
The Board of Trustees has delegated authority for
making voting decisions with respect to the portfolio securities of the Funds
that are sub‑advised to the sub‑advisors of such Funds.
Broad
Run Investment Management, LLC (Focus Fund)
The proxy voting policies and procedures of Broad
Run address the responsibility of Broad Run to ensure that proxies received for
portfolio securities held by the Focus Fund are voted in the best interest of
the Focus Fund, including in those situations involving a conflict of interest
between the Focus Fund on the one hand, and Broad Run or its affiliated persons,
on the other hand. Such voting responsibilities must be exercised in a manner
that is consistent with the general antifraud provisions of the Advisers Act, as
well as Broad Run’s fiduciary duties under federal and state law to act in the
best interest of its clients.
Proxies solicited for items of business with
respect to issuers whose voting securities are owned by the Focus Fund must be
voted in the best interests of the Focus Fund. Proxies are voted on a
case‑by‑case basis in the best economic interest of the Focus Fund’s investors
taking into consideration all relevant contractual obligations and other
circumstances at the time of the vote. Broad Run may abstain from voting a proxy
when the effect on the economic interests of investors in the Focus Fund or the
value of the Focus Fund’s portfolio holding is indeterminable or insignificant
or when the cost of voting the proxies outweighs the benefits, for example, when
voting certain non‑U.S. securities.
FCI
Advisors (Equity and Income Fund – fixed income allocation)
The proxy voting policies and procedures of FCI
Advisors provide that it is FCI Advisors’ intention to vote on all proxy
proposals for all securities held by the Equity and Income Fund in its fixed
income
allocation in a timely manner, unless abstaining on a particular ballot is
seen to be in the best interests of the investors.
In some instances, a proxy vote may present a
conflict between the interests of the Equity and Income Fund, on the one hand,
and FCI Advisors’ interests or the interests of a person affiliated with
FCI Advisors, on the other hand. In such a case, FCI Advisors must disclose
this conflict to the Equity and Income Fund when the conflict arises and obtain
its consent before voting. After the potential conflict analysis has been
completed, all proxies that contain only routine director and auditor votes are
voted automatically on FCI Advisors’ behalf by a proxy advisory service. FCI
Advisors has proxy voting guidelines that address proxy voting on other types of
matters, such as corporate governance, equity‑based compensation plans,
corporate structure, and shareholder rights plans. For example, FCI Advisors
generally:
• |
votes for measures that act to increase the independence of the board
of directors; |
• |
supports measures intended to increase stock ownership by executives
and the use of employee stock purchase plans to increase company stock
ownership by employees; |
• |
votes for proposals that promote the exercise of investors’ rights;
and |
• |
votes against shareholder rights
plans. |
The
London Company of Virginia, LLC (Equity and Income Fund – equity
allocation)
The London Company votes all proxies and act on
other corporate actions for all securities held by the Equity and Income Fund in
its equity allocation in a timely manner as part of its full discretionary
authority over the equity allocation of the Equity and Income Fund.
The London Company votes the recommendation of
Glass Lewis, a leading provider of independent, global proxy research, unless
otherwise directed by the Equity and Income Fund or the Investment Manager. The
London Company’s utmost concern when voting proxies for the Equity and Income
Fund is that all decisions are made in the best interest of the equity
allocation of the Equity and Income Fund. The London Company acts in a prudent
and diligent manner intended to enhance the economic value of the assets of the
Equity and Income Fund’s account and gives substantial weight to the
recommendation of management on any issue.
The London Company also considers whether there
are specific facts and circumstances that may give rise to a material conflict
of interest on the part of The London Company voting the proxy. Should a proxy
proposal raise a material conflict between the interests of The London Company
and the Equity and Income Fund, it resolves the matter on a case‑by‑case basis,
by abstaining from the vote, voting in accordance with the guidelines set forth
by Glass Lewis, or voting the way The London Company feels is in the best
interest of the Equity and Income Fund.
SPARX
Asset Management Co., Ltd. (Japan Fund and Japan Small Cap Fund)
SPARX Japan has adopted a proxy voting policy
(the “Policy”) that provides as
follows:
• |
SPARX Japan generally votes proxies in a manner consistent with
decisions of the Investment Committee of SPARX Japan (the “Committee”), which makes voting
decisions pursuant to its Equity Voting Guidelines (the “Guidelines”), unless otherwise
permitted by the Policy (such as when specific interests and issues
require that a client’s vote be cast differently from the Committee’s
decision in order to act in the best economic interests of
clients). |
• |
Where a material conflict of interest has been identified and the
matter is covered by the Guidelines, proxies are voted in accordance with
the Guidelines. Where a conflict of interest has been identified and the
matter is not covered in the Guidelines, SPARX Japan discloses the
conflict and the determination of the manner in which to vote to the Board
of Directors of the Investment Manager. |
The Guidelines address proxy voting on particular
types of matters such as elections for directors, adoption of option plans, and
antitakeover proposals. For example, the Committee’s decisions generally:
• |
supports management in most elections for directors, unless there are
clear concerns about the past performance of the company or the board
fails to meet minimum corporate governance
standards; |
• |
supports option plans that motivate participants to focus on
long-term investor value and returns, encourage employee stock ownership,
and more closely align employee interests with those of investors;
and |
• |
votes for mergers, acquisitions, and sales of business operations,
unless the impact on earnings or voting rights for one class or group of
investors is disproportionate to the relative contributions of the group
or the company’s structure following the acquisition or merger does not
reflect good corporate governance, and vote against such actions if the
companies do not provide sufficient information upon request concerning
the transaction. |
Subject to policies established by the Board of
Trustees, the Investment Manager or a sub‑advisor, as applicable, is responsible
for the execution of Fund transactions and the allocation of brokerage
transactions for the Funds. As a general matter, in executing Fund transactions
the Investment Manager or sub‑advisor may employ or deal with such brokers or
dealers that, in the Investment Manager’s or sub‑advisor’s best judgment, may
provide prompt and reliable execution of the transaction at favorable security
prices and reasonable commission rates. In selecting brokers or dealers, the
Investment Manager or sub‑advisor considers all relevant factors, including the
price (together with the applicable brokerage commission or dealer spread), size
of the order, nature of the market for the security, timing of the transaction,
the reputation, experience, and financial stability of the broker-dealer, the
quality of service, the difficulty of execution and operational facilities of
the firm involved, and, in the case of securities, the firm’s risk in
positioning a block of securities. Prices paid to dealers in principal
transactions through which most debt securities and some equity securities are
traded generally include a spread, which is the difference between the prices at
which the dealer is willing to purchase and sell a specific security at that
time. Each Fund that invests in securities traded in the over‑the‑counter
markets may engage in transactions with the dealers who make markets in such
securities, unless a better price or execution could be obtained by using a
broker. A Fund has no obligation to deal with any broker or group of brokers in
the execution of Fund transactions.
The Investment Manager or sub‑advisor may select
broker-dealers that provide it with research services and may cause a Fund to
pay such broker-dealers commissions that exceed those that other broker‑dealers
may have charged, if in the Investment Manager’s or sub‑advisor’s view the
commissions are reasonable in relation to the value of the brokerage or research
services provided by the broker-dealer. Research services furnished by brokers
through which a Fund effects securities transactions may be used by the
Investment Manager or sub‑advisor in advising other Funds or accounts and,
conversely, research
services furnished to the Investment Manager or sub‑advisor by brokers in
connection with other Funds or accounts the Investment Manager or sub‑advisor
advises may be used by the Investment Manager or sub‑advisor in advising a Fund.
Information and research received from such brokers is in addition to, and not
in lieu of, the services required to be performed by the Investment Manager
under the Management Agreement or sub‑advisor under a sub‑advisory agreement.
Each Fund may purchase and sell Fund portfolio securities to and from dealers
who provide the Fund with research services. Fund transactions are not directed
to dealers solely based on research services provided.
Investment decisions for each Fund and for other
investment accounts managed by the Investment Manager or sub‑advisor are made
independently of each other in light of differing considerations for the various
accounts. However, the same investment decision may be made for a Fund and one
or more of such other accounts. In such cases, simultaneous transactions are
inevitable. Purchases or sales are then allocated between the Fund and such
other accounts as to amount according to a formula deemed equitable to the Fund
and such other accounts. Although in some cases this practice could have a
detrimental effect on the price or value of the security to a Fund or on such
Fund’s ability to complete its entire order, in other cases the Investment
Manager believes that coordination and the ability to participate in volume
transactions is beneficial to the Fund.
The Funds paid the following amounts in portfolio
brokerage commissions during fiscal years 2023, 2022, and 2021:
|
|
Fiscal Year
Ended October 31,
2023 |
|
Fiscal Year
Ended October 31,
2022 |
|
Fiscal Year
Ended October 31,
2021 |
Cornerstone Growth
Fund |
$ |
379,829 |
$ |
494,572 |
$ |
436,339 |
Focus Fund |
$ |
173,141 |
$ |
95,764 |
$ |
236,535 |
Cornerstone Mid
Cap 30 Fund |
$ |
1,283,890 |
$ |
1,256,491 |
$ |
61,520 |
Cornerstone Large
Growth Fund |
$ |
82,181 |
$ |
114,003 |
$ |
97,364 |
Cornerstone Value
Fund |
$ |
192,958 |
$ |
159,112 |
$ |
190,944 |
Total Return
Fund |
$ |
9,536 |
$ |
4,688 |
$ |
7,049 |
Equity and Income
Fund |
$ |
10,967 |
$ |
10,158 |
$ |
14,538 |
Balanced Fund |
$ |
952 |
$ |
1,304 |
$ |
1,077 |
Energy Transition
Fund |
$ |
24,939 |
$ |
24,435 |
$ |
58,337 |
Midstream Fund |
$ |
32,752 |
$ |
72,148 |
$ |
85,559 |
Gas Utility
Fund |
$ |
116,797 |
$ |
234,690 |
$ |
201,924 |
Japan Fund |
$ |
132,072 |
$ |
138,116 |
$ |
132,958 |
Japan Small Cap
Fund |
$ |
50,846 |
$ |
51,264 |
$ |
38,666 |
Large Cap Financial
Fund |
$ |
77,568 |
$ |
53,390 |
$ |
44,706 |
Small Cap Financial
Fund |
$ |
221,175 |
$ |
127,560 |
$ |
156,646 |
Technology
Fund |
$ |
11,717 |
$ |
28,950 |
$ |
34,230 |
During fiscal year 2023, information regarding
portfolio brokerage commissions paid to brokers that provided research services
to the Funds is as follows:
|
Brokerage Commissions
Paid |
|
Total Transaction
Amount on Which Brokerage Commissions
Paid |
Cornerstone Growth
Fund |
$ |
112,400 |
|
$ |
97,672,178 |
Focus Fund |
$ |
174,930 |
|
$ |
357,779,683 |
Cornerstone Mid
Cap 30 Fund |
$ |
296,368 |
|
$ |
274,456,548 |
Cornerstone Large
Growth Fund |
$ |
43,497 |
|
$ |
72,382,848 |
Cornerstone Value
Fund |
$ |
75,840 |
|
$ |
60,311,864 |
Total Return
Fund |
$ |
2,440 |
|
$ |
9,889,485 |
Equity and Income
Fund |
$ |
9,144 |
|
$ |
26,584,503 |
Balanced Fund |
$ |
– |
|
$ |
– |
Energy Transition
Fund |
$ |
– |
|
$ |
– |
Midstream Fund |
$ |
– |
|
$ |
– |
Gas Utility
Fund |
$ |
34,323 |
|
$ |
60,541,398 |
Japan Fund |
$ |
– |
|
$ |
– |
Japan Small Cap
Fund |
$ |
– |
|
$ |
– |
Large Cap Financial
Fund |
$ |
– |
|
$ |
– |
Small Cap Financial
Fund |
$ |
3,345 |
|
$ |
3,085,913 |
Technology
Fund |
$ |
– |
|
$ |
– |
PORTFOLIO TURNOVER
For reporting purposes, a Fund’s portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities for the fiscal year by the monthly average of the value of
the portfolio securities owned by the Fund during the fiscal year. In
determining such portfolio turnover, securities with maturities at the time of
acquisition of one year or less are excluded. The Investment Manager or
sub‑advisor, as applicable, adjusts a Fund’s assets as it deems advisable, and
portfolio turnover is not a limiting factor should the Investment Manager or
sub‑advisor deem it advisable for a Fund to purchase or sell securities. High
portfolio turnover (100% or more) involves correspondingly greater brokerage
commissions, other transaction costs, and a possible increase in short-term
capital gains or losses. See “VALUATION OF SHARES” and “CERTAIN MATERIAL U.S.
FEDERAL INCOME TAX CONSEQUENCES” below.
The portfolio turnover for each Fund for fiscal
years 2023 and 2022 is listed below.
|
Fiscal Year
Ended October 31, 2023
|
Fiscal Year Ended October 31,
2022 |
Cornerstone Growth
Fund |
90 |
% |
102 |
% |
Focus Fund |
12 |
% |
5 |
% |
Cornerstone Mid
Cap 30 Fund |
120 |
% |
176 |
% |
|
Fiscal Year
Ended October 31, 2023
|
Fiscal Year Ended October 31,
2022 |
Cornerstone Large
Growth Fund |
53 |
% |
76 |
% |
Cornerstone Value
Fund |
31 |
% |
36 |
% |
Total Return
Fund |
36 |
% |
24 |
% |
Equity and Income
Fund |
11 |
% |
15 |
% |
Balanced Fund |
22 |
% |
29 |
% |
Energy Transition
Fund |
28 |
% |
31 |
% |
Midstream Fund |
16 |
% |
33 |
% |
Gas Utility
Fund |
12 |
% |
31 |
% |
Japan Fund |
57 |
% |
21 |
% |
Japan Small Cap
Fund |
32 |
% |
45 |
% |
Large Cap Financial
Fund |
114 |
% |
78 |
% |
Small Cap Financial
Fund |
72 |
% |
27 |
% |
Technology
Fund |
101 |
% |
151 |
% |
POLICY
The Funds’ policy regarding the disclosure of
their portfolio holdings is that portfolio holdings information is not released
to individual investors, institutional investors, financial intermediaries,
rating and ranking organizations, non‑regulatory agencies, or other persons
except that:
(1) The
Funds release their portfolio holdings information as of each calendar quarter
end to various rating and ranking services, including, but not limited to,
Morningstar, Lipper, Standard & Poor’s, and Bloomberg. U.S. Bank Global Fund
Services releases such information upon the authorization of an executive
officer of the Funds. Portfolio holdings information for all Funds other than
the Japan Fund and the Japan Small Cap Fund is generally released to various
rating and ranking services as soon as it becomes available following a calendar
quarter end, while portfolio holdings information for the Japan Fund and the
Japan Small Cap Fund is generally released to various rating and ranking
services on the 30th calendar day following a calendar quarter end.
(2) The
Funds release their portfolio holdings information as of each calendar quarter
end to investors in the Funds and other persons either by posting portfolio
holdings information on their website or by providing portfolio holdings
information upon the request of any such person. Portfolio holdings information
for all Funds other than the Japan Fund and the Japan Small Cap Fund and
portfolio holding information regarding the top 10 holdings of the Japan Fund
and the Japan Small Cap Fund is generally released or available for release as
soon as it becomes available following a calendar quarter end, while portfolio
holdings information regarding all of the holdings for the Japan Fund and the
Japan Small Cap Fund is generally released or available for release on the 30th
calendar day following a calendar quarter end.
(3) By
virtue of their duties and responsibilities, the third‑party service providers
to the Funds generally have regular, daily access to the Funds’ portfolio
holdings information. The service providers are subject to customary
confidentiality agreements regarding the Funds’ information and may not release
the
Funds’ portfolio holdings information to anyone without the written
authorization of an executive officer of the Funds.
(4) For
the purposes of trading portfolio securities, the Investment Manager may from
time to time provide brokers with trade lists that may reflect, in part or in
total, the Funds’ portfolio holdings. The provision of such trade lists is
subject to customary broker confidentiality agreements and trading
restrictions.
(5) The
Funds release their portfolio holdings information in their annual and
semi‑annual reports on Form N‑CSR, on Form N-PORT, on Form 13F, and as
requested or required by law to any governing or regulatory agency of the
Funds.
(6) An
executive officer of the Funds may, subject to confidentiality agreements and
trading restrictions, authorize the release of the Funds’ portfolio holdings
information for due diligence purposes to an investment adviser that is in
merger or acquisition talks with the Investment Manager, or to a newly hired
investment adviser or sub-adviser.
(7) The
Chief Compliance Officer of the Funds or an executive officer of the Investment
Manager may authorize the release of portfolio holding information on an
exception basis provided that:
a) such
person determines that such a release would be beneficial to the Funds’
investors; and
b) the
holdings are as of the end of a calendar month.
Under no circumstances may the Funds, the
Investment Manager, or any Trustee, officer, or employee of the Funds or the
Investment Manager receive any compensation for the disclosure of the Funds’
portfolio holdings information.
There may be instances where the interests of a
Fund’s shareholders respecting the disclosure of information about portfolio
securities may conflict or appear to conflict with the interests of a Service
Provider or an affiliated person of the Fund (including such affiliated person’s
investment adviser or principal underwriter). In such situations, the conflict
must be disclosed to the Board of Trustees, and the Board of Trustees must be
afforded the opportunity to determine whether to allow such disclosure.
PROCEDURE
Each year, an officer of the Funds sends a
written authorization to U.S. Bank Global Fund Services authorizing it to
release the Funds’ portfolio holdings information to rating and ranking services
in accordance with the policy described above. U.S. Bank Global Fund Services
thereafter releases the Funds’ portfolio holdings information as of each
calendar quarter end to various rating and ranking services in accordance with
the policy described above.
Investors may purchase and redeem shares of each
Fund on each day that the New York Stock Exchange, Inc. (“NYSE”) is open for trading (a “Business Day”). Currently, the NYSE is open for trading Monday through
Friday except New Year’s Day, Dr. Martin Luther King Jr. Day, Washington’s
Birthday, Good Friday, Memorial Day, Juneteenth National Independence Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. When
any of the aforementioned holidays falls on a Saturday, the NYSE is not open for
trading the preceding Friday, and when any such holiday falls on a Sunday, the
NYSE
is not open for trading the succeeding Monday, in each case unless unusual
business conditions exist, such as the ending of a monthly or yearly accounting
period. The NYSE may also close for trading on national days of mourning or due
to natural disaster or other extraordinary events or emergencies. Purchases and
redemptions of the shares of each Fund are effected at their respective NAVs per
share determined as of the close of the NYSE (normally 4:00 p.m. Eastern time)
on that Business Day. The time at which the transactions are priced may be
changed in case of an emergency or if the NYSE closes at a time other than 4:00
p.m. Eastern time. When the NYSE closes early on a valuation day, each Funds
calculates its NAV as of such early closing time. On a day when the NYSE is
closed, the Funds do not determine their NAVs, and investors may not purchase or
redeem Fund shares.
The Hennessy Funds may suspend redemption
privileges of shares of any Fund or postpone the date of payment during any
period (i) when the NYSE is closed or trading on the NYSE is restricted as
determined by the SEC, (ii) when an emergency exists, as defined by the
SEC, that makes it not reasonably practicable for the Hennessy Funds to dispose
of securities owned by them or to determine fairly the value of their assets, or
(iii) as the SEC may otherwise permit. The redemption price may be more or
less than the shareholder’s cost, depending on the market value of the relevant
Fund’s securities at the time.
The Hennessy Funds employs reasonable procedures
to confirm that instructions communicated by telephone are genuine. The Hennessy
Funds use some or all of the following procedures to process telephone
redemptions: (i) requesting a shareholder to correctly state some or all of
the following information: account number, name(s), social security number
registered to the account, personal identification, banking institution, bank
account number, and the name in which the bank account is registered;
(ii) recording all telephone transactions; and (iii) sending written
confirmation of each transaction to the registered owner.
The Funds expect to use various techniques to
honor requests to redeem shares of the Funds, including, but not limited to (i)
available cash, (ii) short-term investments, (iii) interest, dividend income,
and other monies earned on portfolio investments, and (iv) proceeds from the
sale or maturity of portfolio holdings. The Funds may also draw on an
uncommitted line of credit to manage their liquidity needs.
The payment of the redemption price may be made
in money or by a distribution of securities from a Fund’s portfolio (referred to
as an in‑kind distribution) or partly in money and partly in kind, as determined
by the Board of Trustees. However, each Fund has elected to be governed by
Rule 18f‑1 under the 1940 Act, pursuant to which the Fund is obligated to
redeem shares solely in money up to the lesser of $250,000 or 1% of the NAV of
the Fund during any 90-day period for any one shareholder. While governed by
Rule 18f‑1 under the 1940 Act, such election may not be revoked without the
approval of the SEC. It is contemplated that if a Fund should redeem in kind,
securities distributed would be valued as described below under “VALUATION OF
SHARES,” and investors would incur brokerage commissions in disposing of such
securities. If a Fund makes an in‑kind distribution, the Fund may do so in the
form of pro rata portions of the Fund’s portfolio, individual securities, or a
representative basket of securities; provided that the Fund does not distribute
depository receipts representing foreign securities. It is not expected that a
Fund would make in‑kind distributions except in unusual circumstances. If an
investor receives an in-kind distribution, the investor would be exposed to
market risk until the readily marketable securities are converted to cash, and
the investor may incur transaction expenses in converting these securities to
cash.
Frequent purchases and redemptions of a Fund’s
shares by a shareholder may harm other shareholders of the Fund by interfering
with the efficient management of the Fund’s portfolio, increasing brokerage and
administrative costs, and potentially diluting the value of their shares.
Accordingly, the Board of Trustees discourages frequent purchases and
redemptions of shares of a Fund by reserving the right to reject any purchase
order for any reason or no reason, including purchase orders from potential
investors that the Fund believes might engage in frequent purchases and
redemptions of shares of the Fund.
Each Fund tracks shareholder and omnibus account
subscription and redemption activity in an effort to detect any shareholders or
institutions that might trade with a frequency harmful to other shareholders of
the Fund. In considering a shareholder’s trading activity, a Fund may consider,
among other factors, the shareholder’s trading history both directly and, if
known, through financial intermediaries, in any of the Hennessy Funds. If
frequent trading or market timing is detected, a Fund, based on its assessment
of the severity of the market timing, may take one or more of the following
actions: (i) advise the owner of the frequently traded account that any
such future activity will cause a freezing of the account’s ability to transact
subscriptions; (ii) freeze the account demonstrating the activity from
transacting further subscriptions; or (iii) close the account demonstrating
frequent trading activity.
Although the Funds have taken steps to discourage
frequent purchases and redemptions of Fund shares, they cannot guarantee that
such trading will not occur.
It is important that the Funds maintain a correct
address for each investor. An incorrect address may cause an investor’s account
statements and other mailings to be returned to the Funds. Upon receiving
returned mail, the Funds attempt to locate the investor or rightful owner of the
account. If the Funds are unable to locate the investor, then they determine
whether the investor’s account has legally been abandoned. The Funds are legally
obligated to escheat (or transfer) abandoned property to the appropriate state’s
unclaimed property administrator in accordance with statutory requirements. The
investor’s last known address of record determines which state has
jurisdiction.
Shareholders that reside in the state of Texas
may designate a representative to receive escheatment notifications by
completing and submitting a designation form that can be found on the website of
the Texas Comptroller. While the designated representative does not have any
rights to claim or access the shareholder’s account or assets, the escheatment
period ceases if the representative communicates knowledge of the shareholder’s
location and confirms that the shareholder has not abandoned his or her
property. If a shareholder designates a representative to receive escheatment
notifications, any escheatment notices are delivered to both the shareholder and
the designated representative. A completed designation form may be mailed to the
Funds (if shares are held directly with the Funds) or to the shareholder’s
financial intermediary (if shares are not held directly with the Funds).
The NAV for the shares of each Fund normally is
determined on each day the NYSE is open for trading. The net assets of each Fund
are valued as of the close of the NYSE (normally 4:00 p.m. Eastern time) on each
Business Day. Each Fund’s NAV per share is calculated separately.
The Board of Trustees has appointed the
Investment Manager as the Funds’ valuation designee under Rule 2a‑5 of the
1940 Act to perform all fair valuations of the Funds’ portfolio investments,
subject to the Board of Trustees’ oversight. As the valuation designee, the
Investment Manager has established procedures for its fair valuation of the
Funds’ portfolio investments.
For each Fund, the NAV per share is computed by
dividing (i) the value of the securities held by the Fund plus any cash or
other assets, less its liabilities, by (ii) the number of outstanding
shares of the Fund, and adjusting the result to the nearest full cent.
Securities listed on the NYSE, NYSE AMEX Equities, or other national exchanges
(other than The Nasdaq Stock Market) are valued at the last sale price on the
date of valuation, and securities that are traded on The Nasdaq Stock Market are
valued at the Nasdaq Official Closing Price on the date of valuation. Bonds and
other fixed-income securities are valued using market quotations provided by
dealers and also may be valued on the basis of prices provided by pricing
services
when the Investment Manager believes that such prices reflect the fair
market value of such securities. If there is no sale in a particular security on
such day, the security is valued at the mean between the bid and ask prices.
Other securities, to the extent that market quotations are readily available,
are valued at market value in accordance with procedures established by the
Investment Manager. Any other securities and other assets for which market
quotations are not readily available are fair valued by the Investment Manager
using established valuation methodologies. Short-term instruments (those with
remaining maturities of 60 days or less) are valued at amortized cost, which
approximates market value.
Fair valuing of foreign securities may be
determined with the assistance of a pricing service using correlations between
the movement of prices of such securities and indices of domestic securities and
other appropriate indicators, such as closing market prices of relevant ADRs or
futures contracts. Using fair value pricing means that the Funds’ NAV reflects
the affected portfolio securities’ value as determined in the judgment of the
Investment Manager instead of being determined by the market. Using a fair value
pricing methodology to price securities may result in a value that is different
from a security’s most recent closing price and from the prices used by other
investment companies to calculate their NAVs.
IN VIEW OF THE COMPLEXITIES OF U.S. FEDERAL AND
OTHER INCOME TAX LAWS APPLICABLE TO REGULATED INVESTMENT COMPANIES, A
PROSPECTIVE SHAREHOLDER IS URGED TO CONSULT WITH, AND RELY SOLELY UPON, SUCH
INVESTOR’S TAX ADVISORS TO UNDERSTAND FULLY THE U.S. FEDERAL, STATE, LOCAL, AND
FOREIGN TAX CONSEQUENCES TO SUCH INVESTOR OF AN INVESTMENT BASED ON SUCH
INVESTOR’S PARTICULAR FACTS AND CIRCUMSTANCES. THIS SUMMARY IS NOT INTENDED TO
BE, AND SHOULD NOT BE CONSTRUED AS, LEGAL OR TAX ADVICE.
The following information supplements and should
be read in conjunction with the section in the Fund Prospectus titled “Tax
Information.” The Fund Prospectus generally describes the U.S. federal income
tax treatment of distributions by the Funds. This section of the SAI provides
additional information concerning U.S. federal income taxes. It is based on the
Code, applicable U.S. Treasury regulations, judicial authority, and
administrative rulings and practice, all as of the date of this SAI and all of
which are subject to change, including changes with retroactive effect. Except
as specifically set forth below, the following discussion does not address any
state, local, or foreign tax matters.
A shareholder’s tax treatment may vary depending
on the shareholder’s particular situation. This discussion applies only to
shareholders holding Fund shares as capital assets within the meaning of the
Code. A shareholder may also be subject to special rules not discussed below if
they are a certain kind of shareholder, including, but not limited to, an
insurance company, a private foundation, a tax-exempt organization, a financial
institution or broker-dealer, a person who is neither a citizen nor resident of
the United States or an entity that is not organized under the laws of the
United States or political subdivision thereof, a shareholder who holds Fund
shares as part of a hedge, straddle, or conversion transaction, a shareholder
who does not hold Fund shares as a capital asset, or an entity taxable as a
partnership for U.S. federal income tax purposes or investors in such an
entity.
The Trust has not requested, and does not plan to
request, an advance ruling from the IRS as to the U.S. federal income tax
matters described below. The IRS could adopt positions contrary to those
discussed below, and such positions could be sustained. In addition, the
following discussion and the discussion in the Fund Prospectus address only some
of the U.S. federal income tax considerations generally affecting investments in
the Funds. Prospective shareholders are urged to consult their own tax advisers
and financial planners regarding the U.S. federal tax consequences of an
investment in a Fund, the application of state,
local, or foreign laws, and the effect of any possible changes in
applicable tax laws on their investment in the Funds.
QUALIFICATION AS A REGULATED INVESTMENT
COMPANY
It is intended that each Fund, other than the
Midstream Fund, qualifies for treatment as a RIC under Subchapter M of Subtitle
A, Chapter 1 of the Code. Each Fund is treated as a separate entity for
U.S. federal income tax purposes, and each Fund separately determines its
income, gains, losses, and expenses for U.S. federal income tax purposes.
Because the Midstream Fund is treated as a C corporation, it is not taxed
as a RIC. As a result, the remainder of this section applies to all Funds other
than the Midstream Fund.
Because each Fund is treated as a separate entity
for U.S. federal income tax purposes, the provisions of the Code applicable to
RICs generally apply separately to each Fund even though each Fund is a series
of the Trust. In order to qualify as a RIC under the Code, each Fund must, among
other things, derive at least 90% of its gross income each taxable year
generally from (i) dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock, securities,
or foreign currencies, and other income attributable to its business of
investing in such stock, securities, or foreign currencies (including, but not
limited to, gains from options, futures, or forward contracts) and (ii) net
income derived from an interest in a qualified publicly traded partnership, as
defined in the Code. Future U.S. Treasury regulations may (possibly
retroactively) exclude from qualifying income foreign currency gains that are
not directly related to a Fund’s principal business of investing in stock,
securities, options, or futures with respect to stock or securities. In general,
for purposes of this 90% gross income requirement, income derived from a
partnership, except a qualified publicly traded partnership, is treated as
qualifying income only to the extent such income is attributable to items of
income of the partnership that would be qualifying income if realized by the
RIC.
In general, gold and other precious metals do not
constitute qualifying assets, and gain derived from the sale of gold or other
precious metals does not constitute qualifying income. To reduce the risk that
the investments of a Fund, such as the Energy Transition Fund, in gold, silver,
platinum, and palladium bullion, whether held directly or indirectly, may result
in the Fund’s failure to satisfy the requirements of Subchapter M, the portfolio
managers endeavor to manage each Fund’s portfolio so that (i) less than 10%
of the Fund’s gross income each year is derived from its investments in gold,
silver, platinum, and palladium bullion, and (ii) less than 50% of the
value of the Fund’s assets, at the end of each quarter, is invested in gold,
silver, platinum, and palladium bullion or other non-qualifying assets.
Each Fund must also diversify its holdings so
that, at the end of each quarter of the Fund’s taxable year, (i) at least
50% of the fair market value of its gross assets consists of (a) cash and
cash items (including receivables), U.S. Government Securities, and securities
of other RICs, and (b) securities of any one issuer (other than those
described in clause (a)) to the extent such securities do not exceed 5% of the
value of the Fund’s total assets and do not exceed 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of the
Fund’s total assets consists of the securities of any one issuer (other than
those described in clause (i)(b)), the securities of two or more issuers the
Fund controls and which are engaged in the same, similar, or related trades or
businesses, or the securities of one or more qualified publicly traded
partnerships. In addition, for purposes of meeting the diversification
requirement of clause (i)(b), the term “outstanding voting securities of
such issuer” includes the equity securities of a qualified publicly traded
partnership. The qualifying income and diversification requirements applicable
to a Fund may limit the extent to which it can engage in transactions in
options, futures contracts, forward contracts, and swap agreements.
If a Fund fails to satisfy any of the qualifying
income or diversification requirements in any taxable year, such Fund may be
eligible for relief provisions if the failures are due to reasonable cause and
not
willful neglect and if a penalty tax is paid with respect to each failure
to satisfy the applicable requirement. Additionally, relief is provided for
certain de minimis failures of the
diversification requirements where the Fund corrects the failure within a
specified period. If the applicable relief provisions were not available or
could not be met, such Fund would be taxed in the same manner as an ordinary
corporation, which is described below.
In addition, with respect to each taxable year,
each Fund generally must distribute to its shareholders at least 90% of its
investment company taxable income, which generally includes (i) its
ordinary income and the excess of any net short-term capital gain over net
long‑term capital loss and (ii) at least 90% of its net tax‑exempt interest
income earned for the taxable year. If a Fund meets all of the RIC qualification
requirements, it generally is not subject to U.S. federal income tax on any of
the investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) it distributes to
its shareholders. For this purpose, a Fund generally must make the distributions
in the same year that it realizes the income and gain, although in certain
circumstances a Fund may make the distributions in the following taxable year.
Shareholders generally are taxed on any distributions from a Fund in the year
such distribution is actually distributed. However, if a Fund declares a
distribution to shareholders of record in October, November, or December of one
year and pays the distribution by January 31 of the following year, the Fund and
its shareholders are treated as if the Fund paid the distribution on
December 31 of the first year. Each Fund intends to distribute its net
income and gain in a timely manner to maintain its status as a RIC and eliminate
fund-level U.S. federal income taxation of such income and gain. However, no
assurance can be given that a Fund will not be subject to U.S. federal income
taxation.
Moreover, a Fund may retain for investment all or
a portion of its net capital gain. If a Fund retains any net capital gain, it is
subject to a tax at regular corporate rates on the amount retained, but may
report the retained amount as undistributed capital gain in a written statement
furnished to its shareholders, who would then (i) be required to include in
income for U.S. federal income tax purposes, as long-term capital gain, their
shares of such undistributed amount, and (ii) be entitled to credit their
proportionate shares of the tax paid by the Fund on such undistributed amount
against their U.S. federal income tax liabilities, if any, and to claim refunds
to the extent the credit exceeds such liabilities. For U.S. federal income tax
purposes, the tax basis of shares owned by a shareholder of the Fund is
increased by an amount equal to the difference between the amount of
undistributed capital gain included in the shareholder’s gross income and the
tax deemed paid by the shareholder under clause (ii) of the preceding sentence.
A Fund is not required to, and there can be no assurance that it will, make this
designation if it retains all or a portion of its net capital gain in a taxable
year.
If, for any taxable year, a Fund fails to qualify
as a RIC and is not eligible for relief as described above, it is taxed in the
same manner as an ordinary corporation without any deduction for its
distributions to shareholders, and all distributions from the Fund’s current and
accumulated earnings and profits (including any distributions of its net
tax-exempt income and net long-term capital gain) to its shareholders are
taxable as dividend income. To requalify as a RIC in a subsequent year, the Fund
may be required to distribute to its shareholders its earnings and profits
attributable to non-RIC years reduced by an interest charge on 50% of such
earnings and profits payable by the Fund to the IRS. In addition, if a Fund
initially qualifies as a RIC but subsequently fails to qualify as a RIC for a
period greater than two taxable years, the Fund generally would be required to
recognize and pay taxes on any net unrealized gain (the excess of aggregate
gain, including items of income, over aggregate loss that would have been
realized if the Fund had been liquidated) or, alternatively, to be subject to
tax on such unrealized gain recognized for a period of 10 years, in order to
requalify as a RIC in a subsequent year.
Equalization Accounting
Each Fund may use the equalization method of
accounting to allocate a portion of its earnings and profits (which generally
equals a Fund’s undistributed investment company taxable income and net capital
gain, with certain adjustments) to redemption proceeds. This method permits a
Fund to achieve more balanced distributions for both continuing and redeeming
shareholders. Although using this method generally does not affect a Fund’s
total returns, it may reduce the amount that the Fund would otherwise distribute
to continuing shareholders by reducing the effect of redemptions of Fund shares
on Fund distributions to shareholders. However, the IRS may not have expressly
sanctioned the particular equalization methods that may be used by a Fund, and
thus a Fund’s use of these methods may be subject to IRS scrutiny.
Capital Loss
Carryforwards
Each Fund other than the Midstream Fund may carry
forward indefinitely a net capital loss to offset its capital gain. The excess
of such Fund’s net short-term capital loss over its net long-term capital gain
is treated as a short-term capital loss arising on the first day of the Fund’s
next taxable year, and the excess of a Fund’s net long-term capital loss over
its net short-term capital gain is treated as a long-term capital loss arising
on the first day of the Fund’s next taxable year. If future capital gain is
offset by capital loss carryforwards, such future capital gain is not subject to
fund-level U.S. federal income tax, regardless of whether it is distributed
to shareholders. Accordingly, the Funds do not expect to distribute any such
offsetting capital gain. The Funds cannot carry back or carry forward any net
operating losses.
The Midstream Fund may carry forward five years a
net capital loss to offset any future realized capital gains.
As of October 31, 2023, the below Funds had
capital loss carryforwards as follows:
|
Amount |
|
Expiration
Date |
Cornerstone Growth
Fund |
$ |
2,751,555 |
|
Indefinite ST |
|
$ |
1,907,296 |
|
Indefinite LT |
Cornerstone Value
Fund |
$ |
243,746 |
|
Indefinite ST |
|
$ |
4,062,377 |
|
Indefinite LT |
Energy Transition
Fund |
$ |
18,433,308 |
|
Indefinite ST |
|
$ |
19,987,078 |
|
Indefinite LT |
Midstream Fund |
$ |
8,590,317 |
|
10/31/2024 |
|
$ |
7,178,863 |
|
10/31/2025 |
Japan Small Cap
Fund |
$ |
1,191,834 |
|
Indefinite ST |
Large Cap Financial
Fund |
$ |
2,567,969 |
|
Indefinite ST |
Technology
Fund |
$ |
741,103 |
|
Indefinite ST |
|
$ |
106,038 |
|
Indefinite LT |
If a Fund engages in a reorganization, either as
an acquiring fund or acquired fund, its capital loss carryforwards (if any), its
unrealized losses (if any), and any such losses of other funds participating in
the reorganization may be subject to severe limitations that could make such
losses substantially unusable. The Funds have engaged in reorganizations in the
past and may engage in reorganizations in the future.
Net Operating Loss
Carryforwards
The Midstream Fund may carry forward indefinitely
any net operating loss arising in a tax year ending after December 31, 2018. As
of October 31, 2023, the Fund had a net operating loss carryforward of
$2,856,952 with no expiration date.
Excise Tax
If a Fund were to fail to distribute by December
31 of each calendar year at least the sum of 98% of its ordinary income for that
year (excluding capital gains and losses), 98.2% of its capital gain net income
(adjusted for certain net ordinary losses) for the 12-month period ending on
October 31 of that year, and any of its ordinary income and capital gain net
income from previous years that was not distributed during such years, the Fund
would be subject to a nondeductible 4% U.S. federal excise tax on the
undistributed amounts (other than to the extent of its tax‑exempt interest
income, if any). For these purposes, a Fund is treated as having distributed any
amount on which it is subject to corporate‑level U.S. federal income tax for the
taxable year ending within the calendar year. Each Fund generally intends to
distribute, or be deemed to have distributed, substantially all of its ordinary
income and capital gain net income, if any, by the end of each calendar year,
and thus expects not to be subject to the excise tax. However, no assurance can
be given that a Fund will not be subject to the excise tax. Moreover, each Fund
reserves the right to pay an excise tax rather than make an additional
distribution when circumstances warrant (for example, the amount of excise tax
to be paid by a Fund is determined to be de
minimis).
Taxation of
Distributions
Distributions paid out of a Fund’s current and
accumulated earnings and profits (as determined at the end of the year), whether
paid in cash or reinvested in the Fund, generally are deemed to be taxable
distributions and must be reported by each shareholder who is required to file a
U.S. federal income tax return. Dividends and other distributions on a Fund’s
shares generally are subject to U.S. federal income tax as described herein to
the extent they do not exceed the Fund’s realized income and gains, even though
such dividends and distributions may economically represent a return of a
particular shareholder’s investment. Such distributions are likely to occur in
respect of shares acquired at a time when the Fund’s NAV reflects gains that are
either unrealized or realized but not distributed. For U.S. federal income tax
purposes, a Fund’s earnings and profits, described above, are determined at the
end of the Fund’s taxable year, and are allocated pro rata to distributions paid
over the entire year. Distributions in excess of a Fund’s current and
accumulated earnings and profits first are treated as a return of capital up to
the amount of a shareholder’s tax basis in the shareholder’s Fund shares and
then as capital gain. A Fund may make distributions in excess of its earnings
and profits, from time to time.
For U.S. federal income tax purposes,
distributions of investment income and distributions of gains from the sale of
investments that a Fund owned for one year or less typically are taxable as
ordinary income. Distributions properly reported in writing by a Fund as capital
gain dividends are taxable to shareholders as long-term capital gain (to the
extent such distributions do not exceed the Fund’s net capital gain for the
taxable year) regardless of how long a shareholder has held Fund shares, and
such distributions do not qualify as dividends for purposes of the
dividends-received deduction or as qualified dividend income. Each Fund reports
capital gain dividends, if any, in a written statement furnished to its
shareholders after the close of the Fund’s taxable year.
Fluctuations in foreign currency exchange rates
may result in foreign exchange gain or loss on transactions in foreign
currencies, foreign currency-denominated debt obligations, and certain foreign
currency options, futures contracts, and forward contracts. Such gains or losses
are generally characterized as ordinary income or loss for tax purposes. A Fund
must make certain distributions in order to qualify as a
RIC, and the timing of and character of transactions such as foreign
currency-related gains and losses may result in the fund paying a distribution
treated as a return of capital. Such distribution is nontaxable to the extent of
the recipient’s basis in its shares.
Some states do not tax distributions made to
individual shareholders that are attributable to interest a Fund earned on
direct obligations of the U.S. government if the Fund meets the state’s
minimum investment or reporting requirements, if any. Investments in GNMA or
FNMA securities, bankers’ acceptances, commercial paper, and repurchase
agreements collateralized by U.S. Government Securities generally do not qualify
for state tax-free treatment. This exemption may not apply to corporate
shareholders.
Sales and Exchanges of Fund
Shares
If a shareholder sells, pursuant to a cash or
in-kind redemption, or exchanges such shareholder’s Fund shares, subject to the
discussion below, such shareholder generally recognizes a taxable capital gain
or loss on the difference between the amount received for the shares (or deemed
received in the case of an exchange) and the shareholder’s tax basis in the
shares. This gain or loss is long-term capital gain or loss if the shareholder
has held such Fund shares for more than one year at the time of the sale or
exchange, and short-term otherwise.
If a shareholder sells or exchanges Fund shares
within 90 days of having acquired such shares and if, before January 31 of the
calendar year following the calendar year of the sale or exchange and as a
result of having initially acquired those shares, the shareholder subsequently
pays a reduced sales charge on a new purchase of shares of the Fund or a
different RIC, the sales charge previously incurred in acquiring the Fund’s
shares generally is not taken into account (to the extent the previous sales
charges do not exceed the reduction in sales charges on the new purchase) for
the purpose of determining the amount of gain or loss on the disposition, but
generally is treated as having been incurred in the new purchase. In addition,
if a shareholder recognizes a loss on a disposition of Fund shares, the loss is
disallowed under the wash sale rules to the extent the shareholder purchases
substantially identical shares within the 61-day period beginning 30 days
before and ending 30 days after the disposition. Any disallowed loss generally
is reflected in an adjustment to the tax basis of the purchased shares.
If a shareholder receives a capital gain dividend
with respect to any Fund share and such Fund share is held for six months or
less, then (unless otherwise disallowed) any loss on the sale or exchange of
that Fund share would be treated as a long-term capital loss to the extent of
the capital gain dividend. If such loss is incurred from the redemption of
shares pursuant to a periodic redemption plan, then U.S. Treasury regulations
may permit an exception to this six-month rule. No such regulations have been
issued as of the date of this SAI.
Foreign Taxes
Amounts realized by a Fund from sources within
foreign countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. If more than 50% of the value of a Fund’s total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund is eligible to file an annual election with the IRS
pursuant to which the Fund may pass through to its shareholders on a pro rata
basis certain foreign income and similar taxes paid by the Fund, and such taxes
may be claimed, subject to certain limitations, either as a tax credit or
deduction by the shareholders. However, even if a Fund qualifies for the
election for any year, it may decide not to make the election for such year. If
a Fund does not make such election, then shareholders cannot claim a credit or
deduction with respect to foreign taxes paid or withheld. If a Fund were to
elect to pass through its foreign taxes paid in a taxable year, the Fund would
furnish a written statement to its shareholders reporting each shareholder’s
proportionate share of the Funds’ foreign taxes paid.
Even if a Fund qualifies for the election,
foreign income and similar taxes only pass through to the Fund’s shareholders if
the Fund and its shareholders meet certain holding period requirements.
If a Fund makes the election, the Fund is
permitted to claim a credit or deduction for foreign taxes paid in that year and
the Fund’s dividends-paid deduction is increased by the amount of foreign taxes
paid that year. Fund shareholders that have satisfied the holding period
requirements and certain other requirements must include their proportionate
share of the foreign taxes paid by the Fund in their gross income and treat that
amount as paid by them for the purpose of the foreign tax credit or deduction.
If the shareholder claims a credit for foreign taxes paid, the credit is limited
to the extent it exceeds the shareholder’s federal income tax attributable to
foreign source taxable income. If the credit is attributable wholly or in part
to qualified dividend income (as defined below), special rules are used to limit
the credit in a manner that reflects any resulting dividend rate differential.
Only the Japan Fund and Japan Small Cap Fund may be eligible to make the
foregoing election for any tax year.
In general, an individual with $300 or less of
creditable foreign taxes may elect to be exempt from the foreign source taxable
income and qualified dividend income limitations if the individual has no
foreign‑source income other than qualified passive income. This $300 threshold
is increased to $600 for joint filers. A deduction for foreign taxes paid may
only be claimed by shareholders that itemize their deductions.
Cost Basis Reporting
In general, each Fund must report cost basis
information to its shareholders and the IRS for redemptions of covered shares.
Fund shares purchased on or after January 1, 2012, generally are treated as
covered shares, and Fund shares purchased before January 1, 2012, and shares
without complete cost basis information generally are treated as noncovered
shares. Fund shareholders should
consult their tax advisers to obtain more information about how these cost basis
rules apply to them and determine which cost basis method allowed by the IRS is
best for them.
TAXATION OF THE MIDSTREAM FUND AS A C
CORPORATION
Because the Midstream Fund is treated as a C
corporation, it is not taxed as a RIC under the Code. Instead, it is taxed in
the same manner as an ordinary corporation, without any deduction for its
distributions to shareholders, and generally is subject to U.S. federal income
tax on its taxable income at the rate applicable to corporations. In addition,
as a regular corporation, the Midstream Fund may be subject to state and local
taxes in multiple states because of its investments in equity securities of
MLPs. Therefore, the Midstream Fund may have state and local tax liabilities in
multiple states, which would reduce the Fund’s cash available to make
distributions on the shares. The extent to which the Midstream Fund is required
to pay U.S. federal, state, or local corporate income, franchise, or other
corporate taxes could materially reduce the Fund’s cash available to make
distributions on the shares.
A beneficial owner of Midstream Fund shares is a
U.S. holder for U.S. federal income tax purposes if such beneficial owner is
(i) a citizen or resident of the United States, (ii) a U.S. domestic
corporation, (iii) an estate the income of which is subject to U.S. federal
income taxation, regardless of its source, or (iv) a trust, if a U.S. court
can exercise primary supervision over the trust’s administration and one or more
U.S. persons are authorized to control all substantial decisions of the
trust.
If an entity treated as a partnership for U.S.
federal income tax purposes holds Midstream Fund shares, the tax treatment of a
partner generally depends on the status of the partner and the activities of the
partnership. Any such partner having an interest in Midstream Fund shares should
consult such partner’s own tax advisor.
Net Operating Losses
Net operating losses of the Midstream Fund can be
carried forward indefinitely. For net operating losses arising in tax years
beginning after December 31, 2017, the Midstream Fund is subject to an annual
limit of 80% on the amount of taxable income that such net operating losses can
offset. No such limitation is imposed on the use of net operating losses that
arose in earlier taxable years. Net operating losses of the Midstream Fund
arising in taxable years ending after December 31, 2017, cannot be carried back
to prior taxable years.
Capital Losses
The Midstream Fund may deduct capital losses to
the extent of its capital gains. Any excess capital losses cannot be deducted
from its ordinary income. The Midstream Fund generally can carry back its
capital losses in excess of its capital gains for the current year for three
years, and can carryforward any capital losses for five years.
Distributions
If the Midstream Fund pays distributions of cash
or property with respect to its stock, those distributions generally constitute
dividends for U.S. federal income tax purposes to the extent paid from its
current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. If a distribution exceeds the Midstream Fund’s current
and accumulated earnings and profits, the excess is treated as a tax-free return
of the U.S. holder’s investment, up to such holder’s tax basis in its shares of
such stock. Any remaining excess is treated as capital gain, subject to the tax
treatment described below under the heading “Gain on Sale, Exchange, or Other
Taxable Disposition.”
Gain on Sale, Exchange, or
Other Taxable Disposition
Upon the sale, exchange, or other taxable
disposition of Midstream Fund shares, a U.S. holder generally recognizes capital
gain or loss in an amount equal to the difference between (i) the amount of
cash plus the fair market value of any property received and (ii) such U.S.
holder’s tax basis in such common shares sold, exchanged, or otherwise disposed.
Such gain or loss generally is long-term capital gain or loss if, at the time of
the sale or other disposition, the common shares have been held by the U.S.
holder for more than one year. Preferential tax rates may apply to long-term
capital gain of a U.S. holder that is an individual, estate, or trust.
Deductions for capital losses are subject to significant limitations.
TAX-DEFERRED PLANS
Shares of the Funds may be available for a
variety of tax-deferred retirement and other tax‑advantaged plans and accounts.
Prospective investors should contact their tax advisers and financial planners
regarding the tax consequences to them of holding Fund shares through such plans
or accounts.
A 1.4% excise tax is imposed on the net
investment income of certain private colleges and universities. This only
applies to private institutions with endowments valued at $500,000 per full‑time
student or more, subject to other limitations. Tax-exempt shareholders should
contact their tax advisers and financial planners regarding the tax consequences
to them of an investment in the Funds.
Any investment in residual interests of a
collateralized mortgage obligation that has elected to be treated as a real
estate mortgage investment conduit (“REMIC”) can create complex U.S.
federal income tax consequences, especially if a Fund has state or local
governments or other tax-exempt organizations as shareholders.
Special tax consequences apply to charitable
remainder trusts (“CRTs”) (as
defined in Section 664 of the Code) that invest in RICs that in turn invest
directly or indirectly in residual interests in REMICs or equity interests in
taxable mortgage pools (“TMPs”).
CRTs are urged to consult their own tax advisers and financial planners
concerning these special tax consequences.
TAXATION OF CERTAIN INVESTMENTS
In general, realized gains or losses on the sale
of securities held by a Fund are treated as capital gains or losses or, if the
Fund has held the disposed securities for more than one year at the time of
disposition, as long-term capital gains or losses.
MLPs
Investment in securities of an MLP involves risks
that differ from investments in common stock, including risks related to limited
control and limited rights to vote on matters affecting the MLP, risks related
to potential conflicts of interest between the MLP and the MLP’s general
partner, cash flow risks, dilution risks, and risks related to the general
partner’s right to require unitholders to sell their common units at an
undesirable time or price. An MLP usually is treated as a partnership under the
Code, and its partnership interests or “units” are traded on securities
exchanges like shares of corporate stock. To qualify as an MLP for U.S. federal
income tax purposes, an entity must receive at least 90% of its income from
qualifying sources such as interest, dividends, income, and gain from mineral or
natural resources activities, income and gain from the transportation or storage
of certain fuels, and, in certain circumstances, income and gain from
commodities or futures, forwards, and options with respect to commodities. For
this purpose, mineral or natural resources activities include exploration,
development, production, mining, refining, marketing, and transportation
(including pipelines) of oil and gas, minerals, geothermal energy, fertilizer,
timber, or industrial source carbon dioxide.
A typical MLP consists of a general partner and
limited partners, although an MLP may also be established as a limited liability
company and still receive partnership taxation treatment under the Code. The
general partner of an MLP manages the partnership, has an ownership stake in the
partnership, and is eligible to receive an incentive distribution in some cases.
The limited partners provide capital to the partnership, receive common units of
the partnership, have a limited role in the operation and management of the
partnership, and are entitled to receive cash distributions with respect to
their units. Currently, most MLPs operate in the Energy, Natural Resources, and
Real Estate sectors. Due to their partnership structure, MLPs generally do not
pay income taxes. Thus, unlike investors in corporate securities, direct MLP
investors generally are not subject to double taxation (i.e., corporate level tax and tax on corporate
dividends).
Historically, MLPs are treated as partnerships
for U.S. federal income tax purposes and have been able to offset a significant
portion of their taxable income with tax deductions, including depreciation and
amortization expense deductions. A change in current tax law, or a change in the
business of a given MLP, could result in an MLP (otherwise treated as a
partnership) to become treated as a corporation or other form of taxable entity
for U.S. federal income tax purposes, which would require such MLP to pay U.S.
federal income tax, excise tax, or other forms of tax on its taxable income. The
classification of an MLP as a corporation or other form of taxable entity for
U.S. federal income tax purposes could have the effect of reducing the amount of
cash available for distribution by the MLP and could cause any such
distributions received by the Funds to be taxed as dividend income, return of
capital, or capital gain. Thus, if any MLP owned by the Funds were treated as a
corporation or other form of taxable entity for U.S. federal income tax
purposes, the after-tax return to the Funds with respect to its investment in
such MLP could be materially reduced, which could cause a material decrease in
the NAV of the Funds’ shares.
Furthermore, because an MLP itself does not pay
federal income tax, its income or loss is allocated to its shareholders
regardless of whether the shareholders receive any cash payment from the MLP.
MLPs generally make quarterly cash distributions. Although they resemble
corporate dividends, MLP distributions are treated differently. An MLP
distribution is treated as a return of capital to the extent of the
shareholder’s basis in the MLP interest and, to the extent that the distribution
exceeds the shareholder’s basis in the MLP interest, capital gain. The
shareholder’s original basis is the price paid for the units. The basis is
adjusted downward with each distribution and allocation of deductions (such as
depreciation) and losses, and upwards with each allocation of income. When the
units are sold, the taxable gain or loss associated with such sale is based on
the difference between the adjusted cost basis (which was reduced by prior
return of capital distributions and allocations of deductions and increased by
allocations of income) and the sale price. In certain situations, that may
result in a taxable gain on the sale even though the sale price was lower than
the original investment. The shareholder generally is not taxed as of a result
of distributions until (i) MLP units are sold and taxes are paid on the
gain, which gain may have increased because of basis decreases that were created
by prior distributions, or (ii) the shareholder’s basis reaches zero.
Debt Obligations
If a Fund purchases a debt obligation with
original issue discount (“OID”),
which generally means a debt obligation with a purchase price at original
issuance less than its principal amount, such as a zero‑coupon bond or
payment-in-kind bond, the Fund typically must include in its annual taxable
income a portion of the OID as ordinary income even though the Fund may not
receive cash payments attributable to the OID until a later date, potentially
until maturity or disposition of the obligation. A portion of the OID includible
in income with respect to certain high-yield corporate discount obligations may
be treated as a dividend for U.S. federal income tax purposes. Similarly, if a
Fund purchases a debt obligation with market discount, which generally means a
debt obligation with a purchase price after original issuance less than its
principal amount (reduced by any OID), the Fund typically must include in its
annual taxable income a portion of the market discount as ordinary income even
though the Fund may not receive cash payments attributable to the market
discount until a later date, potentially until maturity or disposition of the
obligation. A Fund generally must make distributions to shareholders
representing the OID or market discount income on debt obligations that is
currently includible in income, even though the cash representing such income
may not have been received by a Fund. The Fund might sell securities that the
Fund otherwise would have continued to hold in order to obtain cash to pay such
distributions, which could be disadvantageous for the Fund’s shareholders.
If a Fund invests in debt obligations that are in
the lowest rating categories or are unrated, including debt obligations of
issuers not currently paying interest or who are in default, the Fund may have
special tax issues. U.S. federal income tax rules are not entirely clear about
when a Fund may cease to accrue interest, OID, or market discount, when and to
what extent deductions may be taken for bad debts or worthless securities, and
how payments received on obligations in default should be allocated between
principal and income. If a Fund (other than the Midstream Fund) were to invest
in such securities, it would address these and other related issues 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.
Options
If an option granted by a Fund is sold, lapses,
or otherwise terminated through a closing transaction, such as a repurchase by
the Fund of the option from its holder, the Fund realizes a short-term capital
gain or loss depending on whether the premium income is greater or less than the
amount paid by the Fund in the closing transaction. Some capital losses realized
by a Fund in the sale, exchange, exercise, or other disposition of an option
could be deferred if they result from a position that is part of a straddle
position, an explanation of which is included below. If securities are sold by a
Fund pursuant to the exercise of a covered
call option granted by it, the Fund generally adds the premium received to
the sale price of the securities delivered in determining the amount of gain or
loss on the sale. If securities are purchased by a Fund pursuant to the exercise
of a put option granted by it, the Fund generally subtracts the premium received
from its cost basis in the securities purchased.
Certain Futures Contracts,
Foreign Currency Contracts, and Non-Equity Listed Options
Some regulated futures contracts, certain foreign
currency contracts, and non-equity listed options used by a Fund may be deemed
Section 1256 contracts. A Fund is required to treat any such contracts held at
the end of the taxable year as if they had been sold on the last day of that
year at market value under the mark-to-market rule. Sixty percent of any net
gain or loss realized on all dispositions of Section 1256 contracts, including
deemed dispositions under the mark-to-market rule, generally is treated as
long‑term capital gain or loss, and the remaining 40% is treated as short-term
capital gain or loss, although certain foreign currency gains and losses from
such contracts may be treated as ordinary income or loss as described below.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Transactions that qualify as designated hedges are
exempt from the mark‑to‑market rule and the 60%/40% rule and may require the
Fund to defer the recognition of losses on certain futures contracts, foreign
currency contracts, and non-equity options.
Certain Foreign Currency
Gains and Losses
Foreign currency gains and losses realized by a
Fund in connection with certain transactions involving foreign
currency-denominated debt obligations, certain options, futures contracts,
forward contracts, and similar instruments relating to foreign currency, foreign
currencies, or payables or receivables denominated in a foreign currency are
subject to Section 988 of the Code, which generally causes such gains and losses
to be treated as ordinary income or loss and may affect the amount and timing of
recognition of the Fund’s income. Under U.S. Treasury regulations, any such
transactions that are not directly related to a Fund’s investments in stock or
securities (or its options contracts or futures contracts with respect to stock
or securities) may have to be limited in order to enable the Fund to satisfy the
90% income test described above. If the net foreign currency loss exceeds a
Fund’s net investment company taxable income (computed without regard to such
loss) for a taxable year, the resulting ordinary loss for such year is not
deductible by the Fund or its shareholders in future years.
Straddles
Offsetting positions held by a Fund involving
certain derivative instruments, such as financial forward, futures, and options
contracts, may be considered, for U.S. federal income tax purposes, to
constitute straddles. Straddles include offsetting positions in actively traded
personal property. The tax treatment of straddle” is governed by Section 1092 of
the Code, which, in certain circumstances, overrides or modifies the provisions
of Section 1256 of the Code, described above. If a Fund is treated as entering
into straddle and at least one (but not all) of the Fund’s positions in
derivative contracts comprising a part of such straddle is governed by Section
1256 of the Code, then such straddle could be characterized as a mixed straddle.
A Fund may make one or more elections with respect to mixed straddles. Depending
on which election is made, if any, the results with respect to a Fund may
differ. Generally, to the extent the straddle rules apply to positions
established by a Fund, losses realized by the Fund could be deferred to the
extent of unrealized gain in any offsetting positions. Moreover, as a result of
the straddle rules, short-term capital loss on straddle positions may be
recharacterized as long-term capital loss, and long-term capital gain may be
characterized as short-term capital gain. In addition, the existence of a
straddle may affect the holding period of the offsetting positions. As a result,
the straddle rules could cause distributions that would otherwise constitute
qualified dividend income (defined below) to fail to satisfy the applicable
holding period requirements (described below) and therefore to be taxed as
ordinary income. Furthermore, the Fund may be
required to capitalize, rather than deduct currently, any interest expense
and carrying charges applicable to a position that is part of a straddle,
including any interest expense on indebtedness incurred or continued to purchase
or carry any positions that are part of a straddle. Because the application of
the straddle rules may affect the character and timing of gains and losses from
affected straddle positions, the amount that must be distributed to shareholders
and taxed to shareholders as ordinary income or long-term capital gain, may be
increased or decreased substantially as compared to a situation where a Fund had
not engaged in such transactions.
Constructive Sales and
Ownership
If a Fund enters into a constructive sale of any
appreciated financial position in stock, a partnership interest, or certain debt
instruments, the Fund is treated as if it had sold and immediately repurchased
the property and must recognize gain (but not loss) with respect to that
position. A constructive sale of an appreciated financial position occurs when a
Fund enters into certain offsetting transactions with respect to the same or
substantially identical property, including (i) a short sale, (ii) an
offsetting notional principal contract, (iii) a futures or forward
contract, or (iv) other transactions identified in future U.S. Treasury
regulations. The character of the gain from constructive sales depends on a
Fund’s holding period in the appreciated financial position. Losses realized
from a sale of a position that was previously the subject of a constructive sale
are recognized when the Fund disposes of the position. The character of such
losses depends on a Fund’s holding period in the position and the application of
various loss deferral provisions in the Code. Constructive sale treatment does
not apply to certain closed transactions, including if such a transaction is
closed on or before the 30th day after the close of the Fund’s taxable year and
the Fund holds the appreciated financial position unhedged throughout the 60-day
period beginning with the day such transaction was closed.
The amount of long-term capital gain a Fund may
recognize from certain derivative transactions with respect to interests in
certain pass-through entities is limited under the Code’s constructive ownership
rules. The amount of long-term capital gain is limited to the amount of such
gain a Fund would have had if the Fund directly invested in the pass-through
entity during the term of the derivative contract. Any gain in excess of this
amount is treated as ordinary income. An interest charge is imposed on the
amount of gain that is treated as ordinary income.
Certain Derivatives
In addition, a Fund’s transactions in securities
and certain types of derivatives (e.g., options, futures contracts, forward
contracts, and swap agreements) may be subject to other special tax rules, such
as the wash sale rules or the short sale rules, the effect of which may be to
accelerate income to the Fund, defer losses to the Fund, cause adjustments to
the holding periods of the Fund’s securities, convert long-term capital gains
into short-term capital gains, or convert short-term capital losses into
long-term capital losses. These rules could therefore affect the amount, timing,
and character of distributions to shareholders.
Rules governing the U.S. federal income tax
aspects of derivatives, including swap agreements, are in a developing stage and
are not entirely clear in certain respects. Accordingly, while each Fund intends
to account for such transactions in a manner it deems to be appropriate, the IRS
might not accept such treatment. If it did not, the status of a Fund (other than
the Midstream Fund) as a RIC might be jeopardized. Certain requirements that
must be met under the Code in order for a Fund to qualify as a RIC may limit the
extent to which a Fund (other than the Midstream Fund) engages in derivatives
transactions.
REITs and REMICs
Investments in REIT equity securities may require
a 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. A 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 Fund shareholders for U.S.
federal income tax purposes. Dividends received by the Fund from a REIT
generally do not constitute qualified dividend income and do not qualify for the
dividends-received deduction. Taxable
ordinary dividends received and distributed by a Fund on its REIT holdings may
be eligible to be reported by the Fund, and treated by individual shareholders,
as “qualified REIT dividends” that are eligible for a 20% deduction on its
federal income tax returns. Individuals must satisfy holding period and other
requirements in order to be eligible for this deduction. Without further
legislation, the deduction would sunset after 2025. Shareholders should consult
their own tax professionals concerning their eligibility for this
deduction.
Direct or indirect investments in residual
interests in REMICs or in other interests may be treated as TMPs for
U.S. federal income tax purposes. Under IRS guidance, a Fund must allocate
“excess inclusion income” received directly or indirectly from REMIC residual
interests or TMPs to its shareholders in proportion to dividends paid to such
shareholders, with the same consequences as if the shareholders had invested in
the REMIC residual interests or TMPs directly.
In general, excess inclusion income allocated to
shareholders (i) cannot be offset by net operating losses (subject to a
limited exception for certain thrift institutions), (ii) constitutes
unrelated business taxable income to Keogh, 401(k), and qualified pension plans,
as well as individual retirement accounts and certain other tax exempt entities,
thereby potentially requiring such an entity, which otherwise might not be
required to file a tax return, to file a tax return and pay tax on such income,
and (iii) in the case of a foreign shareholder, does not qualify for any
reduction, by treaty or otherwise, in the 30% U.S. federal withholding tax. In
addition, if at any time during any taxable year a disqualified organization (as
defined in the Code) is a record holder of a share in a Fund, then the Fund is
subject to a tax equal to that portion of its excess inclusion income for the
taxable year that is allocable to the disqualified organization, multiplied by
the highest federal corporate income tax rate. To the extent permitted under the
1940 Act, a Fund may elect to specially allocate any such tax to the applicable
disqualified organization, and thus reduce such shareholder’s distributions for
the year by the amount of the tax that relates to such shareholder’s interest in
the Fund. A Fund may or may not make such an election.
PFICs and CFCs
Passive foreign investment companies (“PFICs”) are generally defined as
foreign corporations with respect to which at least 75% of their gross income
for their taxable year is income from passive sources (such as interest,
dividends, certain rents and royalties, or capital gains) or at least 50% of
their assets on average produce, or are held for the production of, such passive
income. If a Fund acquires any equity interest in a PFIC, the Fund could be
subject to U.S. federal income tax and interest charges on excess distributions
received from the PFIC or on gain from the sale of such equity interest in the
PFIC, even if all income or gain actually received by the Fund is timely
distributed to its shareholders. Excess distributions are characterized as
ordinary income even though, absent the application of PFIC rules, some excess
distributions may have been classified as capital gain.
A Fund may not pass through to its shareholders
any credit or deduction for taxes and interest charges incurred with respect to
PFICs. Elections may be available that would ameliorate these adverse tax
consequences, but such elections could require a Fund to recognize taxable
income or gain without the
concurrent receipt of cash. Investments in PFICs could also result in the
treatment of associated capital gains as ordinary income. The Funds may attempt
to limit or manage their holdings in PFICs to minimize their tax liability or
maximize their returns from these investments, but there can be no assurance
that they would be able to do so. Moreover, because it is not always possible to
identify a foreign corporation as a PFIC in advance of acquiring shares in the
corporation, a Fund may incur the tax and interest charges described above in
some instances. Dividends paid by a Fund attributable to income and gains
derived from PFICs are not eligible to be treated as qualified dividend
income.
If a Fund owns 10% or more of either the voting
power or value of the stock of a controlled foreign corporation (“CFC”), such corporation is not treated
as a PFIC with respect to the Fund. In general, a Fund may be required to
recognize dividends from a CFC before actually receiving any dividends. There
may also be a tax imposed on a U.S. shareholder’s aggregate net CFC income that
is treated as global intangible low‑taxed income. As a result, a Fund may be
required to recognize income sooner than it otherwise would.
Additional Information
In addition to the investments described above,
prospective shareholders should be aware that other investments made by a Fund
could involve complex tax rules that could result in income or gain recognition
by a Fund without corresponding current cash receipts. Although a Fund seeks to
avoid significant non-cash income, such non-cash income could be recognized by
the Fund. In such case, the Fund may distribute cash derived from other sources
to meet the minimum distribution requirements described above, which may require
the Fund to liquidate investments prematurely.
Notwithstanding the foregoing, accrual method
taxpayers are required to recognize gross income under the “all events test” no
later than when such income is recognized as revenue in an applicable financial
statement (e.g., an audited financial statement that is used for reporting to
partners). This rule may require the Fund to recognize income earlier than as
described above.
U.S. FEDERAL INCOME TAX RATES
Non‑corporate Fund shareholders (i.e.,
individuals, trusts, and estates) currently are taxed at a maximum rate of 37%
on ordinary income and 20% on net capital gain.
In general, qualified dividend income realized by
non‑corporate Fund shareholders is taxable at the same rate as net capital gain.
Qualified dividend income is dividend income attributable to certain U.S. and
foreign corporations, as long as certain holding period requirements are met. If
less than 95% of the income of a Fund, other than the Midstream Fund, is
attributable to qualified dividend income, then typically only the portion of
the Fund’s distributions that is attributable to qualified dividend income and
reported in writing as such in a timely manner is treated as qualified dividend
income in the hands of individual shareholders. Payments received by a Fund,
other than the Midstream Fund, from securities lending, repurchase, and other
derivative transactions ordinarily do not qualify. The rules attributable to the
qualification of Fund distributions as qualified dividend income are complex,
including the holding period requirements. Individual Fund shareholders
therefore are urged to consult their own tax advisers and financial
planners.
The current maximum stated corporate U.S. federal
income tax rate applicable to ordinary income and net capital gain is 21%.
Actual marginal tax rates may be higher for some shareholders, for example,
through reductions in deductions. Distributions from a Fund may qualify for the
dividends-received deduction applicable to corporate shareholders with respect
to certain dividends. Naturally, the amount of tax payable by any taxpayer is
affected by a combination of tax laws covering, for example, deductions,
credits, deferrals, exemptions, and sources of income.
In addition, non-corporate Fund shareholders
generally are subject to an additional 3.8% tax on their net investment income,
which usually includes taxable distributions received from the corresponding
Fund and taxable gain on the disposition of Fund shares if the shareholders
meets a taxable income test.
Under the Foreign Account Tax Compliance Act
(“FATCA”) U.S. federal income
tax withholding at a 30% rate is imposed on dividends and proceeds of
redemptions in respect of Fund shares received by Fund shareholders who own
their shares through foreign accounts or foreign intermediaries if certain
disclosure requirements related to U.S. accounts or ownership are not satisfied.
The Funds do not pay any additional amounts in respect to any amounts
withheld.
INFORMATION REPORTING AND BACKUP
WITHHOLDING
Distributions on, and the payment of the proceeds
of a disposition of, a Fund share generally is subject to information reporting
if made within the United States or through certain U.S.-related financial
intermediaries. Information returns must be filed with the IRS, and copies of
information returns may be made available to the tax authorities of the country
in which a holder resides or is incorporated under the provisions of a specific
treaty or agreement.
A Fund generally is required to withhold and
remit to the U.S. Treasury, subject to exemptions such as those for certain
corporate or foreign shareholders, an amount equal to 24% of all distributions
and redemption proceeds (including proceeds from exchanges and in-kind
redemptions) paid or credited to a Fund shareholder if (i) the shareholder
fails to furnish the Fund with a correct taxpayer identification number (“TIN”), (ii) the shareholder fails
to certify under penalties of perjury that the TIN provided is correct,
(iii) the shareholder fails to make certain other certifications, or
(iv) the IRS notifies the Fund that the shareholder’s TIN is incorrect or
that the shareholder is otherwise subject to backup withholding. Backup
withholding is not an additional tax imposed on the shareholder. The shareholder
may apply amounts withheld as a credit against the shareholder’s U.S. federal
income tax liability and may obtain a refund of any excess amounts withheld as
long as the required information is furnished to the IRS. If a shareholder fails
to furnish a valid TIN upon request, the shareholder can also be subject to IRS
penalties. A shareholder may generally avoid backup withholding by furnishing a
properly completed IRS Form W-9. State backup withholding may also be required
to be withheld by the Funds under certain circumstances.
FOREIGN SHAREHOLDERS
For purposes of this discussion, foreign
shareholders include (i) nonresident alien individuals, (ii) foreign
trusts (i.e., any trust other than a trust with respect to which a U.S. court is
able to exercise primary supervision over administration of that trust and one
or more U.S. persons have authority to control substantial decisions of that
trust), (iii) foreign estates (i.e., estates whose income is not subject to
U.S. tax regardless of source), and (iv) foreign corporations.
Generally, distributions made to foreign
shareholders are subject to non-refundable U.S. federal income tax withholding
at a 30% rate (or such lower rate provided under an applicable income tax
treaty) even if they are funded by income or gains (such as portfolio interest,
short-term capital gain, or foreign‑source dividend and interest income) that,
if paid to a foreign person directly, would not be subject to such
withholding.
Under legislation that has been available from
time to time, a Fund could report in writing to its shareholders certain
distributions made to foreign shareholders that would not be subject to U.S.
federal income tax withholding where the distribution is attributable to
specific sources (such as portfolio interest and short-term capital gain),
certain requirements are met and the Fund makes appropriate designations to pay
such exempt distributions. Even if a Fund realizes income from such sources, no
assurance can be made
that the Fund would meet such requirements or make such designations. Where
Fund shares are held through an intermediary, even if a Fund makes the
appropriate designation, the intermediary may withhold U.S. federal income
tax.
Capital gains dividends and gains recognized by a
foreign shareholder on the redemption of Fund shares generally are not subject
to U.S. federal income tax withholding, provided that certain requirements are
satisfied.
Under FATCA, a withholding tax of 30% is imposed
on dividends on, and the gross proceeds of a disposition of, Fund shares paid to
certain foreign shareholders unless various information reporting requirements
are satisfied. Such withholding tax generally applies to non-U.S. financial
institutions, which are defined for this purpose as non-U.S. entities that
(i) accept deposits in the ordinary course of a banking or similar
business, (ii) are engaged in the business of holding financial assets for
the account of others, or (iii) are engaged, or hold themselves out as
being engaged, primarily in the business of investing, reinvesting, or trading
in securities, partnership interests, commodities, or any interest in such
assets. Prospective foreign shareholders are encouraged to consult their tax
advisors regarding the implications of FATCA on their investment in a
Fund.
Before investing in a Fund’s shares, a
prospective foreign shareholder should consult with its own tax advisors,
including whether the shareholder’s investment can qualify for benefits under an
applicable income tax treaty.
TAX SHELTER REPORTING REGULATIONS
Generally, under U.S. Treasury regulations, if an
individual shareholder recognizes a loss of $2 million or more, or if a
corporate shareholder recognizes a loss of $10 million or more, with respect to
Fund shares, the shareholder must file with the IRS a disclosure statement on
Form 8886. Direct shareholders of securities are in many cases exempt from this
reporting requirement, but shareholders of a RIC are not exempt under current
guidance. Future guidance may extend the current exemption from this reporting
requirement to shareholders of most or all RICs. 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 own tax advisers to determine the applicability of these
regulations in light of their individual circumstances.
TAX LEGISLATION
Prospective shareholders should recognize that
the present U.S. federal income tax treatment of the Funds and their
shareholders may be modified by legislative, judicial, or administrative actions
at any time, which may be retroactive in effect. The rules addressing U.S.
federal income taxation are constantly under review by Congress, the IRS, and
the U.S. Treasury, and statutory changes, as well as promulgation of new
regulations, revisions to existing statutes, and revised interpretations of
established concepts, occur frequently. You should consult your advisers
concerning the status of legislative proposals that may pertain to holding Fund
shares.
The foregoing summary does not describe fully the
income and other tax consequences of an investment in a Fund. Fund investors are
strongly urged to consult with their tax advisers, with specific reference to
their own respective situations, regarding the potential tax consequences of an
investment in a Fund.
Bankers’ Acceptances.
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.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return.
Commercial Paper.
Commercial paper consists of unsecured promissory notes issued by corporations.
Issues of commercial paper normally have maturities of less than nine months and
fixed rates of return.
U.S. Government Agency and
Instrumentality Obligations. Obligations issued by agencies and
instrumentalities of the U.S. government include such agencies and
instrumentalities as the Government National Mortgage Association, the
Export-Import Bank of the United States, the Tennessee Valley Authority, the
Farmers Home Administration, the Federal Home Loan Banks, the Federal
Intermediate Credit Banks, the Federal Farm Credit Banks, the Federal Land
Banks, the Federal Housing Administration, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, and the Student Loan
Marketing Association. Some of these obligations, such as those of the
Government National Mortgage Association are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. government
to purchase the agency’s obligations; and others, such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. government would
provide financial support to U.S. government‑sponsored instrumentalities if
it is not obligated to do so by law. A Fund invests in the obligations of such
instrumentalities only when its portfolio managers believe that the credit risk
with respect to the instrumentality is minimal.
U.S. Treasury Securities.
U.S. Treasury securities are obligations issued or guaranteed as to payment of
principal and interest by the full faith and credit of the U.S. government.
These obligations may include Treasury bills, notes, and bonds, and issues of
agencies and instrumentalities of the U.S. government, as long as
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. government.
The Trust has established an Anti-Money
Laundering Compliance Program (the “Program”) as required by the Uniting
and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001 (“PATRIOT Act”). To ensure compliance
with this law, the 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 Distributor and Fund Services have
established proper anti-money laundering procedures, reporting suspicious or
fraudulent activity, and performing a complete and thorough review of all new
opening account applications. No Fund may transact business with any person or
legal entity whose identity and whose beneficial owners, if applicable, cannot
be adequately verified under the provision of the PATRIOT Act.
As a result of the Program, the Funds may be
required to freeze the account of a shareholder if the shareholder appears to be
involved in suspicious activity or if certain account information matches
information on government lists of known terrorists or other suspicious persons,
or the Funds may be required to transfer the account or proceeds of the account
to a governmental agency.
DISTRIBUTION PLANS
The Board of Trustees has adopted a separate
Distribution (Rule 12b‑1) Plan (a “Plan”) on behalf of Investor Class
shares of each Fund pursuant to Rule 12b-1 under the 1940 Act. The Plans were
adopted in anticipation that the Funds would benefit from the Plans through
increased sales of shares, thereby spreading each Fund’s fixed expenses over a
greater base and providing the Fund with an asset size that allows greater
flexibility in the management of its portfolio. The Plans allow the Funds to
reimburse eligible expenses actually incurred by the Funds.
The Plans authorize payments by the Funds in
connection with the distribution of their shares at an annual rate set by the
Board of Trustees of up to 0.25% of the average daily net assets of the Funds.
Despite the currently set rate of 0.15% for all Funds, the Board of Trustees is
authorized to set the annual rate of all Funds at up 0.25% pursuant to previous
shareholder approval. Amounts paid under a Plan by a Fund may be spent by the
Fund on any activities or expenses primarily intended to result in the sale of
shares of the Fund, including but not limited to, advertising, compensation for
sales and marketing activities of financial institutions and others such as
dealers and distributors, shareholder account servicing, the printing and
mailing of prospectuses to other than current shareholders, and the printing and
mailing of sales literature. Amounts may also be spent on the cost of
implementing and operating the Plan and the payment of capital or other expenses
of associated equipment, rent, salaries, bonuses, interest, and other overhead
costs. A Fund may reimburse the Distributor for expenses it pays on behalf of
such Fund that are eligible to be paid under the applicable Plan. To the extent
any activity is one that a Fund may finance without a plan pursuant to
Rule 12b‑1, the Fund may also make payments to finance such activity
outside of its Plan and not subject to its limitations.
The Plan for a particular Fund may be terminated
by such Fund at any time by a vote of the Trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
such Plan or any agreement related thereto (the “Rule 12b-1 Trustees”) or by a vote of
a majority of the outstanding shares of such Fund. Any change in the Plan for a
particular Fund that would materially increase the distribution expenses of such
Fund provided for in such Plan requires approval of the Board of Trustees,
including the Rule 12b-1 Trustees, and a majority of the applicable Fund’s
shareholders.
While the Plans are in effect, the selection and
nomination of Rule 12b-1 Trustees is
at the discretion of the Trustees who are not interested persons of the Trust.
The Board of Trustees must review the amount and purposes of expenditures
pursuant to the Plans quarterly as reported to it by the Distributor or officers
of the Trust. The Plans continue in effect for as long their continuance is
specifically approved at least annually by the Board of Trustees, including the
Rule 12b-1 Trustees.
During fiscal year 2023, the following amounts
were paid by the Funds under a Plan with respect to Investor Class shares:
Cornerstone Growth Fund |
|
$ |
221,184 |
|
Focus Fund |
|
$ |
622,366 |
|
Cornerstone Mid Cap 30 Fund |
|
$ |
371,567 |
|
Cornerstone Large Growth Fund |
|
$ |
178,273 |
|
Cornerstone Value Fund |
|
$ |
403,515 |
|
Total Return Fund |
|
$ |
78,480 |
|
Equity and Income Fund |
|
$ |
56,928 |
|
Balanced Fund |
|
$ |
18,674 |
|
Energy Transition Fund |
|
$ |
13,607 |
|
Midstream Fund |
|
$ |
20,828 |
|
Gas Utility Fund |
|
$ |
646,278 |
|
Japan Fund |
|
$ |
68,570 |
|
Japan Small Cap Fund |
|
$ |
50,867 |
|
Large Cap Financial Fund |
|
$ |
30,385 |
|
Small Cap Financial Fund |
|
$ |
104,321 |
|
Technology Fund |
|
$ |
6,576 |
|
During fiscal year 2023, the Funds incurred the
following expenses with respect to Investor Class shares. Other distribution
expenses identified in the column below include administrative, legal, financial
management, and sales support expenses of such Funds:
|
Sales Material and Advertising |
Printing and Mailing
Fund Prospectuses to
other than
Current
Shareholders |
Compensation to
Sales Personnel and Broker-Dealers |
Other
Distribution Expenses |
Approximate Total
Amount Spent with Respect to Each
Fund |
Cornerstone Growth
Fund |
$ |
45,769 |
$ |
— |
$ |
— |
$ |
175,415 |
$ |
221,184 |
Focus Fund |
$ |
44,636 |
$ |
— |
$ |
— |
$ |
577,730 |
$ |
622,366 |
Cornerstone Mid Cap 30
Fund |
$ |
36,366 |
$ |
— |
$ |
— |
$ |
335,201 |
$ |
371,567 |
Cornerstone Large
Growth Fund |
$ |
60,249 |
$ |
— |
$ |
— |
$ |
118,024 |
$ |
178,273 |
Cornerstone Value
Fund |
$ |
174,255 |
$ |
— |
$ |
— |
$ |
229,260 |
$ |
403,515 |
Total Return
Fund |
$ |
24,279 |
$ |
— |
$ |
— |
$ |
54,201 |
$ |
78,480 |
Equity and Income
Fund |
$ |
2,055 |
$ |
— |
$ |
— |
$ |
54,873 |
$ |
56,928 |
Balanced Fund |
$ |
5,115 |
$ |
— |
$ |
— |
$ |
13,559 |
$ |
18,674 |
Energy Transition
Fund |
$ |
69 |
$ |
— |
$ |
— |
$ |
13,538 |
$ |
13,607 |
Midstream Fund |
$ |
235 |
$ |
— |
$ |
— |
$ |
20,593 |
$ |
20,828 |
Gas Utility
Fund |
$ |
110,977 |
$ |
— |
$ |
— |
$ |
535,301 |
$ |
646,278 |
Japan Fund |
$ |
426 |
$ |
— |
$ |
— |
$ |
68,144 |
$ |
68,570 |
Japan Small Cap
Fund |
$ |
1,117 |
$ |
— |
$ |
— |
$ |
49,750 |
$ |
50,867 |
Large Cap Financial
Fund |
$ |
2,665 |
$ |
— |
$ |
— |
$ |
27,720 |
$ |
30,385 |
Small Cap Financial
Fund |
$ |
8,664 |
$ |
— |
$ |
— |
$ |
95,657 |
$ |
104,321 |
Technology
Fund |
$ |
557 |
$ |
— |
$ |
— |
$ |
6,019 |
$ |
6,576 |
SHAREHOLDER SERVICING AGREEMENT
The Funds have entered into a Shareholder
Servicing Agreement with the Investment Manager (the “Servicing Agreement”) with respect to
their Investor Class shares. Pursuant to the Servicing Agreement, the Investment
Manager provides administrative support services to the Funds consisting
of:
• |
maintaining a toll‑free number that current shareholders may call to
ask questions about their accounts or the
Funds; |
• |
responding generally to shareholder
questions; |
• |
actively participating as a liaison between shareholders and Fund
Services; and |
• |
providing such other similar services as may be
requested. |
For such services, each Fund pays an annual
service fee to the Investment Manager equal to 0.10% of the average daily net
assets of its Investor Class shares. Institutional Class shares of the Funds are
not subject to this annual service fee.
During fiscal years 2023, 2022, and 2021, the
Funds paid the following fees to the Investment Manager pursuant to the
Servicing Agreement:
|
Fiscal Year
Ended October 31,
2023 |
Fiscal Year
Ended October 31,
2022 |
Fiscal Year
Ended October 31,
2021 |
Cornerstone Growth
Fund |
$ |
147,456 |
$ |
145,286 |
$ |
149,743 |
Focus Fund |
$ |
414,910 |
$ |
556,444 |
$ |
713,275 |
Cornerstone Mid
Cap 30 Fund |
$ |
247,711 |
$ |
209,761 |
$ |
224,790 |
Cornerstone Large
Growth Fund |
$ |
118,849 |
$ |
128,856 |
$ |
132,721 |
Cornerstone Value
Fund |
$ |
269,010 |
$ |
266,441 |
$ |
240,709 |
Total Return
Fund |
$ |
52,320 |
$ |
53,634 |
$ |
55,677 |
Equity and Income
Fund |
$ |
37,952 |
$ |
46,676 |
$ |
54,092 |
Balanced Fund |
$ |
12,450 |
$ |
13,620 |
$ |
13,316 |
Energy Transition
Fund |
$ |
9,071 |
$ |
8,391 |
$ |
4,764 |
Midstream Fund |
$ |
13,885 |
$ |
8,895 |
$ |
5,905 |
Gas Utility
Fund |
$ |
430,852 |
$ |
481,274 |
$ |
475,033 |
Japan Fund |
$ |
45,714 |
$ |
61,788 |
$ |
137,142 |
Japan Small Cap
Fund |
$ |
33,912 |
$ |
37,624 |
$ |
49,849 |
Large Cap Financial
Fund |
$ |
20,257 |
$ |
28,180 |
$ |
33,404 |
Small Cap Financial
Fund |
$ |
69,547 |
$ |
106,401 |
$ |
107,642 |
Technology
Fund |
$ |
4,384 |
$ |
4,809 |
$ |
5,869 |
The Servicing Agreement may be terminated with
respect to a Fund by either party on 60 days’ prior written notice to the
other party and terminates if its continuance is not approved with respect to
such Fund at
least annually by a majority of those Trustees who are not interested
persons (as defined in the 1940 Act) of any such party.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Funds may pay fees to financial
intermediaries, such as brokers or third-party administrators, for
non-distribution‑related sub-transfer agency, administrative, sub‑accounting,
and other shareholder services. Fees paid pursuant to such agreements are
generally based on either (i) a percentage of the average daily net assets
of Fund shareholders serviced by a financial intermediary or (ii) the
number of accounts held by Fund shareholders that are serviced by a financial
intermediary. Any fees paid pursuant to such agreements may be in addition to,
rather than in lieu of, fees the Funds may pay to financial intermediaries
pursuant to the Plans for distribution and other services.
The Investment Manager also may pay certain
financial intermediaries for certain activities related to the Funds. These
payments are separate from any fees the Funds pay to those financial
intermediaries. Any payments made by the Investment Manager are made from its
own assets and not from the assets of the Funds. These payments do not increase
the price paid by investors for the purchase of shares of, or the cost of
owning, a Fund. The Investment Manager may pay for financial intermediaries to
participate in marketing activities and presentations, educational training
programs, activities designed to make registered representatives, other
professionals, and individual investors more knowledgeable about the Funds, or
activities relating to the support of technology platforms and reporting
systems. The Investment Manager may also make payments to financial
intermediaries for certain printing, publishing, and mailing costs associated
with the Funds. Additionally, the Investment Manager may make payments to
financial intermediaries that make shares of the Funds available to their
clients or for otherwise promoting the Funds. Payments of this type are
sometimes referred to as revenue-sharing payments.
Payments to financial intermediary may be
significant to that financial intermediary, and amounts that financial
intermediaries pay to an investor’s salesperson or other investment professional
may also be significant for the investor’s salesperson or other investment
professional. Because a financial intermediary may make decisions about which
investment options it recommends or makes available to its clients and what
services to provide for various products based on payments it receives or is
eligible to receive, these payments create conflicts of interest between the
financial intermediary and its clients, and these financial incentives may cause
the financial intermediary to recommend the Funds over other investments. The
same conflict of interest exists with respect to an investor’s salesperson or
other investment professional if such individual receives similar payments from
a financial intermediary.
The incremental assets purchased by shareholders
through financial intermediaries to which the Investment Manager makes payments
are not as profitable to the Investment Manager as those purchased in direct
shareholder accounts. A significant majority of shareholders invest in the Funds
through such financial intermediaries.
DESCRIPTION OF SHARES
Each Fund’s authorized capital consists of an
unlimited number of shares of beneficial interest, having no par value.
Shareholders are entitled to (i) one vote per full Fund share,
(ii) such distributions as may be declared by the Board of Trustees out of
funds legally available, and (iii) upon liquidation, to participate ratably
in the assets available for distribution. There are no conversion or sinking
fund provisions applicable to Fund shares, and the holders have no preemptive
rights and may not cumulate their votes in the election of Trustees.
Consequently, the holders of more than 50% of Fund shares voting for the
election of Trustees can elect all the Trustees, and in such event, the holders
of the remaining Fund shares voting for the election of Trustees would be unable
to elect any persons as Trustees. As indicated below, the Funds do not
anticipate holding an annual meeting in any year in which the election of
Trustees is not required to be acted on by shareholders under the 1940
Act.
Fund shares are redeemable and are transferable.
All Fund shares issued and sold by the Funds are fully paid and nonassessable.
Fractional Fund shares entitle the holder to the same rights as whole Fund
shares.
Pursuant to the Trust Instrument, the Trustees
may establish and designate one or more separate and distinct series of Fund
shares, each of which would be authorized to issue an unlimited number of Fund
shares. Additionally, without obtaining any prior authorization or vote of
shareholders, the Trustees may redesignate or reclassify any issued shares of
any series. In the event that more than one series is established, each Fund
share outstanding, regardless of series, would still entitle its holder to one
vote. As a general matter, Fund shares would be voted in the aggregate and not
by series, except where class voting would be required by the 1940 Act (e.g.,
change in investment policy or approval of an investment advisory agreement).
All consideration received from the sale of Fund shares of any series, together
with all income, earnings, profits and proceeds thereof, would belong to that
series and would be charged with the liabilities in respect of that series and
of that series’ share of the general liabilities of the applicable Fund, as the
case may be, in the proportion that the total net assets of the series bear to
the total net assets of all series. The NAV of a Fund share of any series would
be based on the assets belonging to that series less the liabilities charged to
that series, and dividends could be paid on Fund shares of any series only out
of lawfully available assets belonging to that series. In the event of
liquidation or dissolution of a Fund, the shareholders would be entitled to the
assets belonging to that Fund.
Other than the Total Return Fund and the Balanced
Fund, each Fund offers both Investor Class Shares and Institutional Class Shares
(each, a “Class”). Investor
Class shares and Institutional Class shares represent an interest in the same
assets of the Fund, have the same rights and are identical in all material
respects except that (i) Investor Class shares may bear distribution fees
and Institutional Class shares are not subject to such fees, (ii) Investor
Class shares bear shareholder servicing fees payable to the Investment Manager
and Institutional Class shares are not subject to such fees,
(iii) Institutional Class shares are available only to shareholders who
invest directly in a Fund, or who invest through a broker-dealer, financial
institution, or servicing agent that has entered into appropriate arrangements
with a Fund and provides services to the Fund, (iv) Institutional Class
shares have a higher minimum initial investment, and (v) the Board of
Trustees may elect to have certain expenses specific to Investor Class shares or
Institutional Class shares be borne solely by the Class to which such expenses
are attributable, but any expenses not specifically allocated to Investor Class
shares or Institutional Class shares are allocated to each such Class on the
basis of the NAV of that Class in relation to the NAV of the Fund. The Board of
Trustees may classify and reclassify the shares of the Funds into additional
classes of shares at a future date.
The Trust Instrument contains an express
disclaimer of shareholder liability for the Trust’s acts or obligations and
requires that notice of such disclaimer be given in each agreement, obligation,
or instrument entered into or executed by the Funds or their Trustees. The Trust
Instrument provides for indemnification and reimbursement of expenses out of the
Funds’ property, as applicable, for any shareholder held personally liable for
its obligations. The Trust Instrument also provides that the Funds would, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Funds and satisfy any judgment thereon.
The Trust Instrument further provides that the
Trustees are not liable for errors of judgment or mistakes of fact or law, but
nothing in the Trust Instrument protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
such Trustee’s office.
SHAREHOLDER MEETINGS
The Trust does not expect to hold an annual
meeting of shareholders in any year in which the election of Trustees is not
required to be acted on by shareholders under the 1940 Act. At its discretion,
the Board of Trustees may call a special meeting of shareholders to allow
shareholders to vote on any matter that the Board of Trustees deems necessary or
advisable.
The Trust’s Trust Instrument and Bylaws contain
procedures for the removal of Trustees by the Trust’s shareholders. At any duly
called meeting of shareholders and at which a quorum is present, the
shareholders may, by the affirmative vote of the holders of at least two‑thirds
of the outstanding shares, remove any Trustee.
Upon the written request of the holders of shares
entitled to not less than 10% of all the votes entitled to be cast at such
meeting, the Secretary of the Trust must promptly call a special meeting of
shareholders to vote on the question of removal of any Trustee. Whenever 10 or
more shareholders of record who have been such for at least six months preceding
the date of application and who hold in the aggregate either shares having a NAV
of at least $25,000 or at least 1% of the total outstanding shares, whichever is
less, apply to the Secretary in writing stating that they wish to communicate
with other shareholders with a view to obtaining signatures to a request for a
meeting as described above and accompanied by a form of communication and
request which they wish to transmit, the Secretary must, within five business
days after such application, either (i) afford to such applicants access to
a list of the names and addresses of all shareholders as recorded on the books
of the Trust or (ii) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the proposed
communication and form of request.
If the Secretary elects to follow the course
specified in clause (ii) of the last sentence of the preceding paragraph,
the Secretary, upon the written request of such applicants accompanied by a
tender of the material to be mailed and of the reasonable expenses of mailing,
must, with reasonable promptness, mail such material to all shareholders of
record at their addresses as recorded on the books unless, within five business
days after such tender, the Secretary mails to such applicants and files with
the SEC, together with a copy of the material to be mailed, a written statement
signed by at least a majority of the Trustees to the effect that, in their
opinion, either such material contains untrue statements of fact, omits to state
facts necessary to make the statements contained therein not misleading, or
would be in violation of applicable law, and specifying the basis of such
opinion.
After opportunity for hearing on the objections
specified in the written statement so filed, the SEC may, and if demanded by the
Trustees or by such applicants must, enter an order either sustaining one or
more of such objections or refusing to sustain any of them. If the SEC enters an
order refusing to sustain any of such objections or if, after the entry of an
order sustaining one or more of such objections, the SEC finds, after notice and
opportunity for hearing, that all objections so sustained have been met and
enters an order so declaring, the Secretary must mail copies of such material to
all shareholders with reasonable promptness after the entry of such order and
the renewal of such tender.
Rule 18f-2 under the 1940 Act provides that any
matter required under the provisions of the 1940 Act, applicable state law,
or otherwise to be submitted to the holders of the outstanding voting securities
of an investment company such as the Trust has not been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
fund affected by such matter. Rule 18f-2 further provides that a fund is deemed
affected by a matter unless it is clear that the interests of each fund in the
matter are identical or that the matter does not affect any interest of such
fund. The rule exempts the selection of independent auditors and the election of
Trustees from the separate voting requirements.
REGISTRATION STATEMENT
The Fund Prospectus and this SAI do not contain
all the information included in the Registration Statement filed with the SEC
under the 1933 Act with respect to the securities offered by the Fund
Prospectus. The general public can review the Registration Statement, including
the exhibits filed therewith, on the EDGAR Database on the SEC’s Internet
website at http://www.sec.gov. Copies of this information may be obtained, upon
payment of a duplicating fee, by electronic request at
[email protected].
Statements contained in the Fund Prospectus and
this SAI as to the contents of any contract or other document are not complete
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement of which this SAI and
the Fund Prospectus form a part, and each such statement is qualified in all
respects by such reference.
COUNSEL AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The law firm of Foley & Lardner
LLP, 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202‑5306, serves as
counsel to the Funds. Tait, Weller & Baker LLP, Two Liberty Place,
50 South 16th Street, Suite 2900, Philadelphia, Pennsylvania
19102-2529, serves as the independent registered public accounting firm to the
Funds. Tait, Weller & Baker LLP audits and reports on the Funds’ annual
financial statements, reviews certain regulatory reports and the Funds’ income
tax returns, and performs other auditing and tax services when engaged to do
so.
FINANCIAL STATEMENTS
The following, included in the
annual
reports dated October 31, 2023, as filed with the SEC on January 4,
2024, under Investment Company Act File No. 811‑07168 of the Trust, are
incorporated by reference into this SAI:
• |
Statements of Assets and Liabilities |
• |
Statements of Operations |
• |
Statement of Cash Flows (Total Return Fund
only) |
• |
Statements of Changes in Net Assets |
• |
Schedules of Investments |
• |
Notes to the Financial Statements |
• |
Report of Independent Registered Public Accounting Firm (annual
reports only) |