ck0001027596-20231130
Statement
of Additional Information
Dated
March 31, 2024
PIA
BBB Bond Fund
Managed
Account Completion Shares (MACS) (PBBBX)
PIA
MBS Bond Fund
Managed
Account Completion Shares (MACS) (PMTGX)
PIA
High Yield (MACS) Fund
Managed
Account Completion Shares (MACS) (PIAMX)
(Each
a “Fund,” together, the “Funds”)
Each
Fund is a Series of
ADVISORS
SERIES TRUST
This
Statement of Additional Information (“SAI”) is not a prospectus and should be
read in conjunction with the Prospectus dated March 31,
2024
(the “Prospectus”) of Advisors Series Trust (the “Trust”) relating to the Funds.
Pacific Income Advisers, Inc. (the “Adviser”) is the investment adviser to the
Funds.
A
copy of the Prospectus may be obtained by writing to the Funds c/o U.S. Bank
Global Fund Services, P.O. Box 701, Milwaukee, Wisconsin 53201-0701, by
calling toll-free at 1-800-251-1970, or on the Funds’ website at
www.pacificincome.com/mutual-funds.
The
financial statements, accompanying notes and report of independent registered
public accounting firm of the PIA BBB Bond Fund, PIA MBS Bond Fund and PIA High
Yield (MACS) Fund that are included in the annual
report
to shareholders for the fiscal year ended November 30, 2023, have been
incorporated by reference into this SAI.
The
annual report can be obtained in the same way as the Prospectus. This SAI has
been incorporated by reference into the Funds’ Prospectus.
TABLE
OF CONTENTS
No person has been authorized to give any information or to
make any representations other than those contained in this SAI and the
Prospectus dated March 31, 2024, and, if given or made, such information or
representations may not be relied upon as having been authorized by the Trust or
the Funds.
This
SAI does not constitute an offer to sell securities.
FUND
HISTORY AND CLASSIFICATION
The
Trust is an open‑end management investment company organized as a Delaware
statutory trust under the laws of the State of Delaware on
October 3, 1996. The Trust’s Agreement and Declaration of Trust (the
“Declaration of Trust”) permits the Trust’s Board of Trustees (the “Board” or
the “Trustees”) to issue an unlimited number of full and fractional shares of
beneficial interest, par value $0.01 per share, which may be issued in any
number of series. The Trust consists of various series that represent separate
investment portfolios. The Board may from time to time issue other series, the
assets and liabilities of which will be separate and distinct from any other
series. This SAI relates only to the PIA BBB Bond Fund (the “BBB Bond Fund”),
the PIA MBS Bond Fund (the “MBS Bond Fund”) and the PIA High Yield (MACS) Fund
(the “High Yield (MACS) Fund”).
Registration
with the U.S. Securities and Exchange Commission (“SEC”) does not involve
supervision of the management or policies of the Funds. The Prospectus and this
SAI omit certain of the information contained in the Registration Statement
filed with the SEC. Copies of such information may be obtained from the SEC upon
payment of the prescribed fee.
The
predecessor PIA BBB Bond Fund (“Predecessor Fund”) commenced operations on
September 25, 2003, as a separate series of PIA Mutual Fund. PIA
Mutual Fund was organized as a Massachusetts business trust on January 6, 1984.
On December 23, 2004, the Predecessor Fund reorganized into the BBB Bond
Fund, a newly formed series of the Trust. Before the reorganization the BBB Bond
Fund had no assets or liabilities.
The
MBS Bond Fund commenced operations on February 28, 2006, as a separate series of
the Trust.
The
High Yield (MACS) Fund commenced operations on December 26, 2017.
Diversification
The
Funds are diversified. Under applicable federal securities laws, the
diversification of a mutual fund’s holdings is measured at the time the Fund
purchases a security. This means that, as to 75% of a Fund’s total assets
(1) no more than 5% may be invested in the securities of a single issuer,
and (2) the Fund may not hold more than 10% of the outstanding voting
securities of a single issuer. However, if a Fund purchases a security and holds
it for a period of time, the security may become a larger percentage of the
Fund’s total assets due to movements in the financial markets. If the market
affects several securities held by a Fund, the Fund may have a greater
percentage of its assets invested in securities of fewer issuers. In that case,
the Fund would be subject to the risk that its performance may be hurt
disproportionately by the poor performance of relatively few securities despite
the Fund qualifying as a diversified fund under applicable federal securities
laws.
Percentage
Limitations
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 standards or percentage limitation will
be determined immediately after and as a result of the Fund’s acquisition or
sale of such security or other asset. Accordingly, except with respect to
borrowing, any subsequent change in values, net assets or other circumstances
will not be considered in determining whether an investment complies with the
Fund’s investment policies and limitations.
In
addition, if a bankruptcy or other extraordinary event occurs concerning a
particular investment by the Funds, the Funds may receive stock, real estate or
other investments that the Funds would not, or could not buy. If this happens
the Fund would take such action as is reasonable given the Fund’s objective.
Market
and Regulatory Risk
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 a Fund, unusually high and
unanticipated levels of redemptions, an increase in portfolio turnover, a
decrease in net asset value (“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 a 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 will continue, particularly
if they are unprecedented, unforeseen or widespread events or conditions,
pandemics, epidemics and other similar circumstances in one or more countries or
regions. Therefore, it is important to understand that the value of your
investment may fall, sometimes sharply and for extended periods, and you could
lose money.
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 are affecting many aspects of financial regulation, and
may in some instances 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
becoming increasingly interconnected. As a result, whether or not a Fund invests
in securities of issuers located in or with significant exposure to countries
experiencing economic and financial difficulties, the value and liquidity of a
Fund’s investments may be negatively affected.
Loan
Participations and Assignments – High Yield (MACS) Fund
The
Fund may purchase participations in commercial loans. Such indebtedness may be
secured or unsecured. Loan participations typically represent direct
participation in a loan to a corporate borrower, and generally are offered by
banks or other financial institutions or lending syndicates. The Fund may
participate in such syndications, or can buy part of a loan, becoming a part
lender. When purchasing loan participations, the Fund assumes the credit risk
associated with the corporate borrower and may assume the credit risk associated
with an interposed bank or other financial intermediary. The participation
interests in which the Fund intends to invest may not be rated by any nationally
recognized rating service. The Fund may invest in debtor-in-possession
financings (commonly known as “DIP financings”). DIP financings are arranged
when an entity seeks the protections of the bankruptcy court under Chapter 11 of
the U.S. Bankruptcy Code. These financings allow the entity to continue its
business operations while reorganizing under Chapter 11. Such financings
constitute senior liens on unencumbered security (i.e., security
not subject to other creditors’ claims). There is a risk that the entity will
not emerge from Chapter 11 and be forced to liquidate its assets under
Chapter 7 of the U.S. Bankruptcy Code. In the event of liquidation, the
Fund’s only recourse will be against the property securing the DIP financing. A
loan is often administered by an agent bank acting as agent for all holders. The
agent bank administers the terms of the loan, as specified in the loan
agreement. In addition, the agent bank is normally responsible for the
collection of principal and interest payments from the corporate borrower and
the apportionment of these payments to the credit of all institutions which are
parties to the loan agreement. Unless, under the terms of the loan or other
indebtedness, the Fund has direct recourse against the corporate borrower, the
Fund may have to rely on the agent bank or other financial intermediary to apply
appropriate credit remedies against a corporate borrower. A financial
institution’s employment as agent bank might be
terminated
in the event that it fails to observe a requisite standard of care or becomes
insolvent. A successor agent bank would generally be appointed to replace the
terminated agent bank, and assets held by the agent bank under the loan
agreement should remain available to holders of such indebtedness. However, if
assets held by the agent bank for the benefit of the Fund were determined to be
subject to the claims of the agent bank’s general creditors, the Fund might
incur certain costs and delays in realizing payment on a loan or loan
participation and could suffer a loss of principal and/or interest. In
situations involving other interposed financial institutions (e.g.,
an insurance company or governmental agency) similar risks may arise. Purchasers
of loans and other forms of direct indebtedness depend primarily upon the
creditworthiness of the corporate borrower for payment of principal and
interest. If the Fund does not receive scheduled interest or principal payments
on such indebtedness, the Fund’s share price and yield could be adversely
affected. Loans that are fully secured offer the Fund more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the corporate borrower’s obligation, or that the collateral
can be liquidated. The Fund may invest in loan participations with credit
quality comparable to that of issuers of its securities investments.
Indebtedness of companies whose creditworthiness is poor involves substantially
greater risks, and may be highly speculative. Some companies may never pay off
their indebtedness, or may pay only a small fraction of the amount owed.
Consequently, when investing in indebtedness of companies with poor credit, the
Fund bears a substantial risk of losing the entire amount invested.
The
Fund is diversified and limits the amount of its total assets that it will
invest in any one issuer and the Fund limits the amount of its total assets that
it will invest in issuers within the same industry (see “Investment
Restrictions”). For purposes of these limits, the Fund generally will treat the
corporate borrower as the “issuer” of indebtedness held by the Fund. In the case
of loan participations where a bank or other lending institution serves as a
financial intermediary between the Fund and the corporate borrower, if the
participation does not shift to the Fund the direct debtor-creditor relationship
with the corporate borrower, SEC interpretations require the Fund to treat both
the lending bank or other lending institution and the corporate borrower as
“issuers.” Treating a financial intermediary as an issuer of indebtedness may
restrict the Fund’s ability to invest in indebtedness related to a single
financial intermediary, or a group of intermediaries engaged in the same
industry, even if the underlying borrowers represent many different companies
and industries. Loans and other types of direct indebtedness may not be readily
marketable and may be subject to restrictions on resale. In some cases,
negotiations involved in disposing of indebtedness may require weeks to
complete. Consequently, some indebtedness may be difficult or impossible to
dispose of readily at what the Adviser believes to be a fair price. In addition,
valuation of illiquid indebtedness involves a greater degree of judgment in
determining the Fund’s NAV than if that value were based on available market
quotations, and could result in significant variations in the Fund’s daily share
price. At the same time, some loan interests are traded among certain financial
institutions and accordingly may be deemed liquid. As the market for different
types of indebtedness develops, the liquidity of these instruments is expected
to improve. In addition, the Fund currently intends to treat indebtedness for
which there is no readily available market as illiquid for purposes of the
Fund’s limitation on illiquid investments. Investments in loan participations
are considered to be debt obligations for purposes of the Trust’s investment
restriction relating to the lending of funds or assets by the Fund.
Investments
in loans through a direct assignment of the financial institution’s interests
with respect to the loan may involve additional risks to the Fund. For example,
if a loan is foreclosed, the Fund could become part owner of any collateral, and
would bear the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is conceivable that under emerging legal theories of
lender liability, the Fund could be held liable as co-lender. It is unclear
whether loans and other forms of direct indebtedness offer securities law
protections against fraud and misrepresentation. In the absence of definitive
regulatory guidance, the Fund relies upon the Adviser’s research in an attempt
to avoid situations where fraud or misrepresentation could adversely affect the
Fund.
Warrants
to Purchase Securities
The
Funds may invest in or acquire warrants to purchase equity securities. Warrants
are instruments that give the holder the right, but not the obligation, to buy a
security at a specific price for a specific period of time. Changes in the value
of a warrant do not necessarily correspond to changes in the value of its
underlying security. The price of a warrant may be more volatile than the price
of its underlying security, and a warrant may offer greater potential for
capital appreciation as well as capital loss. Warrants do not entitle a holder
to dividends or voting rights with respect to the underlying security and do not
represent any rights in the assets of the issuing company. A warrant ceases to
have value if it is not exercised prior to its expiration date. These factors
can make warrants more speculative than other types of investments. Bonds with
warrants attached to purchase equity securities have many characteristics of
convertible bonds and their prices may, to some degree, reflect the performance
of the underlying stock. Bonds also may be issued with warrants attached to
purchase additional fixed income securities at the same coupon rate. A decline
in interest rates would permit a Fund to buy additional bonds at the favorable
rate or to sell the warrants at a profit. If interest rates rise, the warrants
would generally expire with no value. The Funds will not invest more than 5% of
their net assets in warrants to purchase securities. Warrants acquired in units
or attached to securities will be deemed without value for purposes of this
restriction.
Illiquid
and Restricted Securities
Pursuant
to Rule 22e-4 under the 1940 Act, a Fund may not acquire any “illiquid
investment” if, immediately after the acquisition, a Fund would have invested
more than 15% of its net assets in illiquid investments that are assets. An
“illiquid investment” is any investment that a Fund reasonably expects cannot be
sold or disposed of in current market conditions in seven calendar days or less
without the sale or disposition significantly changing the market value of the
investment. The Funds have implemented a liquidity risk management program and
related procedures to identify illiquid investments pursuant to Rule 22e-4. The
15% limits are applied as of the date a Fund purchases an illiquid investment.
It is possible that a Fund’s holding of illiquid investment could exceed the 15%
limit, for example as a result of market developments or
redemptions.
Each
Fund may purchase certain restricted securities that can be resold to
institutional investors and which may be determined not to be illiquid
investments pursuant to a Fund’s liquidity risk management program. In many
cases, those securities are traded in the institutional market pursuant to Rule
144A under the Securities Act of 1933, as amended (the “1933 Act”) and are
called Rule 144A securities.
Investments
in illiquid investments involve more risks than investments in similar
securities that are readily marketable. Illiquid investments may trade at a
discount from comparable, more liquid investments. Investment of a Fund’s assets
in illiquid investments may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where a Fund’s operations require cash, such as when
the Fund has net redemptions, and could result in a Fund borrowing to meet
short-term cash requirements or incurring losses on the sale of illiquid
investments. Restricted securities sold in private placement transactions
between issuers and their purchasers are neither listed on an exchange nor
traded in other established markets and may be illiquid. In many cases, the
privately placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. To the
extent privately placed securities may be resold in privately negotiated
transactions, the prices realized from the sales could be less than those
originally paid by a Fund or less than the fair value of the securities. A
restricted security may be determined to be liquid under a Fund’s liquidity risk
management program established pursuant to Rule 22e-4 depending on market,
trading, or investment-specific considerations related to the restricted
security. In addition, issuers whose securities are not publicly traded may not
be subject to the disclosure and other investor protection requirements that may
be applicable if their securities were publicly traded. If any privately placed
securities
held by a Fund are required to be registered under the securities laws of one or
more jurisdictions before being resold, the Fund may be required to bear the
expenses of registration.
Private
placement investments may involve investments in smaller, less seasoned issuers,
which may involve greater risks than investments in more established companies.
These issuers may have limited product lines, markets or financial resources, or
they may be dependent on a limited management group. In making investments in
private placement securities, a Fund may obtain access to material non-public
information about an issuer of private placement securities, which may restrict
a Fund’s ability to conduct transactions in those securities.
Leverage
From
time to time the Funds may increase their ownership of securities by borrowing
on a secured or unsecured basis at fixed and floating rates of interest and
investing the borrowed funds (“leveraging”). Currently, the BBB Bond Fund and
MBS Bond Fund do not intend to borrow amounts in excess of 10% of the value of
their total assets for leveraging purposes. It is not anticipated that the High
Yield (MACS) Fund will use its borrowing power to an extent greater than 25% of
the value of its total assets. Borrowings will be made only from banks and only
to the extent that the value of the assets of a Fund, less its liabilities other
than borrowings, is equal to at least 300% of all borrowings, after giving
effect to the proposed borrowing. If the value of the assets of a Fund so
computed should fail to meet the 300% asset coverage requirement, the Fund is
required within three days to reduce its bank debt to the extent necessary to
meet such 300% coverage. Since substantially all of the assets of the Funds
fluctuate in value, but borrowing obligations may be fixed, the NAV per share of
the Funds will correspondingly tend to increase and decrease in value more than
otherwise would be the case.
Lending
Portfolio Securities
The
Funds may, (although do not currently) to increase their income, lend their
securities on a short- or long-term basis to brokers, dealers and financial
institutions if (i) the loan is collateralized in accordance with
applicable regulatory guidelines (the “Guidelines”) and (ii) after any
loan, the value of the securities loaned does not exceed 25% of the value of the
Fund’s total assets. Under the present Guidelines (which are subject to change)
the loan collateral must be, on each business day, at least equal to the value
of the loaned securities and must consist of cash, bank letters of credit or
U.S. government securities. To be acceptable as collateral, a letter of credit
must obligate a bank to pay amounts demanded by the Funds if the demand meets
the terms of the letter of credit. Such terms and the issuing bank would have to
be satisfactory to the Funds. Any loan might be secured by any one or more of
the three types of collateral. The Funds currently expect to invest the
collateral received in government money market funds, agency securities, or the
highest quality commercial paper.
The
Funds receive amounts equal to the interest or other distributions on loaned
securities and also receive one or more of the negotiated loan fees, interest on
securities used as collateral or interest on the securities purchased with such
collateral, either of which type of interest may be shared with the borrower.
The Funds may also pay reasonable finder’s, custodian and administrative fees
but only to persons not affiliated with the Trust. The Funds will not have the
right to vote securities on loan, but the terms of the loan will permit the
Funds to terminate the loan and thus reacquire the loaned securities on three
days’ notice.
The
primary risk in securities lending is a default by the borrower during a sharp
rise in price of the borrowed security resulting in a deficiency in the
collateral posted by the borrower. The Funds will seek to minimize this risk by
requiring that the value of the securities loaned be computed each day and
additional collateral be furnished each day if required. In addition, the Funds
are exposed to the risk of delay in recovery of the loaned securities or
possible loss of rights in the collateral should the borrower become insolvent.
As well, all investments made with the collateral received are subject to the
risks
associated
with such investments. If such investments lose value, the Funds will have to
cover the loss when repaying the collateral.
Hedging
Instruments
The
Funds may engage in hedging. Hedging may be used in an attempt to
(i) protect against declines or possible declines in the market values of
securities held in each Fund’s portfolio (“short hedging”) or
(ii) establish a position in the securities markets as a substitute for the
purchase of individual securities (“long hedging”). The Funds may engage in
short hedging in an attempt to protect the Funds’ value against anticipated
downward trends in the securities markets or engage in long hedging as a
substitute for the purchase of securities, which may then be purchased in an
orderly fashion. It is expected that when the Funds are engaging in long
hedging, it would, in the normal course, purchase securities and terminate the
hedging position, but under unusual market conditions such a hedging position
may be terminated without the corresponding purchase of securities. The various
hedging instruments which the Funds may use are discussed below.
Derivative
Securities
A
derivative is a financial instrument which has a value that is based on, or
“derived from,” the values of other assets, reference rates, or indexes.
Derivatives may relate to a wide variety of underlying references, such as
commodities, stocks, bonds, interest rates, currency exchange rates and related
indexes. Derivatives include futures contracts and options on futures contracts
(see discussion below on “Debt Futures” and “Options on Debt Futures”),
forward-commitment transactions (see discussion below on “When Issued and
Delayed-Delivery Securities”), options on securities (see discussion below on
“Options on Securities”), caps, floors, collars, swap agreements (see discussion
below on “Swaps”), and other financial instruments. Some derivatives, such as
futures contracts and certain options, are traded on U.S. commodity and
securities exchanges, while other derivatives, such as swap agreements, are
privately negotiated and entered into in the over-the-counter (“OTC”) market.
The risks associated with the use of derivatives are different from, or possibly
greater than, the risks associated with investing directly in securities and
other traditional investments. Derivatives are used by some investors for
speculative purposes. Derivatives also may be used for a variety of purposes
that do not constitute speculation, such as hedging, risk management, seeking to
reduce transaction costs, and seeking to simulate an investment in equity or
debt securities or other investments.
Derivative
products are highly specialized instruments that require investment techniques
and risk analyses different from those associated with stocks, bonds, and other
traditional investments. The use of a derivative requires an understanding not
only of the underlying instrument but also of the derivative itself, without the
benefit of observing the performance of the derivative under all possible market
conditions.
The
use of a derivative involves the risk that a loss may be sustained as a result
of the insolvency or bankruptcy of the other party to the contract (usually
referred to as a “counterparty”) or the failure of the counterparty to make
required payments or otherwise comply with the terms of the contract.
Additionally, the use of credit derivatives can result in losses if the Adviser
does not correctly evaluate the creditworthiness of the issuer on which the
credit derivative is based.
Derivatives
may be subject to liquidity risk, which exists when a particular derivative is
difficult to purchase or sell. If a derivative transaction is particularly large
or if the relevant market is illiquid (as is the case with many OTC
derivatives), it may not be possible to initiate a transaction or liquidate a
position at an advantageous time or price.
Derivatives
may be subject to pricing or “basis” risk, which exists when a particular
derivative becomes extraordinarily expensive relative to historical prices or
the prices of corresponding cash market
instruments.
Under certain market conditions, it may not be economically feasible to initiate
a transaction or liquidate a position in time to avoid a loss or take advantage
of an opportunity.
Because
many derivatives have a leverage or borrowing component, adverse changes in the
value or level of the underlying asset, reference rate, or index can result in a
loss substantially greater than the amount invested in the derivative itself.
Certain derivatives have the potential for unlimited loss, regardless of the
size of the initial investment. Accordingly, certain derivative transactions may
be considered to constitute borrowing transactions for purposes of the
Investment Company Act of 1940, as amended, (the “1940 Act”). Such a derivative
transaction will not be considered to constitute the issuance of a “senior
security” by the Funds, and therefore such transaction will not be subject to
the 300% asset coverage requirement otherwise applicable to borrowings by the
Funds, if the Funds cover the transaction or segregate sufficient liquid assets
in accordance with the requirements, and subject to the risks, described above
under the heading “Leverage.”
Like
most other investments, derivative instruments are subject to the risk that the
market value of the instrument will change in a way detrimental to the Funds’
interest. The Funds bear the risk that the Adviser will incorrectly forecast
future market trends or the values of assets, reference rates, indexes, or other
financial or economic factors in establishing derivative positions for the
Funds. If the Adviser attempts to use a derivative as a hedge against, or as a
substitute for, a portfolio investment, the Funds will be exposed to the risk
that the derivative will have or will develop imperfect or no correlation with
the portfolio investment. This could cause substantial losses for the Funds.
While hedging strategies involving derivative instruments can reduce the risk of
loss, they can also reduce the opportunity for gain or even result in losses by
offsetting favorable price movements in other Fund investments. Many
derivatives, in particular OTC derivatives, are complex and often valued
subjectively. Improper valuations can result in increased cash payment
requirements to counterparties or a loss of value to the Funds.
Options
on Securities
An
option is a legal contract that gives the buyer (who then becomes the holder)
the right to buy, in the case of a call, or sell, in the case of a put, a
specified amount of the underlying security at the option price at any time
before the option expires. The buyer of a call obtains, in exchange for a
premium that is paid to the seller, or “writer,” of the call, the right to
purchase the underlying security. The buyer of a put obtains the right to sell
the underlying security to the writer of the put, likewise in exchange for a
premium. Options have standardized terms, including the exercise price and
expiration time; listed options are traded on national securities exchanges that
provide a secondary market in which holders or writers can close out their
positions by offsetting sales and purchases. The premium paid to a writer is not
a down payment; it is a nonrefundable payment from a buyer to a seller for the
rights conveyed by the option. A premium has two components: the intrinsic value
and the time value. The intrinsic value represents the difference between the
current price of the securities and the exercise price at which the securities
will be sold pursuant to the terms of the option. The time value is the sum of
money investors are willing to pay for the option in the hope that, at some time
before expiration, it will increase in value because of a change in the price of
the underlying security.
One
risk of any put or call that is held is that the put or call is a wasting asset.
If it is not sold or exercised prior to its expiration, it becomes worthless.
The time value component of the premium decreases as the option approaches
expiration, and the holder may lose all or a large part of the premium paid. In
addition, there can be no guarantee that a liquid secondary market will exist on
a given exchange, in order for an option position to be closed out. Furthermore,
if trading is halted in an underlying security, the trading of options is
usually halted as well. In the event that an option cannot be traded, the only
alternative to the holder is to exercise the option.
Call
Options on Securities.
When a Fund writes a call, it receives a premium and agrees to sell the related
investments to the purchaser of the call during the call period (usually not
more than nine months) at a fixed exercise price (which may differ from the
market price of the related investments) regardless of market price changes
during the call period. If the call is exercised, a Fund forgoes any gain from
an increase in the market price over the exercise price.
To
terminate its obligation on a call which it has written, a Fund may purchase a
call in a “closing purchase transaction.” A profit or loss will be realized
depending on the amount of option transaction costs and whether the premium
previously received is more or less than the price of the call purchased. A
profit may also be realized if the call lapses unexercised, because a Fund
retains the premium received. All call options written by a Fund must be
“covered.” For a call to be “covered” (i) a Fund must own the underlying
security or have an absolute and immediate right to acquire that security
without payment of additional cash consideration; (ii) a Fund must maintain
cash or liquid securities adequate to purchase the security; or (iii) any
combination of (i) or (ii).
When
a Fund buys a call, it pays a premium and has the right to buy the related
investments from the seller of the call during the call period at a fixed
exercise price. A Fund benefits only if the market price of the related
investment is above the call price plus the premium paid during the call period
and the call is either exercised or sold at a profit. If the call is not
exercised or sold (whether or not at a profit), it will become worthless at its
expiration date and a Fund will lose its premium payment and the right to
purchase the related investment.
Put
Options on Securities. When
a Fund buys a put, it pays a premium and has the right to sell the related
investment to the seller of the put during the put period (usually not more than
nine months) at a fixed exercise price. Buying a protective put permits a Fund
to protect itself during the put period against a decline in the value of the
related investment below the exercise price by having the right to sell the
investment through the exercise of the put.
When
a Fund writes a put option it receives a premium and has the same obligations to
a purchaser of such a put as are indicated above as its rights when it purchases
such a put. A profit or loss will be realized depending on the amount of option
transaction costs and whether the premium previously received is more or less
than the put purchased in a closing purchase transaction. A profit may also be
realized if the put lapses unexercised, because a Fund retains the premium
received. All put options written by a Fund must be “covered.” For a put to be
“covered,” a Fund must maintain cash or liquid securities equal to the option
price.
Options
on Securities Indices.
Each Fund may purchase and write (sell) covered call and put options on
securities indices listed on U.S. securities exchanges or traded in the OTC
market. A securities index option written by a Fund would obligate it, upon
exercise of the options, to pay a case settlement, rather than to deliver or
purchase actual securities, to the option holder. Although a Fund will not
ordinarily own all of the securities comprising the indices on which it writes
call and put options, such options will usually be written on those indices
which correspond most closely to the composition of the Fund’s portfolio. Each
Fund may purchase or sell call and put options in order to terminate its
obligations under options it has written.
Debt
Futures
The
Funds may invest in futures contracts on debt securities (“Debt Futures”) or
options on Debt Futures.
A
futures contract is a commitment to buy or sell a specific product at a
currently determined market price, for delivery at a predetermined future date.
The futures contract is uniform as to quantity, quality and delivery time for a
specified underlying product. The commitment is executed in a designated
contract
market - a futures exchange - that maintains facilities for continuous trading.
The buyer and seller of the futures contract are both required to make a deposit
of cash or U.S. Treasury Bills with their brokers equal to a varying specified
percentage of the contract amount; the deposit is known as initial margin. Since
ownership of the underlying product is not being transferred, the margin deposit
is not a down payment; it is a security deposit to protect against
nonperformance of the contract. No credit is being extended, and no interest
expense accrues on the non-margined value of the contract. The contract is
marked to market every day, and the profits and losses resulting from the daily
change are reflected in the accounts of the buyer and seller of the contract. A
profit in excess of the initial deposit can be withdrawn, but a loss may require
an additional payment, known as variation margin, if the loss causes the equity
in the account to fall below an established maintenance level. The Funds will
maintain cash or liquid securities sufficient to cover their obligations under
each futures contract that they have entered into.
To
liquidate a futures position before the contract expiration date, a buyer simply
sells the contract, and the seller of the contract simply buys the contract, on
the futures exchange. However, the entire value of the contract does not change
hands; only the gains and losses on the contract since the preceding day are
credited and debited to the accounts of the buyers and sellers, just as on every
other preceding trading day, and the positions are closed out.
One
risk in employing Debt Futures to attempt to protect against declines in the
value of the securities held by the Funds is the possibility that the prices of
Debt Futures will correlate imperfectly with the behavior of the market value of
the Funds’ securities. The ordinary spreads between prices in the cash and
futures markets, due to differences in those markets, are subject to
distortions. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through off-setting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. The liquidity
of the Debt Futures being considered for purchase or sale by the Funds will be a
factor in their selection by the Adviser.
Third,
from the point of view of speculators the deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions.
It
is possible that, where the Funds have sold Debt Futures in a short hedge, the
market may advance but the value of the securities held by the Funds may
decline. If this occurred, the Funds would lose money on the Debt Future and
also experience a decline in the value of their securities.
Where
Debt Futures are purchased in a long hedge, it is possible that the market may
decline; if the Funds then decide not to invest in securities at that time
because of concern as to possible further market decline or for other reasons,
the Funds will realize a loss on the Debt Future that is not offset by a
reduction in the price of any securities purchased.
Options
on Debt Futures
Options
on Debt Futures are similar to options on securities, except that the related
investment is not a security, but a Debt Future. Thus, the buyer of a call
option obtains the right to purchase a Debt Future at a specified price during
the life of the option, and the buyer of a put option obtains the right to sell
a Debt Future at a specified price during the life of the option. The options
are traded on an expiration cycle based on the expiration cycle of the
underlying Debt Future. Each Fund may buy options on debt futures and may also
write (sell) covered call and put options on debt futures.
The
risks of options on Debt Futures are similar to those of options on securities
and also include the risks inherent in the underlying Debt Futures.
Special
Risks of Hedging Strategies
Participation
in the options or futures markets involves investment risks and transactions
costs to which the Funds would not be subject absent the use of these
strategies. In particular, the loss from investing in futures contracts is
potentially unlimited. If the Adviser’s prediction of movements in the
securities and interest rate markets is inaccurate, the Funds could be in a
worse position than if such strategies were not used. Risks inherent in the use
of options, futures contracts and options on futures contracts include:
(1) dependence on the Adviser’s ability to predict correctly movements in
the direction of interest rates, securities prices and currency markets;
(2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities
being hedged; (3) the fact that skills needed to use these strategies are
different from those needed to select portfolio securities; and (4) the
possible absence of a liquid secondary market for any particular instrument at
any time.
Limitations
on Options and Futures
Transactions
in options by the Funds will be subject to limitations established by each of
the exchanges governing the maximum number of options which may be written or
held by a single investor or group of investors acting in concert, regardless of
whether the options are written or held on the same or different exchanges or
are written or held in one or more accounts or through one or more brokers.
Thus, the number of options which the Funds may write or hold may be affected by
options written or held by other investment advisory clients of the Adviser and
its affiliates. Position limits also apply to Debt Futures. An exchange may
order the liquidations of positions found to be in excess of these limits, and
it may impose certain sanctions. The Funds may be required to establish
segregated accounts when they enter into certain options or futures, in which
they will maintain cash and/or liquid securities that are equal in value to the
obligations in the applicable option or future.
Regulation
of Derivatives
Rule
18f-4 under the 1940 Act requires a fund that trades derivatives and other
transactions which create future payment or delivery obligations (except reverse
repurchase agreements and similar financing transactions) be subject to a
value-at-risk (“VaR”) leverage limit and certain derivatives risk management
program and reporting requirements. Generally, these requirements apply unless a
fund qualifies as a “limited derivatives user,” as defined in the final rule.
Under the final rule, when a fund trades reverse repurchase agreements or
similar financing transactions, including certain tender option bonds, it needs
to aggregate the amount of indebtedness associated with the reverse repurchase
agreements or similar financing transactions with the aggregate amount of any
other senior securities representing indebtedness when calculating the fund’s
asset coverage ratio or treat all such transactions as derivatives transactions.
Reverse repurchase agreements or similar financing transactions aggregated with
other indebtedness do not need to be included in the calculation of whether a
fund is a limited derivatives user, but for funds subject to the VaR testing,
reverse repurchase agreements and similar financing transactions must be
included for purposes of such testing whether treated as derivatives
transactions or not. These requirements may limit the ability of a fund to use
derivatives and reverse repurchase agreements and similar financing transactions
as part of its investment strategies. These requirements may increase the cost
of a fund’s investments and cost of doing business, which could adversely affect
investors.
Each
of the Funds is classified as a limited derivatives user under Rule 18f-4 under
the 1940 Act. As a limited derivatives user each Fund’s derivatives exposure,
excluding certain currency and interest rate hedging transactions, may not
exceed 10% of its net assets. This restriction is not fundamental and may be
changed by a Fund without a shareholder vote.
Temporary
Investments
The
Funds may invest in cash and money market securities. Money market securities
include Treasury Bills, short-term investment-grade fixed income securities,
bankers’ acceptances, commercial paper, commercial paper master notes and
repurchase agreements. The Funds may do so to have assets available to pay
expenses, satisfy redemption requests or take advantage of investment
opportunities. The Funds may invest in shares of other investment companies. The
Funds may invest in money market mutual funds in connection with their
management of daily cash positions and for temporary defensive purposes. The
Funds currently intend to limit their investments in securities issued by other
investment companies (except for money market funds) so that not more than 3% of
the outstanding voting stock of any one investment company will be owned by a
Fund, or its affiliated persons, as a whole. In addition to the advisory and
operational fees a Fund bears directly in connection with its own operation, the
Funds would also bear their pro rata portions of each other investment company’s
advisory and operational expenses.
The
Funds may invest in commercial paper or commercial paper master notes rated, at
the time of purchase, within the two highest rating categories by a nationally
recognized securities rating organization.
The
Funds may enter into repurchase agreements. A repurchase agreement transaction
occurs when, at the time a Fund purchases a security, the Fund agrees to resell
it to the vendor (normally a commercial bank or a broker-dealer) on an agreed
upon date in the future. Such securities are referred to as the “Resold
Securities.” The Adviser will consider the creditworthiness of any vendor of
repurchase agreements. The resale price will be in excess of the purchase price
in that it reflects an agreed upon market interest rate effective for the period
of time during which the Fund’s money is invested in the Resold Securities. The
majority of these transactions run from day to day, and the delivery pursuant to
the resale typically will occur within one to five days of the purchase. A
Fund’s risk is limited to the ability of the vendor to pay the agreed-upon sum
upon the delivery date; in the event of bankruptcy or other default by the
vendor, there may be possible delays and expenses in liquidating the instrument
purchased, decline in its value and loss of interest. These risks are minimized
when a Fund holds a perfected security interest in the Resold Securities and can
therefore resell the instrument promptly. Repurchase agreements can be
considered as loans “collateralized” by the Resold Securities, such agreements
being defined as “loans” in the 1940 Act. The return on such “collateral” may be
more or less than that from the repurchase agreement. The Resold Securities will
be marked to market every business day so that the value of the “collateral” is
at least equal to the value of the loan, including the accrued interest earned
thereon. All Resold Securities will be held by the Funds’ custodian or another
bank either directly or through a securities depository.
Investment
Company Securities
The
Funds may invest in shares of other investment companies or mutual funds,
including exchange-traded funds (“ETFs”). For example, a Fund may invest in
money market mutual funds in connection with its management of daily cash
positions and for temporary defensive purposes. The Funds currently intend to
limit their investments in securities issued by other investment companies
(except for money market funds) so that not more than 3% of the outstanding
voting shares of any one investment company will be owned by a Fund, or its
affiliated persons, as a whole. A Fund may invest unlimited amounts in money
market funds for management of its daily cash position, subject to certain
conditions. In addition to the advisory and operational fees a Fund bears
directly in connection with its own operation, the Fund would also bear its pro
rata portions of each other investment company’s advisory and operational
expenses.
Section
12(d)(1)(A) of the 1940 Act generally prohibits a fund from purchasing (1) more
than 3% of the total outstanding voting stock of another fund; (2) securities of
another fund having an aggregate value in excess of 5% of the value of the
acquiring fund; and (3) securities of the other fund and all other funds
having
an aggregate value in excess of 10% of the value of the total assets of the
acquiring fund. There are some exceptions, however, to these limitations
pursuant to various rules promulgated by the SEC.
The
Funds may rely on Section 12(d)(1)(F) and Rule 12d1-3 of the 1940 Act, which
provide an exemption from Section 12(d)(1) that allows a Fund to invest all of
its assets in other registered funds, including ETFs, if, among other
conditions: (a) a Fund, together with its affiliates, acquires no more than 3%
percent of the outstanding voting stock of any acquired fund, and (b) the
sales load charged on the Fund’s shares is no greater than the limits set forth
in Rule 2341 of the Conduct Rules of the Financial Industry Regulatory
Authority, Inc. (“FINRA”) applicable to a fund of funds (e.g,
8.5%). In accordance with Rule 12d1-1 under the 1940 Act, the provisions of
Section 12(d)(1) shall not apply to shares of money market funds purchased by a
Fund, whether or not for temporary defensive purposes, provided that the Fund
does not pay a sales charge, distribution fee or service fee as defined in Rule
2341 of the Conduct Rules of FINRA on acquired money market fund shares (or the
Adviser must waive its advisory fees in amount necessary to offset any sales
charge, distribution fee or service fee).
Rule
12d1-4 permits additional types of fund of fund arrangements without an
exemptive order. The rule imposes certain conditions, including limits on
control and voting of acquired funds’ shares, evaluations and findings by
investment advisers, fund investment agreements, and limits on most three-tier
fund structures.
Exchange-Traded
Funds. ETFs
are open-end investment companies whose shares are listed on a national
securities exchange. An ETF is similar to a traditional index mutual fund, but
trades at different prices during the day on a security exchange like a stock.
Similar to investments in other investment companies discussed above, a Fund’s
investments in ETFs will involve duplication of management fees and other
expenses since the Fund will be investing in another investment company. In
addition, a Fund’s investment in ETFs is also subject to its limitations on
investments in investment companies discussed above. To the extent a Fund
invests in ETFs which focus on a particular market segment or industry, the Fund
will also be subject to the risks associated with investing in those sectors or
industries. The shares of the ETFs in which a Fund will invest will be listed on
a national securities exchange and the Fund will purchase or sell these shares
on the secondary market at its current market price, which may be more or less
than its NAV per share.
As
a purchaser of ETF shares on the secondary market, a Fund will be subject to the
market risk associated with owning any security whose value is based on market
price. ETF shares historically have tended to trade at or near their NAV per
share, but there is no guarantee that they will continue to do so. ETFs that
seek to replicate a particular benchmark index are subject to “tracking risk”
which is the risk that an ETF will not be able to replicate exactly the
performance of the index it tracks. Unlike traditional mutual funds, shares of
an ETF may also be purchased and redeemed directly from the ETFs only in large
blocks and only through participating organizations that have entered into
contractual agreements with the ETF. The Funds do not expect to enter into such
agreements and therefore will not be able to purchase and redeem their ETF
shares directly from the ETF.
U.S.
Government Securities and Mortgage-Backed Securities
As
used in this SAI, the term “U.S. government securities” means securities issued
or guaranteed by the U.S. government or any of its agencies or
instrumentalities.
Securities
issued or guaranteed by the U.S. government include a variety of Treasury
securities (i.e.,
securities issued by the U.S. government) that differ only in their interest
rates, maturities and dates of issuance. Treasury Bills have maturities of one
year or less. Treasury Notes have maturities of one to ten years, and Treasury
Bonds generally have maturities of greater than ten years at the date of
issuance.
Zero
coupon Treasury securities consist of Treasury Notes and Bonds that have been
stripped of their unmatured interest coupons.
U.S.
government agencies or instrumentalities which issue or guarantee securities
include, but are not limited to, the Federal Housing Administration, Federal
National Mortgage Association, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Government National
Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Maritime Administration,
Tennessee Valley Authority, District of Columbia Armory Board, the
Inter-American Development Bank, the Asian Development Bank, the Student Loan
Marketing Association and the International Bank for Reconstruction and
Development.
Except
for U.S. Treasury securities, obligations of U.S. government agencies and
instrumentalities may or may not be supported by the full faith and credit of
the United States. Some are backed by the right of the issuer to borrow from the
Treasury; others by discretionary authority of the U.S. government to purchase
the agencies’ obligations; while still others, such as the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
In the case of securities not backed by the full faith and credit of the United
States, the investor must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, and may not be
able to assert a claim against the United States itself in the event the agency
or instrumentality does not meet its commitment. If the Funds elect to invest in
U.S. government securities, then they will invest in securities of such
instrumentality only when the Adviser is satisfied that the credit risk with
respect to any instrumentality is acceptable.
Among
the U.S. government securities that the Funds may purchase are “mortgage-backed
securities” of the Government National Mortgage Association (“Ginnie Mae”), the
Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National
Mortgage Association (“Fannie Mae”). These mortgage-backed securities include
“pass-through” securities and “participation certificates;” both are similar,
representing pools of mortgages that are assembled, with interests sold in the
pool; the assembly is made by an “issuer” which assembles the mortgages in the
pool and passes through payments of principal and interest for a fee payable to
it. Payments of principal and interest by individual mortgagors are “passed
through” to the holders of the interest in the pool. Thus, the monthly or other
regular payments on pass-through securities and participation certificates
include payments of principal (including prepayments on mortgages in the pool)
rather than only interest payments. Another type of mortgage-backed security is
the “collateralized mortgage obligation” or “CMO,” which is similar to a
conventional bond (in that it makes fixed interest payments and has an
established maturity date) and is secured by groups of individual mortgages.
Timely payment of principal and interest on Ginnie Mae pass-throughs is
guaranteed by the full faith and credit of the United States, but their yield is
not guaranteed. Freddie Mac and Fannie Mae are both instrumentalities of the
U.S. government, but their obligations are not backed by the full faith and
credit of the United States. It is possible that the availability and the
marketability (i.e.,
liquidity) of these securities discussed in this paragraph could be adversely
affected by actions of the U.S. government to tighten the availability of its
credit or to affect adversely the tax effects of owning them.
Mortgage
loans are subject to a variety of state and federal regulations designed to
protect mortgagors, which may impair the ability of the mortgage lender to
enforce its rights under the mortgage documents. These regulations include legal
restraints on foreclosures, homeowner rights of redemption after foreclosure,
federal and state bankruptcy and debtor relief laws, restrictions on enforcement
of mortgage loan “due on sale” clauses and state usury laws. Even though the
Funds may invest in Mortgage-Backed Securities which are U.S. government
securities, these regulations may adversely affect the Funds’ investments by
delaying the Funds’ receipt of payments derived from principal or interest on
mortgage loans affected by such regulations.
Events
Regarding Fannie Mae and Freddie Mac Securities.
On September 6, 2008, the Federal Housing Finance Agency (“FHFA”) placed Fannie
Mae and Freddie Mac into conservatorship. As the conservator, FHFA succeeded to
all rights, titles, powers and privileges of Fannie Mae and Freddie Mac and of
any stockholder, officer or director of Fannie Mae and Freddie Mac with respect
to Fannie Mae and Freddie Mac and the assets of Fannie Mae and Freddie Mac.
Fannie
Mae and Freddie Mac are continuing to operate as going concerns while in
conservatorship and each remain liable for all of its obligations, including its
guaranty obligations, associated with its mortgage-backed securities. The FHFA
has indicated that the conservatorship of each enterprise will end when the
director of FHFA determines that FHFA’s plan to restore the enterprise to a safe
and solvent condition has been completed.
Under
the Federal Housing Finance Regulatory Reform Act of 2008 (the “Reform
Act”), which was included as part of the Housing and Economic Recovery Act of
2008, FHFA, as conservator or receiver, has the power to repudiate any contract
entered into by Fannie Mae or Freddie Mac prior to FHFA’s appointment as
conservator or receiver, as applicable, if FHFA determines, in its sole
discretion, that performance of the contract is burdensome and that repudiation
of the contract promotes the orderly administration of Fannie Mae’s or Freddie
Mac’s affairs.
The
Reform Act requires FHFA to exercise its right to repudiate any contract within
a reasonable period of time after its appointment as conservator or receiver.
FHFA, in its capacity as conservator, has indicated that it has no intention to
repudiate the guaranty obligations of Fannie Mae or Freddie Mac because FHFA
views repudiation as incompatible with the goals of the conservatorship.
However, in the event that FHFA, as conservator or if it is later appointed as
receiver for Fannie Mae or Freddie Mac, were to repudiate any such guaranty
obligation, the conservatorship or receivership estate, as applicable, would be
liable for actual direct compensatory damages in accordance with the provisions
of the Reform Act. Any such liability could be satisfied only to the extent of
Fannie Mae’s or Freddie Mac’s assets available therefor. In the event of
repudiation, the payments of interest to holders of Fannie Mae or Freddie Mac
mortgage-backed securities would be reduced if payments on the mortgage loans
represented in the mortgage loan groups related to such mortgage-backed
securities are not made by the borrowers or advanced by the servicer. Any actual
direct compensatory damages for repudiating these guaranty obligations may not
be sufficient to offset any shortfalls experienced by such mortgage-backed
security holders. Further, in its capacity as conservator or receiver, FHFA has
the right to transfer or sell any asset or liability of Fannie Mae or Freddie
Mac without any approval, assignment or consent. Although FHFA has stated that
it has no present intention to do so, if FHFA, as conservator or receiver, were
to transfer any such guaranty obligation to another party, holders of Fannie Mae
or Freddie Mac mortgage-backed securities would have to rely on that party for
satisfaction of the guaranty obligation and would be exposed to the credit risk
of that party.
In
addition, certain rights provided to holders of mortgage-backed securities
issued by Fannie Mae and Freddie Mac under the operative documents related to
such securities may not be enforced against FHFA, or enforcement of such rights
may be delayed, during the conservatorship or any future receivership. The
operative documents for Fannie Mae and Freddie Mac mortgage-backed securities
may provide (or with respect to securities issued prior to the date of the
appointment of the conservator may have provided) that upon the occurrence of an
event of default on the part of Fannie Mae or Freddie Mac, in its capacity as
guarantor, which includes the appointment of a conservator or receiver, holders
of such mortgage-backed securities have the right to replace Fannie Mae or
Freddie Mac as trustee if the requisite percentage of mortgage-backed securities
holders consent. The Reform Act prevents mortgage-backed security holders from
enforcing such rights if the event of default arises solely because a
conservator or receiver has been appointed. The Reform Act also provides that no
person may exercise any right or power to terminate, accelerate or declare an
event of default under certain contracts to which Fannie Mae or Freddie Mac is a
party,
or obtain possession of or exercise control over any property of Fannie Mae or
Freddie Mac, or affect any contractual rights of Fannie Mae or Freddie Mac,
without the approval of FHFA, as conservator or receiver, for a period of 45 or
90 days following the appointment of FHFA as conservator or receiver,
respectively.
In
October 2012, FHFA released a white paper, Building a New Infrastructure for the
Secondary Mortgage Market, proposing a framework for a common securitization
platform and an improved contractual and disclosure framework and requested
public input. The white paper sought to identify the core components of mortgage
securitization that will be needed in the housing finance system in the future.
Along with the white paper, FHFA joined Fannie Mae and Freddie Mac in outreach
to a full range of stakeholders, including a variety of industry participants –
small and large companies, trade groups, advocacy organizations, vendors,
originators, servicers, investors, and mortgage issuers, among others. FHFA has
worked with Fannie Mae and Freddie Mac to use the feedback gathered on the
securitization platform prototype, to align key contractual features and
practices, and address additional protections investors require.
FHFA
has stated that long-term, continued operation in a government-run
conservatorship is not sustainable for Fannie Mae and Freddie Mac because each
company lacks capital, cannot rebuild its capital base, and is operating on a
remaining, finite line of capital from taxpayers. However, FHFA has stated that
it will continue to carry out its responsibilities as conservator until Congress
determines the future of Fannie Mae and Freddie Mac.
Investment
Characteristics of MBS
The
investment characteristics of adjustable and fixed rate mortgage-backed
securities differ from those of traditional fixed income securities. The major
differences include the payment of interest and principal on mortgage-backed
securities on a more frequent (usually monthly) schedule, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. As a result, if the Funds purchase mortgage-backed securities
at a premium, a faster than expected prepayment rate will reduce both the market
value and the yield to maturity from those which were anticipated. A prepayment
rate that is slower than expected will have the opposite effect of increasing
yield to maturity and market value. Conversely, if the Funds purchase
mortgage-backed securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to maturity
and market value.
Prepayments
Prepayments
on a pool of mortgage loans are influenced by a variety of factors, including
economic conditions, changes in mortgagors’ housing needs, job transfer,
unemployment, mortgagors’ net equity in the mortgage properties and servicing
decisions. The timing and level of prepayments cannot be predicted. Generally,
however, prepayments on adjustable rate mortgage loans and fixed rate mortgage
loans will increase during a period of falling mortgage interest rates and
decrease during a period of rising mortgage interest rates. Accordingly, the
amounts of prepayments available for reinvestment by the Funds are likely to be
greater during a period of declining mortgage interest rates. If general
interest rates also decline, such prepayments are likely to be reinvested at
lower interest rates than the Funds were earning on the mortgage-backed
securities that were prepaid.
Adjustable
Rate Mortgage Loans
Certain
mortgage loans underlying the mortgage-backed securities in which the Funds may
invest will be adjustable rate mortgage loans (“ARMs”). ARMs eligible for
inclusion in a mortgage pool will generally provide for a fixed initial mortgage
interest rate for a specified period of time. Thereafter, the interest rates
(the “Mortgage Interest Rates”) may be subject to periodic adjustment based on
changes in the applicable index rate (the “Index Rate”). The adjusted rate would
be equal to the Index Rate plus a gross margin, which is a fixed percentage
spread over the Index Rate established for each ARM at the time of its
origination.
There
are two main categories of indexes which provide the basis for rate adjustments
on ARMs: those based on U.S. Treasury securities and those derived from a
calculated measure such as a cost of funds index or a moving average of mortgage
rates. Commonly utilized indexes include the one-year, three-year and five-year
constant maturity Treasury rates, the three-month rate, the 180-day Treasury
Bill rate, rates on longer-term Treasury securities, the 11th District Federal
Home Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month,
three-month, six-month or one year London Interbank Offered Rate (“LIBOR”), the
prime rate of a specific bank, or commercial paper rates. The Secured Overnight
Financing Rate (“SOFR”) replaced LIBOR in June 2023, when SOFR became the
standard in the United States. Some indexes, such as the one-year constant
maturity Treasury rate, closely mirror changes in market interest rate levels.
Others, such as the 11th
District Federal Home Loan Bank Cost of Funds index, tend to lag behind changes
in market rate levels and tend to be somewhat less volatile. The degree of
volatility in the market value of the Funds’ portfolios and therefore in the NAV
per share of the Fund will be a function of the length of the interest rate
reset periods and the degree of volatility in the applicable
indexes.
Adjustable
interest rates can cause payment increases that some mortgagors may find
difficult to make. However, certain ARMs may provide that the Mortgage Interest
Rate may not be adjusted to a rate above an applicable lifetime maximum rate or
below an applicable lifetime minimum rate for such ARMs. Certain ARMs may also
be subject to limitations on the maximum amount by which the Mortgage Interest
Rate may adjust for any single adjustment period. Other ARMs (“Negatively
Amortizing ARMs”) may provide instead or as well for limitations on changes in
the monthly payment on such ARMs. Limitations on monthly payments can result in
monthly payments which are greater or less than the amount necessary to amortize
a Negatively Amortizing ARM by its maturity at the Mortgage Interest Rate in
effect in any particular month. In the event that a monthly payment is not
sufficient to pay the interest accruing on a Negatively Amortizing ARM, any such
excess interest is added to the principal balance of the loan, causing negative
amortization, and is repaid through future monthly payments. It may take
borrowers under Negatively Amortizing ARMs longer periods of time to achieve
equity and may increase the likelihood of default by such borrowers. In the
event that a monthly payment exceeds the sum of the interest accrued at the
applicable Mortgage Interest Rate and the principal payment which would have
been necessary to amortize the outstanding principal balance over the remaining
term of the loan, the excess (or “accelerated amortization”) further reduces the
principal balance of the ARM. Negatively Amortizing ARMs do not provide for the
extension of their original maturity to accommodate changes in their Mortgage
Interest Rate. As a result, unless there is a periodic recalculation of the
payment amount (which there generally is), the final payment may be
substantially larger than the other payments. These limitations on periodic
increases in interest rates and on changes in monthly payments protect borrowers
from unlimited interest rate and payment increases.
The
mortgage loans underlying other mortgage-backed securities in which the Funds
may invest will be fixed rate mortgage loans. Generally, fixed rate mortgage
loans eligible for inclusion in a mortgage pool will bear simple interest at
fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed rate mortgage loans generally provide for monthly payments of
principal and interest in
substantially
equal installments for the contractual term of the mortgage note in sufficient
amounts to fully amortize principal by maturity although certain fixed rate
mortgage loans provide for a large final “balloon” payment upon
maturity.
Collateralized
Mortgage Obligations (“CMO”)
CMOs
are issued in multiple classes. Each class of CMOs, often referred to as a
“tranche,” is issued at a specific adjustable or fixed interest rate and must be
fully retired no later than its final distribution date. Principal prepayments
on the mortgage loans or other assets (“Mortgage Assets”) underlying the CMOs
may cause some or all of the class of CMOs to be retired substantially earlier
than their final distribution dates. Generally, interest is paid or accrued on
all classes of CMOs on a monthly basis.
The
principal of and interest on the Mortgage Assets may be allocated among the
several classes of CMOs in various ways. In certain structures (known as
“sequential pay” CMOs), payments of principal, including any principal
prepayments, on the Mortgage Assets generally are applied to the classes of CMOs
in the order of their respective final distribution dates. Thus, no payment of
principal will be made on any class of sequential pay CMOs until all other
classes having an earlier final distribution date have been paid in full.
Additional
structures of CMOs include, among others, “parallel pay” CMOs. Parallel pay CMOs
are those which are structured to apply principal payments and prepayments of
the Mortgage Assets to two or more classes concurrently on a proportionate or
disproportionate basis. These simultaneous payments are taken into account in
calculating the final distribution date of each class.
Stripped
Mortgage-Backed U.S. Government Securities
The
Funds may invest in stripped mortgage-backed U.S. government securities
(“SMBS”). SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of Mortgage
Assets. A common type of SMBS will have one class receiving all of the interest
from the Mortgage Assets, while the other class will receive all of the
principal. However, in some instances, one class will receive some of the
interest and most of the principal while the other class will receive most of
the interest and the remainder of the principal. If the underlying Mortgage
Assets experience greater than anticipated prepayments of principal, the Funds
may fail to fully recover their initial investment in these securities. Certain
SMBS may not be readily marketable and will be considered illiquid for purposes
of the Funds’ limitation on investments in illiquid securities. Whether SMBS are
liquid or illiquid will be determined in accordance with guidelines established
by the Board. The market value of the class consisting entirely of principal
payments generally is unusually volatile in response to changes in interest
rates. The yield on a class of SMBS that receives all or most of the interest
from Mortgage Assets are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped.
Mortgage-Related
and Other Asset-Backed Securities – High Yield (MACS) Fund
Mortgage-related
securities include mortgage pass-through securities, collateralized mortgage
obligations (“CMOs”), commercial mortgage-backed securities, mortgage dollar
rolls, CMO residuals, SMBSs and other securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property.
The
value of some mortgage- or asset-backed securities may be particularly sensitive
to changes in prevailing interest rates. Early repayment of principal on some
mortgage-related securities may expose a Fund to a lower rate of return upon
reinvestment of principal. When interest rates rise, the value of a
mortgage-related
security generally will decline; however, when interest rates are declining, the
value of mortgage-related securities with prepayment features may not increase
as much as other fixed income securities. The rate of prepayments on underlying
mortgages will affect the price and volatility of a mortgage-related security,
and may shorten or extend the effective maturity of the security beyond what was
anticipated at the time of purchase. If unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of the security can be expected to increase. The value
of these securities may fluctuate in response to the market’s perception of the
creditworthiness of the issuers. Additionally, although mortgages and
mortgage-related securities are generally supported by some form of government
or private guarantee and/or insurance, there is no assurance that private
guarantors or insurers will meet their obligations.
One
type of SMBS has one class receiving all of the interest from the mortgage
assets (the interest-only, or “IO” class), while the other class will receive
all of the principal (the principal-only, or “PO” class). The yield to maturity
on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on a Fund’s yield to
maturity from these securities. The Fund may invest up to 5% of its total assets
in any combination of mortgage-related or other asset-backed IO, PO, or inverse
floater securities.
The
Fund may invest in collateralized debt obligations (“CDOs”), which includes
collateralized bond obligations (“CBOs”), collateralized loan obligations
(“CLOs”) and other similarly structured securities. CBOs and CLOs are types of
asset-backed securities. A CBO is a trust which is backed by a diversified pool
of high-risk, below investment grade fixed-income securities. A CLO is a trust
typically collateralized by a pool of loans, which may include, among others,
domestic and foreign senior secured loans, senior unsecured loans, and
subordinate corporate loans, including loans that may be rated below investment
grade or equivalent unrated loans. The Fund may invest in other asset-backed
securities that have been offered to investors.
Structured
Notes – High Yield (MACS) Fund
The
Fund may invest in structured notes and indexed securities whose value depends
upon, or is derived from the value of an underlying asset, reference rate or
index, and may relate to stocks, bonds, interest rates, currencies or currency
exchange rates, commodities, and related indexes.
Structured
notes are derivative debt securities, the interest rate or principal of which is
determined by an unrelated indicator. Indexed securities include structured
notes as well as securities other than debt securities, the interest rate or
principal of which is determined by an unrelated indicator. Indexed securities
may include a multiplier that multiplies the indexed element by a specified
factor and, therefore, the value of such securities may be very volatile.
Structured or indexed securities may be more volatile, less liquid, and more
difficult to accurately price than less complex securities or more traditional
debt securities. To the extent the Fund invests in these securities, however,
the Adviser analyzes these securities in its overall assessment of the effective
duration of the Fund’s portfolio in an effort to monitor the Fund’s interest
rate risk.
Payment-in-Kind
Securities – High Yield (MACS) Fund
The
Fund may also purchase Payment-in-Kind (“PIK”) securities. PIK securities are
financial instruments that pay investors in the form of additional securities
rather than cash coupons. Like zero-coupon bonds, they give a company
breathing room before having to make cash outlays, offering in return rich
yields. PIKs can be bonds, notes, or preferred stocks with interest or dividends
paid in securities rather than cash. The securities used to pay the interest or
dividends are usually identical to the underlying securities, but occasionally
they have different terms.
Municipal
Bonds – High Yield (MACS) Fund
Municipal
bonds are generally issued by states and local governments and their agencies,
authorities and other instrumentalities. Municipal bonds are subject to interest
rate, credit and market risk. The ability of an issuer to make payments could be
affected by litigation, legislation or other political events or the bankruptcy
of the issuer. Lower-rated municipal bonds are subject to greater credit and
market risk than higher quality municipal bonds. The types of municipal bonds in
which a Fund may invest include municipal lease obligations. The Fund may also
invest in industrial development bonds, which are municipal bonds issued by a
government agency on behalf of a private sector company and, in most cases, are
not backed by the credit of the issuing municipality and may therefore involve
more risk. The Fund may also invest in securities issued by entities whose
underlying assets are municipal bonds.
The
Fund may invest, without limitation, in residual interest bonds (“RIBs”), which
brokers create by depositing municipal bonds in trusts. The trusts in turn issue
variable rate securities and RIBs. The interest rate for the variable rate
security is determined by an index or an auction process held approximately
every 7 to 35 days, while the RIB holder receives the balance of the income from
the underlying municipal bond less an auction fee. The market prices of RIBs may
be highly sensitive to changes in market rates and may decrease significantly
when market rates increase.
In
a transaction in which the Fund purchases a RIB from a trust, and the underlying
municipal bond was held by the Fund prior to being deposited into the trust, the
Fund treats the transaction as a secured borrowing for financial reporting
purposes. As a result, the Fund will incur a non-cash interest expense with
respect to interest paid by the trust on the variable rate securities, and will
recognize additional interest income in an amount directly corresponding to the
non-cash interest expense. Therefore, the Fund’s NAV per share and performance
are not affected by the non-cash interest expense. This accounting treatment
does not apply to RIBs acquired by the Fund where the Fund did not previously
own the underlying municipal bond.
Event-Linked
Exposure – High Yield (MACS) Fund
The
Fund may obtain event-linked exposure by investing in “event-linked bonds” or
“event-linked swaps” or implement “event-linked strategies.” Event-linked
exposure results in gains or losses that typically are contingent, or
formulaically related to, defined trigger events. Examples of trigger events
include hurricanes, earthquakes, weather-related phenomena, or statistics
relating to such events. Some event-linked bonds are commonly referred to as
“catastrophe bonds.” If a trigger event occurs, the Fund may lose a portion or
its entire principal invested in the bond or notional amount on a swap.
Event-linked exposure often provides for an extension of maturity to process and
audit loss claims where a trigger event has, or possibly has, occurred. An
extension of maturity may increase volatility. Event-linked exposure may also
expose the Fund to certain unanticipated risks including credit risk,
counterparty risk, adverse regulatory or jurisdictional interpretations, and
adverse tax consequences. Event-linked exposures may also be subject to
liquidity risk.
Preferred
Stocks – High Yield (MACS) Fund
The
Fund may invest in preferred stocks. A preferred stock blends the
characteristics of a bond and common stock. It can offer the fixed dividends of
a bond and the equity ownership of a common stock. Unlike common stock, its
participation in the issuer’s growth may be limited. Preferred stock has
priority claim over common stock: (a) in the receipt of dividends, and (b)
should the issuer be dissolved, in any residual assets after payment to
creditors. Although the dividend is set at a fixed annual rate, in some
circumstances it can be changed or omitted by the issuer.
Convertible
Securities – High Yield (MACS) Fund
The
Fund may also invest in convertible securities. Convertible securities include
corporate bonds, notes and preferred stocks that may be converted into or
exchanged for common stock of the issuing company
within
a certain period of time, for a specified number of shares, and other securities
that also provide an opportunity for equity participation. These
securities are convertible either at a stated price or a stated rate (that is,
for a specific number of shares of common stock or other
security). As with other fixed income securities, the price of a
convertible security generally varies inversely with interest
rates. While providing a fixed income stream, a convertible security
also affords the investor an opportunity, through its conversion feature, to
participate in the capital appreciation of the common stock into which it is
convertible. As the market price of the underlying common stock
declines, convertible securities tend to trade increasingly on a yield basis and
so may not experience market value declines to the same extent as the underlying
common stock. When the market price of the underlying common stock
increases, the price of a convertible security tends to rise as a reflection of
higher yield or capital appreciation. In such situations, the Fund
may have to pay more for a convertible security than the value of the underlying
common stock.
Foreign
Securities – BBB Bond Fund and High Yield (MACS) Fund
The
BBB Bond Fund may not invest more than 50% of its total assets in securities of
foreign issuers denominated in U.S. dollars, including issuers in emerging
markets. All foreign-issued securities owned by the BBB Bond Fund are U.S.
dollar denominated and held by the Fund’s domestic custodian. The High Yield
(MACS) Fund may also invest in foreign securities, including up to 5% of its net
assets in securities denominated in foreign currencies. There are risks in
investing in foreign securities. Foreign economies may differ from the U.S.
economy; individual foreign companies may differ from domestic companies in the
same industry; foreign currencies may be stronger or weaker than the U.S.
dollar.
An
investment may be affected by changes in currency rates and in exchange control
regulations, and a Fund may incur transaction costs in exchanging currencies.
For example, at times when the assets of a Fund are invested in securities
denominated in foreign currencies, investors can expect that the value of such
investments will tend to increase when the value of the U.S. dollar is
decreasing against such currencies. Conversely, a tendency toward a decline in
the value of such investments can be expected when the value of the U.S. dollar
is increasing against such currencies.
Foreign
companies or entities are frequently not subject to accounting and financial
reporting standards applicable to domestic companies, and there may be less
information available about foreign issuers. Securities of foreign issuers are
generally less liquid and more volatile than those of comparable domestic
issuers. There is frequently less government regulation of broker-dealers and
issuers than in the United States. The costs associated with securities
transactions are generally higher than in the United States. In addition,
investments in foreign countries are subject to the possibility of
expropriation, confiscatory taxation, political or social instability or
diplomatic developments that could adversely affect the value of those
investments.
Most
foreign securities owned by a Fund are held by foreign sub-custodians that
satisfy certain eligibility requirements. However, foreign sub-custodian
arrangements are significantly more expensive than domestic custody. In
addition, foreign settlement of securities transactions is subject to local law
and custom that is not, generally, as well established or as reliable as U.S.
regulation and custom applicable to settlements of securities transactions and,
accordingly, there is generally perceived to be a greater risk of loss in
connection with securities transactions in many foreign countries.
A
Fund may invest in securities of companies in countries with emerging economies
or securities markets (“Emerging Markets”). Investment in Emerging Markets
involves risks in addition to those generally associated with investments in
foreign securities. Political and economic structures in many Emerging Markets
may be undergoing significant evolution and rapid development, and such
countries may lack the social, political and economic stability characteristics
of more developed countries. As a result, the risks described above relating to
investments in foreign securities, including the risks of nationalization or
expropriation
of assets may be heightened. In addition, unanticipated political or social
developments may affect the values of the investments of a Fund and the
availability to the Fund of additional investments in such Emerging Markets. The
small size and inexperience of the securities markets in certain Emerging
Markets and the limited volume of trading in securities in those markets may
make the Fund’s investments in such countries less liquid and more volatile than
investments in countries with more developed securities markets (such as the
U.S., Japan and most Western European countries).
To
manage the currency risk accompanying investments in foreign securities and to
facilitate the purchase and sale of foreign securities, a Fund may engage in
foreign currency transactions on a spot (cash) basis at the spot rate prevailing
in the foreign currency exchange market or through entering into contracts to
purchase or sell foreign currencies at a future date (“forward foreign currency”
contracts or “forward” contracts).
A
forward foreign currency contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally traded in the inter-bank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement and no
commissions are charged at any stage for trades.
When
a Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it may desire to “lock in” the U.S. dollar price of the
security (transaction hedging). By entering into a forward contract for the
purchase or sale of a fixed amount of U.S. dollars equal to the amount of
foreign currency involved in the underlying security transaction, the Fund can
protect itself against a possible loss, resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date the security is purchased or sold and the date on which
the payment is made or received.
When
the Adviser believes that a particular foreign currency may suffer a substantial
decline against the U.S. dollar, it may enter into a forward contract to sell a
fixed amount of the foreign currency approximating the value of some or all of
the portfolio securities of a Fund denominated in such foreign currency
(position hedging). The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible since the future
value of such securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult and the successful execution of
a short-term hedging strategy is highly uncertain. A Fund will not enter into
such forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Fund to deliver an amount of
foreign currency in excess of the value of the Fund’s securities or other assets
denominated in that currency. Under normal circumstances, the Adviser considers
the long-term prospects for a particular currency and incorporates the prospect
into its overall long-term diversification strategies. The Adviser believes that
it is important to have the flexibility to enter into such forward contracts
when it determines that the best interests of a Fund will be
served.
At
the maturity of a forward contract, a Fund may either sell the portfolio
securities and make delivery of the foreign currency, or it may retain the
securities and terminate its contractual obligation to deliver the foreign
currency by purchasing an “offsetting” contract obligating it to purchase, on
the same maturity date, the same amount of foreign currency.
If
a Fund retains the portfolio securities and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages
in
an offsetting transaction, it may subsequently enter into a forward contract to
sell the foreign currency. Should forward prices decline during the period when
the Fund entered into the forward contract for the sale of a foreign currency
and the date it entered into an offsetting contract for the purchase of the
foreign currency, the Fund will realize a gain to the extent the price of the
currency it has agreed to sell exceeds the price of the currency it has agreed
to purchase. Should forward prices increase, the Fund will suffer a loss to the
extent that the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell.
Shareholders
should note that: (1) foreign currency hedge transactions do not protect
against or eliminate fluctuations in the prices of particular portfolio
securities (i.e.,
if the price of such securities declines due to an issuer’s deteriorating credit
situation); and (2) it is impossible to forecast with precision the market
value of securities at the expiration of a forward contract. Accordingly, a Fund
may have to purchase additional foreign currency on the spot market (and bear
the expense of such purchase) if the market value of the Fund’s securities is
less than the amount of the foreign currency upon expiration of the contract.
Conversely, a Fund may have to sell some of its foreign currency received upon
the sale of a portfolio security if the market value of the Fund’s securities
exceeds the amount of foreign currency the Fund is obligated to deliver. Each
Fund’s dealings in forward foreign currency exchange contracts will be limited
to the transactions described above.
Although
each Fund values its assets daily in terms of U.S. dollars, it does not intend
to convert its holdings of foreign currencies into U.S. dollars on a daily
basis. A Fund will do so from time to time and investors should be aware of the
costs of currency conversion. Although foreign exchange dealers do not charge a
fee for conversion, they realize a profit based on the difference (the “spread”)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
A
Fund may own a bond denominated in U.S. dollars and purchase a currency futures
contract to increase its exposure to different foreign currencies. It may also
sell a currency futures contract on the U.S. dollar to increase its exposure to
various foreign currencies. The uses and risks of currency options and futures
are similar to options and futures relating to securities or indexes, as
discussed above. Currency futures contracts are similar to forward foreign
currency contracts, except that they are traded on exchanges (and have margin
requirements) and are standardized as to contract size and delivery date. Most
currency futures contracts call for payment or delivery in U.S. dollars. The
underlying instrument of a currency option may be a foreign currency, which
generally is purchased or delivered in exchange for U.S. dollars, or may be a
futures contract. The purchaser of a currency call obtains the right to purchase
the underlying currency and the purchaser of a currency put obtains the right to
sell the underlying currency.
Currency
futures and options values can be expected to correlate with exchange rates, but
may not reflect other factors that affect the value of a Fund’s investments. A
currency hedge, for example, should protect a Yen-dominated security from a
decline in the Yen, but will not protect a Fund against a price decline
resulting from deterioration in the issuer’s creditworthiness. Because the value
of a Fund’s foreign-denominated investments change in response to many factors
other than exchange rates, it may not be possible to match the amount of
currency options and futures to the value for a Fund’s investments exactly over
time.
Brexit.
The United Kingdom formally left the European Union (“EU”) on January 31, 2020
(a measure commonly referred to as “Brexit”). Following the withdrawal, in
December 2020, the United Kingdom and the EU entered into a new trading
relationship. The agreement allows for continued trading free of tariffs, but
institutes other new requirements for trading between the United Kingdom and the
EU. Even with a new trading relationship having been established, Brexit could
continue to affect European or world wide political, regulatory, economic, or
market conditions. There is the possibility that there will
continue
to be considerable uncertainty about the potential impact of these developments
on United Kingdom, European and global economies and markets. There is also the
possibility of withdrawal movements within other EU countries and the
possibility of additional political, economic and market uncertainty and
instability. Brexit and any similar developments may have negative effects on
economies and markets, such as increased volatility and illiquidity and
potentially lower economic growth in the United Kingdom, EU and globally, which
may adversely affect the value of the Fund’s investments. Whether or not the
Fund invests in securities of issuers located in Europe or with significant
exposure to European issuers or countries, these events could result in losses
to the Fund, as there may be negative effects on the value and liquidity of the
Fund’s investments and/or the Fund’s ability to enter into certain transactions.
Trust
Preferred Securities – BBB Bond Fund and High Yield (MACS) Fund
The
Funds may purchase trust preferred securities, also known as “trust preferreds”
or “hybrid preferreds,” which are preferred stocks issued by a special purpose
trust subsidiary backed by subordinated debt of the corporate parent. An issuer
creates trust preferred securities by creating a trust and issuing debt to the
trust. The trust in turn issues trust preferred securities. Trust preferred
securities are hybrid securities with characteristics of both subordinated debt
and preferred stock. Such characteristics include long maturities (typically 30
years or more), early redemption by the issuer, periodic fixed or variable
interest payments, and maturities at face value. In addition, trust preferred
securities may allow deferral of interest payments for up to five years.
However, during the deferral period the interest accrues and is taxable for the
holder. Holders of trust preferred securities have limited voting rights to
control the activities of the trust and no voting rights with respect to the
parent company.
When
Issued and Delayed-Delivery Securities
To
ensure the availability of suitable securities for their portfolios, the Funds
may purchase when-issued or delayed delivery securities. When-issued
transactions arise when securities are purchased by the Funds with payment and
delivery taking place in the future in order to secure what is considered to be
an advantageous price and yield to the Funds at the time of entering into the
transaction. When-issued securities represent securities that have been
authorized but not yet issued. The Funds may also purchase securities on a
forward commitment or delayed delivery basis. In a forward commitment
transaction, the Funds contract to purchase securities for a fixed price at a
future date beyond customary settlement time. The Funds are required to hold and
maintain until the settlement date, cash or other liquid assets in an amount
sufficient to meet the purchase price. Alternatively, the Funds may enter into
offsetting contracts for the forward sale of other securities that they own. The
purchase of securities on a when-issued or forward commitment basis involves a
risk of loss if the value of the security to be purchased declines prior to the
settlement date. Although the Funds would generally purchase securities on a
when-issued or forward commitment basis with the intention of actually acquiring
securities for their portfolios, they may dispose of a when-issued security or
forward commitment prior to settlement if the Adviser deems it appropriate to do
so.
Rule
18f-4 under the 1940 Act permits the Funds to invest in securities on a
when-issued or forward-settling basis, or with a non-standard settlement cycle,
notwithstanding the limitation on the issuance of senior securities in Section
18 of the 1940 Act, provided that a Fund intends to physically settle the
transaction and the transaction will settle within 35 days of its trade date
(the “Delayed-Settlement Securities Provision”). A when-issued,
forward-settling, or non-standard settlement cycle security that does not
satisfy the Delayed-Settlement Securities Provision is treated as a derivatives
transaction under Rule 18f-4. See “Regulation of Derivatives” above.
The
Funds may enter into mortgage “dollar rolls” in which the Funds sell
mortgage-backed securities for delivery in the current month and simultaneously
contract to repurchase substantially similar (same type, coupon and maturity)
securities on a specified future date. During the roll period, the Funds forgo
principal and interest paid on the mortgage-backed securities. The Funds are
compensated by the
difference
between the current sales price and the lower forward price for the future
purchase (often referred to as the “drop”) as well as by the interest earned on
the cash proceeds of the initial sale. A “covered roll” is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction. The Funds will only enter into covered rolls. Covered
rolls are not treated as a borrowing or other senior security.
Limited
Partnerships – High Yield (MACS) Fund
The
Fund can hold limited partnership interests that it acquires from a preexisting
bond participation in a reorganization. A limited partnership is a business
model in which at least one general partner and at least one limited partner
share a business’ ownership. In a limited partnership, the general partner does
not usually invest any capital, but has management authority and unlimited
liability. That is, the general partner runs the business and, in the event of a
bankruptcy, is responsible for all debts not paid or discharged. The limited
partners have no management authority and confine their participation to their
capital investment. Limited partners invest a certain amount of money and have
nothing else to do with the business. The liability of limited partners is
limited to the amount of the investment. In the worst case scenario for a
limited partner, he or she loses what he or she invested. Profits are divided
between general and limited partners according to an arrangement formed at the
creation of the partnership.
Swaps
Credit
Default Swaps.
Each Fund may enter into credit default swap agreements. The credit
default swap agreement may have as a reference obligation one or more securities
that are not currently held by a Fund. The buyer in a credit default swap
agreement is obligated to pay the seller a periodic fee, typically expressed in
basis points on the principal amount of the underlying obligation (the
“notional” amount), over the term of the agreement in return for a contingent
payment upon the occurrence of a credit event with respect to the underlying
reference obligation. A credit event is typically a default, restructuring
or bankruptcy.
Each
Fund may be either the buyer or seller in the transaction. As a seller,
the Fund receives a fixed rate of income throughout the term of the agreement,
which typically is between one month and five years, provided that no credit
event occurs. If a credit event occurs, the Fund typically must pay the
contingent payment to the buyer, which is typically the par value (full notional
value) of the reference obligation. The contingent payment may be a cash
settlement or by physical delivery of the reference obligation in return for
payment of the face amount of the obligation. If the Fund is a buyer and
no credit event occurs, the Fund may lose its investment and recover nothing.
However, if a credit event occurs, the buyer typically receives full notional
value for a reference obligation that may have little or no value.
Credit
default swaps may involve greater risks than if a Fund had invested in the
reference obligation directly. Credit default swaps are subject to general
market risk, liquidity risk and credit risk. If the Fund is a buyer in a credit
default swap agreement and no credit event occurs, then it will lose its
investment. In addition, the value of the reference obligation received by the
Fund as a seller if a credit event occurs, coupled with the periodic payments
previously received, may be less than the full notional value it pays to the
buyer, resulting in a loss of value to the Fund.
Each
Fund may also invest in credit default swap index products and in options on
credit default swap index products. The individual credits underlying these
credit default swap indices may be rated above BBB- and/or Baa3 or below BBB-
and/or Baa3. These instruments are designed to track representative segments of
the credit default swap market and provide investors with exposure to specific
“baskets” of issuers of bonds or loans. Such investments are subject to
liquidity risks as well as other risks associated with investments in credit
default swaps discussed above. The Funds reserve the right to invest in similar
instruments that may become available in the future.
High
Yield and Other Securities – BBB Bond Fund and High Yield (MACS)
Fund
The
High Yield (MACS) Fund and BBB Bond Fund may invest in debt securities,
including bonds and debentures (which are long-term) and notes (which may short-
or long-term) that are rated below investment grade or non-rated.
Investments
in high yield securities (i.e.,
less than investment grade), while providing greater income and opportunity for
gain than investments in higher-rated securities, entail relatively greater risk
of loss of income or principal. Lower-grade obligations are commonly referred to
as “junk bonds.” Market prices of high-yield, lower-grade obligations may
fluctuate more than market prices of higher-rated securities. Lower grade, fixed
income securities tend to reflect short-term corporate and market developments
to a greater extent than higher-rated obligations which, assuming no change in
their fundamental quality, react primarily to fluctuations in the general level
of interest rates.
The
High Yield (MACS) Fund and BBB Bond Fund may purchase unrated securities.
Unrated securities may be less liquid than comparable rated securities and
involve the risk that the portfolio manager may not accurately evaluate the
securities comparative credit rating.
The
high yield market at times is subject to substantial volatility. An economic
downturn or increase in interest rates may have a more significant effect on
high yield securities and their markets, as well as on the ability of a
security’s issuer to repay principal and interest. Issuers of high yield
securities may be of low creditworthiness and the high yield securities may be
subordinated to the claims of senior lenders. During periods of economic
downturn or rising interest rates the issuers of high yield securities may have
greater potential for insolvency and a higher incidence of high yield bond
defaults may be experienced.
The
prices of high yield securities have been found to be less sensitive to interest
rate changes than higher-rated investments but are more sensitive to adverse
economic changes or individual corporate developments. During an economic
downturn or substantial period of rising interest rates, highly leveraged
issuers may experience financial stress which would adversely affect their
ability to service their principal and interest payment obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of a
high yield security owned by a Fund defaults the Fund may incur additional
expenses in seeking recovery. Periods of economic uncertainty and changes can be
expected to result in increased volatility of the market prices of high yield
securities and a Fund’s NAV per share. Yields on high yield securities will
fluctuate over time. Furthermore, in the case of high yield securities
structured as zero coupon or pay-in-kind securities, their market prices are
affected to a greater extent by interest rate changes and therefore tend to be
more volatile than the market prices of securities which pay interest
periodically and in cash.
Certain
securities held by a Fund, including high yield securities may contain
redemption or call provisions. If an issuer exercises these provisions in a
declining interest rate market, a Fund would have to replace the security with a
lower yielding security, resulting in a decreased return for the investor.
Conversely, a high yield security’s value will decrease in a rising interest
rate market, as will a Fund’s NAV per share.
The
secondary market for high yield securities may at times become less liquid or
respond to adverse publicity or investor perceptions making it more difficult
for a Fund to accurately value high yield securities or dispose of them. To the
extent a Fund owns or may acquire illiquid or restricted high yield securities,
these securities may involve special registration responsibilities, liabilities
and costs, and liquidity difficulties and judgment will play a greater role in
valuation because there is less reliable and objective data
available.
Special
tax considerations are associated with investing in high yield bonds structured
as zero coupon or pay-in-kind securities. A Fund will report the interest on
these securities as income even though it receives no cash interest until the
security’s maturity or payment date. Further, the Fund must distribute
substantially all of its income to its shareholders to qualify for pass-through
treatment under the tax law. Accordingly, a Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash or may
have to borrow to satisfy distribution requirements.
Credit
ratings evaluate the safety of principal and interest payments, not the market
value risk of high yield securities. Since credit rating agencies may fail to
timely change the credit ratings to reflect subsequent events, the Adviser
monitors the issuers of securities in the portfolio to determine if the issuers
will have sufficient cash flow and profits to meet required principal and
interest payments, and to attempt to assure the security’s liquidity so the
Funds can meet redemption requests. To the extent that a Fund has investments in
high yield securities, the achievement of its investment objective may be more
dependent on the Adviser’s credit analysis than would be the case for higher
quality bonds. The Funds may retain a portfolio security whose rating has been
changed.
To
Be Announced (TBA) Market – MBS Bond Fund
The
MBS Bond Fund may purchase MBS in the TBA Market. Most Fannie Mae, Freddie Mac
and Ginnie Mae MBS are eligible to be sold in the TBA market. The TBA market
allows mortgage lenders to sell the loans they intend to fund before the loans
are closed. A TBA trade represents a contract for purchase or sale of MBS to be
delivered at a future agreed-upon date. In the TBA market, Fannie Mae, Freddie
Mac and Ginnie Mae MBS are traded on a forward or delayed delivery basis with
settlement up to 180 days later. The Fund records the transaction when it agrees
to buy the securities and continually reflects their value in determining the
price of its shares.
The
parties to TBA contracts will agree on the type of MBS, the type of mortgage,
coupon or interest rate, the total dollar amount of the MBS, price and
settlement date. The purchaser will contract to acquire a specified dollar
amount of MBS, which may be satisfied when the seller delivers one or more MBS
pools at settlement. Forty-eight hours before settlement, the seller specifies
or allocates the identity and number of mortgage pools by the specific pool
numbers and CUSIPs to be delivered to satisfy the TBA trade. When a seller in
the TBA market sells an MBS before the underlying mortgage is closed, the
purchaser bears the risk that commitments for the mortgage loans will not close.
The TBA market reduces this risk by pooling MBS together according to similar
characteristics that are based on guidelines established by the TBA Market. The
seller is able to deliver any mortgage pool that satisfies the TBA trade and
meets the TBA market’s delivery requirements. The purchaser assumes the risk
that the characteristics of the mortgage-backed security delivered to the
purchaser may be less favorable.
TBA-eligible
MBS may be traded through generic, stipulated or specified trades. Generic TBA
trades are trades that meet the delivery requirement of the TBA market. The Fund
trades on a generic basis through the TBA market process. Stipulated TBA trades
are trades that meet the TBA delivery requirements which have characteristics
that have been requested by the investor. The most common stipulated terms are
number of pools that can be delivered, the principal dollar amount variance,
maturity year, weighted average loan age of the mortgage loans in the pool, and
geographic location of the underlying properties. In generic and stipulated TBA
trades, there is no specific security identified at the time the parties enter
into the trade. Investors that wish to purchase a particular mortgage pool will
engage in a specified trade. The purchaser identifies the actual pool they wish
to purchase by pool and CUSIP number.
Recently
finalized rules include certain mandatory margin requirements for the TBA
market, which may require the Fund to post collateral in connection with its TBA
transactions. The required margin could increase the cost to the Fund and impose
additional complexity to enter into TBA transactions.
Rule
18f-4 under the 1940 Act permits the Fund to invest in securities on a
when-issued or forward-settling basis, or with a non-standard settlement cycle,
notwithstanding the limitation on the issuance of senior securities in Section
18 of the 1940 Act, provided that the Fund intends to physically settle the
transaction and the transaction will settle within 35 days of its trade date
(the “Delayed-Settlement Securities Provision”). A when-issued,
forward-settling, or non-standard settlement cycle security that does not
satisfy the Delayed-Settlement Securities Provision is treated as a derivatives
transaction under Rule 18f-4. See “Regulation of Derivatives”
above.
Dollar
Rolls
TBA
market participants trade TBA pools using “dollar rolls” as their financing
vehicles. Dollar rolls are a form of collateralized short-term financing where
the collateral consists of mortgage securities and performs a function analogous
to a reverse repurchase agreement. Unlike a reverse repurchase agreement, which
requires redelivery of exactly the same securities, a dollar roll is a
simultaneous purchase and sale of substantially similar TBA securities for
different settlement dates. The dealer (purchaser), who is said to “roll in” the
securities received, is not required to deliver the identical securities, only
securities that meet the TBA market’s good delivery guidelines (which
establishes standard notification and settlement dates for TBA securities). The
investor may assume some risk because the characteristics of the MBS delivered
to the investor may be less favorable than the MBS the investor delivered to the
dealer. Because the dealer is not obligated to return the identical MBS
collateral that the investor has delivered, both parties usually transact the
dollar roll with generic Fannie Mae, Freddie Mac or Ginnie Mae MBS pools that
have the same or less value than the average TBA-eligible security.
A
dollar roll transaction transfers prepayment risk to the dealer. Dollar rolls
offer the dealer a convenient way to obtain promised mortgage securities,
avoiding much of the cost of failing to make timely delivery. The dealer is
willing to pay up to the cost of failure to deliver for the short-term
opportunity to borrow or purchase securities required to meet a delivery
commitment. For this reason most dollar rolls are transacted close to the
monthly settlement date for MBS.
Temporary
Investments
The
Funds may invest in cash and money market securities. Money market securities
include Treasury Bills, short-term investment-grade fixed income securities,
bankers’ acceptances, commercial paper, commercial paper master notes and
repurchase agreements. The Funds may do so to have assets available to pay
expenses, satisfy redemption requests or take advantage of investment
opportunities. The Funds may invest in shares of other investment companies. The
Funds may invest in money market mutual funds in connection with their
management of daily cash positions and for temporary defensive purposes. The
Funds currently intend to limit their investments in securities issued by other
investment companies (except for money market funds) so that not more than 3% of
the outstanding voting stock of any one investment company will be owned by a
Fund, or its affiliated persons, as a whole. In addition to the advisory and
operational fees a Fund bears directly in connection with its own operation, the
Funds would also bear their pro rata portions of each other investment company’s
advisory and operational expenses.
The
Funds may invest in commercial paper or commercial paper master notes rated, at
the time of purchase, within the two highest rating categories by a nationally
recognized securities rating organization.
The
Funds may enter into repurchase agreements. A repurchase agreement transaction
occurs when, at the time a Fund purchases a security, the Fund agrees to resell
it to the vendor (normally a commercial bank or a broker-dealer) on an agreed
upon date in the future. Such securities are referred to as the “Resold
Securities.” The Adviser will consider the creditworthiness of any vendor of
repurchase agreements. The resale price will be in excess of the purchase price
in that it reflects an agreed upon
market
interest rate effective for the period of time during which the Fund’s money is
invested in the Resold Securities. The majority of these transactions run from
day to day, and the delivery pursuant to the resale typically will occur within
one to five days of the purchase. A Fund’s risk is limited to the ability of the
vendor to pay the agreed-upon sum upon the delivery date; in the event of
bankruptcy or other default by the vendor, there may be possible delays and
expenses in liquidating the instrument purchased, decline in its value and loss
of interest. These risks are minimized when a Fund holds a perfected security
interest in the Resold Securities and can therefore resell the instrument
promptly. Repurchase agreements can be considered as loans “collateralized” by
the Resold Securities, such agreements being defined as “loans” in the 1940 Act.
The return on such “collateral” may be more or less than that from the
repurchase agreement. The Resold Securities will be marked to market every
business day so that the value of the “collateral” is at least equal to the
value of the loan, including the accrued interest earned thereon. All Resold
Securities will be held by the Funds’ custodian or another bank either directly
or through a securities depository.
Special
Risks Related to Cyber Security
The
Funds and their service providers are susceptible to cyber security risks that
include, among other things, theft, unauthorized monitoring, release, misuse,
loss, destruction or corruption of confidential and highly restricted data;
denial of service attacks; unauthorized access to relevant systems, compromises
to networks or devices that the Funds and their service providers use to service
the Funds’ operations; or operational disruption or failures in the physical
infrastructure or operating systems that support the Funds and their service
providers. Cyber attacks against or security breakdowns of the Funds or their
service providers may adversely impact the Funds and their shareholders,
potentially resulting in, among other things, financial losses; the inability of
Fund shareholders to transact business and the Funds to process transactions;
inability to calculate a Fund’s NAV; violations of applicable privacy and other
laws; regulatory fines, penalties, reputational damage, reimbursement or other
compensation costs; and/or additional compliance costs. The Funds may incur
additional costs for cyber security risk management and remediation purposes. In
addition, cyber security risks may also impact issuers of securities in which
the Funds invest, which may cause a Fund’s investment in such issuers to lose
value. There can be no assurance that the Funds or their service providers will
not suffer losses relating to cyber attacks or other information security
breaches in the future.
Portfolio
Turnover
The
portfolio turnover of the Funds may vary significantly from year to year. The
Funds’ annual portfolio turnover rate may exceed 100%. High portfolio turnover
(100% or more) would result in the Funds incurring more transaction costs such
as mark-ups or mark-downs. Payment of these transaction costs could reduce the
Funds’ total return. High portfolio turnover could also result in the payment by
the Funds’ shareholders of increased taxes on realized gains. The Funds’
portfolio turnover rates for the fiscal years shown below were as
follows:
Portfolio
Turnover Rate
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For
the Fiscal Year Ended November 30, |
| 2023 |
2022 |
BBB
Bond Fund |
8% |
10% |
MBS
Bond Fund(1) |
13% |
146% |
High
Yield (MACS) Fund |
33% |
24% |
(1) The
MBS Bond Fund had a decrease in portfolio turnover for the fiscal year ended
November 30, 2023, due to the decreased use of dollar roll transactions.
Investment
Restrictions
Each
Fund with respect to 75% of its total assets may not purchase any security,
other than U.S. government securities, if as a result (a) more than 5% of such
Fund’s total assets (taken at current value) would then be invested in
securities of a single issuer; or (b) it would hold more than 10% of the
outstanding voting securities of any one issuer; provided, however, that 25% of
the total assets of the Fund may be invested without regard to this
restriction.
The
Trust has adopted the following restrictions applicable to the Funds as
fundamental policies, which may not be changed without the approval of the
holders of a “majority,” as defined in the 1940 Act, of the shares of the Fund
as to which the policy change is being sought. Under the 1940 Act, approval of
the holders of a “majority” of a Fund’s outstanding voting securities means the
affirmative vote of the holders of the lesser of (i) 67% of its shares
represented at a meeting at which more than 50% of its outstanding shares are
represented or (ii) more than 50% of its outstanding shares.
Each
Fund may not:
1.Make
loans to others, except (a) through the purchase of debt securities in
accordance with its investment objectives and policies, (b) to the extent
the entry into a repurchase agreement is deemed to be a loan.
2.Borrow
(for temporary or emergency purposes and not for the purpose of leveraging its
investments) in an amount exceeding 33 1/3% of the value of its total assets,
and, in the event that market conditions or other factors result in a Fund’s
borrowed amounts exceeding 33 1/3% of its total assets (including amounts
borrowed), a Fund will reduce the amount of its borrowing to an extent and in
such a manner required by the 1940 Act.
3.Purchase
or sell physical commodities, unless acquired as a result of ownership of
securities or other instruments and provided that this restriction does not
prevent a Fund from engaging in transactions involving currencies and futures
contracts and options thereon or investing in securities or other instruments
that are secured by physical commodities.
4.Invest
25% or more of the value of its net assets in the securities of companies
engaged in any one industry (other than securities issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities or securities of
other investment companies).
5.Issue
senior securities, such as shares having priority over other shares as to the
payment of dividends, or as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit a Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures, currency contract or repurchase transactions.
6.Purchase
or sell real estate; however, a Fund may invest in debt securities secured by
real estate or interests therein or issued by companies which invest in real
estate or interests therein, including real estate investment
trusts.
7.Act
as an underwriter except to the extent a Fund may be deemed to be an underwriter
when disposing of securities it owns or when selling its own
shares.
Each
Fund observes the following policies, which are deemed non-fundamental and which
may be changed without shareholder vote. Each Fund may not:
1.Hold,
in the aggregate, more than 15% of its net assets in illiquid investments that
are assets pursuant to Rule 22e-4 under the 1940 Act. Illiquid investments are
investments that cannot be sold or disposed of in the ordinary course of
business within seven business days at approximately the value at which they are
being carried on a Fund’s books.
2.Purchase
more than 3% of any other investment company’s voting securities or make any
other investment in other investment companies except as permitted by the 1940
Act.
3.Make
any change in its investment policy of investing at least 80% of its net assets
in the investments suggested by the Fund’s name without first providing the
Fund’s shareholders with at least 60 days’ prior notice.
Except
with respect to borrowing and illiquid securities, if a percentage restriction
described in the Prospectus or in this SAI is adhered to at the time of
investment, a subsequent increase or decrease in a percentage resulting from a
change in the values of assets will not constitute a violation of that
restriction.
MANAGEMENT
The
overall management of the business and affairs of the Trust is vested with its
Board. The Board approves all significant agreements between the Trust and
persons or companies furnishing services to it, including the agreements with
the Adviser, Administrator, Custodian and Transfer Agent (each as defined
herein). The day-to-day operations of the Trust are delegated to its officers,
subject to the Funds’ investment objectives, strategies, and policies and to
general supervision by the Board.
The
Trustees and officers of the Trust, years of birth, positions with the Trust,
term of office with the Trust and length of time served, their business
addresses and principal occupations during the past five years and other
directorships held are listed in the table below.
Independent
Trustees(1)
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Name,
Address and Age |
Position
Held with the Trust |
Term
of Office and Length of Time Served* |
Principal
Occupation During Past Five Years |
Number
of Portfolios
in
Fund Complex
Overseen
by Trustee(2) |
Other
Directorships Held During Past Five Years(3) |
David
G. Mertens (1960) 615 E. Michigan Street Milwaukee, WI
53202 |
Chair
of the Board
Trustee |
Indefinite
term; since October 2023.
Indefinite
term; since March 2017. |
Partner
and Head of Business Development, QSV Equity Investors, LLC, (formerly
known as Ballast Equity Management, LLC) (a privately-held investment
advisory firm) (February 2019 to present); Managing Director and Vice
President, Jensen Investment Management, Inc. (a privately-held investment
advisory firm) (2002 to 2017). |
6 |
Trustee,
Advisors Series Trust (for series not affiliated with the
Funds). |
Joe
D. Redwine (1947) 615 E. Michigan Street Milwaukee, WI
53202 |
Trustee |
Indefinite
term; since September 2008. |
Retired;
formerly Manager, President, CEO, U.S. Bancorp Fund Services, LLC, and its
predecessors, (May 1991 to July 2017). |
6 |
Trustee,
Advisors Series Trust (for series not affiliated with the
Funds). |
Michele
Rackey (1959) 615 E. Michigan Street Milwaukee, WI
53202
|
Trustee |
Indefinite
term; since January 2023. |
Chief
Executive Officer, Government Employees Benefit Association (GEBA)
(benefits and wealth management organization) (2004 to 2020); Board
Member, Association Business Services Inc. (ABSI) (for-profit subsidiary
of the American Society of Association Executives) (2019 to
2020). |
6 |
Trustee,
Advisors Series Trust (for series not affiliated with the
Funds). |
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Officers
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Name,
Address and Age |
Position
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation During Past Five Years |
Jeffrey
T. Rauman (1969) 615 E. Michigan Street Milwaukee, WI
53202
|
President,
Chief Executive Officer and Principal Executive Officer |
Indefinite
term; since December 2018. |
Senior
Vice President, Compliance and Administration, U.S. Bank Global Fund
Services (February 1996 to present). |
Kevin
J. Hayden (1971) 615 E. Michigan Street Milwaukee, WI
53202
|
Vice
President, Treasurer and Principal Financial Officer |
Indefinite
term; since January 2023. |
Vice
President, Compliance and Administration, U.S. Bank Global Fund Services
(June 2005 to present). |
Cheryl
L. King (1961) 615 E. Michigan Street Milwaukee, WI
53202
|
Assistant
Treasurer |
Indefinite
term; since January 2023. |
Vice
President, Compliance and Administration, U.S. Bank Global Fund Services
(October 1998 to present). |
Richard
R. Conner (1982) 615 E. Michigan Street Milwaukee, WI
53202
|
Assistant
Treasurer |
Indefinite
term; since December 2018. |
Assistant
Vice President, Compliance and Administration, U.S. Bank Global Fund
Services (July 2010 to present). |
Joseph
R. Kolinsky (1970) 2020 E. Financial Way, Suite 100 Glendora, CA
91741
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Vice
President, Chief Compliance Officer and AML Officer |
Indefinite
term; since July 2023. |
Vice
President, U.S. Bank Global Fund Services (May 2023 to present); Chief
Compliance Officer, Chandler Asset Management, Inc. (2020 to 2022);
Director, Corporate Compliance, Pacific Life Insurance Company (2018 to
2019). |
Lillian
A. Kabakali (1980) 2020 E. Financial Way, Suite 100 Glendora, CA
91741 |
Vice
President and Secretary |
Indefinite
term; since March 2024. |
Vice
President, U.S. Bank Global Fund Services (April 2023 to present); Vice
President, Compliance, Guggenheim Partners Investment Management Holdings,
LLC (April 2019 to April 2023); Senior Associate, Compliance, Guggenheim
Partners Investment Management Holdings, LLC (January 2018 to April
2019). |
Elaine
E. Richards (1968) 2020 E. Financial Way, Suite 100 Glendora, CA
91741
|
Assistant
Secretary |
Indefinite
term; since March 2024. |
Senior
Vice President, U.S. Bank Global Fund Services (July 2007 to
present). |
* The
Trustees have designated a mandatory retirement age of 75, such that each
Trustee, serving as such on the date he or she reaches the age of 75, shall
submit his or her resignation not later than the last day of the calendar year
in which his or her 75th birthday occurs (“Retiring Trustee”). Upon request, the
Board may, by vote of a majority of the Trustees eligible to vote on such
matter, determine whether or not to extend such Retiring Trustee’s term and on
the length of a one-time extension of up to three additional years. At a meeting
held December 7-8, 2022, by vote of the majority of the Trustees (not
including Mr. Redwine), Mr. Redwine’s term as Trustee was extended for
three additional years to expire on December 31, 2025.
(1)The
Trustees of the Trust who are not “interested persons” of the Trust as defined
under the 1940 Act (“Independent Trustees”).
(2)As
of November 30, 2023, the Trust was comprised of 34 active portfolios managed by
unaffiliated investment advisers. The term “Fund Complex” applies only to the
Funds, the PIA High Yield Fund, the PIA Short-Term Securities Fund and the PIA
Short Duration Bond Fund (collectively, the “PIA Funds”) and not any other
series of the Trust. The Funds do not hold themselves out as related to any
other series within the Trust for investment purposes, nor do they share the
same investment adviser with any other series.
(3)“Other
Directorships Held” includes only directorships of companies required to
register or file reports with the SEC under the Securities Exchange Act of 1934,
as amended, (that is, “public companies”) or other investment companies
registered under the 1940 Act.
Compensation
Effective
January 1, 2024, the Independent Trustees each receive an annual retainer
of $108,500 per year allocated among each of the various portfolios comprising
the Trust, an additional $6,000 per regularly scheduled Board meeting, and an
additional $500 per special meeting, paid by the Trust or applicable
advisors/portfolios, as well as reimbursement for expenses incurred in
connection with attendance at Board meetings. Prior to January 1, 2024, the
annual retainer was $102,500. The Trust Chair, Chair of the Audit Committee, and
Chair of the Governance and Nominating Committee each receive a separate annual
fee of $10,000, $5,000, and $3,000, respectively, provided that the separate fee
for the Chair of the Audit Committee will be waived if the same individual
serves as both Trust Chair and Audit Committee Chair. The Trust has no pension
or retirement plan. No other entity affiliated with the Trust pays any
compensation to the Trustees. Set forth below is the compensation received by
the Independent Trustees from the Fund for the fiscal year ended
November 30, 2023.
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| Aggregate
Compensation from the BBB Bond Fund |
Aggregate
Compensation from the MBS Bond Fund |
Aggregate
Compensation from the High Yield (MACS) Fund |
Pension
or Retirement Benefits Accrued as Part of Funds Expenses |
Estimated
Annual Benefits Upon Retirement |
Total
Compensation from Funds Complex Paid to Trustees(1) |
|
Independent
Trustee |
David
G. Mertens |
$3,916 |
$3,916 |
$3,916 |
None |
None |
$19,580 |
Raymond
B. Woolson(2) |
$3,765 |
$3,765 |
$3,765 |
None |
None |
$18,825 |
Joe
D. Redwine |
$3,974 |
$3,974 |
$3,974 |
None |
None |
$19,870 |
Michele
Rackey |
$3,653 |
$3,653 |
$3,653 |
None |
None |
$18,265 |
(1)There
are currently numerous series comprising the Trust. The term “Fund Complex”
refers only to the PIA Funds, including Funds presented in other SAIs, and not
to any other series of the Trust. For the Funds’ fiscal year ended
November 30, 2023, aggregate Independent Trustees’ fees for the Trust were
$546,000.
(2)Mr.
Woolson retired from his position with the Board as a Trustee effective as of
October 18, 2023 for personal reasons to attend to health-related
matters.
Additional
Information Concerning Our Board of Trustees
The
Role of the Board
The
Board provides oversight of the management and operations of the Trust. Like all
mutual funds, the day-to-day responsibility for the management and operations of
the Trust is the responsibility of various service providers to the Trust, such
as the Trust’s investment advisers, distributor, administrator, custodian, and
transfer agent, each of whom are discussed in greater detail in this SAI. The
Board approves all significant agreements between the Trust and its service
providers, including the agreements with the investment advisers, distributor,
administrator, custodian and transfer agent. The Board has appointed various
senior individuals of certain of these service providers as officers of the
Trust, with responsibility to monitor and report to the Board on the Trust’s
day-to-day operations. In conducting this oversight, the Board receives regular
reports from these officers and service providers regarding the Trust’s
operations. The Board has appointed a Chief Compliance Officer (“CCO”) who
administers the Trust’s compliance program and regularly reports to the Board as
to compliance matters. Some of these reports are provided as part of formal
“Board Meetings” which are typically held quarterly, in person, and involve the
Board’s review of recent Trust operations. From time to time one or more members
of the Board may also meet with Trust officers in less formal settings, between
formal “Board Meetings,” to discuss various topics. In all cases, however, the
role of the Board and of any individual Trustee is one of oversight and not of
management of the day-to-day affairs of the Trust and its oversight role does
not make the Board a guarantor of the Trust’s investments, operations or
activities.
Board
Leadership Structure
The
Board has structured itself in a manner that it believes allows it to
effectively perform its oversight function. It has established three standing
committees, an Audit Committee, a Governance and Nominating Committee and a
Qualified Legal Compliance Committee (the “QLCC”), which are discussed in
greater detail
under
“Board Committees,” below. Currently, all of the members of the Board are
Independent Trustees, which are Trustees that are not affiliated with the
Adviser or its affiliates or any other investment adviser in the Trust or with
its principal underwriter. The Independent Trustees have engaged their own
independent counsel to advise them on matters relating to their responsibilities
in connection with the Trust.
The
President, Chief Executive Officer and Principal Executive Officer of the Trust
is not a Trustee, but rather is a senior employee of the Administrator who
routinely interacts with the unaffiliated investment advisers of the Trust and
comprehensively manages the operational aspects of the Funds in the Trust. The
Trust has appointed David Mertens, an Independent Trustee, as Chair of the
Board, and he acts as a liaison with the Trust’s service providers, officers,
legal counsel, and other Trustees between meetings, helps to set Board meeting
agendas, and serves as Chair during executive sessions of the Independent
Trustees.
The
Board reviews its structure annually. The Trust has determined that it is
appropriate to separate the Principal Executive Officer and Board Chair
positions because the day-to day responsibilities of the Principal Executive
Officer are not consistent with the oversight role of the Trustees and because
of the potential conflict of interest that may arise from the Administrator’s
duties with the Trust. Given the specific characteristics and circumstances of
the Trust as described above, the Trust has determined that the Board’s
leadership structure is appropriate.
Board
Oversight of Risk Management
As
part of its oversight function, the Board receives and reviews various risk
management reports and assessments and discusses these matters with appropriate
management and other personnel. Because risk management is a broad concept
comprised of many elements (such as, for example, investment risk, issuer and
counterparty risk, compliance risk, operational risks, business continuity
risks, etc.) the oversight of different types of risks is handled in different
ways. For example, the Governance and Nominating Committee meets regularly with
the CCO to discuss compliance and operational risks and the Audit Committee
meets with the Treasurer and the Trust’s independent public accounting firm to
discuss, among other things, the internal control structure of the Trust’s
financial reporting function. The full Board receives reports from the Adviser
and portfolio managers as to investment risks as well as other risks that may be
also discussed in Audit Committee.
Information
about Each Trustee’s Qualification, Experience, Attributes or
Skills
The
Board believes that each of the Trustees has the qualifications, experience,
attributes and skills (“Trustee Attributes”) appropriate to their continued
service as Trustees of the Trust in light of the Trust’s business and structure.
Each of the Trustees has substantial business and professional backgrounds that
indicate they have the ability to critically review, evaluate and access
information provided to them. Certain of these business and professional
experiences are set forth in detail in the table above. In addition, the
majority of the Trustees have served on boards for organizations other than the
Trust, as well as having served on the Board of the Trust for a number of years.
They therefore have substantial board experience and, in their service to the
Trust, have gained substantial insight as to the operation of the Trust. The
Board annually conducts a ‘self-assessment’ wherein the effectiveness of the
Board and individual Trustees is reviewed.
In
addition to the information provided in the table above, below is certain
additional information concerning each particular Trustee and certain of their
Trustee Attributes. The information provided below, and in the table above, is
not all-inclusive. Many Trustee Attributes involve intangible elements, such as
intelligence, integrity, work ethic, the ability to work together, the ability
to communicate effectively, the ability to exercise judgment, the ability to ask
incisive questions, and commitment to shareholder interests. In conducting its
annual self-assessment, the Board has determined that the Trustees have the
appropriate attributes and experience to continue to serve effectively as
Trustees of the Trust.
David
G. Mertens.
Mr. Mertens has substantial mutual fund experience and is experienced with
financial, accounting, investment and regulatory matters. He currently serves as
Partner and Head of Business
Development
of QSV Equity Investors, LLC, (formerly known as Ballast Equity Management,
LLC), a privately-held investment advisory firm. Mr. Mertens also gained
substantial mutual fund experience through his tenure as Managing Director and
Vice President of Jensen Investment Management, Inc. (“Jensen”) from 2002 to
2017. Prior to Jensen, Mr. Mertens held various roles in sales and marketing
management with Berger Financial Group, LLC from 1995 to 2002, ending as Senior
Vice President of Institutional Marketing for Berger Financial Group and
President of its limited purpose broker-dealer, Berger
Distributors.
Joe
D. Redwine.
Mr. Redwine has substantial mutual fund experience and is experienced with
financial, accounting, investment and regulatory matters through his experience
as President and CEO of U.S. Bancorp Fund Services, LLC, (now known as U.S. Bank
Global Fund Services), a full-service provider to mutual funds and alternative
investment products. In addition, he has extensive experience consulting with
investment advisers regarding the legal structure of mutual funds, distribution
channel analysis and actual distribution of those funds. Mr. Redwine serves
as an Audit Committee Financial Expert for the Trust.
Michele
Rackey.
Ms. Rackey has
substantial experience in mutual funds and investment management through her
experience as CEO of Government Employees Benefits Association (GEBA) and also
with The ARK Funds. Ms. Rackey
is
experienced with financial, accounting, investment and regulatory matters and
serves as an Audit Committee Financial Expert for the Trust. Ms. Rackey
was
CEO of GEBA for 17 years and Chief Operating Officer of the ARK Funds for 9
years. Ms. Rackey
has
a BS in Business Administration from the University of Illinois at Chicago and
has an MBA from Keller Graduate School of Management in Chicago. Ms. Rackey
previously
held FINRA series 6, 7 and 63 licenses as well as a Maryland Life and Health
License.
Board
Committees
The
Trust has established the following three standing committees and the membership
of each committee to assist in its oversight functions, including its oversight
of the risks the Trust faces: the Audit Committee, the QLCC, and the Nominating
and Governance Committee. There is no assurance, however, that the Board’s
committee structure will prevent or mitigate risks in actual practice. The
Trust’s committee structure is specifically not intended or designed to prevent
or mitigate each Fund’s investment risks. Each Fund is designed for investors
that are prepared to accept investment risk, including the possibility that as
yet unforeseen risks may emerge in the future.
The
Audit Committee is comprised of all of the Independent Trustees.
Mr. Redwine is the Chairman of the Audit Committee. The Audit Committee
typically meets once per year with respect to the various series of the Trust.
The function of the Audit Committee, with respect to each series of the Trust,
is to review the scope and results of the audit and any matters bearing on the
audit or a Fund’s financial statements and to ensure the integrity of the Fund’s
pricing and financial reporting. The
Audit Committee met three times with respect to the Funds during the Funds’
fiscal year ended November 30, 2023.
The
Audit Committee also serves as the QLCC for the Trust for the purpose of
compliance with Rules 205.2(k) and 205.3(c) of the Code of Federal
Regulations, regarding alternative reporting procedures for attorneys retained
or employed by an issuer who appear and practice before the SEC on behalf of the
issuer (the “issuer attorneys”). An issuer attorney who becomes aware of
evidence of a material violation by the Trust, or by any officer, director,
employee, or agent of the Trust, may report evidence of such material violation
to the QLCC as an alternative to the reporting requirements of
Rule 205.3(b) (which requires reporting to the chief legal officer and
potentially “up the ladder” to other entities). The
QLCC did not meet with respect to the Funds during the fiscal year ended
November 30, 2023.
The
Governance and Nominating Committee is comprised of all, and only of, the
Independent Trustees. The Governance and Nominating Committee is responsible for
seeking and reviewing candidates for consideration as nominees for Trustees as
is considered necessary from time to time and meets only as necessary. The
Governance and Nominating Committee will consider nominees recommended by
shareholders for vacancies on the Board. Recommendations for consideration by
the Governance and Nominating Committee should be sent to the President of the
Trust in writing together with the appropriate biographical information
concerning each such proposed Nominee, and such recommendation must comply with
the notice provisions set forth in
the
Trust’s By-Laws. In general, to comply with such procedures, such nominations,
together with all required biographical information, must be delivered to and
received by the President of the Trust at the principal executive office of the
Trust between 120 and 150 days prior to the shareholder meeting at which any
such nominee would be voted on.
The
Governance and Nominating Committee meets regularly with respect to the various
series of the Trust. The Governance and Nominating Committee is also responsible
for, among other things, assisting the Board in its oversight of the Trust’s
compliance program under Rule 38a-1 under the 1940 Act, reviewing and
making recommendations regarding Independent Trustee compensation and the
Trustees’ annual “self-assessment.” Ms. Rackey is the Chair of the
Governance and Nominating Committee. The
Governance and Nominating Committee met two times with respect to the Trust
during the fiscal year ended November 30, 2023.
Trustee
Ownership of Fund Shares and Other Interests
The
following table shows the amount of shares in the Funds and the amount of shares
in other portfolios of the Trust owned by the Trustees as of the calendar year
ended December 31, 2023.
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| |
Independent
Trustees |
Dollar
Range of Equity Securities in the BBB Fund |
Dollar
Range of Equity Securities in the MBS Fund |
Dollar
Range of Equity Securities in the HY (MACS) Fund |
Aggregate
Dollar Range of Fund Shares in the Trust |
(None,
$1-$10,000, $10,001-$50,000, $50,001-$100,000, Over $100,000) |
|
David
G. Mertens |
None |
None |
None |
Over
$100,000 |
Joe
D. Redwine |
None |
None |
None |
$50,001
- $100,000 |
Michele
Rackey |
None |
None |
None |
$10,001-$50,000 |
As
of December 31, 2023, neither the Independent Trustees nor members of their
immediate family, own securities beneficially or of record in the Adviser, the
distributor, as defined below, or an affiliate of the Adviser or distributor.
Accordingly, neither the Independent Trustees nor members of their immediate
family, have direct or indirect interest, the value of which exceeds $120,000,
in the Adviser, the distributor or any of their affiliates. In addition, during
the two most recently completed calendar years, neither the Independent Trustees
nor members of their immediate families have conducted any transactions (or
series of transactions) in which the amount involved exceeds $120,000 and to
which the Adviser, the distributor or any affiliate thereof was a
party.
CONTROL
PERSONS, PRINCIPAL SHAREHOLDERS, AND MANAGEMENT OWNERSHIP
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of the Fund. A control person is one who owns
beneficially or through controlled companies more than 25% of the voting
securities of a company or acknowledges the existence of control. Shareholders
with a controlling interest could affect the outcome of voting or the direction
of management of a Fund. For control persons only, if a control person is a
company, the table also indicates the control person’s parent, if any, and the
jurisdiction under the laws of which the control person is
organized.
As
of February 29, 2024, the following shareholders were considered to be either a
control person or principal shareholder of the Funds:
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PIA
BBB Bond Fund |
|
|
| |
Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of Ownership |
Wells
Fargo Clearing Services, LLC
Special
Custody Account for the Exclusive Benefit of Customer
2801
Market Street
Saint
Louis, MO 63103-2523 |
Wells
Fargo Advisors, LLC |
DE |
44.01% |
Record |
Morgan
Stanley Smith Barney, LLC
1
New York Plaza, Floor 12
New
York, NY 10004-1965 |
N/A |
N/A |
21.10% |
Record |
National
Financial Services LLC 499 Washington Boulevard, Floor 4 Jersey
City, NJ 07310-2010 |
N/A |
N/A |
7.76% |
Record |
Charles
Schwab & Co., Inc.
Special
Custody Account for
the
Benefit of Customers
211
Main Street
San
Francisco, CA 94105-1901 |
N/A |
N/A |
5.92% |
Record |
Pershing
LLC 1 Pershing Plaza, Floor 14 Jersey City NJ 07399-2052 |
N/A |
N/A |
5.42% |
Record |
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| |
PIA
MBS Bond Fund |
|
|
| |
Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of Ownership |
Morgan
Stanley Smith Barney, LLC
1
New York Plaza, Floor 12
New
York, NY 10004-1965 |
Morgan
Stanley |
DE |
39.70% |
Record |
Charles
Schwab & Co., Inc.
Special
Custody Account for
the
Benefit of Customers
211
Main Street
San
Francisco, CA 94105-1901 |
N/A |
N/A |
12.48% |
Record |
Wells
Fargo Clearing Services, LLC
Special
Custody Account for the Exclusive Benefit of Customer
2801
Market Street
Saint
Louis, MO 63103-2523 |
N/A |
N/A |
11.90% |
Record |
National
Financial Services LLC 499 Washington Boulevard, Floor 4 Jersey
City, NJ 07310-2010 |
N/A |
N/A |
10.42% |
Record |
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| |
PIA
High Yield (MACS) Fund |
|
|
| |
Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of Ownership |
c/o
First Hawaiian Bank
SEI
Private Trust Company
1
Freedom Valley Drive
Oaks,
PA 19456-9989 |
N/A |
N/A |
90.71% |
Record |
National
Financial Services LLC 499 Washington Boulevard, Floor 4 Jersey
City, NJ 07310-2010 |
N/A |
N/A |
5.44% |
Record |
Management
Ownership Information.
As of February 29, 2024, the Trustees and Officers of the Trust, as a group,
beneficially owned less than 1% of the outstanding shares of either
Fund.
Investment
Adviser
Pacific
Income Advisers, Inc., located at 2321 Rosecrans Avenue, Suite 1260, El Segundo,
California, 90245, is the investment adviser to the Funds
pursuant
to an Investment Advisory Agreement (the “Advisory Agreement”). Joseph Lloyd
McAdams, Jr. and Heather U. Baines collectively control the Adviser due to their
ownership of a majority of the outstanding stock of the Adviser. Mr. McAdams is
also a portfolio manager of the High Yield (MACS) Fund. Subject to such policies
as the Board may determine, the Adviser is ultimately responsible for investment
decisions for the Funds. Pursuant to the terms of the Advisory Agreement, the
Adviser provides the Funds with such investment advice and supervision as it
deems necessary for the proper supervision of the Funds’
investments.
The
Advisory Agreement, if not terminated will continue automatically for successive
annual periods, provided that such continuance is specifically approved at least
annually (i) by a majority vote of the Independent Trustees cast in person at a
meeting called for the purpose of voting on such approval and (ii) by the
Board or by vote of a majority of the outstanding voting securities of the
Funds. The Advisory Agreement is terminable without penalty by the Trust on
behalf of the Funds on 60 days’ written notice when authorized either by a
majority vote of the Funds’ shareholders or by a vote of a majority of the
Board, or by the Adviser on 60 days’ written notice, and will automatically
terminate in the event of its “assignment” (as defined in the 1940
Act). The Advisory Agreement provides that the Adviser under such
agreement
shall not be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution of
portfolio transactions for the Funds, except for willful misfeasance, bad faith
or negligence in the performance of its duties, or by reason of reckless
disregard of its obligations and duties thereunder.
Under
the current Advisory Agreement applicable to the Funds, the Adviser is not paid
a fee by the Funds. Only eligible investors (as defined in the Prospectus) are
eligible to invest in the Funds. These clients pay the Adviser a separate fee to
manage their assets, including assets invested in the Funds.
The
Funds are responsible for their own operating expenses, including: fees and
expenses incurred in connection with the issuance, registration and transfer of
its shares; brokerage and commission expenses; all expenses of transfer,
receipt, safekeeping, servicing and accounting for the cash, securities and
other property of the Trust for the benefit of each Fund including all fees and
expenses of its custodian and accounting services agent; fund administration
fees and related expenses; chief compliance officer fees; interest charges on
any borrowings; costs and expenses of pricing and calculating its daily NAV per
share and of maintaining its books of account required under the 1940 Act,
including pricing services; taxes, if any; a pro rata portion of expenditures in
connection with meetings of the Funds’ shareholders and the Board that are
properly payable by the Funds; compensation and fees and expenses of members of
the Board who are not members of, affiliated with or interested persons of the
Adviser or Administrator; insurance premiums on property or personnel of the
Funds which inure to their benefit, including liability and fidelity bond
insurance; the cost of preparing and printing reports, proxy statements,
prospectuses and the statement of additional information of the Funds or other
communications for distribution to existing shareholders; legal counsel,
auditing and accounting fees; trade association membership dues (including
membership dues in the Investment Company Institute allocable to the Funds);
fees and expenses (including legal fees) of registering and maintaining
registration of its shares for sale under federal and applicable state and
foreign securities laws; all expenses of maintaining shareholder accounts,
including all charges for transfer, shareholder recordkeeping, dividend
disbursing, redemption, and other agents for the benefit of the Funds, if any;
and all other charges and costs of their operation plus any extraordinary and
non-recurring expenses. General expenses of the Trust are allocated among all of
the series of the Trust, including the Funds, in a manner proportionate to the
net assets of each Fund, on a transactional basis, or on such other basis as the
Board deems equitable.
The
Adviser has temporarily agreed to pay each Fund’s expenses (excluding acquired
fund fees and expenses (“AFFE”)), through at least March 29, 2025, to the extent
necessary to ensure that the Funds’ expenses do not exceed 0.19%, 0.28%, and
0.25%, respectively, for the BBB Bond Fund, MBS Bond Fund and High Yield (MACS)
Fund. The Adviser may not recoup expense payments under the temporary expense
limitations in future periods. Expense payment obligations are calculated daily
and paid monthly, at an annual rate expressed as a percentage of each Fund’s
average daily net assets.
As
a result of the temporary expense limitations, the following payments were made
by the Adviser to the Funds:
Expense
Payments by Adviser for Fiscal Years Ended November 30,
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| 2023 |
2022 |
2021 |
BBB
Bond Fund |
$0 |
$0 |
$0 |
MBS
Bond Fund |
$105,905 |
$114,009 |
$70,922 |
High
Yield (MACS) Fund |
$0 |
$0 |
$0 |
Portfolio
Managers
Mr.
Rory Hargaden and Ms. Hsin Tong serve as the portfolio managers for the BBB Bond
Fund. Mr. Austin Rutledge and Ms. Tong serve as the portfolio managers for
the MBS Bond Fund. Mr. Lloyd McAdams and Mr. Michael Yean serve as the
portfolio managers for the High Yield (MACS) Fund. The portfolio managers are
responsible for the day-to-day management of each Fund’s portfolio. The
following table shows the number of other accounts (not including the Funds)
managed by the portfolio managers and the total assets in the accounts managed
within various categories as of November 30, 2023.
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| |
Rory
Hargaden |
|
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| |
|
|
| With
Management Fee Based on Performance |
Type
of Accounts |
Number
of Accounts (excluding the Fund) |
Total Assets |
Number
of Accounts |
Total Assets |
Registered
Investment Companies |
1 |
$139 |
0 |
$0 |
Other
Pooled Investments |
0 |
$0 |
0 |
$0 |
Other
Accounts |
0 |
$0 |
0 |
$0 |
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|
| |
Lloyd
McAdams |
|
|
| |
|
|
| With
Management Fee Based on Performance |
Type
of Accounts |
Number
of Accounts (excluding the Funds) |
Total Assets |
Number
of Accounts |
Total Assets |
Registered
Investment Companies |
2 |
$198 |
0 |
$0 |
Other
Pooled Investments |
0 |
$0 |
0 |
$0 |
Other
Accounts |
0 |
$0 |
0 |
$0 |
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| |
Austin
Rutledge |
|
|
| |
|
|
| With
Management Fee Based on Performance |
Type
of Accounts |
Number
of Accounts (excluding the Fund) |
Total Assets |
Number
of Accounts |
Total Assets |
Registered
Investment Companies |
0 |
$0 |
0 |
$0 |
Other
Pooled Investments |
0 |
$0 |
0 |
$0 |
Other
Accounts |
0 |
$0 |
0 |
$0 |
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|
| |
Hsin
Tong |
|
|
| |
|
|
| With
Management Fee Based on Performance |
Type
of Accounts |
Number
of Accounts (excluding the Fund) |
Total Assets |
Number
of Accounts |
Total Assets |
Registered
Investment Companies |
1 |
$139 |
0 |
$0 |
Other
Pooled Investments |
0 |
$0 |
0 |
$0 |
Other
Accounts |
44 |
$691 |
0 |
$0 |
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|
| |
Michael
Y. Yean |
|
|
| |
|
|
| With
Management Fee Based on Performance |
Type
of Accounts |
Number
of Accounts (excluding the Fund) |
Total Assets |
Number
of Accounts |
Total Assets |
Registered
Investment Companies |
1 |
$59 |
0 |
$0 |
Other
Pooled Investments |
0 |
$0 |
0 |
$0 |
Other
Accounts |
4 |
$29 |
0 |
$0 |
Material
Conflict of Interest.
No material strategy conflicts currently exist. When the same securities are
being bought or sold on the same day by a portfolio manager, the portfolio
manager allocates the transaction on a pro rata basis as long as it is in the
best interests of the clients. Where conflicts of interest arise between the
Funds and other accounts managed by the portfolio manager, the portfolio manager
will proceed in a manner that ensures that the Funds will not be treated
materially less favorably. There may be instances where similar portfolio
transactions may be executed for the same security for numerous accounts managed
by each portfolio management team. In such instances, securities will be
allocated in accordance with the Adviser’s trade allocation policy.
Compensation.
The portfolio managers’ total compensation includes a base salary, bonus,
employee benefits, a 401(k) plan with matching contributions. The year-end bonus
represents a subjective calculation of an individual’s contribution to the
portfolio management group’s success.
Securities
Owned in the Funds by Portfolio Managers.
The portfolio managers beneficially owned the following amounts of the Funds as
of November 30, 2023.
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| |
Portfolio
Manager |
Dollar
Range of Securities Owned (None,
$1-$10,000, $10,001-$50,000, $50,001-$100,000, $100,001 - $500,000,
$500,001 - $1,000,000, Over $1,000,000) |
BBB
Bond Fund |
MBS
Bond Fund |
High
Yield (MACS) Fund |
Lloyd
McAdams |
$100,001
- $500,000 |
$50,001-$100,000 |
None |
Michael
Yean |
None |
None |
None |
Austin
Rutledge |
None |
None |
None |
Hsin
Tong |
None |
None |
None |
Rory
Hargaden |
None |
None |
None |
SERVICE
PROVIDERS
Administrator
Pursuant
to an Administration Agreement (the “Administration Agreement”), U.S. Bancorp
Fund Services, LLC, doing business at U.S. Bank Global Fund Services (“Fund
Services”), 615 East Michigan Street, Milwaukee, Wisconsin 53202, acts as
administrator for the Funds. Fund Services provides certain administrative
services to the Funds, including, among other responsibilities, coordinating the
negotiation of contracts and fees with, and the monitoring of performance and
billing of, the Funds’ independent contractors and agents; preparation for
signature by an officer of the Trust of all documents required to be filed for
compliance by the Trust and the Funds with applicable laws and regulations
excluding those of the securities laws of various states; arranging for the
computation of performance data, including NAV per share and yield; responding
to shareholder inquiries; and arranging for the maintenance of books and records
of the Funds, and providing, at its own expense, office facilities, equipment
and personnel necessary to carry out its duties. In this capacity, Fund Services
does not have any responsibility or authority for the management of the Funds,
the determination of investment policy, or for any matter pertaining to the
distribution of Fund shares.
Additionally,
Fund Services provides CCO services to the Trust under a separate agreement. The
cost for the CCO services is charged to the Funds and approved by the Board
annually.
The
Administration Agreement is terminable without penalty by the Trust on behalf of
the Funds or by the Administrator on 60 days’ written notice (as defined in the
1940 Act). The Administration Agreement also provides that neither Fund Services
nor its personnel shall be liable for any error of judgment or mistake of law or
for any act or omission in the administration of the Funds, except for willful
misconduct, bad faith or negligence in the performance of its or their duties
under the Administration Agreement.
During
the fiscal years shown below, the Funds paid the following amounts to Fund
Services for administration services:
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| |
| Fiscal
Years Ended November 30, |
| 2023 |
2022 |
2021 |
BBB
Bond Fund |
$99,681 |
$102,460 |
$91,431 |
MBS
Bond Fund |
$97,176 |
$97,724 |
$57,454 |
High
Yield (MACS) Fund |
$97,394 |
$98,390 |
$65,889 |
Distributor
The
Trust has entered into a Distribution Agreement (the “Distribution Agreement”)
with Quasar Distributors, LLC, Three Canal Plaza, Suite 100, Portland, Maine
04101 (the “Distributor”), pursuant to which the Distributor acts as the Funds’
distributor, provides certain administration services and promotes and arranges
for the sale of the Funds’ shares. The offering of the Funds’ shares is
continuous.
The
Distribution Agreement will continue in effect only if such continuance is
specifically approved at least annually by the Board or by vote of a majority of
the Funds’ outstanding voting securities and, in either case, by a majority of
the Trustees who are not parties to the Distribution Agreement or “interested
persons” (as defined in the 1940 Act) of any such party. The Distribution
Agreement is terminable without penalty by the Trust on behalf of the Funds on
60 days’ written notice when authorized either by a majority vote of the Funds’
shareholders or by vote of a majority of the Board, including a majority of
the
Trustees who are not “interested persons” (as defined in the 1940 Act) of the
Trust, or by the Distributor on 60 days’ written notice, and will automatically
terminate in the event of its “assignment” (as defined in the 1940
Act).
Sub-Accounting
Service Fees
In
addition to the fees that the Funds may pay to the Transfer Agent, the Board has
authorized the Funds to pay service fees, at the annual rate of up to 0.15% of
applicable average net assets or $20 per account, to intermediaries such as
banks, broker-dealers, financial advisers or other financial institutions, for
sub-administration, sub-transfer agency, recordkeeping (collectively,
“sub-accounting services”) and other shareholder services associated with
shareholders whose shares are held of record in omnibus, networked, or other
group accounts or accounts traded through registered securities clearing agents.
Any sub-accounting fees paid by the Fund are included in the total amount of
“Other Expenses” listed in the Fund’s Fees and Expenses table in the
Prospectus.
Fund
Accountant and Transfer Agent
Fund
Services also serves as fund accountant, transfer agent (the “Transfer Agent”)
and dividend disbursing agent under separate agreements.
Custodian
U.S.
Bank National Association, located at 1555 North RiverCenter Drive, Suite 302,
Milwaukee, Wisconsin 53212, acts as custodian (“Custodian”) of the securities
and other assets of the Funds. The Custodian holds the Funds’ portfolio
securities in safekeeping and keeps all necessary records and documents relating
to its duties. The Custodian is compensated with an asset-based fee plus
transaction fees and is reimbursed for out-of-pocket expenses. The Custodian and
Transfer Agent do not participate in decisions relating to the purchase and sale
of securities by the Funds. The Custodian, Transfer Agent and Administrator are
all affiliated entities under the common control of U.S. Bancorp.
The
Custodian and its affiliates may participate in revenue sharing arrangements
with service providers of mutual funds in which the Funds may
invest.
Independent
Registered Public Accounting Firm
Tait,
Weller & Baker LLP (“Tait”), Two Liberty Place, 50 South 16th
Street, Suite 2900, Philadelphia, Pennsylvania 19102, is the independent
registered public accounting firm for the Funds whose services include auditing
each Fund’s financial statements and the performance of related tax
services.
Trust
Counsel
Sullivan
& Worcester LLP (“Sullivan & Worcester”), 1633 Broadway, 32nd Floor, New
York, New York 10019, is counsel to the Trust and provides counsel on legal
matters relating to the Funds.
Sullivan
& Worcester also serves as independent legal counsel to the Board of
Trustees.
PORTFOLIO
TRANSACTIONS AND BROKERAGE
Pursuant
to the Advisory Agreement, the Adviser determines which securities are to be
purchased and sold by the Funds and which broker-dealers are eligible to execute
the Funds’ portfolio transactions.
Purchases
of portfolio securities for the Funds also may be made directly from issuers or
from underwriters. Where possible, purchase and sale transactions will be
effected through dealers (including banks) that specialize in the types of
securities which the Funds will be holding, unless better executions are
available elsewhere. Dealers and underwriters usually act as principal for their
own accounts. Purchases from underwriters will include a concession paid by the
issuer to the underwriter and purchases from dealers will include the spread
between the bid and the asked price. If the execution and price offered by more
than one dealer or underwriter are comparable, the order may be allocated to a
dealer or
underwriter
that has provided research or other services as discussed below.
Explicit
brokerage commissions are not paid on these transactions. However, commissions
will be paid on the Funds’ futures and options transactions. The purchase price
of portfolio securities purchased from an underwriter or dealer may include
underwriting commissions and dealer spreads.
During
the fiscal periods indicated below, the Funds paid the following amounts in
brokerage commissions:
|
|
|
|
|
|
|
|
|
|
| |
| Aggregate
Brokerage Commissions Paid During Fiscal Periods Ended November
30, |
| 2023 |
2022 |
2021 |
BBB
Fund |
$0 |
$0 |
$0 |
MBS
Fund |
$0 |
$0 |
$0 |
HY
(MACS) Fund |
$0 |
$0 |
$0 |
In
placing portfolio transactions, the Adviser will seek best execution. The full
range and quality of services available will be considered in making these
determinations, such as the size of the order, the difficulty of execution, the
operational facilities of the firm involved and the firm’s risk in positioning a
block of securities. In those instances where it is reasonably determined that
more than one broker-dealer can offer the services needed to obtain the most
favorable price and execution available, consideration may be given to those
broker-dealers which furnish or supply research, as it is defined in Section
28(e) of the Securities Exchange Act of 1934, as amended, and statistical
information to the Adviser that they may lawfully and appropriately use in their
investment advisory capacities, as well as provide other services in addition to
execution services. The Adviser considers such information, which is
in addition to and not in lieu of the services required to be performed by it
under its Advisory Agreement with the Funds, to be useful in varying degrees,
but of indeterminable value. Portfolio transactions may be placed with
broker-dealers who sell shares of the Funds subject to policies developed by the
Board and to rules adopted by the Financial Industry Regulatory Authority, Inc.
(“FINRA”) and the SEC. The Adviser is also a registered broker-dealer and may
place portfolio transactions for the Funds with its own registered
representatives.
While
it is the Adviser’s general policy to seek best execution in selecting a
broker-dealer to execute portfolio transactions for the Funds, when it is
determined that one or more broker-dealers can deliver best execution, weight is
also given to the ability of a broker-dealer to furnish brokerage and research
services to the Funds or to the Adviser, even if the specific services are not
directly useful to the Funds and may be useful to the Adviser in advising other
clients. In negotiating commissions with a broker or evaluating the spread to be
paid to a dealer, the Funds may therefore pay a higher commission or spread than
would be the case if no weight was given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by the Adviser to be reasonable in relation to the
value of the brokerage and/or research services provided by such broker-dealer.
The standard of reasonableness is to be measured in light of the Adviser’s
overall responsibilities to the Funds. Additionally, the Adviser may direct
transactions to a broker-dealer with which it has an affiliation.
Investment
decisions for the Funds are made independently from those of other client
accounts that may be managed or advised by the Adviser. Nevertheless, it is
possible that at times identical securities will be acceptable for both the
Funds and one or more of such client accounts. In such event, the position of
the Funds and such client accounts in the same issuer may vary and the length of
time that each may choose to hold its investment in the same issuer may likewise
vary. However, to the extent any of these client accounts seeks to acquire the
same security as the Funds at the same time, the Funds may not be able to
acquire as large a portion of such security as it desires, or it may have to pay
a higher price or
obtain
a lower yield for such security. Similarly, the Funds may not be able to obtain
as high a price for, or as large an execution of, an order to sell any
particular security at the same time. If one or more of such client accounts
simultaneously purchases or sells the same security that the Funds are
purchasing or selling, each day’s transactions in such security will be
allocated between the Funds and all such client accounts in a manner deemed
equitable by the Adviser, taking into account the respective sizes of the
accounts and the amount being purchased or sold. It is recognized that in some
cases this system could have a detrimental effect on the price or value of the
security insofar as the Funds are concerned. In other cases, however, it is
believed that the ability of the Funds to participate in volume transactions may
produce better executions for the Funds.
The
Funds do not effect securities transactions through brokers in accordance with
any formula, nor do they effect securities transactions through brokers for
selling shares of the Funds. However, as stated above, broker-dealers who
execute brokerage transactions may effect purchase of shares of the Funds for
their customers.
The
research services discussed above may be in written form or through direct
contact with individuals and may include information as to particular companies
and securities as well as market, economic or institutional ideas and
information assisting the Funds in the valuation of their
investments.
The
Trust is required to identify any securities of its “regular brokers or dealers”
that the Funds have acquired during its most recent fiscal year. The BBB Bond
Fund held the following amounts for its regular brokers or dealers as of
November 30, 2023:
|
|
|
|
| |
Broker |
Amount |
Barclays
Bank PLC |
$2,387,296 |
|
Citigroup,
Inc. |
$2,114,755 |
|
Goldman
Sachs Group, Inc. |
$998,297 |
|
Morgan
Stanley |
$301,974 |
|
Santander
Holdings USA, Inc. |
$671,684 |
|
| |
PORTFOLIO
HOLDINGS POLICY
The
Adviser and the Funds maintain portfolio holdings disclosure policies that
govern the timing and circumstances of disclosure to shareholders and third
parties of information regarding the portfolio investments held by a Fund. These
portfolio holdings disclosure policies have been approved by the Board.
Disclosure of a Fund’s complete holdings is required to be made quarterly within
60 days of the end of each fiscal quarter in the annual report and semi-annual
report to Fund shareholders and in the quarterly holdings report on Part F of
Form N-PORT. These reports are available, free of charge, on the EDGAR database
on the SEC’s website at www.sec.gov.
Pursuant
to the Trust’s portfolio holdings disclosure policies, information about a
Fund’s portfolio holdings is not distributed to any person unless:
▪The
disclosure is required pursuant to a regulatory request, court order or is
legally required in the context of other legal proceedings;
▪The
disclosure is made to a mutual fund rating and/or ranking organization, or
person performing similar functions, who is subject to a duty of
confidentiality, including a duty not to trade on any non-public
information;
▪The
disclosure is made to internal parties involved in the investment process,
administration, operation or custody of the Funds, including, but not limited to
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund
Services (“Fund Services”) and the Trust’s Board of Trustees, attorneys,
auditors or accountants;
▪The
disclosure is made: (a) in connection with a quarterly, semi-annual or
annual report that is available to the public; or (b) relates to
information that is otherwise available to the public; or
▪The
disclosure is made with the prior written approval of either the Trust’s Chief
Compliance Officer (“CCO”) or his or her designee.
Certain
of the persons listed above receive information about the Funds’ portfolio
holdings on an ongoing basis. The Funds believe that these third parties have
legitimate objectives in requesting such portfolio holdings information and
operate in the best interest of a Fund’s shareholders. These persons
include:
▪A
mutual fund rating and/or ranking organization, or person performing similar
functions, who is subject to a duty of confidentiality, including a duty not to
trade on any non-public information;
▪Rating
and/or ranking organizations, specifically: Lipper; Morningstar; S&P Global
Ratings; Bloomberg; Vickers-Stock Research Corporation; Thomson Financial; and
Capital-Bridge, all of which currently receive such information no later than 15
calendar days following the end of a calendar quarter; or
▪Internal
parties involved in the investment process, administration, operation or custody
of the Funds, specifically: Fund Services; the Trust’s Board of Trustees; and
the Trust’s attorneys and accountants (currently, Sullivan & Worcester LLP
(“Sullivan & Worcester”) and Tait, Weller & Baker LLP, respectively),
all of which typically receive such information after it is
generated.
Any
disclosures to additional parties not described above is made with the prior
written approval of either the Trust’s CCO or his or her designee, pursuant to
the Trust’s Policy and Procedures Regarding Disclosure of Portfolio
Holdings.
The
CCO or designated officer of the Trust will approve the furnishing of non-public
portfolio holdings to a third party only if they consider the furnishing of such
information to be in the best interest of the Funds and their shareholders and
if no material conflict of interest exists regarding such disclosure between
shareholders interest and those of the Adviser, Distributor or any affiliated
person of the Funds. No consideration may be received by the Funds, the Adviser,
any affiliate of the Adviser or their employees in connection with the
disclosure of portfolio holdings information. The Board receives and reviews
annually a list of the persons who receive non-public portfolio holdings
information and the purpose for which it is furnished.
The
Board exercises continuing oversight of the disclosure of the Funds’ portfolio
holdings by (1) overseeing the implementation and enforcement of the
Policies, Codes of Ethics and other relevant policies of the Funds and their
service providers by the Trust’s CCO, (2) considering reports and
recommendations by the Trust’s CCO concerning any material compliance matters
(as defined in Rule 38a-1 under the 1940 Act), and (3) considering approval
of any amendment to these Disclosure Policies. The Board reserves the right to
amend the Disclosure Policies at any time without prior notice in their sole
discretion.
In
the event of a conflict between the interests of the Funds and the interests of
the Adviser or an affiliated person of the Adviser, the CCO of the Adviser, in
consultation with the Trust’s CCO, shall make a determination in the best
interests of the Funds, and shall report such determination to the Adviser’s
Board of Directors and to the Board at the end of the quarter in which such
determination was made. Any
employee
of the Adviser who suspects a breach of this obligation must report the matter
immediately to the Adviser’s CCO or to his or her supervisor.
In
addition, material non-public holdings information may be provided without lag
as part of the normal investment activities of the Funds to each of the
following entities which, by explicit agreement or by virtue of their respective
duties to the Funds, are required to maintain the confidentiality of the
information disclosed: Fund Administrator, Fund Accountant, Custodian, Transfer
Agent, auditors, counsel to the Funds or the trustees, broker-dealers (in
connection with the purchase or sale of securities or requests for price
quotations or bids on one or more securities), and regulatory authorities.
Portfolio holdings information not publicly available with the SEC or through
the Funds’ website may only be provided to additional third parties, in
accordance with the Policies, when the Funds have a legitimate business purpose
and the third-party recipient is subject to a confidentiality
agreement.
There
can be no assurance that the Disclosure Policies and these procedures will
protect the Funds from potential misuse of that information by individuals or
entities to which it is disclosed.
PROXY
VOTING POLICY
The
Board has adopted Proxy Voting Policies and Procedures (the “Proxy Policies”) on
behalf of the Trust which delegate the responsibility for voting proxies to the
Adviser, subject to the Board’s continuing oversight. The Proxy Policies require
that the Adviser vote proxies received in a manner consistent with the best
interests of the Funds and their shareholders. The Proxy Policies also require
the Adviser to present to the Board, at least annually, the Adviser’s Proxy
Policies and a record of each proxy voted by the Adviser on behalf of a Fund,
including a report on the resolution of all proxies identified by the Adviser as
involving a conflict of interest. A copy of the Adviser’s Proxy Voting Policy
can be found in the Appendix.
Conflict
of Interest.
Where a proxy proposal raises a material conflict between the Adviser’s
interests and a Fund’s interests, the Adviser will disclose the conflict to the
Board and may resolve the conflict by voting in accordance with the Proxy
Policies or the Adviser will abstain from voting the securities held by the
Fund, depending on the circumstances.
Proxy
Voting Records.
The Trust is required to annually file Form N-PX, which lists the Funds’
complete proxy voting record for the 12-month period ending June 30. The Funds’
proxy voting records are available without charge, upon request by calling
1-800-251-1970 and on the SEC’s website at www.sec.gov.
MARKETING
AND SUPPORT PAYMENTS
The
Adviser, out of its own resources and without additional cost to the Funds or
their shareholders, may provide additional cash payments or other compensation
to certain financial intermediaries who sell shares of the Funds. Such payments
may be divided into categories as follows:
Support
Payments.
Payments may be made by the Adviser to certain financial intermediaries in
connection with the eligibility of the Funds to be offered in certain programs
and/or in connection with meetings between the Funds’ representatives and
financial intermediaries and their sales representatives. Such meetings may be
held for various purposes, including providing education and training about the
Funds and other general financial topics to assist financial intermediaries’
sales representatives in making informed recommendations to, and decisions on
behalf of, their clients.
Entertainment,
Conferences and Events.
The Adviser also may pay cash or non-cash compensation to sales representatives
of financial intermediaries in the form of (i) occasional gifts;
(ii) occasional meals, tickets or other entertainments; and/or
(iii) sponsorship support for the Financial Intermediary’s client seminars
and cooperative advertising. In addition, the Adviser pays for exhibit space or
sponsorships at regional or national events of financial
intermediaries.
The
prospect of receiving, or the receipt of additional payments or other
compensation as described above by financial intermediaries may provide such
intermediaries and/or their salespersons with an incentive to favor sales of
shares of the Funds, and other mutual funds whose affiliates make similar
compensation available, over sale of shares of mutual funds (or non-mutual fund
investments) not making such payments. You may wish to take such payment
arrangements into account when considering and evaluating any recommendations
relating to the Fund shares.
DETERMINATION
OF NET ASSET VALUE
The
NAV per share of the Funds will be determined as of the close of regular trading
(generally, 4:00 p.m., Eastern Time) on each day the New York Stock
Exchange (the “NYSE”) is open for business. The NYSE is open for trading Monday
through Friday except New Year’s Day, Dr. Martin Luther King, Jr. Day,
Washington’s Birthday/Presidents’ Day, Good Friday, Memorial Day, Juneteenth
National Independence Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Additionally, if any of the aforementioned holidays falls on a
Saturday, the NYSE will not be open for trading on the preceding Friday and when
any such holiday falls on a Sunday, the NYSE will not be open for trading on the
succeeding Monday, unless unusual business conditions exist, such as the ending
of a monthly or the yearly accounting period. Each Fund reserves the right to
close if the primary trading markets of a Fund’s portfolio instruments are
closed and the Fund’s management believes that there is not an adequate market
to meet purchase, redemption or exchange requests. On any business day when the
Securities Industry and Financial Markets Association recommends that the
securities markets close trading early, the Funds may close trading
early.
Purchase
orders for Fund shares will be accepted only on days on which a Fund is open for
business. If a purchase order is received by the Distributor on a day when the
Fund is not open for business, it will be processed on the next succeeding day a
Fund is open for business (according to the succeeding day’s NAV).
The
NAV per share is computed by dividing the value of the securities held by each
Fund plus any cash or other assets (including interest and dividends accrued but
not yet received) minus all liabilities (including accrued expenses) by the
total number of interests in each Fund outstanding at such time, as shown
below:
|
|
|
|
|
|
|
| |
Net
Assets |
= |
NAV
per share |
Shares
Outstanding |
In
determining the NAV per share of a Fund’s shares, common stocks that are listed
on national securities exchanges are valued at the last sale price as of the
close of trading, or, in the absence of recorded sales, at the average of
readily available closing bid and asked prices on such exchanges. Securities
primarily traded in the National Association of Securities Dealers Automated
Quotation (“Nasdaq”) Global Market System for which market quotations are
readily available shall be valued using the Nasdaq Official Closing Price
(“NOCP”). If the NOCP is not available, such securities shall be valued at the
last sale price on the day of valuation, or if there has been no sale on such
day, at the mean between the bid and asked prices.
Unlisted
securities held by a Fund that are not included in the Nasdaq Stock Market are
valued at
the
average of the quoted bid and asked prices in the over-the-counter market.
Securities and other assets for which market quotations are not readily
available are valued by appraisal at their fair value as determined in good
faith by the Adviser under procedures established by and under the general
supervision and responsibility of the Board.
Debt
securities are valued on the basis of valuations provided by independent
third-party pricing services, approved by the Adviser, or at fair value as
determined in good faith by procedures approved by the Adviser. Any such pricing
service, in determining value, will use information with respect to transactions
in the securities being valued, quotations from dealers, market transactions in
comparable securities, analyses and evaluations of various relationships between
securities and yield to maturity information.
An
option that is written by the Funds or purchased by the Funds is generally
valued using composite pricing. Composite pricing uses the National Best Bid and
Offer quotes (“NBBO”). NBBO consists of the highest bid price and lowest ask
price across any of the options exchanges on which an option is quoted.
Specifically, composite pricing looks at the last trades on the exchanges where
the options are traded. If there are no trades for the option on a given
business day, as of closing, composite option pricing calculates the mean of the
highest bid price and lowest ask price across the exchanges where the option is
traded.
When
a Fund writes a call or a put, an amount equal to the premium received is
included in the Statement of Assets and Liabilities as an asset, and an
equivalent amount is included in the liability section. This amount is
“marked-to-market” to reflect the current market value of the call or put. If a
call a Fund wrote is exercised, the proceeds it receives on the sale of the
related investment by it are increased by the amount of the premium it received.
If a put a Fund wrote is exercised, the amount it pays to purchase the related
investment is decreased by the amount of the premium received. If a call a Fund
purchased is exercised by it, the amount it pays to purchase the related
investment is increased by the amount of the premium it paid. If a put a Fund
purchased is exercised by it, the amount it receives on its sale of the related
investment is reduced by the amount of the premium it paid. If a call or put
written by a Fund expires, it has a gain in the amount of the premium; if a Fund
enters into a closing transaction, it will have a gain or loss depending on
whether the premium was more or less than the cost of the closing
transaction.
U.S.
government securities are normally valued using a model that incorporates market
observable data such as reported sales of similar securities, broker quotes,
yields, bids, offers, and reference data. Certain securities are valued
principally using dealer quotations. U.S. government agency securities are
comprised of two main categories consisting of agency issued debt and mortgage
pass-throughs. Agency issued debt securities are generally valued in a manner
similar to U.S. government securities. Mortgage pass-throughs include
to-be-announced (TBAs”) securities and mortgage pass-through certificates. TBA
securities and mortgage pass-throughs are generally valued using dealer
quotations. Short-term debt securities, including those securities having a
maturity of 60 days or less, are valued at the evaluated mean between the bid
and asked prices.
The
Funds price foreign securities in terms of U.S. dollars at the official exchange
rate. Alternatively, they may price these securities at the average of the
current bid and asked price of such currencies against the dollar last quoted by
a major bank that is a regular participant in the foreign exchange market, or on
the basis of a pricing service that takes into account the quotes provided by a
number of such major banks. If the Funds do not have either of these
alternatives available to them or the alternatives do not provide a suitable
method for converting a foreign currency into U.S. dollars, the Adviser in good
faith will establish a conversion rate for such currency.
Foreign
securities trading may not take place on all days when the NYSE is open, or may
take place on Saturdays and other days when the NYSE is not open and a Fund’s
NAV per share is not calculated. When determining NAV per share, the Fund values
foreign securities primarily listed and/or traded in foreign markets at their
market value as of the close of the last primary market where the securities
traded. Securities trading in European countries and Pacific Rim countries are
normally completed well before 4:00 P.M., Eastern Time. It is currently the
policy of a Fund that events affecting the valuation of Fund securities
occurring between the time its NAV per share is determined and the close of the
NYSE, if material, may be reflected in such NAV per share.
The
Funds reserve the right to suspend or postpone redemptions during any period
when: (a) trading on the NYSE is restricted, as determined by the SEC, or
that the NYSE is closed for other than customary weekend and holiday closings;
(b) the SEC has by order permitted such suspension; or (c) an
emergency, as determined by the SEC, exists, making disposal of portfolio
securities or valuation of net assets of the Funds not reasonably practicable.
All
other assets of the Funds are valued in accordance with procedures adopted by
the Adviser.
SHAREHOLDER
SERVICES
Systematic
Withdrawal Plan.
A Systematic Withdrawal Plan is available for shareholders having shares of the
Fund with a minimum value of $10,000, based upon the NAV per share with respect
to the Fund. The Systematic Withdrawal Plan provides for monthly, quarterly, or
annual redemptions in any amount not less than $100 (which amount is not
necessarily recommended).
The
Transfer Agent acts as agent for the shareholder in redeeming sufficient full
and fractional shares to provide the amount of the periodic withdrawal payment.
The Systematic Withdrawal Plan may be terminated at any time, and, while no fee
is currently charged, the Fund reserves the right to initiate a fee of up to $5
per withdrawal, upon 30 days’ written notice to the shareholder.
Withdrawal
payments should not be considered as dividends, yield, or income. If periodic
withdrawals continuously exceed reinvested dividends and capital gains
distributions, the shareholder’s original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore,
each withdrawal constitutes a redemption of shares, and any gain or loss
realized must be recognized for federal income tax purposes. The shareholder may
purchase additional shares when participating in the Systematic Withdrawal
Plan.
Automatic
Investment Plan.
A shareholder who wishes to make additional investments in the Fund on a regular
basis may do so by authorizing the Transfer Agent to deduct a fixed amount each
month from the shareholder’s checking or savings account at his or her bank.
This amount will automatically be invested in the Fund on the same day that the
preauthorized debit is issued. The shareholder will receive a confirmation from
the Fund, and the bank account statement will show the amount charged. In order
to participate in the Automatic Investment Plan, please complete this section of
the Account Application or contact the Transfer Agent for the form necessary to
begin this service. The form necessary to begin this service is available from
the Transfer Agent.
Tax
Sheltered Retirement Plans.
Through the Distributor, retirement plans are either available or expected to be
available for use by the self‑employed (Keogh Plans), Individual Retirement
Accounts (including SEP-IRAs) and “tax‑sheltered accounts” under Section
403(b)(7) of the Code. Adoption of such plans should be on advice of legal
counsel or tax advisers.
For
further information regarding plan administration, custodial fees and other
details, investors should contact the Distributor.
ANTI-MONEY
LAUNDERING PROGRAM
The
Trust has established an Anti-Money Laundering Compliance Program (the “AML
Program”) as required by the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA
PATRIOT Act”). In order to ensure compliance with this law, the AML 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
AML Program.
Procedures
to implement the AML Program include, but are not limited to, determining that
the Distributor and Transfer Agent have established proper anti-money laundering
procedures, reporting suspicious and/or fraudulent activity, checking
shareholder names against designated government lists, including Office of
Foreign Asset Control (OFAC), and a complete and thorough review of all new
opening account applications. The Funds will not transact business with any
person or entity whose identity cannot be adequately verified under the
provisions of the USA PATRIOT Act.
TAXES
General
Each
Fund has elected to be treated and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the “Code”). The discussion that follows is not intended to be a
complete discussion of present or proposed federal income tax laws and the
effect of such laws on an investor. Investors are urged to consult with their
tax advisers for a complete review of the tax consequences of an investment in
the Funds.
If
a Fund fails to qualify as a regulated investment company under
Subchapter M of the Code in any fiscal year, it will be treated as a
regular corporation for federal income tax purposes. As such, that Fund would be
required to pay income taxes on its net investment income and net realized
capital gains, if any, at the rates generally applicable to corporations.
Distributions to shareholders, whether from that Fund’s net investment income or
net realized capital gains, would be treated as taxable dividends to the extent
of current or accumulated earnings and profits of that Fund.
The
Funds' policy is to distribute to its shareholders all of its net investment
income and any net realized long term capital gains for each fiscal year in a
manner that complies with the distribution requirements of the Code, so that a
Fund will not be subject to any federal income or excise taxes. The Funds can
give no assurances that distributions will be sufficient to eliminate all taxes.
To avoid the non-deductible excise tax, a Fund must distribute (or be deemed to
have distributed) by December 31 of each calendar year (i) at least 98% of its
ordinary income for such year, (ii) at least 98.2% of the excess of its realized
capital gains over its realized capital losses for the 12-month period ending on
October 31 during such year, and (iii) any amounts from the prior calendar
year that were not distributed and on which no federal income tax was paid by a
Fund. If,
as expected, a Fund qualifies as a regulated investment company, dividends from
a Fund’s net investment income, including short-term capital gains, are taxable
to shareholders as ordinary income, while distributions of net capital gains are
taxable as long-term capital gains regardless of the shareholder’s holding
period for the shares. Such dividends and distributions are taxable to
shareholders whether received in cash or reinvested in additional shares. Since
all or substantially all of the income of each Fund is derived from interest
payments to it, none of the dividends of the Fund are
expected
to qualify for the intercorporate dividends-received deduction or the reduced
rate for qualified dividend income.
In
order to qualify as a regulated investment company, a Fund must, among other
things, derive at least 90% of its gross income each year from dividends,
interest, payments with respect to loans of stock and securities, gains from the
sale or other disposition of stock or securities, foreign currency gains related
to investments in stock or securities, or other income (generally including
gains from options, futures or forward contracts) derived with respect to the
business of investing in stock, securities or currency, and net income derived
from an interest in a qualified publicly traded partnership. A Fund also must
satisfy the following two asset diversification tests. At the end of each
quarter of each taxable year, (i) at least 50% of the value of the Fund’s total
assets must be represented by cash and cash items (including receivables), U.S.
government securities, the securities of other regulated investment companies,
and other securities, with such other securities being limited in respect of any
one issuer to an amount not greater than 5% of the value of the Fund’s total
assets and not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of the Fund’s total assets may
be invested in the securities of any one issuer (other than U.S. government
securities or the securities of other regulated investment companies), the
securities of any two or more issuers (other than the securities of other
regulated investment companies) that the Fund controls (by owning 20% or more of
their outstanding voting stock) and that are determined to be engaged in the
same or similar trades or businesses or related trades or businesses, or the
securities of one or more qualified publicly traded partnerships. A Fund also
must distribute each taxable year sufficient dividends to its shareholders to
claim a dividends paid deduction equal to at least the sum of 90% of the Fund’s
dividends, interest, and the excess of net short-term capital gain over net
long-term capital loss) and 90% of the Fund’s net tax-exempt interest, if
any.
Any
dividend or capital gain distribution paid shortly after a purchase of shares of
a Fund will have the effect of reducing the NAV per share of such shares by the
amount of the dividend or distribution. Furthermore, if the NAV per share of a
Fund immediately after a dividend or distribution is less than the cost of such
shares to the shareholder, the dividend or distribution will be taxable to the
shareholder even though economically it results in a return of capital to
him.
As
of November 30, 2023, the BBB Bond Fund, the MBS Bond Fund, and the High
Yield (MACS) Fund had tax short-term capital losses and/or tax long term capital
losses, which may be carried over indefinitely to offset future gains, as
follows:
|
|
|
|
|
|
|
|
|
|
| |
| BBB
Bond Fund |
MBS
Bond Fund |
High
Yield (MACS) Fund |
Short-term
capital losses |
$1,749,432 |
$1,496,359 |
$0 |
Long-term
capital losses |
$10,099,027 |
$869,452 |
$4,640,750 |
Redemptions
of shares generally will result in a capital gain or loss for income tax
purposes. Such capital gain or loss will be long-term or short-term, depending
upon the shareholder’s holding period for the shares. However, if a loss is
realized on shares held for six months or less, and the investor received a
capital gain distribution during that period, then such loss is treated as a
long-term capital loss to the extent of the capital gain distribution
received.
For
taxable years beginning after 2017 and before 2025, non-corporate taxpayers
generally may deduct 20% of “qualified business income” derived either directly
or through partnerships or S corporations. For this purpose, “qualified business
income” generally includes dividends paid by a real estate investment trust
(“REIT”) and certain income from publicly traded partnerships. Regulations
recently adopted by the United States Treasury allow non-corporate shareholders
of a Fund to benefit from the 20% deduction
with
respect to net REIT dividends received by the Fund if the Fund meets certain
reporting requirements. There is currently no mechanism for a Fund, to the
extent that a Fund invests in MLPs, to pass through to non-corporate
shareholders the character of income derived from MLP investments so as to allow
such shareholders to claim this deduction. It is uncertain whether future
legislation or other guidance will enable a Fund to pass through to
non-corporate shareholders the ability to claim this deduction.
Rule
17a-7 Transactions
The
Trust has adopted procedures pursuant to Rule 17a-7 under the 1940 Act pursuant
to which the Funds may effect a purchase and sale transaction with an affiliated
person of the Funds (or an affiliated person of such an affiliated person) in
which the Funds issue their shares in exchange for cash payments. For purposes
of determining the number of shares to be issued, the securities involved in the
exchange will be valued in accordance with Rule 17a-7. Certain of the
transactions may be tax-free with the result that the Funds acquire unrealized
appreciation. Most Rule 17a-7 transactions will not be
tax-free.
Taxation
of Hedging Instruments
If
a call option written by a Fund expires, the amount of the premium received by
the Fund for the option will be short-term capital gain. If a Fund enters into a
closing transaction with respect to the option, any gain or loss realized by a
Fund as a result of the transaction will be short-term capital gain or loss. If
the holder of a call option exercises the holder’s right under the option, any
gain or loss realized by the Fund upon the sale of the underlying security or
futures contract pursuant to such exercise will be short-term or long-term
capital gain or loss to the Fund depending on the Fund’s holding period for the
underlying security or futures contract, and the amount of the premium received
will be added to the proceeds of sale for purposes of determining the amount of
the capital gain or loss.
With
respect to call options purchased by a Fund, the Fund will realize short-term or
long-term capital gain or loss if such option is sold and will realize
short-term or long-term capital loss if the option is allowed to expire
depending on the Fund’s holding period for the call option. If such a call
option is exercised, the amount paid by a Fund for the option will be added to
the basis of the security or futures contract so acquired.
Gains
and losses resulting from the expiration, exercise or closing of futures
contracts will be treated as long-term capital gain or loss to the extent of 60%
thereof and short-term capital gain or loss to the extent of 40% thereof
(hereinafter “blended gain or loss”) for determining the character of
distributions. In addition, futures contracts held by a Fund on the last day of
a fiscal year will be treated as sold for market value (“marked to market”) on
that date, and gain or loss recognized as a result of such deemed sale will be
blended gain or loss. The realized gain or loss on the ultimate disposition of
the futures contract will be increased or decreased to take into consideration
the prior marked to market gains and losses.
Each
Fund may acquire put options. Under the Code, put options on securities are
taxed similar to short sales. If a Fund owns the underlying security or acquires
the underlying security before closing the option position, the option position
may be subject to certain modified short sale rules. If a Fund exercises or
allows a put option to expire, the Fund will be considered to have closed a
short sale. A Fund will generally have a short-term gain or loss on the closing
of an option position. The determination of the length of the holding period is
dependent on the holding period of the security used to exercise that put
option. If a Fund sells the put option without exercising it, its holding period
will be the holding period of the option.
Foreign
Taxes – BBB Bond Fund and High Yield (MACS) Fund
The
BBB Bond Fund and the High Yield (MACS) Fund may be subject to foreign taxes on
income and gains derived from their investments outside the U.S. Such taxes
would reduce the return on a Fund’s investments. Tax treaties between certain
countries and the U.S. may reduce or eliminate such taxes. If more than 50% of
the value of a Fund’s total assets at the close of any taxable year consist of
securities of foreign corporations, the Fund may elect, for U.S. federal income
tax purposes, to treat any foreign country income or withholding taxes paid by
the Fund that can be treated as income taxes under U.S. income tax principles as
paid by its shareholders subject to certain exceptions for qualified fund of
funds structures. For any year that a Fund makes such an election, each of its
shareholders will be required to include in his income (in addition to taxable
dividends actually received) his allocable share of such taxes paid by the Fund
and will be entitled, subject to certain limitations, to credit his portion of
these foreign taxes against his U.S. federal income tax due, if any, or to
deduct it (as an itemized deduction) from his U.S. taxable income, if any.
Generally, credit for foreign taxes is subject to the limitation that it may not
exceed the shareholder’s U.S. tax attributable to his foreign source taxable
income.
If
the pass through election described above is made, the source of a Fund’s income
flows through to its shareholders. Certain gains from the sale of securities and
currency fluctuations will not be treated as foreign source taxable income. In
addition, this foreign tax credit limitation must be applied separately to
certain categories of foreign source income, one of which is foreign source
“passive income.” For this purpose, foreign “passive income” includes dividends,
interest, capital gains and certain foreign currency gains. As a consequence,
certain shareholders may not be able to claim a foreign tax credit for the full
amount of their proportionate share of the foreign tax paid by a
Fund.
If
a Fund does not make the pass through election described above, the foreign
taxes it pays will reduce its income, and distributions by the Fund will be
treated as U.S. source income.
Each
shareholder will be notified within 60 days after the close of a Fund’s taxable
year whether, pursuant to the election described above, the foreign taxes paid
by the Fund will be treated as paid by its shareholders for that year and, if
so, such notification will report: (i) such shareholder’s portion of the foreign
taxes paid; and (ii) the portion of the Fund’s dividends and distributions that
represent income derived from foreign sources.
Foreign
shareholders, including shareholders who are nonresident alien individuals, may
be subject to U.S. withholding tax on certain distributions at a rate of 30% or
such lower rate as may be prescribed by any applicable treaty. In addition,
if the requirements of the Foreign Account Tax Compliance Act (“FATCA”) are not
met, the United States may impose a 30% U.S. withholding tax on certain foreign
financial institutions and other foreign entities with respect to ordinary
income distributions on shares of the Funds. Shareholders should consult
their tax advisors regarding the possible implications of this legislation as
well as the other U.S. federal, state, local and foreign tax consequences of an
investment in shares.
Backup
Withholding
Federal
law requires the Funds to withhold from a non-corporate shareholder’s reportable
payments (which include dividends, capital gains distributions and redemption
proceeds) an amount as backup withholding determined at a rate as set forth in
Section 3406 of the Code, for shareholders who have not properly certified that
the social security or other taxpayer identification number they provide is
correct and that the shareholder is not subject to backup withholding, or if
such shareholder or the Internal Revenue Service notifies the Funds that backup
withholding is required. Backup withholding is not an
additional
tax and any amounts withheld may be credited against a shareholder’s ultimate
federal income tax liability if proper documentation is provided.
The
foregoing discussion relates only to federal income tax law applicable to U.S.
persons (i.e.,
U.S. citizens and residents and U.S. domestic corporations, estates, the income
of which is subject to United States federal income taxation regardless of its
source, and trusts that (1) are subject to the primary supervision of a court
within the United States and one or more United States persons have the
authority to control all substantial decisions of the trust or (2) have a valid
election in effect under applicable United States Treasury regulations to be
treated as a United States person). Distributions by a Fund also may be subject
to state and local taxes, and the treatment of distributions under state and
local income tax laws may differ from the federal income tax treatment.
Shareholders should consult their tax advisors with respect to particular
questions of federal, state and local taxation. Shareholders who are not U.S.
persons should consult their tax advisors regarding U.S. and foreign tax
consequences of ownership of shares of a Fund, including the likelihood that
distributions to them would be subject to withholding of U.S. tax at a rate of
30% (or at a lower rate under a tax treaty if one applies).
GENERAL
INFORMATION
The
Declaration of Trust permits the Board to issue an unlimited number of full and
fractional shares of beneficial interest and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in the Funds. Each share represents an
interest in the Fund proportionately equal to the interest of each other share.
Upon a Fund’s liquidation, all shareholders would share pro rata in the net
assets of the Fund available for distribution to shareholders.
With
respect to the Funds, the Trust may offer more than one class of shares. The
Trust has reserved the right to create and issue additional series or classes.
Each share of a series or class represents an equal proportionate interest in
that series or class with each other share of that series or class. Currently,
each Fund has only one class of shares – the Managed Account Completion Shares
(MACS).
The
shares of each series or class participate equally in the earnings, dividends
and assets of the particular series or class. Expenses of the Trust which are
not attributable to a specific series or class are allocated among all the
series in a manner believed by management of the Trust to be fair and equitable.
Shareholders are entitled to one vote for each share held. Shares of each series
or class generally vote together, except when required under federal securities
laws to vote separately on matters that only affect a particular class, such as
the approval of distribution plans for a particular class.
The
Trust is not required to hold annual meetings of shareholders but will hold
special meetings of shareholders of a series or class when, in the judgment of
the Board, it is necessary or desirable to submit matters for a shareholder
vote. Shareholders have, under certain circumstances, the right to communicate
with other shareholders in connection with requesting a meeting of shareholders
for the purpose of removing one or more Trustees. Shareholders also have, in
certain circumstances, the right to remove one or more Trustees without a
meeting. No material amendment may be made to the Declaration of Trust without
the affirmative vote of the holders of a majority of the outstanding shares of
each portfolio affected by the amendment. The Declaration of Trust provides
that, at any meeting of shareholders of the Trust or of any series or class, a
Shareholder Servicing Agent may vote any shares as to which such Shareholder
Servicing Agent is the agent of record and which are not represented in person
or by proxy at the meeting, proportionately in accordance with the votes cast by
holders of all shares of that portfolio otherwise represented at the meeting in
person or by proxy as to which such Shareholder Servicing Agent is the agent of
record. Any shares so voted by a Shareholder Servicing Agent will be deemed
represented at the meeting for purposes of quorum requirements. Shares have no
preemptive or conversion rights. Shares, when issued, are fully paid and
non‑assessable, except as set forth below. Any series or class may
be
terminated (i) upon the merger or consolidation with, or the sale or
disposition of all or substantially all of its assets to, another entity, if
approved by the vote of the holders of two‑thirds of its outstanding shares,
except that if the Board recommends such merger, consolidation or sale or
disposition of assets, the approval by vote of the holders of a majority of the
series’ or class’ outstanding shares will be sufficient, or (ii) by the
vote of the holders of a majority of its outstanding shares, or (iii) by
the Board by written notice to the series’ or class’ shareholders. Unless each
series and class is so terminated, the Trust will continue
indefinitely.
The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, Trustees, officers, employees and
agents covering possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
The
Declaration of Trust does not require the issuance of stock certificates. If
stock certificates are issued, they must be returned by the registered owners
prior to the transfer or redemption of shares represented by such
certificates.
Rule 18f‑2
under the 1940 Act provides that as to any investment company which has two or
more series outstanding and as to any matter required to be submitted to
shareholder vote, such matter is not deemed to have been effectively acted upon
unless approved by the holders of a “majority” (as defined in the Rule) of the
voting securities of each series affected by the matter. Such separate voting
requirements do not apply to the election of Trustees or the ratification of the
selection of accountants. The Rule contains special provisions for
cases in which an advisory contract is approved by one or more, but not all,
series. A change in investment policy may go into effect as to one or more
series whose holders so approve the change even though the required vote is not
obtained as to the holders of other affected series.
In
addition to cash purchases, Fund shares may be purchased by tendering payment
in-kind in the form of bonds or other securities. Any securities used to buy
Fund shares must be readily marketable, their acquisition consistent with a
Fund’s objective and otherwise acceptable to the Adviser and the
Board.
Redemptions
In-Kind
The
Trust has elected to be governed by Rule 18f-1 under the 1940 Act so that the
Funds are obligated to redeem their shares solely in cash up to the lesser of
$250,000 or 1% of its net asset value during any 90-day period for any
shareholder of the Funds. Each Fund has reserved the right to pay the redemption
price of its shares in excess of $250,000 or l% of its net asset value either
totally or partially, by a distribution in-kind of portfolio securities or loans
(instead of cash). The securities or loans so distributed would be valued at the
same amount as that assigned to them in calculating the NAV per share for the
shares being sold. If a shareholder receives a distribution in-kind, the
shareholder could incur brokerage or other charges in converting the securities
or loans to cash. A redemption, whether in cash or in-kind, is a taxable event
for you.
Each
Fund does not intend to hold any significant percentage of its portfolio in
illiquid securities, although a Fund, like virtually all mutual funds, may from
time to time hold a small percentage of securities that are illiquid. In the
unlikely event a Fund were to elect to make an in-kind redemption, the Fund
expects that it would follow the Trust protocol of making such distribution by
way of a pro rata distribution of securities that are traded on a public
securities market or are otherwise considered liquid pursuant to the Fund’s
liquidity policies and procedures. Except as otherwise may be approved by the
Trustees, the securities that would not be included in an in-kind distribution
include (1) unregistered securities which, if distributed, would be required to
be registered under the Securities Act of 1933 (the “1933 Act”), as amended; (2)
securities issued by entities in countries which (a) restrict or prohibit the
holding
of securities by non-nationals other than through qualified investment vehicles,
such as a fund, or (b) permit transfers of ownership of securities to be
effected only by transactions conducted on a local stock exchange; and (3)
certain Fund assets that, although they may be liquid and marketable, must be
traded through the marketplace or with the counterparty to the transaction in
order to effect a change in beneficial ownership.
CODES
OF ETHICS
The
Trust and Adviser have each adopted separate Codes of Ethics under
Rule 17j-1 of the 1940 Act. These Codes permit, subject to certain
conditions, access persons of the Adviser to invest in securities that may be
purchased or held by the Funds. The Distributor, relies on the principal
underwriter’s exception under Rule 17j-1(c)(3), of the 1940 Act,
specifically where the Distributor is not affiliated with the Trust or the
Adviser, and no officer, director or general partner of the Distributor serves
as an officer, director or general partner of the Trust or the
Adviser.
FINANCIAL
STATEMENTS
The
annual
report
to shareholders for the Funds for the fiscal year ended November 30, 2023,
is a separate document supplied with this SAI, and the financial statements,
accompanying notes and report of independent registered public accounting firm
appearing therein are incorporated by reference into this SAI.
PIA
Manual Effective January, 2024
Pacific
Income Advisers, Inc.
Proxy
Voting Policy
Effective
January, 2024
PIA
Manual Effective January 31, 2024
PACIFIC
INCOME ADVISERS, INC.
PROXY
VOTING POLICY
All
contents are the confidential and exclusive property of Pacific Income Advisers,
Inc. (“PIA”).
For
internal use only.
Copyright
©
2024 by Pacific Income Advisers, Inc.
All
rights reserved. No part of this work may be reproduced, transmitted or
transcribed in any form or by any means, electronic or mechanical, now known or
hereafter invented, including but not limited to photocopying and recording or
by any information storage or retrieval system, except as expressly permitted by
the copyright owner.
H.
PROXY VOTING POLICY
On
January 31, 2003, the Securities and Exchange Commission approved proxy voting
regulations for investment advisers registered with the SEC under the Advisers
Act. The regulations require investment advisers to disclose their proxy voting
policies and procedures to their clients.
1.
VOTING PROXIES FOR NON-ERISA ACCOUNTS
In
this regard, it is PIA’s policy to vote proxies for portfolio securities in
accordance with the best economic interests of each client unless that client
explicitly retains responsibility for proxy voting.
2.
VOTING OF PROXIES FOR ERISA ACCOUNTS
The
Department of Labor (“DOL”) takes the position that the fiduciary act of
managing plan assets which are held as shares of corporate stock includes the
obligation to vote proxies appurtenant to those shares of stock. Section 403(a)
of the Employee Retirement Income Security Act of 1974 (“ERISA”) requires plan
trustees to have exclusive authority and responsibility for voting proxies,
unless:
•The
plan expressly provides that the trustees are subject to the discretion of a
named fiduciary who is not a trustee (in which case the trustees are subject to
proper directions made in accordance with the terms of the plan and not contrary
to ERISA); and
•The
authority to manage, acquire or dispose of assets of the plan is delegated to
one or more investment managers pursuant to Section 402 of ERISA.
3.
PROCEDURES
PIA
has adopted the following procedures in relation to the voting of proxies:
•At
the opening of each client relationship, an IAR will determine whether PIA will
have proxy voting responsibility and if so, whether the client has any specific
guidelines or policies it require PIA to comply with.
•All
investment advisory agreements with clients specify whether PIA, the client or
(in the case of ERISA accounts) the plan trustees or a named fiduciary have
proxy voting authority. All agreements with wrap-fee sponsors provide that PIA
has proxy voting authority unless the client explicitly retains responsibility
for proxy voting in writing.
•All
proxy voting materials received by PIA will be forwarded to Operations whose
responsibilities will include but not be limited to:
(i) Reconciliation
of proxies received against securities held and obtaining any missing proxy
materials/ballots prior to the voting deadline.
(ii) Forwarding
all applicable proxy materials to those clients who have retained authority to
vote proxies.
(iii) Voting
proxies in accordance with the Portfolio Manager’s recommendations and
guidelines, or those of the Compliance Committee.
(iv) Transmitting
voted proxies to the appropriate issuers.
(v) Recording
how each proxy was voted for PIA clients.
(vi) Maintaining
appropriate proxy voting records by issuer and for clients.
(vii) Preparing
and providing proxy voting reports to the CCO upon request.
•If
any conflict or potential conflict of interest arises in the execution of PIA’s
proxy voting responsibilities, including the Mutual Fund votes, Operations will
refer the matter to the Compliance Committee who will review and resolve any
such conflict in the best interests of all affected clients. The Compliance
Committee will either instruct Operations to vote the affected proxies in
accordance with the Compliance Committee’s specific instructions or provided
that the client is not an ERISA client, either request the client to vote their
own proxies or abstain from any voting. In all cases the Compliance Committee
will disclose the conflict to all affected clients and notify them of the
specific action taken.
•The
CCO is responsible for ensuring that an accurate summary of PIA’s proxy voting
procedures is included in PIA’s client disclosure document and on its website at
all times.
•PIA
will maintain adequate records to document the voting process for all
clients.
•PIA
will collect and vote Fund proxies and maintain the records of the vote, in
accordance with Form N-PX filing requirement.
•PIA’s
Disclosure Brochure contains detailed information regarding proxy voting
practices and how its clients may obtain information on how their securities
were voted.