nv1a
As
filed with the Securities and Exchange Commission on July 6, 2010
Securities Act File No. _________
Investment Company Act File No. _________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM N-1A
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933 þ
Pre-Effective Amendment No. o
Post-Effective Amendment No. o
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940 þ
Amendment No. o
(Check appropriate box or boxes)
del Rey Global Investors Funds
(Exact Name of Registrant as Specified in Charter)
6701 Center Drive West, Suite 655
Los Angeles, CA 90045
(Address of Principal Executive Offices)
Registrants Telephone Number, including Area Code: (310) 649-1230
Gerald W. Wheeler, Esq.
Chief Operating Officer
del Rey Global Investors, LLC
6701 Center Drive West, Suite 655
Los Angeles, CA 90045
(Name and Address of Agent for Service)
Copies to:
Counsel for the Registrant:
Barry Barbash, Esq.
Maria Gattuso, Esq.
Willkie Farr & Gallagher LLP
787 Seventh Avenue
New York, New York 10019
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF
THIS REGISTRATION STATEMENT.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER
BECOME EFFECTIVE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR
UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. A REGISTRATION STATEMENT
RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THE
SECURITIES DESCRIBED HEREIN MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SECURITIES AND IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE IN WHICH THE OFFER, SOLICITATION OR
SALE WOULD BE UNLAWFUL.
del Rey Global Investors Funds
del Rey International Value Fund
Institutional Shares
Prospectus
[ ], 2010
A SUBSCRIPTION PERIOD FOR SHARES OF THE FUNDS WILL END ON , 2010, UNLESS EXTENDED.
This Prospectus contains information you should know before investing, including information about
risks. Please read it before you invest and keep it for future reference.
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Institutional Shares
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The Securities and Exchange Commission has not approved or disapproved these securities or
passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal
offense.
NOT FDIC INSURED | SHARES MAY LOSE VALUE | NO BANK GUARANTEE
Overview of the Fund
del Rey International Value Fund
Investment Objective
The investment objective of the del Rey International Value Fund (the Fund) is to seek
long-term capital appreciation.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and hold shares of the
Fund. More information about the shares is available from your financial professional and in the
Details About the Shares section on page [ ] of the Funds prospectus and in the Purchase of
Shares section on page [ ] of the Funds statement of additional information.
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Shareholder Fees |
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Institutional |
(fees paid directly from your investment) |
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Shares |
Maximum Sales Charge (Load) Imposed on Purchases
(as percentage of offering price)
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None |
Maximum Deferred Sales Charge (Load)
(as a percentage of offering price or redemption
proceeds, whichever is lower)
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None |
Redemption Fee (as a percentage of
amount redeemed or exchanged within 30 days)
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[2.00%] |
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Annual Fund Operating Expenses |
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Institutional |
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(expenses that you pay each year as a percentage of the value of your investment) |
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Shares |
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Management Fee |
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[__] |
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Distribution and/or Service (12b-1) Fees |
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None |
Other Expenses 1 |
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[__] |
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Acquired Fund Fees and Expenses 1 |
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[__] |
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Total Annual Fund Operating Expenses |
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[__] |
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1 Based on estimated amounts for the current fiscal year.
Example:
This Example is intended to help you compare the cost of investing in the Fund with the cost of
investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the
time periods indicated and then redeem all of your shares at the end of those periods. The Example
also assumes that your investment has a 5% return each year and that the Funds operating expenses
remain the same. Although your actual costs may be higher or lower, based on these assumptions your
costs would be:
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1 Year |
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3 Years |
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Institutional Shares |
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$ |
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$ |
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Portfolio Turnover:
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns
over its portfolio). A higher portfolio turnover may indicate higher transaction costs and may
result in higher taxes when Fund shares are held in a taxable account. These costs, which are not
reflected in annual fund operating expenses or in the example, affect the Funds performance.
Principal Investment Strategies of the Fund
Under normal conditions, the Fund invests primarily in equity securities of issuers located in
a number of different countries outside of the United States. The Fund generally invests at least
80% of its total assets in common and preferred equities, American Depositary Receipts (ADRs),
European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and convertible
securities. The Fund may invest up to 10% of its total assets in Rule 144A securities. The Fund
may invest up to 20% of its total assets in companies located in countries with emerging securities
markets when del Rey Global Investors, LLC (del Rey Global) believes they present an attractive
investment opportunity.
The Fund seeks to invest in intrinsically undervalued non-U.S. companies with strong and/or
improving business fundamentals. The Fund seeks to invest in approximately 35-60 companies whose
capitalizations are generally over $1 billion and represent strong risk/return characteristics.
Generally a countrys weighting will be limited to 35% of the Funds total assets, measured at the
time of purchase. The Funds investment strategy is not designed to track the performance of any
specific benchmark.
The Fund also may invest in other investment companies, including exchange-traded funds, to the
extent permitted under the Investment Company Act of 1940, as amended, and the rules, published
guidance and exemptive orders thereunder.
The Fund also may lend portfolio securities on a short-term or long-term basis, in an amount up to
331/3% of its total assets.
The Fund may invest up to 15% of its total assets in illiquid securities. Illiquid securities are
securities that the Fund may not sell within seven days at their approximate current value. Rule
144A securities will be deemed to be illiquid securities unless the Funds Board or del Rey Global
determines otherwise.
Principal Risks of Investing in the Fund
Risk is inherent in all investing. The value of your investment in the Fund, as well as the
amount of return you receive on your investment, may fluctuate significantly from day to day and
over time. You may lose part or all of the money that you invested in the Fund or your investment
may not perform as well as other similar investments. The following is a summary description of
certain principal risks of investing in the Fund.
Convertible Securities Risk The value of convertible securities may fall when interest rates
rise. Convertible securities with longer maturities tend to be more sensitive to changes in
interests rates, usually making them more volatile than convertible securities with shorter
maturities.
Depositary Receipts Risk The issuers of unsponsored depositary receipts are not obligated to
disclose information that is, in the United States, considered material. Therefore, there may be
less information available regarding these issuers and there
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may not be a correlation between such information and the market value of the depositary receipts.
Depositary receipts are generally subject to the same risks as the foreign securities that they
evidence or into which they may be converted.
Emerging Markets Risk Emerging markets are riskier than more developed markets because they tend
to develop unevenly and may never fully develop. Investments in emerging markets may be considered
speculative. Emerging markets are more likely to experience hyperinflation and currency
devaluations, which adversely affect returns to U.S. investors. In addition, many emerging
securities markets have far lower trading volumes and less liquidity than developed markets.
Equity Securities Risk Stock markets are volatile. The price of equity securities fluctuates
based on changes in a companys financial condition and overall market and economic conditions.
Expense Risk Fund expenses are subject to a variety of factors, including fluctuations in the
Funds net assets. Accordingly, actual expenses may be greater or less than those indicated.
Foreign Investments Risk Foreign investments often involve special risks not present in U.S.
investments that can increase the chances that the Fund will lose money. These risks include:
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The Fund generally holds its foreign securities and cash in foreign banks and
securities depositories, which may be recently organized or new to the foreign custody
business and may be subject to only limited or no regulatory oversight. |
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Changes in currency exchange rates can affect the value of the Funds portfolio. |
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The economies of certain foreign markets may not compare favorably with the economy
of the United States with respect to such issues as growth of gross national product,
reinvestment of capital, resources and balance of payments position. |
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The governments of certain countries may prohibit or impose substantial
restrictions on foreign investments in their capital markets or in certain industries. |
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Many foreign governments do not supervise and regulate stock exchanges, brokers and
the sale of securities to the same extent as does the United States and may not have
laws to protect investors that are comparable to U.S. securities laws. |
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Settlement and clearance procedures in certain foreign markets may result in delays
in payment for or delivery of securities not typically associated with settlement and
clearance of U.S. investments. |
Investment in Other Investment Companies Risk As with other investments, investments in other
investment companies are subject to market and selection risk. In addition, if the Fund acquires
shares of other investment companies, shareholders bear both their proportionate share of expenses
in the Fund (including advisory fees, administration fees and custodial fees) and, indirectly, the
expenses of the investment companies in which the Fund invests.
Investment Style Risk Value investments have generally performed better during periods of
economic recovery. Therefore, this investment style may over time go in and out of favor. At
times when the investment style used by the Fund is out of favor, the Fund may underperform other
international equity funds that use different investment styles.
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Liquidity Risk Liquidity risk exists when particular investments are difficult to purchase or
sell. The Funds investments in illiquid securities, which may include Rule 144A securities, may
reduce the returns of the Fund because it may be difficult to sell the illiquid securities at an
advantageous time or price. To the extent that the Funds principal investment strategies involve
derivatives or securities with substantial market and/or credit risk, the Fund will tend to have
the greatest exposure to liquidity risk.
Market Risk Market risk is the risk that the value of one or more investments in which the Fund
invests may go down in value.
Rule 144A Securities Risk The market for Rule 144A securities typically is less active than the
market for public securities. Rule 144A securities carry the risk that the trading market may not
continue.
Securities Lending Risk Securities lending involves the risk that the borrower may fail to return
the securities in a timely manner or at all. As a result, the Fund may lose money and there may be
a delay in recovering the loaned securities. The Fund could also lose money if it does not recover
the securities and/or the value of the collateral falls, including the value of investments made
with cash collateral. These events could trigger adverse tax consequences for the Fund.
Selection Risk Selection risk is the risk that the securities selected by the investment manager
may underperform the market or other securities selected by other funds.
Performance Information
Because the Fund is expected to commence operations on [ ], 2010, there is no historical
performance information shown. Performance will be presented after the Fund has been in operation
for one full calendar year.
Investment Manager
The Funds investment manager is del Rey Global Investors, LLC.
Portfolio Manager
Paul Hechmer, the Chief Investment Officer of del Rey Global, has been the portfolio manager
of the Fund since its inception in 2010.
Purchase and Sale of Fund Shares
You may purchase or redeem shares of the Fund each day the New York Stock Exchange (NYSE) is
open. To purchase or sell shares you should contact your financial intermediary or financial
professional, or, if you hold your shares through the Fund, you should contact the Fund by phone at
[ ], by mail ([
]), or by the Internet at [ ]. The Funds initial and
subsequent investment minimums generally are as follows, although the Fund may reduce or waive the
minimums in some cases:
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Institutional Shares |
Minimum
Initial
Investment
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$[ ] for
institutions and
individuals. |
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Minimum
Additional
Investment
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No subsequent minimum |
Tax Information
The Funds dividends and distributions may be subject to federal income taxes and may be taxed
as ordinary income or capital gains, unless you are a tax-exempt investor or are investing through
a retirement plan, in which case you may be subject to federal income tax upon withdrawal from such
tax deferred arrangements.
Payments to Broker/Dealers and Other Financial Intermediaries
If you purchase shares of the Fund through a broker-dealer or other financial intermediary,
the Fund and [ ], the Funds distributor, or its affiliates may pay the intermediary for
the sale of Fund shares and other services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary and your individual financial
professional to recommend the Fund over another investment. Ask your individual financial
professional or visit your financial intermediarys website for more information.
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More Information About the Fund
Included in this prospectus are sections that tell you more about the del Rey International
Value Fund (the Fund), buying and selling shares, management information, shareholder features
and your rights as a shareholder.
Types of Investments the Fund Makes
Investment Objective
The investment objective of the Fund is to seek long-term capital appreciation. The Funds
investment objective is not fundamental and may be changed without a shareholder vote.
Investment Process
del Rey Global Investors, LLC (del Rey Global) adheres to disciplined, value-driven investment
strategies whose aim is to achieve the Funds investment objective. The Fund seeks to invest in
intrinsically undervalued non-U.S. companies with strong and/or improving business fundamentals.
del Rey Global performs bottom-up research on companies and industries focusing on qualitative
factors such as restructuring, management strength, shareholder orientation and the ability to
capitalize on improving industry fundamentals. In addition, a broad range of fundamental valuation
metrics are utilized price-to-cash flow, price-to-book, price-to-earnings and
liquidation/replacement value.
Principal Investment Strategies
Under normal conditions, the Fund invests primarily in equity securities of issuers located in a
number of different countries outside of the United States. Equity securities include common
stocks; preferred stocks; warrants to purchase common stocks or preferred stocks; American
Depositary Receipts (ADRs); European Depositary Receipts (EDRs); Global Depositary Receipts
(GDRs); securities convertible into common or preferred stocks, such as convertible bonds and
debentures, and other securities with equity characteristics.
The Fund generally invests at least 80% of its total assets in common and preferred stock, ADRs,
EDRs, GDRs and convertible securities. The Fund may invest in both sponsored and unsponsored ADRs,
which typically are issued by an American bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation, EDRs, which are sometimes referred to as
Continental Depositary Receipts, are receipts issued in Europe, typically by foreign banks and
trust companies, that evidence ownership of either foreign or domestic underlying securities, and
GDRs, which are depositary receipts structured like global debt issues to facilitate trading on an
international basis. A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of common stock or other
equity security of the same or a different issuer within a particular period of time at a specified
price or formula.
The Fund may invest up to 10% of its assets in Rule 144A securities, which are securities that can
be offered and sold only to qualified institutional buyers under Rule 144A under the Securities
Act of 1933. The Fund may also invest up to 20% of its assets in companies located in countries
with emerging securities markets when del Rey Global believes they present an attractive investment
opportunity.
The Fund
will invest in approximately 35-60 companies whose capitalizations
are generally over $1
billion and represent strong risk/return characteristics. Generally a
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countrys weighting will be limited to 35% of the Funds portfolio at the time of purchase.
The Fund may invest in other investment companies, including exchange-traded funds (ETFs), to the
extent permitted under the Investment Company Act of 1940 (the 1940 Act), as amended, and the
rules, published guidance and exemptive orders thereunder. In the case of ETFs, the Fund may
invest in excess of the limits imposed under the 1940 Act pursuant to exemptive orders obtained by
certain ETFs and their sponsors from the Securities and Exchange Commission.
The Fund also may lend portfolio securities on a short-term or long-term basis, in an amount up to
331/3% of its total assets.
The Fund may invest up to 15% of its total assets in illiquid securities. Illiquid securities are
securities that the Fund may not sell within seven days at the approximate current value. Rule
144A securities will be deemed to be illiquid securities unless the Funds Board or del Rey Global
determines otherwise.
The Funds investment strategy is not designed to track the performance of any specific benchmark.
The Fund invests in a particular segment of the securities markets that generally is not
representative of the market as a whole. The Fund is designed to be used as part of broader asset
allocation strategies. Accordingly, an investment in the Fund should not constitute a complete
investment program. An investment in the Fund is not a bank deposit and it is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government agency, del Rey
Global or any of its affiliates.
Non-Principal Investment Strategies
In addition to the principal investment strategies discussed above, the Fund may also invest or
engage in the following investments/strategies:
The Fund may use derivatives for hedging purposes. Derivatives are financial instruments the value
of which is derived from another security, a commodity (such as gold or oil), a currency or an
index (a measure of value or rates, such as the S&P 500 Index or the prime lending rate). While
using derivatives for hedging purposes can reduce the Funds risk of loss, it may also limit the
Funds opportunity for gains or result in losses by offsetting or limiting the Funds ability to
participate in favorable price movements in portfolio investments.
Cash Equivalents and Short-Term Fixed-Income Securities Normally, the Fund will invest
substantially all of its assets to meet its investment objectives. The Fund may invest the
remainder of its assets in securities with maturities of less than one year or cash equivalents or
it may hold cash. The Fund may hold all or a portion of its uninvested cash in foreign currencies
or their equivalents. The percentage of the Fund invested in such holdings will vary and depends on
several factors, including market conditions.
When-Issued and Delayed Delivery Securities. The Fund may buy or sell securities on a when-issued
or delayed delivery basis, paying for or taking delivery of the securities at a later date,
normally within 15 to 45 days of the trade.
Defensive Investments For temporary defensive purposes, including during periods of high cash
inflows, the Fund may depart from its principal investment strategies and invest part or all of its
assets in cash equivalents and short-term fixed-income securities or it may hold cash. During such
periods, the Fund may not be able to achieve its investment objectives. The Fund may adopt a
defensive strategy when its portfolio
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manager believes securities in which the Fund normally invests have elevated risks due to adverse
market conditions, political or economic factors and in other extraordinary circumstances.
Principal Risks
This section contains more discussion of the general risks of investing in the Fund. Risk is
inherent in all investing. The value of your investment in the Fund, as well as the amount of
return you receive on your investment, may fluctuate significantly from day to day and over time.
You may lose part or all of your investment in the Fund or your investment may not perform as well
as other similar investments. Additional Information on Investment Strategies of the Fund in the
Statement of Additional Information (the SAI) also includes more information about the Fund, its
investments and the related risks. As with any fund, there can be no guarantee that the Fund will
meet its investment objective or that the Funds performance will be positive for any period of
time.
Convertible Securities Risk The market value of a convertible security performs like that of a
regular debt security; that is, if market interest rates rise, the value of a convertible security
usually falls. In addition, convertible securities are subject to the risk that the issuer will not
be able to pay interest or dividends when due, and their market value may change based on changes
in the issuers credit rating or the markets perception of the issuers creditworthiness. Since
it derives a portion of its value from the common stock into which it may be converted, a
convertible security is also subject to the same types of market and issuer risks that apply to the
underlying common stock. The income component of convertible securities causes fluctuations based
upon changes in interest rates and the credit quality of the issuer. Convertible securities are
often lower rated securities. The Fund may be required to redeem or convert a convertible security
before the holder would otherwise choose.
Mandatory convertible securities are distinguished as a subset of convertible securities because
the conversion is not optional and the conversion price at maturity is based solely upon the market
price of the underlying common stock, which may be significantly less than par or the price (above
or below par) paid. Mandatory convertible securities generally do not limit the potential for loss
to the same extent as securities convertible at the option of the holder.
Depositary Receipts Risk The issuers of unsponsored depositary receipts are not obligated to
disclose information that is, in the United States, considered material. Therefore, there may be
less information available regarding these issuers and there may not be a correlation between such
information and the market value of the depositary receipts. Depositary receipts are generally
subject to the same risks as the foreign securities that they evidence or into which they may be
converted. Even when denominated in U.S. dollars, depositary receipts are subject to currency risk
if the underlying security is denominated in a foreign currency. There can be no assurance that the
price of depositary receipts will always track the price of the underlying foreign security.
Emerging Markets Risk The risks of foreign investments are usually much greater for emerging
markets. Investments in emerging markets may be considered speculative. Emerging markets include
those in countries defined as emerging or developing by the World Bank, the International Finance
Corporation or the United Nations. Emerging markets are riskier than more developed markets because
they tend to develop unevenly and may never fully develop. They are more likely to experience
hyperinflation and currency devaluations, which adversely affect returns to U.S. investors. In
addition, many emerging markets have far lower trading volumes and less liquidity than
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developed markets. Since these markets are often small, they may be more likely to suffer sharp and
frequent price changes or long-term price depression because of adverse publicity, investor
perceptions or the actions of a few large investors. In addition, traditional measures of
investment value used in the United States, such as price to earnings ratios, may not apply to
certain small markets. Communications between the United States and emerging market countries may
be unreliable, increasing the risk of delayed settlements or losses of security certificates.
Many emerging markets have histories of political instability and abrupt changes in policies. As a
result, their governments are more likely to take actions that are hostile or detrimental to
private enterprise or foreign investment than those of more developed countries. Some countries
have pervasive corruption and crime that may hinder investments. Certain emerging markets may also
face other significant internal or external risks, including the risk of war, and ethnic, religious
and racial conflicts. In addition, governments in many emerging market countries participate to a
significant degree in their economies and securities markets, which may impair investment and
economic growth.
Equity Securities Risk Common and preferred stocks represent equity ownership in a company. Stock
markets are volatile. The price of equity securities will fluctuate and can decline and reduce the
value of a portfolio investing in equities. The value of equity securities purchased by the Fund
could decline if the financial condition of the companies the Fund invests in decline or if overall
market and economic conditions deteriorate. They may also decline due to factors that affect a
particular industry or industries, such as labor shortages or an increase in production costs and
competitive conditions within an industry. In addition, they may decline due to general market
conditions that are not specifically related to a company or industry, such as real or perceived
adverse economic conditions, changes in the general outlook for corporate earnings, changes in
interest or currency rates or generally adverse investor sentiment.
Expense Risk Fund expenses are subject to a variety of factors, including fluctuations in the
Funds net assets. Accordingly, actual expenses may be greater or less than those indicated. For
example, to the extent that the Funds net assets decrease due to market declines or redemptions,
the Funds expenses will increase as a percentage of Fund net assets. During periods of high market
volatility, these increases in the Funds expense ratio could be significant.
Foreign
Investments Risk Securities traded in foreign markets have often (though not always)
performed differently from securities traded in the United States. However, such investments often
involve special risks not present in U.S. investments that can increase the chances that the Fund
will lose money. In particular, the Fund is subject to the risk that because there may be fewer
investors on foreign exchanges and a smaller number of securities traded each day, it may be more
difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of
foreign securities may go up and down more than prices of securities traded in the United States.
Certain Risks of Holding Fund Assets Outside the United States The Fund generally holds
its foreign securities and cash in foreign banks and securities depositories. Some foreign
banks and securities depositories may be recently organized or new to the foreign custody
business. In addition, there may be limited or no regulatory oversight of their operations.
Also, the laws of certain countries limit the Funds ability to recover its assets if a
foreign bank, depository or issuer of a security, or any of their agents, goes bankrupt. In
addition, it is often more expensive for the Fund to buy, sell and hold securities in
certain foreign markets than in the United States. The increased expense of investing in
foreign markets reduces the amount the Fund can earn on its investments and typically
results in a higher operating expense ratio for the Fund than for investment companies
invested only in the United States.
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Currency Risk Securities and other instruments in which the Fund invests may be
denominated or quoted in currencies other than the U.S. dollar. For this reason, changes in
foreign currency exchange rates can affect the value of the Funds portfolio.
Generally, when the U.S. dollar rises in value against a foreign currency, a security
denominated in that currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency, a security
denominated in that currency gains value because the currency is worth more U.S. dollars.
This risk, generally known as currency risk, means that a strong U.S. dollar will reduce
returns for U.S. investors while a weak U.S. dollar will increase those returns.
Foreign Economy Risk The economies of certain foreign markets may not compare favorably
with the economy of the United States with respect to such issues as growth of gross
national product, reinvestment of capital, resources and balance of payments position.
Certain foreign economies may rely heavily on particular industries or foreign capital and
are more vulnerable to diplomatic developments, the imposition of economic sanctions
against a particular country or countries, changes in international trading patterns, trade
barriers and other protectionist or retaliatory measures. Investments in foreign markets
may also be adversely affected by governmental actions such as the imposition of capital
controls, nationalization of companies or industries, expropriation of assets or the
imposition of punitive taxes. In addition, the governments of certain countries may
prohibit or impose substantial restrictions on foreign investments in their capital markets
or in certain industries. Any of these actions could severely affect securities prices or
impair the Funds ability to purchase or sell foreign securities or transfer the Funds
assets or income back into the United States, or otherwise adversely affect the Funds
operations.
Other potential foreign market risks include foreign exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in enforcing
legal judgments in foreign courts and political and social instability. Diplomatic and
political developments, including rapid and adverse political changes, social instability,
regional conflicts, terrorism and war, could affect the economies, industries and
securities and currency markets, and the value of the Funds investments, in non-U.S.
countries. These factors are extremely difficult, if not impossible, to predict and take
into account with respect to the Funds investments.
Governmental Supervision and Regulation/Accounting Standards Many foreign governments do
not supervise and regulate stock exchanges, brokers and the sale of securities to the same
extent as such regulations exist in the United States. They also may not have laws to
protect investors that are comparable to U.S. securities laws. For example, some foreign
countries may have no laws or rules against insider trading. Insider trading occurs when a
person buys or sells a companys securities based on material non-public information about
that company. In addition, some countries may have legal systems that may make it difficult
for the Fund to vote proxies, exercise shareholder rights, and pursue legal remedies with
respect to its foreign investments. Accounting standards in other countries are not
necessarily the same as in the United States. If the accounting standards in another
country do not require as much detail as U.S. accounting standards, it may be harder for
Fund management to completely and accurately determine a companys financial condition.
Settlement Risk Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement
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and clearance procedures and trade regulations also may involve certain risks (such as
delays in payment for or delivery of securities) not typically associated with the
settlement of U.S. investments.
At times, settlements in certain foreign countries have not kept pace with the number of
securities transactions. These problems may make it difficult for the Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of securities,
it may miss attractive investment opportunities and certain of its assets may be uninvested
with no return earned thereon for some period. If the Fund cannot settle or is delayed in
settling a sale of securities, it may lose money if the value of the security then declines
or, if it has contracted to sell the security to another party; the Fund could be liable
for any losses incurred.
Investment in Other Investment Companies Risk The Fund may invest in other investment companies,
including directly in ETFs. The Fund indirectly pays a portion of the expenses (including advisory
fees, administration fees, custodial fees and operating expenses) incurred by the investment
company in which the Fund invests. An investment company in which the Fund invests may buy the
same securities that the Fund sells, or vice-versa. If this happens, an investor in the Fund would
indirectly bear the costs of these transactions without accomplishing the intended investment
purpose. Also, an investor in the Fund may receive taxable gains from portfolio transactions by an
investment company that the Fund has invested in, as well as taxable gains from transactions in
shares of the that investment company.
Investment Style Risk Value investments are securities issued by companies that may be
perceived as undervalued. Value investments can fail to appreciate for long periods of time and may
never realize their full potential value. Value investments have generally performed better during
periods of economic recovery. Therefore, this investment style may over time go in and out of
favor. At times when the investment style used by the Fund is out of favor, the Fund may
underperform other international equity funds that use different investment styles.
Liquidity Risk If a security is illiquid, the Fund might be unable to sell the security at a
time when del Rey Global might wish to sell, and the security could have the effect of decreasing
the overall level of the Funds liquidity. Further, the lack of an established secondary market may
make it more difficult to value some illiquid securities, which could vary from the amount the Fund
could realize upon disposition. The Fund may make investments that become less liquid in response
to market developments or adverse investor perception. The Fund could lose money if it cannot sell
a security at the time and price that would be most beneficial to the Fund.
Market Risk Market risk is the risk that one or more markets in which the Fund invests may go up
or down in response to the prospects of individual issuers and/or general economic conditions.
Securities markets may experience great short-term volatility and may fall sharply at times.
Different markets may behave differently from each other and a foreign market may move in the
opposite direction from the U.S. market. Price changes may be temporary or last for extended
periods. You could lose money over short periods due to fluctuation in the Funds net asset value
(NAV) in response to market movements, and over longer periods during market downturns.
Recently, international markets experienced extraordinary volatility, substantially lower
valuations, reduced liquidity, credit downgrades, increased likelihood of default and valuation
difficulties. Concerns have spread to domestic and international equity markets. Many governments
have taken numerous steps to alleviate these market concerns, including without limitation,
acquiring ownership interests in distressed institutions. However, there is no assurance that such
actions will be successful.
11
Continuing market problems and government intervention in the economy may adversely affect the
Fund.
Rule 144A Securities Risk Rule 144A securities are securities that are not registered under
applicable securities laws but which are bought and sold solely by institutional investors. The
market for Rule 144A securities typically is less active than the market for public securities.
Rule 144A securities carry the risk that the trading market may not continue.
Securities Lending Risk In order to generate additional income, the Fund may lend portfolio
securities in an amount up to 33 1/3% of its assets to broker-dealers, major banks, or other
recognized domestic institutional borrowers of securities. When the Fund lends its securities, it
is responsible for investing the cash collateral it receives from the borrower of the securities,
and the Fund could incur losses in connection with the investment of such cash collateral. As with
other extensions of credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower default or fail financially.
Selection Risk Selection risk is the risk that the securities selected by the Funds management
may underperform the market or other securities selected by other funds. The Funds management
could be wrong in its analysis of industries, companies, economic trends, the relative
attractiveness of different securities or other matters. This means that you may lose money.
When-Issued and Delayed Delivery Securities Risk When-issued and delayed delivery securities
involve the risk that the security the Fund buys will lose value prior to its delivery. There also
is the risk that the security will not be issued or that the other party to the transaction will
not meet its obligation. If this occurs, the Fund loses both the investment opportunity for the
assets it set aside to pay for the security and any gain in the securitys price.
The Fund may also be subject to certain other risks associated with its investments and investment
strategies, including:
Derivatives Risk The Fund may use derivatives for hedging purposes. The Funds use of
derivatives may reduce the Funds returns and/or increase volatility. Volatility is defined as the
characteristic of a security, an index or a market to fluctuate significantly in price within a
short time period. A risk of the Funds use of derivatives is that the fluctuations in their values
may not correlate perfectly with the overall securities markets. Using derivatives as a hedge
against a portfolio investment subjects the Fund to the risk that the derivative will have
imperfect correlation with the portfolio investment, which could result in the Fund incurring
substantial losses. Derivatives are also subject to counterparty risk, which is the risk that the
other party in the transaction will not fulfill its contractual obligation. In addition, some
derivatives are more sensitive to interest rate changes and market price fluctuations than other
securities. The possible lack of a liquid secondary market for derivatives and the resulting
inability of the Fund to sell or otherwise close a derivatives position could expose the Fund to
losses and could make derivatives more difficult for the Fund to value accurately. The Fund could
also suffer losses related to its derivatives positions as a result of unanticipated market
movements, which losses are potentially unlimited. Finally, del Rey Global may not be able to
predict correctly the direction of securities prices, interest rates and other economic factors,
which could cause the Funds derivatives positions to lose value. When a derivative is used as a
hedge against a position that the Fund holds, any loss generated by the derivative generally should
be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce
or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to
imperfect matching between the derivative and the underlying
12
security, and there can be no assurance that the Funds hedging transactions will be
effective. The income from certain derivatives may be subject to Federal income tax.
Portfolio Holdings Information
For a discussion of the Funds policies and procedures regarding the selective disclosure of
its portfolio holdings, please see the SAI. Certain portfolio holdings information for the Fund is
available on the Funds website [______]. By following these links, you can obtain a list of
the Funds top ten holdings as of the end of the most recent month. A complete list of portfolio
holdings information is generally made available on the Funds website following the end of each
month with an approximately one-month lag. This information will remain available on the Funds
website until the Fund files with the Securities and Exchange Commission its annual, semi-annual or
quarterly holdings report for the fiscal period that includes the date(s) as of which the website
information is current.
Fund Management
del Rey Global Investors
del Rey Global, the Funds investment manager, located at 6701 Center Drive West, Suite 655,
Los Angeles, CA 90045, manages the Funds investments and its business operations subject to the
oversight of the Board of Trustees (the Board) of the Fund. While del Rey Global is ultimately
responsible for the management of the Fund, it is able to draw upon the trading, research and
expertise of its asset management affiliates for portfolio decisions and management with respect to
certain portfolio securities.
del Rey Global, a registered investment adviser, was organized in 2009 to perform advisory services
for investment companies, separate accounts and other investment pools. del Rey Global had
approximately $[______] in investment company and other portfolio assets under management as of
[______, 2010].
The Fund has entered into an investment advisory agreement (the Management Agreement) with del
Rey Global under which del Rey Global receives for its services to the Fund a fee of [___]% of the
Funds average daily net assets.
* * *
A discussion of the basis for the Boards approval of the Management Agreement with del Rey Global
with respect to the Fund will be included in the Funds semi-annual shareholder report for the
period ending [______, 201___].
From time to time, a manager, analyst, or other employee of del Rey Global or its affiliates may
express views regarding a particular asset class, company, security, industry, or market sector.
The views expressed by any such person are the views of only that individual as of the time
expressed and do not necessarily represent the views of del Rey Global or any other person within
the organization. Any such views are subject to change at any time based upon market or other
conditions and del Rey Global disclaims any responsibility to update such views. These views may
not be relied on as investment advice and, because investment decisions for the Fund are based on
numerous factors, may not be relied on as an indication of trading intent on behalf of the Fund.
13
Portfolio Manager Information
Information regarding the portfolio manager of the Fund is set out below. Further information
regarding the portfolio manager, including other accounts managed, compensation, ownership of Fund
shares, and possible conflicts of interest, is available under the section titled Information
Regarding the Portfolio Manager in the Funds SAI.
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Portfolio Manager |
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Primary Role |
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Since |
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Title and Recent Biography |
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Paul Hechmer
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Portfolio Manager
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2010 |
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Managing Member and Chief
Investment Officer of del
Rey Global since
September 2009. |
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Tradewinds Global
Investors, LLC
Managing Member from 2006
to June 2009; NWQ
Investment Management
Company Managing
Director, Portfolio
Manager and Equity
Analyst from September
2005 to 2006; NWQ
Investment Management
Company, LLC, Vice
President & Portfolio
Manager & Equity Analyst
from August 2002 to
August 2005 |
Prior Performance Data of the Portfolio Manager
The following table gives the performance of actual, fee-paying separate accounts and pooled
investment vehicles (each, an Account), referred to as a Composite, managed by the portfolio
manager that have investment objectives, policies, strategies and risks substantially similar to
those of the Fund. Performance information includes Accounts managed by the portfolio manager
while at advisory firms other than del Rey Global. The data illustrates the past performance of
the portfolio manager in managing substantially similar accounts. THE DATA DOES NOT REPRESENT THE
PERFORMANCE OF THE FUND. Performance is historical and does not represent the future performance
of the Fund or of del Rey Global.
The manner in which the performance was calculated for the Composite differs from that of
registered mutual funds such as the Fund. This Composite performance data was calculated in
accordance with the standards of the Global Investment Performance Standards (GIPS(R)) and
differs from the SEC standardized method of calculating performance for mutual funds. GIPS were
created and administered by the Chartered Financial Analyst Institute (CFAI). CFAI is an
international, nonprofit organization of more than 50,000 investment practitioners and educators in
over 100 countries. GIPS are intended to (i) promote full and fair presentations by investment
advisers of their performance results and (ii) ensure uniformity in reporting so that performance
results of the investment advisers are directly comparable. CFAI performance presentation standards
differ from SEC standards for calculating performance for mutual funds. CFAI has not been involved
in the preparation or review of the performance information contained in this prospectus. All
returns presented were calculated on a total return basis and include all dividends and interest,
accrued income, and realized and
14
unrealized gains and losses. Except as otherwise noted, all returns reflect the payment of
investment management fees, brokerage commissions, foreign withholding taxes on dividends, interest
income and capital gains paid, and execution costs paid by the Accounts included in the Composite,
without taking into account federal or state income taxes. Custodial fees, if any, were not
included in the calculations. Securities are valued as of the trade-date. Each Account in the
Composite was under management for the entire reporting period in which the Account was included.
Results are based on fully discretionary accounts under management, including those accounts no
longer with the firm.
The U.S. Dollar is the currency used to express performance in the Composite. Returns are
presented gross and net of management fees and include the reinvestment of all income. Net of fee
performance prior to June 15, 2009 is net of all fees associated with the management of pooled
investment vehicles. Performance of the Composite after June 15, 2009 relates to Accounts that are
non-fee paying. Composite performance is presented net of foreign withholding taxes on dividends,
interest income, and capital gains. Withholding taxes may vary according to the investors
domicile. Composite returns represent investors domiciled primarily in the United States. The
MSCI EAFE Index uses the maximum withholding applicable for non-resident shareholders. For
comparison purposes the Composite is measured against the MSCI EAFE Index net of foreign
withholding taxes. The annual composite dispersion presented is an asset-weighted standard
deviation calculated for the Accounts in the composite the entire year. Additional information
regarding the policies for calculating and reporting returns is available upon request.
The [weighted average] fee schedule is 0.90% on the first $5 million, 0.75% on the next $15 million
and 0.65% on remaining amount of assets under management for investment management services for
Accounts in this Composite. Actual investment advisory fees incurred by any particular Account may
vary.
The performance of the Composite (net of management fees) reflects the portfolio managers
applicable account fees and expenses; however, the Funds fees and expenses are generally expected
to be higher than those of the Accounts included in the Composite. If the Funds fees and expenses
had been imposed on the Accounts included in the Composite, the performance shown below would have
been lower. Not all of the Accounts that are included in the Composite are subject to the same type of
expenses to which the Fund is subject and are not all subject to the diversification requirements,
specific tax restrictions, and investment limitations imposed by the federal securities and tax
laws. Consequently, the performance results for the Composite could have been adversely affected if
all of the Accounts in the Composite were subject to the same federal securities and tax laws as the
Funds. The investment results for the Composite presented below are not intended to predict or
suggest the future returns of the Fund. THE PERFORMANCE DATA SHOWN BELOW SHOULD NOT BE CONSIDERED A
SUBSTITUTE FOR THE FUNDS OWN PERFORMANCE INFORMATION. Investors should be aware that the use of a
methodology different than that used below to calculate performance could result in different
performance data.
15
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Composite Assets |
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Annual Performance Results |
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Year |
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Total Firm Assets |
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(USD) |
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Number of |
|
MSCI EAFE Index |
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Composite |
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Composite |
End |
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(millions) |
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(millions) |
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Accounts |
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Net |
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Gross |
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Net |
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Dispersion |
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2009 |
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2 |
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1 |
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Less than 5 |
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31.78 |
% |
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21.06 |
% |
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20.19 |
% |
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N.A. |
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2008 |
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673 |
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Less than 5 |
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-43.38 |
% |
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-28.08 |
% |
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-29.23 |
% |
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N.A. |
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2007 |
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1,100 |
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Less than 5 |
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11.17 |
% |
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11.85 |
% |
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10.15 |
% |
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N.A. |
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2006 |
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1,044 |
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Less than 5 |
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26.34 |
% |
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19.85 |
% |
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17.88 |
% |
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N.A. |
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2005 |
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322 |
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Less than 5 |
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13.54 |
% |
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14.79 |
% |
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12.83 |
% |
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N.A. |
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2004 |
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81 |
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Less than 5 |
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20.25 |
% |
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30.43 |
% |
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28.15 |
%% |
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N.A. |
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2003 |
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33 |
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Less than 5 |
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38.59 |
% |
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47.78 |
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44.39 |
% |
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N.A. |
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2002* |
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18 |
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Less than 5 |
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-3.10 |
% |
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7.84 |
% |
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7.61 |
% |
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N.A. |
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N.A. |
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Information is not statistically meaningful due to an insufficient number of
portfolios in the composite for the entire year. |
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* |
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Performance reflects the period November 1, 2002 to December 31, 2002. Periods shown prior to
September 24, 2009 represent the performance record of the portfolio manager while affiliated with
prior firms. The presentation conforms to the GIPS guidelines regarding the portability of
investment results. |
Conflicts of Interest
The investment activities of del Rey Global (including its managing members, officers and
employees (collectively, the Affiliates)) in the management of, or their interest in, their own
accounts and other accounts they manage, may present conflicts of interest that could disadvantage
the Fund and its shareholders. del Rey Global and its Affiliates may provide investment management
services to other funds and discretionary managed accounts that follow an investment program
similar to that of the Fund. del Rey Global and its Affiliates may take positions for other
clients portfolios that are different than the positions it takes for the Fund, based on differing
investment strategies, guidelines and restrictions that may be imposed by individual clients, the
age of the account, the size of the account as well as other factors that may distinguish
portfolios. Further, certain accounts may pay performance fees, while other accounts pay a fee
based on assets under management, like the Fund. Potential conflicts of interest may be present in
these situations. Client accounts may also hold different security types of the same issuer. In
doing so, del Rey Global or its Affiliates will evaluate each security type on the basis of its
individual investment merits. This may result in del Rey Global or its Affiliates taking different
actions for different security types of the same issuer. This could create a conflict of interest
with respect to one security type that could adversely affect clients who are holding another
security type. No Affiliate is under any obligation to share any investment opportunity, idea or
strategy with the Fund. As a result, an Affiliate may compete with the Fund for appropriate
investment opportunities. The results of the Funds investment activities, therefore, may differ
from those of an Affiliate and of other accounts managed by an Affiliate, and it is possible that
the Fund could sustain losses during periods in which one or more Affiliates and other accounts
achieve profits on their trading for proprietary or other accounts. The opposite result is also
possible. In addition, the Fund may, from time to time, enter into transactions in which an
Affiliate or its other clients have an adverse interest. Furthermore, transactions undertaken by
Affiliate-advised clients may adversely impact the Fund. Transactions by one or more
Affiliate-advised clients or del Rey Global may have the effect of diluting or otherwise
disadvantaging the values, prices or investment strategies of the Fund.
16
The activities of Affiliates may give rise to other conflicts of interest that could disadvantage
the Fund and its shareholders. del Rey Global has adopted policies and procedures designed to
address these potential conflicts of interest. See the SAI for further information.
Account Information
Details about the Shares
Institutional Shares
The public offering price of Institutional Shares of the Fund during the subscription period is
$[10.00] per share. You may purchase Institutional Shares only under limited circumstances, at the
offering price, which is the net asset value per share without any up-front sales charge.
Institutional Shares are not subject to sales charges or ongoing service or distribution fees.
Institutional Shares have lower ongoing expenses than the Class A Shares. Institutional Shares
are available for (i) purchases of $1 million or more, (ii) purchases using dividends and capital
gains distributions on Institutional Shares, and (iii) purchase by the following categories of
investors:
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Certain trustees, directors, employees and affiliates of del Rey Global. |
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Certain financial intermediary personnel. |
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Certain bank or broker-affiliated trust departments. |
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Certain employer-sponsored retirement plans |
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Certain additional categories of investors, including certain advisory accounts of del
Rey Global and its affiliates, and qualifying clients of investment advisers, financial
planners, or other financial intermediaries that charge periodic or asset-based fees for
their services. |
[Institutional Shares may not be purchased by omnibus accounts at broker-dealers and other financial
intermediaries.]
Investment Minimums
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Institutional Shares |
Minimum Initial Investment
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$[ ] for institutions and
individuals. |
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Minimum Additional Investment
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No subsequent minimum |
How to Buy Shares
A subscription period for the Funds shares will end on [______], 2010, unless extended.
Subscriptions will be payable, shares will be issued and the Fund will commence operations on the
third business day after the end of the subscription period. The Fund
17
or the Distributor can
terminate the subscription offering at any time, in which case the Fund will not commence
operations or will commence operations with a limited number of shares.
After a Fund commences operations, its shares can be purchased on each business day, which is any
day the New York Stock Exchange (the NYSE) is open for business and normally ends at 4:00 p.m.
New York time. Generally, the NYSE is closed on weekends and national holidays. The share price you
pay depends on when the Fund
receives your order. Orders received before the close of trading on a business day will receive
that days closing share price; otherwise, you will receive the next business days price.
Through Your Financial Professional
You may buy shares through your financial professional, who can handle all the details for you,
including opening a new account. Financial professionals can also help you review your financial
needs and formulate long-term investment goals and objectives. In addition, financial professionals
generally can help you develop a customized financial plan, select investments and monitor and
review your portfolio on an ongoing basis to help assure your investments continue to meet your
needs as circumstances change. Financial professionals (including brokers or agents) are paid for
providing ongoing investment advice and services, either from fund sales charges and fees or by
charging you a separate fee in lieu of a sales charge. If you do not have a financial professional,
call (310) 649-1230 and the Fund can refer you to one in your area.
Financial professionals or other dealer firms may charge their customers a processing or service
fee in connection with the purchase or redemption of the Funds shares. The amount and
applicability of such a fee is determined and disclosed to customers by each individual dealer.
Processing or service fees typically are fixed, nominal dollar amounts and are in addition to the
sales and other charges described in this prospectus and the SAI. Your dealer will provide you with
specific information about any processing or service fees you will be charged.
By Mail
You may open an account and buy shares by mail by completing an application and mailing it along
with your check to: [______]. Applications may be obtained at www.[______].com or by calling
[______]. No third party checks will be accepted.
By Internet
Existing shareholders may process purchase additional shares on-line. You can continue to look up
your account balance, history and dividend information, as well as order duplicate account
statements and tax forms from the Funds website. To access your account, follow the links under
[______] on www.[______].com. The system will walk you through the log-in process. To purchase
shares on-line, you must have established certain privileges on your account prior to the requested
transaction.
By Telephone
Existing shareholders may also process these same mutual fund transactions via our automated
information line. Simply call [______], press 1 for mutual funds and the voice menu will walk you
through the process. To purchase shares via the telephone, you must have established certain
privileges on your account prior to the requested transaction.
How to Sell Shares
You may sell (redeem) your shares on any business day. You will receive the net asset value of
your shares next determined after the Fund has received your properly
18
completed redemption request.
Your redemption request must be received before the close of trading for you to receive that days
price. If you are selling shares purchased recently with a check, you will not receive your
redemption proceeds until your check has cleared. This may take up to ten days from your purchase
date.
Through Your Financial Professional
You may sell your shares through your financial professional, who can prepare the necessary
documentation. Your financial professional may charge for this service.
By Mail
You can sell your shares at any time by sending a written request to the Fund, at [______].
Your request must include the following information:
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The Funds name; |
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Your name and account number; |
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The dollar or share amount you wish to redeem; |
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The signature of each owner exactly as it appears on the account; |
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The name of the person to whom you want your redemption proceeds paid (if other than to
the shareholder of record); |
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The address where you want your redemption proceeds sent (if other than the address of
record); and |
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Any required signature guarantees. |
We will normally mail your check the next business day, but in no event more than seven days after
we receive your request. If you purchased your shares by check, your redemption proceeds will not
be mailed until your check has cleared. Guaranteed signatures are required if you are redeeming
more than $50,000, you want the check payable to someone other than the shareholder of record or
you want the check sent to another address (or the address of record has been changed within the
last 30 days). Signature guarantees must be obtained from a bank, brokerage firm or other financial
intermediary that is a member of an approved Medallion Guarantee Program or that a fund otherwise
approves. A notary public cannot provide a signature guarantee.
By Internet
You may redeem shares on-line. To access your account, follow the links under [______] on
www.[______].com. The system will walk you through the log-in process. On-line redemptions are
not available for shares owned in certificate form and, with respect to redemptions where the
proceeds are payable by check, may not exceed $[50,000]. Checks will only be issued to you as the
shareholder of record and mailed to your address of record. If you have established certain
privileges, you may have redemption proceeds transferred electronically to your bank account.
By Telephone
If you have authorized telephone redemption privileges, call [______] to redeem your shares.
Telephone redemptions are not available for shares owned in certificate form and, with respect to
redemptions where the proceeds are payable by check, may not exceed $[50,000]. Checks will only be
issued to you as the shareholder of record and mailed to your address of record. If you have
established certain account privileges, you may have redemption proceeds transferred electronically
to your bank account. We will normally mail your check the next business day.
Redemptions In-Kind
The Fund generally pays redemption proceeds in cash. Under unusual conditions that make cash
payment unwise and for the protection of existing shareholders, the Fund may pay all or a portion
of your redemption proceeds in securities or other Fund assets. Although it is unlikely that your
shares would be redeemed in-kind, you would probably
19
have to pay brokerage costs to sell the
securities distributed to you, as well as taxes on any capital gains from that sale.
[Redemption Fee Policy
The Fund charges a 2% redemption fee on the proceeds of shares redeemed or exchanged within 30 days
of acquisition. Investors making purchases into the Fund through a systematic investment plan will
need to discontinue that plan at least 30 days before redeeming in full in order to avoid the
redemption fee on recently purchased shares. The redemption fee is intended to offset the trading
costs and the Funds
operating expenses associated with frequent trading. The Fund may waive the redemption fee on share
redemptions or exchanges by shareholders investing through qualified retirement plans such as
401(k) plans only if the plan sponsor or administrator certifies that the plan does not have the
operational capability to assess the fee.
The Fund also may waive the redemption fee on redemptions or exchanges by shareholders investing
through the fee-based platforms of certain financial intermediaries (where the intermediary charges
an asset-based or comprehensive wrap fee for its services) in instances where the Fund reasonably
believes either that the intermediary has internal policies and procedures in place to effectively
discourage inappropriate trading activity or that the redemptions were effected for reasons other
than the desire to profit from short-term trading in fund shares.
The Fund may waive the redemption fee in other specified circumstances reasonably determined by the
Fund not to relate to inappropriate trading activity, and reserve the right to modify or eliminate
redemption fee waivers at any time. For additional information, see Frequent Trading Policy in
this prospectus.]
Involuntary Redemption
From time to time, the Fund may establish minimum account size requirements. The Fund reserves the
right to liquidate your account upon 30 days written notice if the value of your account falls
below an established minimum. The Fund has set a minimum balance of
$[ ].
Dividend Reinvestment
Unless you instruct the Fund to pay you dividends in cash, dividends and distributions paid by the
Fund will be reinvested in additional shares of the Fund.
Distribution and Service Payments
[______], the Distributor, serves as the selling agent and distributor of the Funds
shares. In this capacity, the Distributor manages the offering of the Funds shares and is
responsible for all sales and promotional activities.
[Shareholder Servicing Plan
The Funds Shareholder Servicing Plan permits the Institutional Shares of the Fund to pay banks,
broker-dealers or other financial institutions for shareholder support services they provide, at a
rate of [0.25]% of its average daily net assets. These services may include, among other services,
providing general shareholder liaison services (including responding to shareholder inquiries),
providing information on shareholder investments, and establishing and maintaining shareholder
accounts and records. Pursuant to a Shareholder Services Agreement between the Fund, on behalf of
the Institutional Shares, and the [Distributor] has agreed to provide shareholder services to the
Institutional Shares pursuant to the Shareholder Servicing Plan. ]
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Other Payments to Financial Intermediaries
The Distributor may from time to time make additional payments, out of its own resources, to
certain financial intermediaries that sell shares of the Fund in order to promote the sales and
retention of the Funds shares by those firms and their customers. The amounts of these payments
vary by financial intermediary and, with respect to a given firm, are typically calculated by
reference to the amount of the firms recent gross sales of the Funds shares and/or total assets
of the Fund held by the firms customers. The level of payments that the Distributor is willing to
provide to a particular financial intermediary may be affected by, among other factors, the firms
total assets held in and recent net investments into the Fund, the firms level of
participation in sales and marketing programs, the firms compensation program for its registered
representatives who sell the Funds shares and provide services to the Funds shareholders, and the
asset class of the Fund for which these payments are provided. The SAI contains additional
information about these payments, including the names of the firms to which payments are made. The
Distributor may also make payments to financial intermediaries in connection with sales meetings,
due diligence meetings, prospecting seminars and other meetings at which the Distributor promotes
its products and services.
In connection with the availability of the Fund within selected mutual fund no-transaction fee
institutional platforms and fee-based wrap programs (together, Platform Programs) at certain
financial intermediaries, the Distributor also makes payments out of its own assets to those firms
as compensation for certain recordkeeping, shareholder communications and other account
administration services provided to the Funds shareholders who own their shares in these Platform
Programs.
Frequent Trading Policy
The Fund is intended for long-term investment and should not be used for excessive trading.
Excessive trading in the Funds shares can disrupt portfolio management, lead to higher operating
costs, and cause other operating inefficiencies for the Fund. However, the Fund is also mindful
that shareholders may have valid reasons for periodically purchasing and redeeming fund shares.
Accordingly, the Board has adopted a Frequent Trading Policy that seeks to balance the Funds need
to prevent excessive trading in its shares while offering investors the flexibility in managing
their financial affairs to make periodic purchases and redemptions of shares.
The Funds Frequent Trading Policy generally limits an investor to four round trip trades in a
12-month period. A round trip is the purchase and subsequent redemption of the Funds shares.
Each side of a round trip may be comprised of either a single transaction or a series of
closely-spaced transactions. The Fund may also suspend the trading privileges of any investor who
makes a round trip within a 30-day period if the purchase and redemption are of substantially
similar dollar amounts and represent at least 25% of the value of the investors account.
[The Fund primarily receives share purchase and redemption orders through third-party financial
intermediaries, some of whom rely on the use of omnibus accounts. An intermediarys account
typically includes multiple investors and provides the Fund only with a net purchase or redemption
amount on any given day where multiple purchases, redemptions and exchanges of shares occur in the
account. The identity of individual purchasers, redeemers and exchangers whose orders are
aggregated in omnibus accounts, and the size of their orders, will generally not be known by the
Fund. Despite the Funds efforts to detect and prevent frequent trading, the Fund may be unable to
identify frequent trading because the netting effect in omnibus accounts often makes it more
difficult to identify frequent traders. The Distributor has entered into agreements
21
with financial
intermediaries that maintain omnibus accounts with the Funds transfer agent. Under the terms of
these agreements, the financial intermediaries undertake to cooperate with the Distributor in
monitoring purchase, exchange and redemption orders by their customers in order to detect and
prevent frequent trading in the Fund through such accounts. Technical limitations in operational
systems at such intermediaries or at the Distributor may also limit the Funds ability to detect
and prevent frequent trading. In addition, the Fund may permit certain financial intermediaries,
including broker-dealer and retirement plan administrators, among others, to enforce their own
internal policies and procedures concerning frequent trading. Such policies may differ from the
Funds Frequent Trading Policy and may be
approved for use in instances where the Fund reasonably believes that the intermediarys policies
and procedures effectively discourage inappropriate trading activity. Shareholders holding their
accounts with such intermediaries may wish to contact the intermediary for information regarding
its frequent trading policy. Although the Fund does not knowingly permit frequent trading, they
cannot guarantee that they will be able to identify and restrict all
frequent trading activity.]
The Fund reserves the right in its sole discretion to waive unintentional or minor violations
(including transactions below certain dollar thresholds) if they determine that doing so would not
harm the interests of Funds other shareholders. In addition, certain categories of redemptions
may be excluded from the application of the Frequent Trading Policy, as described in more detail in
the SAI. These include, among others, redemptions pursuant to systematic withdrawal plans,
redemptions in connection with the total disability or death of the investor, involuntary
redemptions by operation of law, redemptions in payment of account or plan fees, and certain
redemptions by retirement plans, including redemptions in connection with qualifying loans or
hardship withdrawals, termination of plan participation, return of excess contributions, and
required minimum distributions. The Fund may also modify or suspend the Frequent Trading Policy
without notice during periods of market stress or other unusual circumstances.
The Fund reserves the right to impose restrictions on purchases or exchanges that are more
restrictive than those stated above if they determine, in their sole discretion, that a transaction
or a series of transactions involves market timing or excessive trading that may be detrimental to
fund shareholders. The Fund also reserves the right to reject any purchase order, including
exchange purchases, for any reason. For example, the Fund may refuse purchase orders if the Fund
would be unable to invest the proceeds from the purchase order in accordance with the Funds
investment policies and/or objectives, or if the Fund would be adversely affected by the size of
the transaction, the frequency of trading in the account or various other factors. For more
information about the Funds Frequent Trading Policy and its enforcement, see the SAI.
Valuation of Fund Investments
When you buy shares, you pay the net asset value, plus any applicable sales charge. This is
the offering price. Shares are also redeemed at their net asset value, minus any applicable
deferred sales charge. The Fund calculates the net asset value of each class of its shares
(generally by using market quotations) each day the NYSE is open as of the close of business on the
NYSE, based on prices at the time of closing. The NYSE generally closes at 4:00 p.m. (Eastern
time). The net asset value used in determining your share price is the next one calculated after
your purchase or redemption order is placed.
The Funds assets and liabilities are valued primarily on the basis of market quotations. Equity
investments are valued at market value, which is generally determined using the
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last reported sale
price on the exchange or market on which the security is primarily traded at the time of valuation.
The Fund values fixed income portfolio securities using market prices provided directly from one or
more broker-dealers, market makers, or independent third-party pricing services which may use
matrix pricing and valuation models to derive values, each in accordance with valuation procedures
approved by the Funds Board. Certain short-term debt securities are valued on the basis of
amortized cost. For foreign securities, these securities may trade on weekends or other days when
the Fund does not price its shares. As a result, the Funds net asset value may change on days when
you will not be able to purchase or redeem the Funds shares. In
addition, foreign currency exchange rates are generally determined as of the close of business on
the NYSE.
Generally, trading in foreign securities, U.S. government securities and money market instruments
and certain fixed income securities is substantially completed each day at various times prior to
the close of business on the NYSE. The values of such securities used in computing the net asset
value of the Funds shares are determined as of such times.
When market quotations are not readily available or are not believed by del Rey Global to be
reliable, the Funds investments are valued at fair value. Fair value determinations are made by
del Rey Global in accordance with procedures approved by the Board. del Rey Global may conclude
that a market quotation is not readily available or is unreliable if a security or other asset or
liability does not have a price source due to its lack of liquidity, if del Rey Global believes a
market quotation from a broker-dealer or other source is unreliable, where the security or other
asset or liability is thinly traded (e.g., municipal securities and certain non-U.S. securities) or
where there is a significant event subsequent to the most recent market quotation. For this
purpose, a significant event is deemed to occur if del Rey Global determines, in its business
judgment prior to or at the time of pricing the Funds assets or liabilities, that it is likely
that the event will cause a material change to the last closing market price of one or more assets
or liabilities held by the Fund. Foreign securities whose values are affected by volatility that
occurs in U.S. markets on a trading day after the close of foreign securities markets may be fair
valued.
Fair value represents a good faith approximation of the value of a security. The fair value of one
or more securities may not, in retrospect, be the price at which those assets could have been sold
during the period in which the particular fair values were used in determining the Funds net asset
value.
The Fund may accept orders from certain authorized financial intermediaries or their designees. The
Fund will be deemed to receive an order when accepted by the intermediary or designee and the order
will receive the net asset value next computed by the Fund after such acceptance. If the payment
for a purchase order is not made by a designated later time, the order will be canceled and the
financial intermediary could be held liable for any losses.
Dividends, Distributions and Taxes
The following discussion is very general and does not address investors subject to special
rules, such as investors who hold shares in the Fund through an IRA, 401(k) or other tax-advantaged
account. Because each shareholders circumstances are different and special tax rules may apply,
you should consult your tax adviser about your investment in the Fund. In general, unless your
shares are held in a qualified retirement plan, IRA or other tax deferred arrangement, redeeming
shares, exchanging shares and receiving dividends and distributions (whether in cash or additional
shares) are all taxable events.
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The Fund will distribute net investment income, if any, and net realized capital gain, if any, at
least annually. The Fund may also pay a special distribution at the end of the calendar year to
comply with Federal tax requirements. Dividends may be reinvested automatically in shares of the
Fund at net asset value without a sales charge or may be taken in cash. If you would like to
receive dividends in cash, contact your financial professional, financial intermediary or the Fund.
Although this cannot be predicted with any certainty, the Fund anticipates that the majority of its
dividends, if any, will consist of capital gains.
You will pay tax on dividends from the Fund whether you receive them in cash or additional shares.
If you redeem Fund shares or exchange them for shares of another fund, you generally will be
treated as having sold your shares and any gain on the transaction may be subject to tax. Certain
dividend income received by the Fund during the taxable years beginning before January 1, 2011,
including dividends received from qualifying foreign corporations, and long-term capital gains are
eligible for taxation at a reduced rate that applies to non-corporate shareholders. To the extent
the Fund makes any distributions derived from long-term capital gains and qualifying dividend
income, such distributions will be eligible for taxation at the reduced rate.
Recently enacted legislation will impose a 3.8% Medicare contribution tax on the net investment
income (which includes taxable dividends and redemption proceeds) of certain individuals, trusts
and estates, for taxable years beginning after December 31, 2012.
If you are neither a lawful permanent resident nor a citizen of the United States or if you are a
foreign entity, the Funds ordinary income dividends (which include distributions of net short-term
capital gain) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate
applies.
Recently enacted legislation will impose a 30% withholding tax on dividends and redemption proceeds
paid after December 31, 2012, to (i) foreign financial institutions (as defined in Section
1471(d)(4) of the Code) unless they agree to collect and disclose to the IRS information regarding
their direct and indirect United States account holders and (ii) certain other foreign entities
unless they certify certain information regarding their direct and indirect United States owners.
Under some circumstances, a foreign shareholder may be eligible for refunds or credits of such
taxes.
Dividends or other income (including, in some cases, capital gains) received by the Fund from
investments in foreign securities may be subject to withholding and other taxes imposed by foreign
countries. Tax conventions between certain countries and the United States may reduce or eliminate
such taxes in some cases. If more than 50% of the Funds total assets at the close of its taxable
year consists of stock or securities of foreign corporations, the Fund may elect for U.S. income
tax purposes to treat foreign income taxes paid by it as paid by its shareholders. The Fund may
qualify for and make this election in some, but not necessarily all, of its taxable years. If the
Fund were to make an election, shareholders of the Fund would be required to take into account an
amount equal to their pro rata portions of such foreign taxes in computing their taxable income and
then treat an amount equal to those foreign taxes as a U.S. Federal income tax deduction or as a
foreign tax credit against their U.S. Federal income taxes. Shortly after any year for which it
makes such an election, the Fund will report to its shareholders the amount per share of such
foreign income tax that must be included in each shareholders gross income and the amount which
will be available for the deduction or credit. No deduction for foreign taxes may be claimed by a
shareholder who does not itemize deductions. Certain limitations will be imposed on the extent to
which the credit (but not the deduction) for foreign taxes may be claimed. Foreign taxes paid by
the Fund will reduce the return from the Funds investments.
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Distributions attributable to short-term capital gains are treated as dividends, taxable as
ordinary income, currently taxed at a maximum rate of 35%. Taxable dividends and long-term capital
gain distributions are taxable whether received in cash or reinvested in Fund shares. Although
dividends (including dividends from short-term capital gains) are generally taxable as ordinary
income, for taxable years beginning before January 1, 2011, individual shareholders who satisfy
certain holding period and other requirements are taxed on such dividends at long-term capital gain
rates to the extent the dividends are attributable to qualified dividend income received by the
Fund. Qualified dividend income generally consists of dividends received from U.S. corporations (other
than certain dividends from real estate investment trusts and regulated investment companies) and
certain foreign corporations. Long-term capital gain distributions are taxable to you as long-term
capital gain regardless of how long you have owned your shares. You may want to avoid buying shares
when the Fund is about to declare a long-term capital gain distribution or dividend because it will
be taxable to you even though it may actually be a return of a portion of your investment.
For taxable years beginning on or after January 1, 2011, the long-term capital gain rate is
scheduled to return to 20% (10% for taxpayers in the 15% tax bracket).
A dividend declared by the Fund in October, November, or December and paid during January of the
following year will, in certain circumstances, be treated as paid in December for tax purposes.
By law, your dividends and redemption proceeds will be subject to a withholding tax if you have not
provided a taxpayer identification number or social security number or the number you have provided
is incorrect.
This Section summarizes some of the consequences under current Federal tax law of an investment in
the Fund. It is not a substitute for personal tax advice. Consult your personal tax adviser about
the potential tax consequences of an investment in the Fund under all applicable tax laws.
Financial Highlights
The Fund has not yet commenced operations so there is no financial or performance information
for the Fund included in this Prospectus. Please note that certain financial information about the
Fund is included under the caption Financial Statements in the SAI.
General Information
Shareholder Documents
[Electronic Access to Annual Reports, Semi-Annual Reports and Prospectuses
Electronic copies of most financial reports and prospectuses are available on the Funds website.
Shareholders can sign up for e-mail notifications of quarterly statements, annual and semi-annual
reports and prospectuses by enrolling in the Funds electronic delivery program. ]
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To enroll:
Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages: Please contact your
financial professional. Please note that not all investment advisers, banks or brokerages may offer
this service.
Shareholders Who Hold Accounts Directly With del Rey Global: Access the Funds website at
[______]
Log into your account
Delivery of Shareholder Documents
The Fund delivers only one copy of shareholder documents, including prospectuses, shareholder
reports and proxy statements, to shareholders with multiple accounts at the same address. This
practice is known as householding and is intended to eliminate duplicate mailings and reduce
expenses. Mailings of your shareholder documents may be householded indefinitely unless you
instruct us otherwise. If you do not want the mailing of these documents to be combined with those
for other members of your household, please contact the Fund at [______].
Certain Fund Policies
Anti-Money Laundering Requirements
The Fund is subject to the USA PATRIOT Act (the Patriot Act). The Patriot Act is intended to
prevent the use of the U.S. financial system in furtherance of money laundering, terrorism or other
illicit activities. Pursuant to requirements under the Patriot Act, the Fund may request
information from shareholders to enable it to form a reasonable belief that it knows the true
identity of its shareholders. This information will be used to verify the identity of investors or,
in some cases, the status of financial professionals; it will be used only for compliance with the
requirements of the Patriot Act.
The Fund reserves the right to reject purchase orders from persons who have not submitted
information sufficient to allow the Fund to verify their identity. The Fund also reserves the right
to redeem any amounts in the Fund from persons whose identity it is unable to verify on a timely
basis. It is the Funds policy to cooperate fully with appropriate regulators in any investigations
conducted with respect to potential money laundering, terrorism or other illicit activities.
Privacy Principles
Your privacy is very important to the Fund and del Rey Global. You provide the Fund and del Rey
Global with non-public personal information, such as your address, social security number, assets
and/or income information: (i) in related account opening documentation; (ii) in correspondence and
conversations with del Rey Global; and (iii) through transactions involving your account. Neither
the Fund nor del Rey Global will sell your non-public personal information to anyone. Nor will
they disclose any non-public personal information about its investors to anyone, other than to:
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Affiliates for proper business purposes in connection with the provision of management
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Non-affiliated third parties (such as brokers, custodians, attorneys, auditors and
administrators) as necessary for the Fund and del Rey Global to provide agreed upon
services and products to the Fund consistent with applicable law. Such entities are not
allowed to use your non-public personal information for their own purposes and are
contractually obligated to maintain strict confidentiality. |
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The Fund and del Rey Global
will limit those entities use of your non-public personal information to the performance
of the specific services requested; and |
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You, persons believed to be your authorized agent or representative, and, if compelled
to do so, regulators and courts in order to satisfy regulatory and other obligations to
such entities in accordance with applicable law. |
The Fund and del Rey Global seek to carefully safeguard your private information and, to that end,
restrict access to non-public personal information about you to those employees and other persons
who need to know the information to enable the Fund and del Rey Global to provide services to you.
The Fund and del Rey Global maintain
physical, electronic and procedural safeguards to protect your non-public personal information.
Statement of Additional Information
If you would like further information about the Fund, including how it invests, please see the
Statement of Additional Information.
For More Information
Fund and Service Providers
FUND
del Rey Global Investors Funds
del Rey International Value Fund
6701 Center Drive West, Suite 655
Los Angeles, CA 90045
Written Correspondence:
[ADDRESS, IF DIFFERENT]
[FUND PHONE NUMBER]
INVESTMENT MANAGER
del Rey Global Investors, LLC
6701 Center Drive West, Suite 655
Los Angeles, CA 90045
TRANSFER AGENT AND CUSTODIAN
[______]
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[______]
ADMINISTRATOR
[______]
DISTRIBUTOR
[______]
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COUNSEL
Willkie Farr & Gallagher LLP
787 Seventh Avenue
New York, New York 10019
Additional Information
This prospectus contains important information you should know before investing, including
information about risks. Read it carefully and keep it for future reference.
More information about the Fund is available at no charge upon request. This information includes:
Annual/Semi-Annual Reports
These reports contain additional information about each of the Funds investments. The annual
report describes the Funds performance, lists portfolio holdings, and discusses recent market
conditions, economic trends and Fund investment strategies that significantly affected the Funds
performance for the last fiscal year.
Statement of Additional Information
A Statement of Additional Information, dated [______], 2010, has been filed with the Securities
and Exchange Commission (SEC). The SAI, which includes additional information about the Fund, may
be obtained free of charge, along with the Funds annual and semi-annual reports, by calling
[______]. The SAI, as supplemented from time to time, is incorporated by reference into this
prospectus.
The SAI and other information are available from a financial intermediary (such as a broker-dealer
or bank) through which the Funds shares may be purchased or sold.
TO OBTAIN OTHER INFORMATION AND FOR SHAREHOLDER INQUIRIES:
BY TELEPHONE
Call [______]
BY MAIL
[ADDRESS]
ON THE INTERNET
General fund information and specific fund performance, including the prospectus, SAI and
annual/semi-annual reports, can be accessed free of charge at [______].
Portfolio Characteristics and Holdings
A description of the Funds policies and procedures related to disclosure of portfolio
characteristics and holdings is available in the SAI.
For information about portfolio holdings and characteristics, shareholders and prospective
investors may call [______].
Securities and Exchange Commission
You may also view and copy public information about the Fund, including the SAI, by visiting the
EDGAR database on the SEC website (http://www.sec.gov) or the SECs Public Reference Room in
Washington, D.C. Information about the operation of the
28
Public Reference Room can be obtained by
calling the SEC directly at (202) 551-8090. Copies of this information can be obtained, for a
duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by
writing to the Public Reference Room of the SEC, Washington, D.C. 20549-1520.
You should rely only on the information contained in this prospectus. No one is authorized to
provide you with information that is different from information contained in this prospectus.
The Securities and Exchange Commission has not approved or disapproved these securities or passed
upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
INVESTMENT COMPANY ACT FILE #
© del Rey Global Investors, LLC
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STATEMENT OF ADDITIONAL INFORMATION
del Rey Global Investors Funds
del Rey International Value Fund
6701 Center Drive West, Suite 655, Los Angeles, CA 90045
Phone No. (310) 649-1230
This Statement of Additional Information of del Rey International Value Fund (the Fund)
is not a prospectus and should be read in conjunction with the Prospectus of the Fund, dated
[ ], 2010, which has been filed with the Securities and Exchange Commission (the
Commission) and can be obtained, without charge, by calling [ ] or by writing to the Fund
at the above address. The Funds Prospectus is incorporated by reference into this Statement of
Additional Information, and this Statement of Additional Information has been incorporated by
reference into the Funds Prospectus.
References to the Investment Company Act of 1940, as amended (the Investment Company Act or
the 1940 Act), or other applicable law, will include interpretations or modifications by the
Commission, Commission staff or other authority with appropriate jurisdiction, including court
interpretations, and exemptive or other relief or permission from the Commission, Commission staff
or other authority.
del Rey Global Investors, LLC Investment Manager
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Institutional Shares |
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The date of this Statement of Additional Information is [ ], 2010
INFORMATION ABOUT DEL REY INTERNATIONAL VALUE FUND
Organization of the Fund
The Fund was formed on June 18, 2010 as a Delaware Trust. The Fund is classified as a
diversified open-end investment company as defined under the Investment Company Act.
Additional Information on Investment Strategies of the Fund
The Funds investment objective is to seek long-term capital appreciation.
Set out below are descriptions of some of the types of investments and investment strategies
that the Fund may use to seek its investment objective, and the risks and considerations associated
with those investments and investment strategies. Please see the Funds Prospectus and Investment
Restrictions below for further information on the Funds investment policies and risks.
Borrowing and Leverage. The Fund may borrow as a temporary measure for extraordinary or
emergency purposes, including to meet redemptions or to settle securities transactions. The
purchase of securities while borrowings are outstanding will have the effect of leveraging the
Fund. Such leveraging increases the Funds exposure to capital risk, and borrowed funds are subject
to interest costs that will reduce net income. Leveraging may exaggerate changes in the net asset
value of Fund shares and in the yield on the Funds portfolio. Although the principal of such
borrowings will be fixed, the Funds assets may change in value during the time the borrowings are
outstanding. Borrowings will create interest expenses for the Fund that can exceed the income from
the assets purchased with the borrowings.
Certain types of borrowings by the Fund may result in the Fund being subject to covenants in
credit agreements relating to asset coverage, portfolio composition requirements and other matters.
It is not anticipated that observance of such covenants would impede the Manager from managing the
Funds portfolio in accordance with the Funds investment objectives and policies. However, a
breach of any such covenants not cured within the specified cure period may result in acceleration
of outstanding indebtedness and require the Fund to dispose of portfolio investments at a time when
it may be disadvantageous to do so.
Cash Flows; Expenses. The ability of the Fund to satisfy its investment objective depends to
some extent on the Managers ability to manage cash flow (primarily from purchases and redemptions
and distributions from the Funds investments). The Manager will make investment changes to the
Funds portfolio to accommodate cash flow while continuing to seek its investment objective.
Cash Management. Generally, the Manager may employ futures and options on futures to provide
liquidity necessary to meet anticipated redemptions or for day-to-day operating purposes. However,
if considered appropriate in the opinion of the Manager, a portion of the Funds assets may be
invested in certain types of instruments with remaining maturities of 397 days or less for
liquidity purposes. Such instruments would consist of: (i) obligations of the U.S. Government, its
agencies, instrumentalities, authorities or political subdivisions (U.S. Government Securities);
(ii) other fixed-income securities rated Aa or higher by Moodys or AA or higher by S&P or, if
unrated, of comparable quality in the opinion of the Manager; (iii) commercial paper; (iv) bank
obligations, including negotiable certificates of deposit, time deposits and bankers acceptances;
and (v) repurchase agreements. At the time the Fund invests in commercial paper, bank obligations
or repurchase agreements, the issuer
- 3 -
or the issuers parent must have outstanding debt rated Aa or higher by Moodys or AA or higher by
S&P or outstanding commercial paper, bank obligations or other short-term obligations rated Prime-1
by Moodys or A-1 by S&P; or, if no such ratings are available, the instrument must be of
comparable quality in the opinion of the Manager.
Convertible Securities. A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed amount of common stock or
other equity security of the same or a different issuer within a particular period of time at a
specified price or formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible security matures or
is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics
similar to nonconvertible income securities in that they ordinarily provide a stable stream of
income with generally higher yields than those of common stocks of the same or similar issuers, but
lower yields than comparable nonconvertible securities. The value of a convertible security is
influenced by changes in interest rates, with investment value declining as interest rates increase
and increasing as interest rates decline. The credit standing of the issuer and other factors also
may have an effect on the convertible securitys investment value. Convertible securities rank
senior to common stock in a corporations capital structure but are usually subordinated to
comparable nonconvertible securities. Convertible securities may be subject to redemption at the
option of the issuer at a price established in the convertible securitys governing instrument.
The characteristics of convertible securities make them potentially attractive investments for
an investment company seeking a high total return from capital appreciation and investment income.
These characteristics include the potential for capital appreciation as the value of the underlying
common stock increases, the relatively high yield received from dividend or interest payments as
compared to common stock dividends and decreased risks of decline in value relative to the
underlying common stock due to their fixed income nature. As a result of the conversion feature,
however, the interest rate or dividend preference on a convertible security is generally less than
would be the case if the securities were issued in nonconvertible form.
In analyzing convertible securities, the Manager will consider both the yield on the
convertible security relative to its credit quality and the potential capital appreciation that is
offered by the underlying common stock, among other things.
Convertible securities are issued and traded in a number of securities markets. Even in cases
where a substantial portion of the convertible securities held by the Fund are denominated in U.S.
dollars, the underlying equity securities may be quoted in the currency of the country where the
issuer is domiciled. As a result, fluctuations in the exchange rate between the currency in which
the debt security is denominated and the currency in which the share price is quoted will affect
the value of the convertible security. With respect to convertible securities denominated in a
currency different from that of the underlying equity securities, the conversion price may be based
on a fixed exchange rate established at the time the security is issued, which may increase the
effects of currency risk. As described below, the Fund is authorized to enter into foreign currency
hedging transactions in which it may seek to reduce the effect of exchange rate fluctuations.
Apart from currency considerations, the value of convertible securities is influenced by both
the yield on nonconvertible securities of comparable issuers and by the value of the underlying
common stock. The value of a convertible security viewed without regard to its conversion feature
(i.e., strictly on the basis of its yield) is sometimes referred to as its investment value. To
the extent interest rates change, the investment value of the convertible security typically will
fluctuate. At the same time, however, the value of the convertible security will be influenced by
its conversion value, which is the market value of the underlying
- 4 -
common stock that would be obtained if the convertible security were converted. Conversion value
fluctuates directly with the price of the underlying common stock. If the conversion value of a
convertible security is substantially below its investment value, the price of the convertible
security is governed principally by its investment value. To the extent the conversion value of a
convertible security increases to a point that approximates or exceeds its investment value, the
price of the convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the extent investors place
value on the right to acquire the underlying common stock while holding a fixed income security.
The yield and conversion premium of convertible securities issued in Japan and the Euromarket are
frequently determined at levels that cause the conversion value to affect their market value more
than the securities investment value.
Holders of convertible securities generally have a claim on the assets of the issuer prior to
the common stockholders but may be subordinated to other debt securities of the same issuer. A
convertible security may be subject to redemption at the option of the issuer at a price
established in a charter provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Fund is called for
redemption, the Fund will be required to redeem the security, convert it into the underlying common
stock or sell it to a third party. Certain convertible debt securities may provide a put option to
the holder, which entitles the holder to cause the security to be redeemed by the issuer at a
premium over the stated principal amount of the debt security under certain circumstances.
The Fund may also invest in synthetic convertible securities. Synthetic convertible securities
may include either Cash-Settled Convertibles or Manufactured Convertibles. Cash-Settled
Convertibles are instruments that are created by the issuer and have the economic characteristics
of traditional convertible securities but may not actually permit conversion into the underlying
equity securities in all circumstances. As an example, a private company may issue a Cash-Settled
Convertible that is convertible into common stock only if the company successfully completes a
public offering of its common stock prior to maturity and otherwise pays a cash amount to reflect
any equity appreciation. Manufactured Convertibles are created by the Manager or another party by
combining separate securities that possess one of the two principal characteristics of a
convertible security, i.e., fixed income (fixed income component) or a right to acquire equity
securities (convertibility component). The fixed income component is achieved by investing in
nonconvertible fixed income securities, such as nonconvertible bonds, preferred stocks and money
market instruments. The convertibility component is achieved by investing in call options,
warrants, or other securities with equity conversion features (equity features) granting the
holder the right to purchase a specified quantity of the underlying stocks within a specified
period of time at a specified price or, in the case of a stock index option, the right to receive a
cash payment based on the value of the underlying stock index.
A Manufactured Convertible differs from traditional convertible securities in several
respects. Unlike a traditional convertible security, which is a single security that has a unitary
market value, a Manufactured Convertible is comprised of two or more separate securities, each with
its own market value. Therefore, the total market value of such a Manufactured Convertible is the
sum of the values of its fixed income component and its convertibility component.
More flexibility is possible in the creation of a Manufactured Convertible than in the
purchase of a traditional convertible security. Because many corporations have not issued
convertible securities, the Manager may combine a fixed income instrument and an equity feature
with respect to the stock of the issuer of the fixed income instrument to create a synthetic
convertible security otherwise unavailable in the market. The Manager may also combine a fixed
income instrument of an issuer with an equity feature with respect to the stock
- 5 -
of a different issuer when the Manager believes such a Manufactured Convertible would better
promote the Funds objective than alternative investments. For example, the Manager may combine an
equity feature with respect to an issuers stock with a fixed income security of a different issuer
in the same industry to diversify the Funds credit exposure, or with a U.S. Treasury instrument to
create a Manufactured Convertible with a higher credit profile than a traditional convertible
security issued by that issuer. A Manufactured Convertible also is a more flexible investment in
that its two components may be purchased separately and, upon purchasing the separate securities,
combined to create a Manufactured Convertible. For example, the Fund may purchase a warrant for
eventual inclusion in a Manufactured Convertible while postponing the purchase of a suitable bond
to pair with the warrant pending development of more favorable market conditions.
The value of a Manufactured Convertible may respond to certain market fluctuations differently
from a traditional convertible security with similar characteristics. For example, in the event the
Fund created a Manufactured Convertible by combining a short-term U.S. Treasury instrument and a
call option on a stock, the Manufactured Convertible would be expected to outperform a traditional
convertible of similar maturity that is convertible into that stock during periods when Treasury
instruments outperform corporate fixed income securities and underperform during periods when
corporate fixed income securities outperform Treasury instruments.
Depositary Receipts (ADRs, EDRs and GDRs). The Fund may invest in the securities of foreign
issuers in the form of Depositary Receipts or other securities convertible into securities of
foreign issuers. Depositary Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. The Fund may invest in both sponsored and
unsponsored American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) and other similar global instruments. ADRs typically are issued by an
American bank or trust company and evidence ownership of underlying securities issued by a foreign
corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts, are receipts
issued in Europe, typically by foreign banks and trust companies, that evidence ownership of either
foreign or domestic underlying securities. GDRs are depositary receipts structured like global debt
issues to facilitate trading on an international basis. Unsponsored ADR, EDR and GDR programs are
organized independently and without the cooperation of the issuer of the underlying securities. As
a result, available information concerning the issuer may not be as current as for sponsored ADRs,
EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such
instruments were sponsored by the issuer. Depositary Receipts are generally subject to the same
risks as the foreign securities that they evidence or into which they may be converted. Investments
in ADRs, EDRs and GDRs present additional investment considerations as described under Foreign
Investment Risks.
Derivatives. The Fund may use instruments referred to as derivative securities. Derivatives
are financial instruments the value of which is derived from another security, a commodity (such as
gold or oil), a currency or an index (a measure of value or rates, such as the S&P 500 Index or the
prime lending rate). The Fund may use derivatives for hedging purposes. The Fund may not use any
derivative to gain exposure to an asset or class of assets that it would be prohibited by its
investment restrictions from purchasing directly.
Hedging. Hedging is a strategy in which a derivative is used to offset the risks associated
with other Fund holdings. Losses on the other investment may be substantially reduced by gains on a
derivative that reacts in an opposite manner to market movements. While hedging can reduce losses,
it can also reduce or eliminate gains or cause losses if the market moves in a manner different
from that anticipated by the Fund or if the cost of the derivative outweighs the benefit of the
hedge. Hedging also involves correlation risk, i.e. the risk that changes in the value of the
derivative will not match those of the holdings being hedged as
- 6 -
expected by the Fund, in which case any losses on the holdings being hedged may not be reduced or
may be increased. The inability to close options and futures positions also could have an adverse
impact on the Funds ability to hedge effectively its portfolio. There is also a risk of loss by
the Fund of margin deposits or collateral in the event of bankruptcy of a broker with whom the Fund
has an open position in an option, a futures contract or a related option. There can be no
assurance that the Funds hedging strategies will be effective. The Fund is not required to engage
in hedging transactions and the Fund may choose not to do so.
The Fund may use derivative instruments and trading strategies for hedging purposes, including
the following:
Options on Securities and Securities Indices. The Fund may engage in transactions in options
on individual securities, baskets of securities or securities indices, or particular measurements
of value or rates (an index), such as an index of the price of treasury securities or an index
representative of short-term interest rates. Such investments may be made on exchanges and in the
over-the-counter (OTC) markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against their obligations, and
the performance of the parties obligations in connection with such options is guaranteed by the
exchange or a related clearing corporation. OTC options have more flexible terms negotiated between
the buyer and the seller, but generally do not require the parties to post margin and are subject
to greater credit risk. OTC options also involve greater liquidity risk. See Additional Risk
Factors of OTC Transactions; Limitations on the Use of OTC Derivatives below.
Call Options. The Fund may purchase call options on any of the types of securities or
instruments in which it may invest. A purchased call option gives the Fund the right to buy,
and obligates the seller to sell, the underlying security at the exercise price at any time
during the option period. The Fund also may purchase and sell call options on indices.
Index options are similar to options on securities except that, rather than taking or making
delivery of securities underlying the option at a specified price upon exercise, an index
option gives the holder the right to receive cash upon exercise of the option if the level
of the index upon which the option is based is greater than the exercise price of the
option.
The Fund also is authorized to write (i.e., sell) covered call options on the
securities or instruments in which it may invest and to enter into closing purchase
transactions with respect to certain of such options. A covered call option is an option in
which the Fund, in return for a premium, gives another party a right to buy specified
securities owned by the Fund at a specified future date and price set at the time of the
contract. The principal reason for writing call options is the attempt to realize, through
the receipt of premiums, a greater return than would be realized on the securities alone. By
writing covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the option
exercise price. In addition, the Funds ability to sell the underlying security will be
limited while the option is in effect unless the Fund enters into a closing purchase
transaction. A closing purchase transaction cancels out the Funds position as the writer of
an option by means of an offsetting purchase of an identical option prior to the expiration
of the option it has written. Covered call options also serve as a partial hedge to the
extent of the premium received against the price of the underlying security declining.
A call option is considered to be covered if the Fund holds a call on the same security
or index as the call written where the exercise price of the call held is (i) equal to or
less than the exercise price of the call written, or (ii) greater than the exercise price of
the call written provided the difference is maintained by the Fund in liquid assets
- 7 -
designated on the advisers or sub-advisers books and records to the extent required by
Commission guidelines.
The Fund also is authorized to write (i.e., sell) uncovered call options on securities
or instruments in which it may invest but that are not currently held by the Fund. The
principal reason for writing uncovered call options is to realize income without committing
capital to the ownership of the underlying securities or instruments. When writing uncovered
call options, the Fund must deposit and maintain sufficient margin with the broker-dealer
through which it made the uncovered call option as collateral to ensure that the securities
can be purchased for delivery if and when the option is exercised. In addition, in
connection with each such transaction the Fund will segregate unencumbered liquid securities
or cash with a value at least equal to the Funds exposure (the difference between the
unpaid amounts owed by the Fund on such transaction minus any collateral deposited with the
broker-dealer), on a marked-to-market basis (as calculated pursuant to requirements of the
Commission). Such segregation will ensure that the Fund has assets available to satisfy its
obligations with respect to the transaction and will avoid any potential leveraging of the
Funds portfolio. Such segregation will not limit the Funds exposure to loss. During
periods of declining securities prices or when prices are stable, writing uncovered calls
can be a profitable strategy to increase the Funds income with minimal capital risk.
Uncovered calls are riskier than covered calls because there is no underlying security held
by the Fund that can act as a partial hedge. Uncovered calls have speculative
characteristics and the potential for loss is unlimited. When an uncovered call is
exercised, the Fund must purchase the underlying security to meet its call obligation. There
is also a risk, especially with less liquid preferred and debt securities, that the
securities may not be available for purchase. If the purchase price exceeds the exercise
price, the Fund will lose the difference.
Put Options. The Fund is authorized to purchase put options to seek to hedge against a
decline in the value of its securities. By buying a put option, the Fund acquires a right to
sell the underlying securities or instruments at the exercise price, thus limiting the
Funds risk of loss through a decline in the market value of the securities or instruments
until the put option expires. The amount of any appreciation in the value of the underlying
securities or instruments will be partially offset by the amount of the premium paid for the
put option and any related transaction costs. Prior to its expiration, a put option may be
sold in a closing sale transaction and profit or loss from the sale will depend on whether
the amount received is more or less than the premium paid for the put option plus the
related transaction costs. A closing sale transaction cancels out the Funds position as the
purchaser of an option by means of an offsetting sale of an identical option prior to the
expiration of the option it has purchased. The Fund also may purchase uncovered put
options.
The Fund also has authority to write (i.e., sell) put options on the types of
securities or instruments that may be held by the Fund, provided that such put options are
covered, meaning that such options are secured by segregated, liquid assets. The Fund will
receive a premium for writing a put option, which increases the Funds return. The Fund will
not sell puts if, as a result, more than 50% of the Funds assets would be required to cover
its potential obligations under its hedging transactions.
The Fund is also authorized to write (i.e., sell) uncovered put options on securities
or instruments in which it may invest but with respect to which the Fund does not currently
have a corresponding short position or has not deposited as collateral cash equal to the
exercise value of the put option with the broker-dealer through which it made the uncovered
put option. The principal reason for writing uncovered put options is to receive premium
income and to acquire such securities or
- 8 -
instruments at a net cost below the current market value. The Fund has the obligation to
buy the securities or instruments at an agreed upon price if the price of the securities or
instruments decreases below the exercise price. If the price of the securities or
instruments increases during the option period, the option will expire worthless and the
Fund will retain the premium and will not have to purchase the securities or instruments at
the exercise price. In connection with such a transaction, the Fund will segregate
unencumbered liquid assets with a value at least equal to the Funds exposure, on a
marked-to-market basis (as calculated pursuant to requirements of the Commission). Such
segregation will ensure that the Fund has assets available to satisfy its obligations with
respect to the transaction and will avoid any potential leveraging of the Funds portfolio.
Such segregation will not limit the Funds exposure to loss.
There are several risks associated with transactions in options on securities and
indexes. For example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary market for
particular options, whether traded over-the-counter or on a national securities exchange may
be absent for reasons which include the following: there may be insufficient trading
interest in certain options; restrictions may be imposed by a national securities exchange
on opening transactions or closing transactions or both; trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of options or
underlying securities; unusual or unforeseen circumstances may interrupt normal operations
on a national securities exchange; the facilities of a national securities exchange or the
Options Clearing Corporation may not at all times be adequate to handle current trading
volume; or one or more national securities exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on that national
securities exchange (or in that class or series of options) would cease to exist, although
outstanding options that had been issued by the Options Clearing Corporation as a result of
trades on that national securities exchange would continue to be exercisable in accordance
with their terms.
Futures. The Fund may engage in transactions in futures and options on futures. Futures are
standardized, exchange-traded contracts that obligate a purchaser to take delivery, and a seller to
make delivery, of a specific amount of an asset at a specified future date at a specified price. No
price is paid upon entering into a futures contract. Rather, upon purchasing or selling a futures
contract the Fund is required to deposit collateral (margin) equal to a percentage (generally
less than 10%) of the contract value. Each day thereafter until the futures position is closed, the
Fund will pay additional margin representing any loss experienced as a result of the futures
position the prior day or be entitled to a payment representing any profit experienced as a result
of the futures position the prior day. Futures involve substantial leverage risk.
The sale of a futures contract limits the Funds risk of loss from a decline in the market
value of portfolio holdings correlated with the futures contract prior to the futures contracts
expiration date. In the event the market value of the portfolio holdings correlated with the
futures contract increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have been realized without
the purchase of the futures contract.
The purchase of a futures contract may protect the Fund from having to pay more for securities
as a consequence of increases in the market value for such securities during a period when the Fund
was attempting to identify specific securities in which to invest in a market the
- 9 -
Fund believes to be attractive. In the event that such securities decline in value or the Fund
determines not to complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.
The Fund is also authorized to purchase or sell call and put options on futures contracts
including financial futures and stock indices. Generally, these strategies would be used under the
same market and market sector conditions (i.e., conditions relating to specific types of
investments) in which the Fund entered into futures transactions. The Fund may purchase put
options or write call options on futures contracts and stock indices in lieu of selling the
underlying futures contract in anticipation of a decrease in the market value of its securities.
Similarly, the Fund can purchase call options, or write put options on futures contracts and stock
indices, as a substitute for the purchase of such futures to hedge against the increased cost
resulting from an increase in the market value of securities which the Fund intends to purchase.
To maintain greater flexibility, the Fund may invest in instruments which have characteristics
similar to futures contracts. These instruments may take a variety of forms, such as debt
securities with interest or principal payments determined by reference to the value of a security,
an index of securities or a commodity at a future point in time. The risks of such investments
could reflect the risks of investing in futures and securities, including volatility and
illiquidity.
Risks Associated with Futures. The primary risks associated with the use of futures contracts
and options are (a) the imperfect correlation between the change in market value of the instruments
held by the Fund and the price of the futures contract or option; (b) possible lack of a liquid
secondary market for a futures contract and the resulting inability to close a futures contract
when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited;
(d) the Managers or sub-advisers inability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility
that the counterparty will default in the performance of its obligations.
The Manager has claimed an exclusion from the definition of the term commodity pool operator
under the Commodity Exchange Act (CEA) pursuant to Rule 4.5 under the CEA. The Manager is not,
therefore, subject to registration or regulation as a commodity pool operator under the CEA and
the Fund is operated so as not to be deemed a commodity pool under the regulations of the
Commodity Futures Trading Commission.
Foreign Exchange Transactions. The Fund may engage in spot and forward foreign exchange
transactions and currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, Currency Instruments) for purposes of
hedging against the decline in the value of currencies in which its portfolio holdings are
denominated against the U.S. dollar. Such transactions could be effected with respect to hedges on
foreign dollar denominated securities owned by the Fund, sold by the Fund but not yet delivered, or
committed or anticipated to be purchased by the Fund. As an illustration, the Fund may use such
techniques to hedge the stated value in U.S. dollars of an investment in a yen-denominated
security. In such circumstances, for example, the Fund may purchase a foreign currency put option
enabling it to sell a specified amount of yen for dollars at a specified price by a future date. To
the extent the hedge is successful, a loss in the value of the yen relative to the dollar will tend
to be offset by an increase in the value of the put option. To offset, in whole or in part, the
cost of acquiring such a put option, the Fund may also sell a call option which, if exercised,
requires it to sell a specified amount of yen for dollars at a specified price by a future date (a
technique called a straddle). By selling such a call option in this illustration, the Fund gives
up the opportunity to profit without limit from increases in the relative value of the yen to the
dollar. Straddles of the type that may be used
- 10 -
by the Fund are considered to constitute hedging transactions. The Fund will not attempt to hedge
all of its foreign portfolio positions.
Currency Swaps. Currency swaps usually involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency. As a result, the entire
principal value of a currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations.
Forward Foreign Exchange Transactions. Forward foreign exchange transactions are OTC contracts
to purchase or sell a specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange transactions are
similar but require current, rather than future, settlement. The Fund will enter into foreign
exchange transactions for purposes of hedging a specific transaction or portfolio position. The
Fund may enter into a foreign exchange transaction for purposes of hedging a specific transaction
by, for example, purchasing a currency needed to settle a security transaction or selling a
currency in which the Fund has received or anticipates receiving a dividend or distribution. The
Fund may enter into a foreign exchange transaction for purposes of hedging a portfolio position by
selling forward a currency in which a portfolio position of the Fund is denominated or by
purchasing a currency in which the Fund anticipates acquiring a portfolio position in the near
future. The Fund may also hedge portfolio positions through currency swaps, which are transactions
in which one currency is simultaneously bought for a second currency on a spot basis and sold for
the second currency on a forward basis. The Fund may also engage in proxy hedging transactions to
reduce the effect of currency fluctuations on the value of existing or anticipated holdings of
portfolio securities. Proxy hedging is often used when the currency to which the Fund is exposed is
difficult to hedge or to hedge against the dollar. Proxy hedging entails entering into a forward
contract to sell a currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of the Funds securities are, or are expected to be,
denominated, and to buy U.S. dollars. Proxy hedging involves some of the same risks and
considerations as other transactions with similar instruments. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. In addition, there is the risk that the perceived linkage between various
currencies may not be present or may not be present during the particular time that the Fund is
engaged in proxy hedging. The Fund may also cross-hedge currencies by entering into forward
contracts to sell one or more currencies that are expected to decline in value relative to other
currencies to which the Fund has or in which the Fund expects to have portfolio exposure. Forward
foreign exchange transactions involve substantial currency risk, and also involve credit and
liquidity risk. The Fund may also hedge a currency by entering into a transaction in a currency
instrument denominated in a currency other than the currency being hedged (a cross-hedge). The
Fund will only enter into a cross-hedge if the Manager believes that (i) there is a demonstrably
high correlation between the currency in which the cross-hedge is denominated and the currency
being hedged, and (ii) executing a cross-hedge through the currency in which the cross-hedge is
denominated will be significantly more cost-effective or provide substantially greater liquidity
than executing a similar hedging transaction by means of the currency being hedged.
Some of the forward foreign currency contracts entered into by the Fund are classified as
non-deliverable forwards (NDF). NDFs are cash-settled, short-term forward contracts that may be
thinly traded or are denominated in non-convertible foreign currency, where the profit or loss at
the time at the settlement date is calculated by taking the difference between the agreed upon
exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of
funds. All NDFs have a fixing date and a settlement date. The fixing date is the date at which the
difference between the prevailing market exchange rate and the agreed upon exchange rate is
calculated. The settlement date is the date by which the payment of the difference is due to the
party receiving payment. NDFs are commonly quoted for time periods of
- 11 -
one month up to two years, and are normally quoted and settled in U.S. dollars. They are often used
to gain exposure to and/or hedge exposure to foreign currencies that are not internationally
traded.
Currency Futures. The Fund may also seek to hedge against the decline in the value of a
currency through use of currency futures or options thereon. Currency futures are similar to
forward foreign exchange transactions except that futures are standardized, exchange-traded
contracts while forward foreign exchange transactions are traded in the OTC market. Currency
futures involve substantial currency risk, and also involve leverage risk.
Currency Options. The Fund may also seek to hedge against the decline in the value of a
currency through the use of currency options. Currency options are similar to options on
securities. For example, in consideration for an option premium the writer of a currency option is
obligated to sell (in the case of a call option) or purchase (in the case of a put option) a
specified amount of a specified currency on or before the expiration date for a specified amount of
another currency. The Fund may engage in transactions in options on currencies either on exchanges
or OTC markets. The Fund may write covered call options on up to 100% of the currencies in its
portfolio. See Types of Options above and Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC Derivatives below. Currency options involve substantial currency
risk, and may also involve credit, leverage or liquidity risk.
Limitations on Currency Transactions. The Fund will not hedge a currency in excess of the
aggregate market value of the securities that it owns (including receivables for unsettled
securities sales), or has committed to purchase or anticipates purchasing, which are denominated in
such currency. Open positions in forward foreign exchange transactions used for non-hedging
purposes will be covered by the segregation of liquid assets and are marked to market daily. The
Funds exposure to futures or options on currencies will be covered as described below under Risk
Factors in Derivatives.
Risk Factors in Hedging Foreign Currency. Hedging transactions involving currency instruments
involve substantial risks, including correlation risk. While the Funds use of Currency Instruments
to effect hedging strategies is intended to reduce the volatility of the net asset value of the
Funds shares, the net asset value of the Funds shares will fluctuate. Moreover, although Currency
Instruments will be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated currency movements will not
be accurately predicted and that the Funds hedging strategies will be ineffective. To the extent
that the Fund hedges against anticipated currency movements that do not occur, the Fund may realize
losses and decrease its total return as the result of its hedging transactions. Furthermore, the
Fund will only engage in hedging activities from time to time and may not be engaging in hedging
activities when movements in currency exchange rates occur.
In connection with its trading in forward foreign currency contracts, the Fund will contract
with a foreign or domestic bank, or foreign or domestic securities dealer, to make or take future
delivery of a specified amount of a particular currency. There are no limitations on daily price
moves in such forward contracts, and banks and dealers are not required to continue to make markets
in such contracts. There have been periods during which certain banks or dealers have refused to
quote prices for such forward contracts or have quoted prices with an unusually wide spread between
the price at which the bank or dealer is prepared to buy and that at which it is prepared to sell.
Governmental imposition of credit controls might limit any such forward contract trading. With
respect to its trading of forward contracts, if any, the Fund will be subject to the risk of bank
or dealer failure and the inability of, or refusal by, a bank or dealer to perform with respect to
such contracts. Any such default would deprive the Fund of any profit potential or force the Fund
to cover its commitments for resale, if any, at the then market price and could result in a loss to
the Fund.
- 12 -
It may not be possible for the Fund to hedge against currency exchange rate
movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement
is so generally anticipated that the Fund is not able to enter into a hedging transaction at an
effective price, or (ii) the currency exchange rate movement relates to a market with respect to
which Currency Instruments are not available and it is not possible to engage in effective foreign
currency hedging. The cost to the Fund of engaging in foreign currency transactions varies with
such factors as the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange usually are conducted
on a principal basis, no fees or commissions are involved.
Risk Factors in Derivatives. Derivatives are volatile and involve significant risks,
including:
Credit Risk the risk that the counterparty in a derivative transaction will be unable to
honor its financial obligation to the Fund, or the risk that the reference entity in a
credit default swap or similar derivative will not be able to honor its financial
obligations.
Currency Risk the risk that changes in the exchange rate between two currencies will
adversely affect the value (in U.S. dollar terms) of an investment.
Leverage Risk the risk associated with certain types of investments or trading strategies
(such as, for example, borrowing money to increase the amount of investments) that
relatively small market movements may result in large changes in the value of an investment.
Certain investments or trading strategies that involve leverage can result in losses that
greatly exceed the amount originally invested.
Liquidity Risk the risk that certain securities may be difficult or impossible to sell at
the time that the seller would like or at the price that the seller believes the security is
currently worth.
Correlation Risk the risk that changes in the value of a derivative will not match the
changes in the value of the portfolio holdings that are being hedged or of the particular
market or security to which the Fund seeks exposure.
Index Risk If the derivative is linked to the performance of an index, it will be subject
to the risks associated with changes in that index. If the index changes, the Fund could
receive lower interest payments or experience a reduction in the value of the derivative to
below what the Fund paid. Certain indexed securities, including inverse securities (which
move in an opposite direction to the index), may create leverage, to the extent that they
increase or decrease in value at a rate that is a multiple of the changes in the applicable
index.
The Fund intends to enter into transactions involving derivatives only if there appears to be
a liquid secondary market for such instruments or, in the case of illiquid instruments traded in
OTC transactions, such instruments satisfy the criteria set forth below under Additional Risk
Factors of OTC Transactions; Limitations on the Use of OTC Derivatives. However, there can be no
assurance that, at any specific time, either a liquid secondary market will exist for a derivative
or the Fund will otherwise be able to sell such instrument at an acceptable price. It may,
therefore, not be possible to close a position in a derivative without incurring substantial
losses, if at all.
Certain transactions in derivatives (such as futures transactions or sales of put options)
involve substantial leverage risk and may expose the Fund to potential losses that exceed the
- 13 -
amount originally invested by the Fund. When the Fund engages in such a transaction, the Fund will
deposit in a segregated account liquid assets with a value at least equal to the Funds exposure,
on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the
Commission). Such segregation will ensure that the Fund has assets available to satisfy its
obligations with respect to the transaction, but will not limit the Funds exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives.
Certain derivatives traded in OTC markets, including indexed securities, swaps and OTC options,
involve substantial liquidity risk. The absence of liquidity may make it difficult or impossible
for the Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may
also make it more difficult for the Fund to ascertain a market value for such instruments. The
Fund will, therefore, acquire illiquid OTC instruments (i) if the agreement pursuant to which the
instrument is purchased contains a formula price at which the instrument may be terminated or sold,
or (ii) for which the Manager anticipates the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is available, in which case
that dealers quotation may be used.
Because derivatives traded in OTC markets are not guaranteed by an exchange or clearing
corporation and generally do not require payment of margin, to the extent that the Fund has
unrealized gains in such instruments or has deposited collateral with its counterparty the Fund is
at risk that its counterparty will become bankrupt or otherwise fail to honor its obligations. The
Fund will attempt to minimize these risks by engaging in transactions in derivatives traded in OTC
markets only with financial institutions that have substantial capital or that have provided the
Fund with a third-party guaranty or other credit enhancement.
Equity Securities. The Fund may invest in equity securities, which include common stock and
preferred stock (including convertible preferred stock); bonds, notes and debentures convertible
into common or preferred stock; stock purchase warrants and rights; equity interests in trusts;
general and limited partnerships and limited liability companies; and depositary receipts. For a
discussion of the types of equity securities in which the Fund may invest and the risks associated
with investing in such equity securities, see the Funds Prospectus.
Foreign Investment Risks. The Fund may invest in foreign securities, including securities from
issuers located in emerging market countries. These securities may be denominated in U.S. dollars
or in a foreign currency. Investing in foreign securities involves risks not typically associated
with investing in securities of companies organized and operated in the United States that can
increase the chances that the Fund will lose money.
Securities issued by certain companies organized outside the United States may not be deemed to be
foreign securities (but rather deemed to be U.S. securities) if the companys principal operations
are conducted from the U.S., the companys equity securities trade principally on a U.S. stock
exchange, or the company does a substantial amount of business in the U.S.
In addition to equity securities, foreign investments of the Fund may include: (a) debt
obligations issued or guaranteed by foreign sovereign governments or their agencies, authorities,
instrumentalities or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations; (c) debt obligations of foreign banks and bank
holding companies; (d) debt obligations of domestic banks and corporations issued in foreign
currencies; (e) debt obligations denominated in the Euro; and (f) foreign corporate debt securities
and commercial paper. Such securities may include loan participations and assignments, convertible
securities and zero-coupon securities.
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Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to
foreign withholding taxes.
Foreign Market Risk. Because the Fund invests in foreign securities, its strategy offers the
potential for more diversification than the Fund that invests only in the United States because
securities traded on foreign markets have often (though not always) performed differently from
securities traded in the United States. However, such investments often involve risks not present
in U.S. investments that can increase the chances that the Fund will lose money. In particular, the
Fund is subject to the risk that, because there are generally fewer investors on foreign exchanges
and a smaller number of shares traded each day, it may be difficult for the Fund to buy and sell
securities on those exchanges. In addition, prices of foreign securities may fluctuate more than
prices of securities traded in the United States. Investments in foreign markets may also be
adversely affected by governmental actions such as the imposition of punitive taxes. In addition,
the governments of certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these actions could severely
affect security prices, impair the Funds ability to purchase or sell foreign securities or
transfer the Funds assets or income back into the United States, or otherwise adversely affect the
Funds operations. Other potential foreign market risks include exchange controls, difficulties in
pricing securities, defaults on foreign government securities, difficulties in enforcing favorable
legal judgments in foreign courts, and political and social conditions, such as diplomatic
relations, confiscatory taxation, expropriation, limitation on the removal of funds or assets, or
imposition of (or change in) exchange control regulations.. Legal remedies available to investors
in certain foreign countries may be less extensive than those available to investors in the United
States or other foreign countries. In addition, changes in government administrations or economic
or monetary policies in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or adversely affect the Funds operations. Also, brokerage
commissions and other costs of buying or selling securities often are higher in foreign countries
than they are in the United States. This reduces the amount the Fund can earn on its investments.
Foreign Economy Risk. The economies of certain foreign markets often do not compare favorably
with that of the United States with respect to such issues as growth of gross national product,
reinvestment of capital, resources, and balance of payments position. Certain such economies may
rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country or countries,
changes in international trading patterns, trade barriers, and other protectionist or retaliatory
measures.
Currency Risk and Exchange Risk. Because foreign securities generally are denominated and pay
dividends or interest in foreign currencies, the value of the Fund that invests in foreign
securities as measured in U.S. dollars will be affected favorably or unfavorably by changes in
exchange rates. Generally, when the U.S. dollar rises in value against a foreign currency, a
security denominated in that currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency, a security
denominated in that currency gains value because the currency is worth more U.S. dollars. This
risk, generally known as currency risk, means that a stronger U.S. dollar will reduce returns for
U.S. investors while a weak U.S. dollar will increase those returns.
Governmental Supervision and Regulation/Accounting Standards. Many foreign governments
supervise and regulate stock exchanges, brokers and the sale of securities less than does the
United States. Some countries may not have laws to protect investors comparable to the U.S.
securities laws. For example, some foreign countries may have no laws or rules against insider
trading. Insider trading occurs when a person buys or sells a companys securities based on
nonpublic information about that company. Accounting
- 15 -
standards in other countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S. accounting standards,
it may be harder for Fund management to completely and accurately determine a companys financial
condition. In addition, the U.S. Government has from time to time in the past imposed restrictions,
through penalties and otherwise, on foreign investments by U.S. investors such as the Fund. If such
restrictions should be reinstituted, it might become necessary for the Fund to invest all or
substantially all of its assets in U.S. securities.
Certain Risks of Holding Fund Assets Outside the United States. The Fund generally holds its
foreign securities and cash in foreign banks and securities depositories. Some foreign banks and
securities depositories may be recently organized or new to the foreign custody business. In
addition, there may be limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Funds ability to recover its assets if a foreign bank or
depository or issuer of a security or any of their agents goes bankrupt. In addition, it is often
more expensive for the Fund to buy, sell and hold securities in certain foreign markets than in the
United States. The increased expense of investing in foreign markets reduces the amount the Fund
can earn on its investments and typically results in a higher operating expense ratio for the Fund
as compared to investment companies that invest only in the United States.
Publicly Available Information. In general, less information is publicly available with
respect to foreign issuers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting requirements applicable to
issuers in the United States. While the volume of transactions effected on foreign stock exchanges
has increased in recent years, it remains appreciably below that of the New York Stock Exchange.
Accordingly, the Funds foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities in U.S. companies. In addition, there is
generally less government supervision and regulation of securities exchanges, brokers and issuers
in foreign countries than in the United States.
Settlement Risk. Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement procedures and trade regulations
also may involve certain risks (such as delays in payment for or delivery of securities) not
typically generated by the settlement of U.S. investments. Communications between the United States
and emerging market countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates in markets that still rely on physical settlement. Settlements in
certain foreign countries at times have not kept pace with the number of securities transactions;
these problems may make it difficult for the Fund to carry out transactions. If the Fund cannot
settle or is delayed in settling a purchase of securities, it may miss attractive investment
opportunities and certain of its assets may be uninvested with no return earned thereon for some
period. If the Fund cannot settle or is delayed in settling a sale of securities, it may lose money
if the value of the security then declines or, if it has contracted to sell the security to another
party, the Fund could be liable to that party for any losses incurred.
Illiquid or Restricted Securities. The Fund may invest up to 15% of its net assets in
securities that lack an established secondary trading market or otherwise are considered illiquid.
Liquidity of a security relates to the ability to dispose easily of the security and the price to
be obtained upon disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount from comparable, more
liquid investments. Investment of the Funds assets in illiquid securities 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 the Funds operations require cash, such as when
- 16 -
the Fund redeems shares or pays dividends, and could result in the Fund borrowing to meet
short-term cash requirements or incurring capital losses on the sale of illiquid investments.
The Fund may invest in securities that are not registered under the Securities Act
(restricted securities). Restricted securities may be sold in private placement transactions
between issuers and their purchasers and may be neither listed on an exchange nor traded in other
established markets. In many cases, privately placed securities may not be freely transferable
under the laws of the applicable jurisdiction or due to contractual restrictions on resale. As a
result of the absence of a public trading market, privately placed securities may be less liquid
and more difficult to value than publicly traded securities. To the extent that privately placed
securities may be resold in privately negotiated transactions, the prices realized from the sales,
due to illiquidity, could be less than those originally paid by the Fund or less than their fair
market value. 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 the 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. Certain of the Funds investments in
private placements may consist of direct investments and may include investments in smaller, less
seasoned issuers, which may involve greater risks. 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 such securities, the Fund may obtain access to material nonpublic information, which
may restrict the Funds ability to conduct portfolio transactions in such securities.
Some of these securities are new and complex, and trade only among institutions; the markets
for these securities are still developing, and may not function as efficiently as established
markets. Owning a large percentage of restricted or illiquid securities could hamper the funds
ability to raise cash to meet redemptions. Also, because there may not be an established market
price for these securities, the Fund may have to estimate their value, which means that their
valuation (and, to a much smaller extent, the valuation of the Fund) may have a subjective element.
Transactions in restricted or illiquid securities may entail registration expense and other
transaction costs that are higher than those for transactions in unrestricted or liquid securities.
Where registration is required for restricted or illiquid securities a considerable time period may
elapse between the time the fund decides to sell the security and the time it is actually permitted
to sell the security under an effective registration statement. If during such period, adverse
market conditions were to develop, the Fund might obtain less favorable pricing terms that when it
decided to sell the security.
Inflation Risk. Like all mutual funds, the Fund is subject to inflation risk. Inflation risk
is the risk that the present value of assets or income from investments will be less in the future
as inflation decreases the value of money. As inflation increases, the present value of the Funds
assets can decline as can the value of the Funds distributions.
Initial Public Offering (IPO) Risk. The volume of initial public offerings and the levels at
which the newly issued stocks trade in the secondary market are affected by the performance of the
stock market overall. If initial public offerings are brought to the market, availability may be
limited and the Fund may not be able to buy any shares at the offering price, or if it is able to
buy shares, it may not be able to buy as many shares at the offering price as it would like. In
addition, the prices of securities involved in initial public offerings are often subject to
greater and more unpredictable price changes than more established stocks. IPOs have the potential
to produce substantial gains. There is no assurance that the Fund will have access to profitable
IPOs and therefore investors should not rely on any past gains from IPOs as an indication of future
performance. The investment performance of the Fund during periods when it is unable to invest
significantly or at all in IPOs may be lower than during periods when it is able to do so. In
addition, as the Fund increases in size, the impact of IPOs
- 17 -
on its performance will generally decrease. Securities issued in IPOs are subject to many of the
same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs
have no trading history, and information about the companies may be available for very limited
periods.
Investment in Emerging Markets. The Fund may invest up to 20% of its total assets in the
securities of issuers domiciled in various countries with emerging capital markets. Specifically, a
country with an emerging capital market is any country that the World Bank, the International
Finance Corporation, the United Nations or its authorities has determined to have a low or middle
income economy. Countries with emerging markets can be found in regions such as Asia, Latin
America, Eastern Europe and Africa.
Investments in the securities of issuers domiciled in countries with emerging capital markets
involve certain additional risks that do not generally apply to investments in securities of
issuers in more developed capital markets, such as (i) low or non-existent trading volume,
resulting in a lack of liquidity and increased volatility in prices for such securities, as
compared to securities of comparable issuers in more developed capital markets; (ii) uncertain
national policies and social, political and economic instability, increasing the potential for
expropriation of assets, confiscatory taxation, high rates of inflation or unfavorable diplomatic
developments; (iii) possible fluctuations in exchange rates, differing legal systems and the
existence or possible imposition of exchange controls, custodial restrictions or other foreign or
U.S. governmental laws or restrictions applicable to such investments; (iv) national policies that
may limit the Funds investment opportunities such as restrictions on investment in issuers or
industries deemed sensitive to national interests; and (v) the lack or relatively early development
of legal structures governing private and foreign investments and private property. In addition to
withholding taxes on investment income, some countries with emerging markets may impose
differential capital gains taxes on foreign investors.
Political and economic structures in emerging market countries may be undergoing significant
evolution and rapid development, and these countries may lack the social, political and economic
stability characteristic of more developed countries. In such a dynamic environment, there can be
no assurance that any or all of these capital markets will continue to present viable investment
opportunities for the Fund. In the past, governments of such nations have expropriated substantial
amounts of private property, and most claims of the property owners have never been fully settled.
There is no assurance that such expropriations will not reoccur. In such an event, it is possible
that the Fund could lose the entire value of its investments in the affected market. As a result
the risks described above, including the risks of nationalization or expropriation of assets, may
be heightened. In addition, unanticipated political or social developments may affect the value of
investments in these countries and the availability to the Fund of additional investments. The
small size and inexperience of the securities markets in certain of these countries and the limited
volume of trading in securities in these countries may make investments in the countries illiquid
and more volatile than investments in Japan or most Western European countries.
Also, there may be less publicly available information about issuers in emerging markets than
would be available about issuers in more developed capital markets, and such issuers may not be
subject to accounting, auditing and financial reporting standards and requirements comparable to
those to which U.S. companies are subject. In certain countries with emerging capital markets,
reporting standards vary widely. As a result, traditional investment measurements used in the
United States, such as price/earnings ratios, may not be applicable. Emerging market securities may
be substantially less liquid and more volatile than those of mature markets, and company shares may
be held by a limited number of persons. This may adversely affect the timing and pricing of the
Funds acquisition or disposal of securities.
- 18 -
Practices in relation to settlement of securities transactions in emerging markets involve
higher risks than those in developed markets, in part because the Fund will need to use brokers and
counterparties that are less well capitalized, and custody and registration of assets in some
countries may be unreliable. The possibility of fraud, negligence, undue influence being exerted by
the issuer or refusal to recognize ownership exists in some emerging markets, and, along with other
factors, could result in ownership registration being completely lost. The Fund would absorb any
loss resulting from such registration problems and may have no successful claim for compensation.
Investment in non-dollar denominated securities including securities from issuers located in
emerging market countries may be on either a currency hedged or unhedged basis, and the Fund may
hold from time to time various foreign currencies pending investment or conversion into U.S.
dollars. Some of these instruments may have the characteristics of futures contracts. In addition,
the Fund may engage in foreign currency exchange transactions to seek to protect against changes in
the level of future exchange rates which would adversely affect the Funds performance. These
investments and transactions involving foreign securities, currencies, options (including options
that relate to foreign currencies), futures, hedging and cross-hedging are described below and
under DerivativesFutures and Foreign Exchange Transactions.
Restrictions on Certain Investments. A number of publicly traded closed-end investment
companies have been organized to facilitate indirect foreign investment in developing countries,
and certain of such countries, such as Thailand, South Korea, Chile and Brazil, have specifically
authorized such funds. There also are investment opportunities in certain of such countries in
pooled vehicles that resemble open-end investment companies. In accordance with the Investment
Company Act, the Fund may invest up to 10% of its total assets in securities of other investment
companies, not more than 5% of which may be invested in any one such company. In addition, under
the Investment Company Act, the Fund may not own more than 3% of the total outstanding voting stock
of any investment company. These restrictions on investments in securities of investment companies
may limit opportunities for the Fund to invest indirectly in certain developing countries. Shares
of certain investment companies may at times be acquired only at market prices representing
premiums to their net asset values. If the Fund acquires shares of other investment companies,
shareholders would bear both their proportionate share of expenses of the Fund (including
management and advisory fees) and, indirectly, the expenses of such other investment companies.
Investment in Other Investment Companies. The Fund may, subject to applicable law, invest in
other investment companies, including money market funds and exchange traded funds, which are
typically open-end funds or unit investment trusts listed on a stock exchange. In accordance with
the Investment Company Act, the Fund may invest up to 10% of its total assets in securities of
other investment companies. In addition, under the Investment Company Act the Fund may not own more
than 3% of the total outstanding voting stock of any investment company and not more than 5% of the
value of the Funds total assets may be invested in securities of any investment company. Pursuant
to the Investment Company Act (or alternatively, pursuant to exemptive orders received from the
Commission) these percentage limitations do not apply to investments in affiliated money market
funds, and under certain circumstances, do not apply to investments in affiliated investment
companies, including exchange traded funds. To the extent the Fund is held by an affiliated fund,
the ability of the Fund itself to purchase other affiliated investment companies may be limited.
As with other investments, investments in other investment companies are subject to market and
selection risk. In addition, if the Fund acquires shares in investment companies, including
affiliated investment companies, shareholders would bear both their proportionate share of expenses
in the Fund (including management and advisory fees) and, indirectly, the expenses of such
investment companies (including management and advisory fees). Investments by the Fund in
- 19 -
wholly owned investment entities created under the laws of certain countries will not be deemed an
investment in other investment companies.
The Fund may invest in exchange-traded funds (ETFs), to the extent permitted under the
Investment Company Act. In the case of ETFs, the Fund may invest in excess of the limits imposed
under the Investment Company Act pursuant to exemptive orders obtained by certain ETFs and their
sponsors from the Securities and Exchange Commission. An ETF is a fund that holds a portfolio of
common stocks or bonds designed to track the performance of a securities index, including industry,
sector, country and region indexes. ETFs trade on a securities exchange and their shares may, at
times, trade at a premium or discount to their net asset value. An ETF may not replicate exactly
the performance of the index it seeks to track for a number of reasons, including transaction costs
incurred by the ETF. ETFs incur fees and expenses, such as operating expenses, licensing fees,
trustee fees and marketing expenses, which are borne proportionately by ETF shareholders, such as
the fund. The Fund will also incur brokerage costs when purchasing and selling shares of ETFs.
Liquidity Management. As a temporary defensive measure, if the Manager determines that market
conditions warrant, the Fund may invest without limitation in high quality money market
instruments. The Fund may also invest in high quality money market instruments pending investment
or to meet anticipated redemption requests. High quality money market instruments include U.S.
government obligations, U.S. government agency obligations, dollar denominated obligations of
foreign issuers, bank obligations, including U.S. subsidiaries and branches of foreign banks,
corporate obligations, commercial paper, repurchase agreements and obligations of supranational
organizations. Generally, such obligations will mature within one year from the date of settlement,
but may mature within two years from the date of settlement.
Preferred Stock. The Fund may invest in preferred stocks. Preferred stock has a preference
over common stock in liquidation (and generally dividends as well) but is subordinated to the
liabilities of the issuer in all respects. As a general rule, the market value of preferred stock
with a fixed dividend rate and no conversion element varies inversely with interest rates and
perceived credit risk, while the market price of convertible preferred stock generally also
reflects some element of conversion value. Because preferred stock is junior to debt securities and
other obligations of the issuer, deterioration in the credit quality of the issuer will cause
greater changes in the value of a preferred stock than in a more senior debt security with similar
stated yield characteristics. Unlike interest payments on debt securities, preferred stock
dividends are payable only if declared by the issuers board of directors. Preferred stock also may
be subject to optional or mandatory redemption provisions.
Repurchase Agreements and Purchase and Sale Contracts. Under repurchase agreements and
purchase and sale contracts, the other party agrees, upon entering into the contract with the Fund,
to repurchase a security sold to the Fund at a mutually agreed-upon time and price in a specified
currency, thereby determining the yield during the term of the agreement.
A purchase and sale contract differs from a repurchase agreement in that the contract
arrangements stipulate that securities are owned by the Fund and the purchaser receives any
interest on the security paid during the period. In the case of repurchase agreements, the prices
at which the trades are conducted do not reflect accrued interest on the underlying obligation;
whereas, in the case of purchase and sale contracts, the prices take into account accrued interest.
The Fund may enter into tri-party repurchase agreements. In tri-party repurchase agreements, an
unaffiliated third party custodian maintains accounts to hold collateral for the Fund and its
counterparties and, therefore, the Fund may be subject to the credit risk of those custodians.
- 20 -
Repurchase agreements and purchase and sale contracts result in a fixed rate of return
insulated from market fluctuations during the term of the agreement, although such return may be
affected by currency fluctuations. However, in the event of a default under a repurchase agreement
or under a purchase and sale contract, instead of the contractual fixed rate, the rate of return to
the Fund would be dependent upon intervening fluctuations of the market values of the securities
underlying the contract and the accrued interest on those securities. In such event, the Fund would
have rights against the seller for breach of contract with respect to any losses arising from
market fluctuations following the default.
Both types of agreement usually cover short periods, such as less than one week, although they
may have longer terms, and may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Manager will monitor the creditworthiness of the seller, and the
Fund will require the seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase agreement. The Fund
does not have this right to seek additional collateral as a purchaser in the case of purchase and
sale contracts. The Funds adviser or sub-adviser will mark-to-market daily the value of the
securities. Securities subject to repurchase agreements and purchase and sale contracts will be
held by the Funds custodian (or sub-custodian) in the Federal Reserve/Treasury book-entry system
or by another authorized securities depository.
In the event of default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but only constitute
collateral for the sellers obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with disposition of the collateral. If
the seller becomes insolvent and subject to liquidation or reorganization under applicable
bankruptcy or other laws, the Funds ability to dispose of the underlying securities may be
restricted. Finally, it is possible that the Fund may not be able to substantiate its interest in
the underlying securities. To minimize this risk, the securities underlying the repurchase
agreement will be held by the custodian at all times in an amount at least equal to the repurchase
price, including accrued interest. If the seller fails to repurchase the securities, the Fund may
suffer a loss to the extent proceeds from the sale of the underlying securities are less than the
repurchase price.
The Fund may not invest in repurchase agreements or purchase and sale contracts maturing in
more than seven days if such investments, together with the Funds other illiquid investments,
would exceed 15% of the Funds net assets.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase agreements with the
same parties with whom it may enter into repurchase agreements. Under a reverse repurchase
agreement, the Fund sells securities to another party and agrees to repurchase them at a particular
date and price. The Fund may enter into a reverse repurchase agreement when it is anticipated that
the interest income to be earned from the investment of the proceeds of the transaction is greater
than the interest expense of the transaction.
At the time the Fund enters into a reverse repurchase agreement, it will segregate liquid
assets with a value not less than the repurchase price (including accrued interest). The use of
reverse repurchase agreements may be regarded as leveraging and, therefore, speculative.
Furthermore, reverse repurchase agreements involve the risks that (i) the interest income earned in
the investment of the proceeds will be less than the interest expense, (ii) the market value of the
securities retained in lieu of sale by the Fund may decline below the price of the securities the
Fund has sold but is obligated to repurchase, (iii) the market value of the securities sold will
decline below the price at which the Fund is required to repurchase them and (iv) the securities
will not be returned to the Fund.
- 21 -
In addition, if the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce the Funds obligations to repurchase the securities and the
Funds use of the proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision.
Rights Offerings and Warrants to Purchase. The Fund may participate in rights offerings and
may purchase warrants, which are privileges issued by corporations enabling the owners to subscribe
to and purchase a specified number of shares of the corporation at a specified price during a
specified period of time. Subscription rights normally have a short life span to expiration. The
purchase of rights or warrants involves the risk that the Fund could lose the purchase value of a
right or warrant if the right to subscribe to additional shares is not exercised prior to the
rights and warrants expiration. Also, the purchase of rights and/or warrants involves the risk
that the effective price paid for the right and/or warrant added to the subscription price of the
related security may exceed the value of the subscribed securitys market price such as when there
is no movement in the level of the underlying security. Buying a warrant does not make the Fund a
shareholder of the underlying stock. The warrant holder has no voting or dividend rights with
respect to the underlying stock. A warrant does not carry any right to assets of the issuer, and
for this reason investment in warrants may be more speculative than other equity-based investments.
Rule 144A Securities. A Fund may purchase securities that can be offered and sold only to
qualified institutional buyers under Rule 144A under the Securities Act. Rule 144A securities
will be deemed to be illiquid securities unless the Funds Board or the Manager determines
otherwise. The Trustees may determine to treat as liquid Rule 144A securities that are either
freely tradable in their primary markets offshore or to be liquid in accordance with the policies
and procedures adopted by the Funds Trustees. The Trustees may adopt guidelines and delegate to
the Manager the daily function of determining and monitoring liquidity of Rule 144A securities. The
Trustees, however, will retain sufficient oversight and will ultimately be responsible for the
determinations. Since it is not possible to predict with assurance exactly how the market for
securities sold and offered under Rule 144A will continue to develop, the Trustees will carefully
monitor the Funds investments in these securities. This investment practice could have the effect
of increasing the level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these securities.
Securities Lending. The Fund may lend portfolio securities with a value not exceeding
331/3% of its total assets or the limit prescribed by
applicable law to banks, brokers and other financial institutions. In return, the Fund receives
collateral in cash or securities issued or guaranteed by the U.S. Government, which will be
maintained at all times in an amount equal to at least 100% of the current market value of the
loaned securities. The Fund maintains the ability to obtain the right to vote or consent on proxy
proposals involving material events affecting securities loaned. The Fund receives the income on
the loaned securities. Where the Fund receives securities as collateral, the Fund receives a fee
for its loans from the borrower and does not receive the income on the collateral. Where the Fund
receives cash collateral, it may invest such collateral and retain the amount earned, net of any
amount rebated to the borrower. As a result, the Funds yield may increase. Loans of securities
are terminable at any time and the borrower, after notice, is required to return borrowed
securities within the standard time period for settlement of securities transactions. The Fund is
obligated to return the collateral to the borrower at the termination of the loan. The Fund could
suffer a loss in the event the Fund must return the cash collateral and there are losses on
investments made with the cash collateral. In the event the borrower defaults on any of its
obligations with respect to a securities loan, the Fund could suffer a loss where there are losses
on investments made with the cash collateral or where the value of the securities collateral falls
below the market value of the borrowed securities. The Fund could also experience delays and costs
in
- 22 -
gaining access to the collateral. The Fund may pay reasonable finders, lending agent,
administrative and custodial fees in connection with its loans.
The Fund would continue to accrue interest on loaned securities and would also earn income on
investment collateral for such loans. Any cash collateral received by the Fund in connection with
such loans may be invested in a broad range of high quality, U.S. dollar-denominated money market
instruments that meet Rule 2a-7 restrictions for money market funds. Specifically, cash collateral
may be invested in any of the following instruments: (a) securities issued or guaranteed as to
principal and interest by the U.S. Government or by its agencies or instrumentalities and related
custodial receipts; (b) first tier quality commercial paper and other obligations issued or
guaranteed by U.S. and foreign corporations and other issuers rated (at the time of purchase) in
the highest rating category by at least two NRSROs, or one if only rated by one NRSRO; (c) U.S.
dollar-denominated obligations issued or supported by the credit of U.S. or foreign banks or
savings institutions with total assets in excess of $1 billion (including obligations of foreign
branches of such banks) (i.e., CDs, BAs and time deposits); (d) repurchase agreements relating to
the above instruments, as well as corporate debt; and (e) unaffiliated and, to the extent permitted
by SEC guidelines, affiliated money market funds. Any such investments must be rated first tier
and must have a maturity of 397 days or less from the date of purchase.
Standby Commitment Agreements. Standby commitment agreements commit the Fund, for a stated
period of time, to purchase a stated amount of securities that may be issued and sold to the Fund
at the option of the issuer. The price of the security is fixed at the time of the commitment. At
the time of entering into the agreement, the Fund is paid a commitment fee, regardless of whether
or not the security is ultimately issued. The Fund will enter into such agreements for the purpose
of investing in the security underlying the commitment at a price that is considered advantageous
to the Fund. The Fund will limit its investment in such commitments so that the aggregate purchase
price of securities subject to such commitments, together with the value of the Funds other
illiquid investments, will not exceed 15% of its net assets taken at the time of the commitment.
The Fund segregates liquid assets in an aggregate amount equal to the purchase price of the
securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment will be issued,
and the value of the security, if issued, on the delivery date may be more or less than its
purchase price. Since the issuance of the security underlying the commitment is at the option of
the issuer, the Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the commitment period.
The purchase of a security pursuant to a standby commitment agreement and the related
commitment fee will be recorded on the date on which the security can reasonably be expected to be
issued, and the value of the security thereafter will be reflected in the calculation of the Funds
net asset value. The cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
When-Issued and Delayed Delivery Securities. The Fund may purchase or sell securities that it
is entitled to receive on a when issued basis. The Fund may also purchase or sell securities on a
delayed delivery basis or through a forward commitment. (including TBA (to be announced) basis).
These transactions involve the purchase or sale of securities by the Fund at an established price
with payment and delivery taking place in the future. The Fund enters into these transactions to
obtain what is considered an advantageous price to the Fund at the time of entering into the
transaction. When the Fund purchases securities in these transactions, the Fund segregates liquid
securities in an amount equal to the amount of its purchase commitments.
- 23 -
There can be no assurance that a security purchased on a when issued basis will be issued or
that a security purchased or sold on a delayed delivery basis or through a forward commitment will
be delivered. Also, the value of securities in these transactions on the delivery date may be more
or less than the price paid by the Fund to purchase the securities. The Fund will lose money if the
value of the security in such a transaction declines below the purchase price and will not benefit
if the value of the security appreciates above the sale price during the commitment period.
If deemed advisable as a matter of investment strategy, the Fund may dispose of or renegotiate
a commitment after it has been entered into, and may sell securities it has committed to purchase
before those securities are delivered to the Fund on the settlement date. In these cases the Fund
may realize a taxable capital gain or loss.
When the Fund engages in when-issued, TBA or forward commitment transactions, it relies on the
other party to consummate the trade. Failure of such party to do so may result in the Funds
incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase securities, and any
subsequent fluctuations in their market value, is taken into account when determining the market
value of the Fund starting on the day the Fund agrees to purchase the securities. The Fund does not
earn interest on the securities it has committed to purchase until they are paid for and delivered
on the settlement date.
Investment Restrictions
The Fund has adopted restrictions and policies relating to the investment of the Funds
assets and its activities. Certain of the restrictions are fundamental policies of the Fund and may
not be changed without the approval of the holders of a majority of the Funds outstanding voting
securities (which for this purpose and under the Investment Company Act, means the lesser of
(i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares). The Fund has also adopted certain
non-fundamental investment restrictions, which may be changed by the Board of Trustees without
shareholder approval. Set forth below are the Funds fundamental and non-fundamental investment
restrictions. Unless otherwise provided, all references below to the assets of the Fund are in
terms of current market value.
Under its fundamental investment restrictions, the Fund may not:
(1) With respect to 75% of its total assets, purchase the securities of any issuer
(except securities issued or guaranteed by the United States government or any agency or
instrumentality thereof) if, as a result, (i) more than 5% of the Funds total assets would be
invested in securities of that issuer, or (ii) the Fund would hold more than 10% of the outstanding
voting securities of that issuer.
(2) Issue senior securities, borrow money or pledge its assets, except that the Fund may
borrow from banks or enter into reverse repurchase agreements or dollar rolls in amounts
aggregating not more than 33 1/3% of the value of its total assets (calculated when the loan is
made) to take advantage of investment opportunities and may pledge up to 33 1/3% of the value of
its total assets to secure such borrowings. The Fund is also authorized to borrow an additional 5%
of its total assets without regard to the foregoing limitations for temporary purposes such as
clearance of portfolio transactions and share redemptions. For purposes of
- 24 -
these restrictions, the purchase or sale of securities on a when-issued, delayed delivery or
forward commitment basis, the purchase and sale of options and futures contracts and collateral
arrangements with respect thereto are not deemed to be the issuance of a senior security, a
borrowing or a pledge of assets.
(3) Act as an underwriter of another issuers securities, except to the extent that the Fund
may be deemed to be an underwriter within the meaning of the Securities Act in connection with the
purchase and sale of portfolio securities.
(4) Make loans except as permitted by the Investment Company Act, except that the Fund may
purchase and hold debt instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities..
(5) Purchase or sell physical commodities unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from purchasing or selling
options, futures contracts, or other derivative instruments, or from investing in securities or
other instruments backed by physical commodities).
(6) Purchase or sell real estate unless acquired as a result of ownership of securities or
other instruments (but this shall not prohibit the Fund from purchasing or selling securities or
other instruments backed by real estate or of issuers engaged in real estate activities).
(7) Purchase the securities of any issuer if, as a result, 25% or more of the Funds total
assets would be invested in the securities of issuers whose principal business activities are in
the same industry; except that this restriction shall not be applicable to securities issued or
guaranteed by the U.S. government or any agency or instrumentality thereof.
The foregoing restrictions and limitations will apply only at the time of purchase of
securities, and the percentage limitations will not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of an acquisition of securities,
unless otherwise indicated.
Under its non-fundamental investment restrictions, the Fund may not:
(1) Sell securities short, unless the Fund owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short at no added cost, and provided that
transactions in options, futures contracts, options on futures contracts, or other derivative
instruments are not deemed to constitute selling securities short.
(2) Purchase securities on margin, except that the Fund may obtain such short term credits as
are necessary for the clearance of transactions; and provided that margin deposits in connection
with futures contracts, options on futures contracts, or other derivative instruments shall not
constitute purchasing securities on margin.
(3) Pledge, mortgage or hypothecate any assets owned by the Fund except as may be necessary in
connection with permissible borrowings or investments and then such pledging, mortgaging, or
hypothecating may not exceed 33 1/3% of the Funds total assets at the time of the borrowing or
investment.
(4) Purchase securities of open-end or closed-end investment companies except in compliance
with the Investment Company Act and applicable state law.
(5) Enter into futures contracts or related options if more than 30% of the Funds net assets
would be represented by futures contracts or more than 5% of the Funds net assets
- 25 -
would be committed to initial margin deposits and premiums on futures contracts and related
options.
(6) Invest in direct interests in oil, gas or other mineral exploration programs or leases;
however, the Fund may invest in the securities of issuers that engage in these activities.
(7) Invest in illiquid securities if, as a result of such investment, more than 15% of the
Funds net assets would be invested in illiquid securities.
Defensive Investments
For temporary defensive purposes, including during periods of high cash inflows, the Fund
may depart from its principal investment strategies and invest part or all of its assets in cash
equivalents and short-term fixed-income securities or it may hold cash. During such periods, the
Fund may not be able to achieve its investment objectives. The Fund may adopt a defensive strategy
when its portfolio manager believes securities in which the Fund normally invests have elevated
risks due to political or economic factors and in other extraordinary circumstances.
The Fund may invest up to 100% of its total assets for temporary defensive purposes or to keep
cash on hand fully in cash equivalents, and short-term taxable fixed income securities. The
short-term taxable fixed income securities issuers shall have a long-term rating of at least A or
higher by S&P, Moodys or Fitch and shall have a maturity of one year or less. Short-term taxable
fixed income securities are defined to include, without limitation, the following:
(1) The Fund may invest in U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest, which are either issued or guaranteed by the U.S.
Treasury or by U.S. government agencies or instrumentalities. U.S. government agency securities
include securities issued by (a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, and the Government National
Mortgage Association, whose securities are supported by the full faith and credit of the United
States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee
Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S.
Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the
discretionary authority of the U.S. government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported
only by its credit. While the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given that it always will
do so since it is not so obligated by law. The U.S. government, its agencies, and instrumentalities
do not guarantee the market value of their securities, and consequently, the value of such
securities may fluctuate. In addition, the Fund may invest in sovereign debt obligations of
non-U.S. countries. A sovereign debtors willingness or ability to repay principal and interest in
a timely manner may be affected by a number of factors, including its cash flow situation, the
extent of its non-U.S. reserves, the availability of sufficient non-U.S. exchange on the date a
payment is due, the relative size of the debt service burden to the economy as a whole, the
sovereign debtors policy toward principal international lenders and the political constraints to
which it may be subject.
(2) The Fund may invest in certificates of deposit issued against funds deposited in a bank or
savings and loan association. Such certificates are for a definite period of time, earn a specified
rate of return, and are normally negotiable. If such certificates of deposit are non-negotiable,
they will be considered illiquid securities and be subject to the Funds 15% restriction on
investments in illiquid securities. Pursuant to the certificate of deposit, the issuer agrees to
pay the amount deposited plus interest to the bearer of the certificate on the date specified
thereon. Under current FDIC regulations, the maximum insurance payable as to any
- 26 -
one certificate of deposit is $100,000; therefore, certificates of deposit purchased by the Fund
may not be fully insured.
(3) The Fund may invest in bankers acceptances, which are short-term credit instruments used
to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The
draft is then accepted by a bank that, in effect, unconditionally guarantees to pay the face
value of the instrument on its maturity date. The acceptance may then be held by the accepting bank
as an asset or it may be sold in the secondary market at the going rate of interest for a specific
maturity.
(4) The Fund may invest in repurchase agreements which involve purchases of debt securities.
In such an action, at the time the Fund purchases the security, it simultaneously agrees to resell
and redeliver the security to the seller, who also simultaneously agrees to buy back the security
at a fixed price and time. This assures a predetermined yield for the Fund during its holding
period since the resale price is always greater than the purchase price and reflects an agreed-upon
market rate. Such actions afford an opportunity for the Fund to invest temporarily available cash.
The Fund may enter into repurchase agreements only with respect to obligations of the U.S.
government, its agencies or instrumentalities; certificates of deposit; or bankers acceptances in
which the Fund may invest. Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the Fund is limited to the ability of the
seller to pay the agreed-upon sum on the repurchase date; in the event of default, the repurchase
agreement provides that the Fund is entitled to sell the underlying collateral. If the value of the
collateral declines after the agreement is entered into, however, and if the seller defaults under
a repurchase agreement when the value of the underlying collateral is less than the repurchase
price, the Fund could incur a loss of both principal and interest. The portfolio manager monitors
the value of the collateral at the time the action is entered into and at all times during the term
of the repurchase agreement. The portfolio manager does so in an effort to determine that the value
of the collateral always equals or exceeds the agreed-upon repurchase price to be paid to the Fund.
If the seller were to be subject to a federal bankruptcy proceeding, the ability of the Fund to
liquidate the collateral could be delayed or impaired because of certain provisions of the
bankruptcy laws.
(5) The Fund may invest in bank time deposits, which are monies kept on deposit with banks or
savings and loan associations for a stated period of time at a fixed rate of interest. There may be
penalties for the early withdrawal of such time deposits, in which case the yields of these
investments will be reduced.
(6) The Fund may invest in commercial paper, which are short-term unsecured promissory notes,
including variable rate master demand notes issued by corporations to finance their current
operations. Master demand notes are direct lending arrangements between the Fund and a corporation.
There is no secondary market for the notes. However, they are redeemable by the Fund at any time.
The portfolio manager will consider the financial condition of the corporation (e.g., earning
power, cash flow, and other liquidity ratios) and will continuously monitor the corporations
ability to meet all of its financial obligations, because the Funds liquidity might be impaired if
the corporation were unable to pay principal and interest on demand. The Fund may only invest in
commercial paper rated A-2 or better by S&P, Prime-2 or higher by Moodys or F2 or higher by Fitch,
or unrated commercial paper which is, in the opinion of the portfolio manager, of comparable
quality.
Portfolio Turnover
While the Fund generally does not expect to engage in trading for short term gains, it
will effect portfolio transactions without regard to any holding period if, in Fund managements
- 27 -
judgment, such transactions are advisable in light of a change in circumstances of a particular
company or within a particular industry or in general market, economic or financial conditions. The
portfolio turnover rate is calculated by dividing the lesser of the Funds annual sales or
purchases of portfolio securities (exclusive of purchases or sales of U.S. government securities
and all other securities whose maturities at the time of acquisition were one year or less) by the
monthly average value of the securities in the portfolio during the year. A high rate of portfolio
turnover results in certain tax consequences, such as increased capital gain dividends and/or
ordinary income dividends, and in correspondingly greater transaction costs in the form of dealer
spreads and brokerage commissions, which are borne directly by the Fund.
[Portfolio Holdings Disclosure
The Fund has adopted a portfolio holdings disclosure policy which governs the
dissemination of the Funds portfolio holdings. In accordance with this policy, the Fund may
provide portfolio holdings information to third parties no earlier than the time a report is filed
with the Commission that is required to contain such information or one day after the information
is posted on the Funds publicly accessible website, [ ]. [Currently, the Fund generally
make available complete portfolio holdings information on the Funds website following the end of
each month with an approximately one-month lag. Additionally, the Fund publishes on the website a
list of its top ten holdings as of the end of each month, approximately 2-5 business days after the
end of the month for which the information is current.] This information will remain available on
the website at least until the Fund files with the Commission its Form N-CSR or Form N-Q for the
period that includes the date as of which the website information is current.
Additionally, the Fund may disclose portfolio holdings information that has not been included
in a filing with the Commission or posted on the Funds website (i.e., non-public portfolio
holdings information) only if there is a legitimate business purpose for doing so and if the
recipient is required, either by explicit agreement or by virtue of the recipients duties to the
Fund as an agent or service provider, to maintain the confidentiality of the information and to not
use the information in an improper manner (e.g., personal trading). In this connection, the Fund
may disclose on an ongoing basis non-public portfolio holdings information in the normal course of
their investment and administrative operations to various service providers, including the Funds
Manager, independent registered public accounting firm, custodian, financial printer, proxy voting
service(s), and to the legal counsel for the Funds independent trustees. The Funds investment
manager may also provide certain portfolio holdings information to broker-dealers from time to time
in connection with the purchase or sale of securities or requests for price quotations or bids on
one or more securities. In providing this information, reasonable precautions, including
limitations on the scope of the portfolio holdings information disclosed, are taken in an effort to
avoid potential misuse of the disclosed information.
Non-public portfolio holdings information may be provided to other persons if approved by the
Funds Chief Compliance Officer or Secretary upon a determination that there is a legitimate
business purpose for doing so, the disclosure is consistent with the interests of the Fund, and the
recipient is obligated to maintain the confidentiality of the information and not misuse it.
The Chief Compliance Officer of the Fund and the Manager periodically monitor overall
compliance with the policy to ascertain whether portfolio holdings information is disclosed in a
manner that is consistent with the Funds policy. Reports are made to the Board on an annual basis.
- 28 -
There is no assurance that the Funds policies on portfolio holdings information will protect
the Fund from the potential misuse of portfolio holdings information by individuals or firms in
possession of such information.]
Information on Trustees and Officers
The Board of Trustees of the Fund (the Board) consists of [ ] individuals (each a
Trustee), [ ] of whom are not interested persons of the Fund as defined in the Investment
Company Act (the Independent Trustees). The Board has overall responsibility for the oversight
of the Fund. [The Chairman of the Board is an Independent Trustee], and the Chairman of each Board
committee (each, a Committee) is an Independent Trustee. The Board has [five] standing
Committees: an Audit Committee, a Governance and Nominating Committee, a Compliance Committee, [a
Performance Oversight Committee] and an [Executive Committee]. The Chairman of the Boards role is
to preside at all meetings of the Board, and to act as a liaison with service providers, officers,
attorneys, and other Trustees generally between meetings. The Chairman of each Committee performs a
similar role with respect to the Committee. The Chairman of the Board or a Committee may also
perform such other functions as may be delegated by the Board or the Committee from time to time.
The Independent Trustees meet regularly outside the presence of Fund management, in executive
session or with other service providers to the Fund. The Board has regular meetings [five] times a
year, and may hold special meetings if required before its next regular meeting. Each Committee
meets regularly to conduct the oversight functions delegated to that Committee by the Board and
reports its findings to the Board. The Board and each standing Committee conduct annual assessments
of their oversight function and structure. The Board has determined that the Boards leadership
structure is appropriate because it allows the Board to exercise independent judgment over
management and to allocate areas of responsibility among Committees and the full Board to enhance
effective oversight.
The Board has engaged the Manager to manage the Fund on a day-to day basis. The Board is
responsible for overseeing the Manager, other service providers, the operations of the Fund and
associated risk in accordance with the provisions of the Investment Company Act, state law, other
applicable laws, the Funds charter, and the Funds investment objectives and strategies. The Board
reviews, on an ongoing basis, the Funds performance, operations, and investment strategies and
techniques. The Board also conducts reviews of the Manager and its role in running the operations
of the Fund.
Day-to-day risk management with respect to the Fund is the responsibility of the Manager
or other service providers (depending on the nature of the risk), subject to the supervision of the
Manager. The Fund is subject to a number of risks, including investment, compliance, operational
and valuation risks, among others. While there are a number of risk management functions performed
by the Manager or other service providers, as applicable, it is not possible to eliminate all of
the risks applicable to the Fund. Risk oversight forms part of the Boards general oversight of the
Fund and is addressed as part of various Board and Committee activities. The Board, directly or
through a Committee, also reviews reports from, among others, management, the independent
registered public accounting firm for the Fund and internal auditors for the investment adviser or
its affiliates, as appropriate, regarding risks faced by the Fund and managements or the service
providers risk functions. The Committee system facilitates the timely and efficient consideration
of matters by the Trustees, and facilitates effective oversight of compliance with legal and
regulatory requirements and of the Funds activities and associated risks. The Board has appointed
a Chief Compliance Officer, who oversees the implementation and testing of the Funds compliance
program and reports to the Board regarding compliance matters for the Fund and their service providers. The Independent
Trustees have engaged independent legal counsel to assist them in performing their oversight
responsibilities.
- 29 -
The members of the Audit Committee are [ ], all of whom are Independent
Trustees. The principal responsibilities of the Audit Committee are to approve the selection,
retention, termination and compensation of the Funds independent registered public accounting firm
(the independent auditors) and to oversee the independent auditors work. The Audit Committees
responsibilities include, without limitation, to (1) evaluate the qualifications and independence
of the independent auditors; (2) approve all audit engagement terms and fees for the Fund; (3)
review the conduct and results of each independent audit of the Funds financial statements; (4)
review with the independent auditor any audit problems or difficulties encountered during or
related to the conduct of the audit; (5) review the internal controls of the Fund and its service
providers with respect to accounting and financial matters; (6) oversee the performance of the
Funds internal audit function provided by its investment adviser, administrator, pricing agent or
other service provider; (7) oversee policies, procedures and controls regarding valuation of the
Funds investments; and (8) resolve any disagreements between Fund management and the independent
auditors regarding financial reporting. The Board has adopted a written charter for the Audit
Committee.
The members of the Governance and Nominating Committee (the Governance Committee) are
[ ], all of whom are Independent Trustees. The principal responsibilities
of the Governance Committee are to (1) identify individuals qualified to serve as Independent
Trustees of the Fund and recommend Independent Trustee nominees for election by shareholders or
appointment by the Board; (2) advise the Board with respect to Board composition, procedures and
committees (other than the Audit Committee); (3) oversee periodic self-assessments of the Board and
committees of the Board (other than the Audit Committee); (4) review and make recommendations
regarding Independent Trustee compensation; and (5) monitor corporate governance matters and
develop appropriate recommendations to the Board. The Governance Committee may consider nominations
for the office of Trustee made by Fund shareholders as it deems appropriate. Fund shareholders who
wish to recommend a nominee should send nominations to the Secretary of the Fund that include
biographical information and set forth the qualifications of the proposed nominee. The Board has
adopted a written charter for the Governance Committee. The Board has adopted a written charter for
the Governance Committee.
The members of the Compliance Committee are [ ], all of whom are
Independent Trustees. The Compliance Committees purpose is to assist the Board in fulfilling its
responsibility to oversee regulatory and fiduciary compliance matters involving the Fund and the
Funds third party service providers. The Compliance Committees responsibilities include, without
limitation, to (1) oversee the compliance policies and procedures of the Fund and its service
providers; (2) review information on and, where appropriate, recommend policies concerning the
Funds compliance with applicable law; and (3) review reports from and make certain recommendations
and determinations regarding the Funds Chief Compliance Officer. The Board has adopted a written
charter for the Compliance Committee.
[The members of the Performance Oversight Committee (the Performance Committee) are
[ ], all of whom are Independent Trustees, and [ ], who [is an/are]
interested Trustee[s]. The Performance Committees purpose is to assist the Board in fulfilling its
responsibility to oversee the Funds investment performance relative to its agreed-upon performance
objectives. The Performance Committees responsibilities include, without limitation, to (1) review
the Funds investment objectives, policies and practices, (2) recommend to the Board specific
investment tools and techniques employed by the Manager, (3) recommend to the Board appropriate
investment performance objectives based on its review of appropriate benchmarks and competitive
universes, (4) review the Funds investment performance relative to agreed-upon performance
objectives and (5) review information on unusual or exceptional investment matters. The Board has
adopted a written charter for the Performance Committee.]
- 30 -
The members of the Executive Committee are [ ], all of whom are Independent
Trustees, and [ ], who [is an/are] interested Trustee[s]. The principal responsibilities of
the Executive Committee are to (1) act on routine matters between meetings of the Board; (2) act on
such matters as may require urgent action between meetings of the Board; and (3) exercise such
other authority as may from time to time be delegated to the Executive Committee by the Board. The
Board has adopted a written charter for the Executive Committee.
The Independent Trustees have adopted a statement of policy that describes the experience,
qualifications, skills and attributes that are necessary and desirable for potential Independent
Trustee candidates (the Statement of Policy). The Board believes that each Independent Trustee
satisfied, at the time he or she was initially elected or appointed a Trustee, and continues to
satisfy, the standards contemplated by the Statement of Policy. Furthermore, in determining that a
particular Trustee was and continues to be qualified to serve as a Trustee, the Board has
considered a variety of criteria, none of which, in isolation, was controlling. The Board believes
that, collectively, the Trustees have balanced and diverse experience, skills, attributes and
qualifications, which allow the Board to operate effectively in governing the Fund and protecting
the interests of shareholders. Among the attributes common to all Trustees are their ability to
review critically, evaluate, question and discuss information provided to them, to interact
effectively with the Funds investment adviser, sub-advisers, other service providers, counsel and
independent auditors, and to exercise effective business judgment in the performance of their
duties as Trustees. Each Trustees ability to perform his or her duties effectively is evidenced by
his or her educational background or professional training; business, consulting, public service or
academic positions; experience from service as a board member of the Fund, other investment funds,
public companies, or non-profit entities or other organizations; ongoing commitment and
participation in Board and committee meetings, as well as their leadership of standing and ad hoc
committees throughout the years; or other relevant life experiences. Information about the specific
experience, skills, attributes and qualifications of each Trustee, which in each case led to the
Boards conclusion that the Trustee should serve (or continue to serve) as a trustee of the Fund,
is provided in below, in Biographical Information.
Biographical Information
Certain biographical and other information relating to the Trustees of the Fund is set forth
below, including their address and year of birth, their principal occupations for at least the last
five years, the length of time served and any public directorships. The address of each of the
Trustees is [6701 Center Drive West, Suite 655, Los Angeles, CA 90045].
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Certain biographical and other information relating to the officers of the Fund is set
forth below, including their year of birth, their principal occupations for at least the last five
years, the length of time served and any public directorships:
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Number of |
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Portfolios in Fund |
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Position |
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Length of |
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Principal Occupation(s ) |
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Complex |
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Other Directorships/ |
Name and Age |
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With Fund |
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Time Served |
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During Past Five Years |
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Overseen by Director |
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Trusteeships Held |
OFFICERS |
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- 32 -
The Board has concluded that, based on each Trustees experience, qualifications, attributes
or skills on an individual basis and in combination with those of the other Trustee, each Trustee
should serve as a Trustee of the Board. Among the attributes common to all Trustee are their
ability to review critically, evaluate, question and discuss information provided to them, to
interact effectively with the Manager, other service providers, counsel and the independent
registered public accounting firm, and to exercise effective business judgment in the performance
of their duties as Trustee. A Trustees ability to perform his or her duties effectively may have
been attained through the Trustees educational background or professional training; business,
consulting, public service or academic positions; experience from service as a board member of the
Fund, other investment funds, public companies, or non-profit entities or other organizations;
and/or other life experiences. Also, set forth below is a brief discussion of the specific
experience, qualifications, attributes or skills of each Trustee that led the Board to conclude
that he or she should serve as a Trustee.
[DISCUSSION OF TRUSTEE QUALIFICATIONS]
Share Ownership
As of [ ], 2010, no Trustee owned shares of the Fund. Trustees of the Fund are
eligible to purchase Institutional Shares of the Fund.
As of [ ], 2010, the Trustees and officers of the Fund then in office as a group owned
an aggregate of less than 1% of the outstanding shares of the Fund. As of December 31, 2009, none
of the non-interested Trustees of the Fund then in office or their immediate family members owned
beneficially or of record any securities of affiliates of the Manager, the Distributor, or any
person directly or indirectly controlling, controlled by, or under common control with the Manager
or the Distributor.
As of [ ], 2010, del Rey Global Investors, LLC, the Manager, is deemed a control person
of the Fund by virtue of its direct ownership of 100% of the Funds outstanding shares.
Compensation of Trustees
Each an Trustee who is a non-interested Trustee is paid as compensation an annual retainer of
$[ ] per year for his or her services as a Board member of the Fund, and a $[ ] Board
meeting fee to be paid for each Board meeting up to [five] Board meetings held in a calendar year
(compensation for meetings in excess of this number to be determined on a case-by-case basis),
together with out-of-pocket expenses in accordance with a Board policy on travel and other business
expenses relating to attendance at meetings. In addition, the Chairman and Vice-Chairman of the
Board are paid as compensation an additional annual retainer of $[ ] and $[ ],
respectively, per year. The Chairmen of the Audit Committee, Compliance Committee, Governance
Committee, and Performance Committee are paid as compensation an additional annual retainer of
$[ ], respectively.
[The Fund compensates [ ] for his services as its Chief Compliance Officer. ]
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Estimated |
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Aggregate |
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Annual |
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Compensation |
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Benefits Upon |
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Compensation |
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from the Fund |
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Retirement |
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from the Fund |
Interested Trustees |
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- 33 -
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Estimated |
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Aggregate |
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Annual |
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Aggregate |
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Compensation |
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Benefits Upon |
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Compensation |
Name |
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from the Fund |
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Retirement |
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from the Fund |
Non-Interested Trustees |
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Code of Ethics
The Fund, the Manager and our distributor have adopted codes of ethics under Rule 17j-1
under the 1940 Act. These codes permit personnel subject to the codes to invest in securities,
including securities that may be purchased or held by the Fund. These codes of ethics can be
reviewed and copied at the SECs Public Reference Room in Washington, D.C. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at 1-202-551-8090. The
codes of ethics are available on the EDGAR Database on the SECs web site (http://www.sec.gov), and
copies of these codes may be obtained, after paying a duplicating fee, by electronic request at the
following e-mail address: publicinfo@sec.gov, or by writing the SECs Public Reference Section,
Washington, D.C. 20549-0102.
Proxy Voting Policies and Procedures
The Board of has delegated the voting of proxies relating to the Funds portfolio
holdings to the Manager pursuant to the Managers Proxy Voting Policies and Procedures. The
Manager exercises its voting responsibility, as a fiduciary, with the goal of maximizing value to
shareholders consistent with the governance laws and investment policies of the Fund. While
portfolio holdings are not purchased to exercise control or to seek to effect corporate change
through share ownership, the Manager supports sound corporate governance practices within companies
in which they invest.
The Managers Proxy Voting Policies and Procedures seek to ensure that proxies for which the
Manager has ultimate voting authority are voted consistently and solely in the best economic
interests of the beneficiaries of these equity investments. In addition, the Manager may determine
not to vote proxies relating to certain securities if the Manager determines it would be in its
clients overall best interests not to vote, such as when the securities are foreign securities
subject to share blocking (short-term prohibitions on selling after voting). If the Fund requests
the Manager to follow specific voting guidelines, the Manager will review the request and inform
the Fund only if the Manager is not able to follow the Funds request.
- 34 -
The Manager will generally vote with the management of the companies in which the Fund invests
on all routine matters, but will analyze other proposals from management on a case by case basis.
The Manager will generally, except under special circumstances, oppose any ant-takeover proposals.
Any shareholder proposals will be individually analyzed by the Manager.
The portfolio manager of the Fund is responsible for oversight of the proxy voting process. A
copy of Managers Proxy Voting Policies and Procedures will be provided upon written request. Also,
shareholders may request information on how the Manager voted the Funds securities. The Manager
will provide such information through the most recently completed calendar quarter.
No later than [ ] of each year, information regarding how the Manager, on behalf of the
Fund, voted proxies relating to the Funds portfolio securities for the 12 months ended the
preceding [ ] will be available without charge by calling 1-800-736-2316 or on the SECs
website at sec.gov. A copy of the Managers Proxy Voting Policies and Procedures also is available
without charge by calling [ ].
Although the Manager does not anticipate that proxy voting will generally present a conflict
of interest between the Fund and the Manager or one or more of its affiliates, the Manager
recognizes that it is possible that a conflict of interest could arise. If the Manager identifies
a situation which it believes presents a conflict of interest and if the matter is one for which
the Managers proxy policies require a specific vote (e.g., an anti-takeover matter), then the
proxy will be voted in accordance with the predetermined policy.
Investment Manager
del Rey Global Investors, LLC, the Manager, located at 6701 Center Drive West, Suite 655,
Los Angeles, CA 90045 serves as the investment adviser of the Fund. The Manager is a Delaware
limited liability company.
Effective [ ], the Fund entered into a new investment advisory agreement with the
Manager (the Management Agreement), pursuant to which the Manager receives for its services to
the Fund monthly compensation at the annual rate of [ ]% of the average daily net assets of the
Fund.
Pursuant to the Management Agreement, the Manager may delegate certain of its management
functions under the Management Agreement to the extent permitted by applicable law.
Unless sooner terminated, the Management Agreement will continue in effect with respect to the
Fund until [ ], 2012. Thereafter, the Management Agreement will continue in effect for
successive 12-month periods, provided that the continuance is approved at least annually (i) by the
vote of a majority of the Trustees who are not parties to the Management Agreement or interested
persons (as such term is defined in the 1940 Act) of any party thereto, cast in person at a
meeting called for the purpose of voting on such approval and (ii) by the Trustees or by the vote
of a majority of the outstanding shares of the Fund (as defined under Information About the Funds
Shares). The Management Agreement is terminable at any time without penalty by the Fund (by
specified Trustee or shareholder action) or by the Manager on 60 days written notice.
Information Regarding the Portfolio Manager
Paul Hechmer is the Funds portfolio manager.
- 35 -
Other Funds and Accounts Managed
The following table sets forth information about funds and accounts other than the Fund
for which the Funds portfolio manager is primarily responsible for the day-to-day portfolio
management as of the Funds fiscal year ended [ ], 2010.
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Number of Other Accounts Managed |
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Number of Accounts and Assets for which |
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and Assets by Account Type |
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Advisory Fee Is Performance-Based |
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Registered |
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Other Pooled |
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Registered |
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Other Pooled |
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Investment |
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Investment |
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Other |
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Investment |
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Investment |
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Other |
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Name of Portfolio Manager |
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Companies |
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Vehicles |
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Accounts |
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Companies |
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Vehicles |
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Accounts |
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Paul Hechmer |
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[ ] |
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[ ] |
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[ ] |
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[ ] |
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[ ] |
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[ ] |
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$ |
[ ] |
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$ |
[ ] |
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$ |
[ ] |
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$ |
[ ] |
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$ |
[ ] |
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$ |
[ ] |
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Portfolio Manager Compensation Overview
The Managers portfolio manager participates in a highly competitive compensation structure
with the purpose of attracting and retaining the most talented investment professionals and
rewarding them through a total compensation program. The total compensation program consists of
both a base salary and an annual bonus that can be a multiple of the base salary. Bonus
compensation is primarily a function of the firms overall annual profitability.
The total compensation package for portfolio managers includes an equity-like incentive (whose
value is determined by various factors including the increase in profitability of the Manager over
time).
Portfolio Manager Potential Material Conflicts of Interest
Actual or apparent conflicts of interest may arise when a portfolio manager has
day-to-day management responsibilities with respect to more than one account. More specifically,
portfolio managers who manage multiple accounts are presented with the following potential
conflicts:
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The management of multiple accounts may result in a portfolio manager devoting
unequal time and attention to the management of each account. The Manager seeks to
manage such competing interests for the time and attention of portfolio managers by
having portfolio managers focus on a particular investment discipline. Most
accounts managed by a portfolio manager in a particular investment strategy are
managed using the same investment models. |
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If a portfolio manager identifies a limited investment opportunity which may be
suitable for more than one account, an account may not be able to take full
advantage of that opportunity due to an allocation of filled purchase or sale
orders across all eligible accounts. To deal with these situations, the Manager has
adopted procedures for allocating portfolio transactions across multiple accounts. |
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With respect to many of its clients accounts, the Manager determines which
broker to use to execute transaction orders, consistent with its duty to seek best |
- 36 -
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execution of the transaction. However, with respect to certain other accounts, the
Manager may be limited by the client with respect to the selection of brokers or may
be instructed to direct trades through a particular broker. In these cases, the
Manager may place separate, non-simultaneous, transactions for the Fund and other
accounts which may temporarily affect the market price of the security or the
execution of the transaction, or both, to the detriment of the Fund or the other
accounts. |
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Some clients are subject to different regulations. As a consequence of this
difference in regulatory requirements, some clients may not be permitted to engage
in all the investment techniques or transactions or to engage in these transactions
to the same extent as the other accounts managed by the portfolio manager. Finally,
the appearance of a conflict of interest may arise where the Manager has an
incentive, such as a performance-based management fee, which relates to the
management of some accounts, with respect to which a portfolio manager has
day-to-day management responsibilities. |
The Manager has adopted certain compliance procedures which are designed to address these
types of conflicts common among investment managers. However, there is no guarantee that such
procedures will detect each and every situation in which a conflict arises.
Fund Service Providers
Transfer Agent
Under its Transfer Agency Agreement with the Fund, [ ] (the Transfer Agent), as
transfer agent has undertaken to perform some or all of the following services: (i) answer
shareholder inquiries and respond to requests for information regarding the Fund; (ii) process
purchase and redemption transactions; (iii) establish and maintain shareholder accounts and
subaccounts; (iv) furnish confirmations in accordance with applicable law, and provide periodic
account statements to each shareholder; (v) furnish proxy statements and proxies, annual and
semiannual financial statements, and dividend, distribution and tax notices to shareholders; (vi)
act as income disbursing agent; and (vii) maintain appropriate records relating to its services.
The Fund may appoint one or more sub-transfer agents in the performance of its services.
[As compensation for the services rendered by Transfer Agent under the Transfer Agency
Agreement and the assumption by Transfer Agent of related expenses, Transfer Agent is entitled to a
fee from the Fund, payable monthly, at an annual rate of [ ] of the average daily net assets of
the Fund. In addition, Transfer Agent may be reimbursed for certain expenses as provided under the
Transfer Agency Agreement.]
Custodian
Under its Custodian Agreement with the Fund, [ ] (the Custodian) (i) holds the Funds
cash and securities, (ii) maintains such cash and securities in separate accounts in the name of
the Fund, (iii) makes receipts and disbursements of funds on behalf of the Fund, (iv) receives,
delivers and releases securities on behalf of the Fund, (v) collects and receives all income,
principal and other payments in respect of the Funds investments held by the Custodian and (vi)
maintains the accounting records of the Fund. The Custodian may employ one or more subcustodians,
[provided that the Custodian, subject to certain monitoring responsibilities, shall have no more
responsibility or liability to the Fund on account of any action or omission of any subcustodian so
employed than such subcustodian has to the Custodian and that the responsibility or liability of
the subcustodian to the Custodian shall
- 37 -
conform to the resolution of the Trustees of the Fund authorizing the appointment of the particular
subcustodian (or, in the case of foreign securities, to the terms of any agreement entered into
between the Custodian and such subcustodian to which such resolution relates)]. In addition, the
Funds custodial arrangements provide, with respect to foreign securities, that the Custodian shall
not be: (i) responsible for the solvency of any subcustodian appointed by it with reasonable care;
(ii) responsible for any act, omission, default or for the solvency of any eligible foreign
securities depository; and (iii) liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism
or any loss where the subcustodian has otherwise exercised reasonable care. The Custodian also may
appoint agents to carry out such of the provisions of the Custodian Agreement and the Foreign
Custody Agreement as the Custodian may from time to time direct, provided that the appointment of
an agent shall not relieve the Custodian of any of its responsibilities under either Agreement.
[As compensation for the services rendered with respect to the Fund by the Custodian to the
Fund and the assumption by the Custodian of certain related expenses, the Custodian is entitled to
payment from the Fund as follows: (a) a basic custodial fee of (i) $[ ] annually for the
Fund; plus (ii) [ ] annually of the Funds average daily net assets to the extent they
exceed $100 million; plus (b) a basic accounting fee of (i) $[ ] annually for the Fund, plus
(ii) [ ] annually of the Funds average daily net assets to the extent they exceed $50
million; plus (c) a fixed dollar fee for each trade in portfolio securities; plus (d) a fixed
dollar fee for each time that the Custodian receives or transmits funds via wire; plus (e)
reimbursement of expenses incurred by the Custodian for telephone, postage, courier fees, office
supplies and duplicating. The fees referred to in clauses (c) and (d) are subject to annual upward
adjustments based on increases in the Consumer Price Index for All Urban Consumers, provided that
the Custodian may permanently or temporarily waive all or any portion of any upward adjustment. ]
The Custodians fees under the Custodian Agreement are subject to reduction based on the
Funds daily-uninvested U.S. cash balances (if any).
[Unless sooner terminated, the Funds Transfer Agency Agreement and Custodian Agreement will
continue in effect with respect to the Fund until
[ ],
20 . Thereafter, each of the Agreements
will continue in effect for successive 12-month periods, provided that the continuance is approved
at least annually (i) by the vote of a majority of the Trustees who are not parties to the
applicable Agreement or interested persons (as such term is defined in the 1940 Act) of any party
thereto, cast in person at a meeting called for the purpose of voting on such approval and (ii) by
the Trustees or by the vote of a majority of the outstanding shares of the Fund (as defined under
Information About the Funds Shares). Each Agreement is terminable at any time without penalty by
the Fund (by specified Trustee or shareholder action) or by the Custodian or Transfer Agent, as the
case may be, on 60 days written notice.]
Administrator
[ ] (the Administrator) acts as administrator for the Fund under an
Administration Agreement. Subject to the general supervision of the Board, the Administrator
provides supervision of all aspects of the Funds non-investment advisory operations and performs
various corporate secretarial, treasury and blue sky services, including but not limited to: [(i)
maintaining office facilities and furnishing corporate officers for the Fund;] (ii) furnishing data
processing services, clerical services, and executive and administrative services and standard
stationery and office supplies; (iii) performing all functions ordinarily performed by the office
of a corporate treasurer, and furnishing the services and facilities ordinarily incident thereto,
such as expense accrual monitoring and payment of the Funds bills, preparing monthly
reconciliation of the Funds expense records, updating projections of annual expenses, preparing
materials for review by the Board and compliance testing;
- 38 -
(iv) preparing
and submitting reports to the Funds shareholders and the Commission; (v) preparing and arranging
for printing of financial statements; (vi) preparing monthly Fund profile reports; (vii) preparing
and filing the Funds federal and state tax returns (other than those required to be filed by the
Funds Custodian and Transfer Agent) and providing shareholder tax information to the Transfer
Agent; (viii) assisting the Manager, at the Managers request, in monitoring and developing
compliance procedures for the Fund which will include, among other matters, procedures to assist
the Manager in monitoring compliance with the Funds investment objective, policies, restrictions,
tax matters and applicable laws and regulations; (ix) assisting in marketing strategy and product
development; (x) performing oversight/management responsibilities, such as the supervision and
coordination of certain of the Funds service providers; (xi) performing blue sky compliance
functions; (xii) assisting in maintaining corporate records and good standing status of the Trust
in its state of organization; and (xiii) monitoring the Trusts arrangements with respect to
services provided by third party service organizations to their customers who are the beneficial
owners of shares, pursuant to servicing arrangements between the Fund and such servicing agents.
[Subject to the limitations described below, as compensation for its administrative services
and the assumption of related expenses, the Administrator is entitled to a fee from the Fund,
computed daily and payable monthly, at an annual rate of [ ]% of the average daily net assets
of the Fund.]
Unless sooner terminated, the Administration Agreement will continue in effect until [ ],
20 , and thereafter for successive one-year terms with respect to the Fund, provided that the
Agreement is approved annually (i) by the Board or (ii) by the vote of a majority of the
outstanding shares of the Fund (as defined under Information About the Funds Shares), provided
that in either event the continuance also is approved by a majority of the Trustees who are not
parties to the Agreement and who are not interested persons (as defined in the 1940 Act) of any
party thereto, by vote cast in person at a meeting called for the purpose of voting on such
approval. The Administration Agreement is terminable at any time without penalty by the Fund on at
least 60 days written notice to the Administrator. The Administrator may terminate the
Administration Agreement at any time without penalty after at least 60 days written notice to the
Fund. The Administration Agreement provides that the Administrator may render similar services to
others so long as its services under such Agreement are not impaired thereby. The Administration
Agreement also provides that the Trust will indemnify the Administrator against all claims except
those resulting from the willful misfeasance, bad faith or negligence of the Administrator, or the
Administrators breach of confidentiality.
Distributor
[The Fund also has entered into a Distribution Agreement under which [ ] (the
Distributor), with principal offices at [ ], as agent, sells shares of the Fund on a
continuous basis. The Distributor pays the cost of printing and distributing prospectuses to
persons who are not shareholders of the Fund (excluding preparation and typesetting expenses) and
of certain other distribution efforts. No compensation is payable by the Fund to the Distributor
for such distribution services. However, the Manager has entered into an agreement with the
Distributor under which it makes payments to the Distributor in consideration for its services
under the Distribution Agreement. The payments made by the Manager to the Distributor do not
represent an additional expense to the Trust or its shareholders. The Distribution Agreement
provides that the Fund will indemnify the Distributor against certain liabilities relating to
untrue statements or omissions of material fact except those resulting from the reliance on
information furnished to the Fund by the Distributor, or those resulting from the willful
misfeasance, bad faith or negligence of the Distributor, or the Distributors breach of
confidentiality. ]
- 39 -
[Shareholder Servicing Plan
The Board has approved a Shareholder Servicing Plan (Servicing Plan) with respect to
the Institutional Shares of the Fund pursuant to which such class may pay banks, broker-dealers or
other financial institutions that have entered into a shareholder services agreement (a
Shareholder Servicing Agreement) with the Fund (Servicing Agents) in connection with
shareholder support services that they provide to the class. Payments under the Servicing Plan will
be calculated and paid monthly at a rate set from time to time by the Board, provided that the
annual rate may not exceed 0.25% of the average daily net assets of the Institutional Shares. The
shareholder services provided by the Servicing Agents pursuant to the Servicing Plan may include,
among other services, providing general shareholder liaison services, including responding to
shareholder inquiries and requests for information, and providing such other similar services as
may be agreed.
The Servicing Plan was approved by the Board, including a majority of the Independent Trustees
who have no direct or indirect financial interest in the operation of the Servicing Plan or any
Shareholder Services Agreement. The Servicing Plan continues in effect as long as such continuance
is specifically so approved at least annually by a vote of the Board, including a majority of
Independent Trustees who have no direct or indirect financial interest in the operation of the
Servicing Plan or any Shareholder Services Agreement. The Servicing Plan may be terminated by the
Fund with respect to a class of shares by a vote of a majority of such Independent Trustees.
Pursuant to separate Shareholder Services Agreements between the Company, on behalf of the
Fund, and [ ], [ ] has agreed to provide shareholder services to their customers that
are shareholders of the Institutional Shares pursuant to the Servicing Plan. The Fund or the
Manager may enter into similar agreements with certain service organizations, including
broker-dealers and banks whose clients are shareholders of the Fund, to act as Servicing Agents and
to perform shareholder support services with respect to such clients.
The Manager has entered into a Services Agreement with [ ], pursuant to which [ ]
has agreed to provide certain recordkeeping and other shareholder services for its clients who hold
shares of the Fund. [ ] receives a fee from the Manager for providing these services.
Conflict of interest restrictions may apply to the receipt by Servicing Agents of compensation
from the Fund or the Manager in connection with the investment of fiduciary assets in Fund shares.
Servicing Agents, including banks regulated by the Comptroller of the Currency, the Federal Reserve
Board or the Federal Deposit Insurance Corporation, and investment advisers and other money
managers are urged to consult their legal advisers before investing such assets in Fund shares.]
Brokerage Allocation and Other Practices
Subject to policies established by the Board, the Manager is primarily responsible for
the execution of the Funds portfolio transactions and the allocation of brokerage. The Manager
does not execute transactions through any particular broker or dealer, but seeks to obtain the best
net results for the Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution, operational
facilities of the firm and the firms risk and skill in positioning blocks of securities.
While the Manager generally seeks reasonable trade execution costs, the Fund does not
necessarily pay the lowest spread or commission available, and payment of the lowest commission or
spread is not necessarily consistent with obtaining the best price and execution in particular
transactions. Subject to applicable legal requirements, the Manager may select a
- 40 -
broker based partly upon brokerage or research services provided to the Manager and its clients,
including the Fund. In return for such services, the Manager may cause the Fund to pay a higher
commission than other brokers would charge if the Manager determines in good faith that the
commission is reasonable in relation to the services provided.
In selecting brokers or dealers to execute portfolio transactions, the Manager seeks to obtain
the best price and most favorable execution for the Fund, taking into account a variety of factors
including: (i) the size, nature and character of the security or instrument being traded and the
markets in which it is purchased or sold; (ii) the desired timing of the transaction; (iii) the
Managers knowledge of the expected commission rates and spreads currently available; (iv) the
activity existing and expected in the market for the particular security or instrument, including
any anticipated execution difficulties; (v) the full range of brokerage services provided; (vi) the
brokers or dealers capital (vii) the quality of research and research services provided; (viii)
the reasonableness of the commission, dealer spread or its equivalent for the specific transaction;
and (ix) the Managers knowledge of any actual or apparent operational problems of a broker or
dealer.
Section 28(e) of the Exchange Act (Section 28(e)) permits an investment adviser, under
certain circumstances, to cause an account to pay a broker or dealer a commission for effecting a
transaction that exceeds the amount another broker or dealer would have charged for effecting the
same transaction in recognition of the value of brokerage and research services provided by that
broker or dealer. This includes commissions paid on riskless principal transactions under certain
conditions. Brokerage and research services include: (1) furnishing advice as to the value of
securities, including pricing and appraisal advice, credit analysis, risk measurement analysis,
performance and other analysis, as well as the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of securities; (2)
furnishing analyses and reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy, and the performance of accounts; and (3) effecting securities
transactions and performing functions incidental to securities transactions (such as clearance,
settlement, and custody). The Manager believes that access to independent investment research is
beneficial to its investment decision-making processes and, therefore, to the Fund.
The Manager may participate in client commission arrangements under which the Manager may
execute transactions through a broker-dealer and request that the broker-dealer allocate a portion
of the commissions or commission credits to another firm that provides research to the Manager.
The Manager believes that research services obtained through soft dollar or commission sharing
arrangements enhance its investment decision-making capabilities, thereby increasing the prospects
for higher investment returns. The Manager will engage only in soft dollar or commission sharing
transactions that comply with the requirements of Section 28(e). The Manager regularly evaluates
the soft dollar products and services utilized, as well as the overall soft dollar and commission
sharing arrangements to ensure that trades are executed by firms that are regarded as best able to
execute trades for client accounts, while at the same time providing access to the research and
other services the Manager views as have an effect on its trading results.
The Manager may utilize soft dollars and related services, including research (whether
prepared by the broker-dealer or prepared by a third-party and provided to the Manager by the
broker-dealer) and execution or brokerage services within applicable rules and the Managers
policies to the extent that such permitted services do not compromise the Managers ability to seek
to obtain best execution. In this regard, the portfolio management investment and/or trading teams
may consider a variety of factors, including the degree to which the broker-dealer: (a) provides
access to company management; (b) provides access to their analysts; (c) provides meaningful or
insightful research notes on companies or other potential investments; (d) facilitates calls on
which meaningful or insightful ideas about companies or potential
- 41 -
investments are discussed; (e) facilitates conferences at which meaningful or insightful ideas
about companies or potential investments are discussed; or (f) provides research tools such as
market data, financial analysis, and other third party related research and brokerage tools that
aid in the investment process.
Research-oriented services for which the Manager might pay with Fund commissions may be in
written form or through direct contact with individuals and may include information as to
particular companies or industries and securities or groups of securities, as well as market,
economic, or institutional advice and statistical information, political developments and technical
market information that assists in the valuation of investments. Except as noted immediately
below, research services furnished by brokers may be used in servicing some or all client accounts
and not all services may be used in connection with the Fund or account that paid commissions to
the broker providing such services. In some cases, research information received from brokers by
mutual fund management personnel, or personnel principally responsible for the Managers
individually managed portfolios, is not necessarily shared by and between such personnel. Any
investment advisory or other fees paid by the Fund to the Manager are not reduced as a result of
the Managers receipt of research services. In some cases, the Manager may receive a service from
a broker that has both a research and a non-research use. When this occurs the Manager makes a
good faith allocation, under all the circumstances, between the research and non-research uses of
the service. The percentage of the service that is used for research purposes may be paid for with
client commissions, while the Manager will use its own funds to pay for the percentage of the
service that is used for non-research purposes. In making this good faith allocation, the Manager
faces a potential conflict of interest, but the Manager believes that its allocation procedures are
reasonably designed to ensure that it appropriately allocates the anticipated use of such services
to their research and non-research uses.
From time to time, the Fund may purchase new issues of securities in a fixed price offering.
In these situations, the broker may be a member of the selling group that will, in addition to
selling securities, provide the Manager with research services. The Financial Industry Regulatory
Authority (FINRA) has adopted rules expressly permitting these types of arrangements under certain
circumstances. Generally, the broker will provide research credits in these situations at a rate
that is higher than that available for typical secondary market transactions. These arrangements
may not fall within the safe harbor of Section 28(e).
The Manager does not consider sales of shares of the mutual funds it advises as a factor in
the selection of brokers or dealers to execute portfolio transactions for the Fund; however,
whether or not a particular broker or dealer sells shares of the mutual funds advised by the
Manager neither qualifies nor disqualifies such broker or dealer to execute transactions for those
mutual funds.
The Fund anticipates that its brokerage transactions involving foreign securities generally
will be conducted primarily on the principal stock exchanges of the applicable country. Foreign
equity securities may be held by the Fund in the form of depositary receipts, or other securities
convertible into foreign equity securities. Depositary receipts may be listed on stock exchanges,
or traded in over-the-counter markets in the United States or Europe, as the case may be. American
Depositary Receipts, like other securities traded in the United States, will be subject to
negotiated commission rates. Because the shares of the Fund are redeemable on a daily basis in U.S.
dollars, the Fund intends to manage its portfolio so as to give reasonable assurance that it will
be able to obtain U.S. dollars to the extent necessary to meet anticipated redemptions. Under
present conditions, it is not believed that these considerations will have a significant effect on
the Funds portfolio strategies.
The Fund may invest in certain securities traded in the OTC market and intends to deal
directly with the dealers who make a market in the particular securities, except in those
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circumstances in which better prices and execution are available elsewhere. Under the
Investment Company Act, persons affiliated with the Fund and persons who are affiliated with such
affiliated persons are prohibited from dealing with the Fund as principal in the purchase and sale
of securities unless a permissive order allowing such transactions is obtained from the Commission.
Since transactions in the OTC market usually involve transactions with the dealers acting as
principal for their own accounts, the Fund will not deal with affiliated persons in connection with
such transactions.
Over-the-counter issues, including most fixed income securities such as corporate debt and
U.S. Government securities, are normally traded on a net basis without a stated commission,
through dealers acting for their own account and not as brokers. The Fund will primarily engage in
transactions with these dealers or deal directly with the issuer unless a better price or execution
could be obtained by using a broker. Prices paid to a dealer with respect to both foreign and
domestic securities will generally include a spread, which is the difference between the prices
at which the dealer is willing to purchase and sell the specific security at the time, and includes
the dealers normal profit.
Purchases of money market instruments by the Fund are made from dealers, underwriters and
issuers. The Fund does not currently expect to incur any brokerage commission expense on such
transactions because money market instruments are generally traded on a net basis with dealers
acting as principal for their own accounts without a stated commission. The price of the security,
however, usually includes a profit to the dealer. Each money market fund intends to purchase only
securities with remaining maturities of 13 months or less as determined in accordance with the
rules of the Commission. As a result, the portfolio turnover rates of a money market fund will be
relatively high. However, because brokerage commissions will not normally be paid with respect to
investments made by a money market fund, the turnover rates should not adversely affect the Funds
net asset values or net income.
Securities purchased in underwritten offerings include a fixed amount of compensation to the
underwriter, generally referred to as the underwriters concession or discount. When securities are
purchased or sold directly from or to an issuer, no commissions or discounts are paid.
The Manager may seek to obtain an undertaking from issuers of commercial paper or dealers
selling commercial paper to consider the repurchase of such securities from the Fund prior to
maturity at their original cost plus interest (sometimes adjusted to reflect the actual maturity of
the securities), if it believes that the Funds anticipated need for liquidity makes such action
desirable. Any such repurchase prior to maturity reduces the possibility that the Fund would incur
a capital loss in liquidating commercial paper, especially if interest rates have risen since
acquisition of such commercial paper.
Investment decisions for the Fund and for other investment accounts managed by the Manager are
made independently of each other in light of differing conditions. The Manager allocates
investments among client accounts in a fair and equitable manner. A variety of factors will be
considered in making such allocations. These factors include: (i) investment objectives or
strategies for particular accounts, including sector, industry, country or region and
capitalization weightings, (ii) tax considerations of an account, (iii) risk or investment
concentration parameters for an account, (iv) supply or demand for a security at a given price
level, (v) size of available investment, (vi) cash availability and liquidity requirements for
accounts, (vii) regulatory restrictions, (viii) minimum investment size of an account, (ix)
relative size of account, and (x) such other factors as may be approved by the Managers general
counsel. Moreover, investments may not be allocated to one client account over another based
on any of the following considerations: (i) to favor one client account at the expense of another,
(ii) to generate higher fees paid by one client account over another or to produce greater
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performance compensation to the Manager, (iii) to develop or enhance a relationship with a client
or prospective client, (iv) to compensate a client for past services or benefits rendered to the
Manager or to induce future services or benefits to be rendered to the Manager, or (v) to manage or
equalize investment performance among different client accounts.
Equity securities will generally be allocated among client accounts within the same investment
mandate on a pro rata basis. This pro rata allocation may result in the Fund receiving less of a
particular security than if pro-ration had not occurred. All allocations of equity securities will
be subject, where relevant, to share minimums established for accounts and compliance constraints.
Initial public offerings of securities may be over-subscribed and subsequently trade at a
premium in the secondary market. When the Manager is given an opportunity to invest in such an
initial offering or new or hot issue, the supply of securities available for client accounts is
often less than the amount of securities the accounts would otherwise take. In order to allocate
these investments fairly and equitably among client accounts over time, each portfolio manager or a
member of his or her respective investment team will indicate to the Managers trading desk their
level of interest in a particular offering with respect to eligible clients accounts for which that
team is responsible. Initial public offerings of U.S. equity securities will be identified as
eligible for particular client accounts that are managed by portfolio teams who have indicated
interest in the offering based on market capitalization of the issuer of the security and the
investment mandate of the client account and in the case of international equity securities, the
country where the offering is taking place and the investment mandate of the client account.
Generally, shares received during the initial public offering will be allocated among participating
client accounts within each investment mandate on a pro rata basis. In situations where supply is
too limited to be allocated among all accounts for which the investment is eligible, portfolio
managers may rotate such investment opportunities among one or more accounts so long as the
rotation system provides for fair access for all client accounts over time. Other allocation
methodologies that are considered by the Manager to be fair and equitable to clients may be used as
well.
Because different accounts may have differing investment objectives and policies, the Manager
may buy and sell the same securities at the same time for different clients based on the particular
investment objective, guidelines and strategies of those accounts. For example, the Manager may
decide that it may be entirely appropriate for a growth fund to sell a security at the same time a
value fund is buying that security. To the extent that transactions on behalf of more than one
client of the Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may be an adverse effect
on price. For example, sales of a security by the Manager on behalf of one or more of its clients
may decrease the market price of such security, adversely impacting other clients of the Manager
that still hold the security. If purchases or sales of securities arise for consideration at or
about the same time that would involve the Fund or other clients or funds for which the Manager or
an affiliate act as investment manager, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to all.
In certain instances, the Manager may find it efficient for purposes of seeking to obtain best
execution, to aggregate or bunch certain contemporaneous purchases or sale orders of its advisory
accounts. In general, all contemporaneous trades for client accounts under management by the same
portfolio manager or investment team will be bunched in a single order if the trader believes the
bunched trade would provide each client with an opportunity to achieve a more favorable execution
at a potentially lower execution cost. The costs associated with a bunched order will be shared pro
rata among the clients in the bunched order. Generally, if an order for a particular portfolio
manager or management team is filled at several different prices through multiple trades, all
accounts participating in the order will receive the
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average price except in the case of certain international markets where average pricing is not
permitted. While in some cases this practice could have a detrimental effect upon the price or
value of the security as far as the Fund is concerned, in other cases it could be beneficial to the
Fund. Transactions effected by the Manager on behalf of more than one of its clients during the
same period may increase the demand for securities being purchased or the supply of securities
being sold, causing an adverse effect on price. The trader will give the bunched order to the
broker dealer that the trader has identified as being able to provide the best execution of the
order. Orders for purchase or sale of securities will be placed within a reasonable amount of time
of the order receipt and bunched orders will be kept bunched only long enough to execute the order.
The Fund will not purchase securities during the existence of any underwriting or selling group
relating to such securities of which the Distributor or any affiliated person (as defined in the
Investment Company Act) of the Distributor is a member except pursuant to procedures adopted by the
Board in accordance with Rule 10f-3 under the Investment Company Act. In no instance will portfolio
securities be purchased from or sold to the Distributor or any affiliated person of the Distributor
entities except as permitted by Commission exemptive order or by applicable law.
Information About the Funds Shares
Under the Agreement and Declaration of Trust that establishes the Fund, the Trustees are
authorized to issue beneficial interests in the Fund and create future series. Under the Agreement
and Declaration of Trust, the Trustees may also, subject to applicable law, (i) divide the
beneficial interests in the Fund or each class thereof into shares, with or without par value as
the Trustees shall determine; (ii) issue shares without limitation as to number (including
fractional shares) at such time or times and on such terms as the Trustees may deem appropriate;
(iii) classify or reclassify any issued shares of the Fund or any class thereof into shares of one
or more series or classes thereof; and (iv) take such other action with respect to the shares as
the Trustees may deem desirable. The Funds shares currently are only Institutional Shares.
Under the Delaware Statutory Trust Act (the Delaware Act), shareholders are not personally
liable for obligations of the Fund. The Delaware Act entitles shareholders of the Fund to the same
limitation of liability as is available to shareholders of private for-profit corporations.
However, no similar statutory or other authority limiting statutory trust shareholder liability
exists in many other states. As a result, to the extent that the Fund or a shareholder is subject
to the jurisdiction of courts in such other states, those courts may not apply Delaware law and may
subject the shareholders to liability.
Institutional Share Purchase Eligibility
Institutional
shares are available for purchases of $[____] or more and for purchases using
dividends and capital gains distributions on Institutional shares. Institutional shares also are
available for the following categories of investors:
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officers, trustees and former trustees of the Fund and their immediate family
members or trustees/directors of any fund sponsored by the Manager, any parent
company of the Manager and subsidiaries thereof and their immediate family members
(immediate family members are defined as their spouses, parents, children,
grandparents, grandchildren, parents-in-law, sons- and daughters-in-law, siblings,
a siblings spouse, and a spouses siblings); |
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bona fide, full-time and retired employees of the Manager, and subsidiaries
thereof, or their immediate family members; |
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any person who, for at least the last 90 days, has been an officer, director or
bona fide employee of any financial intermediary, or their immediate family
members; |
(Any shares purchased by investors falling within any of the first three categories listed
above must be acquired for investment purposes and on the condition that they will not be
transferred or resold except through redemption by the Fund.)
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bank or broker-affiliated trust departments investing funds over which they
exercise exclusive discretionary investment authority and that are held in a
fiduciary, agency, advisory, custodial or similar capacity; |
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investors purchasing on a periodic fee or asset-based fee program which is
sponsored by a registered broker-dealer or other financial institution that has
entered into an agreement with the Manager; |
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[fee-paying clients of a registered investment advisor (RIA) who initially
invests for clients an aggregate of at least $100,000 in the Fund through a fund
supermarket or other mutual fund trading platform sponsored by a broker-dealer or
trust company of which the RIA is not an affiliated or associated person and which
has entered into an agreement with the Manager;] |
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employer-sponsored retirement plans except SEPs, SAR-SEPs, SIMPLE IRAs and KEOGH
plans; and |
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other affiliated funds whose investment policies allow investments in other
investment companies. |
Suspension of Right of Redemption
The Fund may suspend the right of redemption of Fund shares or delay payment more than seven
days (a) during any period when the NYSE is closed (other than customary weekend and holiday
closings), (b) when trading in the markets the Fund normally utilizes is restricted, or an
emergency exists as determined by the Commission so that trading of the Funds investments or
determination of its net asset value is not reasonably practicable, or (c) for any other periods
that the Commission by order may permit for protection of Fund shareholders.
Redemption In-Kind
The Fund has reserved the right to redeem in-kind (that is, to pay redemption requests in cash
and portfolio securities, or wholly in portfolio securities), although the Fund has no present
intention to redeem in-kind. The Fund voluntarily has committed to pay in cash all requests for
redemption by any shareholder, limited as to each shareholder during any 90-day period to the
lesser of $250,000 or 1% of the net asset value of the Fund at the beginning of the 90-day period.
Frequent Trading Policy
The Funds Frequent Trading Policy is as follows:
The Fund is intended as long-term investments and not as short-term trading vehicles. At the
same time, the Fund recognizes the need of investors to periodically make purchases and redemptions
of Fund shares when rebalancing their portfolios and as their financial needs or circumstances
change. The Fund has adopted the following Frequent Trading Policy that seeks to balance these
needs against the potential for higher operating costs, portfolio management disruption and other
inefficiencies that can be caused by excessive trading of Fund shares.
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1. Definition of Round Trip
A Round Trip trade is the purchase and subsequent redemption of Fund shares, including by
exchange. Each side of a Round Trip trade may be comprised of either a single transaction or a
series of closely-spaced transactions.
2. Round Trip Trade Limitations
The Fund limits the frequency of Round Trip trades that may be placed in the Fund. Subject to
certain exceptions noted below, the Fund limits an investor to four Round Trips per trailing
12-month period and may also restrict the trading privileges of an investor who makes a Round Trip
within a 30-day period if the purchase and redemption are of substantially similar dollar amounts
and represent at least 25% of the value of the investors account.
3. Enforcement
Trades placed in violation of the foregoing policies are subject to rejection or cancellation
by the Fund. The Fund may also bar an investor (and/or the investors financial advisor) who has
violated these policies from opening new accounts with the Fund and may restrict the investors
existing account(s) to redemptions only. The Fund reserves the right, in its sole discretion, to
(a) interpret the terms and application of these policies, (b) waive unintentional or minor
violations (including transactions below certain dollar thresholds) if the Fund determines that
doing so does not harm the interests of Fund shareholders, and (c) exclude certain classes of
redemptions from the application of the trading restrictions set forth above.
The Fund reserves the right to impose restrictions on purchases or exchanges that are more
restrictive than those stated above if they determine, in their sole discretion, that a proposed
transaction or series of transactions involve market timing or excessive trading that is likely to
be detrimental to the Fund. The Fund may also modify or suspend the Frequent Trading Policy
without notice during periods of market stress or other unusual circumstances.
[The ability of the Fund to implement the Frequent Trading Policy for omnibus accounts at
certain financial intermediaries may be dependent on receiving from those intermediaries sufficient
shareholder information to permit monitoring of trade activity and enforcement of the Funds
Frequent Trading Policy. In addition, the Fund may rely on a financial intermediarys policy to
restrict market timing and excessive trading if the Fund believes that the policy is reasonably
designed to prevent market timing that is detrimental to the Fund. Such policy may be more or less
restrictive than the Funds Policy. The Fund cannot ensure that these financial intermediaries
will in all cases apply the Funds policy or their own policies, as the case may be, to accounts
under their control.]
Exclusions from the Frequent Trading Policy
As stated above, certain redemptions are eligible for exclusion from the Frequent Trading
Policy, including: (i) redemptions or exchanges by shareholders investing through the fee-based
platforms of certain financial intermediaries (where the intermediary charges an asset-based or
comprehensive wrap fee for its services) that are effected by the financial intermediaries in
connection with systematic portfolio rebalancing; (ii) when there is a verified trade error
correction, which occurs when a dealer firm sends a trade to correct an earlier trade made in error
and then the firm sends an explanation to the Fund confirming that the trade is actually an error
correction; (iii) in the event of total disability (as evidenced by a determination by the federal
Social Security Administration) of the shareholder (including a registered joint
owner) occurring after the purchase of the shares being redeemed; (iv) in the event of the death of
the shareholder (including a registered joint owner); (v) redemptions made pursuant to a
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systematic withdrawal plan, up to 1% monthly, 3% quarterly, 6% semiannually or 12% annually of an
accounts net asset value depending on the frequency of the plan as designated by the shareholder;
(vi) redemptions of shares that were purchased through a systematic investment program; (vii)
involuntary redemptions caused by operation of law; (viii) redemptions in connection with a payment
of account or plan fees; (ix) redemption or exchanges by any fund of funds advised by the
Manager; and (x) redemptions in connection with the exercise of the Funds right to redeem all
shares in an account that does not maintain a certain minimum balance or that the applicable board
has determined may have material adverse consequences to the shareholders of the Fund.
In addition, the following redemptions of shares by an employer-sponsored qualified defined
contribution retirement plan are excluded from the Frequent Trading Policy: (i) partial or complete
redemptions in connection with a distribution without penalty under Section 72(t) of the Code from
a retirement plan: (a) upon attaining age 59 1/2; (b) as part of a series of substantially equal
periodic payments, or (c) upon separation from service and attaining age 55; (ii) partial or
complete redemptions in connection with a qualifying loan or hardship withdrawal; (iii) complete
redemptions in connection with termination of employment, plan termination, transfer to another
employers plan or IRA or changes in a plans recordkeeper; and (iv) redemptions resulting from the
return of an excess contribution. Also, the following redemptions of shares held in an IRA account
are excluded from the application of the Frequent Trading Policy: (i) redemptions made pursuant to
an IRA systematic withdrawal based on the shareholders life expectancy including, but not limited
to, substantially equal periodic payments described in Code Section 72(t)(A)(iv) prior to age 59
1/2; and (ii) redemptions to satisfy required minimum distributions after age 70 1/2 from an IRA
account.
[Redemption Fee Policy
The Fund will assess a 2% fee on the proceeds of Fund shares redeemed or exchanged within 30
days of acquisition (i.e., through purchase or exchange). The redemption fee will be retained from
redemption or exchange proceeds and paid directly to the Fund. The fee is intended to offset the
trading costs and Fund operating expenses associated with frequent trading. When an investor
redeems or exchanges Fund shares subject to the redemption fee, the Fund will first redeem any
shares that are not subject to the redemption fee, and then redeem the shares owned for the longest
period of time, unless asked to redeem shares in a different order. The Fund reserves the right, in
its sole discretion, to waive any redemption fee charged to shareholders.
The redemption fee may be waived under the following circumstances: (i) redemptions or
exchanges by shareholders investing through the fee-based platforms of certain financial
intermediaries (where the intermediary charges an asset-based or comprehensive wrap fee for its
services) in instances where the Fund reasonably believes either that the intermediary has internal
policies and procedures in place to effectively discourage inappropriate trading activity or that
the redemptions were effected for reasons other than the desire to profit from short-term trading
in Fund shares; (ii) when there is a verified trade error correction, which occurs when a dealer
firm sends a trade to correct an earlier trade made in error and then the firm sends an explanation
to the Fund confirming that the trade is actually an error correction; (iii) in the event of total
disability (as evidenced by a determination by the federal Social Security Administration) of the
shareholder (including a registered joint owner) occurring after the purchase of the shares being
redeemed; (iv) in the event of the death of the shareholder (including a registered joint owner);
(v) for redemptions made pursuant to a systematic withdrawal plan, up to 1% monthly, 3% quarterly,
6% semiannually or 12% annually of an accounts net asset value depending on the frequency of the
plan as designated by the shareholder; (vi) involuntary redemptions caused by operation of law;
(vii) redemptions in connection with a payment of account or plan fees; (viii) redemptions in
connection with the exercise of the Funds right to redeem all shares in an account that does not
maintain a certain
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minimum balance or that the applicable board has determined may have material adverse consequences
to the shareholders of the Fund; (ix) redemptions or exchanges by any funds of funds advised by
the Manager; and (x) redemptions or exchanges by shareholders investing through qualified
retirement plans such as 401(k) plans only if the plan sponsor or administrator certifies that the
plan does not have the operational capability to assess the fee.
In addition, the redemption fee will be waived in connection with the following redemptions of
shares held by an employer-sponsored qualified defined contribution retirement plan: (i) partial or
complete redemptions in connection with a distribution without penalty under Section 72(t) of the
Internal Revenue Code of 1938, as amended (the Code), from a retirement plan: (a) upon attaining
age 59 1/2, (b) as part of a series of substantially equal periodic payments, or (c) upon
separation from service and attaining age 55; (ii) partial or complete redemptions in connection
with a qualifying loan or hardship withdrawal; (iii) complete redemptions in connection with
termination of employment, plan termination or transfer to another employers plan or IRA; and (iv)
redemptions resulting from the return of an excess contribution. The redemption fee will also be
waived in connection with the following redemptions of shares held in an IRA account: (i) for
redemptions made pursuant to an IRA systematic withdrawal based on the shareholders life
expectancy including, but not limited to, substantially equal periodic payments described in Code
Section 72(t)(A)(iv) prior to age 59 1/2; and (ii) for redemptions to satisfy required minimum
distributions after age 70 1/2 from an IRA account.
The Fund reserves the right to modify or eliminate redemption fee waivers at any time.]
Pricing of Shares
Determination of Net Asset Value
The net asset value for each class of shares of the Fund is generally calculated as of the
close of regular trading hours on the NYSE (currently 4:00 p.m. Eastern Time) on each business day
the NYSE is open.
Valuation of securities held by the Fund is as follows:
Equity Investments. Equity securities traded on a recognized securities exchange (e.g., NYSE),
separate trading boards of a securities exchange or through a market system that provides
contemporaneous transaction pricing information (an Exchange) are valued via independent pricing
services generally at the Exchange closing price or if an Exchange closing price is not available,
the last traded price on that Exchange prior to the time as of which the assets or liabilities are
valued, however, under certain circumstances other means of determining current market value may be
used. If an equity security is traded on more than one Exchange, the current market value of the
security where it is primarily traded generally will be used. In the event that there are no sales
involving an equity security held by the Fund on a day on which the Fund values such security, the
last bid (long positions) or ask (short positions) price, if available, will be used as the value
of such security. If the Fund holds both long and short positions in the same security, the last
bid price will be applied to securities held long and the last ask price will be applied to
securities sold short. If no bid or ask price is available on a day on which the Fund values such
security, the prior days price will be used, unless the Manager determines that such prior days
price no longer reflects the fair value of the security, in which case such asset would be treated
as a fair value asset.
Fixed Income Investments. Fixed income securities for which market quotations are readily
available are generally valued using such securities most recent bid prices provided directly from
one or more broker-dealers, market makers, or independent third-party pricing services which may
use matrix pricing and valuation models to derive values, each in
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accordance with valuation procedures approved by the Funds Board. The amortized cost method of
valuation may be used with respect to debt obligations with sixty days or less remaining to
maturity unless the Manager determines that such method does not represent fair value. Loan
participation notes are generally valued at the mean of the last available bid prices from one or
more brokers or dealers as obtained from independent third-party pricing services. Certain fixed
income investments including asset-backed and mortgage-related securities may be valued based on
valuation models that consider the estimated cash flows of each tranche of the entity, establish a
benchmark yield and develop an estimated tranche specific spread to the benchmark yield based on
the unique attributes of the tranche. Fixed income securities for which market quotations are not
readily available may be valued by third-party pricing services that make a valuation determination
by securing transaction data (e.g., recent representative bids), credit quality information,
perceived market movements, news, and other relevant information and by other methods, which may
include consideration of: yields or prices of securities of comparable quality, coupon, maturity
and type; indications as to values from dealers; and general market conditions.
Options, Futures, Swaps and Other Derivatives. Exchange-traded equity options for which market
quotations are readily available are valued at the mean of the last bid and ask prices as quoted on
the Exchange or the board of trade on which such options are traded. In the event that there is no
mean price available for an exchange traded equity option held by the Fund on a day on which the
Fund values such option, the last bid (long positions) or ask (short positions) price, if
available, will be used as the value of such option. If no bid or ask price is available on a day
on which the Fund values such option, the prior days price will be used, unless the Manager
determines that such prior days price no longer reflects the fair value of the option in which
case such option will be treated as a fair value asset. OTC options may be valued using a
mathematical model which incorporates a number of market data factors. Financial futures contracts
and options thereon, which are traded on exchanges, are valued at their last sale price or settle
price as of the close of such exchanges. Swap agreements and other derivatives are generally valued
daily based upon quotations from market makers or by a pricing service in accordance with the
valuation procedures approved by the Board.
Underlying Funds. Shares of underlying open-end funds are valued at net asset value. Shares of
underlying exchange-traded closed-end funds or other exchange-traded funds will be valued at their
most recent closing price.
General Valuation Information
In determining the market value of portfolio investments, the Fund may employ independent
third party pricing services, which may use, without limitation, a matrix or formula method that
takes into consideration market indexes, matrices, yield curves and other specific adjustments.
This may result in the securities being valued at a price different from the price that would have
been determined had the matrix or formula method not been used. All cash, receivables and current
payables are carried on the Funds books at their face value.
Prices obtained from independent third party pricing services, broker-dealers or market makers
to value the Funds securities and other assets and liabilities are based on information available
at the time the Fund values its assets and liabilities. In the event that a pricing service
quotation is revised or updated subsequent to the day on which the Fund valued such security, the
revised pricing service quotation generally will be applied prospectively. Such determination shall
be made considering pertinent facts and circumstances surrounding such revision.
In the event that application of the methods of valuation discussed above result in a price for a
security which is deemed not to be representative of the fair market value of such security, the
security will be valued by, under the direction of or in accordance with a method specified by the
Board as reflecting fair value. All other assets and liabilities (including securities for which
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market quotations are not readily available) held by the Fund (including restricted securities) are
valued at fair value as determined in good faith by the Funds Board or by the Manager (its
delegate). Any assets and liabilities which are denominated in a foreign currency are translated
into U.S. dollars at the prevailing rates of exchange.
Certain of the securities acquired by the Fund may be traded on foreign exchanges or
over-the-counter markets on days on which the Funds net asset value is not calculated. In such
cases, the net asset value of the Funds shares may be significantly affected on days when
investors can neither purchase nor redeem shares of the Fund.
Fair Value
When market quotations are not readily available or are believed by the Manager to be
unreliable, the Funds investments are valued at fair value (Fair Value Assets). Fair Value
Assets are valued by the Manager in accordance with procedures approved by the Board. The Manager
may conclude that a market quotation is not readily available or is unreliable if a security or
other asset or liability does not have a price source due to its complete lack of trading, if the
Manager believes a market quotation from a broker-dealer or other source is unreliable (e.g., where
it varies significantly from a recent trade, or no longer reflects the fair value of the security
or other asset or liability subsequent to the most recent market quotation), where the security or
other asset or liability is only thinly traded or due to the occurrence of a significant event
subsequent to the most recent market quotation. For this purpose, a significant event is deemed
to occur if the Manager determines, in its business judgment prior to or at the time of pricing the
Funds assets or liabilities, that it is likely that the event will cause a material change to the
last exchange closing price or closing market price of one or more assets or liabilities held by
the Fund. On any date the NYSE is open and the primary exchange on which a foreign asset or
liability is traded is closed, such asset or liability will be valued using the prior days price,
provided that the Manager is not aware of any significant event or other information that would
cause such price to no longer reflect the fair value of the asset or liability, in which case such
asset or liability would be treated as a Fair Value Asset. For certain foreign securities, a
third-party vendor supplies evaluated, systematic fair value pricing based upon the movement of a
proprietary multi-factor model after the relevant foreign markets have closed. This systematic fair
value pricing methodology is designed to correlate the prices of foreign securities following the
close of the local markets to the price that might have prevailed as of the Funds pricing time.
[The Manager will submit its recommendations regarding the valuation and/or valuation
methodologies for Fair Value Assets to the Managers Valuation Committee. The Valuation Committee
may accept, modify or reject any recommendations. In addition, the Funds accounting agent
periodically endeavors to confirm the prices it receives from all third party pricing services,
index providers and broker-dealers, and, with the assistance of the Manager, to regularly evaluate
the values assigned to the securities and other assets and liabilities held by the Fund. The
pricing of all Fair Value Assets is subsequently reported to and ratified by the Board or a
Committee thereof.
When determining the price for a Fair Value Asset, the Managers Valuation Committee (or the
Pricing Group) shall seek to determine the price that the Fund might reasonably expect to receive
from the current sale of that asset or liability in an arms-length transaction. The price
generally may not be determined based on what the Fund might reasonably expect to receive for
selling an asset or liability at a later time or if it holds the asset or liability to maturity.
Fair value determinations shall be based upon all available factors that the Valuation Committee
(or Pricing Group) deems relevant at the time of the determination, and may be based on analytical
values determined by the Manager using proprietary or third party valuation models.]
- 51 -
Fair value represents a good faith approximation of the value of an asset or liability. The
fair value of one or more assets or liabilities may not, in retrospect, be the price at which those
assets or liabilities could have been sold during the period in which the particular fair values
were used in determining the Funds net asset value. As a result, the Funds sale or redemption of
its shares at net asset value, at a time when a holding or holdings are valued at fair value, may
have the effect of diluting or increasing the economic interest of existing shareholders.
The Funds annual audited financial statements, which are prepared in accordance with
generally accepted accounting principles (GAAP), follow the requirements for valuation set forth
in Accounting Standards Codification Topic 820 (formerly FAS 157), Fair Value Measurements
(Topic 820), which defines and establishes a framework for measuring fair value under GAAP and
expands financial statement disclosure requirements relating to fair value measurements.
Generally, Topic 820 and other accounting rules applicable to mutual funds and various assets
in which they invest are evolving. Such changes may adversely affect the Fund. For example, the
evolution of rules governing the determination of the fair market value of assets or liabilities to
the extent such rules become more stringent would tend to increase the cost and/or reduce the
availability of third-party determinations of fair market value. This may in turn increase the
costs associated with selling assets or affect their liquidity due to the Funds inability to
obtain a third-party determination of fair market value.
Dividends and Taxes
Dividends
The Fund intends to distribute substantially all of its net investment income, if any.
Dividends from such net investment income are paid as set out in the Funds prospectus. The Fund
will also distribute all net realized capital gains, if any, as set out in the Prospectus. From
time to time, the Fund may declare a special distribution at or about the end of the calendar year
in order to comply with Federal tax requirements that certain percentages of its ordinary income
and capital gains be distributed during the year. If in any fiscal year the Fund has net income
from certain foreign currency transactions, such income will be distributed at least annually.
Dividends are taxable to shareholders, as discussed below, whether they are reinvested in
shares of the Fund or received in cash.
Tax Matters
The following is a summary of certain material U.S. Federal income tax considerations
regarding the purchase, ownership and disposition of shares of the Fund. This summary does not
address all of the potential U.S. Federal income tax consequences that may be applicable to the
Fund or to all categories of investors, some of which may be subject to special tax rules. Current
and prospective shareholders are urged to consult their own tax adviser with respect to the
specific Federal, state, local and foreign tax consequences of investing in the fund. The summary
is based on the laws in effect on the date of this Statement of Additional Information and existing
judicial and administrative interpretations thereof, all of which are subject to change, possibly
with retroactive effect.
The Fund that is a series of a regulated investment companies (RIC) under the Code that
consists of multiple series is treated as a separate corporation for Federal income tax
purposes, and therefore is considered to be a separate entity in determining its treatment under
the rules for RICs. Losses in one series of a RIC do not offset gains in another, and the
- 52 -
requirements (other than certain organizational requirements) for qualifying for RIC status will be
determined at the level of the individual series. In the following discussion, the term Fund
means each individual series, if applicable.
The Fund intends to continue to qualify for the special tax treatment afforded to RICs under
the Code. As long as the Fund so qualifies, the Fund (but not its shareholders) will not be subject
to Federal income tax on the part of its investment company taxable income and net realized capital
gains that it distributes to its shareholders in years in which it distributes at least 90% of its
investment company taxable income (i.e., income other than its net realized long-term capital gain
over its net realized short-term capital loss), plus or minus certain adjustments, and 90% of its
net tax-exempt interest income, if any, for the year. To qualify as a RIC, the Fund must meet
certain requirements regarding the source of its income and the composition and diversification of
its assets.
To qualify, among other requirements, the Fund will limit its investments so that, at the
close of each quarter of the taxable year, (i) at least 50% of the market value of the Funds
assets is represented by cash, securities of other regulated investment companies, U.S. government
securities and other securities, with such other securities limited, in respect of any one issuer,
to an amount not greater than 5% of the Funds assets and not greater than 10% of the outstanding
voting securities of such issuer and (ii) not more than 25% of the value of its assets is invested
in the securities (other than U.S. government securities or securities of other regulated
investment companies) of any one issuer, any two or more issuers of which 20% or more of the voting
stock is held by the Fund and that are determined to be engaged in the same or similar trades or
businesses or related trades or businesses or in the securities of one or more qualified publicly
traded partnerships (i.e., partnerships that are traded on an established securities market or
tradable on a secondary market, other than partnerships that derive 90% of their income from
interest, dividends, capital gains and other traditionally permitted mutual fund income). Foreign
government securities (unlike U.S. government securities) are not exempt from the diversification
requirements of the Code and the securities of each foreign government issuer are considered to be
obligations of a single issuer. These tax-related limitations may be changed by the Board to the
extent necessary to comply with changes to the Federal tax requirements.
The Fund intends to distribute substantially all of such income and gains. If, in any taxable
year, the Fund fails to qualify as a RIC under the Code, the Fund would be taxed in the same manner
as an ordinary corporation and all distributions from earnings and profits (as determined under
U.S. Federal income tax principles) to its shareholders would be taxable as ordinary dividend
income eligible for the maximum 15% tax rate for non-corporate shareholders (for taxable years
beginning prior to January 1, 2011) and the dividends-received deduction for corporate
shareholders. However, distributions to shareholders will not be deducible by the Fund in
computing its taxable income. Moreover, if the Fund fails to qualify as a RIC in any year, it must
pay out its earnings and profits accumulated in that year in order to qualify again as a RIC. If
the Fund fails to qualify as a RIC for a period greater than two taxable years, the Fund may be
required to recognize any net built-in gains with respect to certain of its assets (i.e., the
excess of the aggregate gains, including items of income, over aggregate losses that would have
been realized with respect to such assets if the Fund had been liquidated) if it qualifies as a
regulated investment company in a subsequent year.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent the RIC does not
distribute, by the end of each calendar year, 98% of its ordinary income, determined on a calendar
year basis, and 98% of its capital gain net income, determined, in general, as if the RICs taxable
year ended on October 31, plus certain undistributed amounts from the previous years. While the
Fund intends to distribute its income and capital gains in the manner necessary to avoid imposition
of the 4% excise tax, there can be no assurance that a sufficient amount of the Funds taxable
income and capital gains will be distributed to avoid
- 53 -
entirely the imposition of the tax. In such event, the Fund will be liable for the tax only on the
amount by which it does not meet the foregoing distribution requirements.
Dividends paid by the Fund from its ordinary income or from an excess of net short-term
capital gain over net long-term capital loss (together referred to as ordinary income dividends)
are taxable to shareholders as ordinary income. Distributions made from an excess of net long-term
capital gain over net short-term capital loss (including gains or losses from certain transactions
in futures and options) (capital gain dividends) are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholder has owned Fund shares. Distributions paid
by the Fund that are designated as exempt-interest dividends will not be subject to regular Federal
income tax. Certain dividend income and long-term capital gains are eligible for taxation at a
reduced rate that applies to non-corporate shareholders for taxable years beginning prior to 2011.
Under these rules, the portion of ordinary income dividends constituting qualified dividend
income when paid by a RIC to non-corporate shareholders may be taxable to such shareholders at
long-term capital gain rates. However, to the extent the Funds distributions are derived from
income on debt securities, certain types of preferred stock treated as debt for federal income tax
purposes and short-term capital gains, such distributions will not constitute qualified dividend
income. In addition, dividend income will not be treated as qualified dividend income unless the
Fund satisfies certain holding period requirements in respect of the stock of such corporations and
has not hedged its position in the stock in certain ways. Qualified dividend income does not
include any dividends received from tax exempt corporations. Also, dividends received by the Fund
from a real estate investment trust (a REIT) or another RIC generally are qualified dividend
income only to the extent the dividend distributions are made out of qualified dividend income
received by such REIT or other RIC. In the case of securities lending transactions, payments in
lieu of dividends are not qualified dividend income. If a shareholder elects to treat Fund
dividends as investment income for purposes of the limitation on the deductibility of investment
interest, such dividends would not be qualified dividend income. The Funds net capital gain (the
excess of net long-term capital gains over net short-term capital losses) is not subject to the 90%
distribution requirement for taxation as a RIC, described above. If the Fund retains net capital
gain, it is subject to tax on that gain, and may designate the retained amount as undistributed
capital gain in a notice to its shareholders, who will be required to include in income, as
long-term capital gain, their proportionate shares of such undistributed net capital gain, will be
deemed to have paid and may claim as a credit against their Federal income tax liability (and as a
refund to the extent it exceeds that liability) their proportionate shares of the tax paid by the
Fund on that gain, and may increase the basis of their shares in the Fund by the excess of the
amount included in income over the amount allowed as a credit against their taxes.
Distributions in excess of the Funds earnings and profits will first reduce the adjusted tax
basis of a holders shares and after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset). Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
Recent legislation will impose, beginning in 2013, a new 3.8 percent Medicare tax on net
investment income, including interest, dividends, and capital gain, of U.S. individuals with income
exceeding $200,000 (or $250,000 if married filing jointly), and of estates and trusts.
Under current law, the Fund serves to block unrelated business taxable income (UBTI) from being
realized by its tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt shareholder
could realize UBTI by virtue of its investment in the Fund if shares in the Fund constitute
debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code
Section 514(b). Certain types of income received by the Fund from REITs, real estate mortgage
investment conduits, taxable mortgage pools or other investments may cause the Fund to designate
some or all of its distributions as excess inclusion income. To
- 54 -
Fund shareholders such excess inclusion income may (1) constitute taxable income, as UBTI for those
shareholders who would otherwise be tax-exempt such as individual retirement accounts, 401(k)
accounts, Keogh plans, pension plans and certain charitable entities; (2) not be offset by
otherwise allowable deductions for tax purposes; (3) not be eligible for reduced U.S. withholding
for non-U.S. shareholders even from tax treaty countries; and (4) cause the Fund to be subject to
tax if certain disqualified organizations as defined by the Code are Fund shareholders.
If a charitable remainder annuity trust or charitable remainder unitrust (each as defined in
Code Section 664) has UBTI for a tax year, a 100% excise tax on the UBTI is imposed on the trust.
Ordinary income and capital gain dividends are taxable to shareholders even if they are
reinvested in additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January that was declared in
the previous October, November or December to shareholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid by the Fund and
received by its shareholders on December 31 of the year in which the dividend was declared.
A loss realized on a sale of shares of the Fund will be disallowed if such shares are acquired
(whether through the automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date on which the shares are sold or
exchanged. In such case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Funds investment in foreign currencies or foreign currency denominated or referenced debt
securities, certain asset-backed securities and contingent payment and inflation-indexed debt
instruments also may increase or accelerate the Funds recognition of income, including the
recognition of taxable income in excess of cash generated by such investments.
Ordinary income dividends paid to shareholders who are nonresident aliens or foreign entities
generally will be subject to a 30% U.S. withholding tax under existing provisions of the Code
applicable to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law. Dividends derived by a RIC from
short-term capital gains and qualifying net interest income (including income from original issue
discount and market discount) and paid to shareholders who are nonresident aliens or foreign
entities, if and to the extent properly designated as interest-related dividends or short-term
capital gain dividends, generally will not be subject to U.S. withholding tax. Where possible, the
Fund intends to make such designations. However, depending on its circumstances, the Fund may
designate all, some or none of its potentially eligible dividends as interest-related or as
short-term capital gain dividends, and/or treat such dividends, in whole or in part, as ineligible
for this exemption from withholding. In order to qualify for this exemption from withholding, a
foreign shareholder must comply with applicable certification requirements relating to its foreign
status (including, in general, furnishing an Internal Revenue Service (IRS) Form W-8BEN or
substitute Form). In the case of shares held through an intermediary, the intermediary may withhold
even if the Fund designates the payment as an interest-related or short-term capital gain dividend.
Foreign shareholders should contact their intermediaries with respect to the application of these
rules to their accounts. [It is not possible to predict what portion, if any, of the Funds
distributions will be designated as interest-related dividends or short-term capital gain dividends
under these rules, which, unless extended, will not apply to distributions with respect to taxable
years of the Fund beginning after December 31, 2009.
- 55 -
Distributions to certain foreign shareholders by the Fund at least 50% of whose assets are
U.S. real property interests, as defined in the Code and Treasury regulations, to the extent the
distributions are attributable to gains from sales or exchanges of U.S. real property interests
(including certain REIT capital gain dividends and gains on the sale or exchange of shares in
certain U.S. real property holding corporations, which may include certain REITs, among other
entities, generally must be treated by such foreign shareholders as income effectively connected to
a trade or business within the United States, generally subject to tax at the graduated rates
applicable to U.S. shareholders. Such distributions may be subject to U.S. withholding tax and may
require the foreign shareholder to file a U.S. Federal income tax return. Unless extended by
Congress, this rule will not apply to distributions after December 31, 2009, except to the extent
the distribution is attributable to a distribution to the Fund by a REIT.
Under certain provisions of the Code, some shareholders may be subject to a withholding tax on
ordinary income dividends, capital gain dividends and redemption payments (backup withholding).
Generally, shareholders subject to backup withholding will be non-corporate shareholders for whom
no certified taxpayer identification number is on file with the Fund or who, to the Funds
knowledge, have furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such investor is not
otherwise subject to backup withholding. Backup withholding is not an additional tax. Any amount
withheld generally may be allowed as a refund or a credit against a shareholders Federal income
tax liability, provided that the required information is timely forwarded to the IRS.
If a shareholder recognizes a loss with respect to the Funds shares of $2 million or more for
an individual shareholder or $10 million or more for a corporate shareholder in any single taxable
year (or a greater amount in any combination of taxable years), the shareholder must file a
disclosure statement on Form 8886 with the IRS. Direct shareholders of portfolio securities are in
many cases exempted. That a loss is reportable under these regulations does not affect the legal
determination of whether the taxpayers treatment of the loss is proper. Shareholder should consult
their tax advisers to determine the applicability of these regulations in light of their individual
circumstances.
Dividends and interest received by the Fund may give rise to withholding and other taxes
imposed by foreign countries. Tax conventions between certain foreign countries and the U.S. may
reduce or eliminate such taxes. Shareholders of a Fund more than 50% by value of the assets of
which at the close of a taxable year are foreign securities may be able to claim U.S. foreign tax
credits with respect to such foreign taxes paid by the Fund, subject to certain requirements and
limitations contained in the Code. For example, certain retirement accounts and certain tax-exempt
organizations cannot claim foreign tax credits on investments in foreign securities held in the
Fund. In addition, a foreign tax credit may be claimed with respect to withholding tax on payments
with respect to a security only if the holder of the security meets certain holding period
requirements. Both the shareholder and the Fund must meet these holding period requirements, and if
the Fund fails to do so, it will not be able to pass through to shareholders the ability to claim
a credit or a deduction for the related foreign taxes paid by the Fund. Further, to the extent that
the Fund engages in securities lending with respect to a security paying income subject to foreign
taxes, it may not be able to pass through to its shareholders the ability to take a foreign tax
credit for those taxes. If the Fund satisfies the applicable requirements, the Fund will be
eligible to file an election with the IRS pursuant to which shareholders of the Fund will be
required to include their proportionate shares of such foreign taxes in their U.S. income tax
returns as gross income, treat such proportionate shares as taxes paid by them, and deduct such
proportionate shares in computing their taxable
incomes or, alternatively, use them as foreign tax credits against their U.S. income taxes. No
deductions for foreign taxes, however, may be claimed by noncorporate shareholders who do
- 56 -
not itemize deductions. A shareholder that is a nonresident alien individual or a foreign
corporation may be subject to U.S. withholding tax on the income resulting from the Funds election
described in this paragraph but may not be able to claim a credit or deduction against such U.S.
tax for the foreign taxes treated as having been paid by such shareholder. The Fund will report
annually to its shareholders the amount per share of such foreign taxes and other information
needed to claim the foreign tax credit.
Certain transactions entered into by the Fund are subject to special tax rules of the Code
that may, among other things, (a) affect the character of gains and losses realized, (b) disallow,
suspend or otherwise limit the allowance of certain losses or deductions, and (c) accelerate the
recognition of income without a corresponding receipt of cash (with which to make the necessary
distributions to satisfy distribution requirements applicable to RICs). Operation of these rules
could, therefore, affect the character, amount and timing of distributions to shareholders. Special
tax rules also may require the Fund to mark to market certain types of positions in its portfolio
(i.e., treat them as sold on the last day of the taxable year), and may result in the recognition
of income without a corresponding receipt of cash. The Fund when engaging in transactions affected
by these provisions intends to monitor their transactions, make appropriate tax elections and make
appropriate entries in their books and records to lessen the effect of these tax rules and avoid
any possible disqualification from the special treatment afforded RICs under the Code. If the Fund
purchases shares of an investment company (or similar investment entity) organized under foreign
law, the Fund will generally be treated as owning shares in a passive foreign investment company
(PFIC) for U.S. Federal income tax purposes. The Fund may be subject to U.S. Federal income tax,
and interest charges (at the rate applicable to tax underpayments) on tax liability treated as
having been deferred with respect to certain distributions from such a company and on gain from the
disposition of the shares of such a company (collectively referred to as excess distributions),
even if such excess distributions are paid by the Fund as a dividend to its shareholders. However,
the Fund may elect to mark to market at the end of each taxable year shares that it holds in
PFICs. The election is made separately for each PFIC held and, once made, would be effective for
all subsequent taxable years, unless revoked with consent from the IRS. Under this election, the
Fund would recognize as ordinary income any increase in the value of its shares as of the close of
the taxable year over their adjusted tax basis and as ordinary loss any decrease in such value, but
only to the extent of previously recognized mark-to-market gains. By making the mark-to-market
election, the Fund could avoid imposition of the interest charge with respect to excess
distributions from PFICs, but in any particular year might be required to recognize income in
excess of the distributions it received from PFICs.
If the Fund were to invest in a PFIC and elect to treat the PFIC as a qualified electing
fund under the Code, in lieu of the foregoing requirements, the Fund would be required to include
in income each year a portion of the ordinary earnings and net capital gains of the qualified
electing fund, even if not distributed to the Fund, and such amounts would be subject to the 90%
and excise tax distribution requirements described above. In order to make this election, the Fund
would be required to obtain certain annual information from the PFICs in which it invests, which
may be difficult or impossible to obtain.
The Funds investment in so-called section 1256 contracts, such as regulated futures
contracts, most foreign currency forward contracts traded in the interbank market and options on
most stock indices, are subject to special tax rules. All section 1256 contracts held by the fund
at the end of its taxable year are required to be marked to their market value, and any unrealized
gain or loss on those positions will be included in the Funds income as if each position had been
sold for its fair market value at the end of the taxable year. The resulting gain or loss will be
combined with any gain or loss realized by the fund from positions in section 1256 contracts closed
during the taxable year. Provided such positions were held as capital assets and were not part of
a hedging transaction nor part of a straddle, 60% of the resulting net gain or loss will be
treated as long-term capital gain or loss, and 40% of such net
- 57 -
gain or loss will be treated as short-term capital gain or loss, regardless of the period of time
the positions were actually held by the Fund.
In general, gain or loss on a short sale is recognized when the Fund closes the sale by
delivering the borrowed property to the lender, not when the borrowed property is sold. Gain or
loss from a short sale is generally considered as capital gain or loss to the extent that the
property used to close the short sale constitutes a capital asset in the funds hands. Except with
respect to certain situations where the property used by the Fund to close a short sale has a
long-term holding period on the date of the short sale, special rules would generally treat the
gains on short sales as short-term capital gains. These rules may also terminate the running of
the holding period of substantially identical property held by the Fund. Moreover, a loss on a
short sale will be treated as a long-term capital loss if, on the date of the short sale,
substantially identical property has been held by the Fund for more than one year. In general,
the Fund will not be permitted to deduct payments made to reimburse the lender of securities for
dividends paid on borrowed stock if the short sale is closed on or before the 45th day after the
short sale is entered into.
Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates
between the time the Fund accrues income or receivables or expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such income or pays such
liabilities are generally treated as ordinary income or ordinary loss. In general, gains (and
losses) realized on debt instruments will be treated as Section 988 gain (or loss) to the extent
attributable to changes in exchange rates between the U.S. dollar and the currencies in which the
instruments are denominated. Similarly, gains or losses on foreign currency, foreign currency
forward contracts and certain foreign currency options or futures contracts, to the extent
attributable to fluctuations in exchange rates between the acquisition and disposition dates, are
also treated as ordinary income or loss unless the Fund were to elect otherwise.
If the Fund holds (directly or indirectly) one or more tax credit bonds (defined below) on
one or more specified dates during the Funds taxable year, and the Fund satisfies the minimum
distribution requirement, the Fund may elect for U.S. Federal income tax purposes to pass through
to shareholders tax credits otherwise allowable to the Fund for that year with respect to such
bonds. A tax credit bond is defined in the Code as a qualified tax credit bond (which includes a
qualified forestry conservation bond, a new clean renewable energy bond, a qualified energy
conservation bond, or a qualified zone academy bond, each of which must meet certain requirements
specified in the Code), a build America bond (which includes certain qualified bonds issued
before January 1, 2011) or certain other specified bonds. If the Fund were to make an election, a
shareholder of the Fund would be required to include in income and would be entitled to claim as a
tax credit an amount equal to a proportionate share of such credits. Certain limitations may apply
on the extent to which the credit may be claimed.
The foregoing general discussion of Federal income tax consequences is based on the Code and
the regulations issued thereunder as in effect on the date of this Statement of Additional
Information. Future legislative or administrative changes or court decisions may significantly
change the conclusions expressed in this discussion, and any such changes or decisions may have a
retroactive effect.
An investment in the Fund may have consequences under state, local or foreign tax law, about
which investors should consult their tax advisors.
Independent Registered Public Accounting Firm
The Audit Committee of the Fund, which is comprised of all of the Funds non-interested
Directors, has selected an independent registered public accounting firm for that
- 58 -
Fund that audits the Funds financial statements. Please see the inside back cover page of your
Funds Prospectus for information on your Funds independent registered public accounting firm.
Financial Statements
The statement of assets and liabilities of the Fund as of [ ], 2010 included in
this Registration Statement in reliance of the report of the Funds independent registered public
accounting firm is given on the authority of that firm, as experts in accounting and auditing.
- 59 -
[REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM]
- 60 -
PART C. OTHER INFORMATION
Item 28. Exhibits.
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Exhibit |
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|
Number |
|
Description |
(a)
|
(1) |
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Certificate of Trust, dated June 18, 2010.(a) |
|
(2) |
|
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Trust Agreement of the Registrant.(a) |
(b)
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By-Laws of the Registrant.(b) |
(c)
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Portions of the Agreement and Declaration of Trust and the By-Laws of
the Registrant defining rights of shareholders.(c) |
(d)
|
(1) |
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|
|
Investment Management Agreement between the Registrant and del Rey
Global Investors, LLC (the Manager).(b) |
(e)
|
(1) |
|
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|
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Form of Distribution Agreement between Registrant and [ ] (the
Distributor). (b) |
(f)
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None. |
(g)
|
|
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Form of Custody Agreement between the Registrant and [ ].(b) |
(h)
|
(1) |
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Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and [ ].(b) |
|
(2) |
|
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|
Form of Administrative Services Agreement between the Registrant and
[ ].(b) |
(i)
|
(1) |
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Opinion of [ ], special Delaware counsel for the Registrant.(b) |
(j)
|
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Consent of [ ], independent registered public accounting firm
for the Registrant(b). |
(k)
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None. |
(l)
|
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Certificate of [ ](b) |
(m)
|
(1) |
|
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Form of [Shareholder Service Plan].(b) |
(n)
|
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|
[ ] |
(p)
|
(1) |
|
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Code of Ethics of the Registrant.(b) |
|
(2) |
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Code of Ethics of the Manager.(b) |
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(3) |
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Code of Ethics of the Distributor.(b) |
(q)
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Power of Attorney.(b) |
(a) Filed herewith.
(b) To be filed by subsequent amendment.
(c) Section 2 of the Trust Agreement filed herewith.
Item 29. Persons Controlled by or Under Common Control with Registrant.
Item 30. Indemnification.
Reference is made to Section 7 of the Registrants Trust Agreement (the Trust Agreement) and
Section 3817 of the Delaware Statutory Trust Act (Title 12 of the Delaware Code). Pursuant to its
organizational documents and the applicable provisions of certain agreements, the trustees,
officers, employees and agents of the Trust will be indemnified to the maximum extent permitted by
Delaware law, and the Investment Company Act of 1940, as amended (the Investment Company Act).
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Section 7 of the Registrants Trust Agreement:
7. To the fullest extent permitted by applicable law, the Trust shall indemnify each Trustee
(each an Indemnified Person) for, and hold each Indemnified Person harmless against, any loss,
liability or expense incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the trust or trusts hereunder, including the
costs and expenses (including reasonable legal fees and expenses) of defending itself against, or
investigating, any claim or liability in connection with the exercise or performance of any of its
powers or duties hereunder. The obligation to indemnify as set forth in this paragraph 6 shall
survive the termination of this Trust Agreement.
Item 31. Business and Other Connections of the Manager.
Information as to the members and officers of del Rey Global Investors, LLC, is included
in its Form ADV as filed with the SEC (File No. 801-71069), and is incorporated herein by
reference.
Item 32. Principal Underwriters.
(a) |
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[ ] (the Distributor) acts as principal underwriter for the Registrant. |
The Distributor is registered with the Securities and Exchange Commission as a broker-dealer and
is a member of the Financial Industry Regulatory Authority or FINRA. The Distributor has its
principal business address at [ ].
(b) |
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The Distributor is a [ ] [limited liability company.] |
The following is a list of the directors and executive officers of the Distributor:
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Name |
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Address |
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Position(s) with Distributor |
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(c) Not applicable
Item 33. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section 31(a) of the
Investment Company Act and the rules thereunder are maintained at the offices of:
(a) Registrant, 6701 Center Drive West, Suite 655, Los Angeles, CA 90045.
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(b) Distributor, [ ].
(c) del Rey Global Investors, LLC, 6701 Center Drive West, Suite 655, Los Angeles, CA
90045.
(d) [Administrator], [ ].
Item 34. Management Services.
Other than as set out under the caption Fund Management in the Prospectus constituting
Part A of the Registration Statement and under caption Investment Manager in the Statement of
Additional Information constituting Part B of the Registration Statement for the Registrant, the
Registrant is not a party to any management-related service contract.
Item 35. Undertakings.
Not applicable.
3
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, as amended, the
Registrant has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, and the State of California, on
the 6th day of July, 2010.
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del Rey International Value Fund
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By: |
/s/ Paul J. Hechmer
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Paul J. Hechmer |
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Chief Executive Officer |
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Pursuant to the requirements of the Securities Act, this registration statement has been
signed below by the following persons in the capacities and on the date indicated:
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SIGNATURE |
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TITLE |
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DATE |
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/s/ Paul J. Hechmer
Paul J. Hechmer
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Chief Executive Officer (principal
executive officer)
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July 6, 2010 |
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/s/ Gerald W. Wheeler
Gerald W. Wheeler
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Chief Financial Officer (principal
financial officer)
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July 6, 2010 |
4
EXHIBIT INDEX
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Exhibit |
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Exhibit Name |
(a)(1) |
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Certificate of Trust, dated June 18, 2010 |
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(a)(2) |
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Trust Agreement of the Registrant |