nv1aza
As
filed with the Securities and Exchange Commission on January 28, 2011
Securities Act File No. 333-167999
Investment Company Act File No. 811-22432
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
|
|
|
|
|
|
|
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |
|
þ |
|
|
|
|
|
|
|
|
Pre-Effective Amendment No. 3 |
|
þ |
|
|
|
|
|
|
|
|
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.
del Rey Global Investors
Funds
del Rey Monarch Fund
Class A and Institutional Shares
Prospectus
January 28, 2011
A SUBSCRIPTION PERIOD FOR INSTITUTIONAL SHARES OF THE FUND
WILL END ON FEBRUARY 15, 2011, UNLESS EXTENDED. CLASS A
SHARES ARE NOT EXPECTED TO BE AVAILABLE FOR PURCHASE UNTIL
ON OR ABOUT MARCH 1, 2011.
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.
|
|
|
|
|
|
|
Ticker
|
Class
|
|
Symbol
|
|
Class A Shares
|
|
|
N/A
|
|
Institutional Shares
|
|
|
N/A
|
|
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.
Overview
of the Fund
del Rey
Monarch Fund
Investment
Objective
The investment objective of the del Rey Monarch 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. You may qualify for sales
charge discounts if you and your family invest, or agree to
invest in the future, at least $100,000 in the Fund. More
information about these and other discounts is available from
your financial professional and in the Details About the
Share Classes section on page 15 of the Funds
prospectus and in the Information About the Funds
Shares section on page 42 of the Funds
statement of additional information.
|
|
|
|
|
|
|
|
|
Shareholder Fees
|
|
Class A
|
|
Institutional
|
(Fees Paid Directly from Your Investment)
|
|
Shares
|
|
Shares
|
|
Maximum Sales Charge (Load) Imposed on Purchases (as percentage
of offering price)
|
|
|
5.00
|
%
|
|
|
None
|
|
Maximum Deferred Sales Charge (Load) (as a percentage of
offering price or redemption proceeds, whichever is lower)
|
|
|
None
|
(1)
|
|
|
None
|
|
Redemption Fee (as a percentage of amount redeemed or
exchanged within 60 days)
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
|
|
|
|
|
|
|
|
|
Annual Fund Operating Expenses
|
|
|
|
|
(Expenses that You Pay Each Year as a
|
|
Class A
|
|
Institutional
|
Percentage of the Value of Your Investment)
|
|
Shares
|
|
Shares
|
|
Management Fee
|
|
|
0.90
|
%
|
|
|
0.90
|
%
|
Distribution and/or Service (12b-1) Fees
|
|
|
0.25
|
%
|
|
|
None
|
|
Other Expenses(2)
|
|
|
0.48
|
%
|
|
|
0.48
|
%
|
Acquired Fund Fees and Expenses(2)
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Total Annual Fund Operating Expenses
|
|
|
1.63
|
%
|
|
|
1.38
|
%
|
Fee Waivers and/or Expense Reimbursements(3)
|
|
|
(0.23
|
)%
|
|
|
(0.23
|
)%
|
Total Annual Fund Operating Expenses After Fee Waivers
and/or Expense Reimbursements
|
|
|
1.40
|
%
|
|
|
1.15
|
%
|
|
|
|
(1) |
|
If you invest $100,000 or more in Class A Shares, you will
not pay an initial sales charge. In that case, del Rey Global
Investors, LLC compensates the financial intermediary from its
own resources. However, if you redeem your shares within
18 months after purchase, you may be charged a deferred
sales charge of 1.00% of the lesser of the original cost of the
shares being redeemed or your redemption proceeds. Such deferred
sales charge may be waived in connection with certain fee-based
programs. |
|
(2) |
|
Based on estimated amounts for the current fiscal year. |
|
(3) |
|
As described in the Fund Management section,
del Rey Global Investors, LLC has contractually agreed to waive
and/or reimburse fees or expenses in order to limit Total Annual
Fund Operating Expenses After Fee Waivers and/or Expense
Reimbursements (excluding Acquired Fund Fees and Expenses
and certain other Fund expenses) to 1.40% for Class A
Shares and 1.15% for Institutional Shares until March 1,
2012. The Fund may have to repay some of these waivers and
reimbursements to del Rey Global Investors, LLC in the following
two fiscal years. The agreement may be terminated upon
90 days notice by a majority of the non-interested
trustees of the Fund or by a vote of a majority of the
outstanding voting securities of the Fund. |
1
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:
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
3 Years
|
|
Class A Shares
|
|
$
|
635
|
|
|
$
|
967
|
|
Institutional Shares
|
|
$
|
117
|
|
|
$
|
414
|
|
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 stock,
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),
the Funds investment manager, 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 under that Act.
In the future, the Fund expects to lend portfolio securities on
a short-term or long-term basis, in an amount up to
331/3%
of its total assets, but the Fund does not currently do so.
The Fund may invest up to 15% of its net 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, which are privately offered
securities that may be traded in the institutional investor
market pursuant to an exemption from the Securities Act of 1933,
as amended, will be deemed to be illiquid securities unless the
Funds Board 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.
2
Convertible Securities Risk The Fund may
invest in convertible securities, which generally are debt
securities or preferred stock that may be converted into common
stock. Convertible securities typically pay current income as
either interest (debt security convertibles) or dividends
(preferred stock). A convertibles value usually reflects
both the stream of current income payments and the market value
of the underlying common stock. 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 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 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:
|
|
|
|
|
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.
|
|
|
|
Changes in currency exchange rates can affect the value of the
Funds portfolio.
|
|
|
|
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.
|
|
|
|
The governments of certain countries may prohibit or impose
substantial restrictions on foreign investments in their capital
markets or in certain industries.
|
|
|
|
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.
|
|
|
|
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.
3
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 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. The Fund does not
currently lend its securities, but expects to do so in the
future.
Selection Risk Selection risk is the risk
that the securities selected by the Funds investment
manager may underperform the market or other securities selected
by other funds.
Small and Mid-Cap Capitalization Companies
Risk Companies with small- or mid-size market
capitalizations will normally have more limited product lines,
markets and financial resources and will be dependent upon a
more limited management group than larger capitalized companies.
In addition, it is more difficult to get information on
relatively smaller companies, which tend to be less well known,
have shorter operating histories, do not have significant
ownership by large investors and are followed by relatively few
securities analysts.
Performance
Information
Because the Fund is expected to commence operations on
February 16, 2011, 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 2011.
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 1-866-876-9946 or
by mail
4
(PO Box 4766, Chicago, IL
60680-4766).
The Funds initial and subsequent investment minimums
generally are as follows, although the Fund may reduce or waive
the minimums in certain cases:
|
|
|
|
|
|
|
Class A Shares
|
|
Institutional Shares
|
|
Minimum Initial Investment
|
|
$2,000 for all accounts except:
|
|
$100,000 for institutions and individuals.
|
|
|
$50 through systematic investment plan accounts.
|
|
|
Minimum Additional
|
|
|
|
|
Investment
|
|
$50 for all accounts except certain retirement plans may have a
lower minimum.
|
|
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 Foreside
Fund Services, LLC, the Funds distributor, or the
Funds 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.
More
Information About the Fund
Included in this prospectus are sections that tell you more
about the del Rey Monarch 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.
5
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 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 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 under that Act. 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.
In the future, the Fund expects to lend portfolio securities on
a short-term or long-term basis, in an amount up to
331/3%
of its total assets, but the Fund does not currently do so.
The Fund may invest up to 15% of its net 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.
6
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 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 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 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 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
7
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 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.
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.
8
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 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.
9
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. 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
331/3%
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. The Fund does not currently lend its securities,
but expects to do so in the future.
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.
Small and Mid-Cap Capitalization Companies
Risk The Fund may invest in securities with as
little as $1 billion in market capitalization and some
securities may be considered small or mid-cap securities. Small
and mid-cap companies may have limited product lines or markets.
They may be less financially secure than larger, more
established companies. They may depend on a small number of key
personnel. If a product fails or there are other adverse
developments, or if management changes, the Funds
investment in a small or mid-cap company may lose
substantial value. In addition, it is more difficult to get
information on relatively smaller companies, which tend to be
less well known, have shorter operating histories, do not have
significant ownership by large investors and are followed by
relatively few securities analysts. The securities of small and
mid-cap companies generally trade in lower volumes and are
subject to greater and more unpredictable price changes than
large cap securities or the market as a whole. In addition,
small and mid-cap securities may be particularly sensitive to
10
changes in interest rates, borrowing costs and earnings.
Investing in small or mid-cap securities requires a longer term
view.
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, but does not intend to use derivatives as
part of its principal investment strategy. 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 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.
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.
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 will be available on the Funds website
www.delreyglobal.com/monarchfund. 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.
11
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 $1.118 billion in investment company and
other portfolio assets under management as of December 31,
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 0.90% of the Funds average daily net assets.
del Rey Global has agreed to cap net expenses (excluding
(i) interest, taxes, brokerage fees and commissions, and
extraordinary charges, including, but not limited to, litigation
costs; (ii) expenses incurred indirectly by the Fund as a
result of investments in other investment companies and pooled
investment vehicles; and (iii) other expenses attributable
to, and incurred as a result of, the Funds investments) to
1.40% for Class A Shares and 1.15% for Institutional Shares
until March 1, 2012. To achieve this expense cap,
del Rey Global has agreed to waive
and/or
reimburse fees or expenses if the Funds operating expenses
exceed the specified cap. The agreement may be terminated upon
90 days notice by a majority of the non-interested
trustees of the Fund or by a vote of a majority of the
outstanding voting securities of the Fund.
With respect to this contractual agreement, if during the
Funds fiscal year the operating expenses of a share class,
that at any time during the prior two fiscal years received a
waiver or reimbursement from del Rey Global, are less
than the expense limit for that share class, the share class is
required to repay del Rey Global up to the amount of
fees waived or expenses reimbursed during those prior two fiscal
years under the agreement, provided that: (1) the Fund has
more than $50 million in assets and (2) del Rey Global
or an affiliate serves as the Funds manager. Any amount
reimbursed by a share class will not cause the share class to
exceed the applicable expense cap for that fiscal year.
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 April 30, 2011.
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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Manager
|
|
|
Primary Role
|
|
|
Since
|
|
|
Title and Recent Biography
|
|
|
Paul Hechmer
|
|
|
|
Portfolio Manager
|
|
|
|
2011
|
|
|
Managing Member, Chief Executive Officer and Chief Investment
Officer of del Rey Global since September 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradewinds Global Investors, LLC Managing Member
from January 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.
|
12
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.
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 Share Classes
Class A
Retail Option
The following table shows the front-end sales charge that you
may pay if you buy Class A Shares. The offering price for
Class A Shares is the net asset value per share plus any
front-end sales charge and the dealer compensation will be as
shown in the last column. The front-end sales charge expressed
as a percentage of the offering price may be higher or lower
than the charge described below due to rounding.
You may qualify for a reduced sales charge, or the sales charge
may be waived, as described in How to Reduce Your Sales
Charge. Class A Shares are also subject to an annual
distribution and service fee of 0.25% of the Funds average
daily net assets, which compensates your financial
professionals, financial intermediaries and other entities for
providing ongoing services to you. The Funds distributor,
Foreside Fund Services, LLC (the Distributor),
retains the up-front sales charge and the distribution and
service fee on accounts with no financial intermediary of
record. Such amounts will be used by the Distributor to pay or
reimburse other persons, including del Rey Global or its
affiliates, for any distribution activity which may include
sales and
13
marketing expenses and will not be retained by the Distributor
as compensation. The up-front Class A sales charge for the
Fund is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Sales
|
|
|
|
Financial
|
|
|
Charge
|
|
|
|
Intermediary
|
|
|
As a % of
|
|
Sales Charge
|
|
Compensation
|
|
|
Offering
|
|
As a % of Your
|
|
as a % of
|
Your Investment
|
|
Price
|
|
Investment(1)
|
|
Offering Price
|
|
Less than $100,000
|
|
|
5.00
|
%
|
|
|
5.26
|
%
|
|
|
5.00
|
%
|
$100,000 and over(2)
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
|
(1) |
|
Rounded to the nearest one-hundredth percent. |
|
(2) |
|
If you invest $100,000 or more in Class A Shares, you will
not pay an initial sales charge. In that case, del Rey Global
compensates the financial intermediary from its own resources.
However, if you redeem your shares within 18 months after
purchase, you may be charged a deferred sales charge of 1.00% of
the lesser of the original cost of the shares being redeemed or
your redemption proceeds. Such deferred sales charge may be
waived in connection with certain fee-based programs. |
No initial sales charge applies to Class A Shares that you
buy through reinvestment of Fund dividends or capital gains.
Institutional
Shares
The public offering price of Institutional Shares of the Fund
during the subscription period is $15.00 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 $100,000 or more, (ii) purchases
using dividends and capital gains distributions on Institutional
Shares, and (iii) purchase by the following categories of
investors:
|
|
|
|
|
Certain trustees, directors, employees and affiliates of del Rey
Global.
|
|
|
|
Certain financial intermediary personnel.
|
|
|
|
Certain bank or broker-affiliated trust departments.
|
|
|
|
Certain employer-sponsored retirement plans
|
|
|
|
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.
|
Investment
Minimums
|
|
|
|
|
|
|
Class A Shares
|
|
Institutional Shares
|
|
Minimum Initial Investment
|
|
$2,000 for all accounts except:
|
|
$100,000 for institutions and individuals.
|
|
|
$50 through systematic investment plan accounts.
|
|
|
Minimum Additional Investment
|
|
$50 for all accounts except certain retirement plans may have a
lower minimum.
|
|
No subsequent minimum
|
14
How to
Reduce Your Sales Charge
|
|
|
|
|
Rights of Accumulation. In calculating the
appropriate sales charge on a purchase of Class A Shares of
the Fund, you may be able to add the amount of your purchase to
the value on that day of all of your prior purchases of the
Funds shares.
|
|
|
|
Letter of Intent. Subject to certain
requirements, you may purchase Class A Shares of the Fund
at the sales charge rate applicable to the total amount of the
purchases you intend to make over a
13-month
period.
|
For purposes of calculating the appropriate sales charge as
described under Rights of Accumulation and Letter of Intent
above, you may include purchases by (i) you, (ii) your
spouse (or equivalent if recognized under local law) and
children under 21 years of age, and (iii) a
corporation, partnership or sole proprietorship that is 100%
owned by any of the persons in (i) or (ii). In addition, a
trustee or other fiduciary can count all shares purchased for a
single trust, estate or other single fiduciary account that has
multiple accounts (including one or more employee benefit plans
of the same employer).
Class A
Sales Charge Waivers
Class A Shares of the Fund may be purchased at net asset
value without a sales charge as follows:
|
|
|
|
|
Purchases of $100,000 or more.
|
|
|
|
Certain employer-sponsored retirement plans.
|
|
|
|
Certain employees and affiliates of del Rey Global. Purchases by
any officers, trustees and former trustees of the Fund, as well
as bona fide full-time and retired employees of del Rey Global,
and subsidiaries thereof, and such employees immediate
family members (as defined in the SAI).
|
|
|
|
Financial intermediary personnel. Purchases by any person who,
for at least the last 90 days, has been an officer,
director, or bona fide employee of any financial intermediary or
any such persons immediate family member.
|
|
|
|
Certain trust departments. Purchases by 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.
|
|
|
|
Additional categories of investors. Purchases made by:
(i) investors purchasing on a periodic fee, asset-based
fee, or no transaction fee basis through a broker-dealer
sponsored mutual fund purchase program; and (ii) clients of
investment advisers, financial planners, or other financial
intermediaries that charge periodic or asset-based fees for
their services.
|
In order to obtain a sales charge reduction or waiver, it may be
necessary at the time of purchase for you to inform the Fund or
your financial professional of the existence of other accounts,
including accounts that may be held at different financial
intermediaries, in which there are holdings eligible to be
aggregated for such purposes. You may need to provide the Fund
or your financial professional information or records, such as
account statements, in order to verify your eligibility for a
sales charge reduction or waiver. This may include account
statements of family members and information regarding Fund
shares held in accounts with other financial advisors. The
financial professional or the Fund may request
documentation including account statements and
records of the original cost of the shares owned by the
investor, the investors spouse
and/or
children under the age of 21 showing that the
investor qualifies for a reduced sales charge. The investor
should retain these records because depending on
where an account is held or the type of account the
Fund and/or
the investors financial professional or the Funds
transfer agent may not be able to maintain this information. You
or your financial advisor must notify del Rey Global at the time
of each purchase if you are eligible for any of these programs.
The Fund may modify or discontinue these programs at any time.
More information about sales charge reductions is available in
the Information About the Funds Shares section
on page 42 of the SAI, which is available on the website or
on request. Information about existing
15
sales charge reductions and waivers is also available free of
charge in a clear and prominent format via hyperlink at
www.delreyglobal.com/monarchfund.
How to
Buy Shares
A subscription period for the Funds Institutional Shares
will end on February 15, 2011, unless extended.
Subscriptions will be payable, shares will be issued and the
Fund will commence operations on the next business day after the
end of the subscription period. The Fund 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. Class A Shares are not expected
to be available for purchase until on or about March 1,
2011.
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.
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:
PO Box 4766, Chicago, IL
60680-4766.
Applications may be obtained by calling 1-866-876-9946. No third
party checks will be accepted.
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 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.
You may be assessed a CDSC, if applicable. When you redeem
Class A Shares subject to a CDSC, the Fund will first
redeem any shares that are not subject to a CDSC, and then
redeem the shares you have owned for the longest period of time,
unless you ask the Fund to redeem your shares in a different
order. No CDSC is imposed on shares you buy through the
reinvestment of dividends and capital gains. The holding period
is calculated on a monthly basis and begins the first day of the
month in which the order for investment is received. When you
redeem shares subject to a CDSC, the CDSC is calculated on the
lower of your purchase price or redemption proceeds,
16
deducted from your redemption proceeds, and paid to del Rey
Global. The CDSC may be waived under certain special
circumstances as described in the SAI.
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 PO Box 4766, Chicago, IL
60680-4766.
Your request must include the following information:
|
|
|
|
|
The Funds name;
|
|
|
|
Your name and account number;
|
|
|
|
The dollar or share amount you wish to redeem;
|
|
|
|
The signature of each owner exactly as it appears on the account;
|
|
|
|
The name of the person to whom you want your redemption proceeds
paid (if other than to the shareholder of record);
|
|
|
|
The address where you want your redemption proceeds sent (if
other than the address of record); and
|
|
|
|
Any required signature guarantees.
|
We will normally mail your check the next business day, but in
no event more than ten 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
Telephone
If you have authorized telephone redemption privileges, call
1-866-876-9946 to redeem your shares. Telephone redemptions with
respect to redemptions of the Class A Shares 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 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 60 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
17
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 $1,000 for Class A Shares and
$100,000 for Institutional Shares. You will not be assessed a
CDSC or redemption fee on an involuntary redemption.
Note on Low Balance Accounts Because of the
high cost of maintaining smaller shareholder accounts, the Fund
may redeem the shares in your account (without charging any
deferred sales charge) if the net asset value of your account
falls below the required minimum initial investment due to
redemptions you have made. You will be notified that the value
of your account is less than the required minimum initial
investment before the Fund makes an involuntary redemption. You
will then have 30 days to make an additional investment to
bring the value of your account to at least the required minimum
initial investment before the Fund takes any action. This
involuntary redemption does not apply to accounts of authorized
qualified employee benefit plans, selected fee-based programs or
accounts established under the Uniform Gifts or Transfers to
Minors Acts.
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
Foreside Fund Services, LLC, the Distributor, serves as the
distributor of the Funds shares in a continuous offering
pursuant to a Distribution Agreement. In this capacity, the
Distributor acts as agent of the Fund for the distribution of
the Funds shares and as such will assist in coordinating
with financial intermediaries for the purchase and sale of Fund
shares and assist in reviewing Fund sales materials. The
Distributor may enter into arrangements with banks,
broker-dealers and other financial institutions through which
investors may purchase or redeem shares. The Distributor is not
affiliated with del Rey Global, The Northern Trust Company,
the Funds administrator, transfer agent and custodian, or
any of their respective affiliates.
The Fund pays the Distributor an annual fee equal to 0.01% of
the Funds average daily net assets as compensation for its
services under the Distribution Agreement. In addition, in order
to compensate the Distributor for its costs in connection with
these activities, including compensation paid to financial
intermediaries, the Fund has adopted a distribution and service
plan under
Rule 12b-1
under the 1940 Act. The Fund may pay distribution and
shareholder service fees pursuant to
Rule 12b-1
under the 1940 Act to the Distributor at an annual rate not to
exceed 0.25% of the Funds Class A Shares
average daily net assets. Because these fees are paid out of the
Funds Class A Shares assets on an ongoing
basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of
sales charges.
18
The Distributor uses the distribution and service fee for
Class A Shares as well as any up-front sales charge to
compensate financial intermediaries for any activity primarily
intended to result in the sale of Class A Shares of the
Fund and for providing ongoing account services to shareholders.
These services may include establishing and maintaining
shareholder accounts, answering shareholder inquiries, and
providing other personal services to shareholders. These fees
also compensate financial intermediaries for other expenses,
including printing and distributing prospectuses to persons
other than shareholders, and preparing, printing, and
distributing advertising and sales literature and reports to
shareholders used in connection with the sale of shares. del Rey
Global has entered into a separate agreement with the
Distributor under which it has agreed to compensate and
reimburse the Distributor for any amounts payable by the Fund
under the Distribution Agreement for its provision to the Fund
of any distribution services for which the Fund is not
authorized to compensate and reimburse the Distributor. The
payments made by del Rey Global to the Distributor do not
represent an additional expense to the Fund or its shareholders.
Other
Payments to Financial Intermediaries
In addition to certain payments related to up-front sales
charges and
12b-1
distribution and service fees paid by the Distributor, or del
Rey Global in the case of certain sales charges, to financial
intermediaries as previously described, del Rey Global 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 del Rey Global 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. del Rey Global may also make payments to
financial intermediaries in connection with sales meetings, due
diligence meetings, prospecting seminars and other meetings at
which del Rey Global 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, del Rey
Global may also make 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. These payments are in addition to the
12b-1
distribution and service fee and any applicable omnibus
sub-accounting
fees paid to these firms with respect to these services by the
Fund out of fund assets.
Account
Services and Privileges
The following are examples of account services and privileges
available in your account. Your financial professional can help
you complete the forms for these services, or you can call the
Fund at 1-866-876-9946 for copies of the necessary forms.
Systematic
Investing
Systematic investing allows you to make regular investments
through automatic deductions from your bank account or from
exchanging shares from another mutual fund account (simply
complete the appropriate application). The minimum automatic
deduction is $50 per month. There is no charge to participate in
the Funds systematic investment plan. You can stop the
deductions at any time by notifying your fund in writing.
|
|
|
|
|
From Your Bank Account. You can make systematic investments of
$50 or more per month by authorizing us to draw preauthorized
checks on your bank account.
|
19
Systematic
Withdrawal
If the value of your fund account is at least $10,000, you may
request to have $250 or more withdrawn automatically from your
account. You may elect to receive payments monthly, quarterly,
semi-annually or annually, and may choose to receive a check,
have the monies transferred directly into your bank account,
paid to a third party or sent payable to you at an address other
than your address of record.
You should not establish systematic withdrawals if you intend to
make concurrent purchases of Class A Shares because you may
unnecessarily pay a sales charge or CDSC on these purchases.
Reinstatement
Privilege
If you redeem shares, you may reinvest all or part of your
redemption proceeds up to one year later without incurring any
additional charges. You may only reinvest into the same share
class you redeemed. If you paid a CDSC, we will refund your CDSC
and reinstate your holding period. You may use this
reinstatement privilege only once for any redemption.
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 two 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. Technical
limitations in operational systems at the Funds transfer
agent 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, it cannot
guarantee that it 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 it determines that doing so would
not harm the interests of the 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,
20
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.
Generally, Institutional Shares will have a higher net asset
value than Class A Shares because that class has lower
expenses.
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 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.
21
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.
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.
A 3.8% Medicare contribution tax will be imposed 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.
Dividends paid by the Fund to
non-U.S. shareholders
are generally subject to withholding tax at a 30% rate or a
reduced rate specified by an applicable income tax treaty to the
extent derived from investment income and short-term capital
gains. Dividends paid by the Fund from net-tax exempt income or
long-term capital gains are generally not subject to such
withholding tax. In order to obtain a reduced rate of
withholding, a
non-U.S. shareholder
will be required to provide an IRS
Form W-8BEN
certifying its entitlement to benefits under a treaty. The
withholding tax does not apply to regular dividends paid to a
non-U.S. shareholder
who provides a
Form W-8ECI,
certifying that the dividends are effectively connected with the
non-U.S. shareholders
conduct of a trade or business within the U.S. Instead, the
effectively connected dividends will be subject to regular
U.S. income tax as if the
non-U.S. shareholder
were a U.S. shareholder. A
non-U.S. corporation
receiving effectively connected dividends may also be subject to
additional branch profits tax imposed at a rate of
30% (or lower treaty rate). A
non-U.S. shareholder
who fails to provide an IRS
Form W-8BEN
or other applicable form may be subject to
back-up
withholding at the appropriate rate.
A 30% withholding tax will be imposed on dividends and
redemption proceeds paid after December 31, 2012, to
(i) foreign financial institutions including
non-U.S. investment
funds unless they agree to collect and disclose to the IRS
information regarding their direct and indirect
U.S. account holders and (ii) certain other foreign
entities unless they certify certain information regarding their
direct and indirect U.S. owners. To avoid
22
withholding, a foreign financial institution will need to enter
into agreements with the IRS regarding providing the IRS
information including the name, address and taxpayer
identification number of direct and indirect U.S. account
holders, to comply with due diligence procedures with respect to
the identification of U.S. accounts, to report to the IRS
certain information with respect to U.S. accounts
maintained, to agree to withhold tax on certain payments made to
non-compliant foreign financial institutions or to account
holders who fail to provide the required information, and to
determine certain other information as to their account holders.
Other foreign entities will need to provide the name, address,
and TIN of each substantial U.S. owner or certifications of
no substantial U.S. ownership unless certain exceptions
apply.
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.
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, 2013, 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, 2013,
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.
Unless your investment is in a tax deferred account, you may
want to avoid buying shares shortly before the Fund pays a
dividend. If you buy shares when a fund has declared but not yet
distributed ordinary income or capital gains, you will pay the
full price for the shares and then receive a portion of the
price back in the form of a taxable dividend. Before investing
you may want to consult your tax adviser.
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.
23
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.
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.
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
1-866-876-9946.
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.
The Fund will generally not accept investments from foreign
investors (e.g., foreign financial institutions;
non-U.S. persons).
Where the Fund does accept such investments from a foreign
investor the transfer agent is expected to conduct due diligence
on such foreign investors as may be required under the Patriot
Act and applicable U.S. Department of Treasury or
Securities and Exchange Commission rules, regulations and
guidance. The Fund will not accept applications for
correspondent accounts from foreign financial institutions and
does not intend to maintain business relationships with such
entities.
24
IMPORTANT
INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT
To help the government fight the funding of terrorism and money
laundering activities, federal law requires all financial
institutions, including the Fund, to obtain, verify, and record
information that identifies each person who opens an account.
What this means for you: When you open an
account, the Fund will ask for your name, address, date of
birth, and other information that will allow the Fund to
identify you. The Fund may also ask to see identifying documents.
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:
|
|
|
|
|
Affiliates for proper business purposes in connection with the
provision of management and other services to the Fund;
|
|
|
|
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. 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
|
|
|
|
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.
25
For More
Information
Fund
and Service Providers
FUND
del Rey Global Investors Funds
del Rey Monarch Fund
6701 Center Drive West, Suite 655
Los Angeles, CA 90045
1-866-876-9946
Written Correspondence:
del Rey Global Investors Funds
del Rey Monarch Fund
PO Box 4766
Chicago, IL
60680-4766
INVESTMENT MANAGER
del Rey Global Investors, LLC
6701 Center Drive West, Suite 655
Los Angeles, CA 90045
ADMINISTRATOR, TRANSFER AGENT AND CUSTODIAN
The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Suite 200
350 South Grand Avenue
Los Angeles, CA 90071-3462
DISTRIBUTOR
Foreside Fund Services, LLC
Three Canal Plaza,
Suite 100
Portland, ME 04101
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 affect the Funds performance
for the prior fiscal year.
Statement
of Additional Information
A Statement of Additional Information, dated January 28,
2011, 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 1-866-876-9946. 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 1-866-876-9946
BY MAIL
del Rey Global Investors Funds
del Rey Monarch Fund
PO Box 4766
Chicago, IL
60680-4766
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
www.delreyglobal.com/monarchfund.
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 1-866-876-9946.
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 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 #
811-22434
©del
Rey Global Investors, LLC
STATEMENT OF ADDITIONAL INFORMATION
del Rey Global Investors
Funds
del Rey Monarch Fund
PO Box 4766, Chicago, IL
60680-4766
Phone
No. 1-866-876-9946
This Statement of Additional Information of del Rey Monarch Fund
(the Fund) is not a prospectus and should be read in
conjunction with the Prospectus of the Fund, dated
January 28, 2011, which has been filed with the Securities
and Exchange Commission (the Commission or the
SEC) and can be obtained, without charge, by calling
1-866-876-9946 or by writing to the Fund at
PO Box 4766, Chicago, IL
60680-4766.
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
|
|
|
|
|
Ticker
|
Class
|
|
Symbol
|
|
Class A Shares
|
|
N/A
|
Institutional Shares
|
|
N/A
|
The date of this Statement of Additional Information is
January 28, 2011
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
19
|
|
|
|
|
20
|
|
|
|
|
22
|
|
|
|
|
22
|
|
|
|
|
23
|
|
|
|
|
28
|
|
|
|
|
28
|
|
|
|
|
29
|
|
|
|
|
30
|
|
|
|
|
31
|
|
|
|
|
33
|
|
|
|
|
34
|
|
|
|
|
38
|
|
|
|
|
44
|
|
|
|
|
47
|
|
|
|
|
54
|
|
|
|
|
54
|
|
|
|
|
60
|
|
INFORMATION
ABOUT DEL REY MONARCH FUND
Organization
of the Fund
The Fund was formed on January 14, 2011 as a series of del
Rey Global Investors Funds (the Trust), a Delaware
Trust, which was formed June 18, 2010. 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. del Rey Global Investors, LLC (the
Manager) serves as the investment adviser of the
Fund.
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 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
1
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 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
2
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 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
3
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 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
4
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 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.
5
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
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 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
6
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
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
7
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
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
8
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.
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
9
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 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
10
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.
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 standards
in other countries are not necessarily the same as in the United
States. If the accounting standards in another
11
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 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
12
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
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 securities
markets when the Manager believes they present an attractive
investment opportunity. 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
13
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.
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
Derivatives Futures 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
14
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 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
15
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.
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.
16
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.
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. In the future, the Fund
expects to lend portfolio securities on a short-term or
long-term basis, but does not currently do so. In such case 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
17
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 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.
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
18
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
331/3%
of the value of its total assets (calculated when the loan is
made) to take advantage of investment opportunities and may
pledge up to
331/3%
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 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
19
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. With
respect to (2) above, however, in the event that the asset
coverage on borrowings falls below 300 percent, the Fund
shall, to the extent required by the 1940 Act, within three days
thereafter (not including Sundays and holidays) reduce the
amount of its borrowings to an extent that the asset coverage of
such borrowings shall be at least 300 percent.
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
331/3%
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
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.
20
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 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
21
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 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 policies and procedures to protect against
improper portfolio holdings disclosure. A 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,
www.delreyglobal.com/monarchfund. Currently, the Fund generally
makes 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
22
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 the event that any
officer, Trustee or employee of the Trust or the Fund or a
service provider officer or employee believes it is necessary to
share a Funds portfolio information with third parties,
such person must obtain the prior consent of the chief
compliance officer of the Manager.
The chief compliance officer of the Trust and the chief
compliance officer of 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 policies and procedures. Reports are made
to the Board on an annual basis.
The Funds portfolio holdings policy is designed to prevent
sharing of portfolio information with third parties that have no
legitimate business purpose for accessing the information. The
policy may not be effective to limit access to portfolio
holdings information in all circumstances, however. 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 four individuals (each a Trustee), three
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, Gerald W.
Wheeler, is an interested person of the Fund. The Trustees may
exercise their informed business judgment to appoint an
individual of their choosing to serve as Chairman, regardless of
whether the Trustee happens to be independent or a member of
management. The Trustees have determined that an interested
Chairman is currently appropriate for the Fund and the Trustees
have also determined that there be no lead Independent Trustee
of the Board owing to the relatively small size of the Board.
The Independent Trustees have concluded that they can act
independently and effectively without having an Independent
Trustee serve as Chairman and that a key structural component
for assuring that they are in a position to do so is for the
Independent Trustees to constitute at least a majority of the
Board. In addition to providing feedback and direction during
Board meetings, the Independent Trustees meet regularly, outside
the presence of Fund management, in executive session or with
other service providers to the Fund and an Independent Trustee
chairs all committees of the Board (each, a
Committee). The Board has two standing Committees:
an Audit Committee and a Nominating and Corporate Governance
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 Board has committed to regular meetings four times a
year, and may hold special meetings if required before its next
regular meeting. Each Committee will meet regularly to conduct
the oversight functions delegated to that Committee by the Board
and report its findings to the Board. The Board and each
standing Committee will 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 will review, on an ongoing basis, the
23
Funds performance, operations, and investment strategies
and techniques. The Board will also conduct reviews of the
Manager and its role in running the operations of the Fund.
Subject to the supervision of the Board,
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 will be addressed as part of various Board and
Committee activities. The Board, directly or through a
Committee, will also review reports from, among others,
management, the independent registered public accounting firm
for the Fund and any internal audits or internal control reports
from the Funds service providers, 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 will oversee the implementation and
testing of the Funds compliance program and will report 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.
The members of the Audit Committee are David G. Chrencik, Roger
Hartley and Guy Talarico, all of whom are Independent Trustees.
The initial chairman of the Audit Committee is David G.
Chrencik. 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 with the independent
auditors and service providers the Funds internal control
structure and any periodic assessments and evaluations of the
internal controls of the Fund with respect to accounting and
financial matters, including recommendations for improvement;
(6) oversee policies, procedures and controls regarding
valuation of the Funds investments; and (7) 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 Nominating and Corporate Governance Committee
(the Governance Committee) are David G. Chrencik,
Roger Hartley and Guy Talarico, all of whom are Independent
Trustees. The initial chairman of the Governance Committee is
Guy Talarico. The principal responsibilities of the Governance
Committee are, without limitation, 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; (3) oversee periodic self-assessments of the
Board and committees of the Board; (4) review and make
recommendations regarding Independent Trustee compensation;
(5) monitor corporate governance matters, develop
appropriate recommendations to the Board and assess ongoing
adherence to industry corporate governance best practices; and
(6) make recommendations to the Board regarding executive
and trustee compensation practices. 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. Compensation paid to
the Independent Trustees will be subject to approval of the
Governance Committee. The Board has adopted a written charter
for the Governance Committee.
The charter for the Governance Committee adopted by the Board
includes policies that describe the experience, qualifications,
skills and attributes that are necessary and desirable for
potential Independent Trustee candidates. 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 these policies.
24
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,
is 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 is
their substantial experience, work experience or relationships
that contribute to the overall effectiveness of the Board, their
educational background or professional training, and their
ongoing commitment and willing participation in Board and
committee meetings.
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 below,
in Biographical Information.
Biographical
Information
Certain biographical and other information relating to the
Trustees of the Fund is set forth below, including their age,
their principal occupations for at least the last five years,
the length of time served in their position with the Fund and
any public directorships in the past five years. The address for
each of the Trustees is 6701 Center Drive West, Suite 655,
Los Angeles, CA 90045.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Other
|
|
|
|
|
|
|
|
|
Portfolios in
|
|
Directorships/
|
|
|
|
|
|
|
|
|
Fund
|
|
Trusteeships
|
|
|
|
|
Length of
|
|
|
|
Complex
|
|
Held
|
|
|
Position
|
|
Time
|
|
Principal Occupation(s)
|
|
Overseen by
|
|
During Past
|
Name and Age
|
|
With Fund
|
|
Served
|
|
During Past Five Years
|
|
Director
|
|
Five Years
|
|
INTERESTED TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
Gerald W. Wheeler* (47)
|
|
Chairman of the Board, President, Chief Financial Officer and
Secretary
|
|
Since 2011
|
|
del Rey Global Investors, LLC, Managing Member, Chief Operating
Officer and Chief Compliance Officer, March 2010
present; Ivory Investment Management, L.P., Principal and
General Counsel, June 2006 March 2010; NWQ
Investment Management Company, LLC, Managing Director, General
Counsel and Chief Compliance Officer, September 2005
June 2006.
|
|
One
|
|
None
|
David G. Chrencik (62)
|
|
Trustee
|
|
Since 2011
|
|
GeoGreen Biofuels, Inc., Vice President, Finance, Chief
Financial Officer and Secretary, May 2010 present;
PricewaterhouseCoopers LLP, Partner, July 1972
June 2009.
|
|
One
|
|
None
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Other
|
|
|
|
|
|
|
|
|
Portfolios in
|
|
Directorships/
|
|
|
|
|
|
|
|
|
Fund
|
|
Trusteeships
|
|
|
|
|
Length of
|
|
|
|
Complex
|
|
Held
|
|
|
Position
|
|
Time
|
|
Principal Occupation(s)
|
|
Overseen by
|
|
During Past
|
Name and Age
|
|
With Fund
|
|
Served
|
|
During Past Five Years
|
|
Director
|
|
Five Years
|
|
Roger Hartley (50)
|
|
Trustee
|
|
Since 2011
|
|
Mitchell Hartley Advisers, Managing Member, December
2009 present; Sarus Capital Management, Advisory
Board Member, May 2009 present; Coast Asset
Management, Chief Operating Officer, December 2007
February 2009, and Board Member August 2008 February
2009; Jefferies & Co., Managing Director, July
2007 December 2007; Putnam Lovell NBF, Managing
Director, 2002 July 2007.
|
|
One
|
|
None
|
Guy F. Talarico (55)
|
|
Trustee
|
|
Since 2011
|
|
Alaric Compliance Services, Chief Executive Officer, December
2005 present; EOS Compliance Services, co-Chief
Executive Officer, June 2004 December 2005; Senior
Director, Investors Bank and Trust Company, February
2001 June 2004; Division Executive, JPMorgan-Chase,
October 1986 February 2001.
|
|
One
|
|
None
|
|
|
|
* |
|
Mr. Wheeler is an interested person of the Fund because he
is an executive officer and a managing member of the Manager. |
Certain biographical and other information relating to the
officers of the Fund that are not Trustees is set forth below,
including their age, their principal occupations for at least
the last five years and the length of time served in their
position with the Fund:
|
|
|
|
|
|
|
|
|
|
|
Length of
|
|
|
|
|
Position
|
|
Time
|
|
Principal Occupation(s)
|
Name and Age
|
|
With Fund
|
|
Served
|
|
During Past Five Years
|
|
OFFICERS
|
|
|
|
|
|
|
Paul J. Hechmer (45)
|
|
Chief Executive Officer; Portfolio Manager
|
|
Since 2011
|
|
del Rey Global Investors, Managing Member, Chief Executive
Officer and Chief Investment Officer, September 2009
present; Tradewinds Global Investors, LLC, Managing Member,
January 2006 June 2009; NWQ Investment Management
Company, LLC, Managing Director, Portfolio Manager and Equity
Analyst, September 2005 January 2006.
|
James M. Atwood (45)
|
|
Chief Compliance Officer
|
|
Since 2011
|
|
Director, Foreside Compliance Services, LLC, 2007
present; personal sabbatical, 2004 2007; Attorney,
Pierce Atwood (law firm), 2001-2004.
|
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
Trustees, each Trustee should serve as a Trustee
26
of the Board. Among the attributes common to all Trustees is
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.
|
|
|
Trustee
|
|
Experience, Qualifications and Skills
|
|
Gerald W. Wheeler
|
|
Mr. Wheeler has been a Trustee since the Funds
inception. In addition, he has over 14 years of executive
and business experience in the asset management industry.
Mr. Wheeler has an extensive background in compliance and
legal matters for investment companies and has served as general
counsel and chief compliance officer for asset management firms.
|
David G. Chrencik
|
|
Mr. Chrencik has served as a Trustee since the Funds
inception. Mr. Chrencik spent over 35 years at
PricewaterhouseCoopers, including 26 years as a partner,
and will serve as the audit committee financial
expert for the Fund. Mr. Chrencik has spent most of
his career as an accountant and served many investment companies
in that capacity. Mr. Chrencik now serves as the head of
finance for an alternative energy company.
|
Roger Hartley
|
|
Mr. Hartley has served as a Trustee since the Funds
inception. Mr. Hartley has over 29 years of experience
in the financial services industry, and particularly with
respect to the asset management sector. During his career,
Mr. Hartley has advised many asset management companies and
has also served in a senior executive position with an asset
management firm. He has corporate governance experience serving
on the board of an asset management firm.
|
Guy Talarico
|
|
Mr. Talarico has served as a Trustee since the Funds
inception. He has served as the Chief Executive Officer of
Alaric Compliance Services LLC, a full service compliance
consulting firm since December of 2005. Prior to this role he
was the Co-CEO of EOS Compliance Services, LLC from June 2004 to
December 2005. Mr. Talaricos 25 years of
experience in the financial services industry includes: serving
as Chief Compliance Officer to various mutual funds, and
investment advisors registered with the SEC and the NFA since
October of 2004; the management of a $45 billion asset
management and services group at JP Morgan Chase; client
management of SEC-registered advisers within the Institutional
Custody Division of Investors Bank &
Trust Company; development of an outsourced SEC regulatory
compliance program for registered advisers; and legal compliance
support. Mr. Talarico also served three terms in the New
Jersey State Assembly and sponsored numerous laws, including
regulatory reforms in the insurance and banking industries.
|
Share
Ownership
As of December 31, 2010, no Trustee owned shares of the
Fund. Trustees of the Fund are eligible to purchase
Institutional Shares of the Fund.
As of December 31, 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, 2010, 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, Foreside Fund Services, LLC, the
Funds distributor, or any person directly or indirectly
controlling, controlled by, or under common control with the
Manager or Foreside Fund Services, LLC.
As of January 24, 2011, 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.
27
Compensation
of Trustees
Each Trustee who is a non-interested Trustee will be paid $5,000
plus reimbursement of expenses for the Funds
organizational Board meeting that occurred on January 14,
2011. Each non-interested Trustee will be paid $5,000 for, and
reimbursed for expenses in connection with, each Board meeting
attended in-person until the Fund holds its next in-person
meeting, which is expected to occur on or about March 23,
2011. At the next in-person meeting, the Trustees intend to
revisit and determine the annual compensation and the provision
of any other benefits for the non-interested Trustees from or
after the next quarterly in-person meeting.
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Annual
|
|
Annual
|
|
Aggregate
|
|
|
Compensation
|
|
Benefits Upon
|
|
Compensation
|
Name
|
|
from the Fund(1)
|
|
Retirement(2)
|
|
from the Fund
|
|
Interested Trustees
|
|
|
|
|
|
|
Gerald W. Wheeler(3)
|
|
None
|
|
None
|
|
N/A
|
Non-Interested Trustees
|
|
|
|
|
|
|
David G. Chrencik
|
|
*
|
|
None
|
|
*
|
Roger Hartley
|
|
*
|
|
None
|
|
*
|
Guy Talarico
|
|
*
|
|
None
|
|
*
|
|
|
|
(1) |
|
The Trust is newly organized, and the amounts listed are
estimated for the fiscal year ended October 31, 2011. For a
discussion of the independent trustees compensation, see
above. |
|
(2) |
|
The Trust does not currently have a profit-sharing or retirement
plan, and trustees do not receive any pension or retirement
benefits, but may adopt one in the future. |
|
(3) |
|
Mr. Wheeler is employed and paid by, and may be compensated
through his ownership interests in, del Rey Global Investors,
LLC. |
|
* |
|
As noted above, the Trustees intend to revisit and determine the
annual compensation and the provision of any other benefits for
the non-interested Trustees at the next quarterly in-person
meeting. |
The Trust will compensate James M. Atwood for his services as
its Chief Compliance Officer indirectly pursuant to an agreement
with Foreside Compliance Services, LLC, his employer.
Code of
Ethics
The Fund and the Manager 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
28
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.
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 August 31 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 June 30 will be available without charge by
calling 1-866-876-9946 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
1-866-876-9946.
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 January 14, 2011, 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 0.90% 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 January 14, 2013.
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.
The Manager has agreed to cap net expenses (excluding
(i) interest, taxes, brokerage fees and commissions, and
extraordinary charges, including, but not limited to, litigation
costs; (ii) expenses incurred indirectly by the Fund as a
result of investments in other investment companies and pooled
investment vehicles; and (iii) other expenses attributable
to, and incurred as a result of, the Funds investments) to
1.40% for Class A Shares and 1.15% for Institutional Shares
until March 1, 2012. To achieve this expense cap, del Rey
Global has agreed to waive
and/or
reimburse fees or expenses if the Funds operating expenses
exceed a certain limit. The agreement may be terminated upon
90 days notice by a majority of the non-interested
trustees of the Fund or by a vote of a majority of the
outstanding voting securities of the Fund.
With respect to this contractual agreement, if during the
Funds fiscal year the operating expenses of a share class,
that at any time during the prior two fiscal years received a
waiver or reimbursement from the
29
Manager, are less than the expense limit for that share class,
the share class is required to repay the Manager up to the
amount of fees waived or expenses reimbursed during those prior
two fiscal years under the agreement, provided that:
(1) the Fund has more than $50 million in assets and
(2) the Manager or an affiliate serves as the Funds
manager.
Information
Regarding the Portfolio Manager
Paul Hechmer is the Funds portfolio manager.
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 Trusts fiscal year ended
October 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Other Accounts Managed
|
|
Number of Accounts and Assets for which
|
|
|
and Assets by Account Type
|
|
Advisory Fee is Performance-Based
|
|
|
Registered
|
|
Other Pooled
|
|
|
|
Registered
|
|
Other Pooled
|
|
|
|
|
Investment
|
|
Investment
|
|
Other
|
|
Investment
|
|
Investment
|
|
Other
|
Name of Portfolio Manager
|
|
Companies
|
|
Vehicles
|
|
Accounts
|
|
Companies
|
|
Vehicles
|
|
Accounts
|
|
Paul Hechmer
|
|
|
0
|
|
|
|
3
|
|
|
|
4
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
0
|
|
|
$
|
685,991,501
|
|
|
$
|
6,782,255
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
As of December 31, 2010, the portfolio manager did not
directly own securities in the Fund.
Portfolio
Manager Compensation Overview
As of the date of this Statement of Additional Information, 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:
|
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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 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
|
30
|
|
|
|
|
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.
|
|
|
|
|
|
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 Northern
Trust Company (the Transfer Agent), with
principal offices at 50 South LaSalle Street, Chicago, IL 60675,
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 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.
Custodian
Under its Custodian Agreement with the Fund, The Northern
Trust Company (the Custodian), with principal
offices at 50 South LaSalle Street, Chicago, IL 60675,
(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.
Administrator
The Northern Trust Company (the Administrator),
with principal offices at 50 South LaSalle Street, Chicago, IL
60675, acts as administrator and fund accountant for the Fund
under a Fund Administration and Accounting Services
Agreement (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
and treasury services, including but not limited to:
(i) furnishing data processing services, clerical services,
and executive and administrative services and standard
stationery and office supplies; (ii) 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; (iii) preparing and submitting reports
to the Funds shareholders and the Commission;
(iv) preparing and arranging for printing of financial
statements; (v) preparing monthly Fund profile reports;
(vi) 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;
(vii) 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; (viii) assisting in
marketing strategy and product development; (ix) performing
oversight/management responsibilities, such as
31
the supervision and coordination of certain of the Funds
service providers; (x) coordinating the performance of
blue sky compliance functions; (xi) assisting
in maintaining corporate records and good standing status of the
Trust in its state of organization; and (xii) 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 0.0275%
of the first $250 million of average daily net assets of
the Fund, an annual rate of 0.0225% of the next
$250 million of average daily net assets of the Fund, and
an annual rate of 0.0150% of the average daily net assets of the
Fund over $500,000 and an annual base fee of $150,000. As
compensation for its fund accounting 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 0.0125% of the first $250 million of average daily net
assets of the Fund, an annual rate of 0.01% of the next
$250 million of average daily net assets of the Fund, and
an annual rate of 0.0075% of the average daily net assets of the
Fund over $500,000 and an annual base fee of $50,000, plus
additional fees for additional share classes and fair valuation
services.
Unless sooner terminated, the Administration Agreement will
continue in effect with respect to the Fund for three years.
Thereafter, the Administration Agreement will continue in effect
for successive
12-month
periods, provided that the continuance is approved at least
annually by the vote of a majority of the Trustees. The
Administration Agreement is terminable in the event of the
Funds reasonable dissatisfaction with the
Administrators services under the Administration Agreement
upon no less than 60 days written notice by the Trust
with respect to the Fund, provided that the Administrator is
permitted to cure such dissatisfaction within 60 days, or
upon 180 days prior written notice by the
Administrator to the Fund. The Fund may also terminate the
Administration Agreement at any time: (i) upon the breach
of the Agreement caused by or was a result of willful
misfeasance, willful default, willful misconduct, bad faith,
fraud, negligence or gross negligence on the
Administrators part or the part of its agents or
employees, in the performance of, or from reckless disregard by
the Administrator or its agents or employees of, the duties and
obligations under the Agreement; (ii) if the Administrator
(a) breaches any material provision of the Agreement, or
(b) is in default in the performance of its duties or
obligations and such default has, or may reasonably have, a
material adverse effect on the Fund; or (iii) upon the
occurrence of the bankruptcy of the Administrator. The
Administration Agreement also provides that the Trust will
indemnify the Administrator against all claims except those
resulting from the willful misfeasance, willful default, willful
misconduct, bad faith, fraud, negligence or gross negligence of
the Administrator.
Distributor
The Fund also has entered into a Distribution Agreement under
which Foreside Fund Services, LLC (the
Distributor), with principal offices at Three Canal
Plaza, Suite 100, Portland, ME 04101, serves as distributor
of the Funds shares. The Distributor may enter into
arrangements with banks, broker-dealers and other financial
institutions through which investors may purchase or redeem
shares. The Distributor is not affiliated with the Manager, The
Northern Trust Company, the Funds administrator,
transfer agent and custodian, or any of their affiliates.
Pursuant to the Distribution Agreement, the Fund pays an annual
distribution fee equal to 0.01% of the Funds average daily
net assets to the Distributor for services specified under the
Distribution Agreement. The Manager has entered into a separate
agreement with the Distributor under which it has agreed to
compensate and reimburse the Distributor for any amounts payable
by the Fund under the Distribution Agreement for its provision
to the Fund of any distribution services for which the Fund is
not authorized to compensate and reimburse the Distributor. The
payments made by the Manager to the Distributor do not represent
an additional expense to the Fund or its shareholders. The
Distribution Agreement provides that the Fund will indemnify the
Distributor for any losses arising out of or relating to
(i) the Distributor providing services to the Fund in
accordance with the standards in the Distribution Agreement;
(ii) that Funds breach of any of its obligations,
representations, warranties or covenants contained in the
Distribution Agreement; (iii) the Funds failure to
comply with any applicable securities laws or regulations;
32
or (iv) any claim that the Registration Statement,
Prospectus, shareholder reports, sales literature and
advertising materials or other information filed or made public
by the Fund (as from time to time amended) include or included
an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in
order to make the statements therein not materially misleading
under applicable law. The Fund will not indemnify the
Distributor against any liability to the Fund or its
shareholders to which the Distributor would otherwise be subject
by reason of willful misfeasance, willful default, willful
misconduct, bad faith, fraud, or gross negligence on the
Distributors part or the part of its agents or employees,
in the performance of, or from reckless disregard by the
Distributor or its agents or employees of, the duties and
obligations specifically set out in the Distribution Agreement.
CCO
Services
The Trust has entered into a Fund CCO Agreement (the
CCO Agreement), under which Foreside Compliance
Services, LLC (FCS) provides a Chief Compliance
Officer (CCO) to the Trust. FCS is an affiliate of
the Distributor. Neither the Distributor or FCS, nor any of
their officers or employees who serve as an officer of the Fund,
has any role in determining the Funds investment policies
or which securities are to be purchased or sold by the Fund.
Certain officers or employees of FCS are officers of the Trust.
For making available the CCO under the CCO Agreement, FCS
receives a fee from the Trust of $75,000 per annum, plus $5,000
for any additional series of the Trust; provided that such fee
is reduced to $60,000 for the first year of operations. FCS also
receives reimbursement for reasonable
out-of-pocket
expenses associated with certain matters.
The CCO Agreement with respect to the Trust continues in effect
until terminated. The CCO Agreement is terminable with or
without cause and without penalty by the Board of the Trust or
by FCS with respect to the Fund on 60 days written
notice to the other party.
Under the CCO Agreement, FCS is not liable to the Trust or the
Funds shareholders for any act or omission, except for
willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of reckless disregard of
its obligations and duties under the CCO Agreement. Under the
CCO Agreement, FCS and its officers, directors and employees are
indemnified by the Trust against any and all losses, claims and
expenses related to FCSs actions or omissions, except for
any act or omission resulting from FCSs willful
misfeasance, bad faith or gross negligence in the performance of
its duties or by reason of reckless disregard of its obligations
and duties under the CCO Agreement.
12b-1
Distribution and Service Plans
The Fund has adopted a plan (the Plan) pursuant to
Rule 12b-1
under the 1940 Act, which provides that Class A Shares are
subject to an annual distribution and service fee. Institutional
Shares are not subject to either distribution or service fees.
The distribution and service fee applicable to Class A
Shares under the Funds Plan will be payable to financial
intermediaries to finance any activity primarily intended to
result in the sale of Class A Shares of the Fund and in
connection with the provision of ongoing account services to
shareholders. These services may include establishing and
maintaining shareholder accounts, answering shareholder
inquiries and providing other personal services to shareholders.
The Class A Shares are also subject to an up-front sales
charge used to compensate selected securities dealers and
financial intermediaries. See Information About the
Funds Shares.
The Fund may spend up to 0.25% per year of the average daily net
assets of Class A Shares as a distribution and service fee
under the Plan.
Under the Funds Plan, the Board shall receive, and the
Trustees shall review, at least quarterly, written reports
complying with the requirements of
Rule 12b-1,
which set out the amounts expended under the Plan and the
purposes for which those expenditures were made. The Plan may be
terminated at any time with respect to any class of shares,
without the payment of any penalty, by a vote of a majority of
the independent
33
trustees who have no direct or indirect financial interest in
the Plan or by vote of a majority of the outstanding voting
securities of such class. The Plan may be renewed from year to
year if approved by a vote of the Board and a vote of the
independent trustees who have no direct or indirect financial
interest in the Plan cast in person at a meeting called for the
purpose of voting on the Plan. The Plan may be continued only if
the trustees who vote to approve such continuance conclude, in
the exercise of reasonable business judgment and in light of
their fiduciary duties under applicable law, that there is a
reasonable likelihood that the Plan will benefit the Fund and
its shareholders. The Plan may not be amended to increase
materially the cost which a class of shares may bear under the
Plan without the approval of the shareholders of the affected
class, and any other material amendments of the Plan must be
approved by the independent trustees by a vote cast in person at
a meeting called for the purpose of considering such amendments.
During the continuance of the Plan, the selection and nomination
of the independent trustees of the Fund will be committed to the
discretion of the independent trustees then in office.
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 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.
34
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 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.
35
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
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,
36
(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
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 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
37
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 Amended and Restated Trust Agreement that
establishes the Fund, the Trustees are authorized to issue
beneficial interests in the Fund and create future series. Under
the Amended and Restated Trust Agreement, 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 divided into Class A and 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.
General
Information About Share Classes
As described in the Prospectus, the Fund provides you with
alternative ways of purchasing Fund shares based upon your
individual investment needs and preferences.
Each class of shares of the Fund represents an interest in the
same portfolio of investments. Each class of shares is identical
in all respects except that each class bears its own class
expenses, including distribution and administration expenses,
and each class has exclusive voting rights with respect to any
distribution or service plan applicable to its shares. As a
result of the differences in the expenses borne by each class of
shares, net income per share, dividends per share and net asset
value per share will vary among the Funds classes of
shares. There are no conversion, preemptive or other
subscription rights.
Shareholders of each class will share expenses proportionately
for services that are received equally by all shareholders. A
particular class of shares will bear only those expenses that
are directly attributable to that class, where the type or
amount of services received by a class varies from one class to
another. For example,
class-specific
expenses generally will include distribution and service fees
for those classes that pay such fees.
The minimum initial investment is $2,000 for Class A Shares
and $50 if you establish a systematic investment plan and
$100,000 for Institutional Shares. The Fund reserves the right
to reject purchase orders and to waive or increase the minimum
investment requirements.
The expenses to be borne by specific classes of shares may
include (i) transfer agency fees attributable to a specific
class of shares, (ii) printing and postage expenses related
to preparing and distributing materials such as shareholder
reports, prospectuses and proxy statements to current
shareholders of a specific class of shares,
(iii) Commission and state securities registration fees
incurred by a specific class of shares, (iv) the
38
expense of administrative personnel and services required to
support the shareholders of a specific class of shares,
(v) litigation or other legal expenses relating to a
specific class of shares, (vi) directors fees or
expenses incurred as a result of issues relating to a specific
class of shares, (vii) accounting expenses relating to a
specific class of shares and (viii) any additional
incremental expenses subsequently identified and determined to
be properly allocated to one or more classes of shares.
Class A
Shares
Class A Shares may be purchased at a public offering price
equal to the applicable net asset value per share plus an
up-front sales charge imposed at the time of purchase as set out
in the Prospectus. Shareholders may qualify for a reduced sales
charge, or the sales charge may be waived in its entirety, as
described below. Class A Shares are also subject to an
annual distribution and service fee of up to 0.25%. See
12b-1
Distribution and Service Plans.
The Fund receives the entire net asset value of all Class A
Shares that are sold. The ongoing up-front sales charge and
service fees will cause Class A Shares to have a higher
expense ratio, pay lower dividends and have a lower total return
than Institutional Shares.
The Distributor may reallow discounts to selected securities
dealers and will use any such balance over discounts to pay or
reimburse other persons, including the Manager, for any
distribution activity and will not retain the balances. Since
securities dealers selling front-end load shares of the Fund
will typically receive a concession equal to the sales charge,
they may be deemed to be underwriters.
Rights
of Accumulation
You may qualify for a reduced sales charge on a purchase of
Class A Shares of the Fund if the amount of your purchase,
when added to the value that day of all of your shares of the
Fund, falls within the amounts stated in the Class A Sales
Charges and Commissions table in How to Buy Shares
in the Prospectus. You or your financial professional must
notify the Funds transfer agent of any cumulative discount
whenever you plan to purchase Class A Shares of the Fund
that you wish to qualify for a reduced sales charge.
Letter
of Intent
You may qualify for a reduced sales charge on a purchase of
Class A Shares of the Fund if you plan to purchase
Class A Shares of the Fund over the next 13 months and
the total amount of your purchases would, if purchased at one
time, qualify you for the reduced sales charges shown in the
Class A Sales Charges and Commissions table in How to
Buy Shares in the Prospectus. In order to take advantage
of this option, you must complete the applicable section of the
Application Form or sign and deliver either to a financial
intermediary or to the Funds transfer agent a written
Letter of Intent in a form acceptable to the Fund. A Letter of
Intent states that you intend, but are not obligated, to
purchase over the next 13 months a stated total amount of
Class A Shares that would qualify you for a reduced sales
charge shown above.
By establishing a Letter of Intent, you agree that your first
purchase of Class A Shares of the Fund following execution
of the Letter of Intent will be at least 5% of the total amount
of your intended purchases. You further agree that shares
representing 5% of the total amount of your intended purchases
will be held in escrow pending completion of these purchases.
All dividends and capital gains distributions on Class A
Shares held in escrow will be credited to your account. If total
purchases, less redemptions, prior to the expiration of the
13 month period equal or exceed the amount specified in
your Letter of Intent, the Class A Shares held in escrow
will be transferred to your account. If the total purchases,
less redemptions, exceed the amount specified in your Letter of
Intent and thereby qualify for a lower sales charge than the
sales charge specified in your Letter of Intent, you will
receive this lower sales charge retroactively, and the
difference between it and the higher sales charge paid will be
used to purchase additional Class A Shares on your behalf.
If the total purchases, less redemptions, are less than the
amount specified, you must pay the Fund an amount equal to the
difference between the amounts paid for these purchases and the
amounts which would have been paid if the higher sales charge
had been applied. If you do not pay the additional amount within
20 days after written request by the Fund or your financial
advisor, the Fund will redeem an appropriate number of your
escrowed
39
Class A Shares to meet the required payment. By
establishing a Letter of Intent, you irrevocably appoint the
Funds transfer agent as attorney to give instructions to
redeem any or all of your escrowed shares, with full power of
substitution in the premises.
You or your financial intermediary must notify the Funds
transfer agent whenever you make a purchase of Fund shares that
you wish to be covered under the Letter of Intent option.
For purposes of determining whether you qualify for a reduced
sales charge as described under Rights of Accumulation and
Letter of Intent, you may include together with your own
purchases those made by your spouse (or equivalent if recognized
under local law) and your children under 21 years of age,
whether these purchases are made through a taxable or
non-taxable account. You may also include purchases made by a
corporation, partnership or sole proprietorship which is 100%
owned, either alone or in combination, by any of the foregoing.
In addition, a trustee or other fiduciary can count all shares
purchased for a single trust, estate or other single fiduciary
account that has multiple accounts (including one or more
employee benefit plans of the same employer).
Elimination
of Sales Charge on Class A Shares
Class A Shares of the Fund may be purchased at net asset
value without a sales charge, and may be purchased by the
following categories of investors:
|
|
|
|
|
investors purchasing $100,000 or more;
|
|
|
|
officers, trustees and former trustees of the Fund;
|
|
|
|
bona fide, full-time and retired employees of the Manager, and
subsidiaries thereof, or 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);
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
investors purchasing on a periodic fee, asset-based fee or no
transaction fee basis through a broker-dealer sponsored mutual
fund purchase program;
|
|
|
|
clients of investment advisers, financial planners or other
financial intermediaries that charge periodic or asset-based
fees for their services;
|
|
|
|
employer-sponsored retirement plans except SEPs, SAR-SEPs,
SIMPLE IRAs and KEOGH plans; and
|
|
|
|
with respect to purchases by employer-sponsored retirement plans
with at least 25 employees and that either (a) make an
initial purchase aggregating $100,000 or more; or
(b) execute a Letter of Intent to purchase in the aggregate
$100,000 or more of fund shares.
|
Any Class A Shares purchased pursuant to a special sales
charge waiver must be acquired for investment purposes and on
the condition that they will not be transferred or resold except
through redemption by the Fund. You or your financial
professional must notify the Funds transfer agent whenever
you make a purchase of Class A Shares of the Fund that you
wish to be covered under these special sales charge waivers. All
purchases under the special sales charge waivers will be subject
to minimum purchase requirements as established by the Fund.
If you are eligible to purchase either Class A Shares or
Institutional Shares without a sales charge at net asset value,
you should be aware of the differences between these two classes
of shares. Class A Shares are subject to an annual service
fee to compensate financial intermediaries for providing you
with ongoing account services. Institutional Shares are not
subject to a distribution or service fee and, consequently,
holders of
40
Institutional Shares may not receive the same types or levels of
services from financial intermediaries. In choosing between
Class A Shares and Institutional Shares, you should weigh
the benefits of the services to be provided by financial
intermediaries against the annual service fee imposed upon the
Class A Shares.
The reduced sales charge programs may be modified or
discontinued by the Fund at any time. For more information about
the purchase of Class A Shares or the reduced sales charge
program, or to obtain the required application forms, call the
Fund at 1-866-876-9946.
Acquisition
of Certain Investment Companies
Class A Shares may be offered at net asset value in
connection with the acquisition of the assets of, or merger or
consolidation with, a personal holding company or a public or
private investment company.
Institutional
Share Purchase Eligibility
Institutional Shares are available for purchases of $100,000 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:
|
|
|
|
|
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);
|
|
|
|
bona fide, full-time and retired employees of the Manager, and
subsidiaries thereof, or their immediate family members;
|
|
|
|
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.)
|
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
employer-sponsored retirement plans except SEPs, SAR-SEPs,
SIMPLE IRAs and KEOGH plans; and
|
|
|
|
other affiliated funds whose investment policies allow
investments in other investment companies.
|
Reinstatement
Privilege
If you redeemed Class A Shares of the Fund that were
subject to a sales charge or a CDSC, you have up to one year to
reinvest all or part of the full amount of the redemption in the
same class of shares of the Fund at net asset value. This
reinstatement privilege can be exercised only once for any
redemption, and reinvestment will be made at the net asset value
next calculated after reinstatement of the appropriate class of
Fund shares. If you reinstate shares that were subject to a
CDSC, your holding period as of the redemption date also will be
reinstated for purposes of calculating a CDSC and the CDSC paid
at redemption will be
41
refunded. The federal income tax consequences of any capital
gain realized on a redemption will not be affected by
reinstatement, but a capital loss may be disallowed in whole or
in part depending on the timing, the amount of the reinvestment
and the fund from which the redemption occurred.
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.
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 two 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
42
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 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 funds 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
Internal Revenue Code of 1986, 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, 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 591/2;
and (ii) redemptions to satisfy required minimum
distributions after
age 701/2
from an IRA account.
Redemption Fee
Policy
The Fund will assess a 2% fee on the proceeds of Fund shares
redeemed or exchanged within 60 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,
43
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
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 Code, from a retirement plan: (a) upon attaining
age 591/2,
(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 591/2;
and (ii) for redemptions to satisfy required minimum
distributions after
age 701/2
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
44
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 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
45
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 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 may submit its recommendations regarding the
valuation
and/or
valuation methodologies for Fair Value Assets to a special
pricing committee authorized by the Board that must contain at
least two Trustees (a Special Pricing Committee).
Special Pricing Committees may accept, modify or reject any
recommendations. In addition, the Funds accounting agent
or administrator 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, Special
Pricing Committees 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 Special Pricing Committees deem
46
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.
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.
Computation
of Offering Price Per Share
An illustration of the computation of the public offering price
of the Class A Shares of the Fund is provided below. The
values in the following illustration are provided as examples
and are not based on the actual value of the Funds
Class A Shares net assets and number of Class A
Shares outstanding.
|
|
|
|
|
|
|
Class A Shares
|
|
Net Assets
|
|
$
|
50,000,000
|
|
Number of Shares Outstanding
|
|
$
|
5,000,000
|
|
Net Asset Value Per Share (net assets divided by number of
shares outstanding)
|
|
$
|
10.00
|
|
Sales Charge (for Class A Shares: 5.00% of offering price;
5.26% of net asset value per share)(1)
|
|
$
|
0.53
|
|
Offering Price
|
|
$
|
10.53
|
|
|
|
|
(1) |
|
Assumes maximum sales charge applicable. |
The offering price for the Funds Institutional Shares is
equal to the share classs net asset value computed as set
forth above for Class A Shares, but will not be subject to
a sales charge.
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. The per share dividends on Class A Shares will be
lower than the per share dividends on Institutional Shares as a
result of the service fees applicable to Class A Shares.
47
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 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 the Funds 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 its 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, 2013) and the dividends-received deduction
for corporate shareholders. However, distributions to
shareholders would not be deductible 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 RIC in a subsequent year.
48
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 98.2% 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 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
reported 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 report 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.
Beginning in 2013, a 3.8 percent Medicare contribution tax
will be imposed 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
49
investments may cause the Fund to designate some or all of its
distributions as excess inclusion income. To 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.
Dividends paid by the Fund to
non-U.S. shareholders
are generally subject to withholding tax at a 30% rate or a
reduced rate specified by an applicable income tax treaty to the
extent derived from investment income and short-term capital
gains. Dividends paid by the Fund from net tax-exempt income or
long-term capital gains are generally not subject to such
withholding tax. In order to obtain a reduced rate of
withholding, a
non-U.S. shareholder
will be required to provide an IRS
Form W-8BEN
certifying its entitlement to benefits under a treaty. The
withholding tax does not apply to regular dividends paid to a
non-U.S. shareholder
who provides a
Form W-8ECI,
certifying that the dividends are effectively connected with the
non-U.S. shareholders
conduct of a trade or business within the U.S. Instead, the
effectively connected dividends will be subject to regular
U.S. income tax as if the
non-U.S. shareholder
were a U.S. shareholder. A
non-U.S. corporation
receiving effectively connected dividends may also be subject to
additional branch profits tax imposed at a rate of
30% (or lower treaty rate). A
non-U.S. shareholder
who fails to provide an IRS
Form W-8BEN
or other applicable form may be subject to
back-up
withholding at the appropriate rate.
For taxable years beginning before January 1, 2012,
distributions that the Fund reports as short-term capital
gain dividends or long-term capital gain
dividends will not be treated as such to a recipient
foreign shareholder if the distribution is attributable to gain
received from the sale or exchange of U.S. real property or
an interest in a U.S. real property holding corporation and
the Funds direct or indirect interests in U.S. real
property exceeded certain levels. Instead, if the foreign
shareholder has not owned more than 5% of the outstanding shares
of the Fund at any time during the one year period ending on the
date of distribution, such distributions will be subject to 30%
withholding by the Fund and will be treated as ordinary
dividends to the foreign shareholder; if the foreign shareholder
owned more than 5% of the outstanding shares of the Fund at any
time during the one year period ending on the date of the
distribution, such distribution will be treated as real property
gain subject to 35% withholding tax and could subject the
foreign shareholder to U.S. filing requirements.
Additionally, if the Funds direct or indirect interests in
U.S. real property were to exceed certain levels, a foreign
shareholder realizing gains upon redemption from the Fund on or
before December 31, 2011 could be subject to the 35%
withholding tax and U.S. filing requirements unless more
than 50% of the Funds
50
shares were owned by U.S. persons at such time or unless
the foreign person had not held more than 5% of the Funds
outstanding shares throughout either such persons holding
period for the redeemed shares or, if shorter, the previous five
years.
In addition, the same rules apply with respect to distributions
to a foreign shareholder from the Fund and redemptions of a
foreign shareholders interest in the Fund attributable to
a REITs distribution to the Fund of gain from the sale or
exchange of U.S. real property or an interest in a
U.S. real property holding corporation, if the Funds
direct or indirect interests in U.S. real property were to
exceed certain levels. The rule with respect to distributions
and redemptions attributable to a REITs distribution to
the Fund will not expire for taxable years beginning on or after
January 1, 2012.
The rules laid out in the previous two paragraphs, other than
the withholding rules, will apply notwithstanding the
Funds participation in a wash sale transaction or its
payment of a substitute dividend.
Provided that 50% or more of the value of the Funds stock
is held by U.S. shareholders, distributions of
U.S. real property interests (including securities in a
U.S. real property holding corporation, unless such
corporation is regularly traded on an established securities
market and the Fund has held 5% or less of the outstanding
shares of the corporation during the five-year period ending on
the date of distribution) occurring on or before
December 31, 2011, in redemption of a foreign
shareholders shares of the Fund will cause the Fund to
recognize gain. If the Fund is required to recognize gain, the
amount of gain recognized will equal to the fair market value of
such interests over the Funds adjusted bases to the extent
of the greatest foreign ownership percentage of the Fund during
the five-year period ending on the date of redemption.
For taxable years beginning before January 1, 2012,
properly reported dividends are generally exempt from
U.S. federal withholding tax where they (i) are paid
in respect of the Funds qualified net interest
income (generally, the Funds U.S. source
interest income, other than certain contingent interest and
interest from obligations of a corporation or partnership in
which the Fund is at least a 10% shareholder, reduced by
expenses that are allocable to such income) or (ii) are
paid in respect of the Funds qualified short-term
capital gains (generally, the excess of the Funds
net short-term capital gain over the Funds long-term
capital loss for such taxable year). However, depending on its
circumstances, the Fund may report all, some or none of its
potentially eligible dividends as such qualified net interest
income or as qualified short-term capital gains
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
non-U.S. shareholder
will need to comply with applicable certification requirements
relating to its
non-U.S. status
(including, in general, furnishing an
IRS Form W-8BEN
or substitute Form). In the case of shares held through an
intermediary, the intermediary may withhold even if the Fund
reports the payment as qualified net interest income or
qualified short-term capital gain.
Non-U.S. shareholders
should contact their intermediaries with respect to the
application of these rules to their accounts.
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.
51
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 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
52
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
neither 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 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.
53
Independent
Registered Public Accounting Firm
The Audit Committee of the Fund, which is comprised of all of
the Funds non-interested Trustees, has selected an
independent registered public accounting firm for that 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 financial statements of the Fund as of January 24, 2011
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.
54
DEL REY
MONARCH FUND
Statement of Assets and Liabilities
January 24, 2011
|
|
|
|
|
Assets:
|
Cash
|
|
$
|
100,000
|
|
Receivable from Funds manager for reimbursement of
organizational costs (See Note 2)
|
|
|
200,000
|
|
Deferred offering costs (See Note 2)
|
|
|
283,000
|
|
|
|
|
|
|
Total Assets
|
|
$
|
583,000
|
|
|
|
|
|
|
|
Liabilities
|
Accrued offering costs (See Note 2)
|
|
$
|
283,000
|
|
Accrued organizational expenses (See Note 2)
|
|
|
200,000
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
483,000
|
|
|
|
|
|
|
Net Assets:
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Class capital shares outstanding, $0.001 par
value, unlimited shares authorized
|
|
|
6,666.667
|
|
|
|
|
|
|
Net asset value, offering price and redemption price per share
|
|
$
|
15.00
|
|
The accompanying notes are an integral part of these financial
statements.
55
DEL REY
MONARCH FUND
Statement of Operations
For the period from June 18, 2010 (formation date) to
January 24, 2011
|
|
|
|
|
Income
|
|
$
|
|
|
Expenses
|
|
|
|
|
Organizational expenses Professional fees
(Note 2)
|
|
|
200,000
|
|
Total expenses before reimbursement
|
|
|
200,000
|
|
|
|
|
|
|
Expenses reimbursed by the Funds manager, subject to
future recoupment (Note 3)
|
|
|
(200,000
|
)
|
Net expenses after reimbursement
|
|
|
0
|
|
|
|
|
|
|
Net Income
|
|
$
|
0
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
56
DEL REY
MONARCH FUND
NOTES TO
FINANCIAL STATEMENTS
As of
January 24, 2011 and for the period from June 18, 2010
(formation date) to January 24, 2011
del Rey Monarch Fund (the Fund) was formed on
January 14, 2011 as a series of del Rey Global Investors
Funds, a Delaware statutory trust formed on June 18, 2010.
The Fund is classified as a diversified open-end investment
company as defined under the Investment Company Act of 1940. The
Fund currently intends to offer Class A and Institutional
class shares. As of January 24, 2011, the Fund did not have
any operations other than those actions relating to
organizational matters, including the sale of
6,666.667 shares of Institutional shares for $100,000 cash
in the amount of $15.00 per share.
The Funds investment objective is to seek long-term
capital appreciation. The Funds principal investment
strategy is to invest primarily in equity securities of issuers
located in a number of different countries outside of the United
States. 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.
|
|
2.
|
Significant
Accounting Policies
|
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of the
financial statements. These policies are in conformity with
accounting principles generally accepted in the United States of
America (GAAP).
The following is a description of the valuation policies adopted
by the Fund as approved by the Board of Trustees:
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.
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 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
57
DEL REY
MONARCH FUND
NOTES TO
FINANCIAL STATEMENTS (Continued)
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.
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.
|
|
(b)
|
Organization
and Offering Costs
|
Organization costs consist of costs, consisting of professional
fees, incurred to establish the Fund and enable it legally to do
business. The Fund expenses organization costs as incurred.
These expenses were advanced by del Rey Global Investors, LLC
(the Manager), and the Manager has agreed to
reimburse the Fund for these expenses, subject to potential
recovery (see Note 3).
Offering costs are accounted for as deferred costs until
operations begin. Offering costs include legal fees regarding
the preparation of the initial registration statement. Offering
costs will be amortized to expense over twelve months on a
straight-line basis.
No provision for federal income taxes has been made since the
Funds policy is to comply with the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended,
applicable to regulated investment companies and to distribute,
each year, substantially all of its taxable income and capital
gains to its shareholders.
The Fund may periodically make reclassifications among certain
capital accounts to reflect differences between financial
reporting and federal income tax basis distributions. The
reclassifications are reported in order to reflect the tax
treatment for certain permanent differences that exist between
income tax regulations and GAAP.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those
estimates.
|
|
(e)
|
Distribution
to Shareholders
|
The Fund will distribute net investment income, if any, and net
realized capital gain, if any, at least annually. Income
dividends and capital gain distributions are determined in
accordance with federal income
58
DEL REY
MONARCH FUND
NOTES TO
FINANCIAL STATEMENTS (Continued)
tax regulations. The Fund may also pay a special distribution at
the end of the calendar year to comply with federal tax
requirements.
The Fund has entered into an investment advisory agreement (the
Management Agreement) with the Manager, under which
the Manager receives for its services to the Fund a fee of 0.90%
of the Funds average net assets.
The Manager has agreed to cap net expenses (excluding
(i) interest, taxes, brokerage fees and commissions, and
extraordinary charges, including, but not limited to, litigation
costs; (ii) expenses incurred indirectly by the Fund as a
result of investments in other investment companies and pooled
investment vehicles; and (iii) other expenses attributable
to, and incurred as a result of, the Funds investments) to
1.40% for Class A shares and 1.15% for Institutional shares
until March 1, 2012. To achieve this expense cap, the
Manager has agreed to waive
and/or
reimburse fees or expenses if the Funds operating expenses
exceed a certain limit. The agreement may be terminated upon
90 days notice by a majority of the non-interested
trustees of the Fund or by a vote of a majority of the
outstanding voting securities of the Fund.
With respect to this contractual agreement, if during the
Funds fiscal year the operating expenses of a share class,
that at any time during the prior two fiscal years received a
waiver or reimbursement from the Manager, are less than the
expense limit for that share class, the share class is required
to repay the Manager up to the amount of fees waived or expenses
reimbursed during those prior two fiscal years under the
agreement, provided that: (1) the Fund has more than
$50 million in assets and (2) the Manager or an
affiliate serves as the Funds manager.
As of January 24, 2011, waived amounts subject to future
recoupment were $200,000.
|
|
4.
|
Other
Fees and Transactions with Related Parties
|
Administrative, Transfer agent, and Custodial
services The Fund has administrative, transfer agent
and custodial services agreements with The Northern
Trust Company (Northern Trust). Under these
agreements, the Fund compensates Northern Trust for services
including processing the accounting transactions, shareholder
recordkeeping and transaction processing, and safeguarding of
Fund assets and processing of cash receipts.
Affiliated officers and trustees Officers and
certain trustees of the Fund are or may be considered to be
affiliated with the Fund. No affiliated officers or trustees
will receive any compensation directly from the Fund.
59
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of
del Rey Global Investors Funds del Rey Monarch Fund:
We have audited the accompanying statement of assets and
liabilities of del Rey Global Investors Funds del
Rey Monarch Fund (the Fund) as of January 24,
2011 and the related statement of operations for the period from
June 18, 2010 (formation date) to January 24, 2011.
These financial statements are the responsibility of the
Funds management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the statement of assets and
liabilities is free of material misstatement. The Fund is not
required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit
included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Funds
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the statement of assets and liabilities, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of del Rey Global Investors Funds del Rey Monarch
Fund as of January 24, 2011 and the results of its
operations for the period from June 18, 2010 (formation
date) to January 24, 2011, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Los Angeles, California
January 28, 2011
60
PART C. OTHER INFORMATION
Item 28. Exhibits.
|
|
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
(a) |
|
(1) |
|
|
|
Certificate of Trust of del Ray Global Investors
Funds (the Registrant), dated June 18, 2010,
is incorporated herein by reference to Exhibit
(a)(1) of Registrants filing of its
Registration Statement on Form N-1A on July 6,
2010. |
|
|
(2) |
|
|
|
Amended and Restated Trust Agreement of the
Registrant is incorporated herein by reference
to Exhibit (a)(2) of Pre-Effective Amendment No.
2 to the Registrants Registration Statement
filed on Form N-1A on January 26, 2011. |
(b) |
|
|
|
|
|
By-Laws of the Registrant is incorporated herein
by reference to Exhibit (b) of Pre-Effective
Amendment No. 2 to the Registrants Registration
Statement filed on Form N-1A on January 26,
2011. |
(c) |
|
|
|
|
|
Article V and Sections 4.1, 6.2 and 7.6 of the
Amended and Restated Trust Agreement of the
Registrant incorporated herein by reference to
Exhibit (a)(2), and Article II of the Bylaws
incorporated herein by reference to Exhibit (b),
of Pre-Effective Amendment No. 2 to the
Registrants Registration Statement filed on
Form N-1A on January 26, 2011. |
(d) |
|
(1) |
|
|
|
Investment Management Agreement between the
Registrant and del Rey Global Investors, LLC
(the Manager) dated January 14, 2011 is
incorporated herein by reference to Exhibit
(d)(1) of Pre-Effective Amendment No. 2 to the
Registrants Registration Statement filed on
Form N-1A on January 26, 2011. |
|
|
(2) |
|
|
|
Fee Waiver/Expense Reimbursement Agreement
between the Registrant and the Manager dated
January 24, 2011 is incorporated herein by
reference to Exhibit (d)(2) of Pre-Effective
Amendment No. 2 to the Registrants Registration
Statement filed on Form N-1A on January 26,
2011. |
(e) |
|
(1) |
|
|
|
Form of Distribution Agreement between
Registrant and Foreside Fund Services, LLC (the
Distributor) is incorporated herein by
reference to Exhibit (e)(1) of Pre-Effective
Amendment No. 2 to the Registrants Registration
Statement filed on Form N-1A on January 26,
2011. |
|
|
(2) |
|
|
|
Form of Selling Group Member Agreement.(a) |
|
|
(3) |
|
|
|
Form of Dealer Agreement.(a) |
(f) |
|
|
|
|
|
None. |
(g) |
|
|
|
|
|
Custody Agreement between the Registrant and The
Northern Trust Company dated January 24, 2011 is
incorporated herein by reference to Exhibit (g)
of Pre-Effective Amendment No. 2 to the
Registrants Registration Statement filed on
Form N-1A on January 26, 2011. |
(h) |
|
(1) |
|
|
|
Transfer Agency and Service Agreement between
the Registrant and The Northern Trust Company
dated January 24, 2011 is incorporated herein by
reference to Exhibit (h)(1) of Pre-Effective
Amendment No. 2 to the Registrants Registration
Statement filed on Form N-1A on January 26,
2011. |
|
|
(2) |
|
|
|
Fund Administration and Accounting Agreement
between the Registrant and The Northern Trust
Company dated January 24, 2011 is incorporated
herein by reference to Exhibit (h)(2) of
Pre-Effective Amendment No. 2 to the
Registrants Registration Statement filed on
Form N-1A on January 26, 2011. |
|
|
(3) |
|
|
|
Distribution Services Agreement between
the Manager and the Distributor dated January 27, 2011.(a) |
|
|
(4) |
|
|
|
Fund CCO Agreement between the
Registrant and Foreside Compliance Services,
LLC dated January 27, 2011.(a) |
(i) |
|
|
|
|
|
Opinion of Morris, Nichols, Arsht & Tunnell LLP,
special Delaware counsel for the Registrant.(a) |
(j) |
|
|
|
|
|
Consent of Deloitte & Touche LLP, independent
registered public accounting firm for the
Registrant.(a) |
(k) |
|
|
|
|
|
None. |
(l) |
|
|
|
|
|
Initial Share Purchase Agreement between the
Registrant and the Manager dated January 24,
2011 is incorporated herein by reference to
Exhibit (l) of Pre-Effective Amendment No. 2 to
the Registrants Registration Statement filed on
Form N-1A on January 26, 2011. |
(m) |
|
|
|
|
|
Form of Distribution and Service Plan is
incorporated herein by reference to Exhibit (m)
of Pre-Effective Amendment No. 2 to the
Registrants Registration Statement filed on
Form N-1A on January 26, 2011. |
(n) |
|
|
|
|
|
Form of Plan pursuant to Rule 18f-3 is
incorporated herein by reference to Exhibit (n)
of Pre-Effective Amendment No. 2 to the
Registrants Registration Statement filed on
Form N-1A on January 26, 2011. |
(p) |
|
(1) |
|
|
|
Code of Ethics of the Registrant is incorporated
herein by reference to Exhibit (p)(1) of
Pre-Effective Amendment No. 2 to the
Registrants Registration Statement filed on
Form N-1A on January 26, 2011. |
|
|
(2) |
|
|
|
Code of Ethics of the Manager is incorporated
herein by reference to Exhibit (p)(2) of
Pre-Effective Amendment No. 2 to the
Registrants Registration Statement filed on
Form N-1A on January 26, 2011. |
(q) |
|
(1) |
|
|
|
Power of Attorney for David G. Chrencik is
incorporated herein by reference to Exhibit
(q)(1) of Pre-Effective Amendment No. 2 to the
Registrants Registration Statement filed on
Form N-1A on January 26, 2011. |
|
|
(2) |
|
|
|
Power of Attorney for Roger Hartley is
incorporated herein by reference to Exhibit
(q)(2) of Pre-Effective Amendment No. 2 to the
Registrants Registration Statement filed on
Form N-1A on January 26, 2011. |
|
|
(3) |
|
|
|
Power of Attorney for Guy Talarico is
incorporated herein by reference to Exhibit
(q)(3) of Pre-Effective Amendment No. 2 to the
Registrants Registration Statement filed on
Form N-1A on January 26, 2011. |
C-1
Item 29. Persons Controlled by or Under Common Control with Registrant.
Immediately prior to this offering, del Rey Global Investors, LLC, a Delaware limited
liability company, will own shares of the Registrant, representing 100% of the common stock
outstanding. Following the completion of this offering, del Rey Global Investors, LLCs share
ownership is expected to represent less than 1% of the common stock outstanding.
Item 30. Indemnification.
Reference is made to Article VII of the Registrants Amended and Restated 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).
Section 7.2 of the Trust Agreement provides:
Limitation of Liability. A Trustee shall be liable to the Trust and to any Shareholder solely
for his or her own willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee, and shall not be liable for errors of
judgment or mistakes of fact or law. The Trustees shall not be responsible or liable in any event
for any neglect or wrongdoing of any officer, agent, employee, Manager, advisor, sub-adviser or
Principal Underwriter of the Trust.
All Persons extending credit to, contracting with or having any claim against the Trust or the
Trustees shall look only to the assets of the Series that such Person extended credit to,
contracted with or has a claim against, and neither the Trustees nor the Shareholders, nor any of
the Trusts officers, employees or agents, whether past, present or future, shall be personally
liable therefor.
Every note, bond, contract, instrument, certificate or undertaking and every other act or
thing whatsoever executed or done by or on behalf of the Trust or the Trustees by any of them in
connection with the Trust shall conclusively be deemed to have been executed or done only in or
with respect to his or their capacity as Trustee or Trustees, and such Trustee or Trustees shall
not be personally liable thereon. At the Trustees discretion, any note, bond, contract,
instrument, certificate or undertaking made or issued by the Trustees or by any officer or officers
may give notice that the Certificate of Trust is on file in the Office of the Secretary of State of
the State of Delaware and that a limitation on liability of Series exists and such note, bond,
contract, instrument, certificate or undertaking may, if the Trustees so determine, recite that the
same was executed or made on behalf of the Trust by a Trustee or Trustees in such capacity and not
individually or by an officer or officers in such capacity and not individually and that the
obligations of such instrument are not binding upon any of them or the Shareholders individually
but are binding only on the assets and property of the Trust or a Series thereof, and may contain
such further recital as such Person or Persons may deem appropriate. The omission of any such
notice or recital shall in no way operate to bind any Trustees, officers or Shareholders
individually.
Section 7.3 of the Trust Agreement further provides:
Trustees Good Faith Action, Expert Advice, No Bond or Surety. The exercise in good faith by
the Trustees of their powers and discretions hereunder shall be binding upon everyone interested.
The Trustees may take advice of counsel or other experts with respect to the meaning and operation
of this Agreement and shall be under no liability for any act or omission in accordance with such
advice; provided the Trustees shall be under no liability for failing to
C-2
follow such advice. The Trustees shall not be required to give any bond as such nor any
surety if a bond is obtained.
Section 7.4 of the Trust Agreement further provides:
Insurance. The Trustees shall be entitled and empowered to the fullest extent permitted by
law to purchase with Trust assets insurance for liability and for all expenses reasonably incurred
or paid or expected to be paid by a Trustee, officer, employee or agent of the Trust in connection
with any claim, action, suit or proceeding in which he or she becomes involved by virtue of his or
her capacity or former capacity with the Trust.
Section 7.5 of the Trust Agreement further provides:
Indemnification.
(a) Subject to the exceptions and limitations contained in subsection (b) below:
(i) every person who is, or has been, a Trustee or an officer or employee of the Trust or is
or was serving at the request of the Trust as a trustee, director, officer, employee or agent of
another organization in which the Trust has any interest as a shareholder, creditor or otherwise
(Covered Person) shall be indemnified by the Trust and each Series to the fullest extent
permitted by law against liability and against all expenses reasonably incurred or paid by him or
her in connection with any claim, action, suit or proceeding in which he or she becomes involved as
a party or otherwise by virtue of his or her being or having been a Covered Person and against
amounts paid or incurred by him or her in the settlement thereof.
(ii) as used herein, the words claim, action, suit or proceeding shall apply to all
claims, actions, suits or proceedings (civil, criminal, investigative or other, including appeals),
actual or threatened, and the words liability and expenses shall include, without limitation,
attorneys fees, costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities whatsoever.
(b) To the extent required under the 1940 Act, but only to such extent, no indemnification shall be
provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which the proceeding was brought
(A) to be liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of his or her office
or (B) not to have acted in good faith in the reasonable belief that his or her action was in the
best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a determination that such Covered
Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his or her office: (A) by the court or other body approving
the settlement; (B) by at least a majority of those Trustees who are neither Interested Persons of
the Trust nor are parties to the matter based upon a review of readily available facts (as opposed
to a full trial-type inquiry); or (C) by written opinion of independent legal counsel based upon a
review of readily available facts (as opposed to a full trial-type inquiry).
(c) The rights of indemnification herein provided may be insured against by policies maintained by
the Trust, shall be severable, shall not be exclusive of or affect any other rights to which any
Covered Person may now or hereafter be entitled and shall inure to the benefit of the heirs,
executors and administrators of a Covered Person.
(d) To the maximum extent permitted by applicable law, expenses in connection with the preparation
and presentation of a defense to any claim, action, suit or proceeding of the character described
in subsection (a) of this Section 7.5 shall be paid by the Trust and each
C-3
Series from time to time prior to final disposition thereof upon receipt of an undertaking by or on
behalf of such Covered Person that such amount will be paid over by him or her to the Trust or
applicable Series if it is ultimately determined that he or she is not entitled to indemnification
under this Section; provided, however, that any such advancement will be made in accordance with
any conditions required by the Commission. The advancement of any expenses pursuant to this
Section 7.5(d) shall under no circumstances be considered a loan under the Sarbanes-Oxley Act of
2002, as amended from time to time, or for any other reason.
(e) Any repeal or modification of this Article VII or adoption or modification of any other
provision of this Agreement inconsistent with this Article, shall be prospective only, to the
extent that such repeal or modification would, if applied retrospectively, adversely affect any
limitation on the liability of any Covered Person or indemnification or right to advancement of
expenses available to any Covered Person with respect to any act or omission which occurred prior
to such repeal, modification or adoption.
(f) Notwithstanding any other provision in this Agreement to the contrary, any liability and/or
expense against which any Covered Person is indemnified under this Section 7.5 and any advancement
of expenses that any Covered Person is entitled to be paid under Section 7.5(d) shall be deemed to
be joint and several obligations of the Trust and each Series, and the assets of the Trust and each
Series shall be subject to the claims of any Covered Person therefor under this Article VII;
provided that any such liability, expense or obligation may be allocated and charged by the
Trustees between or among the Trust and/or any one or more Series (and Classes thereof) in such
manner as the Trustees in their sole discretion deem fair and equitable.
In Section 7 of the Distribution Agreement relating to the securities being offered hereby,
the Registrant agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, as amended, (the Securities Act)
against certain types of civil liabilities arising in connection with the Registration Statement or
the Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted
to Trustees, officers and controlling persons of the Registrant and the principal underwriter
pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Trustee, officer or controlling person of the Registrant and the principal
underwriter in connection with the successful defense of any action, suit or proceeding) is
asserted by such Trustee, officer or controlling person or the principal underwriter in connection
with the shares being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
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.
C-4
Item 32. Principal Underwriters.
(a) Foreside Fund Services, LLC (the Distributor) acts as principal underwriter for the del
Rey Monarch Fund. The Distributor also serves as principal underwriter for the following
investment companies registered under the Investment Company Act of 1940, as amended:
1) |
|
American Beacon Funds |
|
2) |
|
American Beacon Mileage Funds |
|
3) |
|
American Beacon Select Funds |
|
4) |
|
Henderson Global Funds |
|
5) |
|
Bridgeway Funds, Inc. |
|
6) |
|
Century Capital Management Trust |
|
7) |
|
Sound Shore Fund, Inc. |
|
8) |
|
Forum Funds |
|
9) |
|
Central Park Group Multi-Event Fund |
|
10) |
|
PMC Funds, Series of the Trust for Professional Managers |
|
11) |
|
Nomura Partners Funds, Inc. |
|
12) |
|
Wintergreen Fund, Inc. |
|
13) |
|
RevenueShares ETF Trust |
|
14) |
|
Direxion Shares ETF Trust |
|
15) |
|
Javelin Exchange-Traded Trust |
|
16) |
|
AdvisorShares Trust |
|
17) |
|
Liberty Street Horizon Fund, Series of the Investment Managers Series Trust |
|
18) |
|
DundeeWealth Funds |
|
19) |
|
U.S. One Trust |
|
20) |
|
Turner Funds |
|
21) |
|
Center Coast MLP Focus Fund, series of the Investment Managers Series Trust |
(b) The following are officers and directors of Foreside Fund Services, LLC, the Registrants
underwriter. Their main business address is Three Canal Plaza, Suite 100, Portland, Maine 04101.
|
|
|
|
|
|
|
|
|
|
|
Position with |
|
Position with |
Name |
|
Address |
|
Underwriter |
|
Registrant |
Mark S. Redman
|
|
690 Taylor Road,
Suite 150, Gahanna,
OH 43230
|
|
President and Manager
|
|
None |
|
|
|
|
|
|
|
Richard J. Berthy
|
|
Three Canal Plaza,
Suite 100,
Portland, ME 04101
|
|
Vice President,
Treasurer and
Manager
|
|
None |
|
|
|
|
|
|
|
Jennifer E. Hoopes
|
|
Three Canal Plaza,
Suite 100,
Portland, ME 04101
|
|
Secretary
|
|
None |
|
|
|
|
|
|
|
Nanette K. Chern
|
|
Three Canal Plaza,
Suite 100,
Portland, ME 04101
|
|
Vice President and
Chief Compliance
Officer
|
|
None |
|
|
|
|
|
|
|
Mark A. Fairbanks
|
|
Three Canal Plaza,
Suite 100,
Portland, ME 04101
|
|
Vice President and
Director of
Compliance
|
|
None |
(c) Not applicable
C-5
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.
(b) Distributor, 690 Taylor Road, Suite 150, Gahanna, OH 43230 and Three Canal Plaza, Suite
100, Portland, ME 04101.
(c) del Rey Global Investors, LLC, 6701 Center Drive West, Suite 655, Los Angeles, CA 90045.
(d) Administrator, The Northern Trust Company, 50 South LaSalle Street, Chicago, IL 60675.
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.
C-6
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 28th day of January, 2011.
|
|
|
|
|
|
|
del Rey Monarch Fund |
|
|
By: |
/s/ Paul J. Hechmer |
|
|
|
Paul J. Hechmer |
|
|
|
Chief Executive Officer |
|
|
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:
|
|
|
|
|
SIGNATURE |
|
TITLE |
|
DATE |
/s/ Paul J. Hechmer
Paul J. Hechmer |
|
Chief Executive Officer (principal
executive officer) |
|
January 28, 2011 |
|
|
|
|
|
/s/ Gerald W. Wheeler
Gerald W. Wheeler |
|
Chief Financial Officer, Chairman (principal
financial officer) |
|
January 28, 2011 |
|
|
|
|
|
/s/ David G. Chrencik
David G. Chrencik |
|
Trustee |
|
January 28, 2011 |
|
|
|
|
|
/s/ Roger Hartley
Roger Hartley |
|
Trustee |
|
January 28, 2011 |
|
|
|
|
|
/s/ Guy Talarico
Guy Talarico |
|
Trustee |
|
January 28, 2011 |
|
|
|
Exhibit |
|
Exhibit Name |
(e)(2) |
|
Form of Selling Group Member Agreement |
(e)(3) |
|
Form of Dealer Agreement |
(h)(3) |
|
Distribution
Services Agreement between del Rey Global Investors, LLC and Foreside
Fund Services, LLC dated January 27, 2011 |
(h)(4) |
|
Fund
CCO Agreement between del Rey Global Investors Funds and Foreside
Compliance Services, LLC dated January 27, 2011 |
(i) |
|
Opinion of Morris, Nichols, Arsht & Tunnell LLP |
(j) |
|
Consent of Deloitte & Touche LLP |