Filed with the Securities and Exchange Commission
on
1933 Act Registration File No. 333-205411
1940 Act File No. 811-23063
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 | [ X ] | ||
| Pre-Effective Amendment No. | [ ] | ||
| Post-Effective Amendment No. | 41 | [ X ] | |
and/or
| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 | [ X ] | ||
| Amendment No. | 44 | [ X ] | |
(Check appropriate box or boxes.)
HORIZON FUNDS
(Exact Name of Registrant as Specified in Charter)
6210 Ardrey Kell Road, Suite 300
Charlotte, North Carolina 28277
(Address of Principal Executive Offices, including Zip Code)
Registrant’s Telephone Number, including Area Code: (704) 544-2399
| Matthew S. Chambers |
| Horizon Funds |
| 6210 Ardrey Kell Road, Suite 300 |
| Charlotte, North Carolina 28277 |
(Name and Address of Agent for Service)
Copy to:
| Jeffrey T. Skinner, Esq. |
| Kilpatrick Townsend & Stockton LLP |
| 1001 West Fourth Street |
| Winston-Salem, North Carolina 27101 |
It is proposed that this filing become effective (check appropriate box)
| [ ] | immediately upon filing pursuant to paragraph (b) |
| [ X ] | on March 29, 2024 pursuant to paragraph (b) |
| [ ] | 60 days after filing pursuant to paragraph (a)(1) |
| [ ] | on (date) pursuant to paragraph (a)(1) |
| [ ] | 75 days after filing pursuant to paragraph (a)(2) |
| [ ] | on (date) pursuant to paragraph (a)(2) of Rule 485. |
If appropriate, check the following box:
| [ ] | This post-effective amendment designates a new effective date for a previously filed post-effective amendment. |
Explanatory Note: This post-effective amendment No. 41 to the Registration Statement of Horizon Funds is being filed for the purpose of updating annual financial information.
|
Horizon Active Asset Allocation Fund Advisor Class () Institutional Class () Investor Class () |
Horizon Active Risk Assist® Fund Advisor Class () Institutional Class () Investor Class () |
|
Horizon Active Income Fund Advisor Class () Institutional Class () Investor Class () |
Horizon Equity Premium Income Fund Advisor Class () Institutional Class ()* Investor Class () |
|
Horizon Defined Risk Fund Advisor Class () Institutional Class ()* Investor Class () |
Horizon Multi-Factor U.S. Equity Fund Advisor Class () Institutional Class ()* Investor Class () |
Horizon Defensive Core Fund Advisor Class () Institutional Class ()* Investor Class () |
Horizon Tactical Fixed Income Fund Advisor Class () Institutional Class ()* Investor Class () |
Horizon Multi-Factor Small/Mid Cap Fund
Advisor Class ()
Institutional Class ()*
Investor Class ()
The Prospectus provides important information about the Funds that you should know before investing. Please read it carefully and keep it for future reference.
These securities have not been approved or disapproved by the U.S. Securities and Exchange Commission nor has the U.S. Securities and Exchange Commission passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
| * |
TABLE OF CONTENTS
| SUMMARY SECTIONS | 1 |
| Horizon Active Asset Allocation Fund | 1 |
| Horizon Active Risk Assist® Fund | 7 |
| Horizon Active Income Fund | 14 |
| Horizon Equity Premium Income Fund | 20 |
| Horizon Defined Risk Fund | 26 |
| Horizon Multi-Factor U.S. Equity Fund | 32 |
| Horizon Defensive Core Fund | 37 |
| Horizon Tactical Fixed Income Fund | 43 |
| Horizon Multi-Factor Small/Mid Cap Fund | 49 |
| ADDITIONAL INFORMATION ABOUT THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES | 54 |
| PRINCIPAL INVESTMENT RISKS | 55 |
| MANAGEMENT OF THE FUNDS | 65 |
| INVESTMENT ADVISER | 65 |
| PORTFOLIO MANAGERS | 66 |
| HOW SHARES ARE PRICED | 67 |
| HOW TO PURCHASE SHARES | 69 |
| HOW TO REDEEM SHARES | 71 |
| HOW TO EXCHANGE SHARES | 75 |
| TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS | 75 |
| FREQUENT PURCHASES AND REDEMPTIONS OF SHARES | 77 |
| HOUSEHOLDING | 78 |
| ADDITIONAL INFORMATION | 78 |
| INDEX PROVIDER | 78 |
| FINANCIAL HIGHLIGHTS | 80 |
| PRIVACY NOTICE | 102 |
SUMMARY SECTIONS
Investment Objective. The investment objective of the Horizon Active Asset Allocation Fund (the “Allocation Fund”) is capital appreciation.
This table describes the fees and expenses that you may pay if you buy, hold and sell shares of the Allocation Fund. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the tables and examples below.
|
Advisor Class |
Institutional Class |
Investor Class |
| Management Fees | |||
| Distribution and/or Service (12b-1) Fees | |||
| Other Expenses | |||
| Shareholder Servicing Expenses | |||
| Acquired Fund Fees and Expenses(1) | |||
| Total Annual Fund Operating Expenses(2) |
| (1) |
| (2) |
Example. This Example is intended to help you compare the cost of investing in the Allocation Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Allocation 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 Allocation Fund’s operating expenses remain the same (taking into account the contractual expense limitation). Although your actual costs may be higher or lower, based upon these assumptions your costs would be:
| 1 Year | 3 Years | 5 Years | 10 Years | |
| Advisor Class | $ |
$ |
$ |
$ |
| Institutional Class | $ |
$ |
$ |
$ |
| Investor Class | $ |
$ |
$ |
$ |
Portfolio Turnover. The Allocation
Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher
portfolio turnover rate 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 Allocation Fund’s performance.
During the most recent fiscal year ended November 30, 2023, the Allocation Fund’s portfolio turnover rate was
1
The Allocation Fund’s investment adviser, Horizon Investments, LLC (“Horizon”), seeks to achieve the Allocation Fund’s investment objective by allocating assets across one or more of the following sectors of the global securities markets:
| • | U.S. Common Stocks |
| • | Foreign Developed Market Common Stocks |
| • | Emerging Market Common Stocks |
| • | Real Estate Investment Trusts (“REITs”) |
| • | Government Bonds |
| • | Corporate Bonds |
| • | International Bonds |
| • | Municipal Bonds |
| • | High Yield Bonds |
Horizon selects asset classes using a flexible approach that allocates the Allocation Fund’s portfolio between asset classes that Horizon believes offer the opportunity for the highest projected return for a given amount of risk. This flexible approach to investing typically seeks to maximize returns by adjusting portfolio asset-allocations among various asset classes based upon near-term forecasts. Horizon assesses projected return and expected risk using a multi-disciplined approach consisting of economic, quantitative and fundamental analysis. Horizon expects to engage in frequent buying and selling of securities to achieve the Allocation Fund’s investment objective.
Horizon may execute the Allocation Fund’s strategy by investing in exchange-traded funds (“ETFs”) or by investing directly in individual securities or baskets of securities. Potential investments are reviewed for trading efficiency, liquidity, risk/return profile, and fit within overall portfolio diversification needs prior to investment. Horizon generally expects to select individual securities or baskets of securities instead of ETFs, when it believes such investments are more cost effective, more operationally efficient or will provide strategic exposure to a specific sector or market segment.
Horizon selects investments without restriction as to the issuer country, capitalization, currency, or maturity or credit quality of the securities or the securities held by each ETF. Under normal market conditions, the Allocation Fund invests a majority of its assets in equity securities or ETFs that invest primarily in equity securities; however, the Allocation Fund may invest in fixed income securities, including, without limitation, lower-quality fixed income securities commonly known as “high yield” or “junk” bonds, which are generally rated lower than Baa3 by Moody’s Investors Service (“Moody’s”) or lower than BBB- by S&P Global Ratings (“S&P”) or in ETFs that invest primarily in such securities. In addition, the Allocation Fund may buy or write options on puts or calls for investment purposes, to hedge other investments or to generate option premiums for the Allocation Fund, and may implement such investments through option combinations such as spreads, straddles, and collars.
The Allocation Fund’s option strategies may involve options combinations, such as spreads or collars. In “spread” transactions, the Allocation Fund buys and writes a put or buys and writes a call on the same underlying instrument with the options having different exercise prices, expiration dates, or both. When the Allocation Fund engages in spread transactions, it seeks to profit from differences in the option premiums paid and received and in the market prices of the related options positions when they are closed out or sold. A “collar” position combines a put option purchased by the Allocation Fund (the right of the Allocation Fund to sell a specific security within a specified period) with a call option that is written by the Allocation Fund (the right of the counterparty to buy the same security) in a single instrument, and the Allocation Fund’s right to sell the security is typically set at a price that is below the counterparty’s right to buy the security. Thus, the combined position “collars” the performance of the underlying security, providing protection from depreciation below the price specified in the put option, and allowing for participation in any appreciation up to the price specified by the call option. In each case, the premium received for writing an option offsets, in part, the premium paid to purchase the corresponding option; however, downside protection may be limited as compared to just owning a single option. There is no limit on the number or size of the options transactions in which the Allocation Fund may engage; however, the Allocation Fund will not use options for the purpose of increasing the Allocation Fund’s leverage with respect to any portfolio investment.
The Allocation Fund will typically sell portfolio securities to adjust portfolio allocations as described above, to seek to secure gains or limit potential losses, or when Horizon otherwise believes it is in the best interest of the Allocation Fund. Depending on market conditions, the Allocation Fund may at times focus its investments in particular sectors or areas of the economy.
Many factors affect the Allocation Fund’s
performance. The Allocation Fund’s share price changes daily based on changes in market conditions in response to economic, political
and financial developments. The direction and extent of those price changes will be affected by the financial condition, industry and
economic sector, and geographic location of the securities in which the Allocation Fund invests.
2
Management Risk. The ability of the Allocation Fund to meet its investment objective is directly related to the allocation of the Allocation Fund’s assets. Horizon may allocate the Allocation Fund’s investments so as to under-emphasize or over-emphasize investments at the wrong times or under the wrong market conditions, in which case the Allocation Fund’s value may be adversely affected.
Market Risk. Investments in securities in general are subject to market risks that may cause their prices to fluctuate over time. The Allocation Fund’s investments may decline in value due to factors affecting securities markets generally, or particular countries, segments, economic sectors, industries or companies within those markets. The value of a security may decline due to general economic and market conditions that are not specifically related to a particular issuer. Markets may, in response to governmental actions or intervention, economic or market developments, trade disputes, the spread of infectious illness or other public health issues, geopolitical factors or other external factors, experience periods of high volatility and reduced liquidity, and, in extreme cases, may lead to trading restrictions and halts. During those periods, the Fund may experience high levels of shareholder redemptions, and may have to sell securities at times when the Fund would otherwise not do so, potentially at unfavorable prices. Certain securities may be difficult to value during such periods.
Options Risk. Investments in options involve risks different from, or possibly greater than, the risks associated with investing directly in securities, including leverage risk, tracking risk and, in the case of over the counter options, counterparty default risk. Option positions may expire worthless exposing the Allocation Fund to potentially significant losses. If the Allocation Fund writes options, it may receive a premium that is small relative to the loss realized in the event of adverse changes in the value of the underlying instruments. When the Allocation Fund utilizes options spreads, collars or other combinations, the premium received for writing the call option offsets, in part, the premium paid to purchase the corresponding put option; however, the Allocation Fund’s participation in gains above the price of the call option are forfeited in return for receiving the call option premium. To the extent the Allocation Fund writes options on individual securities that it does not hold in its portfolio (i.e., “naked” options), it is subject to the risk that a liquid market for the underlying security may not exist at the time an option is exercised or when the Allocation Fund otherwise seeks to close out an option position. Naked call options, in particular, have speculative characteristics and the potential for unlimited loss.
ETF Risk. To the extent that the Allocation Fund invests in ETFs, you will indirectly pay fees and expenses charged by the ETFs in addition to the Allocation Fund’s direct fees and expenses. As a result, the cost of investing in the Allocation Fund will be higher than the cost of investing directly in ETF shares and may be higher than other mutual funds that invest directly in stocks and bonds. Each ETF is subject to specific risks, depending on the nature of the ETF and its underlying investments. These risks could include sector risk (increased risk from a focus on one or more sectors of the market), liquidity risk (risk that the Allocation Fund cannot dispose of its shares of the ETF promptly without a reduction in value) and risks associated with fixed income securities or foreign currencies.
Fluctuation of Net Asset Value (“NAV”); Unit Premiums and Discounts. The NAV of the shares of the ETFs in which the Allocation Fund may invest will generally fluctuate with changes in the market value of the ETF’s securities holdings and supply and demand of the ETF’s shares on the exchanges on which the ETF’s shares are traded. The market prices of an ETF’s shares may deviate significantly from the NAV of the ETF’s shares during periods of market volatility or reduced liquidity. If the Allocation Fund purchases an ETF’s shares at a time when the market price is at a premium to the NAV of the ETF’s shares or sells at a time when the market price is at a discount to the NAV of the ETF’s shares, then the Allocation Fund may sustain losses that are in addition to any losses caused by a decrease in NAV.
Quantitative Model Risk. The Allocation Fund’s strategy relies heavily on quantitative models and the analysis of specific metrics to construct the Allocation Fund’s portfolio. The impact of these metrics on a stock’s performance can be difficult to predict, and stocks that previously possessed certain desirable quantitative characteristics may not continue to demonstrate those same characteristics in the future. In addition, relying on quantitative models entails the risk that the models themselves may be limited or incorrect, that the data on which the models rely may be incorrect or incomplete, and that Horizon may not be successful in selecting companies for investment or determining the weighting of particular stocks in the Allocation Fund’s portfolio. Any of these factors could cause the Allocation Fund to underperform funds with similar strategies that do not select stocks based on quantitative analysis.
Turnover Risk. As a result of its trading strategies, the Allocation Fund may sell portfolio securities without regard to the length of time they have been held and will likely have a higher portfolio turnover rate than other mutual funds. Since portfolio turnover may involve paying brokerage commissions and other transaction costs, higher turnover generally results in additional expenses, which may lower the performance of the Allocation Fund, and may also result in the realization of short-term capital gains. The Allocation Fund must generally distribute realized capital gains to shareholders, increasing the Allocation Fund’s taxable distributions. High rates of portfolio turnover in a given year would likely result in short-term capital gains, which are taxed to shareholders at ordinary income tax rates.
Large Capitalization Company Risk. Large capitalization companies as a group could fall out of favor with the market, causing the Fund to underperform investments that focus on small or mid-cap companies.
3
Emerging Markets Risk. In addition to the risks generally associated with investing in securities of foreign companies, countries with emerging markets also may have relatively unstable governments, social and legal systems that do not protect shareholders, economies based on only a few industries, and securities markets that trade a small number of issues.
Equity Securities Risk. Equity securities typically have greater price volatility than fixed income securities. The market price of equity securities owned by the Allocation Fund may go down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented by those markets, or factors directly related to a specific company, such as decisions made by its management.
Fixed Income Risk. The value of investments in fixed income securities, options on fixed income securities and securities in which the underlying investments are fixed income securities, are expected to fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of the fixed income securities owned by the Allocation Fund or its underlying investments. Issuers of floating rate debt are exposed to higher interest payments in a rising rate environment. Issuers may default on interest and principal payments. Generally, securities with lower debt ratings (“junk bonds”) have greater credit risk.
Focus Risk. To the extent that the Allocation Fund focuses its investments in particular industries, asset classes or sectors of the economy, any market price movements, regulatory or technological changes, or economic conditions affecting companies in those industries, asset classes or sectors may have a significant impact on the Allocation Fund’s performance.
Foreign Currency Risk. Foreign currency-linked investments risks include market risk, credit risk and country risk. Market risk results from adverse changes in exchange rates in the currencies in which the underlying investment is long or short. Credit risk results because a currency-trade counterparty may default. Country risk arises because a government may interfere with transactions in its currency.
Foreign Securities Risk. Investing in securities issued by companies whose principal business activities are outside the United States, or investing in American Depositary Receipts (“ADRs”) or ETFs focusing on such companies, may involve significant risks not present in domestic investments. There is generally less publicly available information about foreign companies, and they are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to domestic issuers. Investments in foreign securities also involve the risk of greater price volatility and possible adverse changes in investment or exchange control regulations or currency exchange rates, expropriation or confiscatory taxation, limitation on the removal of cash or other assets from foreign markets, political or financial instability, or diplomatic and other developments, which could affect such investments.
High Yield or Junk Bond Risk. Lower-quality fixed income securities, known as “high yield” or “junk” bonds, present a significant risk for loss of principal and interest. These bonds offer the potential for higher return, but also involve greater risk than bonds of higher quality, including an increased possibility that the bond’s issuer, obligor or guarantor may not be able to make its payments of interest and principal (credit quality risk).These investments are considered to be speculative in nature.
Operational and Technology Risk. Cyber-attacks, disruptions, or failures that affect the Allocation Fund’s service providers or counterparties, issuers of securities held by the Allocation Fund, or other market participants may adversely affect the Allocation Fund and its shareholders, including by causing losses for the Allocation Fund or impairing its operations.
Real Estate Risk. Real estate values rise and fall in response to a variety of factors, including local, regional and national economic conditions, interest rates and tax considerations. REIT performance depends on the types and locations of the rental properties it owns and on how well it manages those properties.
Smaller and Medium Issuer Risk. Small and medium capitalization companies may be more vulnerable than larger, more established organizations to adverse business or economic developments. In addition, small and medium capitalization companies may be particularly affected by interest rate increases, as they may find it more difficult to borrow money to continue or expand operations, or may have difficulty in repaying any loans.
4
The Allocation Fund is the successor to the investment performance of the Predecessor Allocation Fund as a result of the reorganization of the Predecessor Allocation Fund into the Allocation Fund on February 8, 2016. Accordingly, the performance information shown prior to February 8, 2016 is that of the Predecessor Allocation Fund. The Predecessor Allocation Fund was also advised by Horizon and had substantially the same investment objective, strategies and policies as the Allocation Fund.
Calendar Year Returns as of December 31
Investor Class
During the period shown in the bar chart, the for a quarter was (for the quarter ended ). The was (for the quarter ended ).
Active Asset Allocation Fund
Average Annual Total Returns
| For the periods ended December 31, 2023 | One Year | Five Years | Ten Years* | Since Inception of Class* |
| Investor Class | ||||
| Return Before Taxes | ||||
| Return After Taxes on Distributions | ||||
| Return After Taxes on Distributions and Sale of Fund Shares | ||||
| Advisor Class | ||||
| Return Before Taxes | N/A | |||
| Institutional Class | ||||
| Return Before Taxes | N/A | |||
| S&P 500 Total Return Index |
||||
| S&P Global BMI ex-US Index (reflects no deduction for fees, expenses or taxes) |
| * |
The S&P 500 Total Return Index is an unmanaged market capitalization-weighted index which is comprised of the largest U.S. domiciled companies and includes the reinvestment of all dividends. The S&P Global BMI ex-U.S. Index is a comprehensive, rules-based index that represents the composition of global stock markets. Investors cannot invest directly in an index.
5
Returns would have been lower if Horizon had not waived and/or reimbursed certain expenses of the Allocation Fund during the periods shown.
Investment Adviser. Horizon Investments, LLC.
Portfolio Managers. Scott Ladner, Chief Investment Officer of Horizon, Mike Dickson, Ph.D., Head of Research and Quantitative Strategies of Horizon, and Zachary F. Hill, CFA, Head of Portfolio Management, share responsibility for the day-to-day management of the Allocation Fund as Co-Portfolio Managers. Mr. Ladner has been a Co-Portfolio Manager of the Allocation Fund since 2018. Dr. Dickson and Mr. Hill have been Co-Portfolio Managers of the Allocation Fund since 2020.
Purchase and Sale of Fund Shares. You may purchase and redeem shares of the Allocation Fund on any day that the New York Stock Exchange is open for trading, subject to certain restrictions described under the section titled “How to Purchase Shares” and “How to Redeem Shares” of the Allocation Fund’s Prospectus. Purchases and redemptions may be made by mailing an application or redemption request to Horizon Funds c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee, WI 53201-0701, or by calling 1-855-754-7932. You also may purchase and redeem shares through a financial intermediary. The minimum initial investment in the Allocation Fund is $2,500 and the minimum subsequent investment is $250 for Advisor Class and Investor Class shares. The minimum initial investment in the Allocation Fund is $10 million for Institutional Class shares. There is no minimum subsequent investment for Institutional Class shares.
Tax Information. The Allocation Fund’s distributions are taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Such tax-deferred arrangements may be taxed later upon withdrawal of monies from those arrangements.
Payments to Broker-Dealers and Other Financial Intermediaries. If you purchase the Allocation Fund through a broker-dealer or other financial intermediary (such as a bank), the Allocation Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Allocation Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
6
Investment Objective: The investment objective of the Horizon Active Risk Assist® Fund (the “Risk Assist Fund”) is to capture the majority of the returns associated with equity market investments, while mitigating downside risk through use of a risk overlay strategy (the “Risk Assist strategy”).
This table describes the fees and expenses that you may pay if you buy, hold and sell shares of the Risk Assist Fund. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the tables and examples below.
|
Advisor Class |
Institutional Class |
Investor Class |
| Management Fees | |||
| Distribution and/or Service (12b-1) Fees | |||
| Other Expenses | |||
| Interest Expense | |||
| Remainder of Other Expenses | |||
| Shareholder Servicing Expenses | |||
| Acquired Fund Fees and Expenses(1) | |||
| Total Annual Fund Operating Expenses(2) |
| (1) |
| (2) |
Example: This Example is intended to help you compare the cost of investing in the Risk Assist Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Risk Assist 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 Risk Assist Fund’s operating expenses remain the same (taking into account the contractual expense limitation). Although your actual costs may be higher or lower, based upon these assumptions your costs would be:
| 1 Year | 3 Years | 5 Years | 10 Years | |
| Advisor Class | $ |
$ |
$ |
$ |
| Institutional Class | $ |
$ |
$ |
$ |
| Investor Class | $ |
$ |
$ |
$ |
Portfolio Turnover. The Risk Assist
Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher
portfolio turnover rate 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 Risk Assist Fund’s performance.
During the most recent fiscal period ended November 30, 2023, the Risk Assist Fund’s portfolio turnover rate was
7
The Risk Assist Fund’s investment adviser, Horizon Investments, LLC (“Horizon”), seeks to achieve the Risk Assist Fund’s investment objective by using a multi-discipline active asset allocation investment approach. Horizon allocates the Risk Assist Fund’s assets across various sectors of the global securities markets. In addition, Horizon seeks to mitigate downside risk through its Risk Assist strategy, which is an active risk reduction strategy intended to guard against large declines in an equity portfolio.
Global Securities Strategy
Horizon executes its global securities allocation strategy by allocating assets across one or more of the following sectors of the global securities markets:
| • | U.S. Common Stocks |
| • | Foreign Developed Market Common Stocks |
| • | Emerging Market Common Stocks |
| • | Real Estate Investment Trusts (“REITs”) |
| • | Government Bonds |
| • | Corporate Bonds |
| • | International Bonds |
| • | Municipal Bonds |
| • | High Yield Bonds |
Horizon selects asset classes using a flexible approach that allocates the Risk Assist Fund’s portfolio between asset classes that Horizon believes offer the opportunity for the highest projected return for a given amount of risk. This flexible approach to investing typically seeks to maximize returns by adjusting portfolio asset-allocations among various asset classes based upon near-term forecasts. Horizon assesses projected return and expected risk using a multi-disciplined approach consisting of economic, quantitative and fundamental analysis. Horizon expects to engage in frequent buying and selling of securities to achieve the Risk Assist Fund’s investment objective. Depending on market conditions, the Risk Assist Fund may at times focus its investments in particular sectors or areas of the economy.
Horizon may execute the Risk Assist Fund’s strategy by investing in exchange-traded funds (“ETFs”) or by investing directly in individual securities or baskets of securities. Potential investments are reviewed for trading efficiency, liquidity, risk/return profile, and fit within overall portfolio diversification needs prior to investment. Horizon generally expects to select individual securities or baskets of securities instead of ETFs, when it believes such investments are more cost effective, more operationally efficient or will provide strategic exposure to a specific sector or market segment.
Horizon selects investments without restriction as to the issuer country, capitalization, currency, or maturity or credit quality of the securities or the securities held by each ETF. Under normal market conditions, the Risk Assist Fund invests a majority of its assets in equity securities or ETFs that invest primarily in equity securities; however, the Risk Assist Fund may invest in fixed income securities, including, without limitation, lower-quality fixed income securities commonly known as “high yield” or “junk” bonds, which are generally rated lower than Baa3 by Moody’s Investors Service (“Moody’s”) or lower than BBB- by S&P Global Ratings (“S&P”) or in ETFs that invest primarily in such securities. In addition, the Risk Assist Fund may buy or write options on puts or calls for investment purposes, to hedge other investments or to generate option premiums for the Risk Assist Fund, and may implement such investments through option combinations such as spreads, straddles, and collars.
The Risk Assist Fund’s option strategies may involve options combinations, such as spreads or collars. In “spread” transactions, the Risk Assist Fund buys and writes a put or buys and writes a call on the same underlying instrument with the options having different exercise prices, expiration dates, or both. When the Risk Assist Fund engages in spread transactions, it seeks to profit from differences in the option premiums paid and received and in the market prices of the related options positions when they are closed out or sold. A “collar” position combines a put option purchased by the Risk Assist Fund (the right of the Risk Assist Fund to sell a specific security within a specified period) with a call option that is written by the Risk Assist Fund (the right of the counterparty to buy the same security) in a single instrument, and the Risk Assist Fund’s right to sell the security is typically set at a price that is below the counterparty’s right to buy the security. Thus, the combined position “collars” the performance of the underlying security, providing protection from depreciation below the price specified in the put option, and allowing for participation in any appreciation up to the price specified by the call option. In each case, the premium received for writing an option offsets, in part, the premium paid to purchase the corresponding option; however, downside protection may be limited as compared to just owning a single option. There is no limit on the number or size of the options transactions in which the Risk Assist Fund may engage; however, the Risk Assist Fund will not use options for the purpose of increasing the Risk Assist Fund’s leverage with respect to any portfolio investment.
8
Additional Overlay: Risk Assist Strategy
Under the Risk Assist strategy, Horizon continually measures market conditions with a specific focus on characteristics that indicate abnormal or severe risk conditions (such as increases in market volatility and decreases in global equity markets), in order to apply a proprietary process that prompts a risk reduction of the portfolio. Horizon executes this strategy by investing up to 100% of the Risk Assist Fund’s portfolio in U.S. Treasuries or U.S. Treasury-focused securities, which may include, without limitation, Treasury bonds, Treasury notes, Treasury Inflated Protection Securities (collectively, “U.S. Treasury Securities”), U.S. Government money market funds, exchange traded options on U.S. Treasury Securities, repurchase agreements fully collateralized by U.S. Treasury Securities, or ETFs that invest in any of the foregoing. The Risk Assist Fund may invest in U.S. Treasury Securities without regard to maturity or duration.
Although Horizon may allocate 100% of the Risk Assist Fund’s assets to the Risk Assist strategy, it is not required to. Instead, Horizon employs the Risk Assist strategy in stages, and Horizon may allocate between 0% and 100% of the Risk Assist Fund’s assets to the Risk Assist strategy, depending on Horizon’s determination of current market risk.
The Risk Assist Fund will typically sell portfolio securities to adjust portfolio allocations as described above, to seek to secure gains or limit potential losses, or when Horizon otherwise believes it is in the best interest of the Risk Assist Fund.
The Risk Assist Fund’s algorithm also includes a process by which it systematically raises the loss tolerance limit in an effort to protect investment gains within the portfolio. The result of this process is referred to as a “ratchet”. To implement the ratchet, Horizon first determines the lowest portfolio value that the algorithm is calculated to accommodate during any 12-month period. As the Risk Assist’s portfolio value grows (typically when the portfolio has experienced 3-5% of appreciation, depending on market conditions), the Risk Assist algorithm will increase (i.e., “ratchet” up) the value of the loss tolerance limit in an attempt to protect those gains.
Risk Assist is a registered trademark of Horizon Investments, LLC and is used herein with its permission.
Many factors affect the Risk Assist Fund’s
performance. The Risk Assist Fund’s share price changes daily based on changes in market conditions in response to economic, political
and financial developments. The direction and extent of those price changes will be affected by the financial condition, industry and
economic sector, and geographic location of the securities in which the Risk Assist Fund invests.
Management Risk. The ability of the Risk Assist Fund to meet its investment objective is directly related to the allocation of the Risk Assist Fund’s assets. Horizon may allocate the Risk Assist Fund’s investments so as to under-emphasize or over-emphasize investments at the wrong times or under the wrong market conditions, in which case the Risk Assist Fund’s value may be adversely affected.
Market Risk. Investments in securities in general are subject to market risks that may cause their prices to fluctuate over time. The Risk Assist Fund’s investments may decline in value due to factors affecting securities markets generally, or particular countries, segments, economic sectors, industries or companies within those markets. The value of a security may decline due to general economic and market conditions that are not specifically related to a particular issuer. Markets may, in response to governmental actions or intervention, economic or market developments, trade disputes, the spread of infectious illness or other public health issues, geopolitical factors or other external factors, experience periods of high volatility and reduced liquidity, and, in extreme cases, may lead to trading restrictions and halts. During those periods, the Fund may experience high levels of shareholder redemptions, and may have to sell securities at times when the Fund would otherwise not do so, potentially at unfavorable prices. Certain securities may be difficult to value during such periods.
Options Risk. Investments in options involve risks different from, or possibly greater than, the risks associated with investing directly in securities, including leverage risk, tracking risk and, in the case of over the counter options, counterparty default risk. Option positions may expire worthless exposing the Risk Assist Fund to potentially significant losses. If the Risk Assist Fund writes options, it may receive a premium that is small relative to the loss realized in the event of adverse changes in the value of the underlying instruments. When the Risk Assist Fund utilizes options spreads, collars or other combinations, the premium received for writing the call option offsets, in part, the premium paid to purchase the corresponding put option; however, the Risk Assist Fund’s participation in gains above the price of the call option are forfeited in return for receiving the call option premium. To the extent the Risk Assist Fund writes options on individual securities that it does not hold in its portfolio (i.e., “naked” options), it is subject to the risk that a liquid market for the underlying security may not exist at the time an option is exercised or when the Risk Assist Fund otherwise seeks to close out an option position. Naked call options, in particular, have speculative characteristics and the potential for unlimited loss.
ETF Risk. To the extent that the Risk Assist Fund invests in ETFs, you will indirectly pay fees and expenses charged by the ETFs in addition to the Risk Assist Fund’s direct fees and expenses. As a result, the cost of investing in the Risk Assist Fund will be higher than the cost of investing directly in ETF shares and may be higher than other mutual funds that invest directly in stocks and bonds. Each ETF is subject to specific risks, depending on the nature of the ETF and its underlying investments. These risks could include sector risk (increased risk from a focus on one or more sectors of the market), liquidity risk (risk that the Risk Assist Fund cannot dispose of its shares of the ETF promptly without a reduction in value) and risks associated with fixed income securities or foreign currencies.
9
Fluctuation of Net Asset Value (“NAV”); Unit Premiums and Discounts. The NAV of the shares of the ETFs in which the Risk Assist Fund may invest will generally fluctuate with changes in the market value of the ETF’s securities holdings and supply and demand of the ETF’s shares on the exchanges on which the ETF’s shares are traded. The market prices of an ETF’s shares may deviate significantly from the NAV of the ETF’s shares during periods of market volatility or reduced liquidity. If the Risk Assist Fund purchases an ETF’s shares at a time when the market price is at a premium to the NAV of the ETF’s shares or sells at a time when the market price is at a discount to the NAV of the ETF’s shares, then the Risk Assist Fund may sustain losses that are in addition to any losses caused by a decrease in NAV.
Risk Assist Strategy Risk. There can be no guarantee that the Risk Assist strategy, including the ratchet function, will be successful in preventing losses in the Risk Assist Fund’s portfolio. Because the Risk Assist strategy may be implemented in stages, the Risk Assist Fund may have market exposure during times when the Risk Assist strategy is being implemented. To the extent that the Risk Assist strategy is implemented, the Risk Assist Fund will likely not benefit from capital appreciation or income from the equity markets.
Equity Securities Risk. Equity securities typically have greater price volatility than fixed income securities. The market price of equity securities owned by the Risk Assist Fund may go down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented by those markets, or factors directly related to a specific company, such as decisions made by its management.
Large Capitalization Company Risk. Large capitalization companies as a group could fall out of favor with the market, causing the Fund to underperform investments that focus on small or mid-cap companies.
Fixed Income Risk. The value of investments in fixed income securities, options on fixed income securities and securities in which the underlying investments are fixed income securities, are expected to fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of the fixed income securities owned by the Risk Assist Fund or its underlying investments. Issuers of floating rate debt are exposed to higher interest payments in a rising rate environment. Issuers may default on interest and principal payments. Generally, securities with lower debt ratings (“junk bonds”) have greater credit risk.
Quantitative Model Risk. The Risk Assist Fund’s strategy relies heavily on quantitative models and the analysis of specific metrics to construct the Risk Assist Fund’s portfolio. The impact of these metrics on a stock’s performance can be difficult to predict, and stocks that previously possessed certain desirable quantitative characteristics may not continue to demonstrate those same characteristics in the future. In addition, relying on quantitative models entails the risk that the models themselves may be limited or incorrect, that the data on which the models rely may be incorrect or incomplete, and that Horizon may not be successful in selecting companies for investment or determining the weighting of particular stocks in the Risk Assist Fund’s portfolio. Any of these factors could cause the Risk Assist Fund to underperform funds with similar strategies that do not select stocks based on quantitative analysis.
Turnover Risk. As a result of its trading strategies, the Risk Assist Fund may sell portfolio securities without regard to the length of time they have been held and will likely have a higher portfolio turnover rate than other mutual funds. Since portfolio turnover may involve paying brokerage commissions and other transaction costs, higher turnover generally results in additional expenses, which may lower the performance of the Risk Assist Fund, and may also result in the realization of short-term capital gains. The Risk Assist Fund must generally distribute realized capital gains to shareholders, increasing the Risk Assist Fund’s taxable distributions. High rates of portfolio turnover in a given year would likely result in short-term capital gains, which are taxed to shareholders at ordinary income tax rates.
Emerging Markets Risk. In addition to the risks generally associated with investing in securities of foreign companies, countries with emerging markets also may have relatively unstable governments, social and legal systems that do not protect shareholders, economies based on only a few industries, and securities markets that trade a small number of issues.
Focus Risk. To the extent that the Risk Assist Fund focuses its investments in particular industries, asset classes or sectors of the economy, any market price movements, regulatory or technological changes, or economic conditions affecting companies in those industries, asset classes or sectors may have a significant impact on the Risk Assist Fund’s performance.
Foreign Currency Risk. Foreign currency-linked investment risk includes market risk, credit risk and country risk. Market risk results from adverse changes in exchange rates in the currencies in which the Risk Assist Fund’s underlying investments are long or short. Credit risk results because a currency-trade counterparty may default. Country risk arises because a government may interfere with transactions in its currency.
Foreign Securities Risk. Investing in securities issued by companies whose principal business activities are outside the United States, or investing in American Depositary Receipts (“ADRs”) or ETFs focusing on such companies, may involve significant risks not present in domestic investments. There is generally less publicly available information about foreign companies, and they are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to domestic issuers. Investments in foreign securities also involve the risk of greater price volatility and possible adverse changes in investment or exchange control regulations or currency exchange rates, expropriation or confiscatory taxation, limitation on the removal of cash or other assets from foreign markets, political or financial instability, or diplomatic and other developments, which could affect such investments.
10
High Yield or Junk Bond Risk. Lower-quality fixed income securities, known as “high yield” or “junk” bonds, present a significant risk for loss of principal and interest. These bonds offer the potential for higher return, but also involve greater risk than bonds of higher quality, including an increased possibility that the bond’s issuer, obligor or guarantor may not be able to make its payments of interest and principal (credit quality risk). These investments are considered to be speculative in nature.
Operational and Technology Risk. Cyber-attacks, disruptions, or failures that affect the Risk Assist Fund’s service providers or counterparties, issuers of securities held by the Risk Assist Fund, or other market participants may adversely affect the Risk Assist Fund and its shareholders, including by causing losses for the Risk Assist Fund or impairing its operations.
Real Estate Risk. Real estate values rise and fall in response to a variety of factors, including local, regional and national economic conditions, interest rates and tax considerations. REIT performance depends on the types and locations of the rental properties it owns and on how well it manages those properties.
Smaller and Medium Issuer Risk. Small and medium capitalization companies may be more vulnerable than larger, more established organizations to adverse business or economic developments. In addition, small and medium capitalization companies may be particularly affected by interest rate increases, as they may find it more difficult to borrow money to continue or expand operations, or may have difficulty in repaying any loans.
The Risk Assist Fund is the successor to the investment performance of the Predecessor Risk Assist Fund as a result of the reorganization of the Predecessor Risk Assist Fund into the Risk Assist Fund on February 8, 2016. Accordingly, the performance information shown prior to February 8, 2016 is that of the Predecessor Risk Assist Fund. The Predecessor Risk Assist Fund was also advised by Horizon and had substantially the same investment objective, strategies and policies as the Risk Assist Fund.
Calendar Year Returns as of December 31
Investor Class
During the period shown in the bar chart, the for a quarter was (for the quarter ended ). The was (for the quarter ended ).
11
Active Risk Assist Fund
Average Annual Total Returns
| For the periods ended December 31, 2023 | One Year | Five Years | Since Inception of Class* |
| Investor Class | |||
| Return Before Taxes | |||
| Return After Taxes on Distributions | |||
| Return After Taxes on Distributions and Sale of Fund Shares | |||
| Advisor Class | |||
| Return Before Taxes | |||
| Institutional Class | |||
| Return Before Taxes | |||
| S&P 500 Total Return Index |
|||
| S&P Global BMI ex-US Index (reflects no deduction for fees, expenses or taxes) | |||
| Bloomberg Aggregate Bond Index (reflects no deduction for fees, expenses or taxes) |
| * |
The S&P 500 Total Return Index is an unmanaged market capitalization-weighted index which is comprised of the largest U.S. domiciled companies and includes the reinvestment of all dividends. The S&P Global BMI ex-US Index is a comprehensive, rules-based index that represents the composition of global stock markets. The Bloomberg Aggregate Bond Index is a market-capitalization-weighted index that covers the USD denominated, investment-grade (rated Baa3 or above by Moody’s), fixed-rate, and taxable areas of the bond market. Investors cannot invest directly in an index.
Returns would have been lower if Horizon had not waived and/or reimbursed certain expenses of the Risk Assist Fund during the periods shown.
Investment Adviser. Horizon Investments, LLC.
Portfolio Managers. Scott Ladner, Chief Investment Officer of Horizon, Mike Dickson, Ph.D., Head of Research and Quantitative Strategies of Horizon, and Zachary F. Hill, CFA, Head of Portfolio Management of Horizon, share responsibility for the day-to-day management of the Risk Assist Fund as Co-Portfolio Managers. Mr. Ladner has been a Co-Portfolio Manager of the Risk Assist Fund since its inception in September 2014, Dr. Dickson has been a Co-Portfolio Manager of the Risk Assist Fund since 2018 and Mr. Hill has been a Co-Portfolio Manager of the Risk Assist Fund since 2022.
Purchase and Sale of Fund Shares. You may purchase and redeem shares of the Risk Assist Fund on any day that the New York Stock Exchange is open for trading, subject to certain restrictions described under the section titled “How to Purchase Shares” and “How to Redeem Shares” of the Risk Assist Fund’s Prospectus. Purchases and redemptions may be made by mailing an application or redemption request to Horizon Funds c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee, WI 53201-0701, or by calling 1-855-754-7932. You also may purchase and redeem shares through a financial intermediary. The minimum initial investment in the Risk Assist Fund is $2,500 and the minimum subsequent investment is $250 for Advisor Class and Investor Class shares. The minimum initial investment in the Risk Assist Fund is $10 million for Institutional Class shares. There is no minimum subsequent investment for Institutional Class shares.
12
Tax Information. The Risk Assist Fund’s distributions are taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Such tax-deferred arrangements may be taxed later upon withdrawal of monies from those arrangements.
Payments to Broker-Dealers and Other Financial Intermediaries. If you purchase the Risk Assist Fund through a broker-dealer or other financial intermediary (such as a bank), the Risk Assist Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Risk Assist Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
13
Investment Objective: The investment objective of the Horizon Active Income Fund (the “Income Fund”) is income.
This table describes the fees and expenses that you may pay if you buy, hold and sell shares of the Income Fund. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the tables and examples below.
|
Advisor Class |
Institutional Class |
Investor Class |
| Management Fees | |||
| Distribution and/or Service (12b-1) Fees | |||
| Other Expenses | |||
| Shareholder Servicing Expenses | |||
| Acquired Fund Fees and Expenses(1) | |||
| Total Annual Fund Operating Expenses(2) |
| (1) |
| (2) |
Example. This Example is intended to help you compare the cost of investing in the Income Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Income 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 Income Fund’s operating expenses remain the same (taking into account the contractual expense limitation). Although your actual costs may be higher or lower, based upon these assumptions your costs would be:
| 1 Year | 3 Years | 5 Years | 10 Years | |
| Advisor Class | $ |
$ |
$ |
$ |
| Institutional Class | $ |
$ |
$ |
$ |
| Investor Class | $ |
$ |
$ |
$ |
Portfolio Turnover. The Income Fund
pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher
portfolio turnover rate 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 Income Fund’s performance.
During the fiscal period ended November 30, 2023, the Income Fund’s portfolio turnover rate was
The Income Fund’s investment adviser, Horizon Investments, LLC (“Horizon”), seeks to achieve the Income Fund’s investment objective by allocating assets across various sectors of the global securities markets. Horizon executes this strategy by investing in “income-producing securities”, which Horizon defines as including any of the following: equity securities that are expected to pay a dividend; fixed-income securities; cash equivalents; sovereign debt (including U.S. treasuries); fixed and floating rate securities of publicly traded companies; convertible bonds; preferred stock; master limited partnerships (“MLPs”); mortgage-backed securities (“MBS”); and real estate investment trusts (“REITs”).
14
Horizon selects asset classes using a flexible approach that allocates the Income Fund’s portfolio between asset classes that Horizon believes offer the opportunity for the highest projected return for a given amount of risk. This flexible approach to investing typically seeks to maximize returns by adjusting portfolio asset-allocations among various asset classes based upon near-term forecasts. Horizon assesses projected return and expected risk using a multi-disciplined approach consisting of economic, quantitative and fundamental analysis. Horizon expects to engage in frequent buying and selling of securities to achieve the Income Fund’s investment objective.
Horizon may execute the Income Fund’s strategy by investing in exchange-traded funds (“ETFs”) or by investing directly in individual securities or baskets of securities. Potential investments are reviewed for trading efficiency, liquidity, risk/return profile, and fit within overall portfolio diversification needs prior to investment. Horizon generally expects to select individual securities or baskets of securities instead of ETFs, when it believes such investments are more cost effective, more operationally efficient or will provide strategic exposure to a specific sector or market segment.
The Income Fund will invest primarily in U.S. Dollar denominated securities, but may also invest a portion of its assets in non-U.S. Dollar denominated securities. Horizon selects portfolio investments without restriction as to the issuer country, capitalization, currency, maturity or credit quality. In addition, the Income Fund may buy or write options on puts or calls for investment purposes, to hedge other investments or to generate option premiums for the Income Fund, and may implement such investments through option combinations such as spreads, straddles, and collars.
The Income Fund’s option strategies may involve options combinations, such as spreads or collars. In “spread” transactions, the Income Fund buys and writes a put or buys and writes a call on the same underlying instrument with the options having different exercise prices, expiration dates, or both. When the Income Fund engages in spread transactions, it seeks to profit from differences in the option premiums paid and received and in the market prices of the related options positions when they are closed out or sold. A “collar” position combines a put option purchased by the Income Fund (the right of the Income Fund to sell a specific security within a specified period) with a call option that is written by the Income Fund (the right of the counterparty to buy the same security) in a single instrument, and the Income Fund’s right to sell the security is typically set at a price that is below the counterparty’s right to buy the security. Thus, the combined position “collars” the performance of the underlying security, providing protection from depreciation below the price specified in the put option, and allowing for participation in any appreciation up to the price specified by the call option. In each case, the premium received for writing an option offsets, in part, the premium paid to purchase the corresponding option; however, downside protection may be limited as compared to just owning a single option. There is no limit on the number or size of the options transactions in which the Income Fund may engage; however, the Income Fund will not use options for the purpose of increasing the Income Fund’s leverage with respect to any portfolio investment.
The Income Fund will typically sell portfolio securities to adjust portfolio allocations as described above, to seek to secure gains or limit potential losses, or when Horizon otherwise believes it is in the best interest of the Income Fund. Depending on market conditions, the Income Fund may at times focus its investments in particular sectors or areas of the economy.
Many factors affect the Income Fund’s performance.
The Income Fund’s share price changes daily based on changes in market conditions in response to economic, political and financial
developments. The direction and extent of those price changes will be affected by the financial condition, industry and economic sector,
and geographic location of the securities in which the Income Fund invests.
Management Risk. The ability of the Income Fund to meet its investment objective is directly related to the allocation of the Income Fund’s assets. Horizon may allocate the Income Fund’s investments so as to under-emphasize or over-emphasize investments at the wrong times or under the wrong market conditions, in which case the Income Fund’s value may be adversely affected.
Market Risk. Investments in securities in general are subject to market risks that may cause their prices to fluctuate over time. The Income Fund’s investments may decline in value due to factors affecting securities markets generally, or particular countries, segments, economic sectors, industries or companies within those markets. The value of a security may decline due to general economic and market conditions that are not specifically related to a particular issuer. Markets may, in response to governmental actions or intervention, economic or market developments, trade disputes, the spread of infectious illness or other public health issues, geopolitical factors or other external factors, experience periods of high volatility and reduced liquidity, and, in extreme cases, may lead to trading restrictions and halts. During those periods, the Fund may experience high levels of shareholder redemptions, and may have to sell securities at times when the Fund would otherwise not do so, potentially at unfavorable prices. Certain securities may be difficult to value during such periods.
15
Options Risk. Investments in options involve risks different from, or possibly greater than, the risks associated with investing directly in securities, including leverage risk, tracking risk and, in the case of over the counter options, counterparty default risk. Option positions may expire worthless exposing the Income Fund to potentially significant losses. If the Income Fund writes options, it may receive a premium that is small relative to the loss realized in the event of adverse changes in the value of the underlying instruments. When the Income Fund utilizes options spreads, collars or other combinations, the premium received for writing the call option offsets, in part, the premium paid to purchase the corresponding put option; however, the Income Fund’s participation in gains above the price of the call option are forfeited in return for receiving the call option premium. To the extent the Income Fund writes options on individual securities that it does not hold in its portfolio (i.e., “naked” options), it is subject to the risk that a liquid market for the underlying security may not exist at the time an option is exercised or when the Income Fund otherwise seeks to close out an option position. Naked call options, in particular, have speculative characteristics and the potential for unlimited loss.
ETF Risk. To the extent the Income Fund invests in ETFs, you will indirectly pay fees and expenses charged by the ETFs in addition to the Income Fund’s direct fees and expenses. As a result, the cost of investing in the Income Fund will be higher than the cost of investing directly in ETF shares and may be higher than other mutual funds that invest directly in stocks and bonds. Each ETF is subject to specific risks, depending on the nature of the ETF and its underlying investments. These risks could include sector risk (increased risk from a focus on one or more sectors of the market), liquidity risk (risk that the Income Fund cannot dispose of its shares of the ETF promptly without a reduction in value) and risks associated with fixed income securities or foreign currencies.
Fluctuation of Net Asset Value (“NAV”); Unit Premiums and Discounts. The NAV of the shares of the ETFs in which the Income Fund may invest will generally fluctuate with changes in the market value of the ETF’s securities holdings and supply and demand of the ETF’s shares on the exchanges on which the ETF’s shares are traded. The market prices of an ETF’s shares may deviate significantly from the NAV of the ETF’s shares during periods of market volatility or reduced liquidity. If the Income Fund purchases an ETF’s shares at a time when the market price is at a premium to the NAV of the ETF’s shares or sells at a time when the market price is at a discount to the NAV of the ETF’s shares, then the Income Fund may sustain losses that are in addition to any losses caused by a decrease in NAV.
Fixed Income Risk. The value of investments in fixed income securities, options on fixed income securities and securities in which the underlying investments are fixed income securities, are expected to fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of the fixed income securities owned by the Income Fund or its underlying investments. Issuers of floating rate debt are exposed to higher interest payments in a rising rate environment. Issuers may default on interest and principal payments. Generally, securities with lower debt ratings (“junk bonds”) have greater credit risk.
Credit Risk. Issuers of fixed-income securities may default on their obligations to make interest and principal payments. Generally, securities with lower debt ratings carry a greater risk that the issuer will default on its payment obligations. Fixed-income securities rated in the fourth classification by Moody’s (Baa) and S&P (BBB) or lower (sometimes referred to as “junk bonds”) have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity of those issuers to make principal or interest payments, as compared to issuers of more highly rated securities. These securities can also be thinly traded or have restrictions on resale, which can make them difficult to sell or adversely affect their market value.
Interest Rate Risk. When the Income Fund invests in bonds (either directly or through underlying investments), the value of your investment in the Income Fund will fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of bond funds owned by the Income Fund or its underlying investments. In general, the market price of debt securities with longer maturities will increase or decrease more in response to changes in interest rates than shorter-term securities.
High Yield or Junk Bond Risk. Lower-quality fixed income securities, known as “high yield” or “junk” bonds, present a significant risk for loss of principal and interest. These bonds offer the potential for higher return, but also involve greater risk than bonds of higher quality, including an increased possibility that the bond’s issuer, obligor or guarantor may not be able to make its payments of interest and principal (credit quality risk). These investments are considered to be speculative in nature.
MBS Risk. MBS are subject to credit risk because underlying loan borrowers may default. Additionally, these securities are subject to prepayment risk because the underlying loans held by the issuers may be paid off prior to maturity, reducing overall returns.
MLP Risk. Investments in MLPs involve risks different from those of investing in common stock including risks related to limited control and limited rights to vote on matters affecting the MLP, risks related to potential conflicts of interest between the MLP and the MLP’s general partner, cash flow risks, dilution risks and risks related to the general partner’s limited call right. MLPs, typically, do not pay U.S. federal income tax at the partnership level. Instead, each partner is allocated a share of the partnership’s income, gains, losses, deductions and expenses. A change in current tax law or in the underlying business mix of a given MLP could result in an MLP being treated as a corporation for U.S. federal income tax purposes, which would result in such MLP being required to pay U.S. federal income tax on its taxable income.
16
Non-U.S. Government Debt Risk. An investment in debt obligations of non-U.S. governments and their political subdivisions (“sovereign debt”) involves special risks that are not present in corporate debt obligations, including increased volatility and possible foreign government interference. The non-U.S. issuer of the sovereign debt or the non-U.S. governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due, and a Fund may have limited recourse in the event of a default. A sovereign debtor’s willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange, the relative size of the debt service burden, the sovereign debtor’s policy toward its principal international lenders and local political constraints.
Quantitative Model Risk. The Income Fund’s strategy relies heavily on quantitative models and the analysis of specific metrics to construct the Income Fund’s portfolio. The impact of these metrics on a stock’s performance can be difficult to predict, and stocks that previously possessed certain desirable quantitative characteristics may not continue to demonstrate those same characteristics in the future. In addition, relying on quantitative models entails the risk that the models themselves may be limited or incorrect, that the data on which the models rely may be incorrect or incomplete, and that Horizon may not be successful in selecting companies for investment or determining the weighting of particular stocks in the Income Fund’s portfolio. Any of these factors could cause the Income Fund to underperform funds with similar strategies that do not select stocks based on quantitative analysis.
Turnover Risk. As a result of its trading strategies, the Income Fund may sell portfolio securities without regard to the length of time they have been held and will likely have a higher portfolio turnover rate than other mutual funds. Since portfolio turnover may involve paying brokerage commissions and other transaction costs, higher turnover generally results in additional expenses, which may lower the performance of the Income Fund, and may also result in the realization of short-term capital gains. The Income Fund must generally distribute realized capital gains to shareholders, increasing the Income Fund’s taxable distributions. High rates of portfolio turnover in a given year would likely result in short-term capital gains, which are taxed to shareholders at ordinary income tax rates.
Emerging Markets Risk. In addition to the risks generally associated with investing in securities of foreign companies, countries with emerging markets also may have relatively unstable governments, social and legal systems that do not protect shareholders, economies based on only a few industries, and securities markets that trade a small number of issues.
Equity Securities Risk. Equity securities typically have greater price volatility than fixed income securities. The market price of equity securities owned by the Income Fund may go down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented by those markets, or factors directly related to a specific company, such as decisions made by its management.
Focus Risk. To the extent that the Income Fund focuses its investments in particular industries, asset classes or sectors of the economy, any market price movements, regulatory or technological changes, or economic conditions affecting companies in those industries, asset classes or sectors may have a significant impact on the Income Fund’s performance.
Foreign Currency Risk. Currency trading risks include market risk, credit risk and country risk. Market risk results from adverse changes in exchange rates in the currencies the Income Fund’s underlying investments are long or short. Credit risk results because a currency-trade counterparty may default. Country risk arises because a government may interfere with transactions in its currency.
Foreign Securities Risk. Investing in securities issued by companies whose principal business activities are outside the United States, or investing in American Depositary Receipts (“ADRs”) or ETFs focusing on such companies, may involve significant risks not present in domestic investments. There is generally less publicly available information about foreign companies, and they are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to domestic issuers. Investments in foreign securities also involve the risk of greater price volatility and possible adverse changes in investment or exchange control regulations or currency exchange rates, expropriation or confiscatory taxation, limitation on the removal of cash or other assets from foreign markets, political or financial instability, or diplomatic and other developments, which could affect such investments.
Large Capitalization Company Risk. Large capitalization companies as a group could fall out of favor with the market, causing the Fund to underperform investments that focus on small or mid-cap companies.
Operational and Technology Risk. Cyber-attacks, disruptions, or failures that affect the Income Fund’s service providers or counterparties, issuers of securities held by the Risk Assist Fund, or other market participants may adversely affect the Income Fund and its shareholders, including by causing losses for the Income Fund or impairing its operations.
Real Estate Risk. Real estate values rise and fall in response to a variety of factors, including local, regional and national economic conditions, interest rates and tax considerations. REIT performance depends on the types and locations of the rental properties it owns and on how well it manages those properties.
17
The Income Fund is the successor to the investment performance of the Predecessor Income Fund as a result of the reorganization of the Predecessor Income Fund into the Income Fund on February 8, 2016. Accordingly, the performance information shown prior to February 8, 2016 is that of the Predecessor Income Fund. The Predecessor Income Fund was also advised by Horizon and had substantially the same investment objective, strategies and policies as the Income Fund.
Calendar Year Returns as of December 31
Investor Class
During the period shown in the bar chart, the for a quarter was (for the quarter ended ). The was (for the quarter ended ).
Active Income Fund
Average Annual Total Returns
| For the periods ended December 31, 2023 | One Year | Five Years | Ten Years | Since
Inception of Class* |
| Investor Class | ||||
| Return Before Taxes | ||||
| Return After Taxes on Distributions | - |
- |
- | |
| Return After Taxes on Distributions and Sale of Fund Shares | - |
- | ||
| Advisor Class | ||||
| Return Before Taxes | N/A | |||
| Institutional Class | ||||
| Return Before Taxes | N/A | - | ||
| Bloomberg Aggregate Bond Index |
| * |
18
The Bloomberg Aggregate Bond Index is a market-capitalization-weighted index that covers the USD denominated, investment-grade (rated Baa3 or above by Moody’s), fixed-rate, and taxable areas of the bond market. Investors cannot directly invest in an index.
Returns would have been lower if Horizon had not waived and/or reimbursed certain expenses of the Income Fund during the periods shown.
Investment Adviser. Horizon Investments, LLC.
Portfolio Managers. Scott Ladner, Chief Investment Officer of Horizon, Zachary F. Hill, CFA, Head of Portfolio Management of Horizon, and Mike Dickson, Ph.D., Head of Research and Quantitative Strategies of Horizon, share responsibility for the day-to-day management of the Income Fund as Co-Portfolio Managers. Mr. Ladner has been a Co-Portfolio Manager of the Income Fund since its inception in 2013. Mr. Hill and Mr. Dickson have been a Co-Portfolio Managers of the Income Fund since 2019.
Purchase and Sale of Fund Shares. You may purchase and redeem shares of the Income Fund on any day that the New York Stock Exchange is open for trading, subject to certain restrictions described under the sections titled “How to Purchase Shares” and “How to Redeem Shares” of the Income Fund’s Prospectus. Purchases and redemptions may be made by mailing an application or redemption request to Horizon Funds c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee, WI 53201-0701, or by calling 1-855-754-7932. You also may purchase and redeem shares through a financial intermediary. The minimum initial investment in the Income Fund is $2,500 and the minimum subsequent investment is $250 for Advisor Class and Investor Class shares. The minimum initial investment in the Income Fund is $10 million for Institutional Class shares. There is no minimum subsequent investment for Institutional Class shares.
Tax Information. The Income Fund’s distributions are taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Such tax-deferred arrangements may be taxed later upon withdrawal of monies from those arrangements.
Payments to Broker-Dealers and Other Financial Intermediaries. If you purchase the Income Fund through a broker-dealer or other financial intermediary (such as a bank), the Income Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Income Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
19
Investment Objective. The investment objective of the Horizon Equity Premium Income Fund (the “Equity Premium Income Fund”) is capital appreciation and current income.
This table describes the fees and expenses that you may pay if you buy, hold and sell shares of the Equity Premium Income Fund. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the tables and examples below.
|
Advisor Class |
Institutional Class |
Investor Class |
| Management Fees | |||
| Distribution and/or Service (12b-1) Fees | |||
| Other Expenses(1) | |||
| Expense Recoupment(2) | |||
| Interest Expense | |||
| Remainder of Other Expenses | |||
| Acquired Fund Fees and Expenses(3) | |||
| Total Annual Fund Operating Expenses(4) |
| (1) |
| (2) |
| (3) |
| (4) |
Example. This Example is intended to help you compare the cost of investing in the Equity Premium Income Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Equity Premium Income 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 Equity Premium Income Fund’s operating expenses remain the same (taking into account the contractual expense limitation). The fee waiver/expense reimbursement arrangement discussed in the table above is reflected only through March 31, 2025. Although your actual costs may be higher or lower, based upon these assumptions your costs would be:
| 1 Year | 3 Years | 5 Years | 10 Years | |
| Advisor Class | $ |
$ |
$ |
$ |
| Institutional Class | $ |
$ |
$ |
$ |
| Investor Class | $ |
$ |
$ |
$ |
Portfolio Turnover. The Equity Premium
Income Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio).
A higher portfolio turnover rate 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 Equity Premium
Income Fund’s performance. During the fiscal period ended November 30, 2023, the Equity Premium Income Fund’s portfolio turnover
rate was
20
The Equity Premium Income Fund’s investment adviser, Horizon Investments, LLC (“Horizon”), seeks to achieve the Equity Premium Income Fund’s investment objective primarily by investing in the equity securities of dividend-paying U.S. large-capitalization companies and selling call options on broad-based securities indices (including, without limitation, the S&P 500).
Under normal circumstances, the Equity Premium Income Fund will invest not less than 80% of the value of its net assets (plus the amount of borrowings for investment purposes) in equity securities. Equity securities include common and preferred stock, convertible debt securities, American Depositary Receipts (“ADRs”), and real estate investment trusts (“REITs”) and derivative instruments related thereto. The Equity Premium Income Fund may invest in the equity securities of companies of any size capitalization, although it expects to primarily invest in large capitalization companies. The Fund considers a large market capitalization company to be a company with a market capitalization within the range of one or more companies in the S&P 500 index at the time of purchase.
Dividend-Paying Securities. Horizon selects and weights securities using a flexible approach that combines active management with quantitative models to allocate the Equity Premium Income Fund’s portfolio primarily among dividend-paying securities that Horizon believes offer the opportunity for attractive potential return for a given amount of risk. Horizon defines “dividend-paying securities” as equity securities: (i) that have paid a dividend in the prior 12 calendar months; or (ii) that Horizon believes are reasonably likely to pay a dividend in the 12 calendar months following the Fund’s acquisition of the security. In selecting securities for the Equity Premium Income Fund’s portfolio, Horizon seeks to diversify across dividend-paying securities that have one or more attractive fundamentals, such as: high profitability and stable earnings; low price variability; low fundamental valuation measures; and positive price trends. Horizon may add to or modify the characteristics Horizon considers as economic, market and financial conditions change. In constructing the portfolio, Horizon may consider industry and position constraints to ensure sufficient diversification, as determined by Horizon. Depending on market conditions, the Equity Premium Income Fund may at times focus its investments in particular sectors or areas of the economy.
Options. The Equity Premium Income Fund seeks to generate additional cash flow, and may reduce volatility, through the sale of call options on broad-based securities indices (including, without limitation, the S&P 500). The Equity Premium Income Fund expects that, under normal circumstances, it will sell call options on a portion of the value of the Fund’s portfolio. As a seller of call options, the Equity Premium Income Fund will receive a premium (cash) from the purchaser of the option, in exchange for which the purchaser of the call option has the right to participate in the underlying index’s gains above the predetermined strike price until the option expires. If the option is exercised, the Fund, as the seller of the call option, must pay the difference between the price of the index and the strike price of the option.
During periods where the U.S. equity market is relatively stable, falling, or slightly rising such that the option premiums received by the Fund exceed the appreciation of the index and the strike price, the strategy may outperform an otherwise similar strategy that does not generate additional income from options premiums. Alternatively, during periods of rising markets where gains in the underlying indices exceed the premiums received, the strategy would be expected to underperform an otherwise similar strategy with no option overlay. The Equity Premium Income Fund expects that the underlying portfolio of securities, together with the option overlay, should in the aggregate result in a portfolio with a modest defensive tilt as compared to the S&P 500, designed to outperform in flat to down markets, and expected to underperform in large positive markets.
In addition to the sale of call options discussed above, the Equity Premium Income Fund may also buy or write put and call options on individual securities (including ETFs) or securities indices for investment purposes, to hedge other investments, or to generate additional option premiums for the Fund. The Equity Premium Income Fund’s options investments may involve “covered” positions where the Fund may write a call option on an underlying position to generate income. The Equity Premium Income Fund may involve a “collateralized” strategy more generally, where the Fund may write put options on a security whose value is collateralized by cash (“cash-secured puts”) or otherwise collateralized by the Fund’s securities. The Equity Premium Income Fund may also write options on individual securities that it does not hold in its portfolio (i.e., “naked” options), which have the potential for unlimited loss.
The Equity Premium Income Fund’s option strategies may also involve options combinations, such as spreads, straddles and collars. In “spread” transactions, the Equity Premium Income Fund buys and writes a put or buys and writes a call on the same underlying instrument with the options having different strike prices, expiration dates, or both. When the Equity Premium Income Fund engages in spread transactions, it seeks to profit from differences in the option premiums paid and received and in the market prices of the related options positions when they are closed out or sold. In “straddles,” the Equity Premium Income purchases a put option and a call option or writes a put option and a call option on the same instrument with the same expiration date and the same strike price. A “collar” position combines a put option purchased by the Equity Premium Income (the right of the Equity Premium Income Fund to sell a specific security within a specified period) with a call option that is written by the Equity Premium Income Fund (the right of the counterparty to buy the same security) in a single instrument, and the Equity Premium Income Fund’s right to sell the security is typically set at a price that is below the counterparty’s right to buy the security. Thus, the combined position “collars” the performance of the underlying security, providing protection from depreciation below the price specified in the put option, and allowing for participation in any appreciation up to the price specified by the call option. In each case, the premium received for writing an option offsets, in part, the premium paid to purchase the corresponding option; however, downside protection may be limited as compared to just owning a single option. There is no limit on the number or size of the options transactions in which the Equity Premium Income Fund may engage.
21
The Equity Premium Income Fund will typically sell portfolio securities to seek to secure gains or limit potential losses when Horizon believes that other more favorable opportunities exist or when Horizon otherwise believes it is in the best interest of the Equity Premium Income Fund.
Many factors affect the Equity Premium Income
Fund’s performance. The Equity Premium Income Fund’s share price changes daily based on changes in market conditions in response
to economic, political and financial developments. The direction and extent of those price changes will be affected by the financial condition,
industry and economic sector, and geographic location of the securities in which the Equity Premium Income Fund invests.
Management Risk. The ability of the Equity Premium Income Fund to meet its investment objective is directly related to the allocation of the Equity Premium Income Fund’s assets. Horizon may allocate the Equity Premium Income Fund’s investments so as to under-emphasize or over-emphasize investments at the wrong times or under the wrong market conditions, in which case the Equity Premium Income Fund’s value may be adversely affected.
Market Risk. Investments in securities in general are subject to market risks that may cause their prices to fluctuate over time. The Equity Premium Income Fund’s investments may decline in value due to factors affecting securities markets generally, or particular countries, segments, economic sectors, industries or companies within those markets. The value of a security may decline due to general economic and market conditions that are not specifically related to a particular issuer. Markets may, in response to governmental actions or intervention, economic or market developments, trade disputes, the spread of infectious illness or other public health issues, geopolitical factors or other external factors, experience periods of high volatility and reduced liquidity, and, in extreme cases, may lead to trading restrictions and halts. During those periods, the Fund may experience high levels of shareholder redemptions, and may have to sell securities at times when the Fund would otherwise not do so, potentially at unfavorable prices. Certain securities may be difficult to value during such periods.
Dividend Yield Risk. While the Equity Premium Income Fund may hold securities of companies that have historically paid a dividend, those companies may reduce or discontinue their dividends in the future, thus reducing income to the Equity Premium Income Fund. Past dividend payments are not a guarantee of future dividend payments. Also, the market return of high dividend yield securities, in certain market conditions, may be worse than the market return of other investment strategies or of markets generally.
Domestic Strategy Risk. Because the Equity Premium Income Fund will invest primarily in securities of U.S. issuers, the Equity Premium Income Fund is subject to the risk that certain changes in the U.S. economy, such as when the U.S. economy weakens or when its financial markets decline, may have an adverse effect on the securities to which the Fund has exposure.
Focus Risk. To the extent that the Equity Premium Income Fund focuses its investments in particular industries, asset classes or sectors of the economy, any market price movements, regulatory or technological changes, or economic conditions affecting companies in those industries, asset classes or sectors may have a significant impact on the Equity Premium Income Fund’s performance.
Options Risk. Investments in options involve risks different from, or possibly greater than, the risks associated with investing directly in securities, including leverage risk, tracking risk and, in the case of over the counter options, counterparty default risk. Option positions may expire worthless exposing the Equity Premium Income Fund to potentially significant losses. If the Equity Premium Income Fund writes options, it may receive a premium that is small relative to the loss realized in the event of adverse changes in the value of the underlying instruments. When the Equity Premium Income Fund utilizes options spreads, collars or other combinations, the premium received for writing the call option offsets, in part, the premium paid to purchase the corresponding put option; however, the Equity Premium Income Fund’s participation in gains above the price of the call option are forfeited in return for receiving the call option premium. To the extent the Equity Premium Income Fund writes options on individual securities that it does not hold in its portfolio (i.e., “naked” options), it is subject to the risk that a liquid market for the underlying security may not exist at the time an option is exercised or when the Equity Premium Income Fund otherwise seeks to close out an option position. Naked call options, in particular, have speculative characteristics and the potential for unlimited loss.
Equity Securities Risk. Equity securities typically have greater price volatility than fixed income securities. The market price of equity securities owned by the Fund may go down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented by those markets, or factors directly related to a specific company, such as decisions made by its management.
22
Large Capitalization Company Risk. Large capitalization companies as a group could fall out of favor with the market, causing the Fund to underperform investments that focus on small or mid-cap companies.
Operational and Technology Risk. Cyber-attacks, disruptions, or failures that affect the Equity Premium Income Fund’s service providers or counterparties, issuers of securities held by the Equity Premium Income Fund, or other market participants may adversely affect the Equity Premium Income Fund and its shareholders, including by causing losses for the Equity Premium Income Fund or impairing its operations.
Quantitative Model Risk. The Equity Premium Income Fund’s strategy relies heavily on quantitative models and the analysis of specific metrics to construct the Equity Premium Income Fund’s portfolio. The impact of these metrics on a stock’s performance can be difficult to predict, and stocks that previously possessed certain desirable quantitative characteristics may not continue to demonstrate those same characteristics in the future. In addition, relying on quantitative models entails the risk that the models themselves may be limited or incorrect, that the data on which the models rely may be incorrect or incomplete, and that Horizon may not be successful in selecting companies for investment or determining the weighting of particular stocks in the Equity Premium Income Fund’s portfolio. Any of these factors could cause the Equity Premium Income Fund to underperform funds with similar strategies that do not select stocks based on quantitative analysis.
Real Estate Risk. Real estate values rise and fall in response to a variety of factors, including local, regional and national economic conditions, interest rates and tax considerations. REIT performance depends on the types and locations of the rental properties it owns and on how well it manages those properties.
Calendar Year Return as of December 31
Investor Class
During the period shown in the bar chart, the for a quarter was (for the quarter ended ). The was (for the quarter ended ).
23
Equity Premium Income Fund
Average Annual Total Returns
| For the periods ended December 31, 2023 | One Year | Five Years | Since
Inception of Class* |
| Investor Class | |||
| Return Before Taxes | |||
| Return After Taxes on Distributions | |||
| Return After Taxes on Distributions and Sale of Fund Shares | |||
| Advisor Class | |||
| Return Before Taxes | |||
| S&P 500 Total Return Index |
|||
| MSCI World High Dividend Yield Index (reflects no deduction for fees, expenses or taxes)** | |||
| CBOE S&P 500 Buy-Write Index (reflects no deduction for fees, expenses or taxes) |
| * |
| ** |
The S&P 500 Total Return Index is an unmanaged market capitalization-weighted index which is comprised of the largest U.S. domiciled companies and includes the reinvestment of all dividends. Investors cannot directly invest in an index.
Prior to October 3, 2023, the Equity Premium Income Fund compared its performance to the MSCI World High Dividend Yield Index. The MSCI World High Dividend Yield Index is based on the MSCI World Index, its parent index, and includes large- and mid-cap stocks across 23 developed markets countries. The index is designed to reflect the performance of equities in the parent index (excluding REITs) with higher dividend income and quality characteristics than average dividend yields that are both sustainable and persistent. Investors cannot directly invest in an index.
The CBOE S&P 500 Buy/Write Index is a benchmark index designed to show the hypothetical performance of a portfolio that engages in a buy-write strategy using S&P 500 index call options.
Returns would have been lower if Horizon had not waived and/or reimbursed certain expenses of the Equity Premium Income Fund during the periods shown.
Investment Adviser. Horizon Investments, LLC.
Portfolio Managers. Scott Ladner, Chief Investment Officer of Horizon, Mike Dickson, Ph.D., Head of Research and Quantitative Strategies of Horizon, and Zachary F. Hill, CFA, Head of Portfolio Management of Horizon, share responsible for the day-to-day management of the Equity Premium Income Fund as Co-Portfolio Managers. Dr. Dickson has been a Co-Portfolio Manager of the Equity Premium Income Fund since 2018, Mr. Ladner and Mr. Hill have been Co-Portfolio Managers of the Equity Premium Income Fund since 2023.
Purchase and Sale of Fund Shares. You may purchase and redeem shares of the Equity Premium Income Fund on any day that the New York Stock Exchange is open for trading, subject to certain restrictions described under the section titled “How to Purchase Shares” and “How to Redeem Shares” of the Prospectus. Purchases and redemptions may be made by mailing an application or redemption request to Horizon Funds c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee, WI 53201-0701, or by calling 1-855-754-7932. You also may purchase and redeem shares through a financial intermediary. The minimum initial investment for Advisor Class shares is $2,500 and the minimum subsequent investment is $250. The minimum initial investment for Investor Class shares is $2,500 and the minimum subsequent investment is $250. The minimum initial investment for Institutional Class shares is $10 million. There is no minimum subsequent investment for Institutional Class shares. As of the date of this Prospectus, Institutional Class shares of the Equity Premium Income Fund are not being offered for sale.
24
Tax Information. The Equity Premium Income Fund’s distributions are taxed as ordinary, capital gains, or nontaxable return of capital distributions, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Such tax-deferred arrangements may be taxed later upon withdrawal of monies from those arrangements.
Payments to Broker-Dealers and Other Financial Intermediaries. If you purchase the Equity Premium Income Fund through a broker-dealer or other financial intermediary (such as a bank), the Equity Premium Income Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Equity Premium Income Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
25
Investment Objective: The investment objective of the Horizon Defined Risk Fund (the “Defined Risk Fund”) is capital appreciation and capital preservation.
This table describes the fees and expenses that you may pay if you buy, hold and sell shares of the Defined Risk Fund. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the tables and examples below.
|
Advisor Class |
Institutional Class |
Investor Class |
| Management Fees | |||
| Distribution and/or Service (12b-1) Fees | |||
| Other Expenses(1) | |||
| Interest Expense | |||
| Remainder of Other Expenses | |||
| Total Annual Fund Operating Expenses(2) |
| (1) |
| (2) |
Example: This Example is intended to help you compare the cost of investing in the Defined Risk Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Defined Risk 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 Defined Risk Fund’s operating expenses remain the same (taking into account the contractual expense limitation). Although your actual costs may be higher or lower, based upon these assumptions your costs would be:
| 1 Year | 3 Years | 5 Years | 10 years | |
| Advisor Class | $ |
$ |
$ |
$ |
| Institutional Class | $ |
$ |
$ |
$ |
| Investor Class | $ |
$ |
$ |
$ |
Portfolio Turnover. The Defined Risk
Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher
portfolio turnover rate 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 Defined Risk Fund’s performance.
During the fiscal period ended November 30, 2023, the Defined Risk Fund’s portfolio turnover rate was
26
The Defined Risk Fund’s investment adviser, Horizon Investments, LLC (“Horizon”), seeks to achieve the Defined Risk Fund’s investment objective by investing in a broadly diversified portfolio of equity securities (the “Equity Portfolio”), while seeking to generate income, hedge volatility and reduce the downside risk of the Equity Portfolio by buying and selling put and call options (the “Options Portfolio”). Horizon expects that the combination of the returns from the Equity Portfolio and the potential cash flow, reduced volatility and downside protection from the Options Portfolio will provide the Defined Risk Fund with the potential to capture a majority of the returns associated with the general equity markets with reduced risk and volatility.
Equity Portfolio
Securities in the Equity Portfolio may include common and preferred stock, exchange-traded funds (“ETFs”), convertible debt securities, American Depositary Receipts (“ADRs”), and securities issued by real estate investment trusts (“REITs”).
Horizon selects equity securities for the Defined Risk Fund’s Equity Portfolio by assessing each security’s projected return and expected risk using a multi-disciplined approach consisting of economic, quantitative and fundamental analysis.
The Equity Portfolio typically focuses on investing in individual stocks. However, the Equity Portfolio may also invest in ETFs or baskets of securities, preferred stock, convertible debt securities, ADRs and REITs when Horizon believes such investments may offer higher return and/or lower risk than individual securities or when Horizon believes such investments will provide strategic exposure to a desired sector or market segment. Potential ETFs are reviewed for sufficient trading liquidity and fit within the overall diversification needs of the Equity Portfolio prior to investment. Horizon selects securities for the Equity Portfolio without restriction as to an issuer’s country or capitalization.
The Defined Risk Fund will typically sell equity securities to achieve a desired diversification, to secure gains or limit potential losses or when Horizon otherwise believes it is in the best interest of the Defined Risk Fund. Horizon expects to engage in frequent buying and selling of securities to achieve the Defined Risk Fund’s investment objective.
Options Portfolio
The Options Portfolio will generally consist of options “collars”, which are options combinations comprised of a written call option or call spread and a purchased put option or put spread on the same underlying security. To implement an options collar, the Defined Risk Fund will write a call option or call spread on the underlying security with a strike price above the price of the underlying security and purchase a corresponding put option or put spread on the same underlying security with a strike price below the price of that security. A call or put “spread” is an option combination whereby the Defined Risk Fund buys an option for investment purposes and writes another option on the same underlying security with the same expiration date, but a different strike price (e.g., a higher strike price in the case of a call and a lower strike price in the case of a put), as a way to offset some of the cost of purchasing the first option.
When the Defined Risk Fund writes (sells) a call or put option, it receives a premium from the purchaser, which may be used to offset the price of purchasing other options. In addition to the cash flow generated by the selling options, the Defined Risk Fund will write call options to seek to reduce the volatility of the Equity Portfolio, especially in down or sideways markets. Writing call options will, however, reduce the Defined Risk Fund’s ability to profit from increases in the value of the Equity Portfolio because the Defined Risk Fund will begin to accrue liabilities to the purchaser of the call option once the price of the underlying security rises above the option’s strike price. The Defined Risk Fund will buy corresponding put options in an attempt to protect the Defined Risk Fund from significant market declines in the Equity Portfolio that may occur over short periods of time. The Defined Risk Fund will primarily use exchange-traded options on indexes, ETFs and other individual equity securities, but may also use over-the-counter options when Horizon deems it advisable to do so.
The Defined Risk Fund will typically increase its use of options collars when the Adviser’s research indicates that markets are likely to experience volatility, and there is no maximum or minimum amount of assets that the Defined Fund may use to invest in options collars.
Horizon uses quantitative techniques to screen the available option universe for options collars that Horizon believes offer the best risk/return characteristics for the Equity Portfolio, taking into account, among other things, the following characteristics:
| • | liquidity of underlying instruments |
| • | basis risk/tracking error between portfolio & options positions |
| • | volatility forecasts |
| • | option relative valuation |
| • | time to maturity & strike prices |
27
The Defined Risk Fund typically expects to allow the options in the Options Portfolio to expire, but may seek to close out options positions ahead of expiration when Horizon believes it is advantageous to do so.
There is no limit on the number or size of the options transactions in which the Fund may engage; however, the Fund will not use options for the purpose of increasing the Fund’s leverage with respect to any portfolio investment.
Many factors affect the Defined Risk Fund’s
performance. The Defined Risk Fund’s share price changes daily based on changes in market conditions in response to economic, political
and financial developments. The direction and extent of those price changes will be affected by the financial condition, industry and
economic sector, and geographic location of the securities in which the Defined Risk Fund invests.
Management Risk. The ability of the Defined Risk Fund to meet its investment objective is directly related to the allocation of the Defined Risk Fund’s assets. Horizon may allocate the Defined Risk Fund’s investments so as to under-emphasize or over-emphasize investments at the wrong times or under the wrong market conditions, in which case the Defined Risk Fund’s value may be adversely affected.
Market Risk. Investments in securities in general are subject to market risks that may cause their prices to fluctuate over time. The Defined Risk Fund’s investments may decline in value due to factors affecting securities markets generally, or particular countries, segments, economic sectors, industries or companies within those markets. The value of a security may decline due to general economic and market conditions that are not specifically related to a particular issuer. Markets may, in response to governmental actions or intervention, economic or market developments, trade disputes, the spread of infectious illness or other public health issues, geopolitical factors or other external factors, experience periods of high volatility and reduced liquidity, and, in extreme cases, may lead to trading restrictions and halts. During those periods, the Defined Risk Fund may experience high levels of shareholder redemptions, and may have to sell securities at times when the Defined Risk Fund would otherwise not do so, potentially at unfavorable prices. Certain securities may be difficult to value during such periods.
Options Risk. Investments in options involve risks different from, or possibly greater than, the risks associated with investing directly in securities, including leverage risk, tracking risk and, in the case of over the counter options, counterparty default risk. Option positions may expire worthless exposing the Fund to potentially significant losses. If the Fund writes options, it may receive a premium that is small relative to the loss realized in the event of adverse changes in the value of the underlying instruments. When the Fund utilizes options spreads, collars or other combinations, the premium received for writing the call option offsets, in part, the premium paid to purchase the corresponding put option; however, the Fund’s participation in gains above the price of the call option are forfeited in return for receiving the call option premium. To the extent a Fund writes options on individual securities that it does not hold in its portfolio (i.e., “naked” options), it is subject to the risk that a liquid market for the underlying security may not exist at the time an option is exercised or when the Fund otherwise seeks to close out an option position. Naked call options, in particular, have speculative characteristics and the potential for unlimited loss.
Equity Securities Risk. Equity securities typically have greater price volatility than fixed income securities. The market price of equity securities owned by the Defined Risk Fund may go down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented by those markets, or factors directly related to a specific company, such as decisions made by its management.
Quantitative Model Risk. The Defined Risk Fund’s strategy relies heavily on quantitative models and the analysis of specific metrics to construct the Defined Risk Fund’s portfolio. The impact of these metrics on a stock’s performance can be difficult to predict, and stocks that previously possessed certain desirable quantitative characteristics may not continue to demonstrate those same characteristics in the future. In addition, relying on quantitative models entails the risk that the models themselves may be limited or incorrect, that the data on which the models rely may be incorrect or incomplete, and that Horizon may not be successful in selecting companies for investment or determining the weighting of particular stocks in the Defined Risk Fund’s portfolio. Any of these factors could cause the Defined Risk Fund to underperform funds with similar strategies that do not select stocks based on quantitative analysis.
Foreign Securities Risk. Investing in securities issued by companies whose principal business activities are outside the United States, or investing in ADRs or ETFs focusing on such companies, may involve significant risks not present in domestic investments. There is generally less publicly available information about foreign companies, and they are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to domestic issuers. Investments in foreign securities also involve the risk of greater price volatility and possible adverse changes in investment or exchange control regulations or currency exchange rates, expropriation or confiscatory taxation, limitation on the removal of cash or other assets from foreign markets, political or financial instability, or diplomatic and other developments, which could affect such investments.
28
Real Estate Risk. Real estate values rise and fall in response to a variety of factors, including local, regional and national economic conditions, interest rates and tax considerations. REIT performance depends on the types and locations of the rental properties the REIT owns, how well the REIT manages those properties, competition faced by the REIT’s properties, market conditions and other factors.
ETF Risk. To the extent the Defined Risk Fund invests in ETFs, you will indirectly pay fees and expenses charged by the ETFs in addition to the Defined Risk Fund’s direct fees and expenses. As a result, the cost of investing in the Defined Risk Fund will be higher than the cost of investing directly in ETF shares and may be higher than other mutual funds that invest directly in stocks and bonds. Each ETF is subject to specific risks, depending on the nature of the ETF and its underlying investments. These risks could include sector risk (increased risk from a focus on one or more sectors of the market), liquidity risk (risk that the Defined Risk Fund cannot dispose of its shares of the ETF promptly without a reduction in value) and risks associated with fixed income securities or foreign currencies.
Foreign Currency Risk. Foreign currency-linked investment risk includes market risk, credit risk and country risk. Market risk results from adverse changes in exchange rates in the currencies in which the Defined Risk Fund’s underlying investments are long or short. Credit risk results because a currency-trade counterparty may default. Country risk arises because a government may interfere with transactions in its currency.
Large Capitalization Company Risk. Large capitalization companies as a group could fall out of favor with the market, causing the Fund to underperform investments that focus on small or mid-cap companies.
Operational and Technology Risk. Cyber-attacks, disruptions, or failures that affect the Defined Risk Fund’s service providers or counterparties, issuers of securities held by the Defined Risk Fund, or other market participants may adversely affect the Defined Risk Fund and its shareholders, including by causing losses for the Defined Risk Fund or impairing its operations.
Smaller and Medium Capitalization Company Risk. Small and medium capitalization companies may be more vulnerable than larger, more established organizations to adverse business or economic developments. In addition, small and medium capitalization companies may be particularly affected by interest rate increases, as they may find it more difficult to borrow money to continue or expand operations, or may have difficulty in repaying any loans.
29
Investor Class
During the period shown in the bar chart, the for a quarter was (for the quarter ended ). The was (for the quarter ended ).
Defined Risk Fund
Average Annual Total Returns
| For the periods ended December 31, 2023 | One Year | Five Years | Since
Inception of Class* |
| Investor Class | |||
| Return Before Taxes | |||
| Return After Taxes on Distributions | |||
| Return After Taxes on Distributions and Sale of Fund Shares | |||
| Advisor Class | |||
| Return Before Taxes | |||
| S&P 500 Total Return Index |
|||
| Bloomberg U.S. Treasury 1-3 Years Index (reflects no deduction for fees, expenses or taxes) |
| * |
The S&P 500 Total Return Index is an unmanaged market capitalization-weighted index which is comprised of the largest U.S. domiciled companies and includes the reinvestment of all dividends. Investors cannot invest directly in an index.
The Bloomberg U.S. Treasury 1-3 Years Index measures the performance of the U.S. government bond market and includes public obligations of the U.S. Treasury with a maturity between 1 and up to (but not including) 3 years. Investors cannot invest directly in an index.
Returns would have been lower if Horizon had not waived and/or reimbursed certain expenses of the Defined Risk Fund during the periods shown.
Investment Adviser. Horizon Investments, LLC.
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Portfolio Managers. Scott Ladner, Chief Investment Officer of Horizon, Mike Dickson, Ph.D., Head of Research and Quantitative Strategies of Horizon, and Zachary F. Hill, CFA, Head of Portfolio Management of Horizon, share responsibility for the day-to-day management of the Defined Risk Fund as Co-Portfolio Managers. Mr. Ladner has been a Portfolio Manager of the Defined Risk Fund since its inception in 2016, Dr. Dickson has been a Co-Portfolio Manager of the Defined Risk Fund since 2018 and Mr. Hill has been a Co-Portfolio Manager of the Defined Risk Fund since 2022.
Purchase and Sale of Fund Shares. You may purchase and redeem shares of the Defined Risk Fund on any day that the New York Stock Exchange is open for trading, subject to certain restrictions described under the section titled “How to Purchase Shares” and “How to Redeem Shares” of the Prospectus. Purchases and redemptions may be made by mailing an application or redemption request to Horizon Funds c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee, WI 53201-0701, or by calling 1-855-754-7932. You also may purchase and redeem shares through a financial intermediary. The minimum initial investment for Advisor Class shares is $2,500 and the minimum subsequent investment is $250. The minimum initial investment for Investor Class shares is $2,500 and the minimum subsequent investment is $250. The minimum initial investment for Institutional Class shares is $10 million. There is no minimum subsequent investment for Institutional Class shares. As of the date of this prospectus, Institutional Class shares of the Defined Risk Fund are not being offered for sale.
Tax Information. The Defined Risk Fund’s distributions are taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Such tax-deferred arrangements may be taxed later upon withdrawal of monies from those arrangements.
Payments to Broker-Dealers and Other Financial Intermediaries. If you purchase the Defined Risk Fund through a broker-dealer or other financial intermediary (such as a bank), the Defined Risk Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Defined Risk Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Investment Objective. The investment objective of the Horizon Multi-Factor U.S. Equity Fund (the “Multi-Factor U.S. Equity Fund”) is capital appreciation.
This table describes the fees and expenses that you may pay if you buy, hold and sell shares of the Multi-Factor U.S. Equity Fund. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the tables and examples below.
|
Advisor Class |
Institutional Class |
Investor Class |
| Management Fees | |||
| Distribution and/or Service (12b-1) Fees | |||
| Other Expenses(1) | |||
| Expense Recoupment | |||
| Remainder of Other Expenses | |||
| Total Annual Fund Operating Expenses(2)(3) |
| (1) |
| (2) |
| (3) |
Example: This Example is intended to help you compare the cost of investing in the Multi-Factor U.S. Equity Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Multi-Factor U.S. Equity 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 Multi-Factor U.S. Equity Fund’s operating expenses remain the same (taking into account the contractual expense limitation). The fee waiver/expense reimbursement arrangement discussed in the table above is reflected only through March 31, 2025. Although your actual costs may be higher or lower, based upon these assumptions your costs would be:
| 1 Year | 3 Years | 5 Years | 10 Years | |
| Advisor Class | $ |
$ |
$ |
$ |
| Institutional Class | $ |
$ |
$ |
$ |
| Investor Class | $ |
$ |
$ |
$ |
Portfolio Turnover. The Multi-Factor
U.S. Equity Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio).
A higher portfolio turnover rate 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 Multi-Factor U.S.
Equity Fund’s performance. During the fiscal period ended November 30, 2023, the Multi-Factor U.S. Equity Fund’s portfolio
turnover rate was
The Multi-Factor U.S. Equity Fund seeks to achieve its investment objective by investing primarily in large and mid-cap U.S. common stocks, and employs defensive techniques, including strategic portfolio positioning, to achieve lower overall volatility as compared to the market generally. The Multi-Factor U.S. Equity Fund’s investment adviser, Horizon Investments, LLC (“Horizon”), generally considers large and mid-cap issuers to be those that are within the range of the S&P 500 and S&P 400 indices when purchased. However, the Fund can invest in companies of any size, which may include small-cap companies, at the discretion of the Adviser.
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Horizon selects and weights securities using a flexible approach that combines active management and quantitative models to allocate the Fund’s portfolio between issuers, sectors and/or factors (e.g., growth, value, momentum, quality, size and volatility) that Horizon believes offer the opportunity for the highest projected return for a given amount of risk. Horizon assesses projected return and expected risk using a multi-disciplined approach consisting of economic, quantitative and fundamental analysis. The Multi-Factor U.S. Equity Fund expects its risk/return analysis will favor defensive investments, and therefore the Multi-Factor U.S. Equity Fund may lag the performance of traditional U.S. equity markets in strong up markets, but is designed to outperform when traditional U.S. equity markets decline. The Multi-Factor U.S. Equity Fund expects to engage in frequent buying and selling of securities to achieve its investment objective.
Under normal circumstances, the Multi-Factor U.S. Equity Fund will invest not less than 80% of the value of its net assets in the equity securities of U.S. companies. Depending on market conditions, the Multi-Factor U.S. Equity Fund may at times focus its investments in particular sectors or areas of the economy.
Options. The Multi-Factor U.S. Equity Fund may also buy or write put and call options for investment purposes, to hedge other investments, or to generate option premiums for the Fund. The Multi-Factor U.S. Equity Fund’s options investments may involve “covered” positions where the Fund may write a call option on an underlying position to generate income. The Multi-Factor U.S. Equity Fund may involve a “collateralized” strategy more generally, where the Multi-Factor U.S. Equity Fund may write put options on a security whose value is collateralized by cash (“cash-secured puts”) or otherwise collateralized by the Fund’s securities.
The Multi-Factor U.S. Equity Fund’s option strategies may involve options combinations, such as spreads, straddles, and collars. In “spread” transactions, the Multi-Factor U.S. Equity Fund buys and writes a put or buys and writes a call on the same underlying instrument with the options having different exercise prices, expiration dates, or both. When the Multi-Factor U.S. Equity Fund engages in spread transactions, it seeks to profit from differences in the option premiums paid and received and in the market prices of the related options positions when they are closed out or sold. In “straddles,” the Multi-Factor U.S. Equity Fund purchases a put option and a call option or writes a put option and a call option on the same instrument with the same expiration date and the same exercise price. A “collar” position combines a put option purchased by the Multi-Factor U.S. Equity Fund (the right of the Multi-Factor U.S. Equity Fund to sell a specific security within a specified period) with a call option that is written by the Multi-Factor U.S. Equity Fund (the right of the counterparty to buy the same security) in a single instrument, and the Multi-Factor U.S. Equity Fund’s right to sell the security is typically set at a price that is below the counterparty’s right to buy the security. Thus, the combined position “collars” the performance of the underlying security, providing protection from depreciation below the price specified in the put option, and allowing for participation in any appreciation up to the price specified by the call option. In each case, the premium received for writing an option offsets, in part, the premium paid to purchase the corresponding option; however, downside protection may be limited as compared to just owning a single option. There is no limit on the number or size of the options transactions in which the Multi-Factor U.S. Equity Fund may engage.
Many factors affect the Multi-Factor U.S. Equity
Fund’s performance. The Multi-Factor U.S. Equity Fund’s share price changes daily based on changes in market conditions in
response to economic, political and financial developments. The direction and extent of those price changes will be affected by the financial
condition, industry and economic sector, and geographic location of the securities in which the Multi-Factor U.S. Equity Fund invests.
Management Risk. The ability of the Multi-Factor U.S. Equity Fund to meet its investment objective is directly related to the allocation of the Multi-Factor U.S. Equity Fund’s assets. Horizon may allocate the Multi-Factor U.S. Equity Fund’s investments so as to under-emphasize or over-emphasize investments at the wrong times or under the wrong market conditions, in which case the Multi-Factor U.S. Equity Fund’s value may be adversely affected. Horizon’s analysis of industries, companies, economic trends, the relative attractiveness of different securities or other matters could be wrong and may not produce desired results.
Market Risk. Investments in securities in general are subject to market risks that may cause their prices to fluctuate over time. The Multi-Factor U.S. Equity Fund’s investments may decline in value due to factors affecting securities markets generally, or particular countries, segments, economic sectors, industries or companies within those markets. The value of a security may decline due to general economic and market conditions that are not specifically related to a particular issuer. Markets may, in response to governmental actions or intervention, economic or market developments, trade disputes, the spread of infectious illness or other public health issues, geopolitical factors or other external factors, experience periods of high volatility and reduced liquidity, and, in extreme cases, may lead to restrictions and halts. During those periods, the Fund may experience high levels of shareholder redemptions, and may have to sell securities at times when the Fund would otherwise not do so, potentially at unfavorable prices. Certain securities may be difficult to value during such periods.
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Domestic Strategy Risk. Because the Multi-Factor U.S. Equity Fund will invest primarily in securities of U.S. issuers, the Multi-Factor U.S. Equity Fund is subject to the risk that certain changes in the U.S. economy, such as when the U.S. economy weakens or when its financial markets decline, may have an adverse effect on the securities to which the Fund has exposure, and the Fund will be restricted in its ability to allocate its investments to the securities of non-U.S. issuers.
Options Risk. Investments in options involve risks different from, or possibly greater than, the risks associated with investing directly in securities, including leverage risk, tracking risk and, in the case of over the counter options, counterparty default risk. Option positions may expire worthless exposing the Multi-Factor U.S. Equity Fund to potentially significant losses. If the Multi-Factor U.S. Equity Fund writes options, it may receive a premium that is small relative to the loss realized in the event of adverse changes in the value of the underlying instruments. When the Multi-Factor U.S. Equity Fund utilizes options spreads, collars or other combinations, the premium received for writing the call option offsets, in part, the premium paid to purchase the corresponding put option; however, the Multi-Factor U.S. Equity Fund’s participation in gains above the price of the call option are forfeited in return for receiving the call option premium.
Quantitative Model Risk. The Multi-Factor U.S. Equity Fund’s strategy relies heavily on quantitative models and the analysis of specific metrics to construct the Multi-Factor U.S. Equity Fund’s portfolio. The impact of these metrics on a stock’s performance can be difficult to predict, and stocks that previously possessed certain desirable quantitative characteristics may not continue to demonstrate those same characteristics in the future. In addition, relying on quantitative models entails the risk that the models themselves may be limited or incorrect, that the data on which the models rely may be incorrect or incomplete, and that Horizon may not be successful in selecting companies for investment or determining the weighting of particular stocks in the Multi-Factor U.S. Equity Fund’s portfolio. Any of these factors could cause the Multi-Factor U.S. Equity Fund to underperform funds with similar strategies that do not select stocks based on quantitative analysis.
Turnover Risk. As a result of its trading strategies, the Multi-Factor U.S. Equity Fund may sell portfolio securities without regard to the length of time they have been held and will likely have a higher portfolio turnover rate than other mutual funds. Since portfolio turnover may involve paying brokerage commissions and other transaction costs, higher turnover generally results in additional expenses, which may lower the performance of the Multi-Factor U.S. Equity Fund, and may also result in the realization of short-term capital gains. The Multi-Factor U.S. Equity Fund must generally distribute realized capital gains to shareholders, increasing the Multi-Factor U.S. Equity Fund’s taxable distributions. High rates of portfolio turnover in a given year would likely result in short-term capital gains, which are taxed to shareholders at ordinary income tax rates.
Large Capitalization Company Risk. Large capitalization companies as a group could fall out of favor with the market, causing the Fund to underperform investments that focus on small or mid-cap companies.
Smaller and Medium Issuer Risk. Small and medium capitalization companies may be more vulnerable than larger, more established organizations to adverse business or economic developments. In addition, small and medium capitalization companies may be particularly affected by interest rate increases, as they may find it more difficult to borrow money to continue or expand operations, or may have difficulty in repaying any loans.
Equity Securities Risk. Equity securities typically have greater price volatility than fixed-income securities. The market price of equity securities owned by the Multi-Factor U.S. Equity Fund may go down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented by those markets, or factors directly related to a specific company, such as decisions made by its management.
Focus Risk. To the extent that the Multi-Factor U.S. Equity Fund focuses its investments in particular industries, asset classes or sectors of the economy, any market price movements, regulatory or technological changes, or economic conditions affecting companies in those industries, asset classes or sectors may have a significant impact on the Multi-Factor U.S. Equity Fund’s performance.
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Operational and Technology Risk. Cyber-attacks, disruptions, or failures that affect the Multi-Factor U.S. Equity Fund’s service providers or counterparties, issuers of securities held by the Multi-Factor U.S. Equity Fund, or other market participants may adversely affect the Multi-Factor U.S. Equity Fund and its shareholders, including by causing losses for the Multi-Factor U.S. Equity Fund or impairing its operations.
Calendar Year Return as of December 31
Investor Class
During the period shown in the bar chart, the for a quarter was (for the quarter ended ). The was (for the quarter ended ).
Multi-Factor U.S. Equity Fund
Average Annual Total Returns
| For the periods ended December 31, 2023 | One Year | Since
Inception of Class* |
| Investor Class | ||
| Return Before Taxes | ||
| Return After Taxes on Distributions | ||
| Return After Taxes on Distributions and Sale of Fund Shares | ||
| Advisor Class | ||
| Return Before Taxes | ||
| S&P 500 Total Return Index |
||
| MSCI USA Minimum Volatility Index (reflects no deduction for fees, expenses or taxes) |
| * |
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The S&P 500 Total Return Index is an unmanaged market capitalization-weighted index which is comprised of the largest U.S. domiciled companies and includes the reinvestment of all dividends. The MSCI USA Minimum Volatility Index aims to reflect the performance characteristics of a minimum variance strategy applied to the large and mid-cap USA equity universe. The index is calculated by optimizing the MSCI USA Index, its parent index, in USD for the lowest absolute risk (within a given set of constraints). Investors cannot directly invest in an index. Returns would have been lower if Horizon had not waived and/or reimbursed certain expenses of the Multi-Factor U.S. Equity Fund during the periods shown.
Investment Adviser. Horizon Investments, LLC.
Portfolio Managers. Scott Ladner, Chief Investment Officer of Horizon, Mike Dickson, Ph.D., Head of Research and Quantitative Strategies of Horizon, and Zachary F. Hill, CFA, Head of Portfolio Management of Horizon, share responsibility for the day-to-day management of the Multi-Factor U.S. Equity Fund as Co-Portfolio Managers. Mr. Ladner and Dr. Dickson have been Co-Portfolio Managers of the Multi-Factor U.S. Equity Fund since its inception in June 2019 and Mr. Hill has been a Co-Portfolio Manager of the Multi-Factor U.S. Equity Fund since 2022.
Purchase and Sale of Fund Shares. You may purchase and redeem shares of the Multi-Factor U.S. Equity Fund on any day that the New York Stock Exchange is open for trading, subject to certain restrictions described under the section titled “How to Purchase Shares” and “How to Redeem Shares” of the Multi-Factor U.S. Equity Fund’s Prospectus. Purchases and redemptions may be made by mailing an application or redemption request to Horizon Funds c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee, WI 53201-0701, or by calling 1-855-754-7932. You also may purchase and redeem shares through a financial intermediary. The minimum initial investment in the Multi-Factor U.S. Equity Fund is $2,500 and the minimum subsequent investment is $250 for Advisor Class and Investor Class shares. The minimum initial investment in the Multi-Factor U.S. Equity Fund is $10 million for Institutional Class shares. There is no minimum subsequent investment for Institutional Class shares.
Tax Information. The Multi-Factor U.S. Equity Fund’s distributions are taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Such tax-deferred arrangements may be taxed later upon withdrawal of monies from those arrangements.
Payments to Broker-Dealers and Other Financial Intermediaries. If you purchase the Multi-Factor U.S. Equity Fund through a broker-dealer or other financial intermediary (such as a bank), the Multi-Factor U.S. Equity Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Multi-Factor U.S. Equity Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Investment Objective: The investment objective of the Horizon Defensive Core Fund (the “Defensive Core Fund”) is to seek to generate comparable returns, before fees and expenses, to an index that is designed to measure the performance of the large and mid-cap segments of the U.S. market and that screens companies with regards to certain ESG criteria for the equity portion of the Fund’s portfolio, while mitigating downside risk by allocating a portion of the Fund’s portfolio to a risk overlay strategy (the “Risk Assist® strategy”).
This table describes the fees and expenses that you may pay if you buy, hold and sell shares of the Defensive Core Fund. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the tables and examples below.
|
Advisor Class |
Institutional Class |
Investor Class |
| Management Fees | |||
| Distribution and/or Service (12b-1) Fees | |||
| Other Expenses(1) | |||
| Expense Recoupment | |||
| Interest Expense | |||
| Remainder of Other Expenses | |||
| Acquired Fund Fees and Expenses(2) | |||
| Total Annual Fund Operating Expenses(3)(4) |
| (1) |
| (2) |
| (3) |
| (4) |
Example: This Example is intended to help you compare the cost of investing in the Defensive Core Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Defensive Core 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 Defensive Core Fund’s operating expenses remain the same (taking into account the contractual expense limitation). The fee waiver/expense reimbursement arrangement discussed in the table above is reflected only through March 31, 2025. Although your actual costs may be higher or lower, based upon these assumptions your costs would be:
| 1 Year | 3 Years | 5 Years | 10 Years | |
| Advisor Class | $ |
$ |
$ |
$ |
| Institutional Class | $ |
$ |
$ |
$ |
| Investor Class | $ |
$ |
$ |
$ |
Portfolio Turnover. The Defensive Core
Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher
portfolio turnover rate 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 Defensive Core Fund’s performance.
During the fiscal period ended November 30, 2023, the Defensive Core Fund’s portfolio turnover rate was
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The Defensive Core Fund seeks to achieve its investment objective by utilizing two strategies: (1) the ESG Strategy; and (2) the Risk Assist® Strategy. The ESG Strategy seeks to track the performance of the MSCI USA ESG Leaders Index (the “Index”), while the Risk Assist® Strategy is an actively managed risk reduction strategy intended to guard against large declines in the Fund’s equity portfolio. Horizon will determine how to allocate the Defensive Core Fund’s assets between the ESG Strategy and the Risk Assist® Strategy. Under normal circumstances, substantially all (at least 80%) of the value of Fund’s net assets will be invested in a combination of equity securities included in the Index and Defensive Investments (as defined below).
ESG Strategy. The ESG Strategy seeks to track the performance of the Index. The Index is a capitalization weighted index that provides exposure to companies with high Environmental, Social and Governance (ESG) performance relative to their sector peers. The Index consists of large and mid-capitalization companies in the US market. The Index uses MSCI ESG Ratings, MSCI ESG Controversies and MSCI Business Involvement Screening Research, each of which is provided by MSCI ESG Research Inc., a subsidiary of MSCI, Inc. (the “Index Provider”) to determine the securities that comprise the Index.
| • | MSCI ESG Ratings provides research, analysis and ratings of how well companies manage their ESG risks and opportunities. MSCI ESG Ratings provides a company with an overall ESG rating on a seven point scale, from ‘AAA’ to ‘CCC.’ |
| • | MSCI ESG Controversies provides assessments of controversies concerning the negative environmental, social, and/or governance impact of company operations, products and services. MSCI ESG Controversies Score falls on a 0-10 scale, with “0” being the most severe controversy. |
| • | MSCI ESG Business Involvement Screening Research (MSCI ESG BISR) screens companies for involvement in specific business activities which have high potential for negative social and/or environmental impact, such as alcohol, gambling, tobacco, nuclear power, fossil fuel extraction, thermal coal power, conventional weapons, nuclear weapons, controversial weapons and civilian firearms, are ineligible for inclusion. |
Companies that are not existing constituents of the Index must have an MSCI ESG Rating of ‘BB’ or above and an MSCI ESG Controversies Score of 3 or above to be eligible. Current constituents of the Index must have an MSCI ESG Rating of ‘BB’ or above and an MSCI ESG Controversies Score of 1 or above to be eligible. In addition, companies showing qualifying involvement in alcohol, gambling, tobacco, nuclear power, civilian firearms, fossil fuels extraction, thermal coal power and weapons based on the MSCI ESG BISR are excluded from the Index. The final Index is constructed by selecting, from the screened securities, the highest ESG rated companies by sector, targeting a representation of 50% market capitalization of each sector. The Index Provider conducts a quarterly review to ensure that all securities represented in the Index continue to meet the applicable ESG standards. The Index is also rebalanced quarterly. The Defensive Core Fund generally rebalances its portfolio in accordance with the Index. The Defensive Core Fund expects to invest in equity securities included in the Index in weightings that approximate the relative composition of the securities contained in the Index. However, the Defensive Core Fund has adopted a fundamental investment policy not to concentrate its investments in a particular industry or group of industries, therefore to the extent the Index is concentrated, the Defensive Core Fund will deviate from the composition of the Index.
Risk Assist® Strategy. Under the Risk Assist® strategy, Horizon continually measures market conditions with a specific focus on characteristics that indicate abnormal or severe risk conditions (such as increases in market volatility and decreases in global equity markets), in order to apply a proprietary process that prompts a risk reduction of the portfolio. The Defensive Core Fund typically executes this strategy by investing up to 100% of the Defensive Core Fund’s portfolio in U.S. Treasuries or other cash equivalents, which may include, without limitation, U.S. Treasury-focused securities, which may include, without limitation, Treasury bonds, Treasury notes, Treasury Inflated Protection Securities (collectively, “U.S. Treasury Securities”); exchange traded options on U.S. Treasury Securities; repurchase agreements fully collateralized by U.S. Treasury Securities; and money market instruments, including obligations of U.S. and foreign banks, corporate obligations, U.S. government securities, municipal securities, repurchase agreements and asset-backed securities, paying a fixed, variable or floating interest rate (collectively, “Cash Equivalents”); or money market funds or ETFs that invest in Cash Equivalents (collectively “Defensive Investments”). The Defensive Core Fund may invest in U.S. Treasury Securities without regard to maturity or duration.
Although Horizon may elect to allocate 100% of the Defensive Core Fund’s assets to the Risk Assist® strategy, it is not required to. Instead, Horizon employs the Risk Assist® strategy in stages, and Horizon may elect to allocate between 0% and 100% of the Defensive Core Fund’s assets to the Risk Assist® strategy, depending on Horizon’s determination of current market risk.
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The Risk Assist® algorithm includes a process by which it systematically attempts to protect investment gains within the portfolio based on Horizon’s measures of perceived risk. The result of this process is referred to as a “ratchet”. To implement the ratchet, Horizon first determines the lowest portfolio value that the algorithm is calculated to accommodate during any 12-month period. As the Risk Assist® strategy portfolio value grows (typically when the portfolio has experienced 3-5% of appreciation, depending on market conditions), the Risk Assist® algorithm will increase (i.e., “ratchet” up) the value of the loss tolerance limit in an attempt to protect those gains.
Many factors affect the Defensive Core Fund’s
performance. The Defensive Core Fund’s share price changes daily based on changes in market conditions in response to economic,
political and financial developments. The direction and extent of those price changes will be affected by the financial condition, industry
and economic sector and geographic location of the securities in which the Defensive Core Fund invests.
ESG Investing Risk. Investing primarily in investments that meet ESG criteria carries the risk that the Defensive Core Fund may forgo otherwise attractive investment opportunities or increase or decrease its exposure to certain types of companies and, therefore, may underperform funds that are not ESG funds. ESG research and ratings are generally based on information that is publicly available and/or provided by the companies themselves or by third parties. Such information may be unavailable or unreliable and, with respect to information provided by third parties, may be based on criteria that differs among data providers.
Index Risk. The Defensive Core Fund’s ESG Strategy is linked to an Index maintained by the Index Provider that is unaffiliated with Horizon and that exercises complete control over the Index. The Defensive Core Fund will be negatively affected by general declines in the securities and asset classes represented in its Index. In addition, because the ESG Strategy portion of the Defensive Core Fund is not “actively” managed, unless a specific security is removed from the Index, the Defensive Core Fund generally would not sell a security because the security’s issuer was in financial trouble. Market disruptions and regulatory restrictions could have an adverse effect on the Defensive Core Fund’s ability to adjust its exposure to the required levels in order to track its Index. There is no guarantee that the methodology used by the Index Provider to identify constituents for the Index will achieve its intended result or positive performance.
Risk Assist® Strategy Risk. The ability of the Defensive Core Fund to meet its investment objective is directly related to Horizon’s ability to effectively allocate Fund assets to, and otherwise implement, the Risk Assist® strategy. Implementing the Defensive Core Fund’s Risk Assist® strategy may result in periods of time when the Defensive Core Fund is invested primarily (or entirely) in Cash Equivalents (as opposed to equity securities). There can be no guarantee that the Risk Assist® strategy, including the ratchet function, will be successful in preventing losses in the Defensive Core Fund’s portfolio. Because the Risk Assist® strategy may be implemented in stages, the Defensive Core Fund may have market exposure during times when the Risk Assist® strategy is being implemented. To the extent that the Risk Assist® strategy is implemented, the Defensive Core Fund will likely not benefit from capital appreciation or income from the equity markets. To the extent that the Risk Assist® strategy is not implemented in a timely manner, the Defensive Core Fund may underperform. The Defensive Core Fund’s portfolio managers analysis of economic trends, or other matters could be wrong and may not produce desired results.
Management Risk. The ability of the Defensive Core Fund to meet its investment objective is directly related to the allocation of the Defensive Core Fund’s assets. Horizon may allocate the Defensive Core Fund’s investments so as to under-emphasize or over-emphasize investments at the wrong times or under the wrong market conditions, in which case the Defensive Core Fund’s value may be adversely affected.
Market Risk. Investments in securities in general are subject to market risks that may cause their prices to fluctuate over time. The Defensive Core Fund’s investments may decline in value due to factors affecting securities markets generally, or particular countries, segments, economic sectors, industries or companies within those markets. The value of a security may decline due to general economic and market conditions that are not specifically related to a particular issuer. Markets may, in response to governmental actions or intervention, economic or market developments, trade disputes, the spread of infectious illness or other public health issues, geopolitical factors or other external factors, experience periods of high volatility and reduced liquidity, and, in extreme cases, lead to trading restrictions and halts. During those periods, the Defensive Core Fund may experience high levels of shareholder redemptions, and may have to sell securities at times when the Defensive Core Fund would otherwise not do so, potentially at unfavorable prices. Certain securities may be difficult to value during such periods.
Operational and Technology Risk. Cyber-attacks, disruptions, or failures that affect the Defensive Core Fund’s service providers or counterparties, issuers of securities held by the Defensive Core Fund, or other market participants may adversely affect the Defensive Core Fund and its shareholders, including by causing losses for the Defensive Core Fund or impairing its operations.
39
Quantitative Model Risk. The Risk Assist® strategy relies heavily on quantitative models and the analysis of specific metrics to construct and implement the Risk Assist® strategy portion of the Defensive Core Fund. The impact of these metrics on performance can be difficult to predict. In addition, relying on quantitative models entails the risk that the models themselves may be limited or incorrect, that the data on which the models rely may be incorrect or incomplete, and that Horizon may not be successful in determining the weighting of particular investments in the Defensive Core Fund’s portfolio. Any of these factors could cause the Defensive Core Fund to underperform funds with similar strategies that do not utilize quantitative analysis.
Turnover Risk. As a result of its trading strategies, the Defensive Core Fund may sell portfolio securities without regard to the length of time they have been held and will likely have a higher portfolio turnover rate than other mutual funds. Since portfolio turnover may involve paying brokerage commissions and other transaction costs, higher turnover generally results in additional expenses, which may lower the performance of the Defensive Core Fund, and may also result in the realization of short-term capital gains. The Defensive Core Fund must generally distribute realized capital gains to shareholders, increasing the Defensive Core Fund’s taxable distributions. High rates of portfolio turnover in a given year would likely result in short-term capital gains, which are taxed to shareholders at ordinary income tax rates.
Domestic Strategy Risk. Because the Defensive Core Fund will invest primarily in securities of U.S. issuers, the Defensive Core Fund is subject to the risk that certain changes in the U.S. economy, such as when the U.S. economy weakens or when its financial markets decline, may have an adverse effect on the securities to which the Defensive Core Fund has exposure, and the Defensive Core Fund will be restricted in its ability to allocate its investments to the securities of non-U.S. issuers.
Equity Securities Risk. Equity securities typically have greater price volatility than fixed-income securities. The market price of equity securities owned by the Defensive Core Fund may go down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented by those markets, or factors directly related to a specific company, such as decisions made by its management.
Fixed-income Risk. The Defensive Core Fund will be subject to fixed-income risks to the extent that the Defensive Core Fund implements the Risk Assist® strategy. The value of investments in fixed-income securities, options on fixed-income securities and securities in which the underlying investments are fixed-income securities, are expected to fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of the fixed-income securities owned by the Defensive Core Fund or its underlying investments. Issuers of floating rate debt are exposed to higher interest payments in a rising rate environment. Issuers may default on interest and principal payments. Generally, securities with lower debt ratings (“junk bonds”) have greater credit risk.
Focus Risk. To the extent that the Defensive Core Fund focuses its investments in particular asset classes or sectors of the economy, any market price movements, regulatory or technological changes, or economic conditions affecting companies in those asset classes or sectors may have a significant impact on the Defensive Core Fund’s performance.
Mid-Capitalization Company Risk. Mid-capitalization companies may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, investments in these mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, mid-cap stocks may be more volatile than those of larger companies.
Large Capitalization Company Risk. Large capitalization companies as a group could fall out of favor with the market, causing the Defensive Core Fund to underperform investments that focus on small or mid-cap companies.
40
Calendar Year Return as of December 31
Investor Class
During the period shown in the bar chart, the for a quarter was (for the quarter ended ). The was (for the quarter ended ).
Defensive Core Fund
Average Annual Total Returns
| For the periods ended December 31, 2023 | One Year | Since
Inception of Class* |
| Investor Class | ||
| Return Before Taxes | ||
| Return After Taxes on Distributions | ||
| Return After Taxes on Distributions and Sale of Fund Shares | ||
| Advisor Class | ||
| Return Before Taxes | ||
| MSCI USA ESG Leaders Index |
| * |
The MSCI USA ESG Leaders Index is designed to measure the performance of the large and mid-cap segments of the U.S. market through investing in U.S. common stocks screened by the Index Provider with regard to certain ESG criteria.
Returns would have been lower if Horizon had not waived and/or reimbursed certain expenses of the Defensive Core Fund during the periods shown.
Investment Adviser. Horizon Investments, LLC serves as the investment adviser to the Defensive Core Fund.
Portfolio Managers. Scott Ladner, Chief Investment Officer of Horizon, Mike Dickson, Ph.D., Head of Research and Quantitative Strategies of Horizon, and Clark Allen, Director of Quantitative Research, share responsibility for the day-to-day management of the Defensive Core Fund as Co-Portfolio Managers. Mr. Ladner and Dr. Dickson have each been a Co-Portfolio Manager of the Defensive Core Fund since its inception in December 2019 and Mr. Allen has been a Co-Portfolio Manager since March 2023.
Purchase and Sale of Fund Shares. You may purchase and redeem shares of the Defensive Core Fund on any day that the New York Stock Exchange is open for trading, subject to certain restrictions described under the section titled “How to Purchase Shares” and “How to Redeem Shares” of the Defensive Core Fund’s Prospectus. Purchases and redemptions may be made by mailing an application or redemption request to Horizon Funds c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee, WI 53201-0701, or by calling 1-855-754-7932. You also may purchase and redeem shares through a financial intermediary. The minimum initial investment in the Defensive Core Fund is $2,500 and the minimum subsequent investment is $250 for Advisor Class and Investor Class shares. The minimum initial investment in the Defensive Core Fund is $10 million for Institutional Class shares. There is no minimum subsequent investment for Institutional Class shares.
41
Tax Information. The Defensive Core Fund’s distributions are taxed as ordinary income or capital gains, unless you are investing through a tax- deferred arrangement, such as a 401(k) plan or an individual retirement account. Such tax-deferred arrangements may be taxed later upon withdrawal of monies from those arrangements.
Payments to Broker-Dealers and Other Financial Intermediaries. If you purchase the Defensive Core Fund through a broker-dealer or other financial intermediary (such as a bank), the Defensive Core Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Defensive Core Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
42
The investment objective of the Horizon Tactical Fixed Income Fund (the “Tactical Income Fund”) is to seek to provide total return through a combination of current income and capital appreciation.
This table describes the fees and expenses that you may pay if you buy, hold and sell shares of the Tactical Income Fund. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the tables and examples below.
|
Advisor Class |
Institutional Class |
Investor Class |
| Management Fees | |||
| Distribution and/or Service (12b-1) Fees | |||
| Other Expenses(1) | |||
| Acquired Fund Fees and Expenses (1)(2) | |||
| Total Annual Fund Operating Expenses(3) |
| (1) |
| (2) |
| (3) |
Example: This Example is intended to help you compare the cost of investing in the Tactical Income Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Tactical Income 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 Tactical Income Fund’s operating expenses remain the same (taking into account the contractual expense limitation). Although your actual costs may be higher or lower, based upon these assumptions your costs would be:
| 1 Year | 3 Years | 5 Years | 10 Years | |
| Advisor Class | $ |
$ |
$ |
$ |
| Institutional Class | $ |
$ |
$ |
$ |
| Investor Class | $ |
$ |
$ |
$ |
The Tactical Income Fund pays transaction
costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover
rate 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 Tactical Income Fund’s performance. During
the fiscal period ended November 30, 2023, the Tactical Income Fund’s portfolio turnover rate was
43
The Tactical Income Fund’s investment adviser, Horizon Investments, LLC (“Horizon”), seeks to achieve the Tactical Income Fund’s investment objective by allocating to investments across various sectors of the global securities markets. The Tactical Income Fund’s investments will be primarily comprised of fixed and floating rate bonds of U.S. and foreign corporate issuers, both those that are investment-grade and non-investment grade (i.e., high yield or “junk” bonds); debt securities issued by the U.S. government and its agencies and instrumentalities (collectively, “U.S. Government Securities”); foreign sovereign debt; preferred stocks; convertible bonds; mortgage-backed securities (“MBS”); and bank loan assignments and participations. Horizon may execute the Tactical Income Fund’s strategy by investing in exchange-traded funds (“ETFs”) that invest primarily in the foregoing or by investing directly in individual securities or baskets of securities.
Horizon selects and weights securities using a flexible approach that combines active management and quantitative models to allocate the Tactical Income Fund’s portfolio. The Tactical Income Fund’s strategy is primarily driven by a tactical, systematic approach that uses measures of past return and risk to shift the Tactical Income Fund’s holdings towards asset classes determined by Horizon to have high and stable measures of price trends. Depending on market conditions, the Tactical Income Fund may at times focus its investments in particular sectors or areas of the economy. The strategy also incorporates a tactical risk management component that monitors asset class trends on a daily basis, and, if conditions deteriorate, prompts Horizon to reduce the Tactical Income Fund’s exposure to that asset class and allocate to more defensive-oriented investments, including, without limitation, U.S. Government Securities and money market instruments. As a result of the Tactical Income Fund’s tactical risk management strategy, in certain market conditions up to 100% of the Tactical Income Fund’s portfolio may be invested in U.S. Government Securities or money market instruments.
The Tactical Income Fund invests in the securities of non-U.S. issuers, including, without limitation, securities of emerging markets issuers and, while the Tactical Income Fund will invest primarily in U.S. Dollar denominated securities, it may also invest a portion of its assets in non-U.S. Dollar denominated securities. Horizon selects portfolio investments without restriction as to the issuer country, capitalization, currency, maturity or credit quality, and investments are expected to include those rated below investment grade (commonly referred to as “high yield” or “junk” bonds). Potential investments are reviewed for trading efficiency, liquidity, risk/return profile, and fit within overall portfolio diversification needs prior to investment. Horizon generally expects to select individual securities or baskets of securities instead of ETFs when it believes such investments are more cost effective, more operationally efficient or will provide strategic exposure to a specific sector or market segment. Horizon expects to engage in frequent buying and selling of securities to achieve the Tactical Income Fund’s objective.
Under normal circumstances, the Tactical Income Fund invests not less than 80% of the value of its net assets in fixed income investments. Horizon defines fixed income investments as including: (i) any debt or debt-related securities, income producing securities, and other instruments or evidences of indebtedness, including bonds, bills, notes (including structured notes), loans, money market instruments, mortgage and asset backed securities, and preferred stocks, and derivative instruments related thereto; and (ii) ETFs and mutual funds that invest primarily in fixed income investments.
Many factors affect the Tactical Income Fund’s
performance. The Tactical Income Fund’s share price changes daily based on changes in market conditions in response to economic,
political and financial developments. The direction and extent of those price changes will be affected by the financial condition, industry
and economic sector, and geographic location of the securities in which the Tactical Income Fund invests.
Management Risk. The ability of the Tactical Income Fund to meet its investment objective is directly related to the allocation of the Tactical Income Fund’s assets. Horizon may allocate the Tactical Income Fund’s investments so as to under-emphasize or over-emphasize investments at the wrong times or under the wrong market conditions, in which case the Tactical Income Fund’s value may be adversely affected. Horizon’s analysis of industries, companies, economic trends, the relative attractiveness of different securities or other matters could be wrong and may not produce desired results.
Market Risk. Investments in securities in general are subject to market risks that may cause their prices to fluctuate over time. The Tactical Income Fund’s investments may decline in value due to factors affecting securities markets generally, or particular countries, segments, economic sectors, industries or companies within those markets. The value of a security may decline due to general economic and market conditions that are not specifically related to a particular issuer. Markets may, in response to governmental actions or intervention, economic or market developments, trade disputes, the spread of infectious illness or other public health issues, geopolitical factors or other external factors, experience periods of high volatility and reduced liquidity, and, in extreme cases, may lead to restrictions and halts. During those periods, the Fund may experience high levels of shareholder redemptions, and may have to sell securities at times when the Fund would otherwise not do so, potentially at unfavorable prices. Certain securities may be difficult to value during such periods.
44
ETF Risk. To the extent the Tactical Income Fund invests in ETFs, you will indirectly pay fees and expenses charged by the ETFs in addition to the Tactical Income Fund’s direct fees and expenses. As a result, the cost of investing in the Tactical Income Fund will be higher than the cost of investing directly in ETF shares and may be higher than other mutual funds that invest directly in stocks and bonds. Each ETF is subject to specific risks, depending on the nature of the ETF and its underlying investments. These risks could include sector risk (increased risk from a focus on one or more sectors of the market), liquidity risk (risk that the Tactical Income Fund cannot dispose of its shares of the ETF promptly without a reduction in value) and risks associated with fixed income securities or foreign currencies.
Fixed Income Risk. The value of investments in fixed income securities and securities in which the underlying investments are fixed income securities are expected to fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of the fixed income securities owned by the Tactical Income Fund or its underlying investments. Issuers of floating rate debt are exposed to higher interest payments in a rising rate environment. Issuers may default on interest and principal payments. Generally, securities with lower debt ratings (“junk bonds”) have greater credit risk.
Credit Risk. Issuers of fixed-income securities may default on their obligations to make interest and principal payments. Generally, securities with lower debt ratings carry a greater risk that the issuer will default on its payment obligations. Fixed-income securities rated in the fourth classification by Moody’s (Baa) and S&P (BBB) or lower (sometimes referred to as “junk bonds”) have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity of those issuers to make principal or interest payments, as compared to issuers of more highly rated securities. These securities can also be thinly traded or have restrictions on resale, which can make them difficult to sell or adversely affect their market value.
Interest Rate Risk. When the Tactical Income Fund invests in bonds (either directly or through underlying investments), the value of your investment in the Tactical Income Fund will fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of bond funds owned by the Tactical Income Fund or its underlying investments. In general, the market price of debt securities with longer maturities will increase or decrease more in response to changes in interest rates than shorter-term securities.
High Yield or Junk Bond Risk. Lower-quality fixed income securities, known as “high yield” or “junk” bonds, present a significant risk for loss of principal and interest. These bonds offer the potential for higher return, but also involve greater risk than bonds of higher quality, including an increased possibility that the bond’s issuer, obligor or guarantor may not be able to make its payments of interest and principal (credit quality risk). These investments are considered to be speculative in nature.
MBS Risk. MBS are subject to credit risk because underlying loan borrowers may default. Additionally, these securities are subject to prepayment risk because the underlying loans held by the issuers may be paid off prior to maturity, reducing overall returns.
Foreign Securities Risk. Investing in securities issued by companies or governments whose location or principal business activities are outside the United States, or investing in American Depositary Receipts (“ADRs”) or ETFs focusing on such companies, may involve significant risks not present in domestic investments. There is generally less publicly available information about foreign companies and foreign government debt, and the issuers are generally not uniformly bound by consistent accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to domestic issuers. Investments in foreign securities also involve the risk of greater price volatility and possible adverse changes in investment or exchange control regulations or currency exchange rates, expropriation or confiscatory taxation, limitation on the removal of cash or other assets from foreign markets, political or financial instability, or diplomatic and other developments, which could affect such investments.
Non-U.S. Government Debt Risk. An investment in debt obligations of non-U.S. governments and their political subdivisions (“sovereign debt”) involves special risks that are not present in corporate debt obligations, including increased volatility and possible foreign government interference. The non-U.S. issuer of the sovereign debt or the non-U.S. governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due, and a Fund may have limited recourse in the event of a default. A sovereign debtor’s willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange, the relative size of the debt service burden, the sovereign debtor’s policy toward its principal international lenders and local political constraints.
45
Emerging Markets Risk. In addition to the risks generally associated with investing in securities of foreign issuers, countries within emerging markets also may have relatively unstable governments, social and legal systems that do not protect securityholders, economies based on only a few industries, and securities markets that trade a small number of issues.
Foreign Currency Risk. Currency trading risks include market risk, credit risk and country risk. Market risk results from adverse changes in exchange rates in the currencies the Tactical Income Fund’s underlying investments are long or short. Credit risk results because a currency-trade counterparty may default. Country risk arises because a government may interfere with transactions in its currency.
Quantitative Model Risk. The Tactical Income Fund’s strategy relies heavily on quantitative models and the analysis of specific metrics to construct the Tactical Income Fund’s portfolio. The impact of these metrics on a security’s performance can be difficult to predict, and securities that previously possessed certain desirable quantitative characteristics may not continue to demonstrate those same characteristics in the future. In addition, relying on quantitative models entails the risk that the models themselves may be limited or incorrect, that the data on which the models rely may be incorrect or incomplete, and that Horizon may not be successful in selecting companies for investment or determining the weighting of particular securities in the Tactical Income Fund’s portfolio. Any of these factors could cause the Tactical Income Fund to underperform funds with similar strategies that do not select investments based on quantitative analysis.
Turnover Risk. As a result of its trading strategies, the Tactical Income Fund may sell portfolio securities without regard to the length of time they have been held and will likely have a higher portfolio turnover rate than other mutual funds. Since portfolio turnover may involve paying brokerage commissions and other transaction costs, higher turnover generally results in additional expenses, which may lower the performance of the Tactical Income Fund, and may also result in the realization of short-term capital gains. The Tactical Income Fund must generally distribute realized capital gains to shareholders, increasing the Tactical Income Fund’s taxable distributions. High rates of portfolio turnover in a given year would likely result in short-term capital gains, which are taxed to shareholders at ordinary income tax rates.
Equity Securities Risk. Preferred stocks are sensitive to interest rate changes, and are also subject to equity risk, which is the risk that stock prices will fall over short or extended periods of time. Equity securities typically have greater price volatility than fixed income securities. The market price of equity securities owned by the Tactical Income Fund may go down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented by those markets, or factors directly related to a specific company, such as decisions made by its management. The rights of preferred stocks on the distribution of a company’s assets in the event of a liquidation are generally subordinate to the rights associated with a company’s debt securities.
Convertible Securities Risk. 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) and the credit standing of the issuer. The price of a convertible security will also normally vary in some proportion to changes in the price of the underlying common stock because of the conversion or exercise feature.
Focus Risk. To the extent that the Tactical Income Fund focuses its investments in particular industries, asset classes or sectors of the economy, any market price movements, regulatory or technological changes, or economic conditions affecting companies in those industries, asset classes or sectors may have a significant impact on the Tactical Income Fund’s performance.
Bank Loans Risk. The Fund may invest in ETFs that hold bank loans. Investments in bank loans are subject to the same risks as investments in other types of debt securities, including credit risk, interest rate risk, liquidity risk and valuation risk that may be heightened because of the limited public information available regarding bank loans and because loan borrowers may be leveraged and tend to be more adversely affected by changes in market or economic conditions.
Operational and Technology Risk. Cyber-attacks, disruptions, or failures that affect the Tactical Income Fund’s service providers or counterparties, issuers of securities held by the Risk Assist Fund, or other market participants may adversely affect the Tactical Income Fund and its shareholders, including by causing losses for the Tactical Income Fund or impairing its operations.
U.S. Government Securities Risk. The Fund’s investment in U.S. government obligations may include securities issued or guaranteed as to principal and interest by the U.S. government, or its agencies or instrumentalities. Payment of principal and interest on U.S. government obligations may be backed by the full faith and credit of the United States or may be backed solely by the issuing or guaranteeing agency or instrumentality itself. There can be no assurance that the U.S. government would provide financial support to its agencies or instrumentalities (including government-sponsored enterprises) where it is not obligated to do so. In addition, U.S. government securities are not guaranteed against price movements due to changing interest rates.
46
Money Market Fund Risk. An investment in a money market fund is not a bank deposit and is not insured or guaranteed by any bank or any government agency. It is possible for the Tactical Income Fund to lose money by investing in money market funds. The value of money market instruments may be affected by changing interest rates and by changes in the credit ratings of the investments held by the money market fund.
New Fund Risk. The Fund was recently formed and has a limited operating history as of the date of this Prospectus. There can be no assurance that the Fund will grow to or maintain an economically viable size.
Calendar Year Return as of December 31
Investor Class
During the period shown in the bar chart, the for a quarter was (for the quarter ended ). The was (for the quarter ended ).
Tactical Income Fund
Average Annual Total Returns
| For the periods ended December 31, 2023 | One Year | Since
Inception of Class* |
| Investor Class | ||
| Return Before Taxes | ||
| Return After Taxes on Distributions | ||
| Return After Taxes on Distributions and Sale of Fund Shares | ||
| Advisor Class | ||
| Return Before Taxes | N/A | |
| Bloomberg US Aggregate Bond Index |
| * |
47
The Bloomberg US Aggregate Bond Index is a market-capitalization-weighted index that covers the USD denominated, investment-grade (rated Baa3 or above by Moody’s), fixed-rate, and taxable areas of the bond market. Index returns do not reflect the effects of fees or expenses. Investors cannot invest directly in an index or benchmark.
Returns would have been lower if Horizon had not waived and/or reimbursed certain expenses of the Defensive Core Fund during the periods shown.
Investment Adviser
The investment adviser to the Tactical Income Fund is Horizon Investments, LLC.
Portfolio Managers
Scott Ladner, Chief Investment Officer of Horizon, Mike Dickson, Ph.D., Head of Research and Quantitative Strategies of Horizon, and Zachary F. Hill, CFA, Head of Portfolio Management of Horizon, share responsibility for the day-to-day management of the Tactical Income Fund as Co-Portfolio Managers. Mr. Ladner, Dr. Dickson, and Mr. Hill have been Co-Portfolio Managers of the Tactical Income Fund since its inception in 2022.
Purchase and Sale of Fund Shares
You may purchase and redeem shares of the Tactical Income Fund on any day that the New York Stock Exchange is open for trading, subject to certain restrictions described under the section titled “How to Purchase Shares” and “How to Redeem Shares” of the Tactical Income Fund’s Prospectus. Purchases and redemptions may be made by mailing an application or redemption request to Horizon Funds c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee, WI 53201-0701, or by calling 1-855-754-7932. You also may purchase and redeem shares through a financial intermediary. The minimum initial investment in the Tactical Income Fund is $2,500 and the minimum subsequent investment is $250 for Advisor Class and Investor Class shares. The minimum initial investment in the Tactical Income Fund is $10 million for Institutional Class shares. There is no minimum subsequent investment for Institutional Class shares.
Tax Information
The Tactical Income Fund’s distributions are taxed as ordinary income or capital gains, unless you are investing through a tax- deferred arrangement, such as a 401(k) plan or an individual retirement account. Such tax-deferred arrangements may be taxed later upon withdrawal of monies from those arrangements.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Tactical Income Fund through a broker-dealer or other financial intermediary (such as a bank), the Tactical Income Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Tactical Income Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
48
The investment objective of the Horizon Multi-Factor Small/Mid Cap Fund (the “Multi-Factor Small/Mid Cap Fund”) is capital appreciation.
This table describes the fees and expenses that you may pay if you buy, hold and sell shares of the Multi-Factor Small/Mid Cap Fund. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the tables and examples below.
|
Advisor Class |
Institutional Class |
Investor Class |
| Management Fees | |||
| Distribution and/or Service (12b-1) Fees | |||
| Other Expenses(1) | |||
| Total Annual Fund Operating Expenses | |||
| Fee Waiver and Expense Reimbursements(2) | - |
- |
- |
| Total Annual Fund Operating Expenses After Fee Waiver and Expense Reimbursements/Recoupment |
| (1) |
| (2) |
Example: This Example is intended to help you compare the cost of investing in the Multi-Factor Small/Mid Cap Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Multi-Factor Small/Mid Cap 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 Multi-Factor Small/Mid Cap Fund’s operating expenses remain the same (taking into account the contractual expense limitation). The fee waiver/expense reimbursement arrangement discussed in the table above is reflected only through March 31, 2025. Although your actual costs may be higher or lower, based upon these assumptions your costs would be:
| 1 Year | 3 Years | 5 Years | 10 Years | |
| Advisor Class | $ |
$ |
$ |
$ |
| Institutional Class | $ |
$ |
$ |
$ |
| Investor Class | $ |
$ |
$ |
$ |
The Multi-Factor Small/Mid Cap Fund pays transaction
costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover
rate 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 Multi-Factor Small/Mid Cap Fund’s performance.
During the fiscal period ended November 30, 2023, the Multi-Factor Small/Mid Cap Fund’s portfolio turnover rate was
49
The Multi-Factor Small/Mid Cap Fund seeks to achieve its investment objective by investing primarily in small and mid-cap U.S. equity securities. In addition, the Fund employs defensive techniques, including strategic portfolio positioning, to achieve lower overall volatility as compared to the market generally.
Under normal circumstances, the Multi-Factor Small/Mid Cap Fund will invest not less than 80% of the value of its net assets in the equity securities of small and mid-cap U.S. issuers. The Multi-Factor Small/Mid Cap Fund’s investment adviser, Horizon Investments, LLC (“Horizon”), generally considers small and mid-cap issuers to be those that are within the range of the S&P 600 and S&P 400 indices, respectively, when purchased.
Horizon selects and weights securities using a flexible approach that combines active management and quantitative models to allocate the Fund’s portfolio between issuers, sectors and/or factors (e.g., growth, value, momentum, quality, size and volatility) that Horizon believes offer the opportunity for the highest projected return for a given amount of risk. Horizon assesses projected return and expected risk by diversifying across stocks that have one or more high quality underlying fundamentals, such as: high profitability and stable earnings; low price variability; low fundamental valuation measures; and high recent price trends. Horizon may add or modify these characteristics as economic conditions change. In constructing the portfolio, Horizon may consider industry and position constraints to ensure sufficient diversification, as determined by Horizon. The Defensive Small/Mid-Cap Fund expects equity securities with the foregoing characteristics in aggregate to have a defensive tilt, and therefore the Defensive Small/Mid-Cap Fund may lag the performance of traditional U.S. Small/Mid-Cap equity markets in strong up markets, but is designed to outperform when U.S. Small/Mid-Cap equity markets decline. The Multi-Factor Small/Mid Cap Fund will primarily invest in common stocks and public real estate investment trusts (“REITs”). Depending on market conditions, the Multi-Factor Small/Mid Cap Fund may at times focus its investments in particular sectors or areas of the economy. The Defensive Small/Mid-Cap Fund expects to engage in frequent buying and selling of securities to achieve its investment objective.
Options. The Multi-Factor Small/Mid Cap Fund may also buy or write put and call options for investment purposes, to hedge other investments, or to generate option premiums for the Fund. The Multi-Factor Small/Mid Cap Fund’s options investments may involve “covered” positions where the Fund may write a call option on an underlying position to generate income. The Multi-Factor Small/Mid Cap Fund may involve a “collateralized” strategy more generally, where the Multi-Factor Small/Mid Cap Fund may write put options on a security whose value is collateralized by cash (“cash-secured puts”) or otherwise collateralized by the Fund’s securities.
The Multi-Factor Small/Mid Cap Fund’s option strategies may involve options combinations, such as spreads, straddles and collars. In “spread” transactions, the Multi-Factor Small/Mid Cap Fund buys and writes a put or buys and writes a call on the same underlying instrument with the options having different exercise prices, expiration dates, or both. When the Multi-Factor Small/Mid Cap Fund engages in spread transactions, it seeks to profit from differences in the option premiums paid and received and in the market prices of the related options positions when they are closed out or sold. In “straddles,” the Multi-Factor Small/Mid Cap Fund purchases a put option and a call option or writes a put option and a call option on the same instrument with the same expiration date and the same exercise price. A “collar” position combines a put option purchased by the Multi-Factor Small/Mid Cap Fund (the right of the Multi-Factor Small/Mid Cap Fund to sell a specific security within a specified period) with a call option that is written by the Multi-Factor Small/Mid Cap Fund (the right of the counterparty to buy the same security) in a single instrument, and the Multi-Factor Small/Mid Cap Fund’s right to sell the security is typically set at a price that is below the counterparty’s right to buy the security. Thus, the combined position “collars” the performance of the underlying security, providing protection from depreciation below the price specified in the put option, and allowing for participation in any appreciation up to the price specified by the call option. In each case, the premium received for writing an option offsets, in part, the premium paid to purchase the corresponding option; however, downside protection may be limited as compared to just owning a single option. There is no limit on the number or size of the options transactions in which the Multi-Factor Small/Mid Cap Fund may engage.
Many factors affect the Multi-Factor Small/Mid
Cap Fund’s performance. The Multi-Factor Small/Mid Cap Fund’s share price changes daily based on changes in market conditions
in response to economic, political and financial developments. The direction and extent of those price changes will be affected by the
financial condition, industry and economic sector, and geographic location of the securities in which the Multi-Factor Small/Mid Cap
Fund invests.
Management Risk. The ability of the Multi-Factor Small/Mid Cap Fund to meet its investment objective is directly related to the allocation of the Multi-Factor Small/Mid Cap Fund’s assets. Horizon may allocate the Multi-Factor Small/Mid Cap Fund’s investments so as to under-emphasize or over-emphasize investments at the wrong times or under the wrong market conditions, in which case the Multi-Factor Small/Mid Cap Fund’s value may be adversely affected. Horizon’s analysis of industries, companies, economic trends, the relative attractiveness of different securities or other matters could be wrong and may not produce desired results.
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Market Risk. Investments in securities in general are subject to market risks that may cause their prices to fluctuate over time. The Multi-Factor Small/Mid Cap Fund’s investments may decline in value due to factors affecting securities markets generally, or particular countries, segments, economic sectors, industries or companies within those markets. The value of a security may decline due to general economic and market conditions that are not specifically related to a particular issuer. Markets may, in response to governmental actions or intervention, economic or market developments, trade disputes, the spread of infectious illness or other public health issues, geopolitical factors or other external factors, experience periods of high volatility and reduced liquidity, and, in extreme cases, may lead to restrictions and halts. During those periods, the Fund may experience high levels of shareholder redemptions, and may have to sell securities at times when the Fund would otherwise not do so, potentially at unfavorable prices. Certain securities may be difficult to value during such periods.
Domestic Strategy Risk. Because the Multi-Factor Small/Mid Cap Fund will invest primarily in securities of U.S. issuers, the Multi-Factor Small/Mid Cap Fund is subject to the risk that certain changes in the U.S. economy, such as when the U.S. economy weakens or when its financial markets decline, may have an adverse effect on the securities to which the Fund has exposure, and the Fund will be restricted in its ability to allocate its investments to the securities of non-U.S. issuers.
Smaller and Medium Issuer Risk. Small and medium capitalization companies may be more vulnerable than larger, more established organizations to adverse business or economic developments. In addition, small and medium capitalization companies may be particularly affected by interest rate increases, as they may find it more difficult to borrow money to continue or expand operations, or may have difficulty in repaying any loans.
Real Estate Risk. Real estate values rise and fall in response to a variety of factors, including local, regional and national economic conditions, interest rates and tax considerations. REIT performance depends on the types and locations of the rental properties it owns and on how well it manages those properties.
Options Risk. The value of an option will fluctuate in response to changes in the value of the underlying security or index. In addition, investments in options involve risks different from, or possibly greater than, the risks associated with investing directly in securities, including leverage risk, tracking risk and, in the case of over the counter options, counterparty default risk. Option positions may expire worthless exposing the Multi-Factor Small/Mid Cap Fund to potentially significant losses. If the Multi-Factor Small/Mid Cap Fund writes options, it may receive a premium that is small relative to the loss realized in the event of adverse changes in the value of the underlying instruments. When the Multi-Factor Small/Mid Cap Fund utilizes options spreads, collars or other combinations, the premium received for writing the call option offsets, in part, the premium paid to purchase the corresponding put option; however, the Multi-Factor Small/Mid Cap Fund’s participation in gains above the price of the call option are forfeited in return for receiving the call option premium.
Quantitative Model Risk. The Multi-Factor Small/Mid Cap Fund’s strategy relies heavily on quantitative models and the analysis of specific metrics to construct the Multi-Factor Small/Mid Cap Fund’s portfolio. The impact of these metrics on a security’s performance can be difficult to predict, and securities that previously possessed certain desirable quantitative characteristics may not continue to demonstrate those same characteristics in the future. In addition, relying on quantitative models entails the risk that the models themselves may be limited or incorrect, that the data on which the models rely may be incorrect or incomplete, and that Horizon may not be successful in selecting companies for investment or determining the weighting of particular securities in the Multi-Factor Small/Mid Cap Fund’s portfolio. Any of these factors could cause the Multi-Factor Small/Mid Cap Fund to underperform funds with similar strategies that do not select investments based on quantitative analysis.
Turnover Risk. As a result of its trading strategies, the Multi-Factor Small/Mid Cap Fund may sell portfolio securities without regard to the length of time they have been held and will likely have a higher portfolio turnover rate than other mutual funds. Since portfolio turnover may involve paying brokerage commissions and other transaction costs, higher turnover generally results in additional expenses, which may lower the performance of the Multi-Factor Small/Mid Cap Fund, and may also result in the realization of short-term capital gains. The Multi-Factor Small/Mid Cap Fund must generally distribute realized capital gains to shareholders, increasing the Multi-Factor Small/Mid Cap Fund’s taxable distributions. High rates of portfolio turnover in a given year would likely result in short-term capital gains, which are taxed to shareholders at ordinary income tax rates.
Equity Securities Risk. The prices of equity securities are volatile and may fluctuate in response to many factors. The market price of equity securities owned by the Multi-Factor Small/Mid Cap Fund may go down, sometimes rapidly or unpredictably. Equity securities may decline in value due to factors affecting equity securities markets generally, particular industries represented by those markets, or factors directly related to a specific company, such as decisions made by its management.
Focus Risk. To the extent that the Multi-Factor Small/Mid Cap Fund focuses its investments in particular industries, asset classes or sectors of the economy, any market price movements, regulatory or technological changes, or economic conditions affecting companies in those industries, asset classes or sectors may have a significant impact on the Multi-Factor Small/Mid Cap Fund’s performance.
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Operational and Technology Risk. Cyber-attacks, disruptions, or failures that affect the Multi-Factor Small/Mid Cap Fund’s service providers or counterparties, issuers of securities held by the Multi-Factor Small/Mid Cap Fund, or other market participants may adversely affect the Multi-Factor Small/Mid Cap Fund and its shareholders, including by causing losses for the Multi-Factor Small/Mid Cap Fund or impairing its operations.
New Fund Risk. The Fund was recently formed and has a limited operating history as of the date of this Prospectus. There can be no assurance that the Fund will grow to or maintain an economically viable size.
Calendar Year Return as of December 31
Investor Class
During the period shown in the bar chart, the for a quarter was (for the quarter ended ). The was (for the quarter ended ).
Multi-Factor Small/Mid Cap Fund
Average Annual Total Returns
| For the periods ended December 31, 2023 | One Year | Since
Inception of Class* |
| Investor Class | ||
| Return Before Taxes | ||
| Return After Taxes on Distributions | ||
| Return After Taxes on Distributions and Sale of Fund Shares | ||
| Advisor Class | ||
| Return Before Taxes | N/A | |
| S&P 1000 Total Return Index |
| * |
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The S&P 1000® Total Return Index combines the S&P MidCap 400® and the S&P SmallCap 600® to form an investable benchmark for the mid- to small-cap segment of the U.S. equity market. Index returns do not reflect the effects of fees or expenses. Investors cannot invest directly in an index or benchmark. Returns would have been lower if Horizon had not waived and/or reimbursed certain expenses of the Multi-Factor Small/Mid Cap Fund during the periods shown.
Investment Adviser
The Multi-Factor Small/Mid Cap Fund’s investment adviser is Horizon Investments, LLC.
Portfolio Managers
Scott Ladner, Chief Investment Officer of Horizon, Mike Dickson, Ph.D., Head of Research and Quantitative Strategies of Horizon, and Zachary F. Hill, CFA, Head of Portfolio Management of Horizon, share responsibility for the day-to-day management of the Multi-Factor Small/Mid Cap Fund as Co-Portfolio Managers. Mr. Ladner, Dr. Dickson, and Mr. Hill have been Co-Portfolio Managers of the Multi-Factor Small/Mid Cap Fund since its inception in 2022.
Purchase and Sale of Fund Shares
You may purchase and redeem shares of the Multi-Factor Small/Mid Cap Fund on any day that the New York Stock Exchange is open for trading, subject to certain restrictions described under the section titled “How to Purchase Shares” and “How to Redeem Shares” of the Multi-Factor Small/Mid Cap Fund’s Prospectus. Purchases and redemptions may be made by mailing an application or redemption request to Horizon Funds c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee, WI 53201-0701, or by calling 1-855-754-7932. You also may purchase and redeem shares through a financial intermediary. The minimum initial investment in the Multi-Factor Small/Mid Cap Fund is $2,500 and the minimum subsequent investment is $250 for Advisor Class and Investor Class shares. The minimum initial investment in the Multi-Factor Small/Mid Cap Fund is $10 million for Institutional Class shares. There is no minimum subsequent investment for Institutional Class shares.
Tax Information
The Multi-Factor Small/Mid Cap Fund’s distributions are taxed as ordinary income or capital gains, unless you are investing through a tax- deferred arrangement, such as a 401(k) plan or an individual retirement account. Such tax-deferred arrangements may be taxed later upon withdrawal of monies from those arrangements.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase the Multi-Factor Small/Mid Cap Fund through a broker-dealer or other financial intermediary (such as a bank), the Multi-Factor Small/Mid Cap Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Multi-Factor Small/Mid Cap Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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| ADDITIONAL INFORMATION ABOUT THE FUNDS’ PRINCIPAL INVESTMENT STRATEGIES |
Investment Objective: Each of the Allocation Fund, the Risk Assist Fund, the Income Fund, Equity Premium Income Fund, the Defined Risk Fund, the Multi-Factor U.S. Equity Fund, the Defensive Core Fund, the Multi-Factor Small/Mid Cap Fund and the Tactical Income Fund (each, a “Fund”) may change its investment objective without shareholder approval upon not less than 60 days’ written notice to shareholders. Additionally, the 80% investment limitation for each of the Equity Premium Income Fund, the Multi-Factor U.S. Equity Fund and the Defensive Core Fund is non-fundamental and may be changed without shareholder approval upon 60 days’ written notice to shareholders.
Additional Information Regarding the Allocation of Fund Assets Among Market Segments (All Funds): Horizon believes changing market conditions can provide opportunities value creation. Horizon’s portfolio construction methodology is based on modern optimization and risk mitigation tools and is focused on balancing the tradeoff between expected risk and return. Risk is controlled through position, portfolio and market level metrics. Each Fund’s portfolio is periodically tested through both historical as well as simulated market environments to evaluate factors relevant to that Fund, such as potential periods of volatility and downside risk.
Temporary Defensive Strategies (All Funds): To respond to adverse market, economic, political or other conditions, each Fund may take a defensive position and invest up to 100% of its total assets, without limitation, in high-quality short-term debt securities or money market instruments. These short-term debt securities and money market instruments may include, without limitation: shares of money market mutual funds, commercial paper, certificates of deposit, bankers’ acceptances, U.S. Government securities and repurchase agreements. While a Fund is in a defensive position, the opportunity to achieve its investment objective will be limited. Furthermore, to the extent that the Fund invests in money market mutual funds for cash positions, there will be some duplication of expenses because the Fund pays its pro-rata portion of such money market funds’ advisory fees and operational fees. Each Fund may also invest a substantial portion of its assets in such instruments at any time to maintain liquidity or pending selection of investments in accordance with its policies.
Fund-of-Funds (Allocation Fund, Risk Assist Fund, Income Fund and Tactical Income Fund): Horizon may execute each of the Allocation Fund, Risk Assist Fund, Income Fund and Tactical Income Fund’s investment strategy by investing primarily in ETFs, which is commonly referred to as a “fund-of- funds” investment style. ETFs are registered investment companies that are generally index-based or actively managed. An index-based ETF typically seeks to track the performance of a particular market index. These indexes include not only broad-market indexes, but more specific indexes as well, including those relating to particular sectors, markets, regions or industries. An actively managed ETF seeks to achieve its investment objective through active management in accordance with an investment strategy, similar to other non-index-based investment companies. An ETF is traded like a stock on a securities exchange and may be purchased and sold throughout the trading day based on its market price. The trading price of an ETF fluctuates in accordance with changes in market supply and demand.
Selection of ETFs (Allocation Fund, Risk Assist Fund, Income Fund and Tactical Income Fund): Horizon selects specific ETFs for investment, in part, on their investment goals and strategies, their investment adviser and portfolio manager, and on the analysis of their past performance (absolute, relative and risk-adjusted). Horizon also considers other factors in the selection of ETFs, such as fund size, liquidity, expense ratio, reputation of sponsor, reputation and tenure of portfolio manager, general composition of its investment portfolio and current and expected portfolio holdings. Some ETFs in which a Fund may invest may not share the same investment goal or investment limitations as the Fund.
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| PRINCIPAL INVESTMENT RISKS |
An investment in a Fund is subject to one or more of the principal risks identified in the following table and in the description of each Fund’s principal risks, above. The principal risks identified below are discussed in more detail in the disclosure that immediately follows the table.
| Active Asset Allocation Fund | Active Risk Assist Fund |
Active Income Fund |
Equity Premium Income Fund | Defined Risk Fund |
Multi-Factor U.S. Equity Fund |
Defensive Core Fund | Multi-Factor Small/ Mid Cap Fund | Tactical Income Fund | |
| Bank Loans Risk | ✓ | ||||||||
| Convertible Securities Risk | ✓ | ||||||||
| Credit Risk | ✓ | ✓ | |||||||
| Dividend Yield Risk | ✓ | ||||||||
| Domestic Strategy Risk | ✓ | ✓ | ✓ | ✓ | |||||
| Emerging Markets Risk | ✓ | ✓ | ✓ | ✓ | |||||
| Equity Securities Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ |
| ESG Investing Risk | ✓ | ||||||||
| ETF Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ||||
| Fixed Income Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ||||
| Fluctuation of NAV; Unit Premiums and Discounts | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |||
| Focus Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |
| Foreign Currency Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ||||
| Foreign Securities Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ||||
| High Yield or Junk Bond Risk | ✓ | ✓ | ✓ | ✓ | |||||
| Index Risk | ✓ | ||||||||
| Interest Rate Risk | ✓ | ✓ | |||||||
| Large Capitalization Company Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||
| Management Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ |
| Market Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ |
| Money Market Fund Risk | ✓ | ||||||||
| Mortgage Backed Securities Risk | ✓ | ✓ | |||||||
| Master Limited Partnership Risk | ✓ | ||||||||
| Mid Capitalization Company Risk | ✓ | ||||||||
| New Fund Risk | ✓ | ✓ | |||||||
| Non-U.S. Government Debt Risk | ✓ | ✓ | |||||||
| Operational and Technology Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ |
| Options Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||
| Quantitative Model Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ |
| Real Estate Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |||
| Risk Assist Strategy Risk | ✓ | ✓ | |||||||
| Smaller and Medium Capitalization Company Risk | ✓ | ||||||||
| Turnover Risk | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |
| U.S. Government Securities Risk | ✓ |
Bank Loans Risk. Investments in bank loans are subject to the same risks as investments in other types of debt securities, including credit risk, interest rate risk, liquidity risk and valuation risk that may be heightened because of the limited public information available regarding bank loans and because loan borrowers may be leveraged and tend to be more adversely affected by changes in market or economic conditions. If a bank loan is held through another financial institution or another financial institution administers the loan, receipt of principal and interest on the loan may be subject to the credit risk of that financial institution. Any collateral securing a loan may be insufficient or unavailable in the event of default, particularly for second liens. Bank loans may not be considered “securities,” and purchasers therefore may not be entitled to rely on the anti-fraud protections of the federal securities laws.
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Convertible Securities Risk. 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) and the credit standing of the issuer. The price of a convertible security will also normally vary in some proportion to changes in the price of the underlying common stock because of the conversion or exercise feature. Convertible securities may be subordinate to other debt securities issued by the same issuer. Issuers of convertible securities are often not as strong financially as issuers with higher credit ratings. Convertible securities typically provide yields lower than comparable non-convertible securities. Their values may be more volatile than those of non-convertible securities, reflecting changes in the values of the securities into which they are convertible.
Credit Risk. Issuers of fixed-income securities may default on their obligations to make interest and principal payments. Generally, securities with lower debt ratings carry a greater risk that the issuer will default on its payment obligations. Fixed-income securities rated below the fourth classification by Moody’s (Baa) and S&P (BBB) (sometimes referred to as “junk bonds”) have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity of those issuers to make principal or interest payments, as compared to issuers of more highly rated securities. These securities can also be thinly traded or have restrictions on resale, which can make them difficult to sell or adversely affect their market value.
Dividend Yield Risk. While a Fund may hold securities of companies that have historically paid a dividend, those companies may reduce or discontinue their dividends in the future, thus reducing income to the Fund. Past dividend payments are not a guarantee of future dividend payments. Also, the market return of high dividend yield securities, in certain market conditions, may be worse than the market return of other investment strategies or of markets generally.
Domestic Strategy Risk. Because the Multi-Factor U.S. Equity Fund, Defensive Core Fund and Multi-Factor Small/Mid Cap Fund will each invest primarily in U.S. issuers, these Funds are subject to the risk that certain changes in the U.S. economy, such as when the U.S. economy weakens or when its financial markets decline, may have an adverse effect on the securities to which the Fund has exposure, and the Fund will be restricted in its ability to allocate its investments to the securities of non-U.S. issuers.
Emerging Markets Risk. In addition to the risks generally associated with investing in securities of foreign issuers, countries with emerging markets also may have relatively unstable governments, social and legal systems that do not protect securityholders, economies based on only a few industries, and securities markets that trade a small number of issues. Emerging market countries may have relatively unstable governments, weaker economies, and less-developed legal systems which offer fewer protections to securityholders. Emerging market economies may be based on only a few industries and security issuers may be more susceptible to economic weakness and more likely to default. Emerging market securities also tend to be less liquid.
Equity Market Risk. Equity securities may experience sudden, unpredictable drops in value or long periods of decline in value. Equity securities may also lose value because of factors affecting an entire industry or sector, such as increases in production costs, or factors directly related to a specific company, such as decisions made by its management.
Common Stocks. Common stocks are susceptible to general stock market fluctuations and to volatile increases and decreases in value as market confidence in and perceptions of their issuers change. These investor perceptions are based on various and unpredictable factors including, competition; expectations regarding government, economic, monetary and fiscal policies; inflation and interest rates; economic expansion or contraction; and global or regional political, economic and banking crises. If an investor held common stock of an issuer, the investor would generally be exposed to greater risk than if the investor held preferred stocks and debt obligations of the issuer because holders of common stock generally have inferior rights to receive payments from issuers in comparison with the rights of the holders of other securities, bondholders and other creditors of such issuers.
Convertible Preferred Stocks. Preferred stock (see below) may also be convertible. Convertible preferred stock may be converted at a stated price within a specified period of time into a certain quantity of common stock of the same or a different issuer. Convertible preferred stock is senior to common stocks in an issuer’s capital structure, but is usually subordinated to similar non-convertible securities. However, convertible preferred stock provides a fixed-income stream (generally higher in yield than the income derived from common stock but lower than that afforded by a similar non-convertible security) and gives the investor the opportunity, through the conversion feature, to participate in the capital appreciation of the issuing company depending upon a market price advance in the convertible security’s underlying common stock. The market value of convertible preferred stock performs like that of a regular debt security, that is, if market interest rates rise, the value of convertible preferred stock typically falls.
Preferred Stocks. A preferred stock is a blend of the characteristics of a bond and common stock. It can offer the higher yield of a bond and has priority over common stock in equity ownership, but does not have the seniority of a bond and, unlike common stock, its participation in the issuer’s growth may be limited. Preferred stock has preference over common stock in the receipt of dividends and in any residual assets after payment to creditors should the issuer be dissolved. Although the dividend on a preferred stock may be set at a fixed annual rate, in some circumstances it can be changed or omitted by the issuer. Because preferred stocks represent an equity ownership interest in an issuer, their value will usually react more strongly than bonds and other debt instruments to actual or perceived changes in an issuer’s financial condition or prospects or to fluctuations in the equity markets.
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Rights. Rights are usually granted to existing shareholders of a corporation to subscribe to shares of a new issue of common stock before it is issued to the public. The right entitles its holder to buy common stock at a specified price. Rights have similar features to warrants, except that the life of a right is typically much shorter, usually a few weeks. The purchase of rights involves the risk that an investor could lose the purchase value of a right if the right is not exercised prior to its expiration. Also, the purchase of rights involves the risk that the effective price paid for the right added to the subscription price of the related security may exceed the value of the subscribed security’s market price such as when there is no movement in the level of the underlying security.
Warrants. A warrant gives the holder a right to purchase at any time during a specified period a predetermined number of shares of common stock at a fixed price. Unlike convertible debt securities or preferred stock, warrants do not pay a fixed coupon or dividend. Investments in warrants involve certain risks, including the possible lack of a liquid market for resale of the warrants, potential price fluctuations as a result of speculation or other factors, and failure of the price of the underlying security to reach or have reasonable prospects of reaching a level at which the warrant can be prudently exercised (in which event the warrant may expire without being exercised, resulting in a loss of a Fund’s entire investment therein).
ESG Investing Risk. Investing primarily in investments that meet ESG criteria carries the risk that the Defensive Core Fund may forgo otherwise attractive investment opportunities or increase or decrease its exposure to certain types of companies and, therefore, may underperform funds that do not consider ESG factors. The ESG research and ratings are generally based on information that is publicly available and/or provided by the companies themselves or by third parties. Such information may be unavailable or unreliable and, with respect to information provided by third parties, may be based on criteria that differs among data providers.
ETF Risk. When a Fund invests in ETFs, the value of your investment will fluctuate in response to the performance of those ETFs. In addition, investing through a portfolio of ETFs involves certain additional expenses and certain tax results that would not arise for direct investments in the ETFs. By investing indirectly in ETFs through a Fund, an investor will bear not only the investor’s proportionate share of that Fund’s expenses (including operating costs and investment advisory fees), but also, indirectly, similar expenses and charges of the ETFs. In addition, to the extent these ETFs trade their portfolios actively, they will likely incur higher brokerage commissions and increased realization of taxable gains. ETFs that use margin, leverage, short sales and other forms of financial derivatives, such as options and futures, may be more volatile than investments in other funds.
Under the Investment Company Act of 1940 (the “1940 Act”), a Fund may not acquire shares of an ETF or other investment company if, immediately after such acquisition, the Fund and its affiliated persons would hold more than 3% of the ETF’s or investment company’s total outstanding shares unless (i) the ETF or the Fund has received an order for exemptive relief from the 3% limitation from the Securities and Exchange Commission (the “SEC”) that is applicable to the Fund or complies with Rule 12d1-4 under the 1940 Act; and (ii) the ETF and the Fund take appropriate steps to comply with any conditions in such order or Rule 12d1-4, as applicable. Accordingly, the 3% limitation may prevent the Fund from allocating its investments in the manner the Funds adviser considers optimal or cause the adviser to select an investment other than that which it considers optimal.
Index-based ETFs may not be able to replicate exactly the performance of the indices they track because the total return generated by the securities will be reduced by transaction costs incurred in adjusting the actual balance of the securities. Index-based ETFs that utilize a representative sampling approach to track their respective underlying indices are subject to an increased risk of tracking error because the securities selected for the ETF in the aggregate may vary from the investment profile of the underlying index. Additionally, if using a representative sampling approach, an ETFs will typically hold a smaller number of securities than the underlying index, and as a result, an adverse development to an ETF could result in a greater decline in NAV than would be the case if the ETF held all of the securities in the underlying index.
Fixed Income Risk. The value of investments in fixed income securities, options on fixed income securities or in securities in which the underlying investments are fixed income securities are expected to fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of the fixed income securities. In general, the market price of fixed income securities with longer maturities will increase or decrease more in response to changes in interest rates than shorter-term securities. Issuers of floating rate debt are exposed to higher interest payments in a rising rate environment, which increases the change of default. Other risk factors impacting fixed income securities include credit risk, maturity risk, market risk, extension or prepayment risk, illiquid security risks, investment-grade and high yield securities risk. Issuers may default on interest and principal payments. Generally, securities with lower debt ratings (“junk bonds”) have greater credit risk.
Fluctuation of NAV; Unit Premiums and Discounts. The NAV of the shares of the ETFs in which a Fund may invest will generally fluctuate with changes in the market value of the ETF’s securities holdings. The market prices of an ETF’s shares will generally fluctuate in accordance with changes in the ETF’s NAV and supply and demand of the ETF’s shares on the exchanges on which the ETF’s shares are traded. It cannot be predicted whether an ETF’s shares will trade below, at or above their NAV. Price differences may be due, in large part, to the fact that supply and demand forces at work in the secondary trading market for the ETF’s shares will be closely related to, but not identical to, the same forces influencing the prices of the securities of the ETF trading individually or in the aggregate at any point in time. The market prices of an ETF’s shares may deviate significantly from the NAV of the ETF’s shares during periods of market volatility or illiquidity. While an ETF’s creation/redemption feature is designed to make it likely that the ETF’s shares normally will trade close to its NAV, disruptions to creations and redemptions and/or market volatility may result in trading prices that differ significantly from the ETF’s NAV. If a Fund purchases an ETF’s shares at a time when the market price is at a premium to the NAV of the ETF’s shares or sells at a time when the market price is at a discount to the NAV of the ETF’s shares, then the Fund may sustain losses that are in addition to any losses caused by a decrease in NAV.
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Market makers (other than lead market makers) have no obligation to make markets in an ETF’s shares and may discontinue doing so at any time without notice. To the extent that no market makers are willing to process creation and/or redemption orders for an ETF, shares of the ETF may trade like closed-end fund shares at a discount to NAV and the ETF may possibly face delisting. Trading in an ETF’s shares may be halted because of market conditions or for reasons that, in the view of the exchange on which the ETF lists its shares, make trading in the ETF’s shares inadvisable. In addition, trading in an ETF’s shares is subject to trading halts caused by extraordinary market volatility pursuant to “circuit breaker” rules. During stressed market conditions, the liquidity of an ETF’s shares may be less than the liquidity of the securities in the ETF’s portfolio. Any of the foregoing would have an adverse effect on the value of the Fund’s investment in the ETF’s shares.
Focus Risk. To the extent that a Fund focuses its investments in particular industries, asset classes or sectors of the economy, any market price movements, regulatory or technological changes, or economic conditions affecting companies in those industries, asset classes or sectors may have a significant impact on the Fund’s performance.
Foreign Currency Risk. Currency trading involves significant risks, including market risk, interest rate risk, country risk, counterparty credit risk and short sale risk. Market risk results from the price movement of foreign currency values in response to shifting market supply and demand. Since exchange rate changes can readily move in one direction, a currency position carried overnight or over a number of days may involve greater risk than one carried a few minutes or hours. Interest rate risk arises whenever a country changes its stated interest rate target associated with its currency. Country risk arises because virtually every country has interfered with international transactions in its currency. Interference has taken the form of regulation of the local exchange market, restrictions on foreign investment by residents or limits on inflows of investment funds from abroad. Restrictions on the exchange market or on international transactions are intended to affect the level or movement of the exchange rate. This risk could include the country issuing a new currency, effectively making the “old” currency worthless. ETFs that hold short positions in foreign currencies, or buy or write options on currency-focused ETFs, in an attempt to hedge against, or generate returns from, potential depreciation in the value of a currency are subject to the risks of rising currency values.
Foreign Securities Risk. Investing in securities issued by companies or governments whose location or principal business activities are outside the United States, or investing in ADRs or ETFs focusing on such companies, may involve significant risks not present in domestic investments. There is generally less publicly available information about foreign issuers, particularly those not subject to the disclosure and reporting requirements of U.S. securities laws. Foreign issuers are generally not uniformly bound by consistent accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to domestic issuers. Investments in foreign securities also involve the risk of possible adverse changes in investment or exchange control regulations or currency exchange rates, expropriation or confiscatory taxation, limitation on the removal of cash or other assets of the Fund from foreign markets, political or financial instability, or diplomatic and other developments which could affect such investments. Further, economies of particular countries or areas of the world may differ favorably or unfavorably from the economy of the United States. Foreign securities often trade with less frequency and volume than domestic securities and therefore may exhibit greater price volatility. ADRs provide a method whereby the Fund may invest in securities issued by companies whose principal business activities are outside the United States. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities, and may be issued as sponsored or unsponsored programs. In sponsored programs, an issuer has made arrangements to have its securities trade in the form of ADRs. In unsponsored programs, the issuer may not be directly involved in the creation of the program. Although regulatory requirements with respect to sponsored and unsponsored programs are generally similar, in some cases it may be easier to obtain financial information from an issuer that participates in a sponsored program.
High Yield or Junk Bond Risk. Lower-quality fixed-income securities, known as “high yield” or “junk” bonds, present a significant risk for loss of principal and interest. These bonds offer the potential for higher return, but also involve greater risk than bonds of higher quality, including an increased possibility that the bond’s issuer, obligor or guarantor may not be able to make its payments of interest and principal (credit quality risk). These investments are considered to be speculative in nature.
Index Risk. The Defensive Core Fund’s ESG Strategy is linked to an Index maintained by the Index Provider that is unaffiliated with Horizon and that exercises complete control over the Index. The Defensive Core Fund will be negatively affected by general declines in the securities and asset classes represented in its Index. In addition, because the ESG Strategy portion of the Defensive Core Fund is not “actively” managed, unless a specific security is removed from the Index, the Defensive Core Fund generally would not sell a security because the security’s issuer was in financial trouble. Market disruptions and regulatory restrictions could have an adverse effect on the Defensive Core Fund’s ability to adjust its exposure to the required levels in order to track its Index. There is no guarantee that the methodology used by the Index Provider to identify constituents for the Index will achieve its intended result or positive performance.
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Indexing Strategy/Index Tracking Risk. The Defensive Core Fund is managed in part with an indexing investment strategy, attempting to track the performance of an unmanaged index of securities, regardless of the current or projected performance of the Index or of the actual securities comprising the Index. The Defensive Core Fund’s performance may be less favorable than that of a portfolio managed using an entirely active investment strategy. The structure and composition of the Index will affect the performance, volatility, and risk of the Index and, consequently, the performance, volatility, and risk of the Defensive Core Fund. When there are changes made to the component securities of the Index and the Defensive Core Fund in turn makes similar changes to its portfolio, any transaction costs and market exposure arising from such portfolio changes will be borne directly by the Defensive Core Fund and its shareholders. The Defensive Core Fund may recognize gains as a result of rebalancing or reconstituting its securities holdings to reflect changes in the securities included in the Index. The Defensive Core Fund also may be required to distribute any such gains to its shareholders to avoid adverse federal income tax consequences. While the ESG Strategy portion of the Defensive Core Fund’s portfolio seeks to track the performance of the Index (i.e., achieve a high degree of correlation with the Index), the Defensive Core Fund’s return may not match the return of the Index. The Defensive Core Fund incurs a number of operating expenses not applicable to the Index, and incurs costs in buying and selling securities. In addition, there will be times when the Defensive Core Fund is not fully invested in the securities comprising the Index, generally as a result of the implementation of the Risk Assist® or because of cash flows into or out of the Fund or reserves of cash held by the Fund to meet redemptions.
Index Calculation Methodology Risk. The Index relies on various sources of information to assess the criteria of issuers included in the 51 Index, including fundamental and governance information that may be based on assumptions and estimates. Neither the Defensive Core Fund, Horizon, nor the Index Provider can offer assurances that the Index’s calculation methodology or sources of information will provide a correct valuation of securities, nor can they guarantee the availability or timeliness of the production of the Index. There is no assurance that the sources of information are reliable, and Horizon does not assess the due diligence conducted by the Index Provider with respect to the data it uses or the Index construction and computation processes. That is, Horizon’s due diligence does not include an assessment of the Index Provider’s due diligence. Errors in Index data, Index computations or the construction of the Index in accordance with its methodology may occur from time to time and may not be identified and corrected by the index provider for a period of time or at all, which may have an adverse impact on the Defensive Core Fund and its shareholders. Neither the Defensive Core Fund, Horizon nor the Index Provider guarantee the accuracy, availability or timeliness of the production of the Index. The Index Provider may utilize third party data in constructing the Index, but it does not guarantee the quality, accuracy or availability of any such third-party data.
Interest Rate Risk. The value of investments in bonds (made either directly or through underlying investments) will fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of bonds. In general, the market price of debt securities with longer maturities will increase or decrease more in response to changes in interest rates than shorter-term securities. In recent years the U.S. has experienced historically low interest rates, increasing the exposure of fixed income investors to the risks associated with rising interest rates. It is likely there will be less governmental action in the near future to maintain low interest rates. The negative impact on fixed income securities from the resulting rate increases for that and other reasons could be swift and significant. Rising interest rates tend to extend the duration of securities, making them more sensitive to changes in interest rates. The value of longer-term securities generally changes more in response to changes in interest rates than shorter-term securities. As a result, in a period of rising interest rates, some fixed income securities may experience increased volatility and may lose value, which could adversely impact a Fund’s net asset value. Rising interest rates could also impair the ability of borrowers to service interest payment obligations and make principal loan repayments, which could adversely impact a Fund’s net investment income and its distributions to shareholders. Additionally, decreases in the value of fixed income securities could lead to increased shareholder redemptions, which could impair a Fund’s ability to achieve its investment objective.
Large Capitalization Company Risk. Large capitalization companies as a group could fall out of favor with the market, causing the Fund to underperform investments that focus on small or mid-cap companies. Larger, more established companies may be unable to respond quickly to new competitive challenges such as changes in consumer tastes or innovative smaller competitors. Also, large-cap companies are sometimes unable to attain the high growth rates of successful, smaller companies, especially during extended periods of economic expansion.
Management Risk. The ability of a Fund to meet its investment objective is directly related to the allocation of that Fund’s assets. Horizon may allocate a Fund’s investments so as to under-emphasize or over-emphasize investments under the wrong market conditions, in which case a Fund’s value may be adversely affected. Horizon’s judgments about the attractiveness, value and potential appreciation of particular security or other investment in which a Fund invests or sells short may prove to be incorrect and may not produce the desired results.
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Market Risk. Investments in securities and other investments in general are subject to market risks that may cause their prices to fluctuate over time. Investments may decline in value due to factors affecting securities markets generally, or particular countries, segments, economic sectors, industries or companies within those markets. The value of a security may decline due to general economic, political and market conditions that are not specifically related to a particular issuer, such as real or perceived adverse economic conditions or changes in interest or currency rates. Also, certain market events could increase volatility and exacerbate market risk, such as changes in governments’ economic policies, political turmoil, environmental events, trade disputes, and epidemics, pandemics or other public health issues. For example, the novel coronavirus disease (COVID-19) that emerged in 2020 resulted in closing borders, closings of non-essential businesses, quarantines, cancellations, disruptions to supply chains and customer activity, trading halts, government economic stimulus measures, rapid increases in unemployment, as well as general concern and uncertainty, thus causing significant disruptions to global business activity and financial markets. During those periods, a Fund may experience high levels of shareholder redemptions, and may have to sell securities at times when the Fund would otherwise not do so, potentially at unfavorable prices. Certain securities may be difficult to value during such periods. The value of securities convertible into equity securities, such as warrants or convertible debt, is also affected by prevailing interest rates, the credit quality of the issuer and any call provision. Fluctuations in the value of a Fund’s securities (which may be material on a daily, weekly, monthly or other basis) will cause the NAV of that Fund to fluctuate. In addition, market events and disruptions such as long-term pandemics may result in the Funds and their service providers experiencing operational difficulties in managing overloads to information technology and communications, coordinating a remote workforce and implementing business continuity plans, among others.
Master Limited Partnership Risk. Investments in MLPs involve risks different from those of investing in common stock, including risks related to limited control and limited rights to vote on matters affecting the MLP, risks related to potential conflicts of interest between the MLP and the MLP’s general partner, cash flow risks, dilution risks and risks related to the general partner’s limited call right. MLPs are generally considered interest-rate sensitive investments. During periods of interest rate volatility, these investments may not provide attractive returns. Depending on the state of interest rates in general, the use of MLPs could enhance or harm the overall performance of a Fund. MLPs, typically, do not pay U.S. federal income tax at the partnership level. Instead, each partner is allocated a share of the MLP’s income, gains, losses, deductions and expenses. A change in current tax law or in the underlying business mix of a given MLP could result in an MLP being treated as a corporation for U.S. federal income tax purposes, which would result in such MLP being required to pay U.S. federal income tax on its taxable income. The classification of an MLP as a corporation for U.S. federal income tax purposes would have the effect of reducing the amount of cash available for distribution by the MLP. Thus, if any of the MLPs owned by a Fund were treated as corporations for U.S. federal income tax purposes, it could result in a reduction of the value of your investment in that Fund and lower income, as compared to an MLP that is not taxed as a corporation.
Mid-Capitalization Company Risk. Mid-capitalization companies may be more vulnerable to adverse business or economic events than larger, more established companies. In particular, investments in these mid-sized companies may pose additional risks, including liquidity risk, because these companies tend to have limited product lines, markets and financial resources, and may depend upon a relatively small management group. Therefore, mid-cap stocks may be more volatile than those of larger companies.
Money Market Fund Risk. An investment in a money market fund is not a bank deposit and is not insured or guaranteed by any bank or any government agency. It is possible for the Tactical Income Fund to lose money by investing in money market funds. The value of money market instruments may be affected by changing interest rates and by changes in the credit ratings of the investments held by the money market fund. If the liquidity of a money market fund’s portfolio deteriorates below certain levels, the money market fund may suspend redemptions and thereby prevent the Tactical Income Fund from selling its investment in the money market fund or impose a fee of up to 2% on amounts the Fund redeems from the money market fund. These measures may result in an investment loss or prohibit the Tactical Income Fund from redeeming shares when the Adviser would otherwise redeem shares.
Mortgage Backed Securities Risk. MBS are subject to credit risk because underlying loan borrowers may default. Additionally, these securities are subject to prepayment risk because the underlying loans held by the issuers may be paid off prior to maturity, reducing overall returns. The value of these securities may go down as a result of changes in prepayment and/or default rates on the underlying mortgage loans. During periods of declining interest rates, prepayment rates usually increase and a Fund may have to reinvest prepayment proceeds at lower interest rates. During periods of rising interest rates, prepayment rates usually decrease and a Fund may have less opportunity to reinvest prepayment proceeds at higher interest rates.
New Fund Risk. The Multi-Factor Small/Mid Cap Fund and the Tactical Income Fund are recently formed and have limited operating histories. There can be no assurance that either Fund will grow to or maintain an economically viable size.
Non-U.S. Government Debt Risk. An investment in debt obligations of non-U.S. governments and their political subdivisions (“sovereign debt”) involves special risks that are not present in corporate debt obligations. The non-U.S. issuer of the sovereign debt or the non-U.S. governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due, and a Fund may have limited recourse in the event of a default. During periods of economic uncertainty, the market prices of sovereign debt may be more volatile than prices of debt obligations of U.S. issuers. In the past, certain non-U.S. countries have encountered difficulties in servicing their debt obligations, withheld payments of principal and interest and declared moratoria on the payment of principal and interest on their sovereign debt.
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A sovereign debtor’s willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange, the relative size of the debt service burden, the sovereign debtor’s policy toward its principal international lenders and local political constraints. Sovereign debtors may also be dependent on expected disbursements from non-U.S. governments, multinational agencies and other entities to reduce principal and interest arrearages on their debt. The failure of a sovereign debtor to implement economic reforms, achieve specified levels of economic performance or repay principal or interest when due may result in the cancellation of third-party commitments to lend funds to the sovereign debtor, which may further impair such debtor’s ability or willingness to service its debts.
Operational and Technology Risk. Cyber-attacks, disruptions, or failures that affect the Funds’ service providers or counterparties, issuers of securities held by the Funds, or other market participants may adversely affect the Funds and their shareholders, including by causing losses for the Funds or impairing fund operations.
Cyber-attacks may include unauthorized attempts by third parties to improperly access, modify, disrupt the operations of, or prevent access to the systems of the Funds’ service providers or counterparties, issuers of securities held by the Funds or other market participants or data within them. In addition, power or communications outages, information technology equipment malfunctions, operational errors, and inaccuracies within software or data processing systems, whether the result of acts of god, terrorist acts, war, cyber-attack, pandemic or otherwise, may also disrupt business operations or impact critical data. Market events also may trigger a volume of transactions that overloads current information technology and communication systems and processes, impacting the ability to conduct the Funds’ operations.
Cyber-attacks, disruptions, or failures may adversely affect the Funds and their shareholders or cause reputational damage and subject the Funds to regulatory fines, litigation costs, penalties or financial losses, reimbursement or other compensation costs, and/or additional compliance costs. For example, the Funds’ or its service providers’ assets or sensitive or confidential information may be misappropriated, data may be corrupted, and operations may be disrupted (e.g., cyber-attacks or operational failures may cause the release of private shareholder information or confidential fund information, interfere with the processing of shareholder transactions, impact the ability to calculate the Funds’ net asset value, and impede trading). In addition, cyber-attacks, disruptions, or failures involving a Fund counterparty could affect such counterparty’s ability to meet its obligations to the Fund, which may result in losses to the Fund and its shareholders. Similar types of operational and technology risks are also present for issuers of securities held by the Funds, which could have material adverse consequences for such issuers, and may cause the Funds’ investments to lose value. Furthermore, as a result of cyber-attacks, disruptions, or failures, an exchange or market may close or issue trading halts on specific securities or the entire market, which may result in the Funds being, among other things, unable to buy or sell certain securities or financial instruments or unable to accurately price its investments.
While the Funds and their service providers may establish business continuity and other plans and processes that seek to address the possibility of and fallout from cyberattacks, disruptions or failures, there are inherent limitations in such plans and systems, including that they do not apply to third parties, such as Fund counterparties, issuers of securities held by the Funds, or other market participants, as well as the possibility that certain risks have not been identified or that unknown threats may emerge in the future and there is no assurance that such plans and processes will address the possibility of and fallout from cyber-attacks, disruptions, or failures. In addition, the Funds cannot directly control any cybersecurity plans and systems put in place by their service providers, Fund counterparties, issuers of securities held by the Funds, or other market participants.
For example, the Funds rely on various sources to calculate their NAV. Therefore, the Funds are subject to certain operational risks associated with reliance on third party service providers and data sources. NAV calculation may be impacted by operational risks arising from factors such as failures in systems and technology. Such failures may result in delays in the calculation of the Funds’ NAV and/or the inability to calculate NAV over extended time periods. The Funds may be unable to recover any losses associated with such failures.
Options Risk. Investments in options involve risks different from, or possibly greater than, the risks associated with investing directly in securities, including leverage risk, tracking risk and, in the case of over the counter options, counterparty default risk. Option positions may expire worthless exposing the Fund to potentially significant losses. If a Fund writes options, it may receive a premium that is small relative to the loss realized in the event of adverse changes in the value of the underlying instruments. When the Fund utilizes options spreads, collars or other combinations, the premium received for writing the call option offsets, in part, the premium paid to purchase the corresponding put option; however, the Fund’s participation in gains above the price of the call option are forfeited in return for receiving the call option premium. To the extent a Fund writes options on individual securities that it does not hold in its portfolio (i.e., “naked” options), it is subject to the risk that a liquid market for the underlying security may not exist at the time an option is exercised or when the Fund otherwise seeks to close out an option position. Naked call options, in particular, have speculative characteristics and the potential for unlimited loss. Option prices are highly volatile and may fluctuate substantially during a short period of time. Such prices are influenced by numerous factors that affect the markets, including, but not limited to: changing supply and demand relationships; government programs and policies; national and international political and economic events, changes in interest rates, inflation and deflation and changes in supply and demand relationships.
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Trading options involves risks different from, or possibly greater than, the risks associated with investing directly in securities including:
Liquidity Risk. It is possible that particular investments might be difficult to purchase or sell, possibly preventing a Fund from executing positions at an advantageous time or price, or possibly requiring them to dispose of other investments at unfavorable times or prices in order to satisfy the Fund’s obligations.
Options Collars. A “collar” position combines a put option purchased by an investor (the right of the investor to sell a specific security within a specified period) with a call option that is written by the investor (the right of the counterparty to buy the same security) in a single instrument. An investor’s right to sell the security is typically set at a price that is below the counterparty’s right to buy the security. Thus, the combined position “collars” the performance of the underlying security, providing protection from depreciation below the price specified in the put option, and allowing for limited participation in appreciation (up to the price specified by the call option). The premium received for writing an option offsets, in part, the premium paid to purchase the corresponding option, however, participation in gains above the price of the call option are forfeited in return for receiving the call option premium.
When an investor writes a call or put option on an underlying securities it does not own (is not short), the option is sometimes referred to as a “naked option”. When writing “naked” call options, an investor must deposit and maintain sufficient margin with the broker-dealer through which it wrote the “naked” call option as collateral to ensure that it meets its obligations as the writer of the option. Registered funds are further subject to segregation requirements (described in the SAI) when the fund writes “naked” call options. Such segregation will ensure that a fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the fund’s exposure to loss. During periods of declining securities prices or when prices are stable, writing “naked” call options can be a profitable strategy to increase income with minimal capital risk. However, when the price of the security underlying a written option increases, the investor is exposed to an increased risk of loss, because if the price of the security underlying the option exceeds the option’s exercise price, the investor will lose the difference. “Naked” written call options are riskier than covered call options because there is no underlying security held by the investor that can act as a partial hedge. “Naked” written call options have speculative characteristics, and the potential for loss is theoretically unlimited. When a “naked” written call option is exercised, the investor must purchase the underlying security to meet its delivery obligation or make a payment equal to the value of its obligation in order to close out the option. There is also a risk, especially with less liquid preferred and debt securities or small capitalization securities, that the securities may not be available for purchase.
Speculation Risk. Because option premiums paid or received by an investor are small in relation to the market value of the investments underlying the options, buying and selling put and call options can be more speculative than investing directly in securities.
Quantitative Model Risk. Each Fund’s strategy relies heavily on quantitative models and the analysis of specific metrics to construct the fund’s portfolio. The impact of these metrics on a security’s performance can be difficult to predict, and securities that previously possessed certain desirable quantitative characteristics may not continue to demonstrate those same characteristics in the future. In addition, relying on quantitative models entails the risk that the models themselves may be limited or incorrect, that the data on which the models rely may be incorrect or incomplete, and that the investment adviser(s) may not be successful in selecting companies for investment or determining the weighting of particular securities in a Fund’s portfolio. Any of these factors could cause a Fund to underperform funds with similar strategies that do not select investments based on quantitative analysis.
Real Estate Risk. Real estate values rise and fall in response to a variety of factors, including local, regional and national economic conditions, interest rates and tax considerations. When economic growth is slow, demand for property decreases and prices tend to decline. Property values tend to decrease because of overbuilding, increases in property taxes and operating expenses, changes in zoning laws, environmental regulations or hazards, uninsured casualty or condemnation losses, or a general decline in neighborhood values. A REIT’s performance depends on the types and locations of the properties the REIT owns, how well the REIT manages those properties, competition faced by the REIT’s properties, market conditions and other factors. A decline in rental income may result from extended vacancies, increased competition from other properties, tenants’ failure to pay rent or poor management. A REIT’s performance also depends on the company’s ability to finance property purchases and renovations and manage its cash flows. Because REITs typically are invested in a limited number of projects or in a particular market segment, they are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. Changes in regulations may have adverse effects on the value or performance of REITs or their properties.
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Risk Assist Strategy Risk. Implementing a Fund’s Risk Assist strategy may result in periods of time when the Fund is invested primarily (or entirely) in Cash Equivalents (as opposed to equity securities). There can be no guarantee that the Risk Assist strategy, including the ratchet function, will be successful in preventing losses in a Fund’s portfolio. Because the Risk Assist strategy may be implemented in stages, a Fund may have market exposure during times when the Risk Assist strategy is being implemented. To the extent that the Risk Assist strategy is implemented, a Fund will likely not benefit from capital appreciation or income from the equity markets. To the extent that the Risk Assist strategy is not implemented in a timely manner, a Fund may underperform.
Smaller and Medium Capitalization Company Risk. Investments in small and medium capitalization companies may be more vulnerable than larger, more established organizations to adverse business or economic developments. In particular, small and medium-capitalization companies may have more price volatility, greater spreads between their bid and ask prices, significantly lower trading volumes, and cyclical or static growth prospects. Small-capitalization and medium-capitalization companies often have limited product lines, markets, and financial resources and may be dependent upon a relatively small management group. These securities may trade over-the-counter or on an exchange and may or may not pay dividends. In addition, small and medium capitalization companies may be particularly affected by interest rate increases, as they may find it more difficult to borrow money to continue or expand operations, or may have difficulty in repaying any loans.
Turnover Risk. A higher portfolio turnover may result in higher transactional and brokerage costs associated with the turnover which will reduce a Fund’s return, unless the securities traded can be bought and sold without corresponding commission costs. Active trading of securities may also increase a Fund’s realized capital gains or losses, which may affect the taxes you pay as a Fund shareholder.
U.S. Government Securities Risk. A Fund’s investment in U.S. government obligations may include securities issued or guaranteed as to principal and interest by the U.S. government, or its agencies or instrumentalities. Payment of principal and interest on U.S. government obligations may be backed by the full faith and credit of the United States or may be backed solely by the issuing or guaranteeing agency or instrumentality itself. There can be no assurance that the U.S. government would provide financial support to its agencies or instrumentalities (including government-sponsored enterprises) where it is not obligated to do so. In addition, U.S. government securities are not guaranteed against price movements due to changing interest rates.
Non-Principal Risks
In addition to the principal risks outlined above, an investment in a Fund is also subject to the following additional risk:
Commodity Risk. Exposure to commodities through underlying investments that invest in commodities may subject an investor to greater volatility than investments in traditional securities. The value of such investments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or sectors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments.
Loans of Portfolio Securities. Each Fund may lend its portfolio securities to brokers, dealers, banks and other institutional investors. By lending its portfolio securities, the Fund attempts to increase its net investment income through the receipt of interest on the cash collateral with respect to the loan or fees received from the borrower in connection with the loan. Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund. Each Fund employs an agent to implement the securities lending program and the agent receives a fee from the Fund for its services. A Fund will not lend more than 33⅓% of the value of its total assets.
A Fund may lend its portfolio securities so long as the terms, structure and the aggregate amount of such loans are not inconsistent with the 1940 Act or the rules and regulations or interpretations of the SEC thereunder. While voting rights pass with the loaned securities, each Fund will retain the right to call any security in anticipation of a vote that Horizon deems material to the security on loan.
Loans of securities involve a risk that the borrower may fail to return the securities or may fail to maintain the proper amount of collateral, which may result in a loss of money by the Fund. There may be risks of delay and costs involved in recovery of securities or even loss of rights in the collateral should the borrower of the securities fail financially. These delays and costs could be greater for foreign securities. However, loans will be made only to borrowers deemed by the Fund’s adviser to be creditworthy and when, in the judgment of the adviser, the income that can be earned from such securities loans justifies the attendant risk. Each Fund bears the risk that the reinvestment of collateral will result in a principal loss. Finally, there is the risk that the price of the securities will increase while they are on loan and the collateral will not be adequate to cover their value.
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Temporary Defensive Strategies
To respond to adverse market, economic, political or other conditions, each Fund may take a defensive position and invest up to 100% of its total assets, without limitation, in high-quality short-term debt securities or money market instruments. These short-term debt securities and money market instruments may include, without limitation: shares of money market mutual funds, commercial paper, certificates of deposit, bankers’ acceptances, U.S. Government securities and repurchase agreements. While a Fund is in a defensive position, the opportunity to achieve its investment objective will be limited. Furthermore, to the extent that the Fund invests in money market mutual funds for cash positions, there will be some duplication of expenses because the Fund pays its pro-rata portion of such money market funds’ advisory fees and operational fees. Each Fund may also invest a substantial portion of its assets in such instruments at any time to maintain liquidity or pending selection of investments in accordance with its policies.
Portfolio Holdings Disclosure
A description of the Funds’ policies regarding the release of portfolio holdings information is available in the Funds’ Statement of Additional Information. The Funds may, from time to time, make available quarter-end (and in some instances month-end) portfolio holdings information on their website at www.horizonmutualfunds.com. The portfolio holdings are generally posted to the website within 30 days following the end of each quarter (or month as applicable) and remain available until more recent portfolio holdings are posted. Shareholders may request portfolio holdings schedules at no charge by calling 1-855-754-7932.
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| MANAGEMENT OF THE FUNDS |
Investment Adviser
Horizon Investments, LLC, a South Carolina limited liability company, serves as investment adviser to each of the Funds. Horizon has been an investment adviser since 1995, and serves individuals, mutual funds, employee benefit plans, trusts and corporations. Horizon maintains its principal offices at 6210 Ardrey Kell Road, Suite 300, Charlotte, North Carolina 28277. Under the terms of its Investment Advisory Agreement with each Fund, Horizon is responsible for formulating each Fund’s investment program, making day-to-day investment decisions and engaging in portfolio transactions. Horizon provides office space, services and equipment and assistance in supervising matters relating to the Funds’ operations. As of December 31, 2023, Horizon managed approximately $3.72 billion in client assets.
Under the terms of the Investment Advisory Agreements, Horizon receives monthly fees from each Fund calculated in accordance with the following:
| Allocation Fund | At an annual rate of 0.99% of the Fund’s average daily net assets. |
| Risk Assist Fund | At an annual rate of 0.99% of the Fund’s average daily net assets. |
| Income Fund | At an annual rate of 0.77% of the Fund’s average daily net assets. |
| Equity Premium Income Fund | At an annual rate of 0.75% of the Fund’s average daily net assets. |
| Defined Risk Fund | At an annual rate of 0.80% of the Fund’s average daily net assets. |
| Multi-Factor U.S. Equity Fund | At an annual rate of 0.80% of the Fund’s average daily net assets. |
| Defensive Core Fund | At an annual rate of 0.68% of the Fund’s average daily net assets. |
| Multi-Factor Small/Mid Cap Fund | At an annual rate of 0.80% of the Fund’s average daily net assets. |
| Tactical Income Fund | At an annual rate of 0.60% of the Fund’s average daily net assets. |
Prior to October 1, 2022, for the Defensive Core Fund Horizon received a management fee of at an annual rate of 0.75% of the Fund’s average daily net assets up to $150 million, and 0.70% of the Fund’s average daily net assets of $150 million and above.
For the most recent fiscal year ended November 30, 2023, Horizon received an advisory fee equal to 0.99%, 0.99%, 0.77%, 0.75%, 0.80%, 0.83%, 0.69%, 0.00% and 0.60% of the average daily net assets from the Allocation Fund, Risk Assist Fund, Income Fund, Equity Premium Income Fund, Defined Risk Fund, Multi-Factor U.S. Equity Fund, Defensive Core Fund, Multi-Factor Small/Mid Cap Fund and the Tactical Income Fund, respectively, after taking into account the fee waiver and expense reimbursements and recoupments.
A discussion regarding the basis for the Board of Trustees’ approval of the Investment Advisory Agreements is included in the Funds’ annual report to shareholders dated November 30, 2023.
Multi-Manager Structure. Horizon, subject to the approval of the Board of Trustees, has ultimate responsibility to recommend the hiring, termination and replacement of sub-advisers, if any, on behalf of each Fund (each, a “Sub-Advised Fund”), and to supervise, monitor and evaluate the performance of each sub-adviser thereof. The Trust, on behalf of each Sub-Advised Fund, and Horizon have obtained an order from the SEC (the “Order”) that permits Horizon to appoint or replace certain sub-advisers to manage all or a portion of each Sub-Advised Fund’s assets and enter into, amend or terminate a sub-advisory agreement with certain sub-advisers, in each case subject to the approval of the Board, but without obtaining shareholder approval (“multi-manager structure”). None of the Funds is currently operating in a multi-manager structure, although the shareholders of each Fund have approved its operation in a multi-manager structure and such Funds may determine to operate in this way in the future. The Defensive Core Fund operated in a multi-manager structure prior to October 1, 2022 and may determine to operate in this way again in the future. Board approval of any change of a Sub-Advised Fund’s sub-adviser will include a determination by the Board that the change is in the best interests of the Sub-Advised Fund and its shareholders and, based on the information provided to the Board, does not involve a conflict of interest from which Horizon, a sub-adviser, any officer or trustee of the Sub-Advised Fund, or any officer or board member of Horizon derives an inappropriate advantage. Pursuant to the Order, Horizon, with the approval of the Board, has the discretion to terminate any sub-adviser and allocate and reallocate the Sub-Advised Fund’s assets among any other sub-advisers. Because Horizon compensates each sub-adviser out of its management fee, Horizon is able to reduce a Sub-Advised Fund’s sub-advisory fees and retain a larger portion of the management fee, or increase the Sub-Advised Fund’s sub-advisory fees and retain a smaller portion of the management fee. Pursuant to the Order, Horizon is not required to publicly disclose its contractual fee arrangements with any sub-adviser. Each Sub-Advised Fund and Horizon is subject to the conditions imposed by the Order, including the condition that within 90 days of hiring a new sub-adviser pursuant to the multi-manager structure, the Sub-Advised Fund will provide shareholders with an information statement containing information about the new sub-adviser. The shareholders of each Sub-Advised Fund have approved the multi-manager structure described herein.
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Expense Limitation Agreements
Horizon has agreed to waive its advisory fee and reimburse expenses to limit total operating expenses of each Fund, at least until March 31, 2025, so that direct expenses (exclusive of front-end or contingent deferred loads; brokerage fees and commissions; acquired fund fees and expenses; borrowing costs (such as interest and dividend expense on securities sold short); payments, if any, under a Rule 12b-1 Distribution Plan or Shareholder Servicing Plan; expenses paid with securities lending expense offset credits; taxes; and extraordinary expenses (such as litigation)) of each Fund do not exceed the amounts listed below:
|
Advisor Class |
Institutional Class |
Investor Class | |
| Active Asset Allocation Fund | 1.17% | 1.17% | 1.17% |
| Active Risk Assist Fund | 1.17% | 1.17% | 1.17% |
| Active Income Fund | 0.99% | 0.99% | 0.99% |
| Equity Premium Income Fund | 0.99% | 0.99% | 0.99% |
| Defined Risk Fund | 0.94% | 0.94% | 0.94% |
| Multi-Factor U.S. Equity Fund | 0.99% | 0.99% | 0.99% |
| Defensive Core Fund | 0.87% | 0.87% | 0.87% |
| Multi-Factor Small/Mid Cap Fund | 0.99% | 0.99% | 0.99% |
| Tactical Income Fund | 0.80% | 0.80% | 0.80% |
Any fees waived or expenses reimbursed are subject to possible recoupment by Horizon within 36 months after such fees have been waived or expenses reimbursed, if such recoupment can be achieved without exceeding the lower of the expense limit in place at the time of the waiver or reimbursement and the expense limit in place at the time of recoupment.
Portfolio Managers
Scott Ladner – Chief Investment Officer (Active Asset Allocation Fund, Active Risk Assist Fund, Active Income Fund, Equity Premium Income Fund, Defined Risk Fund, Multi-Factor U.S. Equity Fund, Defensive Core Fund, Multi-Factor Small/Mid Cap Fund and Tactical Income Fund)
Mr. Ladner serves as Chief Investment Officer and is the Chair of the Investment Committee for Horizon. In these capacities, he oversees all aspects of the Investment Management division for the firm. He also provides the Investment Management division with Macro analysis and interpretation of global derivatives, credit, foreign exchange, equity, and funding markets. His previous roles at Horizon included Head of Risk and Director of Quantitative & Alternative Strategies. Prior to joining Horizon, Mr. Ladner was a founder of Charlotte Global Advisors and Principal Guard, LLC. Mr. Ladner helped to launch an equity index volatility and dispersion trading unit at PEΔK6 Investments in Chicago, a proprietary listed option and volatility trading firm. Previously at First Union/Wachovia, Mr. Ladner founded and ran the equity swap and forwards portfolio while also managing equity option and volatility portfolios. He also co-founded and managed the Risk Arbitrage and Special Situations portfolio. Mr. Ladner then managed the swaption and cap/floor portion of the bank’s interest rate derivatives portfolio. Mr. Ladner received his BA in Economics and Russian Language & Literature from the University of North Carolina at Chapel Hill.
Mike Dickson, Ph.D. – Head of Research and Quantitative Strategies (Active Asset Allocation Fund, Active Risk Assist Fund, Active Income Fund, Equity Premium Income Fund, Defined Risk Fund, Multi-Factor U.S. Equity Fund, Defensive Core Fund, Multi-Factor Small/Mid Cap Fund and Tactical Income Fund)
Dr. Dickson serves as the Head of Research and Quantitative Strategies. He leads Horizon’s systematic strategy and process design for all investment strategies managed by the firm. He also oversees the team’s research efforts focused on quantitative methods to support Horizon’s investment process, risk management, and new product development. Additionally, Dr. Dickson serves as a Portfolio Manager for the firm’s mutual fund trust, sub-advisory relationships and model portfolios. He joined Horizon in 2015 and previous roles include Head of Portfolio Management and Director of Structured Financial Solutions. Dr. Dickson specializes in the areas of systematic index design, portfolio construction, and risk mitigation. Both during and after his Ph.D. studies, he taught undergraduate and graduate school coursework in finance and portfolio management at University of North Carolina at Charlotte. Prior to earning his Ph.D., he worked in financial analysis support roles at Premier, Inc. and Global Compliance. Dr. Dickson received his BS in Chemistry from Winthrop University and an MS in Economics and Ph.D. in Finance from UNC Charlotte..
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Zachary F. Hill, CFA – Head of Portfolio Management (Active Asset Allocation Fund, Active Risk Assist Fund, Active Income Fund, Equity Premium Income Fund, Defined Risk Fund, Multi-Factor U.S. Equity Fund, Multi-Factor Small/Mid Cap Fund and Tactical Income Fund)
Mr. Hill serves as the Head of Portfolio Management at Horizon Investments. He oversees the implementation and communication for all investment strategies managed by Horizon across the firm’s mutual funds and model portfolios. Prior to this role, Mr. Hill served as the Global Macro Strategist where he focused on providing investment insights on asset allocation decisions from a global macro and derivatives perspective. Prior to joining Horizon, Mr. Hill held senior roles with Cold Spring Asset Management in New York and in the Foreign Exchange division of Wachovia/Wells Fargo. Mr. Hill received a BA in Economics and a BA in Physics from the University of Virginia. He is also a CFA® Charterholder.
Clark Allen, CFA – Director, Quantitative Research (Defensive Core Fund)
Mr. Allen serves as the Director, Quantitative Research for Horizon. In this role Mr. Allen works on research and product development focusing on the development and implementation of systematic strategies across the investment strategies managed by the firm. Mr. Allen also works on research focused on quantitative methods to support Horizon’s investment process, risk management, and new product development. Additionally, Mr. Allen leads ESG efforts at Horizon Investments. Prior to joining Horizon Investments, Mr. Allen managed the investments at a multi-billion-dollar single-family office. Mr. Allen has also worked on the portfolio management team at a large insurance company as well as at a consulting firm doing merger and valuation work. Mr. Allen holds a Masters of Accountancy and BS in Accounting from Georgia Southern University. He is also a CFA® Charterholder, CPA and a CAIA® Charterholder.
The SAI provides additional information about the Portfolio Managers’ compensation, other accounts managed by the Portfolio Managers, and the Portfolio Managers’ ownership of securities in the Funds.
| HOW SHARES ARE PRICED |
The price of each Fund’s shares is based on the Fund’s NAV. Each Fund’s NAV is calculated on each day that the New York Stock Exchange (“NYSE”) is open. The NYSE is closed on weekends and most national holidays. The calculated and reported NAV of a Fund is the value of a single share of the Fund. The NAV is calculated for each Fund at the close of business of the NYSE, normally 4:00 p.m. Eastern time (“Valuation Time”), and the price at which a purchase or redemption of a Fund share is effected is based on the next calculation of net asset value after the order is placed. Each Fund’s NAV is determined by subtracting the total of a Fund’s liabilities from its total assets and dividing the remainder by the number of shares outstanding. Due to the fact that different expenses are charged to the Advisor Class, Institutional Class and Investor Class shares of a Fund, the NAV of the three classes of a Fund may vary. The value of a Fund’s total assets is generally based on the market value of the securities that a Fund holds. Fund portfolio securities, which are traded on a national securities exchange, are valued at the last quoted sale price. NASDAQ traded securities are valued using the NASDAQ official closing price (NOCP). Certain short-term securities are valued on the basis of amortized cost. Foreign securities may be traded in their primary markets on weekends or other days when a Fund does not price its shares. Similarly, when the Funds hold securities traded in foreign markets that close prior to U.S. markets then significant events, including company-specific developments or broad market moves, may affect the value of foreign securities held by the Funds. Therefore, the NAV of a Fund holding foreign securities may change on days when shareholders will not be able to buy or redeem their Fund shares. The Funds normally use third party pricing services to obtain market quotations.
If a security does not have a readily available market quotation, Horizon values the security based on fair value, as determined in good faith in accordance with the guidelines established by the Funds’ Board of Trustees (the “Board”). The types of securities for which fair value pricing is required include, but are not limited to:
| • | Securities for which market quotations are insufficient or not readily available at the Valuation Time on a particular Business Day (including securities for which there is a short and temporary lapse in the provision of a price by the regular pricing source); |
| • | Securities for which, in the judgment of Horizon, the prices or values available do not represent the fair value of the instrument. Factors which may cause Horizon to make such a judgment include, but are not limited to, the following: only a bid price or an asked price is available; the spread between bid and asked prices is substantial; the frequency of sales; the thinness of the market; the size of reported trades; and actions of the securities markets, such as the suspension or limitation of trading; |
| • | Securities determined to be illiquid; and |
| • | Securities with respect to which an event that will affect the value thereof has occurred since the closing prices were established on the principal exchange on which they are traded, but prior to a Fund’s calculation of its NAV. |
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Fair value pricing should result in a more accurate determination of a Fund’s NAV, which should eliminate the potential for arbitrage in the Fund. However, valuing securities at fair value involves greater reliance on judgment than securities that have readily available market quotations. There can be no assurance that the Funds could purchase or sell a portfolio security at the price used to calculate the Funds’ NAVs. In the case of fair valued portfolio securities, lack of information and uncertainty as to the significance of information may lead to a conclusion that a prior valuation is the best indication of a portfolio security’s present value. Fair valuations may remain unchanged until new information becomes available. Consequently, changes in the fair valuation of portfolio securities may be less frequent and of greater magnitude than changes in the price of portfolio securities valued by an independent pricing service, or based on market quotations.
Fair valuation of a Fund’s portfolio securities can serve to reduce arbitrage opportunities available to short term traders, but there is no assurance that fair value pricing policies will prevent dilution of a Fund’s NAV by short-term traders. There is no assurance that a Fund will obtain the fair value assigned to a security if it were to sell such security while it is fair valued.
With respect to any portion of the Funds’ assets that are invested in one or more open-end management investment companies that are registered under the Investment Company Act of 1940 (the “1940 Act”), each Fund’s NAV is calculated based upon the NAV of the registered open-end management investment companies in which a Fund invests, and the prospectuses for these companies explain the circumstances under which those companies will use fair value pricing and the effects of using fair value pricing.
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| HOW TO PURCHASE SHARES |
Choosing a Class
Each Fund has authorized three classes of shares, Advisor Class, Institutional Class and Investor Class. Each class of shares is designed for specific investors. Not all classes are currently being offered for sale.
If you are making your initial investment in a Fund, you must select a class of shares. Each class represents an interest in the same portfolio of securities and each has the same rights with one exception. Pursuant to the 1940 Act, you will have exclusive voting rights with respect to the Distribution Plan pursuant to Rule 12b-1, if any, for the class you choose.
Different share classes allow you to choose the class that will be most beneficial to you. Your decision should depend upon a number of factors including the amount you purchase and the length of time you plan to hold the shares. All share classes are not available to all investors. Your financial consultant can assist you in determining which class is best for you. Because all future investments in your account will be made in the share class you designate when opening the account, you should make your decision carefully.
12b-1 Plans. The Board of Trustees of the Funds has adopted, on behalf of the Advisor Class shares of each Fund, and on behalf of the Investor Class shares of the Equity Premium Income Fund, Defined Risk Fund, Multi-Factor U.S. Equity Fund, Defensive Core Fund, Multi-Factor Small/Mid Cap Fund, and Tactical Income Fund, a Distribution Plan pursuant to Rule 12b-1 under the 1940 Act (the “12b-1 Plan”). The 12b-1 Plan allows a Fund to use part of its assets for the sale and distribution of these Shares, including advertising, marketing and other promotional activities, as well as shareholder servicing. For these services, under the 12b-1 Plan, each Fund is authorized to pay the Distributor a distribution fee at the rate of up to 0.25% of average net assets attributable to Advisor Class shares and 0.10% of the average net assets attributable to Investor Class shares, as applicable, of that Fund on an annualized basis. The Distributor may use monies authorized by the 12b-1 Plan to compensate other parties that have entered into selling and/or shareholder servicing agreements with Distributor with respect to the distribution of Fund shares. Because these distribution and shareholder service fees are paid out of a Fund’s assets on an ongoing basis, the fees under the 12b-1 Plan may, over time, increase the cost of investing in that Fund and cost investors more than other types of sales loads.
Shareholder Servicing. The Board of Trustees of the Funds has adopted, on behalf of the Investor Class shares of the Allocation Fund, Risk Assist Fund and Income Fund, a shareholder serving plan (the “Shareholder Servicing Plan”). The Shareholder Servicing Plan allows each of the Allocation Fund, Risk Assist Fund and Income Fund to use part of its assets for shareholder servicing expenses. Payments under the Shareholder Servicing Plan may vary and are determined by each of the Allocation Fund, Risk Assist Fund and Income Fund in its sole discretion, in amounts up to 0.10% of that Fund’s average daily net assets attributable to Investor Class shares of that Fund on an annualized basis. Payments under the Shareholder Servicing Plan are made for the provision of support services to shareholders, including administrative or other shareholder support services such as responding to customer inquiries or assisting that Fund in establishing or maintaining shareholder accounts and records. The entities providing shareholder services may provide such services directly, or may arrange for such services to be provided by another entity that has a servicing relationship with one or more shareholders. However, payments under the Shareholder Servicing Plan are an operating expense of a Fund that is subject to the expense limitation provided by Horizon.
Advisor Class
Advisor Class shares are offered without any sales charges, and are not subject to shareholder servicing fees but are subject to a 0.25% 12b-1 fee.
Investor Class
Allocation Fund, Risk Assist Fund and Income Fund. Investor Class shares of the Allocation Fund, Risk Assist Fund and Income Fund are offered only through financial intermediaries that have been approved by the Funds and are not subject to any 12b-1 fees, but may be subject to shareholder servicing fees as described above.
Dividend Fund and Defined Risk Fund. Investor Class shares of the Equity Premium Income Fund, Defined Risk Fund, Multi-Factor U.S. Equity Fund, Defensive Core Fund, Multi-Factor Small/Mid Cap Fund and Tactical Income Fund are offered only through financial intermediaries that have been approved by the Funds and are subject to a 12b-1 fee of up to 0.10%, but are not subject to the Shareholder Servicing Plan.
Please refer to your financial representative for detailed information on purchasing Investor Class shares of any Fund.
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Institutional Class
Institutional Class shares are offered without any sales charges, and are not subject to any 12b-1 or shareholder servicing fees.
Additional Information Regarding the Purchase of Shares
All checks must be in U.S. Dollars drawn on a domestic bank. The Funds will not accept payment in cash or money orders. The Funds do not accept post-dated checks or any conditional order or payment. To prevent check fraud, the Funds will not accept third party checks, Treasury checks, credit card checks, traveler’s checks or starter checks for the purchase of shares.
The Transfer Agent will charge a $25 fee against a shareholder’s account, in addition to any loss sustained by a Fund, for any payment that is returned. It is the policy of the Funds not to accept applications under certain circumstances or in amounts considered disadvantageous to shareholders. The Funds reserve the right to reject any application.
To buy shares of the Funds, complete an account application and send it together with your check for the amount you wish to invest in the Funds to the address below. To make additional investments once you have opened your account, write your account number on the check and send it together with the Invest by Mail form from your most recent confirmation statement received from the transfer agent. If you do not have the Invest by Mail form, include the Fund name, address, and account number on a separate piece of paper along with your check. If you are purchasing Shares, you may send your purchase request to:
By Regular Mail
Horizon Funds
c/o U.S. Bank Global Fund Services
P.O. Box 701
Milwaukee, WI 53201-0701
By Overnight Delivery
Horizon Funds
c/o U.S. Bank Global Fund Services
615 East Michigan Street, 3rd Floor
Milwaukee, WI 53202
The Funds do not consider the U.S. Postal Service or other independent delivery services to be their agents. Therefore, deposit in the mail or with such services, or receipt at the Transfer Agent’s post office box, of purchase orders or redemption request does not constitute receipt by the Transfer Agent or the Funds. Receipt of purchase orders or redemption requests is based on when the order is received at the Transfer Agent’s offices.
For initial purchases by wire
If you are making your first investment in the Funds, before you wire funds, the Transfer Agent must have a completed account application. You may mail or overnight deliver your account application to the Transfer Agent. Upon receipt of your completed account application, the Transfer Agent will establish an account for you. The account number assigned will be required as part of the instruction that should be provided to your bank to send the wire. Your bank must include both the name of the Fund you are purchasing, the account number, and your name so that monies can be correctly applied. Your bank should transmit funds by wire to:
U.S. Bank, N.A.
777 East Wisconsin Avenue
Milwaukee, WI 53202
ABA #075000022
Credit:
U.S. Bancorp Fund Services, LLC
Account #112-952-137
Further Credit:
(name of Fund to be purchased)
(shareholder registration)
(shareholder account number)
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For subsequent investment by wire
Before sending your wire, please contact the Transfer Agent to advise them of your intent to wire funds. This will ensure prompt and accurate credit upon receipt of your wire.
Wired funds must be received prior to 4:00 p.m. Eastern time to be eligible for same day pricing. The Funds and U.S. Bank, N.A. are not responsible for the consequences of delays resulting from the banking or Federal Reserve wire system, or from incomplete wiring instructions.
Telephone Purchases
Investors may purchase additional shares of the Funds by calling 1-855-754-7932. If you elected this option on your account application, and your account has been open for at least 7 business days, telephone orders will be accepted via electronic funds transfer from your bank account through the Automated Clearing House (ACH) network. You must have banking information established on your account prior to making a purchase. If you order is received prior to 4 p.m. Eastern time, your shares will be purchased at the net asset value calculated on the day your order is placed.
Telephone trades must be received by or prior to market close. During periods of high market activity, shareholders may encounter higher than usual call waits. Please allow sufficient time to place your telephone transaction.
Automatic Investment Plan (AIP)
Once your account has been opened with the initial minimum investment you may make additional purchases at regular intervals through the Automatic Investment Plan. This Plan provides a convenient method to have monies deducted from your bank account, for investment into the Fund, on a monthly basis. In order to participate in the Plan, each purchase must be in the amount of $100 or more, and your financial institution must be a member of the Automated Clearing House (ACH) network. If your bank rejects your payment, the Fund’s transfer agent will charge a $25 fee to your account. To begin participating in the Plan, please complete the Automatic Investment Plan section on the account application or call the Fund’s transfer agent at 1-855-754-7932 for instructions. Any request to change or terminate your Automatic Investment Plan should be submitted to the transfer agent 5 days prior to the effective date.
| HOW TO REDEEM SHARES |
You have the right to sell (“redeem”) all or any part of your shares subject to certain restrictions. Selling your shares in a Fund is referred to as a “redemption” because the Funds buy back their shares. We will redeem your shares at a price per share equal to the NAV next computed following receipt of your redemption request in good order. See the section entitled “Redemption Procedures Request in Good Order”.
The Funds typically expect to meet redemption requests by paying out proceeds from cash or cash equivalent portfolio holdings, or by selling portfolio holdings. In stressed market conditions, redemption methods may include redeeming in kind. We will mail your redemption proceeds to your address of record, or, if previously established on your account, you may have proceeds sent by wire or electronic funds transfer through the ACH network directly to your bank account. Wires are subject to a $15 fee paid by the investor and your bank may charge a fee to receive wired funds. You do not incur any charge when proceeds are sent via the ACH network; however, credit may not be available in your bank account for two to three days.
The Funds typically send the redemption proceeds on the next business day (a day when the NYSE is open for normal business) after the redemption request is received in good order and prior to market close, regardless of whether the redemption proceeds are sent via check, wire, or ACH transfer. Under unusual circumstances, the Funds may suspend redemptions, or postpone payment for up to seven days, as permitted by federal securities law. If you purchase shares by check or electronic funds transfer through the ACH network and, soon after, request a redemption, your redemption request will not be processed until the purchase amount has cleared (usually within 10 calendar days). This delay will not apply if you purchased your shares via wire payment.
The Funds cannot accept requests that specify a certain date for redemption or which specify any other special conditions. Redemption proceeds must be payable to the registered shareholder(s) of the account or to a financial intermediary for the benefit of the registered shareholder(s) of the account. Please call 1-855-754-7932 for further information. We will not process your redemption request if it is not in good order. We will notify you if your redemption request is not in good order.
If, as a result of your redemption, your account value drops below $2,500, we may redeem the remaining shares in your account. We will notify you in writing of our intent to redeem your shares. We will allow at least sixty days thereafter for you to make an additional investment to bring your account value up to at least the minimum amount before we will process the redemption.
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Systematic Withdrawal Plan
For Investor Class shares, please refer to your financial representative for detailed information on whether your financial representative’s firm is participating in the Funds’ systematic withdrawal plan. Generally, a Fund will mail your redemption proceeds to your address of record or transmit them electronically to your designated bank account. Except under certain extraordinary conditions, we will send your redemption to you within seven days after we receive your redemption request. If you purchase shares by check and, soon after, request a redemption, your redemption request will not be processed until the check used for your purchase has cleared (usually within 10 calendar days). Generally, if your current account value is at least $10,000, you may adopt a Systematic Withdrawal Plan to provide for monthly, quarterly or other periodic checks for any designated amount of $100 or more.
For Advisor Class, Investor Class and Institutional Class shares, if your current account value is at least $10,000, you may adopt a Systematic Withdrawal Plan to provide for monthly, quarterly or other periodic checks for any designated amount of $100 or more. If you wish to open a Systematic Withdrawal Plan, please indicate on your application or contact the Funds at 1-855-754-7932 for instructions. You may also elect to modify or terminate your participation in this Plan at any time by contacting the transfer agent at least 5 days prior to the next scheduled withdrawal.
Signature Guarantees
Under certain circumstances, your redemption request must be accompanied by a signature guarantee. Signature guarantees will generally be accepted from domestic banks, brokers, dealers, credit unions, national securities exchanges, registered securities associations, clearing agencies and savings associations, as well as from participants in the New York Stock Exchange Medallion Signature Program and the Securities Transfer Agents Medallion Program (“STAMP”). A notary public is not an acceptable signature guarantor.
A signature guarantee, from either a Medallion program member or a non-Medallion program member, is required in the following situations:
| • | If ownership is being changed on your account; |
| • | When redemption proceeds are payable or sent to any person, address or bank account not on record; |
| • | When a redemption request is received by the Transfer Agent and the account address has changed within the last 30 calendar days; |
| • | For all redemptions in excess of $50,000 from any shareholder account. |
A Fund may waive any of the above requirements in certain instances. In addition to the situations described above, the Fund(s) and/or the Transfer Agent reserve the right to require a signature guarantee in other instances based on the circumstances relative to the particular situation.
Non-financial transactions, including establishing or modifying certain services on an account, may require a signature guarantee, signature verification from a Signature Validation Program member, or other acceptable form of authentication from a financial institution source.
Third Party Transactions
The Funds have authorized certain financial intermediaries to accept on their behalf purchase and redemption orders. The Funds will be deemed to have received the order when an approved financial intermediary or an authorized designee accepts your order. Your order will be priced per share at that Fund’s NAV next computed after it is received by an approved financial intermediary or its authorized designee.
If you buy and redeem shares of the Funds through a member of the Financial Industry Regulatory Authority, Inc. that member may charge you a fee for that service. The Funds have authorized one or more brokers to accept on their behalf purchase and redemption orders. Such brokers are authorized to designate intermediaries to accept orders on the Funds’ behalf. The Funds will be deemed to have received the order when an authorized broker or a broker authorized designee accepts your order. Your order will be priced per share at that Fund’s NAV next computed after it is received by the authorized broker or broker authorized designee.
Horizon may pay certain financial institutions (which may include banks, brokers, securities dealers and other industry professionals) a fee for providing distribution related services and/or for performing certain administrative and servicing functions for Fund shareholders and/or making the Funds available for purchase on their platforms. However, distribution-related fees are made from Horizon and are not charged to the Funds, unless part of an approved 12b-1 Plan.
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Redemptions in Kind
The Funds reserve the right to honor requests for redemption or repurchase orders by making payment in whole or in part in readily marketable securities (“redemption in kind”) if the amount of such a request is large enough to affect operations (for example, if the request is greater than $250,000 or 1% of a Fund’s assets). The securities will be chosen by each Fund and be valued at an amount equal to the net asset value of the shares being redeemed. A shareholder may incur transaction expenses in subsequently converting these securities to cash.
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Method of Redemption |
Redemption Procedures |
| By Telephone |
You may authorize redemption of some or all shares in your account with each Fund by telephoning the Funds at 1-855-754-7932. between 8:30 a.m. and 4:00 p.m. Eastern time on any day the Funds are open. You will NOT be eligible to use the telephone redemption service if you: • have declined or canceled your telephone investment privilege; • wish to redeem shares valued in excess of $50,000 or if you ask us to send the redemption proceeds using an address, bank instructions, or payee other than what is currently on file; • must provide supporting legal documents such as a signature guarantee for redemption; or • wish to redeem from certain type of retirement accounts. |
| By Mail |
If you are redeeming Shares, you may send your redemption request to:
By Regular Mail Horizon Funds c/o U.S. Bank Global Fund Services P.O. Box 701 Milwaukee, WI 53201-0701
By Overnight Delivery Horizon Funds c/o U.S. Bank Global Fund Services 615 East Michigan Street, 3rd Floor Milwaukee, WI 53202
You must include the following information in your written request: • a letter of instruction stating the name of the Fund, the number of shares or dollar amount you are redeeming, the names in which the account is registered and your account number; • other supporting legal documents, if necessary, for redemption requests by corporations, trusts and partnerships; • a signature guarantee, if necessary. |
| By Wire | You may request your redemption proceeds be wired directly to the bank account designated on your application. The Funds’ Transfer Agent will charge you a $15.00 fee for each wire redemption. The Transfer Agent will deduct the fee from your redemption proceeds for complete and share certain redemptions and directly from your account in the case of a partial redemption. Your bank may also impose a fee for the incoming wire. |
| Request in “Good Order” |
For our mutual protection, all redemption requests must include: • your account number; • the amount of the transaction; • for mail request, signatures of all owners EXACTLY as registered on the account and signature guarantees, if required (signature guarantees can be obtained at most banks, credit unions, and licensed brokers); and • any supporting legal documentation that may be required. Your redemption request will be processed at the next determined share price after we have received all required information. |
|
IMPORTANT NOTE |
Once we have processed your redemption request, and a confirmation number has been given, the transaction cannot be revoked. |
Other Redemption Considerations
Shareholders who have an individual retirement account (“IRA”) or other retirement plan must indicate on their written redemption request whether or not to withhold federal income tax. Redemption requests failing to indicate an election not to have tax withheld will generally be subject to 10% withholding. Shares held in IRA or other retirement plan accounts may be redeemed by telephone at 1-855-754-7932. Investors will be asked whether or not to withhold taxes from any distribution.
The Funds do not consider the U.S. Postal Service or other independent delivery services to be their agents. Therefore, deposit in the mail or with such services, or receipt at the Transfer Agent’s post office box, of purchase orders or redemption requests does not constitute receipt by the Transfer Agent or the Funds. Receipt of purchase orders or redemption requests is based on when the order is received at the Transfer Agent’s offices.
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Options For Redemption Proceeds
You may receive your redemption proceeds by check, ACH transfer, or wire.
Check Redemptions. Normally we will mail your check within two business days of a redemption.
ACH Redemptions. Before you can receive redemption proceeds by ACH, you must establish this option by completing a special form or the appropriate section of your account application.
Wire Redemptions. Before you can receive redemption proceeds by wire, you must establish this option by completing a special form or the appropriate section of your account application.
You may request that your redemption proceeds be wired directly to your bank account. The Funds’ Transfer Agent imposes a $15.00 fee for each wire redemption and deducts the fee directly from your account. Your bank may also impose a fee for the incoming wire. The redemption proceeds must be paid to the same bank and account as designated on the application or in written instructions in proper form subsequently received by the Fund.
Telephone Redemptions
We will automatically establish the telephone redemption option for your account, unless you instruct us otherwise in writing. Telephone redemptions are easy and convenient, but this account option involves a risk of loss from unauthorized or fraudulent transactions. We will take reasonable precautions to protect your account from fraud. You should do the same by keeping your account information private and by reviewing immediately any account statements and confirmations that you receive. Please contact us immediately about any transaction you believe to be unauthorized.
The Funds reserve the right to refuse a telephone redemption if the caller cannot provide:
| • | the account number |
| • | the name and address exactly as registered on the account |
| • | the primary social security or employer identification number as registered on the account |
The Funds will not be responsible for any account losses due to telephone fraud, so long as we have taken reasonable steps to verify the caller’s identity. If an account has more than one owner or authorized person, the Funds will accept telephone instructions from any one owner or authorized person. Once a telephone transaction has been placed, it cannot be canceled or modified after the close of regular trading on the NYSE (generally, 4:00 p.m., Eastern time). If you wish to cancel the telephone redemption feature for your account, please notify us in writing.
Limitation On Purchases and Redemptions
Purchases or sales of shares of the Funds should not be used to try to take advantage of short-term swings in the market. Frequent purchase and sale transactions create higher expenses for the Fund. Accordingly, the Funds reserve the right to limit or terminate the ability to purchase shares of the Funds for any shareholder making frequent purchases or sales.
Transferring Registration
You can transfer the registration of your shares in the Funds to another owner by completing a transfer form and sending it to the Horizon Funds, c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee, WI 53201-0701. Generally, a signature guarantee is required for all transfers.
Other Purchase Information
Each Fund reserves the right, in its sole discretion, to suspend the offering of its shares or any class thereof, to reject any purchase order or to waive any minimum investment requirements.
Purchases of each Fund’s shares will be made in full and fractional shares of the Fund calculated to three decimal places. In the interest of economy and convenience, certificates for shares will not be issued.
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Policy on prohibition of Foreign Shareholders
Shares of the Funds have not been registered for sale outside of the United States. Accordingly, the Funds generally require that all shareholders must be U.S. persons with a valid U.S. taxpayer identification number to open an account with the Funds. The Funds generally do not sell shares to investors residing outside the United States, even if they are United States citizens or lawful permanent residents, except to investors with United States military APO or FPO addresses. In the rare event that the Transfer Agent is unable to verify your identity, the Fund reserves the right to redeem your account at the current day’s net asset value.
Lost Shareholders, Inactive Accounts and Unclaimed Property
It is important that the Funds maintain a correct address for each shareholder. An incorrect address may cause a shareholder’s account statements and other mailings to be returned to the Funds. Based upon statutory requirements for returned mail, a Fund will attempt to locate the shareholder or rightful owner of the account. If the Fund is unable to locate the shareholder, then it will determine whether the shareholder’s account can legally be considered abandoned. Your mutual fund account may be transferred to the state government of your state of residence if no activity occurs within your account during the “inactivity period” specified in your state’s abandoned property laws. The Funds are legally obligated to escheat (or transfer) abandoned property to the appropriate state’s unclaimed property administrator in accordance with statutory requirements. The shareholder’s last known address of record determines which state has jurisdiction. Please proactively contact the Transfer Agent at 1-855-754-7932 (toll free) at least annually to ensure your account remains in active status.
If you are a resident of the state of Texas, you may designate a representative to receive notifications that, due to inactivity, your mutual fund account assets may be delivered to the Texas Comptroller. Please contact the Transfer Agent if you wish to complete a Texas Designation of Representative form.
| HOW TO EXCHANGE SHARES |
Exchanges of all or a portion of your investment from a Fund for shares in an identically registered account of another Horizon Fund may be made as long as the exchange is for the same class of shares of the other Horizon Fund. Any new account established through an exchange will be subject to the minimum investment requirements described above. Exchanges will be executed on the basis of the relative NAV of the shares exchanged after your request for an exchange is received. An exchange is considered to be a sale of shares for federal income tax purposes on which you may realize a taxable gain or loss. Call the Funds to learn more about exchanges. If you purchased shares of a Fund through your financial intermediary, please contact your financial intermediary to determine if you may take advantage of the exchange policies described in this section and for your financial intermediary’s policies to effect an exchange.
The Funds are intended as a long-term investment vehicle and not to provide a means of speculating on short-term market movements. In addition, excessive trading can hurt the Funds’ performance and shareholders. Therefore, each Fund may terminate, without notice, the exchange privilege of any investor who uses the exchange privilege excessively. The Funds may change or temporarily suspend the exchange privilege during unusual market conditions.
| TAX STATUS, DIVIDENDS AND DISTRIBUTIONS |
As a Fund shareholder, you are entitled to your share of that Fund’s net income and capital gains on its investments. Each Fund passes substantially all of its earnings along to its investors as distributions. When a Fund earns dividends from stocks and interest from bonds and other debt securities and distributes these earnings to shareholders, it is called a dividend. Each Fund realizes capital gains when it sells securities for a higher price than it paid. When net long-term capital gains are distributed to shareholders, it is called a capital gain distribution. Net short-term capital gains are considered ordinary income and are included in dividends.
Long-Term vs. Short-Term Capital Gains
| • | Long-term capital gains are realized on securities held for more than one year and are part of your capital gain distribution. |
| • | Short-term capital gains are realized on securities held less than one year and are part of your dividends. |
The Active Asset Allocation Fund, Active Risk Assist Fund, Defined Risk Fund, Multi-Factor U.S. Equity Fund, Defensive Core Fund, and Multi-Factor Small/Mid Cap Fund each distribute dividends annually. The Active Income Fund and Tactical Income Fund distribute dividends quarterly. The Equity Premium Income Fund distributes dividends monthly. Each Fund distributes capital gains annually. These distributions are typically declared and paid in December, and are taxable as if paid on December 31st of the year declared. A Fund may make an additional distribution if necessary to avoid federal income taxes, excise taxes, or as otherwise approved by the Board of Trustees. The Internal Revenue Service {“IRS”) requires you to report these amounts on your income tax return for the year declared.
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You will receive distributions from the Funds in additional shares of the Funds unless you choose to receive your distributions in cash. If you wish to change the way in which you receive distributions, please contact your financial representative for instructions.
If an investor elects to receive distributions in cash and the U.S. Postal Service cannot deliver your check, or if a check remains uncashed for six months, the Funds reserve the right to reinvest the amount of the distribution check in the shareholder’s account at the distributing Fund’s then current NAV per share and to reinvest all subsequent distributions. You may change your distribution option in writing or by telephone. Any request for change should be submitted at least 5 days prior to the record date of the next distribution.
Federal Tax Considerations
The following information is meant as a general summary for U.S. taxpayers (other than U.S. investors who hold their shares in an IRA or other tax-qualified plan). Additional tax information appears in the SAI. Shareholders should rely on their own tax advisors for advice about the particular federal, state, and local tax consequences of investing in the Fund.
Taxes on Distributions. You may be subject to federal income tax on all Fund distributions. Your distributions will be taxed in the same manner whether you receive the distributions in cash or additional shares of the Funds making the distribution. Distributions that are derived from net long-term capital gains will generally be taxed as long-term capital gains. The rate of tax will depend on how long the Funds held the securities on which it realized the gains. In general, for individual shareholders, the maximum long-term capital gain rate is 20 percent. All other distributions, including short-term capital gains, will be taxed as ordinary income. Each Fund sends detailed tax information to its shareholders about the amount and type of its distributions by January 31st for the prior calendar year.
You may also be subject to state and local taxes on all dividends, other distributions each Fund declares, and redemption proceeds.
Taxes on Sales. If you redeem your shares of a Fund, you may be subject to tax on any taxable gain. Your taxable gain or loss is computed by subtracting your tax basis in the shares from the redemption proceeds. Because your tax basis depends on the original purchase price and on the price at which any dividends may have been reinvested, you should keep your account statements so that you or your tax preparer will be able to determine whether a sale or exchange will result in a taxable gain or loss. All or a portion of any loss realized upon a taxable disposition of Fund shares will be disallowed if you purchase other substantially identical shares within 30 days before or 30 days after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
“Buying a Dividend”. Unless your investment is in a tax-deferred account, such as an IRA, you may want to avoid investing in the Funds close to the date of a distribution because you will pay the full pre-distribution price for your shares and then receive part of your investment back as a taxable distribution. This is known as “buying a dividend”. We recommend you consult with your independent tax advisor to determine the federal, state, and local tax consequences of “buying a dividend”.
Tax Withholding. The Funds may be required to withhold U.S. federal income tax at the rate of 24% from all taxable distributions and from proceeds from certain sales and exchanges payable to shareholders who fail to provide the Funds with their correct taxpayer identification number or to make required certifications, or who have been notified by the IRS that they are subject to backup withholding. Any such withheld amounts may be credited against the shareholder’s U.S. federal income tax liability.
Medicare Tax. Certain U.S. shareholders, including individuals and estates and trusts, will be subject to an additional 3.8% Medicare tax on all or a portion of their “net investment income”, which should include dividends from the Funds and net gains from the disposition of shares of the Fund. U.S. shareholders are urged to consult their own tax advisors regarding the implications of the additional Medicare tax resulting from an investment in the Fund.
Cost Basis. A shareholder’s basis in shares of a Fund that he or she acquires (“Covered Shares”) will be determined in accordance with the Funds’ default method, which is average basis, unless the shareholder affirmatively elects in writing, which may be electronic, to use a different acceptable basis determination method, such as a specific identification method. Each Fund, or its administrative agent, must report to the IRS and furnish to its shareholders the basis information for Covered Shares. Fund shareholders should consult with their tax advisers to determine the best IRS-accepted basis determination method for their tax situation and to obtain more information about how the basis reporting law applies to them.
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| FREQUENT PURCHASES AND REDEMPTIONS OF SHARES |
The Board has adopted policies and procedures with respect to frequent purchases and redemptions of Fund shares by Fund shareholders and discourages market timing. Market timing is an investment strategy using frequent purchases, redemptions and/or exchanges in an attempt to profit from short-term market movements. Market timing may disrupt portfolio management strategies and hurt Fund performance. Such practices may dilute the value of Fund shares, interfere with the efficient management of the Funds’ investments, and increase brokerage and administrative costs. The Funds may reject purchase orders or temporarily or permanently revoke privileges if there is reason to believe that a shareholder is engaging in market timing activities. Brokers maintaining omnibus accounts with the Funds have agreed to provide shareholder transaction information, to the extent known to the broker, to the Funds upon request. The Funds do not accommodate frequent purchases and redemptions of Fund shares by Fund shareholders.
To prevent disruption in the management of the Fund, excessive trading or exchange activity is limited. An investor’s right to purchase additional shares may be revoked if the redemption or exchange activity is considered excessive. Generally, trading or exchange activity is considered excessive if an exchange or redemption in excess of a predetermined dollar amount occurs within 7 calendar days of purchase.
The Funds may accept redemptions and exchanges in excess of the above guidelines if they believe that granting such exceptions is in the best interest of the Funds and the redemption is not part of a market timing strategy.
It is a violation of policy for an officer or Trustee of the Funds to knowingly facilitate a purchase or redemption where the shareholder executing the transaction is engaged in any activity which violates the terms of the Funds’ Prospectus or Statement of Additional Information, and/or is considered not to be in the best interests of the Funds or their other shareholders.
Each Fund will apply its policies and procedures uniformly to all Fund shareholders. Although the Funds intend to deter market timing, there is no assurance that they will be able to identify and eliminate all market timers. For example, certain accounts called “omnibus accounts” include multiple shareholders. Omnibus accounts typically provide the Funds with a net purchase or redemption request on any given day where purchasers of the Funds’ shares and redeemers of the Funds’ shares are netted against one another and the identities of individual purchasers and redeemers whose orders are aggregated are not known by the Fund. The netting effect often makes it more difficult for the Funds to detect market timing, and there can be no assurance that the Funds will be able to do so. Therefore, with respect to Omnibus accounts, the Funds rely on selling group members to enforce the Funds’ market timing policies and procedures. Omnibus account arrangements are common forms of holding shares of the Funds. While the Funds will encourage financial intermediaries to apply the Funds’ Market Timing Trading Policy to their customers who invest indirectly in the Funds, the Funds are limited in its ability to monitor the trading activity or enforce the Funds’ Market Timing Trading Policy with respect to customers of financial intermediaries. For example, should it occur, the Funds may not be able to detect market timing that may be facilitated by financial intermediaries or made difficult to identify in the omnibus accounts used by those intermediaries for aggregated purchases, exchanges, and redemptions on behalf of all their customers. More specifically, unless the financial intermediaries have the ability to apply the Funds’ Market Timing Trading Policy to their customers through such methods as implementing short-term trading limitations or restrictions and monitoring trading activity for what might be market timing, the Funds may not be able to determine whether trading by customers of financial intermediaries is contrary to the Funds’ Market Timing Trading Policy. However, the Funds will ensure that financial intermediaries maintaining omnibus accounts on behalf of the Funds enter into an agreement with the Funds to provide shareholder transaction information, to the extent know to the financial intermediary, to the Funds upon request.
Each Fund reserves the right to modify its policies and procedures at any time without prior notice as it deems in its sole discretion to be in the best interests of its shareholders, or to comply with state or Federal legal requirements.
Anti-Money Laundering Program
In compliance with the USA Patriot Act of 2001, please note that the Transfer Agent will verify certain information on your Account Application as part of the Fund’s Anti-Money Laundering Program. As requested on the Application, you must supply your full name, date of birth, social security number and permanent street address. If you are opening the account in the name of a legal entity (e.g., partnership, limited liability company, business trust, corporation, etc.), you must also supply the identity of the beneficial owners. Mailing addresses containing only a P.O. Box will not be accepted. Please contact the Transfer Agent at 1-855-754-7932 if you need additional assistance when completing your Application.
If we do not have a reasonable belief of the identity of a customer, the account will be rejected or the customer will not be allowed to perform a transaction on the account until such information is received. In the rare event that the Transfer Agent is unable to verify your identity, the Fund reserves the right to redeem your account at the current day’s net asset value.
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| HOUSEHOLDING |
To reduce expenses, the Trust mails only one copy of the prospectus and other similar documents to those addresses shared by two or more accounts. If you wish to receive individual copies of these documents, please call the Funds at 1-855-754-7932 between the hours of 8:30 a.m. and 6:00 p.m. Eastern time on days the Funds are open for business or contact your financial institution. The Trust will begin sending you individual copies thirty days after receiving your request.
| ADDITIONAL INFORMATION |
The Trust enters into contractual arrangements with various parties, including among others, the Funds’ investment adviser, principal underwriter, custodian and transfer agent, who provide services to the Funds. Shareholders are not parties to any such contractual arrangements or intended beneficiaries of those contractual arrangements, and those contractual arrangements are not intended to create in any shareholder any right to enforce them against the service providers or to seek any remedy under them against the service providers, either directly or on behalf of the Trust.
This prospectus provides information concerning the Funds that you should consider in determining whether to purchase Fund shares. Neither this prospectus nor the Statement of Additional Information is intended, or should be read, to be or give rise to an agreement or contract between the Trust, the Trustees or any Fund and any investor, or to give rise to any rights in any shareholder or other person other than any rights under federal or state law that may not be waived.
INDEX PROVIDER
MSCI, Inc. (“MSCI”) is the Index Provider to the Defensive Core Fund. MSCI compiles, maintains and calculates the Index. MSCI is not affiliated with the Funds, the Adviser or the Distributor.
THIS FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY MSCI INC. (“MSCI”), ANY OF ITS AFFILIATES, ANY OF ITS INFORMATION PROVIDERS OR ANY OTHER THIRD PARTY INVOLVED IN, OR RELATED TO, COMPILING, COMPUTING OR CREATING ANY MSCI INDEX (COLLECTIVELY, THE “MSCI PARTIES”). THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAMES ARE SERVICE MARK(S) OF MSCI OR ITS AFFILIATES AND HAVE BEEN LICENSED FOR USE FOR CERTAIN PURPOSES BY HORIZON. NONE OF THE MSCI PARTIES MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE ISSUER OR OWNERS OF THIS FUND OR ANY OTHER PERSON OR ENTITY REGARDING THE ADVISABILITY OF INVESTING IN FUNDS GENERALLY OR IN THIS FUND PARTICULARLY OR THE ABILITY OF ANY MSCI INDEX TO TRACK CORRESPONDING STOCK MARKET PERFORMANCE. MSCI OR ITS AFFILIATES ARE THE LICENSORS OF CERTAIN TRADEMARKS, SERVICE MARKS AND TRADE NAMES AND OF THE MSCI INDEXES WHICH ARE DETERMINED, COMPOSED AND CALCULATED BY MSCI WITHOUT REGARD TO THIS FUND OR THE ISSUER OR OWNERS OF THIS FUND OR ANY OTHER PERSON OR ENTITY. NONE OF THE MSCI PARTIES HAS ANY OBLIGATION TO TAKE THE NEEDS OF THE ISSUER OR OWNERS OF THIS FUND OR ANY OTHER PERSON OR ENTITY INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE MSCI INDEXES. NONE OF THE MSCI PARTIES IS RESPONSIBLE FOR OR HAS PARTICIPATED IN THE DETERMINATION OF THE TIMING OF, PRICES AT, OR QUANTITIES OF THIS FUND TO BE ISSUED OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY OR THE CONSIDERATION INTO WHICH THIS FUND IS REDEEMABLE. FURTHER, NONE OF THE MSCI PARTIES HAS ANY OBLIGATION OR LIABILITY TO THE ISSUER OR OWNERS OF THIS FUND OR ANY OTHER PERSON OR ENTITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR OFFERING OF THIS FUND.
ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE MSCI INDEXES FROM SOURCES THAT MSCI CONSIDERS RELIABLE, NONE OF THE MSCI PARTIES WARRANTS OR GUARANTEES THE ORIGINALITY, ACCURACY AND/OR THE COMPLETENESS OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI PARTIES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER OF THE FUND, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY, FROM THE USE OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI PARTIES SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS OF OR IN CONNECTION WITH ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. FURTHER, NONE OF THE MSCI PARTIES MAKES ANY EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, AND THE MSCI PARTIES HEREBY EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO EACH MSCI INDEX AND ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL ANY OF THE MSCI PARTIES HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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No purchaser, seller or holder of this security, product or fund, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCI’s permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI.
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| FINANCIAL HIGHLIGHTS |
The following financial highlights tables are intended to help you understand the financial performance of each Fund for the periods presented. Certain information reflects financial results for a single Fund share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in each Fund, assuming reinvestment of all dividends and distributions. The information presented in the tables below has been audited by Cohen & Company, Ltd., the Funds’ independent registered public accounting firm, whose report, along with the Funds’ financial statements, are included in the annual report, which is available upon request. The financial highlights tables on the following pages reflect selected per share data and ratios for a share outstanding of each Fund throughout each period.
No financial highlights are presented for the Institutional Class shares of the Defensive Core Fund, the Equity Premium Income Fund, the Defined Risk Fund, the Multi-Factor U.S. Equity Fund, the Multi-Factor Small/Mid Cap Fund, or the Tactical Fixed Income Fund the because they had not commenced operations prior to the fiscal year ended November 30, 2023.
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Horizon Active Asset Allocation Fund – Investor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Year Ended November 30, 2019 | ||||||||||||||||
| Net Asset Value, Beginning of Year | $ | 12.71 | $ | 16.17 | $ | 14.07 | $ | 12.61 | $ | 12.68 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income(b,e) | 0.08 | 0.15 | 0.06 | 0.09 | 0.08 | |||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | 0.63 | (1.42 | ) | 2.96 | 1.46 | 0.65 | ||||||||||||||
| Total from investment operations | 0.71 | (1.27 | ) | 3.02 | 1.55 | 0.73 | ||||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (0.13 | ) | (0.10 | ) | (0.07 | ) | (0.09 | ) | (0.08 | ) | ||||||||||
| From net realized gains | — | (2.09 | ) | (0.85 | ) | — | (0.72 | ) | ||||||||||||
| Total Distributions | (0.13 | ) | (2.19 | ) | (0.92 | ) | (0.09 | ) | (0.80 | ) | ||||||||||
| Net Asset Value, End of Year | $ | 13.29 | $ | 12.71 | $ | 16.17 | $ | 14.07 | $ | 12.61 | ||||||||||
| Total Return | 5.69 | % | (9.63 | %) | 22.63 | % | 12.32 | % | 7.23 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (in 000’s) | $ | 872,904 | $ | 761,418 | $ | 729,517 | $ | 521,477 | $ | 508,839 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(c,d) | 1.22 | % | 1.21 | % | 1.23 | % | 1.25 | % | 1.21 | % | ||||||||||
| Net expenses (a,c) | 1.18 | % | 1.14 | % | 1.14 | % | 1.20 | % | 1.24 | % | ||||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset(c,e) | 0.62 | % | 1.15 | % | 0.35 | % | 0.75 | % | 0.66 | % | ||||||||||
| Portfolio turnover rate | 247 | % | 139 | % | 142 | % | 208 | % | 279 | % | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | The ratio of expenses to average net assets includes interest expense which was 0.00%, 0.00%, 0.00%, 0.00%, and 0.01%, respectively. |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Does not reflect the expenses of the underlying funds in which the Fund invests. |
| (d) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (e) | Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the investment companies in which the Fund invests. |
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Horizon Active Asset Allocation Fund − Advisor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Year Ended November 30, 2019 | ||||||||||||||||
| Net Asset Value, Beginning of Year | $ | 12.64 | $ | 16.10 | $ | 14.01 | $ | 12.55 | $ | 12.62 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income (b,e) | 0.05 | 0.14 | 0.03 | 0.08 | 0.07 | |||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | 0.62 | (1.42 | ) | 2.95 | 1.45 | 0.65 | ||||||||||||||
| Total from investment operations | 0.67 | (1.28 | ) | 2.98 | 1.53 | 0.72 | ||||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (0.09 | ) | (0.09 | ) | (0.04 | ) | (0.07 | ) | (0.07 | ) | ||||||||||
| From net realized gains | — | (2.09 | ) | (0.85 | ) | — | (0.72 | ) | ||||||||||||
| Total Distributions | (0.09 | ) | (2.18 | ) | (0.89 | ) | (0.07 | ) | (0.79 | ) | ||||||||||
| Net Asset Value, End of Year | $ | 13.22 | $ | 12.64 | $ | 16.10 | $ | 14.01 | $ | 12.55 | ||||||||||
| Total Return | 5.44 | % | (9.76 | %) | 22.43 | % | 12.24 | % | 7.12 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (in 000’s) | $ | 1,907 | $ | 2,126 | $ | 3,893 | $ | 10,052 | $ | 7,879 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(c,d) | 1.42 | % | 1.36 | % | 1.38 | % | 1.41 | % | 1.39 | % | ||||||||||
| Net expenses(a,c) | 1.38 | % | 1.28 | % | 1.29 | % | 1.25 | % | 1.39 | % | ||||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset(c,e) | 0.46 | % | 1.11 | % | 0.21 | % | 0.63 | % | 0.57 | % | ||||||||||
| Portfolio turnover rate | 247 | % | 139 | % | 142 | % | 208 | % | 279 | % | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | The ratio of expenses to average net assets includes interest expense which was 0.00%, 0.00%, 0.00%, 0.00%, and 0.00%, respectively. |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Does not reflect the expenses of the underlying funds in which the Fund invests. |
| (d) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (e) | Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the investment companies in which the Fund invests. |
82
Horizon Active Asset Allocation Fund − Institutional Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Year Ended November 30, 2019 | ||||||||||||||||
| Net Asset Value, Beginning of Year | $ | 12.76 | $ | 16.23 | $ | 14.11 | $ | 12.64 | $ | 12.71 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income(b,e) | 0.09 | 0.14 | 0.08 | 0.12 | 0.10 | |||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | 0.64 | (1.40 | ) | 2.97 | 1.44 | 0.65 | ||||||||||||||
| Total from investment operations | 0.73 | (1.26 | ) | 3.05 | 1.56 | 0.75 | ||||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (0.14 | ) | (0.12 | ) | (0.08 | ) | (0.09 | ) | (0.10 | ) | ||||||||||
| From net realized gains | — | (2.09 | ) | (0.85 | ) | — | (0.72 | ) | ||||||||||||
| Total Distributions | (0.14 | ) | (2.21 | ) | (0.93 | ) | (0.09 | ) | (0.82 | ) | ||||||||||
| Net Asset Value, End of Year | $ | 13.35 | $ | 12.76 | $ | 16.23 | $ | 14.11 | $ | 12.64 | ||||||||||
| Total Return | 5.86 | % | (9.57 | %) | 22.82 | % | 12.44 | % | 7.33 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (in 000’s) | $ | 30,215 | $ | 25,595 | $ | 8,894 | $ | 1,732 | $ | 28,631 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(c,d) | 1.12 | % | 1.11 | % | 1.13 | % | 1.16 | % | 1.14 | % | ||||||||||
| Net expenses(a,c) | 1.08 | % | 1.04 | % | 1.05 | % | 1.01 | % | 1.16 | % | ||||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset(c,e) | 0.71 | % | 1.10 | % | 0.47 | % | 1.01 | % | 0.80 | % | ||||||||||
| Portfolio turnover rate | 247 | % | 139 | % | 142 | % | 208 | % | 279 | % | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | The ratio of expenses to average net assets includes interest expense which was 0.00%, 0.00%, 0.00%, 0.00%, and 0.00%, respectively. |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Does not reflect the expenses of the underlying funds in which the Fund invests. |
| (d) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (e) | Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the investment companies in which the Fund invests. |
83
Horizon Active Risk Assist® Fund − Investor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Year Ended November 30, 2019 | ||||||||||||||||
| Net Asset Value, Beginning of Year | $ | 20.71 | $ | 26.13 | $ | 21.74 | $ | 21.38 | $ | 21.69 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income(b,e) | 0.18 | 0.13 | 0.08 | 0.16 | (f) | 0.12 | ||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | 1.29 | (3.48 | ) | 4.39 | 0.42 | (f) | 0.33 | |||||||||||||
| Total from investment operations | 1.47 | (3.35 | ) | 4.47 | 0.58 | 0.45 | ||||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (0.11 | ) | (0.17 | ) | (0.08 | ) | (0.22 | ) | (0.12 | ) | ||||||||||
| From net realized gains | — | (1.90 | ) | — | — | (0.64 | ) | |||||||||||||
| Total Distributions | (0.11 | ) | (2.07 | ) | (0.08 | ) | (0.22 | ) | (0.76 | ) | ||||||||||
| Net Asset Value, End of Year | $ | 22.07 | $ | 20.71 | $ | 26.13 | $ | 21.74 | $ | 21.38 | ||||||||||
| Total Return | 7.13 | % | (14.24 | %) | 20.64 | % | 2.71 | % | 2.52 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (in 000’s) | $ | 1,158,227 | $ | 1,238,187 | $ | 1,156,627 | $ | 764,775 | $ | 738,854 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(c,d) | 1.21 | % | 1.19 | % | 1.22 | % | 1.25 | % | 1.20 | % | ||||||||||
| Net expenses(a,c) | 1.19 | % | 1.17 | % | 1.16 | % | 1.20 | % | 1.24 | % | ||||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset(c,e) | 0.83 | % | 0.58 | % | 0.34 | % | 0.81 | % | 0.60 | % | ||||||||||
| Portfolio turnover rate | 176 | % | 366 | % | 108 | % | 462 | % | 368 | % | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | The ratio of expenses to average net assets includes interest expense which was 0.01%, 0.00%, 0.00%, 0.00%, and 0.00%, respectively. |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Does not reflect the expenses of the underlying funds in which the Fund invests. |
| (d) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (e) | Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the investment companies in which the Fund invests. |
| (f) | Due to timing of shareholder transactions, and allocations of expenses among share classes, the per unit amounts presented may not coincide with the aggregate presentation on the Statement of Operations. |
84
Horizon Active Risk Assist® Fund − Advisor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Year Ended November 30, 2019 | ||||||||||||||||
| Net Asset Value, Beginning of Year | $ | 20.66 | $ | 26.08 | $ | 21.73 | $ | 21.36 | $ | 21.66 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income (loss)(b,e) | 0.16 | 0.12 | 0.05 | (0.04 | )(f) | 0.10 | ||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | 1.27 | (3.49 | ) | 4.37 | 0.57 | (f) | 0.32 | |||||||||||||
| Total from investment operations | 1.43 | (3.37 | ) | 4.42 | 0.53 | 0.42 | ||||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (0.10 | ) | (0.15 | ) | (0.07 | ) | (0.16 | ) | (0.08 | ) | ||||||||||
| From net realized gains | — | (1.90 | ) | — | — | (0.64 | ) | |||||||||||||
| Total Distributions | (0.10 | ) | (2.05 | ) | (0.07 | ) | (0.16 | ) | (0.72 | ) | ||||||||||
| Net Asset Value, End of Year | $ | 21.99 | $ | 20.66 | $ | 26.08 | $ | 21.73 | $ | 21.36 | ||||||||||
| Total Return | 6.98 | % | (14.34 | %) | 20.41 | % | 2.50 | % | 2.37 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (in 000’s) | $ | 1,489 | $ | 4,472 | $ | 8,312 | $ | 6,399 | $ | 177 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(c,d) | 1.36 | % | 1.34 | % | 1.37 | % | 1.43 | % | 1.38 | % | ||||||||||
| Net expenses(a,c) | 1.33 | % | 1.31 | % | 1.31 | % | 1.37 | % | 1.42 | % | ||||||||||
| Net investment income (loss) net of reimbursement (recapture) and securities lending expense offset(c,e) | 0.75 | % | 0.53 | % | 0.21 | % | (0.18 | %) | 0.49 | % | ||||||||||
| Portfolio turnover rate | 176 | % | 366 | % | 108 | % | 462 | % | 368 | % | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | The ratio of expenses to average net assets includes interest expense which was 0.01%, 0.01%, 0.00%, 0.00%, and 0.00%, respectively. |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Does not reflect the expenses of the underlying funds in which the Fund invests. |
| (d) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (e) | Recognition of net investment income (loss) by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the investment companies in which the Fund invests. |
| (f) | Due to timing of shareholder transactions, and allocations of expenses among share classes, the per unit amounts presented may not coincide with the aggregate presentation on the Statement of Operations. |
85
Horizon Active Risk Assist® Fund − Institutional Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Year Ended November 30, 2019 | ||||||||||||||||
| Net Asset Value, Beginning of Year | $ | 20.76 | $ | 26.19 | $ | 21.79 | $ | 21.43 | $ | 21.72 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income(b,e) | 0.19 | 0.16 | 0.13 | 0.23 | (f) | 0.10 | ||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | 1.31 | (3.50 | ) | 4.37 | 0.36 | (f) | 0.39 | |||||||||||||
| Total from investment operations | 1.50 | (3.34 | ) | 4.50 | 0.59 | 0.49 | ||||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (0.13 | ) | (0.19 | ) | (0.10 | ) | (0.23 | ) | (0.14 | ) | ||||||||||
| From net realized gains | — | (1.90 | ) | — | — | (0.64 | ) | |||||||||||||
| Total Distributions | (0.13 | ) | (2.09 | ) | (0.10 | ) | (0.23 | ) | (0.78 | ) | ||||||||||
| Net Asset Value, End of Year | $ | 22.13 | $ | 20.76 | $ | 26.19 | $ | 21.79 | $ | 21.43 | ||||||||||
| Total Return | 7.27 | % | (14.17 | %) | 20.75 | % | 2.78 | % | 2.70 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (in 000’s) | $ | 32,378 | $ | 30,798 | $ | 34,320 | $ | 40,562 | $ | 62,964 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(c,d) | 1.11 | % | 1.09 | % | 1.12 | % | 1.15 | % | 1.13 | % | ||||||||||
| Net expenses(a,c) | 1.09 | % | 1.06 | % | 1.06 | % | 1.09 | % | 1.08 | % | ||||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset(c,e) | 0.90 | % | 0.70 | % | 0.54 | % | 1.14 | % | 0.47 | % | ||||||||||
| Portfolio turnover rate | 176 | % | 366 | % | 108 | % | 462 | % | 368 | % | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | The ratio of expenses to average net assets includes interest expense which was 0.01%, 0.00%, 0.00%, 0.00%, and 0.00%, respectively. |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Does not reflect the expenses of the underlying funds in which the Fund invests. |
| (d) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (e) | Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the investment companies in which the Fund invests. |
| (f) | Due to timing of shareholder transactions, and allocations of expenses among share classes, the per unit amounts presented may not coincide with the aggregate presentation on the Statement of Operations. |
86
Horizon Active Income Fund − Investor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Year Ended November 30, 2019 | ||||||||||||||||
| Net Asset Value, Beginning of Year | $ | 8.24 | $ | 9.72 | $ | 9.90 | $ | 9.44 | $ | 9.13 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income(b,e) | 0.26 | 0.13 | 0.19 | 0.18 | 0.29 | |||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | (0.23 | ) | (1.48 | ) | (0.18 | ) | 0.50 | 0.31 | ||||||||||||
| Total from investment operations | 0.03 | (1.35 | ) | 0.01 | 0.68 | 0.60 | ||||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (0.24 | ) | (0.13 | ) | (0.19 | ) | (0.22 | ) | (0.29 | ) | ||||||||||
| Total Distributions | (0.24 | ) | (0.13 | ) | (0.19 | ) | (0.22 | ) | (0.29 | ) | ||||||||||
| Net Asset Value, End of Year | $ | 8.03 | $ | 8.24 | $ | 9.72 | $ | 9.90 | $ | 9.44 | ||||||||||
| Total Return | 0.38 | % | (14.04 | %) | 0.11 | % | 7.29 | % | 6.78 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (in 000’s) | $ | 245,555 | $ | 439,460 | $ | 432,982 | $ | 430,958 | $ | 272,400 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(c,d) | 1.01 | % | 0.99 | % | 1.03 | % | 1.05 | % | 1.03 | % | ||||||||||
| Net expenses(a,c) | 0.95 | % | 0.89 | % | 0.95 | % | 0.90 | % | 0.88 | % | ||||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset(c,e) | 3.20 | % | 1.47 | % | 1.98 | % | 1.87 | % | 3.13 | % | ||||||||||
| Portfolio turnover rate | 175 | % | 110 | % | 93 | % | 225 | % | 167 | % | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | The ratio of expenses to average net assets includes interest and dividend expense which was 0.00%, 0.00%, 0.00%, 0.01%, and 0.00%, respectively. |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Does not reflect the expenses of the underlying funds in which the Fund invests. |
| (d) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (e) | Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the investment companies in which the Fund invests. |
87
Horizon Active Income Fund − Advisor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Year Ended November 30, 2019 | ||||||||||||||||
| Net Asset Value, Beginning of Year | $ | 8.29 | $ | 9.77 | $ | 9.95 | $ | 9.47 | $ | 9.16 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income(b,e) | 0.24 | 0.12 | 0.18 | 0.18 | 0.26 | |||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | (0.22 | ) | (1.49 | ) | (0.18 | ) | 0.47 | 0.32 | ||||||||||||
| Total from investment operations | 0.02 | (1.37 | ) | (0.00 | ) | 0.65 | 0.58 | |||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (0.22 | ) | (0.11 | ) | (0.18 | ) | (0.17 | ) | (0.27 | ) | ||||||||||
| Total Distributions | (0.22 | ) | (0.11 | ) | (0.18 | ) | (0.17 | ) | (0.27 | ) | ||||||||||
| Net Asset Value, End of Year | $ | 8.09 | $ | 8.29 | $ | 9.77 | $ | 9.95 | $ | 9.47 | ||||||||||
| Total Return | 0.26 | % | (14.12 | %) | (0.05 | %) | 6.96 | % | 6.53 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (in 000’s) | $ | 675 | $ | 1,960 | $ | 4,391 | $ | 3,896 | $ | 2,328 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(c,d) | 1.16 | % | 1.14 | % | 1.18 | % | 1.17 | % | 1.20 | % | ||||||||||
| Net expenses(a,c) | 1.10 | % | 1.03 | % | 1.10 | % | 1.06 | % | 1.05 | % | ||||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset(c,e) | 3.02 | % | 1.31 | % | 1.82 | % | 1.90 | % | 2.79 | % | ||||||||||
| Portfolio turnover rate | 175 | % | 110 | % | 93 | % | 225 | % | 167 | % | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | The ratio of expenses to average net assets includes interest expense which was 0.00%, 0.00%, 0.00%, 0.00%, and 0.00%, respectively. |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Does not reflect the expenses of the underlying funds in which the Fund invests. |
| (d) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (e) | Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the investment companies in which the Fund invests. |
88
Horizon Active Income Fund − Institutional Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Year Ended November 30, 2019 | ||||||||||||||||
| Net Asset Value, Beginning of Year | $ | 8.21 | $ | 9.68 | $ | 9.86 | $ | 9.43 | $ | 9.13 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income(b,e) | 0.26 | 0.14 | 0.17 | 0.49 | (f) | 0.29 | ||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | (0.22 | ) | (1.47 | ) | (0.15 | ) | 0.17 | (f) | 0.31 | |||||||||||
| Total from investment operations | 0.04 | (1.33 | ) | 0.02 | 0.66 | 0.60 | ||||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (0.25 | ) | (0.14 | ) | (0.20 | ) | (0.23 | ) | (0.30 | ) | ||||||||||
| Total Distributions | (0.25 | ) | (0.14 | ) | (0.20 | ) | (0.23 | ) | (0.30 | ) | ||||||||||
| Net Asset Value, End of Year | $ | 8.00 | $ | 8.21 | $ | 9.68 | $ | 9.86 | $ | 9.43 | ||||||||||
| Total Return | 0.49 | % | (13.90 | %) | 0.20 | % | 7.07 | % | 6.83 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (in 000’s) | $ | 1,725 | $ | 1,704 | $ | 1,840 | $ | 184 | $ | 8,040 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(c,d) | 0.91 | % | 0.89 | % | 0.94 | % | 0.93 | % | 0.95 | % | ||||||||||
| Net expenses(a,c) | 0.84 | % | 0.79 | % | 0.85 | % | 0.82 | % | 0.80 | % | ||||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset(c,e) | 3.27 | % | 1.57 | % | 1.74 | % | 5.13 | % | 3.15 | % | ||||||||||
| Portfolio turnover rate | 175 | % | 110 | % | 93 | % | 225 | % | 167 | % | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | The ratio of expenses to average net assets includes interest expense which was 0.00%, 0.00%, 0.00%, 0.00%, and 0.00%, respectively. |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Does not reflect the expenses of the underlying funds in which the Fund invests. |
| (d) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (e) | Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the investment companies in which the Fund invests. |
| (f) | Due to timing of shareholder transactions, and allocations of expenses among share classes, the per unit amounts presented may not coincide with the aggregate presentation on the Statement of Operations. |
89
Horizon Equity Premium Income Fund − Investor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Year Ended November 30, 2019 | ||||||||||||||||
| Net Asset Value, Beginning of Year | $ | 61.62 | $ | 63.02 | $ | 55.01 | $ | 58.58 | $ | 60.03 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income(a) | 1.06 | 1.23 | 1.03 | 1.19 | 1.47 | |||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | (1.42 | ) | 0.02 | (c) | 8.02 | (3.25 | ) | 0.27 | (c) | |||||||||||
| Total from investment operations | (0.36 | ) | 1.25 | 9.05 | (2.06 | ) | 1.74 | |||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (1.23 | ) | (1.16 | ) | (1.04 | ) | (1.29 | ) | (1.14 | ) | ||||||||||
| From net realized gains | — | (1.49 | ) | — | (0.22 | ) | (2.05 | ) | ||||||||||||
| Total Distributions | (1.23 | ) | (2.65 | ) | (1.04 | ) | (1.51 | ) | (3.19 | ) | ||||||||||
| Net Asset Value, End of Year | $ | 60.03 | $ | 61.62 | $ | 63.02 | $ | 55.01 | $ | 58.58 | ||||||||||
| Total Return | (0.51 | %) | 1.90 | % | 16.58 | % | (3.41 | %) | 3.67 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (in 000’s) | $ | 92,322 | $ | 102,135 | $ | 123,269 | $ | 104,774 | $ | 156,452 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(b) | 1.13 | % | 1.10 | % | 1.06 | % | 1.11 | % | 1.09 | % | ||||||||||
| Net expenses(d) | 1.12 | % | 1.09 | % | 1.08 | % | 1.09 | % | 1.09 | % | ||||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset | 1.80 | % | 2.03 | % | 1.67 | % | 2.28 | % | 2.59 | % | ||||||||||
| Portfolio turnover rate | 4 | %(e) | 150 | % | 222 | % | 376 | % | 369 | % | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | Per share amounts are calculated using the average shares method. |
| (b) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (c) | Net realized and unrealized gain (loss) per share in this caption is a balancing amount necessary to reconcile the change in the net asset value per share for the period, and may not reconcile with the aggregate gain (loss) on the Statements of Operations due to share transactions for the period. |
| (d) | The ratio of expenses to average net assets includes interest expense which was 0.06%, 0.02%, 0.00%, 0.00% and 0.00%, respectively. |
| (e) | The cost of purchases and proceeds from sales of securities that were incurred by the Fund related to the Fund’s change in investment strategy are excluded from the portfolio turnover rate calculation. If such amounts had not been excluded, the portfolio turnover rate would have been 67% for the year ended November 30, 2023. |
90
Horizon Equity Premium Income Fund − Advisor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Year Ended November 30, 2019 | ||||||||||||||||
| Net Asset Value, Beginning of Year | $ | 61.66 | $ | 63.04 | $ | 54.99 | $ | 58.56 | $ | 60.00 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income(a) | 0.97 | 1.09 | 0.95 | 1.13 | 1.37 | |||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | (1.43 | ) | 0.06 | (c) | 8.04 | (3.28 | ) | 0.29 | (c) | |||||||||||
| Total from investment operations | (0.46 | ) | 1.15 | 8.99 | (2.15 | ) | 1.66 | |||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (1.13 | ) | (1.04 | ) | (0.94 | ) | (1.21 | ) | (1.05 | ) | ||||||||||
| From net realized gains | — | (1.49 | ) | — | (0.21 | ) | (2.05 | ) | ||||||||||||
| Total Distributions | (1.13 | ) | (2.53 | ) | (0.94 | ) | (1.42 | ) | (3.10 | ) | ||||||||||
| Net Asset Value, End of Year | $ | 60.07 | $ | 61.66 | $ | 63.04 | $ | 54.99 | $ | 58.56 | ||||||||||
| Total Return | (0.68 | %) | 1.73 | % | 16.45 | % | (3.55 | %) | 3.50 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (in 000’s) | $ | 3,443 | $ | 4,834 | $ | 10,941 | $ | 8,781 | $ | 27,452 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(b) | 1.28 | % | 1.23 | % | 1.21 | % | 1.25 | % | 1.24 | % | ||||||||||
| Net expenses (d) | 1.29 | % | 1.25 | % | 1.24 | % | 1.24 | % | 1.24 | % | ||||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset | 1.63 | % | 1.76 | % | 1.52 | % | 2.17 | % | 2.42 | % | ||||||||||
| Portfolio turnover rate | 4 | %(e) | 150 | % | 222 | % | 376 | % | 369 | % | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | Per share amounts are calculated using the average shares method. |
| (b) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (c) | Net realized and unrealized gain (loss) per share in this caption is a balancing amount necessary to reconcile the change in the net asset value per share for the period, and may not reconcile with the aggregate gain (loss) on the Statements of Operations due to share transactions for the period. |
| (d) | The ratio of expenses to average net assets includes interest expense which was 0.05%, 0.01%, 0.00%, 0.00% and 0.00%, respectively. |
| (e) | The cost of purchases and proceeds from sales of securities that were incurred by the Fund related to the Fund’s change in investment strategy are excluded from the portfolio turnover rate calculation. If such amounts had not been excluded, the portfolio turnover rate would have been 67% for the year ended November 30, 2023. |
91
Horizon Defined Risk Fund − Investor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Year Ended November 30, 2019 | ||||||||||||||||
| Net Asset Value, Beginning of Year | $ | 61.16 | $ | 63.49 | $ | 56.98 | $ | 54.09 | $ | 51.00 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income(a) | 0.16 | 0.26 | 0.22 | 0.37 | 0.51 | |||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | 5.39 | (2.41 | ) | 6.62 | 2.82 | 2.86 | ||||||||||||||
| Total from investment operations | 5.55 | (2.15 | ) | 6.84 | 3.19 | 3.37 | ||||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (0.21 | ) | (0.18 | ) | (0.33 | ) | (0.30 | ) | (0.17 | ) | ||||||||||
| From net realized gains | (0.73 | ) | — | — | — | (0.11 | ) | |||||||||||||
| Total Distributions | (0.94 | ) | (0.18 | ) | (0.33 | ) | (0.30 | ) | (0.28 | ) | ||||||||||
| Net Asset Value, End of Year | $ | 65.77 | $ | 61.16 | $ | 63.49 | $ | 56.98 | $ | 54.09 | ||||||||||
| Total Return | 9.26 | % | (3.40 | %) | 12.06 | % | 5.93 | % | 6.69 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (in 000’s) | $ | 489,234 | $ | 359,743 | $ | 247,061 | $ | 210,993 | $ | 163,322 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(b) | 1.44 | % | 1.12 | % | 1.11 | % | 1.12 | % | 1.20 | % | ||||||||||
| Net expenses(c) | 1.44 | % | 1.12 | % | 1.05 | % | 1.04 | % | 1.04 | % | ||||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset | 0.25 | % | 0.43 | % | 0.35 | % | 0.70 | % | 0.99 | % | ||||||||||
| Portfolio turnover rate | 3 | % | 15 | % | 27 | % | 28 | % | 10 | % | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | Per share amounts are calculated using the average shares method. |
| (b) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (c) | The ratio of expenses to average net assets includes interest expense which was 0.40%, 0.08%, 0.01%, 0.00% and 0.00%, respectively. |
92
Horizon Defined Risk Fund − Advisor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Year Ended November 30, 2019 | ||||||||||||||||
| Net Asset Value, Beginning of Year | $ | 61.11 | $ | 63.45 | $ | 56.93 | $ | 54.06 | $ | 50.98 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income(a) | 0.07 | 0.13 | 0.13 | 0.29 | 0.42 | |||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | 5.40 | (2.39 | ) | 6.62 | 2.82 | 2.87 | ||||||||||||||
| Total from investment operations | 5.47 | (2.26 | ) | 6.75 | 3.11 | 3.29 | ||||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (0.07 | ) | (0.08 | ) | (0.23 | ) | (0.24 | ) | (0.10 | ) | ||||||||||
| From net realized gains | (0.73 | ) | — | — | — | (0.11 | ) | |||||||||||||
| Total Distributions | (0.80 | ) | (0.08 | ) | (0.23 | ) | (0.24 | ) | (0.21 | ) | ||||||||||
| Net Asset Value, End of Year | $ | 65.78 | $ | 61.11 | $ | 63.45 | $ | 56.93 | $ | 54.06 | ||||||||||
| Total Return | 9.12 | % | (3.57 | %) | 11.90 | % | 5.78 | % | 6.51 | % | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (in 000’s) | $ | 19,725 | $ | 12,227 | $ | 19,816 | $ | 24,804 | $ | 22,807 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(b) | 1.60 | % | 1.26 | % | 1.26 | % | 1.28 | % | 1.37 | % | ||||||||||
| Net expenses(c) | 1.60 | % | 1.26 | % | 1.20 | % | 1.19 | % | 1.19 | % | ||||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset | 0.11 | % | 0.20 | % | 0.21 | % | 0.56 | % | 0.80 | % | ||||||||||
| Portfolio turnover rate | 3 | % | 15 | % | 27 | % | 28 | % | 10 | % | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | Per share amounts are calculated using the average shares method. |
| (b) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (c) | The ratio of expenses to average net assets includes interest expense which was 0.41%, 0.07%, 0.01%, 0.00% and 0.00%, respectively. |
93
Horizon Multi-Factor U.S Equity Fund − Investor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each period/year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Year Ended November 30, 2020 | For the Period Ended November 30, 2019(a) | ||||||||||||||||
| Net Asset Value, Beginning of Period/Year | $ | 26.34 | $ | 33.53 | $ | 27.19 | $ | 26.22 | $ | 25.00 | ||||||||||
| Income From Investment Operations: | ||||||||||||||||||||
| Net investment income(b) | 0.18 | 0.22 | 0.15 | 0.12 | 0.12 | |||||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | 1.25 | (0.29 | ) | 6.27 | 0.91 | 1.10 | ||||||||||||||
| Total from investment operations | 1.43 | (0.07 | ) | 6.42 | 1.03 | 1.22 | ||||||||||||||
| Less Distributions: | ||||||||||||||||||||
| From net investment income | (0.20 | ) | (0.18 | ) | (0.08 | ) | (0.06 | ) | — | |||||||||||
| From net realized gains | — | (6.94 | ) | — | — | — | ||||||||||||||
| Total Distributions | (0.20 | ) | (7.12 | ) | (0.08 | ) | (0.06 | ) | — | |||||||||||
| Net Asset Value, End of Period/Year | $ | 27.57 | $ | 26.34 | $ | 33.53 | $ | 27.19 | $ | 26.22 | ||||||||||
| Total Return | 5.51 | % | (1.62 | %) | 23.70 | % | 3.96 | % | 4.88 | %(f) | ||||||||||
| Ratios/Supplemental Data | ||||||||||||||||||||
| Net assets, end of period/year (in 000’s) | $ | 261,501 | $ | 143,236 | $ | 128,449 | $ | 205,886 | $ | 85,776 | ||||||||||
| Ratio to average net assets: | ||||||||||||||||||||
| Gross expenses(c) | 1.07 | % | 1.12 | % | 1.17 | % | 1.14 | % | 1.93 | %(e) | ||||||||||
| Net expenses(d) | 1.09 | % | 1.11 | % | 1.09 | % | 1.09 | % | 1.09 | %(e) | ||||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset | 0.68 | % | 0.83 | % | 0.50 | % | 0.49 | % | 1.10 | %(e) | ||||||||||
| Portfolio turnover rate | 238 | % | 197 | % | 218 | % | 325 | % | 0.11 | %(f) | ||||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | Since June 26, 2019 (Commencement of Operations). |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (d) | The ratio of expenses to average net assets includes interest expense which was 0.00%, 0.02%, 0.00%, 0.00% and 0.00%, respectively. |
| (e) | Annualized. |
| (f) | Not annualized. |
94
Horizon Multi-Factor U.S Equity Fund − Advisor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each period/year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Period Ended November 30, 2020(a) | |||||||||||||
| Net Asset Value, Beginning of Period/Year | $ | 26.27 | $ | 33.46 | $ | 27.16 | $ | 26.23 | ||||||||
| Income From Investment Operations: | ||||||||||||||||
| Net investment income(b) | 0.14 | 0.14 | 0.10 | 0.04 | ||||||||||||
| Net gain (loss) from investments (both realized and unrealized) | 1.26 | (0.26 | ) | 6.27 | 0.89 | |||||||||||
| Total from investment operations | 1.40 | (0.12 | ) | 6.37 | 0.93 | |||||||||||
| Less Distributions: | ||||||||||||||||
| From net investment income | (0.11 | ) | (0.13 | ) | (0.07 | ) | — | |||||||||
| From net realized gains | — | (6.94 | ) | — | — | |||||||||||
| Total Distributions | (0.11 | ) | (7.07 | ) | (0.07 | ) | — | |||||||||
| Net Asset Value, End of Period/Year | $ | 27.56 | $ | 26.27 | $ | 33.46 | $ | 27.16 | ||||||||
| Total Return | 5.38 | % | (1.79 | %) | 23.53 | % | 3.55 | %(f) | ||||||||
| Ratios/Supplemental Data | ||||||||||||||||
| Net assets, end of period/year (in 000’s) | $ | 7,543 | $ | 189 | $ | 544 | $ | 730 | ||||||||
| Ratio to average net assets: | ||||||||||||||||
| Gross expenses(c) | 1.21 | % | 1.27 | % | 1.32 | % | 1.30 | %(e) | ||||||||
| Net expenses(d) | 1.22 | % | 1.25 | % | 1.24 | % | 1.24 | %(e) | ||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset | 0.52 | % | 0.52 | % | 0.34 | % | 0.17 | %(e) | ||||||||
| Portfolio turnover rate | 238 | % | 197 | % | 218 | % | 325 | %(f) | ||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | Since February 2, 2020 (Commencement of Operations). |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (d) | The ratio of expenses to average net assets includes interest expense which was 0.00%, 0.01%, 0.00% and 0.00%, respectively. |
| (e) | Annualized. |
| (f) | Not annualized. |
95
Horizon Defensive Core Fund − Investor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each period/year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Period Ended November 30, 2020(a) | |||||||||||||
| Net Asset Value, Beginning of Period/Year | $ | 30.99 | $ | 36.09 | $ | 28.78 | $ | 25.00 | ||||||||
| Income From Investment Operations: | ||||||||||||||||
| Net investment income(b,i) | 0.28 | 0.11 | 0.11 | 0.19 | (f) | |||||||||||
| Net gain (loss) from investments (both realized and unrealized) | 4.01 | (4.29 | ) | 8.01 | 3.59 | (f) | ||||||||||
| Total from investment operations | 4.29 | (4.18 | ) | 8.12 | 3.78 | |||||||||||
| Less Distributions: | ||||||||||||||||
| From net investment income | (0.15 | ) | (0.08 | ) | (0.10 | ) | — | |||||||||
| From net realized gains | — | (0.84 | ) | (0.71 | ) | — | ||||||||||
| Total Distributions | (0.15 | ) | (0.92 | ) | (0.81 | ) | — | |||||||||
| Net Asset Value, End of Period/Year | $ | 35.13 | $ | 30.99 | $ | 36.09 | $ | 28.78 | ||||||||
| Total Return | 13.95 | % | (11.99 | %) | 28.91 | % | 15.12 | %(e) | ||||||||
| Ratios/Supplemental Data | ||||||||||||||||
| Net assets, end of period/year (in 000’s) | $ | 190,927 | $ | 148,912 | $ | 120,315 | $ | 3,985 | ||||||||
| Ratio to average net assets: | ||||||||||||||||
| Gross expenses(c,h) | 0.97 | % | 1.04 | % | 1.09 | % | 6.24 | %(d) | ||||||||
| Net expenses (g,h) | 0.98 | % | 1.03 | % | 1.04 | % | 1.04 | %(d) | ||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset (h,i) | 0.89 | % | 0.36 | % | 0.32 | % | 0.73 | %(d) | ||||||||
| Portfolio turnover rate | 139 | % | 270 | % | 29 | % | 81 | %(e) | ||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | Since December 26, 2019 (Commencement of Operations). |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (d) | Annualized. |
| (e) | Not annualized. |
| (f) | Due to the timing of shareholder transactions, and allocations of expenses among share classes, the per unit amounts presented may not coincide with the aggregate presentation on the Statements of Operations. |
| (g) | The ratio of expenses to average net assets includes interest expense which was 0.01%, 0.01%, 0.00% and 0.00%, respectively. |
| (h) | Does not reflect the expenses of the underlying funds in which the Fund invests. |
| (i) | Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the investment companies in which the Fund invests. |
96
Horizon Defensive Core Fund − Advisor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each period/year.
For the Year Ended November 30, 2023 | For the Year Ended November 30, 2022 | For the Year Ended November 30, 2021 | For the Period Ended November 30, 2020(a) | |||||||||||||
| Net Asset Value, Beginning of Period/Year | $ | 30.85 | $ | 35.95 | $ | 28.69 | $ | 25.04 | ||||||||
| Income From Investment Operations: | ||||||||||||||||
| Net investment income(b,i) | 0.23 | 0.06 | 0.07 | 0.13 | (f) | |||||||||||
| Net gain (loss) from investments (both realized and unrealized) | 3.99 | (4.27 | ) | 7.97 | 3.52 | (f) | ||||||||||
| Total from investment operations | 4.22 | (4.21 | ) | 8.04 | 3.65 | |||||||||||
| Less Distributions: | ||||||||||||||||
| From net investment income | (0.10 | ) | (0.05 | ) | (0.07 | ) | — | |||||||||
| From net realized gains | — | (0.84 | ) | (0.71 | ) | — | ||||||||||
| Total Distributions | (0.10 | ) | (0.89 | ) | (0.78 | ) | — | |||||||||
| Net Asset Value, End of Period/Year | $ | 34.97 | $ | 30.85 | $ | 35.95 | $ | 28.69 | ||||||||
| Total Return | 13.76 | % | (12.11 | %) | 28.69 | % | 14.58 | %(e) | ||||||||
| Ratios/Supplemental Data | ||||||||||||||||
| Net assets, end of period/year (in 000’s) | $ | 47,232 | $ | 33,632 | $ | 35,205 | $ | 4,283 | ||||||||
| Ratio to average net assets: | ||||||||||||||||
| Gross expenses(c,h) | 1.12 | % | 1.18 | % | 1.28 | % | 4.56 | %(d) | ||||||||
| Net expenses (g,h) | 1.13 | % | 1.18 | % | 1.19 | % | 1.19 | %(d) | ||||||||
| Net investment income net of reimbursement (recapture) and securities lending expense offset (h,i) | 0.72 | % | 0.17 | % | 0.19 | % | 0.52 | %(d) | ||||||||
| Portfolio turnover rate | 139 | % | 270 | % | 29 | % | 81 | %(e) | ||||||||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | Since January 8, 2020 (Commencement of Operations). |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (d) | Annualized. |
| (e) | Not annualized. |
| (f) | Due to timing of shareholder transactions, and allocations of expenses among share classes, the per unit amounts presented may not coincide with the aggregate presentation on the Statements of Operations. |
| (g) | The ratio of expenses to average net assets includes interest expense which was 0.01%, 0.01%, 0.00% and 0.00%, respectively. |
| (h) | Does not reflect the expenses of the underlying funds in which the Fund invests. |
| (i) | Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the investment companies in which the Fund invests. |
97
Horizon Tactical Fixed Income Fund − Investor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each period.
For the Period Ended November 30, 2023(a) | ||||
| Net Asset Value, Beginning of Period | $ | 50.00 | ||
| Income From Investment Operations: | ||||
| Net investment income(b,h) | 1.88 | |||
| Net gain (loss) from investments (both realized and unrealized) | (2.68 | ) | ||
| Total from investment operations | (0.80 | ) | ||
| Less Distributions: | ||||
| From net investment income | (0.83 | ) | ||
| Total Distributions | (0.83 | ) | ||
| Net Asset Value, End of Period | $ | 48.37 | ||
| Total Return | (1.63 | %)(e) | ||
| Ratios/Supplemental Data | ||||
| Net assets, end of period (in 000’s) | $ | 157,988 | ||
| Ratio to average net assets: | ||||
| Gross expenses(c,g) | 0.90 | %(d) | ||
| Net expenses (f,g) | 0.84 | %(d) | ||
| Net investment income net of reimbursement (recapture) and securities lending expense offset(g,h) | 4.13 | %(d) | ||
| Portfolio turnover rate | 638 | %(e) | ||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | Since December 20, 2022 (Commencement of Operations). |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (d) | Annualized. |
| (e) | Not annualized. |
| (f) | The ratio of expenses to average net assets includes interest expense which was 0.00%. |
| (g) | Does not reflect the expenses of the underlying funds in which the Fund invests. |
| (h) | Recognition of net investment income (loss) by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the investment companies in which the Fund invests. |
98
Horizon Tactical Fixed Income Fund − Advisor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each period.
For the Period Ended November 30, 2023(a) | ||||
| Net Asset Value, Beginning of Period | $ | 49.48 | ||
| Income From Investment Operations: | ||||
| Net investment income(b,h) | 0.90 | |||
| Net gain (loss) from investments (both realized and unrealized) | (1.45 | ) | ||
| Total from investment operations | (0.55 | ) | ||
| Less Distributions: | ||||
| From net investment income | (0.58 | ) | ||
| Total Distributions | (0.58 | ) | ||
| Net Asset Value, End of Period | $ | 48.35 | ||
| Total Return | (1.10 | %)(e) | ||
| Ratios/Supplemental Data | ||||
| Net assets, end of period (in 000’s) | $ | 8,082 | ||
| Ratio to average net assets: | ||||
| Gross expenses(c,g) | 1.16 | %(d) | ||
| Net expenses(f,g) | 0.96 | %(d) | ||
| Net investment income net of reimbursement (recapture) and securities lending expense offset(g,h) | 2.58 | %(d) | ||
| Portfolio turnover rate | 638 | %(e) | ||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | Since March 7, 2023 (Commencement of Operations). |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (d) | Annualized. |
| (e) | Not annualized. |
| (f) | The ratio of expenses to average net assets includes interest expense which was 0.00%. |
| (g) | Does not reflect the expenses of the underlying funds in which the Fund invests. |
| (h) | Recognition of net investment income (loss) by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the investment companies in which the Fund invests. |
99
Horizon Multi-Factor Small/Mid Cap Fund − Investor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each period.
For the Period Ended November 30, 2023(a) | ||||
| Net Asset Value, Beginning of Period | $ | 25.00 | ||
| Income From Investment Operations: | ||||
| Net investment income(b) | 0.14 | |||
| Net gain (loss) from investments (both realized and unrealized) | 3.22 | |||
| Total from investment operations | 3.36 | |||
| Net Asset Value, End of Period | $ | 28.36 | ||
| Total Return | 13.48 | %(e) | ||
| Ratios/Supplemental Data | ||||
| Net assets, end of period (in 000’s) | $ | 12,482 | ||
| Ratio to average net assets: | ||||
| Gross expenses(c) | 3.38 | %(d) | ||
| Net expenses (f) | 1.09 | %(d) | ||
| Net investment income net of reimbursement and securities lending expense offset | 0.53 | %(d) | ||
| Portfolio turnover rate | 179 | %(e) | ||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | Since December 20, 2022 (Commencement of Operations). |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (d) | Annualized. |
| (e) | Not annualized. |
| (f) | The ratio of expenses to average net assets includes interest expense which was 0.00%. |
100
Horizon Multi-Factor Small/Mid Cap Fund − Advisor Class
FINANCIAL HIGHLIGHTS
The table below sets forth financial data for one share of beneficial interest outstanding throughout each period.
For the Period Ended November 30, 2023(a) | ||||
| Net Asset Value, Beginning of Period | $ | 26.88 | ||
| Income From Investment Operations: | ||||
| Net investment income(b) | 0.09 | |||
| Net gain (loss) from investments (both realized and unrealized) | 1.37 | |||
| Total from investment operations | 1.46 | |||
| Net Asset Value, End of Period | $ | 28.34 | ||
| Total Return | 5.43 | %(e) | ||
| Ratios/Supplemental Data | ||||
| Net assets, end of period (in 000’s) | $ | 427 | ||
| Ratio to average net assets: | ||||
| Gross expenses(c) | 3.64 | %(d) | ||
| Net expenses (f) | 1.24 | %(d) | ||
| Net investment income net of reimbursement and securities lending expense offset | 0.43 | %(d) | ||
| Portfolio turnover rate | 179 | %(e) | ||
Portfolio turnover is calculated for the Fund as a whole.
| (a) | Since March 7, 2023 (Commencement of Operations). |
| (b) | Per share amounts are calculated using the average shares method. |
| (c) | Represents the ratio of expenses to average net assets absent securities lending expense offset, fee waivers and/or expense reimbursements by the Adviser. |
| (d) | Annualized. |
| (e) | Not annualized. |
| (f) | The ratio of expenses to average net assets includes interest expense which was 0.00%. |
101
PRIVACY NOTICE
| FACTS | WHAT DOES HORIZON FUNDS DO WITH YOUR PERSONAL INFORMATION? |
| Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share and protect your personal information. Please read this notice carefully to understand what we do. |
| What? |
The types of personal information we collect and share depend on the product or service you have with us. This information can include: ▪ Social Security number and account information ▪ Account balance and transaction history ▪ Wire Transfer Instructions |
| How? | All financial companies need to share your personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information the reasons Horizon Funds chooses to share and whether you can limit this sharing. |
| Reasons we can share your personal information | Does Horizon Funds share? | Can you limit this sharing? |
|
For our everyday business purposes – Such as to process your transactions, maintain your account(s), respond to court orders and legal investigations or report to credit bureaus |
Yes | No |
|
For our marketing purposes – to offer our products and services to you |
No | We don’t share |
| For joint marketing with other financial companies | No | We don’t share |
|
For our affiliates’ everyday business purposes – information about your transactions and experiences or creditworthiness |
No | We don’t share |
| For non-affiliates to market to you | No | We don’t share |
| Questions? | Call 1-855-754-7932 |
| Page 2 | ||
| Who we are | ||
| Who is providing this notice? | Horizon Funds | |
| What we do | ||
| How does Horizon Funds protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings. | |
| How does Horizon Funds collect my personal information? |
We collect your personal information, for example, when you
▪ Open an account ▪ Provide account information ▪ Give us your contact information ▪ Make deposits or withdrawals from your account ▪ Make a wire transfer ▪ Tell us where to send the money ▪ Tell us who receives the money ▪ Show your government-issued ID ▪ Show your driver’s license | |
| Why can’t I limit all sharing? |
Federal law gives you the right to limit only
▪ Sharing for affiliates’ everyday business purposes – information about your creditworthiness ▪ Affiliates from using your information to market to you ▪ Sharing for non-affiliates to market to you
State laws and individual companies may give you additional rights to limit sharing. | |
| Definitions | ||
| Affiliates |
Companies related by common ownership or control. They can be financial and nonfinancial companies.
▪ Our affiliates include companies such as Horizon Investments, LLC. | |
| Non-affiliates |
Companies not related by common ownership or control. They can be financial and nonfinancial companies
▪ Non-affiliates we share with can include financial companies such as custodians, transfer agents, registered representatives, financial advisers, and nonfinancial companies such as fulfillment, proxy voting and class action service providers. | |
| Joint marketing |
A formal agreement between nonaffiliated financial companies that together market financial products or services to you.
▪ Horizon Funds does not jointly market. | |
Investment Adviser
Horizon Investments, LLC
6210 Ardrey Kell Road, Suite 300
Charlotte, North Carolina 28277
Independent Registered Public Accounting Firm
Cohen & Company, Ltd.
342 North Water Street, Suite 830
Milwaukee, Wisconsin 53202
Legal Counsel
Kilpatrick Townsend & Stockton LLP
1001 West 4th Street
Winston-Salem, North Carolina 27101
Custodian
U.S. Bank, N.A
Custody Operations
1555 North River Center Drive, Suite 302
Milwaukee, Wisconsin 53212
Transfer Agent, Fund Accountant and Fund Administrator
U.S. Bank Global Fund Services
615 East Michigan Street
Milwaukee, Wisconsin 53202
Distributor
Quasar Distributors, LLC
3 Canal Plaza, Suite 100
Portland, ME 04101
WHERE TO GO FOR MORE INFORMATION
You will find more information about the Funds in the following documents:
Annual and Semi-annual Reports. The Funds’ annual and semi-annual reports to shareholders and in Form N-SCR, list the holdings in the Funds, describe the Funds’ performance, and include financial statements for the Funds, and the Funds’ annual report discusses the market conditions and strategies that significantly affected the Funds’ performance during the prior fiscal year. In Form N-CSR, you will find the Fund’s annual and semi-annual financial statements.
Statement of Additional Information (“SAI”). The Statement of Additional Information contains additional and more detailed information about the Funds.
The SAI is incorporated by reference into (and is thus a part of) this Prospectus.
The SAI and the Funds’ annual and semi-annual reports are available, without charge, upon request. In addition to requesting these documents from your financial representative, there are three additional ways to get a copy of these documents:
1. Request a copy by calling the Fund at 1-855-754-7932 or submitting a written request to the address listed below and a copy will be sent to you without charge.
Horizon Funds
c/o U.S. Bank Global Fund Services
P.O. Box 701
Milwaukee, WI 53201-0701
The Prospectus, Annual Report, Semi-Annual Report and holdings information are available at www.horizonmutualfunds.com.
2. Go to the EDGAR Database on the SEC’s website (www.sec.gov) and download a free text-only version. Copies of the SAI, Annual Report, Annual Report, and Semi-annual may be obtained after paying a duplicating fee, by electronic request to publicinfo@sec.gov.
If you are a current Fund shareholder and would like information about your account, account transactions, or account statements, please call us at 1-855-754-7932.
If you purchased your shares through a financial institution, you may contact that institution for more information.
The U.S. 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.
The Funds’ Investment Company Act File Number is 811-23063.
HORIZON FUNDS
STATEMENT OF ADDITIONAL INFORMATION
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Horizon Active Asset Allocation Fund Advisor Class (HASAX) Institutional Class (HASIX) Investor Class (AAANX) |
Horizon Active Risk Assist® Fund Advisor Class (ARAAX) Institutional Class (ACRIX) Investor Class (ARANX) |
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Horizon Active Income Fund Advisor Class (AIHAX) Institutional Class (AIRIX) Investor Class (AIMNX) |
Horizon Equity Premium Income Fund Advisor Class (HADUX) Institutional Class (HIDDX)* Investor Class (HNDDX) |
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Horizon Defined Risk Fund Advisor Class (HADRX) Institutional Class (HIDRX)* Investor Class (HNDRX) |
Horizon Multi-Factor U.S. Equity Fund Advisor Class (USRTX) Institutional Class (USRIX)* Investor Class (USRAX) |
Horizon Defensive Core Fund Advisor Class (HESAX) Institutional Class (HESIX)* Investor Class (HX) |
Horizon Tactical Fixed Income Fund Advisor Class (HTFAX) Institutional Class (HTFIX)* Investor Class (HTFNX) |
Horizon Multi-Factor Small/Mid Cap Fund Advisor Class (HSMBX) Institutional Class (HSMIX)* Investor Class (HSMNX) | |
March 29, 2024
This Statement of Additional Information (the “SAI”) provides additional information to the Prospectus dated March 29, 2024, as the same may be amended from time to time. This SAI is not a prospectus and should only be read in conjunction with the Prospectus.
The financial statements of each of the Horizon Active Asset Allocation Fund, Horizon Active Risk Assist® Fund, Horizon Active Income Fund, Horizon Equity Premium Income Fund, Horizon Defined Risk Fund, Horizon Multi-Factor U.S. Equity Fund, Horizon Defensive Core Fund, Horizon Tactical Fixed Income Fund, and the Horizon Multi-Factor Small/Mid Cap Fund for the fiscal year ended November 30, 2023, which are included in the Annual Report, are incorporated herein by reference.
A copy of the Prospectus or Annual Report may be obtained without charge by calling the Funds at 1-855-754-7932 or by visiting the Funds’ website at www.horizonmutualfunds.com.
| * | As of the date of this SAI, the Institutional Class shares of the Horizon Equity Premium Income Fund, the Horizon Defined Risk Fund, the Horizon Defensive Core Fund, the Horizon Multi-Factor U.S. Equity Fund, the Horizon Multi-Factor Small/Mid Cap Fund, and the Horizon Tactical Fixed Income Fund have not commenced operations. |
TABLE OF CONTENTS
| GENERAL INFORMATION | 1 |
| INVESTMENT RESTRICTIONS OF THE FUNDS | 2 |
| TEMPORARY DEFENSIVE POSITIONS | 4 |
| DESCRIPTION OF SECURITIES, OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS | 4 |
| DISCLOSURE OF PORTFOLIO HOLDINGS | 30 |
| MANAGEMENT OF THE TRUST | 31 |
| CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES | 35 |
| INVESTMENT MANAGEMENT AND OTHER SERVICES | 40 |
| ADMINISTRATOR | 44 |
| CUSTODIAN | 46 |
| TRANSFER AGENT SERVICES | 46 |
| DISTRIBUTION OF SHARES | 46 |
| CODES OF ETHICS | 47 |
| PROXY VOTING POLICIES AND PROCEDURES | 47 |
| PORTFOLIO MANAGERS | 47 |
| BROKERAGE ALLOCATION AND OTHER PRACTICES | 49 |
| REDEMPTION OF SECURITIES BEING OFFERED | 54 |
| DISTRIBUTION PLANS | 54 |
| SHAREHOLDER SERVICES | 55 |
| DETERMINATION OF NET ASSET VALUE | 56 |
| ANTI-MONEY LAUNDERING AND CUSTOMER IDENTIFICATION PROGRAMS | 56 |
| TAXES | 57 |
| ORGANIZATION OF THE TRUST | 62 |
| INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 62 |
| LEGAL MATTERS | 63 |
| FINANCIAL STATEMENTS | 63 |
| APPENDIX A | A-1 |
| APPENDIX B | B-1 |
GENERAL INFORMATION
This Statement of Additional Information (“SAI”) is meant to be read in conjunction with the prospectus for the Advisor Class shares, Institutional Class shares and Investor Class shares of the Horizon Active Asset Allocation Fund (the “Active Asset Allocation Fund”), the Horizon Active Risk Assist® Fund (the “Risk Assist Fund”), the Horizon Active Income Fund (the “Active Income Fund”), the Horizon Equity Premium Income Fund (the “Equity Premium Income Fund”), the Horizon Defined Risk Fund (the “Defined Risk Fund”), Horizon Multi-Factor U.S. Equity Fund (the “Multi-Factor U.S. Equity Fund”), the Horizon Defensive Core Fund (the “Defensive Core Fund”), Horizon Multi-Factor Small/Mid Cap Fund (the “Multi-Factor Small/Mid Cap Fund”) and the Horizon Tactical Fixed Income Fund (the “Tactical Income Fund”) (each, a “Fund” and collectively, the “Funds”). Each of the Funds is a separate diversified series of Horizon Funds (the “Trust”). The prospectus for the Funds (the “Prospectus”) incorporates this SAI by reference in its entirety. Because this SAI is not itself a prospectus, no investment in shares of the Funds should be made solely upon the information contained herein. Copies of the Prospectus and Annual Report for the Funds may be obtained at no charge by writing or calling the Funds at the address or phone number shown above. Capitalized terms used but not defined herein have the same meanings as in the Prospectus. Risk Assist® is a registered trademark of Horizon Investments, LLC and is used herein with its permission.
TRUST HISTORY
The Trust is an open-end management investment company, commonly known as a “mutual fund”, and sells and redeems shares every day that it is open for business. The Trust consists of the nine Funds. The Trust was organized as a Delaware business trust by a Declaration of Trust filed May 21, 2015, with the Secretary of State of Delaware, and is registered with the Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940 (the “1940 Act”). As a Delaware statutory trust, the Trust is subject to Delaware law, including the Delaware Statutory Trust Act. The Delaware Statutory Trust Act provides that a shareholder of a Delaware statutory trust shall be entitled to the same limitation of personal liability extended to shareholders of Delaware corporations, and the Declaration of Trust further provides that no shareholder of the Trust shall be personally liable for the obligations of the Trust or of any series or class thereof except by reason of his or her own acts or conduct.
Each Fund has registered three classes of shares, Advisor Class shares, Institutional Class shares and Investor Class shares. Each class of shares of each Fund represents an interest in the same assets of that Fund, have the same rights and are identical in all material respects except that (i) each class of shares may be subject to different (or no) sales loads; (ii) each class of shares may bear different distribution fees; (iii) certain other class specific expenses will be borne solely by the class to which such expenses are attributable and (iv) each class has exclusive voting rights with respect to matters relating to its own distribution arrangements. The Board of Trustees of the Trust (the “Board”) may classify and reclassify the shares of any Fund into additional classes of shares at a future date. Not all of the share classes are currently being offered for sale.
The Active Asset Allocation Fund, Risk Assist Fund and Active Income Fund became effective on January 29, 2016 and each is a successor in interest to a fund of the same name that was a separate series of another investment company (AdvisorOne Funds) (each, a “Predecessor Fund”). Each Predecessor Fund had the same name and substantially similar investment objectives as the corresponding Fund, and all of the Predecessor Funds were advised by Horizon Investments, LLC, a South Carolina limited liability company (“Horizon” or the “Adviser”). On January 22, 2016, the shareholders of each Predecessor Fund approved its reorganization into the corresponding Fund and effective as of the close of business on February 5, 2016, the assets and liabilities of each Predecessor Fund were transferred to the Trust in exchange for Investor Class shares of the applicable Fund.
The Equity Premium Income Fund commenced operations on December 28, 2016, and, prior to October 4, 2023, was known as the “Horizon Active Dividend Fund,” and prior to that as “Horizon Dynamic Dividend Fund.” The Defined Risk Fund commenced operations on December 28, 2017, and was named “Horizon Collar Fund” prior to commencement of operations.
The Multi-Factor U.S. Equity Fund commenced operations on June 26, 2019, and prior to October 4, 2023 was known as “Horizon US Defensive Equity Fund” and prior to that was known as “Horizon Defensive Multi-Factor Fund”.
The Defensive Core Fund commenced operations on December 26, 2019, and, prior to October 4, 2023, was known as “Horizon ESG & Defensive Core Fund,” and prior to that was known as the “Horizon ESG Defensive Core Fund.”
The Multi-Factor Small/Mid Cap Fund commenced operations on December 20, 2022 and prior to October 4, 2023 was known as the “Horizon US Defensive Small/Mid Cap Fund. The Tactical Income Fund commenced operations on December 20, 2022.
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The Funds are managed by Horizon Investments, LLC. Horizon directs the day-to-day operations and the investment of assets of the Funds.
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services (“Fund Services”) is the administrator, accounting agent, transfer agent and dividend disbursing agent for the Funds. U.S. Bank, N.A. (the “Custodian”) is the custodian for the Funds. Quasar Distributors, LLC (the “Distributor”) is the distributor of the Funds’ shares. Fund Services and the Custodian are affiliates.
INVESTMENT RESTRICTIONS OF THE FUNDS
Fundamental Restrictions. The Funds have adopted the following fundamental investment limitations, which cannot be changed without approval by holders of a majority of its outstanding voting shares. A “majority” for this purpose means the lesser of (i) 67% of the applicable Fund’s outstanding shares represented in person or by proxy at a meeting at which more than 50% of its outstanding shares are represented; or (ii) more than 50% of the applicable Fund’s outstanding shares.
Shares of each Fund will be voted separately on matters affecting that Fund, including approval of changes in the fundamental investment policies of the Fund. Except for the fundamental investment limitations listed below, the investment policies and limitations described in this Statement of Additional Information are not fundamental and may be changed without shareholder approval.
As a matter of fundamental policy, each of the Active Asset Allocation Fund, Risk Assist Fund, Active Income Fund will not:
(1) Purchase securities on margin, except the Fund may make margin deposits in connection with permissible options and futures transactions subject to (5) below and may obtain short-term credits as may be necessary for clearance of transactions.
(2) Issue any class of securities senior to any other class of securities except in compliance with the 1940 Act.
(3) Borrow money for investment purposes in excess of 33-1/3% of the value of its total assets, including any amount borrowed less its liabilities not including any such borrowings. Any borrowings, which come to exceed this amount, will be reduced in accordance with applicable law. Additionally, the Fund may borrow up to 5% of its total assets (not including the amount borrowed) for temporary or emergency purposes.
(4) Purchase or sell real estate, or invest in real estate limited partnerships, except the Fund may, as appropriate and consistent with its respective investment objective, policies and other investment restrictions, buy securities of issuers that engage in real estate operations and securities that are secured by interests in real estate (including shares of real estate mortgage investment conduits, mortgage pass-through securities, mortgage-backed securities and collateralized mortgage obligations) and may hold and sell real estate acquired as a result of ownership of such securities.
(5) Purchase or sell commodities or contracts thereon, except that the Fund may purchase and sell options, forward contracts, futures contracts, including those relating to indices, and options on futures contracts or indices and may purchase interests in equity securities issued by companies (including, without limitation, investment companies) that hold or invest in one or more commodities as their sole or principal business activity.
(6) Underwrite securities issued by other persons, except to the extent that the Fund may be deemed to be an underwriter, within the meaning of the Securities Act of 1933, in connection with the purchase of securities directly from an issuer in accordance with that Fund’s investment objective, policies and restrictions.
(7) Make loans, except that the Fund may, in accordance with its investment objective, policies and restrictions: (i) invest in all or a portion of an issue of publicly issued or privately placed bonds, debentures, notes, other debt securities and loan participation interests for investment purposes; (ii) purchase money market securities and enter into repurchase agreements; and (iii) lend its portfolio securities in an amount not exceeding one-third of the value of the Fund’s total assets.
(8) Make an investment unless 75% of the value of the Fund’s total assets is represented by cash, cash items, U.S. Government securities, securities of other investment companies and “other securities.” For purposes of this restriction, the term “other securities” means securities as to which the Fund invests no more than 5% of the value of its total assets in any one issuer or purchases no more than 10% of the outstanding voting securities of any one issuer. As a matter of operating policy, the Fund will not consider repurchase agreements to be subject to the above-stated 5% limitation if all of the collateral underlying the repurchase agreements are U.S. Government securities and such repurchase agreements are fully collateralized.
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(9) Invest 25% or more of the value of its total assets in any one industry or group of industries. This limitation does not apply to securities issued or guaranteed by the U.S. government, its agencies or instrumentalities or repurchase agreements secured by U.S. Government securities.
As a matter of fundamental policy, each of the Equity Premium Income Fund, the Defined Risk Fund, the Defensive Core Fund, the Multi-Factor U.S. Equity, the Multi-Factor Small/Mid Cap Fund and the Tactical Income Fund will not:
(1) Purchase securities on margin, except the Fund may make margin deposits in connection with permissible options and futures transactions subject to (5) below and may obtain short-term credits as may be necessary for clearance of transactions.
(2) Issue any class of securities senior to any other class of securities except in compliance with the 1940 Act.
(3) Borrow money except as permitted under the 1940 Act.
(4) Purchase or sell real estate, or invest in real estate limited partnerships, except the Fund may, as appropriate and consistent with its respective investment objective, policies and other investment restrictions, buy securities of issuers that engage in real estate operations and securities that are secured by interests in real estate (including shares of real estate mortgage investment conduits, mortgage pass-through securities, mortgage-backed securities and collateralized mortgage obligations) and may hold and sell real estate acquired as a result of ownership of such securities.
(5) Purchase or sell commodities or contracts thereon, except that the Fund may purchase and sell options, forward contracts, futures contracts, including those relating to indices, and options on futures contracts or indices and may purchase interests in equity securities issued by companies (including, without limitation, investment companies) that hold or invest in one or more commodities as their sole or principal business activity.
(6) Underwrite securities issued by other persons, except to the extent that the Fund may be deemed to be an underwriter, within the meaning of the Securities Act of 1933, in connection with the purchase of securities directly from an issuer in accordance with that Fund’s investment objective, policies and restrictions.
(7) Make loans, except that the Fund may, in accordance with its investment objective, policies and restrictions: (i) invest in all or a portion of an issue of publicly issued or privately placed bonds, debentures, notes, other debt securities and loan participation interests for investment purposes; (ii) purchase money market securities and enter into repurchase agreements; and (iii) lend its portfolio securities in an amount not exceeding one-third of the value of the Fund’s total assets.
(8) Invest 25% or more of the value of its total assets in any one industry or group of industries. This limitation does not apply to securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities or repurchase agreements secured by U.S. Government securities.
Non-Fundamental Restrictions. The following investment limitations are not fundamental and may be changed by the Board without shareholder approval. As a matter of non-fundamental policy, each Fund will not:
(1) Invest in portfolio companies for the purpose of acquiring or exercising control of such companies.
(2) Purchase or otherwise acquire any security or invest in a repurchase agreement if, as a result, more than 15% of the net assets of the Fund would be invested in securities that are illiquid or not readily marketable, including repurchase agreements maturing in more than seven days and non-negotiable fixed time deposits with maturities over seven days. The Fund may invest without limitation in restricted securities provided such securities are considered to be liquid by the Board of Trustees. If, through a change in values, net assets or other circumstances, the Fund was in a position where more than 15% of its net assets were invested in illiquid securities, it would seek to take appropriate steps to protect liquidity.
(3) Mortgage, pledge, or hypothecate in any other manner, or transfer as security for indebtedness any security owned by the Fund, except as may be necessary in connection with permissible borrowings and then only if such mortgaging, pledging or hypothecating does not exceed 33 1/3% of the Fund’s total assets. Collateral arrangements with respect to margin, option and other risk management and when-issued and forward commitment transactions are not deemed to be pledges or other encumbrances for purposes of this restriction.
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The foregoing fundamental and non-fundamental restrictions supplement the policies and limitations set forth in the Prospectus. Unless otherwise noted, whenever a restriction states a maximum percentage of a Fund’s assets that may be invested in any security or other asset, or sets forth a policy regarding quality standards, such standard or percentage limitations will be determined immediately after and as a result of a Fund’s acquisition of such security or other asset. Accordingly, any subsequent change in values, net assets or other circumstances will not be considered when determining whether the investment complies with a Fund’s investment policies and limitations.
With respect to the above fundamental investment restriction on borrowing money, the entry into options, forward contracts, futures contracts, including those relating to indices, and options on futures contracts or indices shall not constitute borrowing. With respect to the above fundamental investment restriction on making loans, investment in U.S. Government obligations, short-term commercial paper, certificates of deposit, bankers’ acceptances and repurchase agreements shall not be deemed to be the making of a loan.
With respect to the above fundamental investment restriction on purchasing securities on margin, short sales of securities, forward contracts or similar trades requiring margin deposits or other use of a margin account are not considered purchasing securities on margin.
With respect to the above fundamental investment restriction on concentration in a particular industry or group of industries, securities of the U.S. Government (including its agencies and instrumentalities), tax-exempt securities of state or municipal governments and their political subdivisions and investments in other registered investment companies are not considered to be issued by members of any industry. If the Fund invests in a revenue bond tied to a particular industry, the Fund will consider such investment to be issued by a member of the industry to which the revenue bond is tied.
The 1940 Act presently allows a Fund to borrow from any bank (including pledging, mortgaging or hypothecating assets) in an amount up to 33⅓% of its total assets and the Fund will, to the extent necessary, reduce its existing borrowings (within 3 days, excluding Sundays and holidays) to comply with the provisions of the 1940 Act.
TEMPORARY DEFENSIVE POSITIONS
Each Fund may, from time to time, take temporary defensive positions that are inconsistent with its principal investment objective or strategies in an attempt to respond to adverse market, economic, political or other conditions or when the Adviser believes it is otherwise appropriate to do so. When this happens, a Fund may increase temporarily its investment in short-term securities such as money market funds, or hold cash, without regard to that Fund’s investment restrictions, policies or normal investment emphasis. During such a period, the Fund could be unable to achieve its investment objectives. In addition, this defensive investment strategy may cause frequent trading and high portfolio turnover ratios. High transaction costs could result from more frequent trading. Such trading may also result in realization of net short-term capital gains upon which you may be taxed at ordinary tax rates when distributed from a Fund.
DESCRIPTION OF SECURITIES, OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
The following descriptions of certain of the Funds’ policies and risks, which descriptions apply to the Funds’ direct investments and, where applicable, investments in other investment companies and exchange-traded funds (each, an “underlying fund”), supplement the Funds’ investment objectives and policies as described in the Prospectus.
CYBERSECURITY
As technology becomes more integrated into the Funds’ operations, the Funds will face greater operational risks through breaches in cybersecurity. A breach in cybersecurity refers to both intentional and unintentional events that may cause the Funds to lose proprietary information, suffer data corruption, or lose operational capacity. This in turn could cause the Funds to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures, and/or financial loss. Cybersecurity threats may result from unauthorized access to the Funds’ digital information systems (e.g., through “hacking” or malicious software coding), but may also result from outside attacks such as denial-of-service attacks (i.e., efforts to make network services unavailable to intended users). In addition, because the Funds work closely with third-party service providers (e.g., administrators, transfer agents, and custodians), cybersecurity breaches at such third-party service providers may subject the Funds to many of the same risks associated with direct cybersecurity breaches. The same is true for cybersecurity breaches at any of the issuers in which the Funds may invest. While the Funds and their third-party service providers have established information technology and data security programs and have in place business continuity plans and other systems designed to prevent losses and mitigate cybersecurity risks associated with cybersecurity, there are inherent limitations in such plans and systems, including the possibility that certain risks have not been identified or that cyber-attacks may be highly sophisticated, and there can be no assurance that the Funds’ and their third party service providers’ preventative measures will succeed.
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DEBT AND OTHER FIXED INCOME INSTRUMENTS
General. Fixed income and debt investments bear certain risks, including credit risk, or the ability of an issuer to pay interest and principal as they become due. Generally, higher yielding fixed income and debt investments are subject to more credit risk than lower yielding fixed income and debt investments. Such investments are also subject to interest rate risk, which refers to the fluctuations in value of fixed income securities resulting from the inverse relationship between the market value of outstanding fixed income securities and changes in interest rates. An increase in interest rates will generally reduce the market value of fixed income investments and a decline in interest rates will tend to increase their value.
Call risk is the risk that an issuer will pay principal on an obligation earlier than scheduled or expected, which would accelerate cash flows from, and shorten the average life of, the security. Bonds are typically called when interest rates have declined. In the event of a bond being called, the Adviser may have to reinvest the proceeds in lower yielding securities to the detriment of the Fund.
Extension risk is the risk that an issuer may pay principal on an obligation slower than expected, having the effect of extending the average life and duration of the obligation. This typically happens when interest rates have increased.
Prepayment risk is the risk that, when interest rates decline, fixed income securities with stated interest rates may have their principal paid earlier than expected. This may result in a Fund having to reinvest that money at lower prevailing interest rates, which can reduce the returns of the Fund.
A number of factors, including changes in a central bank’s monetary policies or general improvements in the economy, may cause interest rates to rise. Fixed income and debt securities with longer durations are more sensitive to interest rate changes than securities with shorter durations, making them more volatile. This means their prices are more likely to experience a considerable reduction in response to a rise in interest rates.
Adjustable Rate Securities. Adjustable rate securities (i.e., variable rate and floating rate instruments) are securities that have interest rates that are adjusted periodically, according to an interest rate index or other set formula. The maturity of some adjustable rate securities may be shortened under certain special conditions described more fully below.
Floating rate instruments have interest rate reset provisions similar to those for variable rate instruments and may be subject to demand features like those for variable rate instruments. The interest rate is adjusted, periodically (e.g., daily, monthly, semi-annually), based on the prevailing interest rate in the marketplace. The interest rate on floating rate securities is ordinarily determined by reference to the 90-day U.S. Treasury bill rate, the rate of return on commercial paper or bank certificates of deposit or an index of short-term interest rates. The maturity of a floating rate instrument is considered to be the period remaining until the principal amount can be recovered through demand.
Resets of the interest rates of adjustable rate securities can occur at predetermined intervals or whenever changes in the applicable benchmark index occur. Changes in the benchmark index and the interest rate may be difficult to predict and may increase the volatility of the price, and have adverse effects on the value of the adjustable rate securities.
Adjustable Rate Mortgage Securities. Adjustable-rate mortgage securities (“ARMS”) bear interest at a rate determined by reference to a predetermined interest rate or index. The interest rates paid on the ARMS in which a Fund may invest generally are readjusted or reset at intervals of one year or less to an increment over some predetermined interest rate index. There are two main categories of indices: those based on U.S. Treasury securities and those derived from a calculated measure, such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant maturity Treasury Note rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities, the National Median Cost of Funds, the one-month or three-month London Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year constant maturity Treasury Note rate, closely mirror changes in market interest rate levels. Others may lag changes in market rate levels and be more or less volatile.
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The underlying mortgages which collateralize ARMs may be fixed-rate mortgages or adjustable-rate mortgages. ARMS secured by fixed-rate mortgages generally have lifetime caps on the coupon rates of the securities. The adjustable-rate mortgages that secure ARMS will frequently have caps and floors that limit the maximum amount by which the interest rate or the monthly principal and interest payments on the mortgages may increase. These payment caps may result in negative amortization. The value of mortgage securities may be affected if market interest rates rise or fall faster and farther than the allowable caps or floors on the underlying residential mortgage loans. Additionally, even though the interest rates on the underlying residential mortgages are adjustable, amortization and prepayments may occur, thereby causing the effective maturities of mortgage securities to be shorter than the maturities stated in the underlying mortgages.
Below-Investment-Grade Debt Securities. When investing in fixed income and debt securities, the Funds may purchase securities regardless of their rating, including debt securities that are rated below “investment grade” by Standard and Poor’s (“S&P”) or Moody’s Investors Services, Inc. (“Moody’s”) or, if unrated, are deemed by the Adviser to be of comparable quality. Securities rated less than Baa by Moody’s or BBB by S&P are classified as below investment grade securities and are commonly referred to as “junk bonds” or “high yield” securities. Debt rated BB, B, CCC, CC and C and debt rated Ba, B, Caa, Ca, and C is regarded by S&P and Moody’s, respectively, on balance, as high risk and predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal in accordance with the terms of the obligation. For S&P, BB indicates the lowest degree of speculation and C the highest degree of speculation. For Moody’s, Ba indicates the lowest degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Similarly, debt rated Ba or BB and below is regarded by the relevant rating agency as speculative. Debt rated C by Moody’s or S&P is the lowest rated debt that is not in default as to principal or interest, and such issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Such securities are also generally considered to be subject to greater risk than securities with higher ratings with regard to a deterioration of general economic conditions.
The use of credit to evaluate high yield securities can involve certain risks. For example, ratings of debt securities represent the rating agency’s opinion regarding the debt security’s quality and are not a guarantee of quality. In addition, rating agencies attempt to evaluate the safety of principal and interest payments and do not evaluate the risks of fluctuations in market value. Also, rating agencies may fail to make timely changes in credit ratings to reflect events occurring since the security was last rated. The achievement of each Fund’s investment objective may be more dependent on the Adviser’s own credit analysis than might be the case for a fund which invests in higher quality bonds, and analysis of the creditworthiness of issuers of debt securities that are high yield may be more complex than for issuers of higher quality debt securities. The Funds may retain a security whose rating has been changed. The market values of lower quality debt securities tend to reflect individual developments of the issuer to a greater extent than do higher quality securities, which react primarily to fluctuations in the general level of interest rates. In addition, while investments in lower quality debt securities generally provide greater income and increased opportunity for capital appreciation than investments in higher quality debt securities, lower quality debt securities tend to be more sensitive to economic conditions and generally have more volatile prices and principal and income risk than higher quality securities. Issuers of lower quality securities are often highly leveraged and may not have available to them more traditional methods of financing, and the prices of high yield securities have been found to be more sensitive to adverse economic downturns or individual corporate developments. For example, during an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of lower quality securities may experience financial stress, and during such periods, such issuers may not have sufficient revenues to meet their interest payment obligations. If an issuer of high yield securities defaults, in addition to risking payment of all or a portion of interest and principal, by investing in such securities the applicable Fund may incur additional expenses to obtain recovery. In addition, the issuer’s ability to service debt obligations may also be adversely affected by specific developments affecting the issuer, such as the issuer’s inability to meet specific projected business forecasts or the unavailability of additional financing. Similarly, certain emerging market governments that issue lower quality debt securities are among the largest debtors to commercial banks, foreign governments and supranational organizations such as the World Bank and may not be able or willing to make principal and/or interest repayments as they come due. The risk of loss due to default by the issuer is significantly greater for the holders of lower quality securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. Lower quality debt securities frequently have call or buy-back features, which would permit an issuer to call or repurchase the security from a Fund. In addition, a Fund may have difficulty disposing of lower quality securities because the secondary market on which high yield securities are traded may be less liquid than the market for higher grade securities. There may be no established retail secondary market for many of these securities, and there may be at times a limited number of dealers or institutional investors that may be willing to purchase such securities. Less liquidity in the secondary trading market could adversely affect the price at which the Fund could sell a high yield security, may make it more difficult for a Fund to obtain accurate market quotations for purposes of valuing the Fund’s portfolio (e.g., such valuation may require more research, and elements of judgment may play a greater role in the valuation because there is less reliable, objective data available), and could adversely affect the daily NAV of a Fund’s shares. The Funds may also acquire lower quality debt securities during an initial underwriting or which are sold without registration under applicable securities laws. Such securities involve special considerations and risks.
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In addition to the foregoing, factors that could have an adverse effect on the market value of lower quality debt securities in which the Funds may invest, include: (i) potential adverse publicity, (ii) heightened sensitivity to general economic or political conditions, and (iii) the likely adverse impact of a major economic recession. The Funds may also incur additional expenses to the extent the Funds are required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings, and the Funds may have limited legal recourse in the event of a default. Debt securities issued by governments in emerging markets can differ from debt obligations issued by private entities in that remedies for defaults generally must be pursued in the courts of the defaulting government, and legal recourse is therefore somewhat diminished. Political conditions, in terms of a government’s willingness to meet the terms of its debt obligations, also are of considerable significance. There can be no assurance that the holders of commercial bank debt may not contest payments to the holders of debt securities issued by governments in emerging markets in the event of default by the governments under commercial bank loan agreements. The Adviser attempts to minimize the speculative risks associated with investments in lower quality securities through credit analysis and monitoring current trends in interest rates, political developments and other factors. Nonetheless, investors should carefully review the investment objective and policies of the Funds and consider their ability to assume the investment risks involved before making an investment. The Funds may also invest in unrated debt securities. Unrated debt securities, while not necessarily of lower quality than rated securities, may not have as broad a market. Because of the size and perceived demand for an issue, among other factors, certain issuers may decide not to pay the cost of obtaining a rating for their bonds.
Certificates of Deposit and Bankers’ Acceptances. The Funds may invest in certificates of deposit and bankers’ acceptances, which are considered to be short-term money market instruments.
Certificates of deposit are unsecured, interest bearing receipts issued by a depository institution in exchange for the deposit of funds. The issuer agrees to pay the amount deposited plus interest to the bearer of the receipt on the date specified on the certificate. The certificate usually can be traded in the secondary market prior to maturity. Bankers’ acceptances typically arise from short-term credit arrangements designed to enable businesses to obtain funds 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 earning asset or it may be sold in the secondary market at the going rate of discount for a specific maturity. Although maturities for acceptances can be as long as 270 days, most acceptances have maturities of six months or less.
Commercial Paper. Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by banks, corporations or other borrowers in order to finance their current operations. Commercial Paper is typically sold on a discounted basis rather than as an interest-bearing instrument.
Loans and Other Direct Debt Instruments. Direct debt instruments are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates (loans and loan participations), to suppliers of goods or services (trade claims or other receivables), or to other parties. These loans may bear fixed or floating rates. Syndicated loans have generally been arranged through private negotiations between a corporate borrower and one or more financial institutions.
Purchasers of loans and other forms of direct indebtedness depend primarily upon the creditworthiness of the borrower for payment of principal and interest. Direct debt instruments may not be rated by any nationally recognized rating service. If a Fund does not receive scheduled interest or principal payments on such indebtedness, a Fund’s share price and yield could be adversely affected. Loans that are fully secured offer a Fund more protections than an unsecured loan in the event of non-payment of scheduled interest or principal. However, there is no assurance that the liquidations of collateral from a secured loan would satisfy the borrower’s obligation, or that the collateral could be liquidated. Indebtedness of borrowers whose creditworthiness is poor involves substantially greater risks and may be highly speculative. Borrowers that are in bankruptcy or restructuring may never pay off their indebtedness, or may pay only a small fraction of the amount owed. Direct indebtedness of developing countries also involves a risk that the governmental entities responsible for the repayment of the debt may be unable, or unwilling, to pay interest and repay principal when due. Further, obligations of sovereigns and their affiliates may be difficult or impossible to enforce.
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Investments in loans through direct assignment of a financial institution’s interests with respect to a loan may involve additional risks to a Fund, and in certain cases, the rights and obligations acquired by a Fund through the purchase of an assignment may differ from, and be more limited than, those held by the assigning selling institution. For example, if a loan is foreclosed, a Fund could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral. In addition, it is conceivable that under emerging legal theories of lender liability, a Fund could be held liable as a co-lender. In certain cases, the rights and obligations acquired by a Fund through the purchase of an assignment may differ from, and be more limited than, those held by the assigning selling institution. Assignments are sold strictly without recourse to the selling institutions, and the selling institutions will generally make no representations or warranties to the Fund about the underlying loan, the borrowers, the documentation of the loans or any collateral securing the loans.
With respect to loan participations, the Funds have the right to receive payments of principal, interest and any fees to which they are entitled only from the lender selling the loan participation and only upon receipt by the lender of the payments from the borrower. A Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan in which the Fund has purchased a loan participation, nor any rights of set-off against the borrower, and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the loan participation. Thus, the Fund assumes the credit risk of both the borrower and the lender that is selling the loan participation. In addition, in connection with purchasing loan participations, the Funds generally will have no role in terms of negotiating or effecting amendments, waivers and consents with respect to the loans underlying the loan participations. In the event of the insolvency of the lender, the applicable Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower.
Investments in loan participations and assignments involve additional risks, including the risk of nonpayment of principal and interest by the borrower, the risk that any loan collateral may become impaired and that the applicable Fund may obtain less than the full value for the loan interests sold because they may be illiquid. Purchasers of loans depend primarily upon the creditworthiness of the borrower for payment of interest and repayment of principal. If scheduled interest or principal payments are not made, the value of the instrument may be adversely affected. Loan participations may also have the risk that the counterparty to the loan participation defaults or becomes insolvent.
Direct debt instruments may also involve a risk of insolvency of the lending bank or other intermediary. Direct debt instruments that are not in the form of securities may offer less legal protection to a Fund in the event of fraud or misrepresentation. In the absence of definitive regulatory guidance, the Funds rely on the Adviser’s research in an attempt to avoid situations where fraud or misrepresentation could adversely affect the Funds.
A syndicated loan is often administered by a bank or other financial institution that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. Unless, under the terms of the loan or other indebtedness, a Fund has direct recourse against the borrower, the Fund may have to rely on the agent to apply appropriate credit remedies against a borrower. If assets held by the agent for the benefit of a Fund were determined to be subject to the claims of the agent’s general creditors, a Fund might incur certain costs and delays in realizing payment on the loan or loan participation and could suffer a loss of principal or interest.
Interests in loans are also subject to additional liquidity risks. Loans are generally subject to legal or contractual restrictions on resale. Loans are not currently listed on any securities exchange or automatic quotation system, but are traded by banks and other institutional investors engaged in loan syndication. As a result, no active market may exist for some loans, and to the extent a secondary market exists for other loans, such market may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. Consequently, the Funds may have difficulty disposing of loan assignments or loan participations in response to a specific economic event such as deterioration in the creditworthiness of the borrower, which can result in a loss. In such market situations, it may be more difficult for a Fund to assign a value to loan assignments or loan participations when valuing the Fund’s securities and calculating its net asset value.
The loans acquired by the Funds may be unsecured or undersecured. In addition, in the event of the insolvency of the selling institution, under the U.S. laws, a Fund may be treated as a general creditor of such selling institution, and may not have any exclusive or senior claim with respect to the selling institution’s interest in, or the collateral with respect to, a secured loan. Consequently, the Funds may be subject to the credit risk of the selling institution as well as of the borrower. Certain of the secured loans or loan participations may be governed by the law of a jurisdiction other than the United States, which may present additional risks as regards the characterization under such laws of such participation in the event of the insolvency of the selling institution or the borrower.
Direct indebtedness purchased by a Fund may include letters of credit, revolving credit facilities, or other standby financing commitments obligating a Fund to pay additional cash on demand. These commitments may have the effect of requiring a Fund to increase its investment in a borrower at a time when it would not otherwise have done so, even if the borrower’s condition makes it unlikely that the amount will ever be repaid. A Fund will typically set aside appropriate liquid assets in a custodial account to cover its potential obligations under standby financing commitments.
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Each Fund limits the amount of total assets that it will invest in any one issuer or, in issuers within the same industry. For purposes of these limitations, a Fund generally will treat the borrower as the “issuer” of indebtedness held by that Fund. In the case of loan participations where a bank or other lending institution serves as financial intermediary between a Fund and the borrower, if the participation does not shift to a Fund the direct debtor-creditor relationship with the borrower, SEC interpretations require that the Funds, in appropriate circumstances, to treat both the lending bank or other lending institution and the borrower as “issuers” for these purposes. Treating a financial intermediary as an issuer of indebtedness may restrict a Fund’s ability to invest in indebtedness related to a single financial intermediary, or a group of intermediaries engaged in the same industry, even if the underlying borrowers represent many different companies and industries.
Maturity of Debt Securities. The maturity of debt securities may be considered long (10 years or more), intermediate (3 to 10 years), or short-term (less than 3 years). In general, the principal values of longer-term securities fluctuate more widely in response to changes in interest rates than those of shorter-term securities, providing greater opportunity for capital gain or risk of capital loss. A decline in interest rates usually produces an increase in the value of debt securities, while an increase in interest rates generally reduces their value.
Mortgage Pass-Through Securities. Interests in pools of mortgage pass-through securities differ from other forms of debt securities (which normally provide periodic payments of interest in fixed amounts and the payment of principal in a lump sum at maturity or on specified call dates). Instead, mortgage pass-through securities represent undivided ownership interests in pools of mortgages and provide monthly payments consisting of both interest and principal payments. In effect, these payments are a “pass-through” of the monthly payments made by the individual borrowers on the underlying residential mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Unscheduled payments of principal may be made if the underlying mortgage loans are repaid or refinanced or the underlying properties are foreclosed, thereby shortening the securities’ weighted average life. Some mortgage pass-through securities (such as securities guaranteed by the Government National Mortgage Association (“GNMA”)) are described as “modified pass-through securities”. These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, on the scheduled payment dates regardless of whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through securities is GNMA. GNMA is authorized to guarantee, with the full faith and credit of the U.S. Treasury, the timely payment of principal and interest (but not as to price and yield) on securities issued by lending institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of mortgage loans. These mortgage loans are either insured by the Federal Housing Administration or guaranteed by the Veterans Administration. A “pool” or group of such mortgage loans is assembled and after being approved by GNMA, is offered to investors through securities dealers.
Government-related guarantors of mortgage pass-through securities (i.e., not backed by the full faith and credit of the U.S. Treasury) include the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”). FNMA is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved sellers/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Mortgage pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but are not backed by the full faith and credit of the U.S. Treasury.
FHLMC was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a U.S. Government-sponsored corporation formerly owned by the twelve Federal Home Loan Banks and now owned entirely by private stockholders. FHLMC issues Participation Certificates (“PCs”), which represent interests in conventional mortgages from FHLMC’s national portfolio. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the U.S. Treasury.
Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may, in addition, be the originators and/or servicers of the underlying mortgage loans as well as the guarantors of the mortgage pass-through securities.
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Mortgage pass-through certificates are subject to more rapid prepayment than their stated maturity date would indicate; their rate of prepayment tends to accelerate during periods of declining interest rates or increased property transfers and, as a result, the proceeds from such prepayments may be reinvested in instruments that have lower yields. The impact of prepayments on the price of a security may be difficult to predict and may increase the volatility of the price.
Repurchase Agreements. A repurchase agreement is an instrument under which the investor (such as a Fund) acquires ownership of a security (known as the “underlying security”) and simultaneously commits to resell that security to the seller (i.e., a bank or primary dealer) at a mutually agreed upon price on an agreed upon date (usually within seven days of purchase), thereby determining the yield during the term of the agreement. The resale price reflects the purchase price plus an agreed upon market rate of interest which is unrelated to the coupon rate or date of maturity of the purchased security. This results in a fixed rate of return insulated from market fluctuations during such period, unless the seller defaults on its repurchase obligations. Repurchase agreements involve certain risks not associated with direct investments in the underlying securities. In the event of a default or bankruptcy by the seller, the applicable Fund will typically seek to liquidate such collateral. The exercise of the applicable Fund’s right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss.
Repurchase agreements are considered to be loans by an investment company under the 1940 Act. A Fund will only enter into repurchase agreements in accordance with policies and procedures approved by the Board and adopted by the Trust on behalf of the Fund. Repurchase agreements usually are for short periods, often under one week, and will not be entered into by a Fund for a duration of more than seven days if, as a result, more than 15% of the NAV of a Fund would be invested in such agreements or other securities which are illiquid.
Each Fund will assure that the amount of collateral with respect to any repurchase agreement is adequate. As with a true extension of credit, however, there is risk of delay in recovery or the possibility of inadequacy of the collateral should the seller of the repurchase agreement fail financially. In addition, a Fund could incur costs in connection with the disposition of the collateral if the seller were to default. A Fund will enter into repurchase agreements only with sellers deemed to be creditworthy by, or pursuant to guidelines established by, the Board of Trustees of the Trust and only when the economic benefit to a Fund is believed to justify the attendant risks. Each Fund has adopted standards for the sellers with whom they will enter into repurchase agreements. The Board of Trustees of the Trust believe these standards are designed to reasonably assure that such sellers present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase agreement.
The use of repurchase agreements involves certain risks. For example, if the seller of the agreements defaults on its obligation to repurchase the underlying securities at a time when the value of these securities has declined, the applicable Fund may incur a loss upon disposition of them. If the seller of the agreement becomes insolvent and subject to liquidation or reorganization under the Bankruptcy Code or other laws, a bankruptcy court may determine that the underlying securities are collateral not within the control of the applicable Fund and therefore subject to sale by the trustee in bankruptcy. Finally, it is possible that the applicable Fund may not be able to substantiate its interest in the underlying securities.
United States Government Obligations. United States Government obligations consist of various types of marketable securities issued by the United States Treasury, i.e., bills, notes and bonds. Such securities are direct obligations of the United States Government and its agencies and instrumentalities that issue or guarantee securities, such as the Federal Home Loan Banks, FNMA and the Student Loan Marketing Association, and differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government security, have a maturity of up to one year and are issued on a discount basis.
Except for U.S. Treasury securities, obligations of U.S. Government agencies and instrumentalities may or may not be supported by the full faith and credit of the United States. Some, such as those of the Federal Home Loan Banks, are backed by the right of the issuer to borrow from the U.S. Treasury, others by discretionary authority of the U.S. Government to purchase the agencies’ obligations, while still others, such as the Student Loan Marketing Association, are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assess a claim against the United States itself in the event the agency or instrumentality does not meet its commitment.
United States Government Agency Securities. United States Government agency securities consist of debt securities issued by agencies and instrumentalities of the United States government, including the various types of instruments currently outstanding or which may be offered in the future. Agencies include, among others, GNMA, Farmer’s Home Administration, Export-Import Bank of the United States, Maritime Administration, and General Services Administration. Instrumentalities include, for example, each of the Federal Home Loan Banks, the National Bank for Cooperatives, FHLMC, the Farm Credit Banks, FNMA, and the United States Postal Service. These securities are either: (i) backed by the full faith and credit of the United States Government (e.g., United States Treasury Bills); (ii) guaranteed by the United States Treasury (e.g., GNMA mortgage-backed securities); (iii) supported by the issuing agency’s or instrumentality’s right to borrow from the United States Treasury (e.g., FNMA Discount Notes); or (iv) supported only by the issuing agency’s or instrumentality’s own credit (e.g., Tennessee Valley Association). No assurance can be given that the U.S. government will provide financial support to U.S. government agencies or instrumentalities that are not supported by the full faith and credit of the U.S. government, since the U.S. government is not obligated to do so by law. The guarantee of the U.S. government does not extend to the yield or value of the Funds’ shares.
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Warrants. Warrants are options to purchase equity securities at a specific price and are valid for a specific period of time. They do not represent ownership of the securities, but only the right to buy them. Warrants are typically issued with preferred stock or bonds. The price of the warrant usually represents a premium over the applicable market value of the common stock at the time of the warrant’s issuance. Investments in warrants involve certain risks, including the possible lack of a liquid market for the resale of the warrants, potential price fluctuations due to adverse market conditions or other factors and failure of the price of the common stock to rise. If the warrant is not exercised within the specified time period, it becomes worthless. Warrants may be more speculative than other types of investments in that they have no voting rights, pay no dividends and have no rights with respect to the assets of the corporation issuing them. Warrants differ from call options in that warrants are issued by the issuer of the security, which may be purchased on their exercise, whereas call options may be written or issued by anyone. The prices of warrants may not necessarily move parallel to the prices of the underlying securities.
DERIVATIVE INSTRUMENTS
The Funds’ derivative investments have risks, including the imperfect correlation between the value of such instruments and the underlying assets of the Funds, which creates the possibility that the loss on such instruments may be greater than the gain in the value of the underlying assets in the Funds’ portfolios; the loss of principal; the possible default of the other party to the transaction; and illiquidity of the derivative investments. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the applicable Fund may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization proceeding. In addition, in the event of the insolvency of a counterparty to a derivative transaction, the derivative contract would typically be terminated at its fair market value. If a Fund is owed this fair market value in the termination of the derivative contract and its claim is unsecured, the Fund will be treated as a general creditor of such counterparty, and will not have any claim with respect to the underlying security.
Certain of the derivative investments in which the Funds may invest may, in certain circumstances, give rise to a form of financial leverage, which may magnify the risk of owning such instruments. The ability to successfully use derivative investments depends on the ability of the Adviser to predict pertinent market movements, which cannot be assured. In addition, amounts paid by the Funds as premiums and cash or other assets held in margin accounts with respect to the Fund’s derivative investments would not be available to the Fund for other investment purposes, which may result in lost opportunities for gain.
Over-the-counter (“OTC”) derivatives may be more difficult to purchase, sell or value than other investments. Although both OTC and exchange-traded derivatives markets may experience a lack of liquidity, OTC non-standardized derivative transactions are generally less liquid than OTC cleared and exchange-traded instruments. The illiquidity of the derivatives markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and technical and operational or system failures. In addition, the liquidity of a secondary market in an exchange-traded derivative contract may be adversely affected by “daily price fluctuation limits” established by the exchanges which limit the amount of fluctuation in an exchange-traded contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days. If it is not possible to close an open derivative position entered into by a Fund, the Fund would continue to be required to make cash payments of variation (or mark-to-market) margin in the event of adverse price movements. In such a situation, if the applicable Fund has insufficient cash, it may have to sell portfolio securities to meet variation margin requirements at a time when it may be disadvantageous to do so. The absence of liquidity may also make it more difficult for the Funds to ascertain a market value for such instruments. The inability to close derivatives transactions positions also could have an adverse impact on the Funds’ abilities to effectively hedge their portfolios. OTC derivatives that are not cleared are also subject to counterparty risk, which is the risk that the other party to the contract will not fulfill its contractual obligation to complete the transaction with the applicable Fund. If a counterparty were to default on its obligations, the applicable Fund’s contractual remedies against such counterparty may be subject to bankruptcy and insolvency laws, which could affect the Fund’s rights as a creditor (e.g., the Fund may not receive the net amount of payments that it is contractually entitled to receive). In addition, the use of certain derivatives may cause the Fund to realize higher amounts of income or short-term capital gains (generally taxed at ordinary income tax rates).
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FOREIGN SECURITIES
Exposure to Foreign Markets. Investing in foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations involves certain considerations and significant risks that are not typically associated with investing in U.S. investments. The value of securities denominated in foreign currencies, and of dividends and interest paid with respect to such securities will fluctuate based on the relative strength of the U.S. dollar.
There may be less publicly available information about foreign securities, issuers and countries than is available about U.S. government securities and securities of domestic issuers. Foreign companies generally are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to domestic companies. There may also be less government supervision and regulation of foreign securities exchanges, brokers and listed companies than exists in the United States. Securities of some foreign companies are less liquid and their prices may be more volatile than securities of comparable domestic companies. The Funds’ interest and dividends from foreign issuers as well as gains or proceeds realized from the sale or other disposition of international securities may be subject to non-U.S. withholding and other foreign taxes, which may decrease the net return on such investments as compared to dividends and interest paid to the Funds by domestic companies or the U.S. Government and thereby reduce a Fund’s net investment income.
Currency exchange rates may fluctuate significantly over short periods and can be subject to unpredictable change based on such factors as political developments and currency controls by foreign governments. Decreases in the value of currencies of the foreign countries in which a Fund invests relative to the U.S. dollar will result in a corresponding decrease in the U.S. dollar value of the Fund’s assets denominated in those currencies (and possibly a corresponding increase in the amount of securities required to be liquidated to meet distribution requirements). Conversely, increases in the value of currencies of the foreign countries in which a Fund invests relative to the U.S. dollar will result in a corresponding increase in the U.S. dollar value of the Fund’s assets (and possibly a corresponding decrease in the amount of securities to be liquidated). Because the Funds may invest in securities denominated in foreign currencies, it may seek to hedge foreign currency risks by engaging in foreign currency exchange transactions. These may include buying or selling foreign currencies on a spot basis, entering into foreign currency forward contracts, and buying and selling foreign currency options, foreign currency futures, and options on foreign currency futures. These activities may constitute “derivatives” transactions.
The Funds may invest in issuers domiciled in “emerging markets”, or those countries determined by the Adviser to have developing or emerging economies and markets. Emerging market investing can have more risks than investing in developed foreign markets. For example, governments of developing and emerging market countries may be more unstable as compared to more developed countries. Also, currency values may fluctuate more in developing or emerging markets, and many emerging market countries have experienced substantial, and in some periods extremely high, rates of inflation for many years. In addition, economies in emerging markets generally are heavily dependent upon international trade and, accordingly, have been and continue to be adversely affected by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. The securities markets of developing and emerging countries are substantially smaller, less developed, less liquid and more volatile than the securities markets of the United States and other more developed countries, and such countries may have less developed legal and accounting systems. It may be more difficult to sell securities at acceptable prices and security prices may be more volatile than in countries with more mature markets. Further, brokerage commissions, custodial services and other costs relating to investment in foreign markets generally are more expensive than in the United States, particularly with respect to emerging markets. In addition, some emerging market countries impose transfer taxes or fees on a capital market transaction. Some currencies in emerging markets may have been devalued significantly against the U.S. Dollar. For these and other reasons, the prices of securities in foreign markets can fluctuate more significantly than the prices of securities of companies in developed countries.
Foreign investments involve a risk of local political, economic, or social instability, military action or unrest, or adverse diplomatic developments, and may be affected by actions of foreign governments adverse to the interests of U.S. investors. Such actions may include the possibility of expropriation or nationalization of assets, confiscatory taxation, restrictions on U.S. investment or on foreign ownership of local companies generally, restrictions on the ability to repatriate investment income or constraints on currency exchange, or other government intervention. There is no assurance that the Adviser will be able to anticipate these potential events or counter their effects. These risks are magnified for investments in developing countries, which may have relatively unstable governments, economies based on only a few industries, and securities markets that trade a small number of securities. The less developed the country, the greater effect these risks may have on the Fund.
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Economies of particular countries or areas of the world may differ favorably or unfavorably from the economy of the United States. Foreign markets may offer less protection to investors than U.S. markets. It is anticipated that in most cases the best available market for foreign securities will be on an exchange or in over-the-counter markets located outside the United States. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as those in the United States, and securities of some foreign issuers (particularly those located in developing countries) may be less liquid and more volatile than securities of comparable U.S. issuers. Foreign security trading practices, including those involving securities settlement where Fund assets may be released prior to receipt of payment, may result in increased risk in the event of a failed trade or the insolvency of a foreign broker-dealer, and may involve substantial delays. In addition, the costs of foreign investing, including withholding taxes, brokerage commissions and custodial costs, are generally higher than for U.S. investors. In general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States. It may also be difficult to enforce legal rights in foreign countries. Foreign issuers are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to U.S. issuers.
Some foreign securities impose restrictions on transfer within the United States or to U.S. persons. Although securities subject to such transfer restrictions may be marketable abroad, they may be less liquid than foreign securities of the same class that are not subject to such restrictions. American Depositary Receipts (“ADRs”), as well as other “hybrid” forms of ADRs, including European Depositary Receipts (“EDRs”) and Global Depositary Receipts (“GDRs”), are certificates evidencing ownership of shares of a foreign issuer. ADRs typically are issued by a U.S. bank or trust company, evidence ownership of underlying securities issued by a foreign company, and are designed for use in U.S. securities markets; EDRs are issued by European financial institutions and typically trade in Europe; and GDRs are issued by European financial institutions and typically trade in both Europe and the United States. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. The underlying shares are held in trust by a custodian bank or similar financial institution in the issuer’s home country. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. However, ADRs continue to be subject to many of the risks associated with investing directly in foreign securities. These risks include foreign exchange risk as well as the political and economic risks of the underlying issuer’s country.
Investments in European securities are subject to the risks of European countries, which can be significantly affected by the actions of their own individual governments as well as the actions of other European institutions, such as the European Union (“EU”), the European Economic and Monetary Union (“EMU”) and the European Central Bank. The EU is an intergovernmental and supranational union consisting of 27 member states. One of the key responsibilities of the EU is to create and administer a unified trade policy. The member states created the EMU, which established different stages and commitments that member states need to follow to achieve greater economic policy coordination and monetary cooperation. Member states relinquish their monetary control to the European Central Bank and use a single unified currency, the euro. Investments in Europe are also subject to currency risks. Further, because many countries are dependent on foreign exports, any fluctuations in the euro exchange rate could have a negative effect on an issuer’s profitability and performance. In addition, the EU has been extending its influence to the east as it has accepted several new Eastern European countries as members. Some of the new members remain burdened by the inherited inefficiencies of centrally planned economies. Additionally, these countries are dependent on Western Europe for trade and credit. The current and future status of the EU continues to be the subject of political and regulatory controversy, with widely differing views both within and between member countries. Further, the European financial markets have experienced uncertainty over the past few years, largely because of concerns about rising government debt levels and increased budget deficits. Political and regulatory responses to address structural and policy issues have created even greater instability throughout the region. The high levels of public debt increases the likelihood that certain European issuers will either default or restructure their debt obligations, which would have a negative effect on asset values. The use of austerity measures in countries such as Spain, Italy, Greece, Portugal and Ireland during times in which the eurozone has high levels of unemployment has limited economic growth. European countries can be adversely affected by the tight fiscal and monetary controls that the EMU requires its members to comply with.
Investments in emerging markets can be subject to a number of types of taxes that vary by country, change frequently, and are sometimes defined by custom rather than written regulation. Emerging countries can tax interest, dividends, and capital gains through the application of a withholding tax. The local custodian normally withholds the tax upon receipt of a payment and forwards such tax payment to the foreign government on behalf of each Fund. Certain foreign governments can also require a foreign investor to file an income tax return and pay the local tax through estimated tax payments, or pay with the tax return. Although not frequently used, some emerging markets have attempted to slow conversion of their currency by imposing a repatriation tax. Generally, this tax is applied to amounts, that are converted from the foreign currency to the investor’s currency and withdrawn from the local bank account. Transfer taxes or fees, such as stamp duties, security transfer taxes, and registration and script fees, are generally imposed by emerging markets as a tax or fee on a capital market transaction. Each emerging country may impose a tax or fee at a different point in time as the foreign investor perfects his interest in the securities acquired in the local market. A stamp duty is generally a tax on the official recording of a capital market transaction. Payment of such duty is generally a condition of the transfer of assets and failure to pay such duty can result in a loss of title to such asset as well as loss of benefit from any corporate actions. A stamp duty is generally determined based on a percentage of the value of the transaction conducted and can be charged against the buyer (e.g., Cyprus, India, Israel, Jordan, Malaysia, Pakistan, and the Philippines), against the seller (e.g., Argentina, Australia, China, Egypt, Indonesia, Kenya, Portugal, South Korea, Trinidad, Tobago, and Zimbabwe). Although such a fee does not generally exceed 100 basis points, certain emerging markets have assessed a stamp duty as high as 750 basis points (e.g., Pakistan). A security transfer tax is similar to a stamp duty and is generally applied to the purchase, sale or exchange of securities, that occur in a particular foreign market. These taxes are based on the value of the trade and similar to stamp taxes, can be assessed against the buyer, seller or both. Although the securities transfer tax may be assessed in lieu of a stamp duty, such tax can be assessed in addition to a stamp duty in certain foreign markets (e.g., Switzerland, South Korea, Indonesia). Upon purchasing a security in an emerging market, such security must often be submitted to a registration process in order to record the purchaser as a legal owner of such security interest. Often foreign countries will charge a registration or script fee to record the change in ownership and, where physical securities are issued, issue a new security certificate. In addition to assessing this fee upon the acquisition of a security, some markets also assess registration charges upon the registration of local shares to foreign shares.
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Foreign Currency Transactions. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. A Fund may also invest in non-deliverable forward contracts (cash-settled contracts for currencies of countries which do not allow non-residents to hold substantial sums of their currency, e.g. China), in order to hedge the foreign currency risk. These contracts are principally traded in the interbank market conducted directly between currency traders (usually large, commercial banks) and their customers as opposed to on exchanges regulated by the CFTC (note, however, that under new definitions adopted by the CFTC and SEC, many non-deliverable foreign currency forwards will be considered swaps for certain purposes, including determination of whether such instruments must be traded on exchanges and centrally cleared). A forward contract generally has no standard maturity dates or amounts (i.e., the parties to the contract may fix the maturity date and the amount) or initial margin deposit requirement, and no commissions are charged at any stage for trades.
A Fund may enter into forward contracts for a variety of purposes in connection with the management of the foreign currency exposure of its portfolio. When a Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may desire to “lock in” the U.S. dollar price of the security. By entering into a forward contract for the purchase or sale, for a fixed amount of dollars of the amount of foreign currency involved in the underlying security transactions, a Fund will seek to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date the security is purchased or sold and the date on which payment is made or received.
When the Adviser believes that one currency may experience a substantial movement against another currency, including the U.S. dollar, or it wishes to alter a Fund’s exposure to the currencies of the countries in its investment universe, it may enter into a forward contract to sell or buy foreign currency in exchange for the U.S. dollar or another foreign currency. Alternatively, where appropriate, a Fund may manage all or part of its foreign currency exposure through the use of a basket of currencies or a proxy currency where such currency or currencies act as an effective proxy for other currencies. In such a case, a Fund may enter into a forward contract where the amount of the foreign currency to be sold exceeds the value of the securities denominated in such currency. The use of this basket hedging technique may be more efficient and economical than entering into separate forward contracts for each currency held in a Fund. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movement is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the longer-term investment decisions made with regard to overall diversification strategies. However, each Fund retains flexibility to enter into such forward contracts when the Adviser determines that the best interests of the Fund will be served.
A Fund may enter into forward contracts for any other purpose consistent with that Fund’s investment objective and program. In determining the amount to be delivered under a contract, a Fund may net offsetting positions.
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At the maturity of a forward contract, a Fund may sell the portfolio security and make delivery of the foreign currency, or it may retain the security and either extend the maturity of the forward contract (by “rolling” that contract forward) or initiate a new forward contract.
If a Fund retains the portfolio security and engages in an offsetting transaction, that Fund will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. If a Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency. Should forward prices decline during the period between a Fund’s entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, that Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, a Fund will suffer a loss to the extent of the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell.
A Fund’s dealing in forward foreign currency exchange contracts will generally be limited to the transactions described above. However, each Fund reserves the right to enter into forward foreign currency contracts for different purposes and under different circumstances. No Fund is required to enter into forward contracts with regard to its foreign currency denominated securities and a Fund will not do so unless deemed appropriate by the Adviser. Further, this method of hedging against a decline in the value of a currency is intended to establish a rate of exchange at a future date, and not to eliminate fluctuations in the underlying prices of the securities. Additionally, although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time, they tend to limit any potential gain, which might result from an increase in the value of that currency.
Although each Fund values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the “spread”) between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, while offering a lesser rate of exchange should a Fund desire to resell that currency to the dealer.
Foreign Futures and Options. Participation in foreign futures and foreign options transactions involves the execution and clearing of trades on or subject to the rules of a foreign board of trade. Neither the National Futures Association nor any domestic exchange regulates activities of any foreign boards of trade, including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign board of trade or any applicable foreign law. This is true even if the exchange is formally linked to a domestic market so that a position taken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country in which the foreign futures or foreign options transaction occurs. For these reasons, customers who trade foreign futures or foreign options contracts may not be afforded certain of the protective measures provided by the Commodity Exchange Act (“CEA”), the CFTC’s regulations and the rules of the National Futures Association and any domestic exchange, including the right to use reparations proceedings before the Commission and arbitration proceedings provided by the National Futures Association or any domestic futures exchange. In particular, funds received from a Fund for foreign futures or foreign options transactions may not be provided the same protections as funds received in respect of transactions on United States futures exchanges. In addition, the price of any foreign futures or foreign options contract and, therefore, the potential profit and loss thereon may be affected by any variance in the foreign exchange rate between the time a Fund’s order is placed and the time it is liquidated, offset or exercised.
FORWARD COMMITMENTS
Forward commitments are securities purchased on a “when-issued” or delayed delivery basis. Such securities are not available for immediate delivery despite the fact that a market exists for those securities. The price for such securities, which is generally expressed in yield terms, is fixed at the time the commitment to purchase is made, but delivery and payment for the when-issued securities take place at a later date. Normally, the settlement date occurs within two months of the purchase, but may be negotiated to take up to three months. During the period between purchases and settlement, no payment is made by a Fund to the issuer and no interest accrues to a Fund. At the time a Fund makes the commitment to purchase a security on a when-issued basis, it will record the transaction as a purchase and thereafter reflect the value of the security each day in determining the Fund’s NAV. When-issued and forward commitment transactions involve the risk that the price or yield obtained in a transaction may be less favorable than the price or yield available in the market when the transaction takes place.
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FUTURES CONTRACTS
General. Futures contracts include stock index, interest rate and currency futures (commonly referred to as “futures” or “futures contracts”).
Stock index futures contracts may be used to provide a hedge for a portion of a Fund’s portfolio, as a cash management tool, or as an efficient way for the Adviser to implement either an increase or decrease in portfolio market exposure in response to changing market conditions. Each Fund may purchase or sell futures contracts with respect to any stock index. Nevertheless, to hedge a Fund’s portfolio successfully, a Fund must sell futures contracts with respect to indices or sub-indices whose movements will have a significant correlation with movements in the prices of a Fund’s portfolio securities.
Interest rate or currency futures contracts may be used to manage a Fund’s exposure to changes in prevailing levels of interest rates or currency exchange rates in order to establish more definitely the effective return on securities or currencies held or intended to be acquired by a Fund. In this regard, a Fund could sell interest rate or currency futures as an offset against the effect of expected increases in interest rates or currency exchange rates and purchase such futures as an offset against the effect of expected declines in interest rates or currency exchange rates.
Each Fund may enter into futures contracts that are traded on national or foreign futures exchanges, which are standardized as to maturity date and underlying financial instrument. Futures exchanges and trading in the United States are regulated under the CEA by the CFTC. Futures are traded in London at the London International Financial Futures Exchange in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange. Although techniques other than the sale and purchase of futures contracts could be used for the above-referenced purposes, futures contracts offer an effective and relatively low cost means of implementing a Fund’s objectives in these areas.
Although the Funds have no current intention of engaging in futures or options transactions other than those described above, they reserve the right to do so. Such futures and options trading might involve risks, which differ from those involved in the futures and options described in this Statement of Additional Information.
Hedging Risk. A decision of whether, when and how to hedge involves skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of unexpected market behavior or market or interest rate trends. There are several risks in connection with the use by a Fund of futures contracts as a hedging device. One risk arises because of the possible imperfect correlation between movements in the prices of the futures contracts and movements in the prices of the underlying instruments, which are the subject of the hedge. The Adviser will, however, attempt to reduce this risk by entering into futures contracts whose movements, in its judgment, will have a significant correlation with movements in the prices of a Fund’s underlying instruments sought to be hedged.
Successful use of futures contracts by a Fund for hedging purposes is also subject to the Adviser’s ability to correctly predict movements in the direction of the market. It is possible that, when a Fund has sold futures to hedge its portfolio against a decline in the market, the index, indices, or instruments underlying futures might advance and the value of the underlying instruments held in a Fund’s portfolio might decline. If this were to occur, a Fund would lose money on the futures and also would experience a decline in value in its underlying instruments. However, while this might occur to a certain degree, the Adviser believes that over time the value of a Fund’s portfolio will tend to move in the same direction as the market indices used to hedge the portfolio. It is also possible that if a Fund were to hedge against the possibility of a decline in the market (adversely affecting the underlying instruments held in its portfolio) and prices instead increased, a Fund would lose part or all of the benefit of increased value of those underlying instruments that it has hedged, because it would have offsetting losses in its futures positions. In addition, in such situations, if a Fund had insufficient cash, it might have to sell underlying instruments to meet daily variation margin requirements. Such sales of underlying instruments might be, but would not necessarily be, at increased prices (which would reflect the rising market). A Fund might have to sell underlying instruments at a time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect correlation, or no correlation at all, between price movements in the futures contracts and the portion of the portfolio being hedged, the price movements of futures contracts might not correlate perfectly with price movements in the underlying instruments due to certain market distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors might close futures contracts through offsetting transactions, which could distort the normal relationship between the underlying instruments and futures markets. Second, the margin requirements in the futures market are less onerous than margin requirements in the securities markets, and as a result the futures market might attract more speculators than the securities markets do. Increased participation by speculators in the futures market might also cause temporary price distortions. Due to the possibility of price distortion in the futures market and also because of the imperfect correlation between price movements in the underlying instruments and movements in the prices of futures contracts, even a correct forecast of general market trends by the Adviser might not result in a successful hedging transaction over a very short time period.
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LIBOR Risk. Many financial instruments, financings or other transactions use a floating rate based on the London Interbank Offered Rate (“LIBOR”). In July 2017, the Financial Conduct Authority, the United Kingdom’s financial regulatory body, announced that after 2021 it will cease its active encouragement of banks to provide the quotations needed to sustain LIBOR. In March 2021, the administrator of LIBOR announced a delay in the phase out of the majority of U.S. dollar LIBOR publications until June 30, 2023, although the remainder of LIBOR publications ended on December 31, 2021. The unavailability and/or discontinuation of LIBOR could have adverse impacts on newly issued financial instruments and existing financial instruments that reference LIBOR. While some instruments may contemplate a scenario in which LIBOR is no longer available by providing for an alternative rate setting methodology, not all instruments may have such provisions and there is uncertainty regarding the effectiveness of any alternative methodology. In addition, the unavailability or replacement of LIBOR may affect the value, liquidity or return on certain Fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. The potential effect of the transition away from LIBOR on the Fund or the financial instruments in which the Fund invests cannot yet be determined and may adversely affect the Fund’s performance or net asset value.
Liquidity. A Fund may elect to close some or all of its futures positions at any time prior to their expiration. A Fund would do so to reduce exposure represented by long futures positions or short futures positions. A Fund may close its positions by taking opposite positions, which would operate to terminate that Fund’s position in the futures contracts. Final determinations of variation margin would then be made, additional cash would be required to be paid by or released to a Fund, and that Fund would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of trade where the contracts were initially traded. Although each Fund intends to purchase or sell futures contracts only on exchanges or boards of trade where there appears to be an active market, there is no assurance that a liquid market on an exchange or board of trade will exist for any particular contract at any particular time. The reasons for the absence of a liquid secondary market on an exchange are substantially the same as those discussed in the section entitled “Description of Securities, Other Investment Policies and Risk Considerations – Special Risks of Transactions in Options on Futures Contracts”. In the event that a liquid market does not exist, it might not be possible to close out a futures contract, and in the event of adverse price movements, a Fund would continue to be required to make daily cash payments of variation margin. However, in the event futures contracts have been used to hedge the underlying instruments, a Fund would continue to hold the underlying instruments subject to the hedge until the futures contracts could be terminated. In such circumstances, an increase in the price of underlying instruments, if any, might partially or completely offset losses on the futures contract. However, as described below, there is no guarantee that the price of the underlying instruments will, in fact, correlate with the price movements in the futures contract and thus provide an offset to losses on a futures contract.
Trading in Futures Contracts. A futures contract provides for the future sale by one party and purchase by another party of a specified amount of a specific financial instrument (e.g., units of a stock index) for a specified price, date, time and place designated at the time the contract is made. The financial instrument underlying the contract may be a stock, stock index, bond, bond index, interest rate, foreign exchange rate or other similar instrument. Brokerage fees are incurred when a futures contract is bought or sold and margin deposits must be maintained. Entering into a contract to buy is commonly referred to as buying or purchasing a contract or holding a long position. Entering into a contract to sell is commonly referred to as selling a contract or holding a short position.
Futures contracts are traded in the United States on commodity exchanges or boards of trade (known as “contract markets”) approved for such trading and regulated by the CFTC. These contract markets standardize the terms, including the maturity date and underlying financial instrument, of all futures contracts.
Unlike when a Fund purchases or sells a security, no price would be paid or received by that Fund upon the purchase or sale of a futures contract. Upon entering into a futures contract, and to maintain a Fund’s open positions in futures contracts, a Fund would be required to deposit with its custodian or futures broker in a segregated account in the name of the futures broker an amount of cash, U.S. Government securities, suitable money market instruments, or other liquid securities, known as “initial margin”. The margin required for a particular futures contract is set by the exchange on which the contract is traded, and may be significantly modified from time to time by the exchange during the term of the contract. Futures contracts are customarily purchased and sold on margins that may range upward from less than 5% of the value of the contract being traded.
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If the price of an open futures contract changes (by increase in the underlying instrument or index in the case of a sale or by decrease in the case of a purchase) so that the loss on the futures contract reaches a point at which the margin on deposit does not satisfy margin requirements, the broker will require an increase in the margin. However, if the value of a position increases because of favorable price changes in the futures contract so that the margin deposit exceeds the required margin, the broker will pay the excess to that Fund.
These subsequent payments, called “variation margin”, to and from the futures broker, are made on a daily basis as the price of the underlying assets fluctuate making the long and short positions in the futures contract more or less valuable, a process known as “marking to the market”. A Fund expects to earn interest income on its margin deposits.
Although certain futures contracts, by their terms, require actual future delivery of and payment for the underlying instruments, in practice most futures contracts are usually closed out before the delivery date. Closing out an open futures contract purchase or sale is effected by entering into an offsetting futures contract sale or purchase, respectively, for the same aggregate amount of the identical underlying instrument or index and the same delivery date. If the offsetting purchase price is less than the original sale price, a Fund realizes a gain; if it is more, a Fund realizes a loss. Conversely, if the offsetting sale price is more than the original purchase price, a Fund realizes a gain; if it is less, a Fund realizes a loss. The transaction costs must also be included in these calculations. There can be no assurance, however, that a Fund will be able to enter into an offsetting transaction with respect to a particular futures contract at a particular time. If a Fund is not able to enter into an offsetting transaction that Fund will continue to be required to maintain the margin deposits on the futures contract.
For example, one contract in the Financial Times Stock Exchange 100 Index future is a contract to buy 25 pounds sterling multiplied by the level of the UK Financial Times 100 Share Index on a given future date. Settlement of a stock index futures contract may or may not be in the underlying instrument or index. If not in the underlying instrument or index, then settlement will be made in cash, equivalent over time to the difference between the contract price and the actual price of the underlying asset at the time the stock index futures contract expires.
Volatility and Leverage. The prices of futures contracts are volatile and are influenced, among other things, by actual and anticipated changes in the market and interest rates, which in turn are affected by fiscal and monetary policies and national and international political and economic events. Most United States futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of futures contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves an extremely high degree of leverage. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss, as well as gain, to the investor. For example, if at the time of purchase, 10% of the value of the futures contract were deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit, if the contract were closed out. Thus, a purchase or sale of a futures contract may result in losses in excess of the amount of margin deposited to maintain the futures contract. However, a Fund would presumably have sustained comparable losses if, instead of the futures contract, it had invested in the underlying financial instrument and sold it after the decline.
ILLIQUID SECURITIES
Certain securities that a Fund may purchase (e.g., restricted securities purchased in private placements) may be illiquid (generally, securities that the Fund determines are unlikely to be able to be sold within seven (7) days) when purchased.
Securities held by a Fund, even if liquid when acquired, may become illiquid if the underlying issuer faces material financial difficulties or bankruptcy, the securities are delisted from an exchange on which they were traded or the Adviser otherwise determines that the securities are illiquid. Illiquid securities are subject to the risk that they cannot be sold in a timely manner, and are also subject to the risk that they must be fair valued by the applicable Fund with little or no current, independent pricing information. In such a case, the Fund may undervalue or overvalue the securities. Each Fund is subject to a restriction preventing the Fund from acquiring illiquid securities with more than 15% of its assets. If through the appreciation of illiquid securities or the depreciation of liquid securities, a Fund should be in a position where more than 15% of the value of its net assets are invested in illiquid assets, including restricted securities, a Fund will take appropriate steps to protect liquidity.
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INVESTMENT COMPANIES
The Funds may invest in the securities of other investment companies, including ETFs, closed-end funds and open-end (mutual) funds (also called underlying funds), as well as in business development companies. To the extent such underlying funds are index-based, these underlying funds will generally attempt to replicate the performance of a particular index. An underlying fund may not always hold all of the same securities as the index it attempts to track. An underlying fund may use statistical sampling techniques to attempt to replicate the returns of an index. Statistical sampling techniques attempt to match the investment characteristics of the index and the fund by taking into account such factors as capitalization, industry exposures, dividend yield, price/earnings (P/E) ratio, price/book (P/B) ratio, and earnings growth. An underlying fund may not track the index perfectly because differences between the index and the fund’s portfolio can cause differences in performance. In addition, expenses and transaction costs, the size and frequency of cash flow into and out of the fund, and differences between how and when the fund and the index are valued can cause differences in performance. Furthermore, when a Fund invests in shares of underlying funds, performance is directly related to the ability of the underlying funds to meet their respective investment objectives, as well as the allocation of the Fund’s assets among the underlying funds by the Adviser. Accordingly, each Fund’s investment performance will be influenced by the investment strategies of and risks associated with any underlying funds in direct proportion to the amount of assets the Fund allocates to such underlying funds utilizing such strategies.
There is also a risk that the underlying funds may terminate due to extraordinary events. For example, any of the service providers to an underlying fund, such as the trustee or sponsor, may close or otherwise fail to perform their obligations to the underlying fund, and the underlying fund may not be able to find a substitute service provider. Also, the underlying fund may be dependent upon licenses to use the various indices as a basis for determining their compositions and/or otherwise to use certain trade names. If these licenses are terminated, the respective underlying fund may also terminate. In addition, an underlying fund may terminate if its net assets fall below a certain amount. Although the Funds believe that in the event of the termination of an underlying fund, the applicable Fund will be able to invest instead in shares of an alternate underlying fund tracking the same market index or another index covering the same general market, there can be no assurance that shares of an alternate underlying fund would be available for investment at that time.
Additional risks related to investments in investment companies, including risks related to specific types of investment companies, are set forth below.
1940 Act Requirements. Generally, under Section 12(d)(1) of the 1940 Act, a fund may not acquire shares of another investment company if, immediately after such acquisition, (i) a fund would hold more than 3% of the other investment company’s total outstanding shares, (ii) a fund’s investment in securities of the other investment company would be more than 5% of the value of the total assets of the fund, or (iii) more than 10% of a fund’s total assets would be invested in investment companies. Under certain statutory and regulatory exemptions, a fund may invest in registered and unregistered money market funds in excess of these limitations. The Funds may rely upon any applicable statutory or regulatory exemptions in investing in other investment companies. These restrictions and conditions may limit the Funds’ ability to invest in other investment companies to the extent desired.
Business Development Companies. Business Development Companies (“BDCs”) are a type of closed-end investment company regulated under the 1940 Act. BDCs typically operate as publicly traded private equity firms that invest in early stage to mature private companies as well as small public companies. BDCs are regulated under the 1940 Act and are taxed as regulated investment companies (“RICs”) under the Internal Revenue Code of 1986, as amended (the “Code”). . BDCs realize operating income when their investments are sold off, and therefore maintain complex organizational, operational, tax and compliance requirements. For tax purposes, BDCs generally intend to qualify for taxation as RICs. To so qualify, BDCs must satisfy certain asset diversification and source of income tests and must generally distribute at least 90% of their taxable earnings as dividends. Under the 1940 Act, BDCs are also required to invest at least 70% of their total assets primarily in securities of private companies or thinly traded U.S. public companies, cash, cash equivalents, U.S. Government securities and high quality debt investments that mature in one year or less. While BDCs are expected to generate income in the form of dividends, because BDCs generally invest in less mature private companies or thinly traded U.S. public companies (which involve greater risk than well-established publicly-traded companies), certain BDCs during certain periods of time may not generate such income. Generally, little public information exists for private and thinly traded companies and there is a risk that investors may not be able to make a fully informed evaluation of a BDC and the BDC’s portfolio of investments. Securities of private companies may be difficult to value and may be difficult to sell at a price representative of their intrinsic value. Small and medium-sized companies also may have fewer lines of business so that changes in any one line of business may have a greater impact on the value of their stock than is the case with a larger company. In addition, investments made by BDCs are generally subject to legal and other restrictions on resale and are otherwise less liquid than publicly-traded securities. The illiquidity of these investments may make it difficult to sell such investments if the need arises, and if there is a need for a BDC in which a Fund invests to liquidate its portfolio quickly, it may realize a loss on its investments. BDCs may have relatively concentrated investment portfolios, consisting of a relatively small number of holdings. A consequence of this limited number of investments is that the aggregate returns realized may be disproportionately impacted by the poor performance of a small number of investments, or even a single investment, particularly if a company experiences the need to write down the value of an investment. Since BDCs rely on access to short-term money markets, longer-term capital markets and the bank markets as significant sources of liquidity, if BDCs are not able to access capital at competitive rates, their ability to implement certain financial strategies will be negatively impacted. Market disruptions, including a downturn in capital markets in general or a downgrade of the credit rating of a BDC held by a Fund, may increase the cost of borrowing to that company, thereby increasing its cost of borrowing and adversely impacting the Fund’s returns. Credit downgrades may also result in requirements for a BDC to provide additional support in the form of letters of credit or cash or other collateral to various counterparties.
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Closed-End Investment Companies. Each Fund may invest in “closed-end” investment companies (or “closed-end funds”), subject to the investment restrictions set forth below. A Fund, together with any company or companies controlled by that Fund, and any other investment companies having the Adviser as an investment adviser, may purchase in the aggregate only up to 3% of the total outstanding voting stock of any closed-end fund. Shares of closed-end funds are typically offered to the public in a one-time initial public offering by a group of underwriters who retain a spread or underwriting commission of between 4% or 6% of the initial public offering price. Such securities are then listed for trading on the NYSE, the National Association of Securities Dealers Automated Quotation System (commonly known as “NASDAQ”) and, in some cases, may be traded in other over-the-counter markets. Because the shares of closed-end funds cannot be redeemed upon demand to the issuer like the shares of an open-end investment company (such as the Funds), investors seek to buy and sell shares of closed-end funds in the secondary market.
Each Fund generally will purchase shares of closed-end funds only in the secondary market. A Fund will incur normal brokerage costs on such purchases similar to the expenses a Fund would incur for the purchase of securities of any other type of issuer in the secondary market. A Fund may, however, also purchase securities of a closed-end fund in an initial public offering when, in the opinion of the Adviser, based on a consideration of the nature of the closed-end fund’s proposed investments, the prevailing market conditions and the level of demand for such securities, they represent an attractive opportunity for growth of capital. The initial offering price typically will include a dealer spread, which may be higher than the applicable brokerage cost if a Fund purchased such securities in the secondary market.
The shares of many closed-end funds, after their initial public offering, frequently trade at a price per share, which is less than the NAV per share, the difference representing the “market discount” of such shares. This market discount may be due in part to the investment objective of long-term appreciation, which is sought by many closed-end funds, as well as to the fact that the shares of closed-end funds are not redeemable by the holder upon demand to the issuer at the next determined NAV but rather are subject to the principles of supply and demand in the secondary market. A relative lack of secondary market purchasers of closed-end fund shares also may contribute to such shares trading at a discount to their net asset value.
A Fund may invest in shares of closed-end funds that are trading at a discount to NAV or at a premium to net asset value. There can be no assurance that the market discount on shares of any closed-end fund purchased by a Fund will ever decrease. In fact, it is possible that this market discount may increase and a Fund may suffer realized or unrealized capital losses due to further decline in the market price of the securities of such closed-end funds, thereby adversely affecting the NAV of a Fund’s shares. Similarly, there can be no assurance that any shares of a closed-end fund purchased by a Fund at a premium will continue to trade at a premium or that the premium will not decrease subsequent to a purchase of such shares by the Fund.
Closed-end funds may issue senior securities (including preferred stock and debt obligations) for the purpose of leveraging the closed-end fund’s common shares in an attempt to enhance the current return to such closed-end fund’s common shareholders. A Fund’s investment in the common shares of closed-end funds that are financially leveraged may create an opportunity for greater total return on its investment, but at the same time may be expected to exhibit more volatility in market price and NAV than an investment in shares of investment companies without a leveraged capital structure.
Exchange Traded Funds. A Fund may invest in shares of exchange traded funds (“ETFs”), which are investment companies, commodity pools or other entities that are traded on an exchange. Typically, assets underlying the ETF shares are stocks, though they may also be commodities or other instruments. An ETF may seek to replicate the performance of a specific index or may be actively managed.
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Typically, shares of an ETF that tracks an index are expected to increase in value as the value of the underlying benchmark increases. However, in the case of inverse ETFs (also called “short ETFs” or “bear ETFs”), ETF shares are expected to increase in value as the value of the underlying benchmark decreases. Inverse ETFs seek to deliver the opposite of the performance of the benchmark they track and are often marketed as a way for investors to profit from, or at least hedge their exposure to, downward moving markets. Investments in inverse ETFs are similar to holding short positions in the underlying benchmark. Leveraged ETFs seek to deliver multiples of the performance of the index or other benchmark they track and use derivatives in an effort to amplify the returns (or declines, in the case of leveraged inverse ETFs) of the underlying index or benchmark. In addition, some ETFs are non-registered investment companies that invest directly in securities, commodities or other assets (such as precious metals).
Inverse and leveraged ETFs are subject to additional risks not generally associated with traditional ETFs. The NAV and market price of leveraged or inverse ETFs are usually more volatile than the value of the tracked index or of other ETFs that do not use leverage. Inverse and leveraged ETFs may use investment techniques and financial instruments such as derivative transactions and short selling techniques, and the use of these techniques may cause the inverse or leveraged ETFs to lose more money in market environments that are adverse to their investment strategies than other funds that do not use such techniques. In addition, while leveraged ETFs may offer the potential for greater return, the potential for loss and the speed at which losses can be realized also are greater. Most leveraged and inverse ETFs “reset” daily, meaning they are designed to achieve their stated objectives on a daily basis. Leveraged and inverse ETFs can deviate substantially from the performance of their underlying benchmark over longer periods of time, particularly in volatile periods.
ETF shares are redeemable only in large blocks (typically, 50,000 shares), called “creation units”, and are redeemed principally in-kind at each day’s next calculated net asset value per share (NAV). ETFs typically incur fees that are separate from those fees incurred directly by a fund. A Fund’s purchase of ETFs results in the layering of expenses, such that the Fund would indirectly bear a proportionate share of any ETF’s operating expenses. Further, while traditional investment companies are continuously offered at NAV, ETFs are traded in the secondary market (e.g., on a stock exchange) on an intra-day basis at prices that may be above or below the value of their underlying portfolios.
Investments in an ETF involve certain risks generally associated with investments in a broadly based portfolio of securities, including risks that the general level of stock prices may decline, thereby adversely affecting the value of each unit of the ETF or other instrument. In addition, an index-based ETF may not fully replicate the performance of its benchmark index because of the temporary unavailability of certain investments in the secondary market, discrepancies between the ETF and the index with respect to the weighting or number of investments held or other factors. In addition, an ETF may be adversely affected by the performance of the specific index, market sector or group of industries on which it is based. ETFs that invest in other assets, such as commodities, are subject to the risks associated with directly investing in those assets. In addition, ETFs are subject to the following risks that do not apply to conventional mutual funds: (1) the market price of the ETF’s shares may trade at a discount to their net asset value and, if an index-based ETF, the ETF may not track an index as well as a traditional index mutual fund because of the disparity between the ETF’s market value and the ETF’s NAV; (2) an active trading market for an ETF’s shares may not develop or be maintained; or (3) trading of an ETF’s shares may be halted if the listing exchange’s officials deem such action appropriate, if the shares are de-listed from the exchange, or upon the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.
Because ETFs and pools that issue similar instruments bear various fees and expenses, a Fund’s investment in these instruments will involve certain indirect costs, as well as transaction costs, such as brokerage commissions. The Adviser may consider the expenses associated with an investment in determining whether to invest in an ETF.
Expenses of Other Investment Companies. A Fund’s investments in ETFs, mutual funds, closed-end funds and other underlying funds involve certain additional expenses and certain tax results, which would not be present in a direct investment in the underlying funds.
Master/Feeder Structure. Notwithstanding these limitations, each Fund reserves the right to convert to a “master/feeder” structure at a future date. If the Board approved the use of a master-feeder structure for a Fund, a Fund (the “feeder” fund) would invest all of its investable assets in an open-end management investment company (the “master” fund) with substantially the same investment objectives, policies and limitations as that Fund. For this purpose, “all of the Fund’s investable assets” means that the only investment securities that would be held by that Fund would be that Fund’s interest in the master fund. Under such a structure, one or more “feeder” funds, such as a Fund, invest all of their assets in a “master” fund, which, in turn, invests directly in a portfolio of securities. If required by applicable law, a Fund will seek shareholder approval before converting to a master/feeder structure. If the requisite regulatory authorities determine that such approval is not required, shareholders will be deemed, by purchasing shares, to have consented to such a conversion and no further shareholder approval will be sought. Such a conversion is expressly permitted under the investment objective and fundamental policies of a Fund.
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Open-End Investment Companies. The 1940 Act provides that an underlying fund whose shares are purchased by a Fund will be obligated to redeem shares held by a Fund only in an amount up to 1% of the underlying fund’s outstanding securities during any period of less than 30 days. Shares held by a Fund in excess of 1% of an underlying fund’s outstanding securities therefore, will generally be considered not readily marketable securities, which, together with other such securities, may not exceed 15% of a Fund’s assets. In some cases deemed appropriate by the Adviser or the Board of Trustees, Shares held by a Fund in excess of 1% of an underlying fund’s outstanding securities will be considered readily marketable securities (for example, ETFs, which are registered as open-end investment companies but listed on an exchange).
Under certain circumstances an underlying fund may determine to make payment of a redemption by a Fund wholly or partly by a distribution in kind of securities from its portfolio, in lieu of cash, in conformity with the rules of the SEC. In such cases, a Fund may hold securities distributed by an underlying fund until the Adviser determines that it is appropriate to dispose of such securities.
Investment decisions by the investment advisers of the underlying funds are made independently of a Fund and the Adviser. Therefore, the investment adviser of one underlying fund may be purchasing shares of the same issuer whose shares are being sold by the investment adviser of another such fund. The result of this would be an indirect expense to a Fund without accomplishing any investment purpose.
MARKET RISK
Market risk is the risk that the value of the securities in the Funds’ portfolios may decline due to daily fluctuations in the securities markets that are generally beyond the Adviser’s control, including fluctuation in interest rates, the quality of the Funds’ investments, economic conditions and general market conditions. Certain market events could increase volatility and exacerbate market risk, and could result in trading halts, such as changes in governments’ economic policies, political turmoil, environmental events, trade disputes, terrorism, war, military action and epidemics, pandemics or other public health issues. Any of the foregoing market events can adversely affect the economies of one or more countries or the entire global economy, certain industries or individual issuers, and capital and security markets in ways that cannot necessarily be foreseen or quickly addressed.
As shown with the novel coronavirus disease that emerged in 2020 (COVID-19), market events (including public health crises and concerns) can have a profound economic and business effect that results in cancellations and disruptions to supply chains and customer activity, disruption and displacement of one or more sectors or industries, closing of borders and imposition of travel restrictions and quarantines, general public concern and uncertainty and, in extreme cases, exchange trading halts due to rapidly falling prices.
Market events such as these and other types of market events may cause significant declines in the values and liquidity of many securities and other instruments, and significant disruptions to global business activity and financial markets. Turbulence in financial markets, and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers both domestically and around the world, and can result in trading halts, any of which could have an adverse impact on the Fund. During periods of market volatility, security prices (including securities held by the Funds) could change drastically and rapidly and therefore adversely affect the Funds.
OPTIONS
Dealer (Over-the-Counter) Options. The Funds may engage in transactions involving dealer options. Certain risks are specific to dealer options. While the Funds would look to a clearing corporation to exercise exchange-traded options, if the Funds were to purchase a dealer option, it would rely on the dealer from whom it purchased the option to perform if the option were exercised. Failure by the dealer to do so would result in the loss of the premium paid by the Funds as well as loss of the expected benefit of the transaction. Transaction costs regarding writing and purchasing options are normally higher than those applicable to purchases and sales of portfolio securities.
Exchange-traded options generally have a continuous liquid market while dealer options have none. Consequently, the Funds will generally be able to realize the value of a dealer option it has purchased only by exercising it or reselling it to the dealer who issued it. Similarly, when a Fund writes a dealer option, it generally will be able to close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer to which the Funds originally wrote the option. While the Funds will seek to enter into dealer options only with dealers who will agree to and which are expected to be capable of entering into closing transactions with a Fund, there can be no assurance that a Fund will be able to liquidate a dealer option at a favorable price at any time prior to expiration. Until a Fund, as a covered dealer call option writer, is able to effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) or currencies used as cover until the option expires or is exercised. In the event of insolvency of the contra party, the Funds may be unable to liquidate a dealer option. With respect to options written by a Fund, the inability to enter into a closing transaction may result in material losses to that Fund. For example, since the Funds must maintain a secured position with respect to any call option on a security they write, the Funds may not sell the assets, that they have segregated to secure the position while it is obligated under the option. This requirement may impair a Fund’s ability to sell portfolio securities or currencies at a time when such sale might be advantageous.
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The Staff of the SEC has taken the position that purchased dealer options and the assets used to secure the written dealer options are illiquid securities. A Fund may treat the cover used for written OTC options as liquid if the dealer agrees that a Fund may repurchase the OTC option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the OTC option would be considered illiquid only to the extent the maximum repurchase price under the formula exceeds the intrinsic value of the option. Accordingly, each Fund will treat dealer options as subject to a Fund’s limitation on unmarketable securities. If the SEC changes its position on the liquidity of dealer options, a Fund will change its treatment of such instrument accordingly.
Options on Futures Contracts. Each Fund may purchase and sell options on the same types of futures in which it may invest. Options on futures are similar to options on underlying instruments except that options on futures give the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put), rather than to purchase or sell the futures contract, at a specified exercise price at any time during the period of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by the delivery of the accumulated balance in the writer’s futures margin account which represents the amount by which the market price of the futures contract, at exercise, exceeds (in the case of a call) or is less than (in the case of a put) the exercise price of the option on the futures contract. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid.
Where a Fund seeks to close out an option position by writing or buying an offsetting option covering the same underlying instrument, index or contract and having the same exercise price and expiration date, its ability to establish and close out positions on such options will be subject to the maintenance of a liquid secondary market. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options, or underlying instruments; (iv) unusual or unforeseen circumstances (e.g., volume exceeds clearing capability) may interrupt normal operations on an exchange; (v) the facilities of an exchange or a clearing corporation may not at all times be adequate to handle current trading volume; or (vi) one or more 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 exchange (or in the class or series of options) would cease to exist, although outstanding options on the exchange that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of any of the clearing corporations inadequate, and thereby result in the institution by an exchange of special procedures which may interfere with the timely execution of customers’ orders.
As an alternative to writing or purchasing call and put options on stock index futures, each Fund may write or purchase call and put options on stock indices. Such options would be used in a manner similar to the use of options on futures contracts.
Purchasing Call Options. Each Fund may purchase American or European style call options. As the holder of a call option, a Fund has the right to purchase the underlying security or currency at the exercise price at any time during the option period (American style) or at the expiration of the option (European style). A Fund may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. A Fund may purchase call options for the purpose of increasing its current return or avoiding tax consequences, which could reduce its current return. A Fund may also purchase call options in order to acquire the underlying securities or currencies. Examples of such uses of call options are provided below.
Call options may be purchased by a Fund for the purpose of acquiring the underlying securities or currencies for its portfolio. Utilized in this fashion, the purchase of call options enables a Fund to acquire the securities or currencies at the exercise price of the call option plus the premium paid. At times the net cost of acquiring securities or currencies in this manner may be less than the cost of acquiring the securities or currencies directly. This technique may also be useful to a Fund in purchasing a large block of securities or currencies that would be more difficult to acquire by direct market purchases. So long as it holds such a call option rather than the underlying security or currency itself, a Fund is partially protected from any unexpected decline in the market price of the underlying security or currency and in such event could allow the call option to expire, incurring a loss only to the extent of the premium paid for the option.
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Purchasing Put Options. Each Fund may purchase American or European style put options. As the holder of a put option, a Fund has the right to sell the underlying security or currency at the exercise price at any time during the option period (American style) or at the expiration of the option (European style). In return for this right, the Fund pays the current market price for the option (known as the “option premium”). A Fund may enter into closing sale transactions with respect to such options, exercise them or permit them to expire. A Fund may purchase put options for defensive purposes in order to protect against an anticipated decline in the value of its securities or currencies.
Each Fund may purchase a put option on an underlying security or currency (a “protective put”) owned by a Fund as a defensive technique in order to protect against an anticipated decline in the value of the security or currency. Such hedge protection is provided only during the life of the put option when a Fund, as the holder of the put option, is able to sell the underlying security or currency at the put exercise price regardless of any decline in the underlying security’s market price or currency’s exchange value. For example, a put option may be purchased in order to protect unrealized appreciation of a security or currency where the Adviser deems it desirable to continue to hold the security or currency because of tax considerations. The premium paid for the put option and any transaction costs would reduce any capital gain otherwise available for distribution when the security or currency is eventually sold.
Each Fund may also purchase put options at a time when a Fund does not own the underlying security or currency. By purchasing put options on a security or currency it does not own, a Fund seeks to benefit from a decline in the market price of the underlying security or currency. If the put option is not sold when it has remaining value, and if the market price of the underlying security or currency remains equal to or greater than the exercise price during the life of the put option, a Fund will lose its entire investment in the put option. In order for the purchase of a put option to be profitable, the market price of the underlying security or currency must decline sufficiently below the exercise price to cover the premium and transaction costs, unless the put option is sold in a closing sale transaction.
Option Combinations. Each Fund may purchase or write put or call options in combinations, including, without limitation, spreads, straddles and collars. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out. In “spread” transactions, a Fund buys and writes a put or buys and writes a call on the same underlying instrument with the options having different exercise prices, expiration dates, or both. In “straddles,” a Fund purchases a put option and a call option or writes a put option and a call option on the same instrument with the same expiration date and the same exercise price. When a Fund engages in spread and straddle transactions, it seeks to profit from differences in the option premiums paid and received and in the market prices of the related options positions when they are closed out or sold. Because these transactions require the Fund to buy and/or write more than one option simultaneously, the Fund’s ability to enter into such transactions and to liquidate its positions when necessary or deemed advisable may be more limited than if the Fund were to buy or sell a single option. Similarly, costs incurred by the Fund in connection with these transactions will in many cases be greater than if the Fund were to buy or sell a single option. A Fund also may use option “collars.” A “collar” position combines a put option purchased by the Fund (the right of the Fund to sell a specific security within a specified period) with a call option that is written by the Fund (the right of the counterparty to buy the same security) in a single instrument. The Fund’s right to sell the security is typically set at a price that is below the counterparty’s right to buy the security. Thus, the combined position “collars” the performance of the underlying security, providing protection from depreciation below the price specified in the put option, and allowing for participation in any appreciation up to the price specified by the call option. In each case, the premium received for writing an option offsets, in part, the premium paid to purchase the corresponding option, however, downside protection may be limited as compared to just owning a single option. Also, certain option combinations, such as straddles, may be subject to special tax rules.
Special Risks of Over the Counter Options. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between a Fund and its counter-party (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when the Fund purchases an OTC option, it relies on the counter-party from whom it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the counter-party to do so would result in the loss of any premium paid by the Fund as well as the loss of any expected benefit of the transaction.
A Fund’s ability to establish and close out positions in exchange-traded options depends on the existence of a liquid market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by negotiating directly with the counter-party or by a transaction in the secondary market if any such market exists. There can be no assurance that the Fund will in fact be able to close out an OTC option position at a favorable price prior to expiration. In the event of insolvency of the counter-party, the Fund might be unable to close out an OTC option position at any time prior to its expiration.
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If a Fund were unable to effect a closing transaction for an option it had purchased, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by the Fund could cause material losses because the Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.
Writing Covered Call Options. A Fund may write (sell) American or European style “covered” call options and purchase options to close out options previously written by that Fund. In writing covered call options, a Fund expects to generate additional premium income which should serve to enhance that Fund’s total return and reduce the effect of any price decline of the security or currency involved in the option. Covered call options will generally be written on securities or currencies which, in the Adviser’s opinion, are not expected to have any major price increases or moves in the near future but which, over the long term, are deemed to be attractive investments for a Fund.
A call option gives the holder (buyer) the “right to purchase” a security or currency at a specified price (the exercise price) at expiration of the option (European style) or at any time until a certain date (the expiration date) (American style). So long as the obligation of the writer of a call option continues, he may be assigned an exercise notice by the broker-dealer through whom such option was sold, requiring him to deliver the underlying security or currency against payment of the exercise price. This obligation terminates upon the expiration of the call option, or such earlier time at which the writer effects a closing purchase transaction by repurchasing an option identical to that previously sold. To secure his obligation to deliver the underlying security or currency in the case of a call option, a writer is required to deposit in escrow the underlying security or currency or other assets in accordance with the rules of a clearing corporation.
A call option is considered “covered” if a Fund (i) owns the security or currency subject to the option, or owns an option to purchase the same underlying security or currency having an exercise price equal to or less than the exercise price of the “covered” option; or (ii) has established with its custodian for the term of the option an account consisting of cash, U.S. Government securities or other liquid securities having a value equal to the fluctuating market value of the securities or currencies on which a Fund holds the option.
The writing of covered call options is a conservative investment technique believed to involve relatively little risk (in contrast to the writing of naked or uncovered options), but capable of enhancing a Fund’s total return. When writing a covered call option, a Fund, in return for the premium, gives up the opportunity for profit from a price increase in the underlying security or currency above the exercise price, but conversely retains the risk of loss should the price of the security or currency decline. Unlike one who owns securities or currencies not subject to an option, a Fund has no control over when it may be required to sell the underlying securities or currencies, since it may be assigned an exercise notice at any time prior to the expiration of its obligation as a writer. If a call option, which a Fund has written, expires, a Fund will realize a gain in the amount of the premium; however, such gain may be offset by a decline in the market value of the underlying security or currency during the option period. If the call option is exercised, a Fund will realize a gain or loss from the sale of the underlying security or currency. The Funds do not consider a security or currency covered by a call to be “pledged” as that term is used in a Fund’s policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium a Fund will receive from writing a call option will reflect, among other things, the current market price of the underlying security or currency, the relationship of the exercise price to such market price, the historical price volatility of the underlying security or currency, and the length of the option period. Once the decision to write a call option has been made, the Adviser, in determining whether a particular call option should be written on a particular security or currency, will consider the reasonableness of the anticipated premium and the likelihood that a liquid secondary market will exist for those options. The premium received by a Fund for writing covered call options will be recorded as a liability of that Fund. This liability will be adjusted daily to the option’s current market value, which will be the latest sale price at the time at which the net asset value (“NAV”) per share of a Fund is computed (the close of the New York Stock Exchange (“NYSE”)) or, in the absence of such sale, the latest asked price. The option will be terminated upon expiration of the option, the purchase of an identical option in a closing transaction, or delivery of the underlying security or currency upon the exercise of the option.
Closing transactions are typically effected in order to realize a profit on an outstanding call option, to prevent an underlying security or currency from being called, or, to permit the sale of the underlying security or currency. Furthermore, effecting a closing transaction will permit a Fund to write another call option on the underlying security or currency with either a different exercise price or expiration date or both. If a Fund desires to sell a particular security or currency from its portfolio on which it has written a call option, or purchased a put option, it will seek to effect a closing transaction prior to, or concurrently with, the sale of the security or currency. There is no assurance that a Fund will be able to effect such closing transactions at favorable prices. If a Fund cannot enter into such a transaction, it may be required to hold a security or currency that it might otherwise have sold. When a Fund writes a covered call option, it runs the risk of not being able to participate in the appreciation of the underlying securities or currencies above the exercise price, as well as the risk of being required to hold on to securities or currencies that are depreciating in value. This could result in higher transaction costs. A Fund will pay transaction costs in connection with the writing of options to close out previously written options. Such transaction costs are normally higher than those applicable to purchases and sales of portfolio securities.
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The exercise price of the options may be below, equal to, or above the current market values of the underlying securities or currencies at the time the options are written. From time to time, a Fund may purchase an underlying security or currency for delivery in accordance with an exercise notice of a call option assigned to it, rather than delivering such security or currency from its portfolio. In such cases, additional costs may be incurred.
A Fund will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from the writing of the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security or currency, any loss resulting from the repurchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security or currency owned by the Fund.
Writing Covered Put Options. Each Fund may write American or European style covered put options and purchase options to close out options previously written by a Fund. A put option gives the purchaser of the option the right to sell and the writer (seller) has the obligation to buy, the underlying security or currency at the exercise price during the option period (American style) or at the expiration of the option (European style). So long as the obligation of the writer continues, it may be assigned an exercise notice by the broker-dealer through whom such option was sold, requiring it to make payment of the exercise price against delivery of the underlying security or currency. The operation of put options in other respects, including their related risks and rewards, is substantially identical to that of call options.
A put option is considered “covered” if a Fund (i) maintains in a segregated account cash, U.S. Government securities or other liquid appropriate securities in an amount not less than the exercise price or (ii) owns an option to sell the underlying security or currency subject to the option having an exercise price equal to or greater than the exercise price of the “covered” option at all times while the put option is outstanding. (The rules of a clearing corporation currently require that such assets be deposited in escrow to secure payment of the exercise price.) A Fund would generally write covered put options in circumstances where the Adviser wishes to purchase the underlying security or currency for a Fund’s portfolio at a price lower than the current market price of the security or currency. In such event a Fund would write a put option at an exercise price, which, reduced by the premium received on the option, reflects the lower price it is willing to pay. Since a Fund would also receive interest on debt securities or currencies maintained to cover the exercise price of the option, this technique could be used to enhance current return during periods of market uncertainty. The risk in such a transaction would be that the market price of the underlying security or currency would decline below the exercise price less the premiums received. Such a decline could be substantial and result in a significant loss to a Fund. In addition, a Fund, because it does not own the specific securities or currencies, which it may be required to purchase in exercise of the put, cannot benefit from appreciation, if any, with respect to such specific securities or currencies.
If trading is interrupted in an underlying security, the trading of options on that security is usually halted as well. Holders and writers of options will then be unable to close out their positions until options trading resumes, and they may be faced with considerable losses if the security reopens at a substantially different price. Even if options trading is halted, holders of options will generally be able to exercise them. However, if trading has also been halted in the underlying security, option holders face the risk of exercising options without knowing the security’s current market value. If exercises do occur when trading of the underlying security is halted, the party required to deliver the underlying security may be unable to obtain it, which may necessitate a postponed settlement and/or the fixing of cash settlement prices.
REAL ESTATE INVESTMENT TRUSTS
The Funds may invest in real estate investment trusts (“REITs”). Equity REITs invest directly in real property while mortgage REITs invest in mortgages on real property. REITS may also include operating or finance companies. REITs are subject to similar risks to those of direct investments in real estate and the real estate industry generally, including, without limitation, declines in the value of real estate, risks related to changes in general and local economic conditions, overbuilding and increased competition (including, without limitation, competition based on rental rates), increases in property taxes and operating expenses, variations in rental income, loss to casualty or condemnation, zoning law amendments, changes in interest rates, variations in market value, changes in the financial condition of tenants, changes in operating costs, attractiveness and location of properties, adverse changes in the real estate markets generally or in specific sectors of the real estate industry and possible environmental liabilities. REITs pay dividends to their shareholders based upon available funds from operations. It is quite common for these dividends to exceed a REIT’s taxable earnings and profits, resulting in the excess portion of such dividends being designated as a return of capital. To the extent that a Fund includes the gross dividends from such REITs in its distributions to its shareholders, a portion of the Fund’s distributions may be deemed a return of capital. In addition, generally, REITs are subject to management fees and other expenses, and so any Fund invested in a REIT might bear its proportionate share of the costs of the REIT’s operations. REITs are also subject to additional risks associated with poor performance by the REIT’s manager, changes to the tax laws, and failure by the REIT to qualify for tax-free distributions of income or exemption under the 1940 Act. Furthermore, REITs are not diversified and are heavily dependent on cash flow.
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REGULATORY MATTERS
Changing Fixed Income Market Conditions. Changes in domestic policy may expose fixed-income and related markets to heightened volatility and may reduce liquidity for certain fixed income investments, including fixed income investments held by a Fund, which could cause the value of the Fund’s investments and share price to decline and/or may increase shareholder redemptions from the Fund. Heavy redemptions could cause a Fund to sell assets at inopportune times or at a loss or depressed value and could hurt the Fund’s performance. To the extent that a Fund invests in derivatives tied to fixed income markets, the Fund will be more substantially exposed to these risks than a fund that does not invest in such derivatives.
Regulatory Limitations. The Funds will engage in futures contracts and options thereon only for bona fide hedging, yield enhancement, risk management purposes, or as otherwise permitted by the rules and regulations of the CFTC. The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in July 2010, regulates the OTC derivatives market by, among other things, requiring many derivative transactions to be cleared, expanding entity registration requirements, imposing business conduct requirements on dealers and requiring banks to move some derivatives trading units to a non-guaranteed affiliate separate from the deposit-taking bank or divest them altogether.
The Funds’ investments in regulated derivatives instruments, such as swaps, futures and options, may be subject to maximum position limits established by the CFTC and U.S. and foreign futures exchanges. Under the exchange rules, all accounts owned or managed by advisers (such as the Adviser) or the Adviser’s principals or affiliates would be combined for position limit purposes. To comply with the position limits established by the CFTC and the relevant exchanges, the Adviser may in the future reduce the size of positions that would otherwise be taken for the Funds or not trade in certain markets on behalf of the Funds to avoid exceeding such limits. A violation of position limits by the Adviser could lead to regulatory action resulting in mandatory liquidation of certain positions held by the Adviser on behalf of any Fund. There can be no assurance that the Adviser will liquidate positions held on behalf of all of the Adviser’s accounts in a proportionate manner or at favorable prices, which may result in substantial losses to the Funds. Such policies could affect the nature and extent of derivatives use by the Funds.
Regulation as a Commodity Pool Operator. The Adviser has filed with the National Futures Association, a notice claiming an exclusion from the definition of the term “commodity pool operator” with respect to the Active Allocation Fund, the Active Income Fund and the Risk Assist Fund pursuant to Rule 4.5 under the CEA, as amended, and the rules of the CFTC promulgated thereunder. Accordingly, the Adviser is not subject to registration or regulation as a commodity pool operator with respect to those Funds. Changes to the Fund’s investment strategies or investments may trigger additional CFTC regulation, in which case the Adviser or the Fund may incur additional expenses. In addition, recent legal and regulatory changes, and additional legal and regulatory changes in the future, may substantially affect over-the-counter derivatives markets and such changes may impact the Funds’ use of such instruments to the extent such instruments are used by the Funds.
RESTRICTED SECURITIES AND RULE 144A
Restricted securities may be acquired in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the 1933 Act. Where registration is required, a Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time a Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, a Fund might obtain a less favorable price than prevailed when it decided to sell. Restricted securities are generally illiquid, and will be priced at fair value as determined in accordance with procedures prescribed by the Board of Trustees of the Trust.
Restricted securities acquired by a Fund will generally be eligible for purchase and sale under Rule 144A under the 1933 Act. This rule permits certain qualified institutional buyers to trade in privately placed securities even though such securities are not registered under the 1933 Act. The Adviser, under the supervision of the Board of Trustees of the Trust, will consider whether securities purchased under Rule 144A are illiquid and thus subject to each Fund’s restriction of investing no more than 15% of its net assets in illiquid securities. A determination of whether a Rule 144A security is liquid or not is a question of fact. In making this determination, the Adviser will consider the trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition, the Adviser could consider: (1) the frequency of trades and quotes, (2) the number of dealers and potential purchases, (3) any dealer undertakings to make a market, and (4) the nature of the security and of marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A securities would be monitored, and if as a result of changed conditions it is determined that a Rule 144A security is no longer liquid, a Fund’s holdings of illiquid securities would be reviewed to determine what, if any, steps are required to assure that a Fund does not invest more than 15% of its net assets in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of a Fund’s assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase such securities.
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SECURITIES LENDING
In order to generate additional income, each Fund may lend portfolio securities in an amount up to 33% of its total assets to broker-dealers, major banks, or other recognized domestic institutional borrowers of securities which Horizon has determined are creditworthy under guidelines established by the Board. In determining whether a Fund will lend securities, Horizon will consider all relevant facts and circumstances. A Fund may not lend securities to any company affiliated with Horizon. Each loan of securities will be collateralized by cash, securities or letters of credit. A Fund might experience a loss if the borrower of a security defaults on the loan or its other obligations.
The borrower at all times during the loan must maintain with the Fund cash or cash equivalent collateral, or provide to the Fund an irrevocable letter of credit, equal in value to at least 100% of the value of the securities loaned. While the loan is outstanding, the borrower will pay the Fund any interest paid on the loaned securities, and the Fund may invest the cash collateral to earn additional income. Alternatively, the Fund may receive an agreed-upon amount of interest income from the borrower who has delivered equivalent collateral or a letter of credit. It is anticipated that a Fund may share with the borrower some of the income received on the collateral for the loan or the Funds will be paid a premium for the loan. Loans are subject to termination at the option of a Fund or the borrower at any time. A Fund may pay reasonable administrative and custodial fees in connection with a loan, and may pay a negotiated portion of the income earned on the cash to the borrower or placing broker. A Fund might experience the risk of loss if the institution with which the Fund has engaged in a portfolio loan transaction breaches its agreement with the Fund. The principal risk of portfolio lending is potential default or insolvency of the borrower, and as with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower fail financially. In either of these cases, a Fund could experience delays in recovering securities or collateral or could lose all or part of the value of the loaned securities. As part of participating in a lending program, a Fund may be required to invest in securities that bear the risk of loss of principal. In addition, all investments made with the collateral received are subject to the risks associated with such investments. If such investments lose value, the applicable Fund will have to cover the loss when repaying the collateral.
The Funds participate in securities lending arrangements whereby a Fund lends certain of its portfolio securities to brokers, dealers and financial institutions (not with individuals) in order to receive additional income and increase the rate of return of its portfolio. U.S. Bank, N.A. serves as the Funds’ securities lending agent, and it oversees the securities lending process, which includes the screening, selection and ongoing review of borrowers, monitoring the availability of securities, negotiating rebates, daily marking to market of loans, monitoring and maintaining cash collateral levels, processing securities movements and reinvesting cash collateral as directed by Horizon.
SHORT SALES
A Fund may sell securities short as part of its overall portfolio management strategies involving the use of derivative instruments and to offset potential declines in long positions in similar securities. A short sale involves the sale of a security that is borrowed from a broker or other institution to complete the sale. It is a transaction in which a Fund sells a security it does not own or has the right to acquire (or that it owns but does not wish to deliver) in anticipation that the market price of that security will decline.
When a Fund makes a short sale, the broker-dealer through which the short sale is made must borrow the security sold short and deliver it to the party purchasing the security. A Fund is required to make a margin deposit in connection with such short sales; a Fund may have to pay a fee to borrow particular securities and will often be obligated to pay over any dividends and accrued interest on borrowed securities. These types of short sales expenses are sometimes referred to as the “negative cost of carry,” and will tend to cause the Fund to lose money on a short sale even in instances where the price of the security sold short does not change over the duration of the short sale.
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If the price of the security sold short increases between the time of the short sale and the time a Fund covers its short position, a Fund will incur a loss; conversely, if the price declines, a Fund will realize a capital gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. The successful use of short selling may be adversely affected by imperfect correlation between movements in the price of the security sold short and the securities being hedged. In addition, short sales expose a Fund to the risk that the Fund will be required to acquire, convert or exchange securities to replace the borrowed security (also known as “covering” the short position) at a time when the security sold short has appreciated in value, thus resulting in a loss to the Fund. The Fund’s investment performance may also suffer if the Fund is required to close out a short position earlier than it had intended.
A Fund may sell securities short to the full extent permitted under the 1940 Act. A short sale is “against the box” to the extent a Fund contemporaneously owns, or has the right to obtain at no added cost, securities identical to those sold short.
SWAP AGREEMENTS
Each Fund may enter into interest rate, index and currency exchange rate swap agreements in attempts to obtain a particular desired return at a lower cost to a Fund than if a Fund has invested directly in an instrument that yielded that desired return. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of returns) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped” between the parties are calculated with respect to a “notional amount”, i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a “basket” of securities representing a particular index. The “notional amount” of the swap agreement is only a fictive basis on which to calculate the obligations the parties to a swap agreement have agreed to exchange. A Fund’s obligations (or rights) under a swap agreement will generally be equal only to the amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”).
Swap transactions are subject to market risk, liquidity risk, risk of default by the other party to the transaction, known as “counterparty risk,” regulatory risk and risk of imperfect correlation between the value of such instruments and the underlying assets and may involve commissions or other costs. Whether a Fund’s use of swap agreements enhance that Fund’s total return will depend on the Adviser’s ability to correctly to predict whether certain types of investments are likely to produce greater returns than other investments. Because they are two-party contracts and may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The Adviser will cause a Fund to enter into swap agreements only with counterparties that would be eligible for consideration as repurchase agreement counterparties under a Fund’s repurchase agreement guidelines.
Swap agreements are primarily entered into by institutional investors and the value of such agreements may be extremely volatile. Certain swap agreements are traded OTC between two parties, while other more standardized swaps must be transacted through a futures commission merchant and centrally cleared or exchange-traded. While central clearing and exchange-trading are intended to reduce counterparty credit and liquidity risk, they do not make a swap transaction risk-free. The current regulatory environment regarding swap agreements is subject to change. The Adviser will continue to monitor these developments, particularly to the extent regulatory changes affect the Fund’s ability to enter into or close out swap agreements. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a Fund’s ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
The swap market has matured in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid; however there is no guarantee that the swap market will continue to provide liquidity and may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. The absence of liquidity may also make it more difficult for the Funds to ascertain a market value for such instruments. The inability to close derivative positions also could have an adverse impact on the Funds’ abilities to effectively hedge their respective portfolios. If the Adviser is incorrect in its forecasts of market values, interest rates or currency exchange rates, the investment performance of the Funds would be less favorable than it would have been if these investment techniques were not used.
Certain swap agreements are exempt from most provisions of the CEA and, therefore, are not regulated as futures or commodity option transactions under the CEA, pursuant to regulations of the CFTC. To qualify for this exemption, a swap agreement must be entered into by “eligible participants”, which include the following, provided the participants’ total assets exceed established levels: a bank or trust company, savings association or credit union, insurance company, investment company subject to regulation under the 1940 Act, commodity pool, corporation, partnership, proprietorship, organization, trust or other entity, employee benefit plan, governmental entity, broker-dealer, futures commission merchant, natural person, or regulated foreign person. To be eligible, natural persons and most other entities must have total assets exceeding $10 million; commodity pools and employees benefit plans must have assets exceeding $5 million. In addition, an eligible swap transaction must meet three conditions. First, the swap agreement may not be part of a fungible class of agreements that are standardized as to their material economic terms. Second, the creditworthiness of parties with actual or potential obligations under the swap agreement must be a material consideration in entering into or determining the terms of the swap agreement, including pricing, cost or credit enhancement terms. Third, swap agreements may not be entered into and traded on or through a multilateral transaction execution facility.
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Credit Default Swaps. A credit default swap is a specific kind of counterparty agreement that allows the transfer of third party credit risk from one party to the other. One party in the swap is akin to a lender and faces credit risk from a third party, and the counterparty in the credit default swap agrees to insure this risk in exchange for regular periodic payments (essentially an insurance premium). If the third party defaults, the party providing insurance will have to purchase from the insured party the defaulted asset. In turn, the insurer typically pays the insured the remaining interest on the debt, as well as the principal. A credit default swap agreement may reference one or more debt securities or obligations that may not then be currently held by the applicable Fund. If a credit event occurs under a swap referencing a corporate, sovereign or municipal reference obligation, the buyer typically receives the notional amount of the reference obligation subject to an obligation to physically deliver the notional amount of the reference obligation (or other permitted security) to the seller, which reference obligation (or other permitted security) may not be readily available to the buyer, in which case the buyer may forfeit its credit event payment. However, in many cases, the parties to the swap will agree to an industry-wide cash-settlement auction process. Following a credit event and the physical delivery or cash settlement thereof, a swap referencing a corporate, sovereign or municipal reference obligation will terminate. If a credit event occurs under a swap referencing an asset-backed security reference obligation, the buyer typically receives a payment calculated by reference to the principal write-downs and interest shortfalls under a notional amount of the reference obligation. In certain cases, the buyer may be required to make a payment calculated by reference to a write-up or recovery under a notional amount of the reference obligation, which may relate to a credit event that occurred prior to the time that the buyer entered into the swap. Swaps referencing asset-backed security reference obligations do not terminate following a credit event thereunder. If a Fund is a buyer and no credit event occurs, the Fund will have made payments under the swap and received nothing. If a Fund is a seller of protection under a credit default swap, the Fund effectively adds leverage to its portfolio because it gains exposure to the notional amount of the swap. Entering into a credit default swap may subject the applicable Fund to greater risk than if the Fund had invested in the reference obligation directly. In addition to general market risks, credit default swaps also involve illiquidity risk, counter-party risk (for OTC swaps) and credit risk.
TAX MATTERS
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign Exchange Contracts. The Funds may enter into certain option, futures, and forward foreign exchange contracts, including options and futures on currencies, which qualify as “section 1256 contracts” under the Code (“Section 1256 Contracts”) and may result in the Funds entering into straddles.
Section 1256 Contracts held by a Fund at fiscal year-end are treated for federal income tax purposes as being sold on such date for their fair market value, and any gains or losses will be recognized for tax purposes at that time. Such gains or losses from the normal closing or settlement of such transactions will be characterized as 60% long-term capital gain or loss and 40% short-term capital gain or loss regardless of the holding period of the instrument. When the Section 1256 Contract is subsequently disposed of, the actual gain or loss will be adjusted by the amount of any year-end gain or loss previously recognized. Each Fund will be required to distribute net gains on such transactions to shareholders even though the Fund may not have closed the transaction and received cash to pay such distributions.
Options, futures and forward foreign exchange contracts, including options and futures on currencies, that offset a security or currency position may be considered straddles for tax purposes, in which case a loss on any position in a straddle will be subject to deferral to the extent of unrealized gain in an offsetting position. The holding period of the securities or currencies comprising the straddle may be deemed not to begin until the straddle is terminated. The holding period of the security offsetting an “in-the-money qualified covered call” option will not include the period of time the option is outstanding. Losses on written covered calls and purchased puts on securities, excluding certain “qualified covered call” options, may be long-term capital loss, if the security covering the option was held for more than twelve months prior to the writing of the option.
In order for a Fund to continue to qualify for federal income tax treatment as a RIC, at least 90% of its gross income for a taxable year must be derived from qualifying income; i.e., dividends, interest, income derived from loans of securities, and gains from the sale of securities or currencies.
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DISCLOSURE OF PORTFOLIO HOLDINGS
The Trust has adopted policies and procedures that govern the disclosure of each Fund’s portfolio holdings. These policies and procedures are designed to ensure that such disclosure is in the best interests of Fund shareholders.
No sooner than sixty days after the end of each quarter/semi-annual period, the Funds will make available a complete schedule of their portfolio holdings as of the last day of the quarter/semi-annual period. Currently, the Trust files with the SEC a Form N-CSR or a Form N-Q report for the period that includes the date as of which that list of portfolio holdings was current. The filing discloses each Fund’s portfolio holdings as of the end of the applicable quarter. Monthly portfolio disclosures will be filed with the SEC on Form N-PORT, with quarter-end disclosures being made public 60 days after the end of each fiscal quarter.
The Funds and/or Horizon may also, from time to time, make additional portfolio holdings information available to the public on the Fund’s website at www.horizonmutualfunds.com. Complete lists of each Fund’s holdings will typically be posted to the website approximately 30 days following the end of any calendar quarter or month and such information will remain available until new information for the next calendar quarter or month is posted. The Funds may also send a portion or all of this information to shareholders of the Funds and to mutual fund analysts and rating and trading entities; provided that the Funds will not send this information to shareholders of the Funds or analysts or rating and/or trading entities until such information is at least 30 days old or until one day after the information has been posted to the Funds’ website, if earlier.
Other than to rating agencies and service providers, as described below, the Funds do not selectively disclose portfolio holdings to any person. In each case, a determination has been made that such advance disclosure is supported by a legitimate business purpose and that the recipient is subject to a duty to keep the information confidential.
| • | Personnel of the Adviser, including personnel responsible for managing the Funds’ portfolios, may have full daily access to the Funds’ portfolio holdings since that information is necessary in order for the Adviser to provide its management, administrative, and investment services to the Funds. As required for purposes of analyzing the impact of existing and future market changes on the prices, availability, demand and liquidity of such securities, as well as for the assistance of portfolio managers in the trading of such securities, Adviser personnel may also release and discuss certain portfolio holdings with various broker-dealers and portfolio research providers. |
| • | U.S. Bank Global Fund Services, is the transfer agent, fund accountant and administrator for the Funds; therefore, its personnel have full daily access to the Funds’ portfolio holdings since that information is necessary in order for them to provide the agreed-upon services for the Trust. |
| • | U.S. Bank, NA. is the custodian for the Funds; therefore, its personnel and agents have full daily access to the Funds’ portfolio holdings since that information is necessary in order for them to provide the agreed-upon services for the Trust. |
| • | Cohen & Company, Ltd. serves as the Funds’ independent registered public accounting firm; therefore, its personnel have access to the Funds’ portfolio holdings in connection with the review of the Funds’ annual and semi-annual shareholder reports. |
| • | Kilpatrick Townsend & Stockton LLP is counsel to the Funds; therefore, its personnel have access to the Funds’ portfolio holdings in connection with the review of the Funds’ annual and semi-annual shareholder reports, SEC filings and materials prepared in connection with meetings of the Board of Trustees and otherwise in connection with such representation. |
| • | Stradley Ronon Stevens & Young, LLP is counsel to the those Trustees who are not an “interested person” as defined in the 1940 Act (“Independent Trustees”); therefore, its personnel have access to the Funds’ portfolio holdings in connection with the review of the Funds’ annual and semi-annual shareholder reports and SEC filings and materials prepared in connection with meetings of the Board of Trustees and otherwise in connection with such representation. |
| • | ICE Data Services performs portfolio liquidity analysis for the Funds; therefore, its personnel have full daily access to the Funds’ portfolio holdings since that information is necessary in order for them to provide the agreed-upon services for the Trust. |
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| • | Morningstar, Lipper and other mutual fund rating agencies may also receive the Funds’ full portfolio holdings, generally quarterly on a 30-day lag basis with the understanding that such holdings may be posted or disseminated to the public by the rating agencies at any time. |
| • | Investment Company Institute, the national association of US investment companies, including mutual funds, closed-end funds, exchange-traded funds and unit investment trusts, receives portfolio holdings information on a monthly basis, generally on a 30-day lag, in order to compile and analyze industry data. |
The Funds’ Chief Compliance Officer, or his or her designee, may also grant exceptions to permit additional disclosure of Fund portfolio holdings information at differing times and with different lag times (the period from the date of the information to the date the information is made available) in instances where a Fund has legitimate business purposes for doing so, it is in the best interests of shareholders, and the recipients are subject to a duty of confidentiality, including a duty not to trade on the nonpublic information and are required to execute an agreement to that effect. The Board will be informed of any such disclosures at its next regularly scheduled meeting or as soon as is reasonably practicable thereafter. In no event shall a Fund, the Adviser, or any other party receive any direct or indirect compensation in connection with the disclosure of information about the Funds’ portfolio holdings.
There is no assurance that the Trust’s policies on disclosure of portfolio holdings will protect a Fund from the potential misuse of holdings information by individuals or firms in possession of that information.
MANAGEMENT OF THE TRUST
Trustees and Officers
The Board is responsible for the overall management of the Trust, including general supervision and review of the investment activities of the Funds. The Board, in turn, elects the Officers of the Trust, who are responsible for administering the day-to-day operations of the Trust and each of the Funds. The current Trustees and Officers of the Trust, their year of birth and positions with the Trust, term of office with the Trust and length of time served, their principal occupations for the past five years and other directorships held during the past five years are set forth in the following table. Those Trustees who are “interested persons” as defined in the 1940 Act and those Trustees who are identified in the table.
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Independent Trustees
| Name, Address* and Year of Birth |
Position/Term of Office |
Principal Occupation During the Past Five Years |
Number of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships held by Trustee During the Past Five Years |
|
John W. Davidson Year of Birth: 1946 |
Trustee; Indefinite Term of Office (since 2015) | Creator, author and founder of John Davidson’s Economic Comments (2009-2018). | 9 | Trustee, AdvisorOne Funds (7 portfolios). |
|
Todd W. Gaylord Year of Birth: 1975 |
Trustee; Indefinite Term of Office (since 2015) | Consultant (financial services) since 2012; Owner, McCauley Street Partners, Inc. (real estate brokerage firm) (2009-2014); Vice President, Corporate Bond, Syndicated Loan, and Credit Default Swap Trader, Wachovia Securities (2005-2008). | 9 | None |
|
Thomas W. Okel Year of Birth: 1962 |
Trustee; Indefinite Term of Office (since 2015) | Executive Director (2011-2019), Catawba Lands Conservancy; Global Head of Syndicated Capital Markets (1998-2010), Bank of America Merrill Lynch. | 9 | Trustee, Barings Funds Trust (8 portfolios); Trustee, Barings Global Short Duration High Yield Fund (1 portfolio). Trustee, Barings BDC, Inc. Trustee, Barings Private Investment Corporation. Trustee, Barings Capital Investment Corporation |
| * | The address for each Trustee and officer is 6210 Ardrey Kell Road, Suite 300, Charlotte, North Carolina 28277. |
Interested Trustees and Officers
| Name, Address* and Year of Birth |
Position/Term of Office |
Principal Occupation During the Past Five Years |
Number of Portfolios in Fund Complex Overseen by Trustee |
Other Directorships held by Trustee During the Past Five Years |
|
John Drahzal ** Year of Birth: 1966 |
Interested Trustee Indefinite Term of Office (since 2021) and President; One Year Term of Office (since 2021) | CEO and President of Horizon Investments, LLC (CEO November 2021 - present and President December 2020- present); Various Positions at Horizon Investments (2017-2020). | 9 | None |
|
Matthew Chambers Year of Birth: 1976 |
Vice President, Chief Compliance Officer and Secretary; One Year Term of Office (since 2015) | General Counsel and Chief Compliance Officer of Horizon Investments, LLC, December 2014-present; Attorney, Kilpatrick Townsend & Stockton, 2008 - 2014 | Not Applicable | Not Applicable |
|
Steve Terry Year of Birth: 1980 |
Treasurer, Chief Financial Officer; One Year Term of Office (since October 2018) |
Chief Financial Officer of Horizon Investments, LLC, November 2021- present; Head of Finance and Business Systems of Horizon Investments, LLC, August 2016-present; Co-Founder, Catamaran Investment Partners, 2015-August 2016; Principal, Intersection Partners, 2011-2015 | Not Applicable | Not Applicable |
| * | The address for each Trustee and officer is 6210 Ardrey Kell Road, Suite 300, Charlotte, North Carolina 28277. |
| ** | Mr. Drahzal is considered an “interested person” of the Trust, as defined in the 1940 Act, because of his current position with Horizon. |
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The Role of the Board of Trustees
The Board oversees the management and operations of the Trust. Like all mutual funds, the day-to-day management and operation of the Trust is the responsibility of the various service providers to the Trust, such as Horizon, the Distributor, the Custodian and Fund Services (the transfer agent and administrator), each of whom are discussed in greater detail in this Statement of Additional Information. The Board has appointed various senior employees of Horizon as officers of the Trust, with responsibility to monitor and report to the Board regarding certain of the Trust’s operations. In conducting this oversight, the Board receives regular reports from these officers and the service providers. The Board has appointed a Chief Compliance Officer (“CCO”) who administers the Trust’s compliance program and regularly reports to the Board as to compliance matters. These reports are provided as part of the Board’s regular quarterly Board Meetings, which are typically held quarterly, in person, and involve the Board’s review of recent operations.
Board Leadership Structure
The Board has structured itself in a manner that it believes allows it to perform its oversight function effectively. The Trust’s Board includes three Independent Trustees and one Interested Trustee. Mr. Okel, an Independent Trustee, serves as Chair of the Board. The Board has determined that this is an appropriate structure for the Trust because, among other things, the Board’s small size and the small number of Funds in the Trust permit Trust management to communicate with each independent Trustee as and when needed, and permit each Independent Trustee to be involved in each committee of the Board (each a “Committee”) as well as each Board function.
The Board has established a committee structure that includes an Audit Committee, Nominating Committee and a Proxy Voting Committee (discussed in more detail below). Each Committee is comprised entirely of Independent Trustees.
The Board reviews annually the structure and operation of the Board and its Committees. The Board has determined that the composition of the Board and the function and composition of its various Committees provide the appropriate means and communication channels to address any potential conflicts of interest that may arise.
Board Oversight of Risk Management
Through the Board’s direct oversight role and the officers and service providers of the Funds, the Board performs a risk oversight function for the Funds. To effectively perform its risk oversight function, the Board, among other things, performs the following activities: receives and reviews reports related to the performance and operations of the Funds; reviews and approves, as applicable, the compliance policies and procedures of the Funds; approves the Funds’ principal investment policies; meets with representatives of various service providers, including Horizon and the independent registered public accounting firm of the Funds, to review and discuss the activities of the Funds and to provide direction with respect thereto; and appoints a CCO of the Funds who oversees the implementation and testing of the Funds’ compliance program and reports to the Board regarding compliance matters for the Funds and their service providers. The Board holds four regular meetings each year to consider and address matters involving the Trust and Funds. As part of its oversight function, the Board also may hold special meetings or communicate directly with Trust management or the CCO to address matters arising between regular meetings.
Not all risks that may affect the Funds can be identified nor can controls be developed to eliminate or mitigate their occurrence or effects. It may not be practical or cost effective to eliminate or mitigate certain risks, the processes and controls employed to address certain risks may be limited in their effectiveness, and some risks are simply beyond the reasonable control of the Funds, Horizon or other service providers. Moreover, it is necessary to bear certain risks (such as investment-related risks) to achieve the Funds’ goals. As a result of the foregoing and other factors, the Funds’ ability to manage risk is subject to substantial limitations.
Information about Each Trustee’s Qualification, Experience, Attributes or Skills
The Board believes that each of the Trustees has the qualifications, experience, attributes and skills (“Trustee Attributes”) appropriate to their continued service as Trustees of the Trust in light of the Board’s function and the Trust’s business and structure. The Board annually conducts a “self-assessment” wherein the effectiveness of the Board is reviewed.
In addition to the information provided in the prior chart, below is certain additional information concerning each particular Trustee and his/her Trustee Attributes.
John Drahzal. Mr. Drahzal has been the President of Horizon since December 2020 and the CEO of Horizon and President of the Trust since November 2021. Previously, Mr. Drahzal served as head of distribution for Prudential Investments, and President of Reich & Tang, an investment affiliate of Natixis Global Asset Management. Mr. Drahzal began his career at Victory Asset Management where he helped launch their mutual fund business, The Victory Funds.
| 34 |
John W. Davidson. Mr. Davidson is currently a board member of AdvisorOne Funds, where he is the lead independent trustee. He has over 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts, and insurance assets. Mr. Davidson was most recently the President of PartnerRe Asset Management Corporation.
Todd W. Gaylord. Mr. Gaylord has received CPA and CFA designations, and worked in various capacities on trading floors for Bank of America and Wachovia Securities from 1999-2008 trading corporate bonds, syndicated loans, and credit default swaps. In recent years he has been active in real estate and private equity investing, as well as financial consulting.
Thomas W. Okel. Mr. Okel was most recently the Executive Director of Catawba Lands Conservancy, which is a nonprofit land trust that works with willing landowners to save land in North Carolina's Southern Piedmont to preserve a healthy, natural environment for future generations. He is also a trustee of Babson Capital Global Short Duration High Yield Fund and Barings Funds Trust. Tom previously served as Global Head of Syndicated Capital Markets at Bank of America Merrill Lynch and managed capital markets, sales, trading and research for the United States, Europe, Asia and Latin America.
The Board has determined that each of the Trustees’ careers and background, combined with their interpersonal skills and general understanding of financial and other matters, enable the Trustees to effectively participate in and contribute to the Board’s functions and oversight of the Trust. References to the qualifications, attributes and skills of Trustees are pursuant to requirements of the SEC, do not constitute holding out the Board or any Trustee as having any special expertise or experience, and shall not impose any greater responsibility on any such person or on the Board by reason thereof.
Trustee Standing Committees
The Board has established the following standing committees:
Audit Committee. The Independent Trustees are the current members of the Audit Committee. The Audit Committee oversees the Funds’ accounting and financial reporting policies and practices, reviews the results of the annual audits of the Funds’ financial statements, and interacts with the Funds’ independent auditors on behalf of the Board. The Audit Committee also serves in the role of the Trust’s qualified legal compliance committee and, as such, receives, investigates and makes recommendations as to appropriate remedial action in connection with, any report of evidence of a material violation of securities laws or breach of fiduciary duty or similar violation by the Trust, its officers, trustees or agents. The Audit Committee operates pursuant to an Audit Committee Charter and meets periodically as necessary. The Audit Committee met two times during the last fiscal year.
Nominating Committee. The Independent Trustees are the current members of the Nominating Committee. The Nominating Committee nominates, selects, and appoints Independent Trustees to fill vacancies on the Board and to stand for election at appropriate meetings of the shareholders of the Trust. The Nominating Committee meets only as necessary. The Nominating Committee generally will not consider nominees recommended by shareholders of the Trust. The Nominating Committee did not meet during the last fiscal year.
Proxy Voting Committee. The Independent Trustees are the current members of the Proxy Voting Committee. The Proxy Voting Committee will determine how a Fund should cast its vote, if called upon by the Board or the Adviser, when a matter with respect to which a Fund is entitled to vote presents a conflict between the interests of a Fund’s shareholders, on the one hand, and those of the Adviser, principal underwriter or an affiliated person of the Funds, the Adviser, or principal underwriter, on the other hand. The Proxy Voting Committee will review the Trust’s Proxy Voting and Disclosure Policy and recommend any changes to the Board as it deems necessary or advisable. The Proxy Voting Committee will also decide if a Fund should participate in a class action settlement, if called upon by the Adviser, in cases where a class action settlement with respect to which a Fund is eligible to participate presents a conflict between the interests of a Fund’s shareholders, on the one hand, and those of the Adviser, on the other hand. The Proxy Voting Committee meets only as necessary. The Proxy Voting Committee did not meet during the last fiscal year.
Compensation of Trustees
The Trust pays each Trustee of the Trust who is not an interested person an annual retainer of $85,000 for each fiscal year plus $10,000 for attendance at each quarterly board meeting. The Trust also reimburses the Trustees for travel and other expenses incurred in attending meetings of the Board. Trustees who are interested persons of the Trust do not receive any direct compensation from the Trust. No other compensation or retirement benefits are received by any Trustee from the Funds.
| 35 |
The table below reflects the amount of compensation received by each Trustee during the fiscal year ended November 30, 2023:
| Name of Trustee | Aggregate Compensation from Funds |
Pension or Retirement Benefits Estimated Accrued as Part of Trust Expense |
Annual Benefits Upon Retirement |
Total Compensation From Registrant and Fund Complex Paid To Trustees |
| John Drahzal (Interested Trustee) | $0 | $0 | $0 | $0 |
| John W. Davidson | $125,000 | $0 | $0 | $125,000 |
| Todd W. Gaylord | $125,000 | $0 | $0 | $125,000 |
| Thomas W. Okel | $125,000 | $0 | $0 | $125,000 |
The Trustees serve on the Board for terms of indefinite duration. A Trustee’s position in that capacity will terminate if such Trustee is removed, resigns or is subject to various disabling events such as death or incapacity.
Trustee Ownership of Fund Shares and Other Interests
The following table shows, for each Trustee, the aggregate dollar range of equity securities in the Funds owned by the Trustees as of December 31, 2023, stated as one of the following ranges: A = None; B = $1–$10,000; C = $10,001–$50,000; D = $50,001–$100,000; and E = over $100,000.
| Name of Fund | John Drahzal Interested Trustee |
John W. Davidson Independent Trustee |
Todd W. Gaylord Trustee |
Thomas W. Okel Trustee |
| Active Asset Allocation Fund | D | C | E | D |
| Active Risk Assist Fund | E | C | A | C |
| Active Income Fund | A | A | A | A |
| Equity Premium Income Fund | A | A | A | A |
| Defined Risk Fund | A | D | A | A |
| Multi-Factor U.S. Equity Fund | D | A | A | A |
| Defensive Core Fund | A | A | A | A |
| Multi-Factor Small/Mid Cap Fund | D | A | A | A |
| Tactical Income Fund | A | A | A | A |
| Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Trustee in Family of Investment Companies | E | E | E | E |
Ownership of Fund Affiliates
Neither the Independent Trustees nor members of their immediate family, own securities beneficially or of record in Horizon, the Funds’ principal underwriter, or any of their affiliates. Accordingly, during the two most recently completed calendar years, neither the Independent Trustees nor members of their immediate family, have had a direct or indirect interest, the value of which exceeds $120,000, in Horizon, the Trust’s principal underwriter or any of its affiliates.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 1, 2024, the Trustees and officers as a group owned less than 1% of the outstanding shares of the Funds.
| 36 |
A shareholder owning of record or beneficially more than 25% of the Fund’s outstanding shares may be considered a controlling person. That shareholder’s vote could have a more significant effect on matters presented at a shareholder’s meeting than the vote of other shareholders.
As of March 1, 2024, the following shareholders owned more than 5% of the outstanding shares of beneficial interest of a Fund or Class of shares of a Fund:
| Fund | Shareholder and Address | Percentage of Class Owned | Type of Ownership |
Active Asset Allocation Fund Advisor Class Shares |
National Financial Services LLC 499 Washington Blvd, FL 4th Jersey City, NJ 07310-1995 |
49.74% | Record |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
42.18% | Record | |
Pershing LLC 1 Pershing Plz. Jersey City, NJ 07399-0002 |
8.08% | Record | |
Active Asset Allocation Fund Investor Class Shares |
LPL Financial Omnibus Customer Account Attn: Lindsay O’Toole 4707 Executive Dr. San Diego, CA 92121-3091 |
36.61% | Record |
National Financial Services LLC 499 Washington Blvd, FL 4th Jersey City, NJ 07310-1995 |
29.66% | Record | |
Pershing LLC 1 Pershing Plz. Jersey City, NJ 07399-0002 |
21.06% | Record | |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
8.39% | Record | |
Active Asset Allocation Fund Institutional Class Shares |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
61.93% | Record |
Axos Clearing LLC P.O. Box 6503 Englewood, CO 80155-6503 |
19.58% | Record | |
Axos Clearing LLC P.O. Box 6503 Englewood, CO 80155-6503 |
7.20% | Record | |
Active Risk Assist Fund Advisor Class Shares |
National Financial Services LLC 499 Washington Blvd, FL 4th Jersey City, NJ 07310-1995 |
49.89% | Record |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
31.77% | Record |
| 37 |
| Fund | Shareholder and Address | Percentage of Class Owned | Type of Ownership |
Pershing LLC 1 Pershing Plz. Jersey City, NJ 07399-0002 |
18.34% | Record | |
Active Risk Assist Fund Investor Class Shares |
Pershing LLC 1 Pershing Plz. Jersey City, NJ 07399-0002 |
33.23% | Record |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
19.49% | Record | |
National Financial Services LLC 499 Washington Blvd, FL 4th Jersey City, NJ 07310-1995 |
19.10% | Record | |
LPL Financial Omnibus Customer Account Attn: Lindsay O’Toole 4707 Executive Dr. San Diego, CA 92121-3091 |
16.21% | Record
| |
Axos Clearing LLC P.O. Box 6503 Englewood, CO 80155-6503 |
11.63% | Record | |
Active Risk Assist Fund Institutional Class Shares
|
Axos Clearing LLC P.O. Box 6503 Englewood, CO 80155-6503 |
82.13% | Record |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
11.18% | Record | |
Matrix Trust Company as Agent for Newport Trust Company Horizon Investment LLC 401(k) Plan 35 Iron Point Circle Folsom CA 95630-8587 |
6.53% | Record | |
Active Income Fund Advisor Class Shares
|
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
96.28% | Record |
Active Income Fund Investor Class Shares |
Pershing LLC 1 Pershing Plz. Jersey City, NJ 07399-0002 |
40.97% | Record |
National Financial Services LLC 499 Washington Blvd, FL 4th Jersey City, NJ 07310-1995 |
18.35% | Record | |
LPL Financial Omnibus Customer Account Attn: Lindsay O’Toole 4707 Executive Dr. San Diego, CA 92121-3091 |
14.96% | Record | |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
14.08% | Record |
| 38 |
| Fund | Shareholder and Address | Percentage of Class Owned | Type of Ownership |
Axos Clearing LLC P.O. Box 6503 Englewood, CO 80155-6503 |
11.44% | Record | |
Active Income Fund Institutional Class Shares
|
Axos Clearing LLC P.O. Box 6503 Englewood, CO 80155-6503 |
96.69% | Record
|
Equity Premium Income Fund Advisor Class Shares
|
Axos Clearing LLC P.O. Box 6503 Englewood, CO 80155-6503 |
89.67% | Record
|
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
7.75% | Record | |
Equity Premium Income Fund Investor Class Shares |
Pershing LLC 1 Pershing Plz. Jersey City, NJ 07399-0002 |
36.16% | Record
|
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
21.27% | Record | |
LPL Financial Omnibus Customer Account Attn: Lindsay O’Toole 4707 Executive Dr. San Diego, CA 92121-3091 |
21.24% | Record | |
National Financial Services LLC For the Exclusive Benefit of our Customers Attn: Mutual Funds Dept. 4th FL 499 Washington Blvd Jersey City, NJ 07310-1995 |
16.24% | Record | |
Defined Risk Fund Advisor Class Shares |
Axos Clearing LLC P.O. Box 6503 Englewood, CO 80155-6503 |
68.25% | Record |
National Financial Services LLC 499 Washington Blvd, FL 4th Jersey City, NJ 07310-1995 |
15.96% | Record | |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
15.60% | Record | |
Defined Risk Fund Investor Class Shares |
LPL Financial Omnibus Customer Account Attn: Lindsay O’Toole 4707 Executive Dr. San Diego, CA 92121-3091 |
48.84% | Record |
National Financial Services LLC For the Exclusive Benefit of our Customers 499 Washington Blvd, 4th FL Jersey City, NJ 07310-1995 |
23.50% | Record | |
Pershing LLC 1 Pershing Plz. Jersey City, NJ 07399-0002 |
19.51% | Record |
| 39 |
| Fund | Shareholder and Address | Percentage of Class Owned | Type of Ownership |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
6.01% | Record | |
Multi-Factor U.S. Equity Fund Investor Class Shares
|
Pershing LLC 1 Pershing Plz. Jersey City, NJ 07399-0002 |
34.64% | Record |
LPL Financial Omnibus Customer Account Attn: Mutual Fund Operations 4707 Executive Dr. San Diego, CA 92121-3091 |
25.46% | Record | |
National Financial Services LLC For the Exclusive Benefit of our Customers 499 Washington Blvd, 4th FL Jersey City, NJ 07310-1995 |
20.71% | Record | |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
13.36% | Record | |
Multi-Factor U.S. Equity Fund Advisor Class Shares
|
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
80.46% | Record |
National Financial Services LLC 499 Washington Blvd, FL 4th Jersey City, NJ 07310-1995 |
19.37% | Record | |
Defensive Core Fund Investor Class Shares |
LPL Financial Omnibus Customer Account Attn: Lindsay O’Toole 4707 Executive Dr. San Diego, CA 92121-3091 |
34.14% | Record |
Pershing LLC 1 Pershing Plz. Jersey City, NJ 07399-0002 |
25.04% | Record | |
National Financial Services LLC 499 Washington Blvd, FL 4th Jersey City, NJ 07310-1995 |
22.45% | Record | |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
12.74% | Record | |
Defensive Core Fund Advisor Class Shares
|
Axos Clearing LLC P.O. Box 6503 Englewood, CO 80155-6503 |
37.61% | Record |
Pershing LLC 1 Pershing Plz. Jersey City, NJ 07399-0002 |
28.59% | Record | |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
20.00% | Record |
| 40 |
| Fund | Shareholder and Address | Percentage of Class Owned | Type of Ownership |
National Financial Services LLC 499 Washington Blvd, FL 4th Jersey City, NJ 07310-1995 |
13.27% | Record | |
Tactical Income Fund* Investor Class Shares |
Pershing LLC 1 Pershing Plz. Jersey City, NJ 07399-0002 |
38.43% | Record |
National Financial Services LLC 499 Washington Blvd, FL 4th Jersey City, NJ 07310-1995 |
21.36% | Record | |
LPL Financial Omnibus Customer Account Attn: Mutual Fund Operations 4707 Executive Dr. San Diego, CA 92121-3091 |
15.83% | Record | |
Axos Clearing LLC P.O. Box 6503 Englewood, CO 80155-6503 |
11.43% | Record | |
Tactical Income Fund* Advisor Class Shares |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
97.74% | Record |
Multi-Factor Small/Mid Cap Fund* Investor Class Shares |
Pershing LLC 1 Pershing Plz. Jersey City, NJ 07399-0002 |
45.27% | Record |
National Financial Services LLC 499 Washington Blvd, FL 4th Jersey City, NJ 07310-1995 |
32.54% | Record | |
Axos Clearing LLC P.O. Box 6503 Englewood, CO 80155-6503 |
9.39% | Record | |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
8.08% | Record | |
Multi-Factor Small/Mid Cap Fund* Advisor Class Shares |
Charles Schwab & Co Inc. Special Custody A/C FBO Customers Attn: Mutual Funds 211 Main St. San Francisco, CA 94105-1905 |
70.06% | Record |
National Financial Services LLC 499 Washington Blvd, FL 4th Jersey City, NJ 07310-1995 |
18.81% | Record | |
Horizon Investments LLC 6210 Ardrey Kell Rd, Ste 300 Charlotte, NC 82877-4945 |
10.12% | Record |
| * | Multi-Factor Small/Mid Cap Fund and the Tactical Income Fund commenced operations on December 20, 2022. |
| 41 |
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Adviser
Horizon Investments, LLC, a South Carolina limited liability company, serves as investment adviser to each of the Funds. Horizon has been an investment adviser since 1995, and serves individuals, mutual funds, employee benefit plans, trusts and corporations. Horizon maintains its principal offices at 6210 Ardrey Kell Road, Suite 300, Charlotte, North Carolina 28277. Under the terms of its Investment Advisory Agreement with each Fund, Horizon is responsible for formulating each Fund’s investment program, making day-to-day investment decisions and engaging in portfolio transactions. Horizon provides office space, services and equipment and assistance in supervising matters relating to the Funds’ operations. Horizon is controlled by ACP Horizon Holdings, L.P., an entity affiliated with Altamont Capital Management, LLC, a private investment firm. As of December 31, 2023, Horizon managed approximately $8.19 billion in client assets.
In addition to the duties set forth in the Prospectus under the section entitled “Management”, Horizon, in furtherance of such duties and responsibilities, is authorized in its discretion to engage in the following activities: (i) develop a continuing program for the management of the assets of the Funds; (ii) buy, sell, exchange, convert, lend, or otherwise trade in portfolio securities and other assets; (iii) place orders, negotiate commissions for the execution of transactions in securities and establish relationships with or through broker-dealers, underwriters, or issuers; (iv) prepare and supervise the preparation of shareholder reports and other shareholder communications; and (v) obtain and evaluate business and financial information in connection with the exercise of its duties.
Subject to policies established by the Board, which has overall responsibility for the business and affairs of the Funds, Horizon manages the operations of the Funds. In addition to providing advisory services, Horizon furnishes the Funds with office space and certain facilities and personnel required for conducting the business of the Funds.
Investment Advisory Agreements
Each Investment Advisory Agreement will continue in effect for two (2) years initially and thereafter shall continue from year to year provided such continuance is approved at least annually by (a) a vote of the majority of the Independent Trustees, cast in person at a meeting specifically called for the purpose of voting on such approval and by (b) the majority vote of either all of the Trustees or the vote of a majority of the outstanding shares of a Fund. Each Advisory Agreement may be terminated without penalty on 60 days’ written notice by a vote of a majority of the Trustees or by Horizon, or by holders of a majority of that Fund’s outstanding shares. Each Advisory Agreement shall terminate automatically in the event of its “assignment,” as such term is defined in the 1940 Act.
For the advisory services provided and expenses assumed by it, Horizon has agreed to a fee computed daily and payable monthly as follows:
| Allocation Fund | At an annual rate of 0.99% of the Fund’s average daily net assets. |
| Risk Assist Fund | At an annual rate of 0.99% of the Fund’s average daily net assets. |
| Income Fund | At an annual rate of 0.77% of the Fund’s average daily net assets. |
| Equity Premium Income Fund | At an annual rate of 0.75% of the Fund’s average daily net assets. |
| Defined Risk Fund | At an annual rate of 0.80% of the Fund’s average daily net assets. |
| Multi-Factor U.S. Equity Fund | At an annual rate of 0.80% of the Fund’s average daily net assets. |
| Defensive Core Fund | At an annual rate of 0.68% of the Fund’s average daily net assets. |
| Multi-Factor Small/Mid Cap Fund | At an annual rate of 0.80% of the Fund’s average daily net assets. |
| Tactical Income Fund | At an annual rate of 0.60% of the Fund’s average daily net assets. |
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The following table shows the amount of advisory fees paid by the Funds to Horizon, the amount of the advisory fees waived/reimbursed by Horizon and the amount of expenses recouped by Horizon for the fiscal periods ended November 30:
| Gross Advisory Fee | Net Fee Waived or Expenses Reimbursed by Horizon |
Net Expenses Recouped by Horizon |
Net Advisory Fee Paid by Fund | |
| Active Asset Allocation Fund | ||||
| November 30, 2023 | $8,423,752 | $0 | $0 | $8,423,752 |
| November 30, 2022 | $7,370,381 | $0 | $0 | $7,370,381 |
| November 30, 2021 | $6,494,587 | $0 | $4,388 | $6,498,975 |
| Active Risk Assist Fund | ||||
| November 30, 2023 | $12,168,531 | $0 | $0 | $12,168,531 |
| November 30, 2022 | $12,115,605 | $0 | $0 | $12,115,605 |
| November 30, 2021 | $10,390,972 | $0 | $0 | $10,390,972 |
| Active Income Fund | ||||
| November 30, 2023 | $2,733,866 | $0 | $0 | $2,733,866 |
| November 30, 2022 | $3,343,411 | $0 | $0 | $3,343,411 |
| November 30, 2021 | $3,223,310 | $0 | $0 | $3,223,310 |
| Equity Premium Income Fund | ||||
| November 30, 2023 | $734,253 | $0 | $1,013 | $735,266 |
| November 30, 2022 | $881,000 | $869 | $3,032 | $883,163 |
| November 30, 2021 | $958,897 | $14,218 | $61,112 | $1,005,791 |
| Defined Risk Fund | ||||
| November 30, 2023 | $3,570,192 | $58,577 | $52,186 | $3,563,801 |
| November 30, 2022 | $2,474,537 | $74,784 | $64,512 | $2,464,265 |
| November 30, 2021 | $1,845,378 | $141,014 | $0 | $1,704,364 |
| Multi-Factor U.S. Equity Fund | ||||
| November 30, 2023 | $1,602,112 | $5,306 | $55,515 | $1,652,321 |
| November 30, 2022 | $1,001,788 | $31,460 | $21,935 | $992,263 |
| November 30, 2021 | $1,192,880 | $129,170 | $11,653 | $1,075,363 |
| Defensive Core Fund | ||||
| November 30, 2023 | $1,433,035 | $19,996 | $37,498 | $1,450,537 |
| November 30, 2022 | $1,225,785 | $51,615 | $40,435 | $1,214,605 |
| November 30, 2021 | $639,596 | $64,630 | $27,690 | $602,655 |
| Tactical Income Fund* | ||||
| Period Ended November 30, 2023 | $464,010 | $37,963 | $37,963 | $464,010 |
| Multi-Factor Small/Mid Cap Fund* | ||||
| Period Ended November 30, 2023 | $42,178 | $120,585 | $0 | $0 |
| * | The Multi-Factor Small/Mid Cap Fund and the Tactical Income Fund commenced operations on December 20, 2022. |
| 43 |
Expense Limitation Agreements
Horizon has agreed to waive its advisory fee and reimburse expenses to limit total operating expenses for each Fund at least until March 31, 2025, so that the direct expenses (exclusive of front-end or contingent deferred loads; brokerage fees and commissions; acquired fund fees and expenses; borrowing costs (such as interest and dividend expense on securities sold short); payments, if any, under a Rule 12b-1 Distribution Plan or Shareholder Servicing Plan; expenses paid with securities lending expense offset credits; taxes; and extraordinary expenses (such as litigation)) of each Fund do not exceed the amounts listed below:
|
Advisor Class |
Institutional Class |
Investor Class | |
| Active Asset Allocation Fund | 1.17% | 1.17% | 1.17% |
| Active Risk Assist Fund | 1.17% | 1.17% | 1.17% |
| Active Income Fund | 0.99% | 0.99% | 0.99% |
| Equity Premium Income Fund | 0.99% | 0.99% | 0.99% |
| Defined Risk Fund | 0.94% | 0.94% | 0.94% |
| Multi-Factor U.S. Equity Fund | 0.99% | 0.99% | 0.99% |
| Defensive Core Fund(1) | 0.87% | 0.87% | 0.87% |
| Multi-Factor Small/Mid Cap Fund | 0.99% | 0.99% | 0.99% |
| Tactical Income Fund | 0.80% | 0.80% | 0.80% |
| (1) | Prior to October 1, 2022, Horizon agreed to waive its advisory fee and reimburse expenses to limit total operating expenses for the Defensive Core Fund so that the direct expenses (exclusive of front-end or contingent deferred loads; brokerage fees and commissions; acquired fund fees and expenses; borrowing costs (such as interest and dividend expense on securities sold short); payments, if any, under a Rule 12b-1 Distribution Plan or Shareholder Servicing Plan; expenses paid with securities lending expense offset credits; taxes; and extraordinary expenses (such as litigation)) of the Defensive Core Fund did not exceed 0.94%. |
Any fees waived or expenses reimbursed are subject to possible recoupment by Horizon within 36 months after such fees have been waived or expenses reimbursed, if such recoupment can be achieved without exceeding the lower of the expense limit in place at the time of the waiver or reimbursement and the expense limit in place at the time of recoupment.
The following table contains the amounts of fee waivers and expense reimbursements subject to recapture by Horizon through November 30 of the year indicated.
| Year of Expiration | ||||
| Fund | 2024 | 2025 | 2026 | Total |
| Active Asset Allocation Fund | $— | $— | $— | $— |
| Active Risk Assist Fund | $— | $— | $— | $— |
| Active Income Fund | $— | $— | $— | $— |
| Equity Premium Income Fund | $1,061 | $869 | $— | $1,930 |
| Active Defined Risk Fund | $141,014 | $74,784 | $58,577 | $274,375 |
| Multi-Factor U.S. Equity Fund | $128,664 | $31,381 | $5,296 | $165,341 |
| Defensive Core Fund | $45,582 | $51,617 | $19,996 | $117,195 |
| Tactical Income Fund* | $— | $— | $— | $— |
| Multi-Factor Small/Mid Cap Fund* | $— | $— | $120,585 | $120,585 |
| * | The Multi-Factor Small/Mid Cap Fund and the Tactical Income Fund commenced operations on December 20, 2022. |
If Horizon waives any fee or reimburses any expense pursuant to a waiver agreement, and a Fund’s operating expenses are subsequently less than its respective limit described in the waiver agreement, Horizon shall be entitled to reimbursement by that Fund. If the Funds’ operating expenses subsequently exceed the figures in the above table, the reimbursements shall be suspended. Horizon may seek reimbursement only for expenses waived or paid by it during the 36 months prior to such reimbursement; provided, however, that such expenses may only be reimbursed to the extent they were waived or paid after the date of the waiver agreement (or any similar agreement). No amounts will be paid to Horizon in any fiscal quarter unless the Board determines that reimbursement is in the best interests of the Fund and its shareholders.
| 44 |
The following table shows the amount of reimbursements paid by the Funds to Horizon for the fiscal periods ended November 30:
Amount of Fund Expenses Reimbursed by the Fund to Horizon | |
| Active Asset Allocation Fund | |
| November 30, 2023 | $0 |
| November 30, 2022 | $0 |
| November 30, 2021 | $4,388 |
| Active Risk Assist Fund | |
| November 30, 2023 | $0 |
| November 30, 2022 | $0 |
| November 30, 2021 | $0 |
| Active Income Fund | |
| November 30, 2023 | $0 |
| November 30, 2022 | $0 |
| November 30, 2021 | $0 |
| Equity Premium Income Fund | |
| November 30, 2023 | $1,013 |
| November 30, 2022 | $3,032 |
| November 30, 2021 | $61,112 |
| Defined Risk Fund | |
| November 30, 2023 | $52,186 |
| November 30, 2022 | $64,512 |
| November 30, 2021 | $0 |
| Multi-Factor U.S. Equity Fund | |
| November 30, 2023 | $55,515 |
| November 30, 2022 | $21,935 |
| November 30, 2021 | $11,653 |
| Defensive Core Fund | |
| November 30, 2023 | $37,498 |
| November 30, 2022 | $40,435 |
| November 30, 2021 | $27,690 |
| Tactical Income Fund* | |
| November 30, 2023 | $37,963 |
| Multi-Factor Small/Mid Cap Fund* | |
| November 30, 2023 | $0 |
| * | The Multi-Factor Small/Mid Cap Fund and the Tactical Income Fund commenced operations on December 20, 2022. |
ADMINISTRATOR
Fund Services, 615 East Michigan Street, Milwaukee, Wisconsin 53202, acts as each Fund’s administrator pursuant to an administration agreement (the “Administration Agreement”). Fund Services provides certain administrative services to the Funds, including, among other responsibilities, coordinating the negotiation of contracts and fees with, and the monitoring of performance and billing of, the Funds’ independent contractors and agents; preparation for signature by an officer of the Trust of all documents required to be filed for compliance by the Trust and the Funds with applicable laws and regulations excluding those of the securities laws of various states; arranging for the computation of performance data, including NAV and yield; responding to shareholder inquiries; and arranging for the maintenance of books and records of the Funds, and providing, at its own expense, office facilities, equipment and personnel necessary to carry out its duties. In this capacity, Fund Services does not have any responsibility or authority for the management of the Funds, the determination of investment policy, or for any matter pertaining to the distribution of Fund shares.
| 45 |
For these services, the Funds paid the following in administrative fees for the fiscal periods ended November 30:
| Fiscal Period Ended | Administrative Fees Paid |
| Active Asset Allocation Fund | |
| November 30, 2023 | $368,378 |
| November 30, 2022 | $319,173 |
| November 30, 2021 | $302,288 |
| Active Risk Assist Fund | |
| November 30, 2023 | $547,759 |
| November 30, 2022 | $490,460 |
| November 30, 2021 | $492,530 |
| Active Income Fund | |
| November 30, 2023 | $177,145 |
| November 30, 2022 | $192,574 |
| November 30, 2021 | $217,044 |
| Equity Premium Income Fund | |
| November 30, 2023 | $67,104 |
| November 30, 2022 | $74,316 |
| November 30, 2021 | $73,573 |
| Defined Risk Fund | |
| November 30, 2023 | $227,793 |
| November 30, 2022 | $151,158 |
| November 30, 2021 | $118,306 |
| Multi-Factor U.S. Equity Fund | |
| November 30, 2023 | $106,753 |
| November 30, 2022 | $66,571 |
| November 30, 2021 | $93,916 |
| Defensive Core Fund | |
| November 30, 2023 | $120,228 |
| November 30, 2022 | $88,007 |
| November 30, 2021 | $56,483 |
| Tactical Income Fund* | |
| Period Ended November 30, 2023 | $48,839 |
| Multi-Factor Small/Mid Cap Fund* | |
| Period Ended November 30, 2023 | $38,878 |
| * | The Multi-Factor Small/Mid Cap Fund and the Tactical Income Fund commenced operations on December 20, 2022. |
| 46 |
CUSTODIAN
U.S. Bank, NA, (the “Custodian”) serves as the Custodian of the Trust’s assets pursuant to a Custody Agreement by and between the Custodian and the Trust. The Custodian’s responsibilities include safeguarding and controlling the Trust’s cash and securities, handling the receipt and delivery of securities, and collecting interest and dividends on the Trust’s investments. Pursuant to the Custody Agreement, the Custodian also provides certain accounting and pricing services to the Trust; maintaining original entry documents and books of record and general ledgers; posting cash receipts and disbursements; reconciling bank account balances monthly; recording purchases and sales based upon communications from the Adviser; and preparing monthly and annual summaries to assist in the preparation of financial statements of, and regulatory reports for, the Trust. The Trust may employ foreign sub-custodians that are approved by the Board of Trustees to hold foreign assets. The Custodian is located at 1555 North River Center Drive, Suite 302, Milwaukee, Wisconsin 53212. Fund Services and the Custodian are affiliates.
TRANSFER AGENT SERVICES
Fund Services, 615 East Michigan Street, Milwaukee, Wisconsin 53202, acts as the Funds’ transfer agent and dividend disbursing agent.
DISTRIBUTION OF SHARES
Quasar Distributors, LLC (the “Distributor”), 3 Canal Plaza, Suite 100, Portland, Maine 04101, serves as the distributor in connection with the continuous offering of the Funds’ shares. The Distributor and participating dealers with whom it has entered into dealer agreements offer shares of the Fund as agents on a best efforts basis and are not obligated to sell any specific amount of shares. Currently, Horizon compensates the Distributor for services that the Distributor provides to the Fund.
SECURITIES LENDING AGENT
The Board of Trustees has approved the Funds’ participation in a securities lending program. Under the securities lending program, U.S. Bank, N.A. serves as securities lending agent for the Funds and in that role administers the Funds’ securities lending program pursuant to the terms of a Master Securities Lending Agreement entered into between the Funds and U.S. Bank, N.A. For its services as securities lending agent, the Funds pay to U.S. Bank, N.A. a share of the revenue generated from the Funds’ securities lending program. Additionally, an affiliate and wholly-owned subsidiary of U.S. Bank, N.A. receives compensation from the Funds for managing the pooled investment vehicle into which cash collateral from the Funds’ securities lending program is invested. The net income to which the Funds are entitled pursuant to the securities lending program may be used to offset against costs and other charges incurred by the Funds with the Custodian or its affiliates or, as directed in writing by the Funds, other service providers.
As securities lending agent, U.S. Bank, N.A. is responsible for marketing to approved borrowers available securities from Fund portfolios. U.S. Bank, N.A. is responsible for the administration and management of the Funds’ securities lending program, including the preparation and execution of a participant agreement with each borrower governing the terms and conditions of any securities loan, ensuring that securities loans are properly coordinated and documented with the Funds’ custodian, ensuring that loaned securities are daily valued and that the corresponding required cash collateral of at least 102% of the current market value of the loaned securities is delivered by the borrower(s), using best efforts to obtain additional collateral on the next business day if the value of the collateral falls below the required amount, and arranging for the investment of cash collateral received from borrowers in accordance with the Funds’ investment guidelines.
The table below sets forth, for a Fund’s most recently completed fiscal year, the Fund’s gross income received from securities lending activities, the fees and/or other compensation paid by the Fund for securities lending activities, and the net income earned by the Fund for securities lending activities, and the amount of expenses offset from net income derived from securities lending activities.
| 47 |
Asset Allocation Fund |
Risk Asset Fund |
Active Income Fund |
Equity Fund |
Defined Fund |
Multi-Factor Fund |
Multi-Factor Small/Mid Cap Fund |
Tactical Income Fund | |
| Gross income from securities lending activities: | $5,282,463 | $5,736,960 | $1,754,095 | $49,692 | $18,791 | $715 | $48 | $218,970 |
| Fees paid to securities lending agent from a revenue split: | $83,049 | $79,117 | $58,873 | $3,156 | $1,370 | $33 | $0 | $12,829 |
| Fees paid for any cash collateral management service that are not included in the revenue split: | $151,071 | $161,127 | $48,551 | $1,404 | $413 | $22 | $1 | $5,655 |
| Administrative fees not included in revenue split: | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
| Indemnification fee not included in revenue split: | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
| Rebates (paid to borrower): | $4,716,148 | $5,180,247 | $1,411,182 | $32,510 | $11,529 | $525 | $45 | $149,167 |
| Other fees not included in revenue split (specify): | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
| Aggregate fees/compensation for securities lending activities: | $4,950,268 | $5,420,491 | $1,518,606 | $37,070 | $13,312 | $580 | $47 | $167,651 |
| Net income from securities lending activities: | $332,195 | $316,469 | $235,489 | $12,622 | $5,479 | $134 | $2 | $51,319 |
| Expenses offset from net income from securities lending activities: | $334,284 | $315,981 | $234,994 | $13,123 | $5,476 | $134 | $2 | $49,633 |
CODES OF ETHICS
The Trust, Horizon and the Distributor each have adopted codes of ethics under Rule 17j-1 under the 1940 Act that governs the personal securities transactions of their board members, officers and employees who may have access to current trading information of the Trust. The codes of ethics permit personnel subject thereto to invest in securities, including securities that may be purchased or held by the Funds, subject to certain restrictions. The codes of ethics requires access persons (other than independent Trustees) to pre-clear most transactions and to report transactions and security holdings to the Funds’ chief compliance officer. In addition, the Trust has adopted a code of ethics, which applies only to the Trust’s executive officers to ensure that these officers promote professional conduct in the practice of corporate governance and management.
PROXY VOTING POLICIES AND PROCEDURES
The Trust has adopted a proxy voting and disclosure policy that delegates to Horizon the authority to vote proxies for the Funds, subject to oversight of the Board. The Trust’s proxy voting policy appears in Appendix A and Horizon’s proxy voting policy appears in Appendix B.
No later than August 31 of each year, the Trust files Form N-PX with the SEC. Form N-PX states how the Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30. Each Fund’s proxy voting records, as set forth in its most recent Form N-PX filing, are available upon request, without charge, by calling the Fund at 1-855-754-7932. This information is also available on the SEC’s website at http://www.sec.gov.
PORTFOLIO MANAGERS
Other Accounts
The following table identifies, for each portfolio manager of a Fund, the number of other accounts managed (excluding the Funds) and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles and other accounts. Information in the table is shown as of November 30, 2023, except as indicated below. Asset amounts are approximate and have been rounded. None of the portfolio managers manage accounts with performance-based fees.
| 48 |
Number of Other Accounts Managed and Assets by Account Type | |||
| Portfolio Manager | Registered Investment Companies |
Other Pooled Investment Vehicles |
Other Accounts |
| Scott Ladner | 3 $141 million |
0 $0 |
44,000 $3.91 billion |
| Mike Dickson, Ph.D. | 3 $141 million |
0 $0 |
44,000 $3.91 billion |
| Zach Hill | 0 $0 |
0 $0 |
44,000 $3.91 billion |
| Clark Allen | 0 $0 |
0 $0 |
26,800 $2.3 billion |
Conflicts of Interest
When a portfolio manager has responsibility for managing more than one account, potential conflicts of interest may arise. Those conflicts could include preferential treatment of one account over others in terms of allocation of resources or of investment opportunities. For instance, Horizon may receive fees from certain accounts that are higher than the fee it receives from a Fund. In those instances, the portfolio manager may have an incentive to favor the higher fee accounts over a Fund. Horizon has adopted policies and procedures designed to address these potential material conflicts. For instance, portfolio managers within Horizon are normally responsible for all accounts within a certain investment discipline, and do not, absent special circumstances, differentiate among the various accounts when allocating resources. Additionally, Horizon and its advisory affiliates utilize a system for allocating investment opportunities among portfolios that is designed to provide a fair and equitable allocation.
Compensation
The compensation of Horizon’s portfolio managers include an annual fixed salary, which is based on various market factors and the skill and experience of the individual, and a discretionary bonus. The discretionary bonus takes into account several factors including Horizon’s profitability (net income and ability to pay a bonus), the value and number of accounts/portfolios overseen by the portfolio manager, the general performance of client accounts relative to market conditions and the performance of a Fund based on percent return, adjusted for dividends and capital gains, calculated on a pre-tax basis relative to the performance of a Fund’s relevant benchmarks and competitors for the preceding one year period, or shorter if a Fund has not operated for these periods. The formula for determining these amounts may vary, and no individual’s compensation is solely tied to the investment performance or asset value of any one product or strategy.
Ownership of Fund Shares
Each portfolio manager that has decision making authority over a Fund’s management beneficially owned shares of each Fund as of November 30, 2023 (except as indicated below) as summarized in the following table using the following ranges: A = None; B = $1–$10,000; C = $10,001–$50,000; D = $50,001–$100,000; E = $100,001–$500,000; F = $500,001–$1,000,000; and G = over $1,000,000.
| 49 |
| Fund/Portfolio Manager | Dollar Range of Beneficial Ownership in the Fund |
| Active Asset Allocation Fund | |
| Mike Dickson, Ph.D. | E |
| Scott Ladner | F |
| Zach Hill | E |
| Active Risk Assist Fund | |
| Scott Ladner | F |
| Mike Dickson, Ph.D. | C |
| Zach Hill | C |
| Active Income Fund | |
| Mike Dickson, Ph.D. | A |
| Scott Ladner | C |
| Zach Hill | A |
| Equity Premium Income Fund | |
| Scott Ladner | E |
| Mike Dickson, Ph.D. | A |
| Zach Hill | A |
| Defined Risk Fund | |
| Scott Ladner | E |
| Mike Dickson, Ph.D. | A |
| Zach Hill | D |
| Defensive Core Fund | |
| Scott Ladner | E |
| Mike Dickson, Ph.D. | A |
| Clark Allen | D |
| Multi-Factor U.S. Equity Fund | |
| Scott Ladner | E |
| Mike Dickson, Ph.D. | E |
| Zach Hill | A |
| Multi-Factor Small/Mid Cap Fund | |
| Scott Ladner | E |
| Mike Dickson, Ph.D. | C |
| Zach Hill | A |
| Tactical Income Fund | |
| Scott Ladner | E |
| Mike Dickson, Ph.D. | A |
| Zach Hill | C |
BROKERAGE ALLOCATION AND OTHER PRACTICES
Subject to the general supervision of the Board of Trustees of the Trust, the Adviser is responsible for making decisions with respect to the purchase and sale of portfolio securities on behalf of the Funds. The Adviser is also responsible for the implementation of those decisions, including the selection of broker-dealers to effect portfolio transactions, the negotiation of commissions and the allocation of principal business and portfolio brokerage. In purchasing and selling the Funds’ portfolio securities, it is the Adviser’s policy to obtain quality execution at the most favorable prices through responsible broker-dealers and, in the case of agency transactions, at competitive commission rates where such rates are negotiable. However, under certain conditions, a Fund may pay higher brokerage commissions in return for brokerage and research services. In selecting broker-dealers to execute the Funds’ portfolio transactions, consideration is given to a number of factors, including, without limitation: the price of the security; the rate of the commission; the size and difficulty of the order; the reliability, integrity, financial condition, general execution and operational capabilities of competing broker-dealers; the broker-dealers’ expertise in particular markets; the brokerage and research services they provide to the Adviser or the Fund; and other factors that may be specific to any particular transaction. It is not the policy of the Adviser to seek the lowest available commission rate where it is believed that a broker or dealer charging a higher commission rate would offer greater reliability or provide better price or execution.
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Transactions on stock exchanges involve the payment of brokerage commissions. In transactions on stock exchanges in the United States, these commissions are negotiated. Traditionally, commission rates have generally not been negotiated on stock markets outside the United States. In recent years, however, an increasing number of overseas stock markets have adopted a system of negotiated rates, although a number of markets continue to be subject to an established schedule of minimum commission rates. It is expected that equity securities will ordinarily be purchased in the primary markets, whether over-the-counter or listed, and that listed securities may be purchased in the over-the-counter market if such market is deemed the primary market. In the case of securities traded on the over-the-counter markets, there is generally no stated commission, but the price usually includes an undisclosed commission or markup. In underwritten offerings, the price includes a disclosed, fixed commission or discount.
For fixed income securities, it is expected that purchases and sales will ordinarily be transacted with the issuer, the issuer’s underwriter, or with a primary market maker acting as principal on a net basis, with no brokerage commission being paid by a Fund. However, the price of the securities generally includes compensation, which is not disclosed separately. Transactions placed through dealers who are serving as primary market makers reflect the spread between the bid and asked prices.
With respect to equity and fixed income securities, the Adviser may effect principal transactions on behalf of a Fund with a broker or dealer who furnishes brokerage and/or research services, designate any such broker or dealer to receive selling concessions, discounts or other allowances or otherwise deal with any such broker or dealer in connection with the acquisition of securities in underwritings. The price a Fund pays to underwriters of newly-issued securities usually includes a concession paid by the issuer to the underwriter. The Adviser may receive research services in connection with brokerage transactions, including designations in fixed price offerings.
The Adviser receives a wide range of research services from brokers and dealers covering investment opportunities throughout the world, including information on the economies, industries, groups of securities, individual companies, statistics, political developments, technical market action, pricing and appraisal services, and performance analyses of all the countries in which a Fund’s portfolio is likely to be invested. The Adviser cannot readily determine the extent to which commissions charged by brokers reflect the value of their research services, but brokers occasionally suggest a level of business they would like to receive in return for the brokerage and research services they provide. To the extent that research services of value are provided by brokers, the Adviser may be relieved of expenses, which it might otherwise bear. In some cases, research services are generated by third parties but are provided to the Adviser by or through brokers.
When one or more brokers is believed capable of providing the best combination of price and execution, a Fund’s Adviser may select a broker based upon brokerage or research services provided to the Adviser. The Adviser may pay a higher commission than otherwise obtainable from other brokers in return for such services only if a good faith determination is made that the commission is reasonable in relation to the services provided.
Section 28(e) of the Securities Exchange Act of 1934 permits the Adviser, under certain circumstances, to cause a Fund to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the transaction in recognition of the value of brokerage and research services provided by the broker or dealer. In addition to agency transactions, the Adviser may receive brokerage and research services in connection with certain riskless principal transactions, in accordance with applicable SEC guidance. Brokerage and research services include: (1) furnishing advice as to the value of securities, 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 thereto (such as clearance, settlement, and custody). In the case of research services, the Adviser believes that access to independent investment research is beneficial to their investment decision-making processes and, therefore, to a Fund.
To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation and pricing of investments. Examples of research-oriented services for which the Adviser might utilize Fund commissions include research reports and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. The Adviser may use research services furnished by brokers in servicing all client accounts and not all services may necessarily be used in connection with the account that paid commissions to the broker providing such services. Information so received by the Adviser will be in addition to and not in lieu of the services required to be performed by the Adviser under the Advisory Agreement. Any advisory or other fees paid to the Adviser are not reduced as a result of the receipt of research services. Portfolio securities will not be purchased from or sold to the Adviser or the Distributor, or any affiliated person or any of them acting as principal, except to the extent permitted by rule or order of the SEC.
| 51 |
The table below shows the aggregate brokerage commissions paid by each Fund as well as aggregate commissions paid to an affiliate of the Fund, the Adviser or distributor or an affiliate thereof. The data presented are for the past three fiscal years (or shorter period depending on the Fund’s commencement of operations).
| 52 |
| Fund | Total Brokerage Commissions |
Total Brokerage Commissions Paid to an Affiliate of the Fund or the Fund’s Adviser or Distributor |
Percent of Brokerage Commissions Paid to an Affiliate of the Fund or the Fund’s Adviser or Distributor |
Percent of Transactions Executed by an Affiliate of the Fund or the Fund’s Adviser or Distributor |
| Active Asset Allocation Fund(1) | ||||
| Year Ended November 30, 2023 | $834,425 | $0 | 0% | 0% |
| Year Ended November 30, 2022 | $396,166 | $0 | 0% | 0% |
| Year Ended November 30, 2021 | $205,984 | $0 | 0% | 0% |
| Active Risk Assist Fund | ||||
| Year Ended November 30, 2023 | $1,822,911 | $0 | 0% | 0% |
| Year Ended November 30, 2022 | $1,536,903 | $0 | 0% | 0% |
| Year Ended November 30, 2021 | $1,692,110 | $0 | 0% | 0% |
| Active Income Fund(2) | ||||
| Year Ended November 30, 2023 | $262,186 | $0 | 0% | 0% |
| Year Ended November 30, 2022 | $93,527 | $0 | 0% | 0% |
| Year Ended November 30, 2021 | $92,752 | $0 | 0% | 0% |
| Equity Premium Income Fund | ||||
| Year Ended November 30, 2023 | $22,958 | $0 | 0% | 0% |
| Year Ended November 30, 2022 | $29,282 | $0 | 0% | 0% |
| Year Ended November 30, 2021 | $58,129 | $0 | 0% | 0% |
| Defined Risk Fund | ||||
| Year Ended November 30, 2023 | $41,195 | $0 | 0% | 0% |
| Year Ended November 30, 2022 | $72,114 | $0 | 0% | 0% |
| Year Ended November 30, 2021 | $511,542 | $0 | 0% | 0% |
| Multi-Factor U.S. Equity Fund | ||||
| Year Ended November 30, 2023 | $70,789 | $0 | 0% | 0% |
| Year Ended November 30, 2022 | $31,524 | $0 | 0% | 0% |
| Year Ended November 30, 2021 | $56,647 | $0 | 0% | 0% |
| Defensive Core Fund | ||||
| Year Ended November 30, 2023 | $16,838 | $0 | 0% | 0% |
| Year Ended November 30, 2022 | $46,320 | $0 | 0% | 0% |
| Year Ended November 30, 2021 | $13,750 | $0 | 0% | 0% |
| Multi-Factor Small/Mid Cap Fund* | ||||
| Period Ended November 30, 2023 | $3,933 | $0 | 0% | 0% |
| Tactical Income Fund* | ||||
| Period Ended November 30, 2023 | $52,424 | $0 | 0% | 0% |
| * | The Multi-Factor Small/Mid Cap Fund and the Tactical Income Fund commenced operations on December 20, 2022. |
| (1) | The increase in brokerage commissions paid between the fiscal years ended November 30, 2023 and November 30, 2022 for the Active Asset Allocation Fund can be attributed primarily to increases in agency trades placed during the period. |
| (2) | The increase in brokerage commissions paid between the fiscal years ended November 30, 2023 and November 30, 2022 for the Active Income Fund can be attributed primarily to increases in agency trades placed during the period. |
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| Fund | Commissions | Value of Transactions |
| Active Asset Allocation Fund | $720,807 | $2,746,485,947 |
| Active Risk Assist Fund | $366,662 | $1,537,700,064 |
| Active Income Fund | $238,525 | $506,312,039 |
| Equity Premium Income Fund | $17,303 | $86,142,013 |
| Tactical Fixed Income Fund | $52,424 | $180,608,711 |
| Multi-Factor U.S. Equity Fund | $11,867 | $94,380,155 |
As of the fiscal year ended November 30, 2023, the following Fund owned the following securities of their “regular brokers or dealers” or their parents:
| Fund | Security of “Regular Broker/ Dealer” of the Portfolio |
Value of Portolio’s Aggregare Holdings of Securities of 11/30/23 |
| Active Risk Assist Fund | Citigroup, Inc. | $25,585 |
Aggregated Trades
While investment decisions for each Fund are made independently from those for any other investment companies and accounts advised or managed by the Adviser, such other advisory clients may invest in the same securities as the Funds. To the extent permitted by law, the Adviser may aggregate the securities to be sold or purchased for each Fund with those to be sold or purchased for other investment companies or accounts advised or managed by the Adviser in executing transactions. When a purchase or sale of the same security is made as part of an aggregated trade, the transaction will be averaged as to price and available investments allocated as to amount in a manner which the Adviser believes to be equitable to the participating Fund(s) and other participating investment companies or accounts. In some instances, this investment procedure may adversely affect the price paid or received by a Fund or the size of the position obtained or sold by a Fund.
Portfolio Turnover
The portfolio turnover rate of a Fund is calculated by dividing the lesser of a Fund’s purchases or sales of portfolio securities for the year by the monthly average value of the portfolio securities. The calculation excludes all securities whose remaining maturities at the time of acquisition were one year or less. The portfolio turnover rate may vary greatly from year to year as well as within a particular year, and may also be affected by cash requirements for redemptions of shares. High portfolio turnover rates will generally result in higher transaction costs, including brokerage commissions, to a Fund and may result in additional tax consequences to a Fund’s Shareholders. For the fiscal years ended November 30, 2023 and November 30, 2022, the Funds had the following portfolio turnover rates:
| Portfolio Turnover Rates | ||
| Fund | 2023 | 2022 |
| Active Asset Allocation Fund | 247% | 139% |
| Active Risk Assist Fund | 176% | 366% |
| Active Income Fund | 175% | 110% |
| Equity Premium Income Fund | 4% | 150% |
| Defined Risk Fund | 3% | 15% |
| Multi-Factor U.S. Equity Fund | 238% | 197% |
| Defensive Core Fund | 139% | 270% |
| Tactical Income Fund* | 638% | N/A |
| Multi-Factor Small/Mid Cap Fund* | 179% | N/A |
| * | The Multi-Factor Small/Mid Cap Fund and the Tactical Income Fund commenced operations on December 20, 2022. |
The decrease in turnover rate for the Equity Premium Income Fund between fiscal years ended November 30, 2022 and November 30, 2023 can be attributed primarily to decreased market volatility.
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REDEMPTION OF SECURITIES BEING OFFERED
Each Fund intends to pay all redemptions of its shares in cash. However, a Fund may make full or partial payment of any redemption request by the payment to shareholders of portfolio securities of the applicable Fund (i.e., by redemption-in-kind), at the value of such securities used in determining the redemption price. Each Fund, as a separate series of the Trust, nevertheless, pursuant to Rule 18f-1 under the 1940 Act, has filed a notification of election under which a Fund is committed to pay in cash to any shareholder of record, all such shareholder’s requests for redemption made during any 90-day period, up to the lesser of $250,000 or 1% of a Fund’s NAV at the beginning of such period. The securities to be paid in-kind to any shareholders will be readily marketable securities selected in such manner, as the Board deems fair and equitable. If shareholders were to receive redemptions-in-kind, they would incur brokerage costs should they wish to liquidate the portfolio securities received in such payment of their redemption request. The Trust does not anticipate making redemptions-in-kind under normal circumstances.
The right to redeem shares or to receive payment with respect to any redemption of shares of a Fund may only be suspended (1) for any period during which trading on the NYSE is restricted or such Exchange is closed, other than customary weekend and holiday closings, (2) for any period during which an emergency exists as a result of which disposal of securities or determination of the NAV of a Fund is not reasonably practicable, or (3) for such other periods as the SEC may by order permit for protection of shareholders of the Fund.
A Fund will be deemed to have received a purchase or redemption order when an authorized broker or, if applicable, a broker’s authorized designee, receives the order.
DISTRIBUTION PLANS
Each Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940 Act (each a “12b-1 Plan” and collectively, the “12b-1 Plans”). See the section entitled “How to Purchase Shares – 12b-1 Plans” in the Prospectus. As required by Rule 12b-1, the 12b-1 Plans were approved by the Board and separately by a majority of the Independent Trustees who have no direct or indirect financial interest in the operation of the 12b-1 Plans. The 12b-1 Plans require that the Distributor or Treasurer shall provide to the Board, at least quarterly, a written report of the amounts expended pursuant to the 12b-1 Plans and the purposes of such expenditures. The Board will take into account the expenditures for purposes of reviewing the operation of the 12b-1 Plans and in connection with their annual consideration of the renewal of the 12b-1 Plans.
Potential benefits of the 12b-1 Plans to the Funds include savings to the Funds in certain operating expenses, benefits to the investment process through growth and stability of assets, and maintenance of a financially healthy management organization. The continuation of the 12b-1 Plans must be approved by the Board annually.
Under the 12b-1 Plans, each Fund may annually expend up to 0.25% of its average daily net assets allocable to Advisor Class shares, and the Equity Premium Income Fund, the Defined Risk Fund, the Multi-Factor U.S. Equity Fund, the Defensive Core Fund, the Multi-Factor Small/Mid Cap Fund and the Tactical Income Fund may annually expend up to 0.10% of their average daily net assets allocable to Investor Class shares. Expenditures under the 12b-1 Plans may be used to pay for shareholder servicing or any activity primarily intended to result in the sale of those shares, provided that the Board has approved the category of expenses for which payment is being made. Such expenditures paid as distribution fees to any person who sells shares may not exceed 0.25% per annum of the Fund’s Advisor Class of Shares’ average daily net assets and 0.10% per annum of the applicable Fund’s Investor Class Shares’ average daily net assets. Such expenditures may include, without limitation: (i) the printing and mailing of Fund Prospectuses, statements of additional information, any supplements thereto and shareholder reports for prospective shareholders; (ii) those relating to the development, preparation, printing and mailing of advertisements, sales literature and other promotional materials describing and/or relating to the Funds; (iii) obtaining information and providing explanations to wholesale and retail distributors of contracts regarding Fund investment objectives and policies and other information about the Funds, including the performance of the Funds; (iv) training sales personnel regarding the Funds; and (v) financing any activity that the Distributor determines is primarily intended to result in the sale of Fund shares. The Funds do not participate in any joint distribution activities with other investment companies.
The amount of distribution and service fees incurred by the Advisor Class shares of the Funds and by the Investor Class shares of the Equity Premium Income Fund, Defined Risk Fund, Multi-Factor U.S. Equity Fund, Defensive Core Fund, Multi-Factor Small/Mid Cap Fund, and Tactical Fixed Income Fund during the fiscal year ended November 30, 2023 were as follows:
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| Fund | Advertising/ Marketing |
Printing/ Postage |
Payment to distributor |
Payment to dealers |
Compensation to sales personnel |
Other | Total |
| Advisor Class | |||||||
| Active Asset Allocation Fund | $0 | $0 | $0 | $4,720 | $0 | $0 | $4,720 |
| Active Risk Assist Fund | $0 | $0 | $0 | $7,350 | $0 | $0 | $7,350 |
| Active Income Fund | $0 | $0 | $0 | $2,547 | $0 | $0 | $2,547 |
| Equity Premium Income Fund | $0 | $0 | $0 | $103,886 | $0 | $0 | $103,886 |
| Defined Risk Fund | $0 | $0 | $0 | $471,534 | $0 | $0 | $471,534 |
| Multi-Factor U.S. Equity Fund | $0 | $0 | $0 | $207,229 | $0 | $0 | $207,229 |
| Defensive Core Fund | $0 | $0 | $0 | $272,866 | $0 | $0 | $272,866 |
| Multi-Factor Small/Mid Cap Fund* | $0 | $0 | $0 | $5,410 | $0 | $0 | $5,410 |
| Tactical Fixed Income Fund* | $0 | $0 | $0 | $79,167 | $0 | $0 | $79,167 |
| Investor Class | |||||||
| Equity Premium Income Fund | $0 | $0 | $0 | $93,911 | $0 | $0 | $93,911 |
| Defined Risk Fund | $0 | $0 | $0 | $429,434 | $0 | $0 | $429,434 |
| Multi-Factor U.S. Equity Fund | $0 | $0 | $0 | $195,621 | $0 | $0 | $195,621 |
| Defensive Core Fund | $0 | $0 | $0 | $169,323 | $0 | $0 | $169,323 |
| Multi-Factor Small/Mid Cap Fund* | $0 | $0 | $0 | $5,181 | $0 | $0 | $5,181 |
| Tactical Fixed Income Fund* | $0 | $0 | $0 | $76,113 | $0 | $0 | $76,113 |
| * | The Multi-Factor Small/Mid Cap Fund and the Tactical Income Fund commenced operations on December 20, 2022. |
SHAREHOLDER SERVICES
Shareholder Servicing Agreement. The Active Asset Allocation Fund, Active Risk Assist Fund and Active Income Fund have each adopted a Shareholder Services Plan (the “Servicing Plan”). The Servicing Plan allows each Fund to use part of its assets for shareholder servicing expenses. Payments under the Plan may vary and are determined by each Fund in its sole discretion, in amounts up to 0.10% of a Fund’s average daily net assets for Investor Class shares on an annualized basis. Payments under the Servicing Plan are made for the provision of support services to shareholders, including administrative or other shareholder support services such as responding to customer inquiries or assisting a Fund in establishing or maintaining shareholder accounts and records. The entities providing shareholder services may provide such services directly, or may arrange for such services to be provided by another entity that has a servicing relationship with one or more shareholders. However, payments under the Plan are an operating expense of the Funds that is subject to the expense limitation provided by Horizon. During the fiscal year ended November 30, 2023 the Investor Class shares of the Funds paid the following, with respect to shareholder servicing fees:
| Fund Investor Class Shares | Shareholder Servicing Fees Paid |
| Active Asset Allocation Fund | $821,345 |
| Active Risk Assist Fund | $1,194,648 |
| Active Income Fund | $352,277 |
Systematic Withdrawal Program. A shareholder owning or purchasing shares of the Funds having a total value of $10,000 or more may participate in a systematic withdrawal program providing regular monthly or quarterly payments. An application form containing details of the Systematic Withdrawal Program is available upon request from the Funds’ transfer agent. The Program is voluntary and may be terminated at any time by the shareholders.
Income dividends and capital gain distributions on shares of the Funds held in a Systematic Withdrawal Program should be invested in additional shares of the relevant Fund at net asset value. A Systematic Withdrawal Program is not an annuity and does not and cannot protect against loss in declining markets. Amounts paid to a shareholder from the Systematic Withdrawal Program represent the proceeds from redemptions of Fund shares, and the value of the shareholder’s investment in the Funds will be reduced to the extent that the payments exceed any increase in the aggregate value of the shareholder’s shares (including shares purchased through reinvestment of dividends and distributions). If a shareholder receives payments that are greater than the appreciation in value of his or her shares, plus the income earned on the shares, the shareholder may eventually withdraw his or her entire account balance. This will occur more rapidly in a declining market. For tax purposes, depending upon the shareholder’s cost basis and date of purchase, each withdrawal will result in a capital gain or loss. See “Distributions” and “Federal Tax Considerations” in the Funds’ Prospectus and “Taxes” in this SAI.
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The Funds offer certain shareholder services, which are designed to facilitate investment in their shares. Each of the options is described in the Funds’ Prospectus. All of these special services may be terminated by either the Funds or the shareholder without any prior written notice.
Automatic Account Builder. An investor may arrange to have a fixed amount of $100 or more automatically invested in shares of a Fund monthly by authorizing his or her bank account to be debited to invest specified dollar amounts in shares of a Fund. The investor’s bank must be a member of the Automatic Clearing House System. Stock certificates are not issued to Automatic Account Builder participants.
Further information about these programs and an application form can be obtained from the Funds’ transfer agent.
DETERMINATION OF NET ASSET VALUE
The NAV per share of each Fund will be determined for each class of shares. The NAV per share of a given class of shares of a Fund is determined by calculating the total value of that Fund’s assets attributable to such class of shares, deducting its total liabilities attributable to such class of shares in conformance with the provisions of the plan adopted by the Funds in accordance with Rule 18f-3 under the 1940 Act and dividing the result by the number of shares of such class outstanding. The NAV of shares of each class of a Fund is normally calculated as of the close of regular trading on the NYSE on every day the NYSE is open for trading. The NYSE is open Monday through Friday except on the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The NYSE also may be closed on national days of mourning or due to natural disaster or other extraordinary events or emergency.
Due to the fact that different expenses are charged to the Advisor Class, Institutional Class and Investor Class shares of a Fund, the NAV of the classes of a Fund may vary.
In determining a Fund’s NAV per share, equity securities for which market quotations are readily available are valued at current market value using the last reported sales price. NASDAQ traded securities are valued using the NASDAQ official closing price (NOCP). If the NOCP is not available, such securities shall be valued at the mean between the current bid and ask prices on the day of valuation, or if there has been no sale on such day, at the mean between the current bid and ask prices on the primary exchange. If market quotations are not readily available, then securities are valued at fair value as determined by the Board (or its delegate). Short-term debt instruments with a remaining maturity of more than 60 days, intermediate and long-term bonds, convertible bonds, and other debt securities are generally valued on the basis of dealer supplied quotations or by pricing system selected by Horizon and approved by the Board of Trustees of the Trust. Where such prices are not available, valuations will be obtained from brokers who are market makers for such securities. However, in circumstances where Horizon deems it appropriate to do so, the mean of the bid and asked prices for over- the-counter securities or the last available sale price for exchange-traded debt securities may be used. Where no last sale price for exchange traded debt securities is available, the mean of the bid and asked prices may be used. Short-term debt securities with a remaining maturity of 60 days or less are amortized to maturity, provided such valuations represent par value.
Other securities and assets for which market quotations are not readily available or for which valuation cannot be provided, as described above, are valued as determined in good faith in accordance with procedures approved by the Board of Trustees of the Trust.
Trading in securities on Far Eastern securities exchanges and over-the-counter markets is normally completed well before the close of business on each business day in New York (i.e., a day on which the NYSE is open). In addition, Far Eastern securities trading generally or in a particular country or countries may not take place on all business days in New York. Furthermore, trading may take place in certain foreign markets on certain Saturdays or other days that are not business days in New York, and on which a Fund’s NAV is not calculated. The Funds calculate NAV per share, and therefore effects sales, redemptions and repurchases of its shares, as of the close of regular trading on the NYSE once on each day on which the NYSE is open. Such calculation may not take place contemporaneously with the determination of the prices of the majority of the portfolio securities used in such calculation. If events that may materially affect the value of such securities occur between the time when their price is determined and the time when a Fund’s NAV is calculated, such securities may be valued at fair value as determined in good faith in accordance with procedures approved by the Board of Trustees of the Trust.
ANTI-MONEY LAUNDERING AND CUSTOMER IDENTIFICATION PROGRAMS
The USA PATRIOT Act requires financial institutions, including each Fund, to adopt certain policies and programs to prevent money laundering activities or the financing of terrorist activities, including procedures to verify the identity of customers opening new accounts. As required by law, the Funds may employ various procedures, such as comparing the information to fraud databases or requesting additional information or documentation from you, to ensure that the information supplied by you is correct. The Trust’s AML Compliance Officer is responsible for implementing and monitoring the operations and internal controls of the program. Compliance officers at certain of the Funds’ service providers are also responsible for monitoring aspects of the AML program. The AML program is subject to the continuing oversight of the Board.
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TAXES
The following is only a summary of certain additional U.S. federal income tax considerations generally affecting the Funds and their shareholders that is intended to supplement the discussion contained in the Prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Funds or their shareholders, and the discussion here and in the Prospectus is not intended to serve as a substitute for careful tax planning. Shareholders are urged to consult their tax advisors with specific reference to their own tax situations, including their state, local, and foreign tax liabilities.
This general discussion of certain federal income tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
Qualification as a Regulated Investment Company.
Each Fund has elected and intends to qualify as a RIC under Subchapter M of the Code. In general, to qualify as a RIC: (a) at least 90% of the gross income of a Fund for the taxable year must be derived from dividends, interest, payments with respect to loans of securities, gains from the sale or other disposition of securities, or other income derived with respect to its business of investing in securities; (b) a Fund must distribute to its shareholders 90% of its ordinary income and net short-term capital gains; and (c) a Fund must diversify its assets so that, at the close of each quarter of its taxable year, (i) at least 50% of the fair market value of its total (gross) assets is comprised of cash, cash items, U.S. Government securities, securities of other RICs, and other securities limited in respect of any one issuer to no more than 5% of the fair market value of a Fund’s total assets and 10% of the outstanding voting securities of such issuer and (ii) no more than 25% of the fair market value of its total assets is invested in the securities of any one issuer (other than U.S. Government securities and securities of other RICs) or of two or more issuers controlled by a Fund and engaged in the same, similar, or related trades or businesses.
Although the Funds intend to distribute substantially all of their net investment income and may distribute their capital gains for any taxable year, the Funds will be subject to federal income taxation to the extent any such income or gains are not distributed. Each Fund is treated as a separate corporation for federal income tax purposes. A Fund, therefore, is considered to be a separate entity in determining its treatment under the rules for RICs described herein. Losses in one Fund do not offset gains in another and the requirements (other than certain organization requirements) for qualifying RIC status are determined at the Fund level.
If a Fund fails to satisfy the RIC requirements set forth above in any taxable year, such Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures of the diversification requirements where the Fund corrects the failure within a specified period.
If, in any taxable year, a Fund should not qualify as a RIC under the Code: (1) that Fund would be taxed at normal corporate rates on the entire amount of its taxable income without deduction for dividends paid or other distributions to its shareholders, and (2) that Fund’s distributions to the extent made out of a Fund’s current or accumulated earnings and profits would be taxable to its shareholders (other than shareholders in tax deferred accounts) as ordinary dividends (regardless of whether they would otherwise have been considered capital gain dividends), and may qualify for the deduction for dividends received by corporations. In addition, a Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a RIC. Failure to qualify as a RIC would thus have a negative impact on the Fund’s income and performance. It is possible that the Fund will not qualify as a RIC in any given tax year.
Federal Excise Tax.
In addition, a Fund must declare and distribute dividends equal to at least 98% of its ordinary income (as of the twelve months ended December 31) and at least 98.2% of its net capital gain (as of the twelve months ended October 31), in order to avoid a 4% federal excise tax. Each Fund intends to make the required distributions, but they cannot guarantee that they will do so. The Funds intend to make sufficient distributions to avoid liability for federal excise tax, but can make no assurances that such tax will be completely eliminated. The Funds may in certain circumstances be required to liquidate Fund investments in order to make sufficient distributions to avoid federal excise tax liability at a time when the Fund might not otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the ability of the Funds to satisfy the requirement for qualification as RICs.
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Distributions to Shareholders.
The Funds anticipate distributing substantially all of their investment company taxable income and net tax-exempt interest (if any) for each tax year. Distributions characterized as dividends paid to you out of the Fund’s current and accumulated earnings and profits generally may be characterized as ordinary income. A portion of these distributions may qualify for the dividends-received deduction when paid to certain corporate shareholders. Under current tax law, qualifying corporate dividends are taxable at long-term capital gains tax rates. The long-term capital gains rate for individual taxpayers is currently at a maximum rate of 20%, with lower rates potentially applicable to taxpayers depending on their income levels. The Equity Premium Income Fund may make distributions when the Equity Premium Income Fund does not have any current or accumulated earnings and profits, as a result these distributions will be treated for tax purposes as a return of capital distribution and will not be subject to tax unless the amount of the distribution exceeds their basis in the Equity Premium Income Fund. Any return of capital distributions that are in excess of an investor’s basis in the Active Income Fund will be taxed at capital gains tax rates.
If the Fund designates a dividend as a capital gains distribution, it generally will be taxable to shareholders as long-term capital gains, regardless of how long the shareholders have held their Fund shares or whether the dividend was received in cash or reinvested in additional Fund shares. All taxable dividends paid by the Fund, other than those designated as qualified dividend income or capital gains distributions, will be taxable as ordinary income to shareholders, whether received in cash or reinvested in additional shares. To the extent the Fund engages in increased portfolio turnover, short-term capital gains may be realized, and any distribution resulting from such gains will be considered ordinary income for federal tax purposes.
A corporate shareholder may be entitled to take a deduction for income dividends received by it that are attributable to dividends received from a domestic corporation, provided that both the corporate shareholder retains its shares in the applicable Fund for more than 45 days and that Fund retains its shares in the issuer from whom it received the income dividends for more than 45 days. A distribution of net capital gain reflects a Fund’s excess of net long-term gains over its net short-term losses. A Fund must designate distributions of net capital gain and must notify shareholders of this designation within sixty days after the close of the Trust’s taxable year. A corporate shareholder of a Fund cannot use a dividends-received deduction for distributions of net capital gain.
Shareholders who hold Fund shares in a tax-deferred account, such as an individual retirement account (“IRA”), generally will not have to pay tax on Fund distributions until they receive distributions from their account.
The Funds will send shareholders information each year on the tax status of dividends and return of capital distributions. A dividend or capital gains distribution paid shortly after shares have been purchased, although in effect a return of investment, is subject to federal income taxation. Dividends from net investment income and distributions of capital gains will be taxable to shareholders, whether received in cash or reinvested in Fund shares and no matter how long the shareholder has held Fund shares, even if they reduce the net asset value of shares below the shareholder’s cost and thus, in effect, result in a return of a part of the shareholder’s investment.
Dividends attributable to a Fund’s ordinary income and net capital gain are taxable as such to shareholders in the year in which they are received except dividends declared in October, November, and December to the shareholders of record on a specified date in such a month and paid in January of the following year are taxable in the previous year.
Certain individuals, estates and trusts are required to pay a 3.8% Medicare surtax on “net investment income” including, among other things, dividends and proceeds of sale in respect of securities like the shares, subject to certain exceptions. Prospective investors should consult with their own tax advisors regarding the effect, if any, of the tax on net investment income on their ownership and disposition of the shares.
Sale, Exchange, or Repurchase of Shares.
In general, a shareholder who sells or redeems shares will realize a capital gain or loss, which will be long-term or short-term depending upon the shareholder’s holding period of Fund shares. An exchange of shares is generally treated as a sale and any gain may be subject to tax. All or a portion of any loss so recognized may be disallowed if you purchase (for example, by reinvesting dividends) shares of the same Fund within 30 days before or after the sale, exchange, or repurchase. If disallowed, the loss will be reflected in an upward adjustment to the basis of the shares purchased.
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Shareholders should note that, upon the sale of shares in a Fund, if the shareholder has not held such shares for at least six months, any loss on the sale or exchange of those shares will be treated as a long-term capital loss to the extent of the capital gains dividends received with respect to the shares. Any capital loss arising from the sale, exchange or repurchase of shares held for six months or less, however, will be treated as a long-term capital loss to the extent of the amount of distributions of net capital gain received on such shares. In determining the holding period of such shares for this purpose, any period during which your risk of loss is offset by means of options, short sales or similar transactions is not counted. Capital losses in any tax year are deductible only to the extent of capital gains plus, in the case of a non-corporate taxpayer, $3,000 of ordinary income.
The repurchase or transfer of shares may result in a taxable gain or loss to a tendering shareholder. Different tax consequences may apply for tendering and non-tendering shareholder in connection with a repurchase offer. For example, if a shareholder does not tender all of his or her shares, such repurchase may not be treated as a sale or exchange for U.S. federal income tax purposes, and may result in deemed distributions to non-tendering shareholder. On the other hand, shareholder holding shares as capital assets who tender all of their shares (including shares deemed owned by shareholders under constructive ownership rules) will be treated as having sold their shares and generally will recognize capital gain or loss. The amount of the gain or loss will be equal to the difference between the amount received for the shares and the shareholder adjusted tax basis in the relevant shares. Such gain or loss generally will be a long-term capital gain or loss if the shareholder has held such shares as capital assets for more than one year. Otherwise, the gain or loss will be treated as short-term capital gain or loss.
Certain Tax Rules Applicable to Fund Transactions.
A Fund may elect to treat part or all of any “qualified late year loss” as if it had been incurred in the succeeding taxable year in determining the Fund’s taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such “qualified late year loss” as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar year. A “qualified late year loss” generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as “post-October losses”) and certain other late-year losses.
The treatment of capital loss carryovers for the Funds is similar to the rules that apply to capital loss carryovers of individuals, which provide that such losses are carried over indefinitely. If a Fund has a “net capital loss” (that is, capital losses in excess of capital gains), the excess of the Fund’s net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund’s next taxable year, and the excess (if any) of the Fund’s net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund’s next taxable year. The carryover of capital losses may be limited under the general loss limitation rules if a Fund experiences an ownership change as defined in the Code.
At the time of purchase, a Fund’s NAV may reflect undistributed income or net capital gains. A subsequent distribution to shareholders of such amounts, although constituting a return of their investment, would be taxable either as dividends or capital gain distributions. For federal income tax purposes, the Funds are permitted to carry forward their net realized capital losses, if any, for eight years, and realize net capital gains up to the amount of such losses without being required to pay taxes on, or distribute such gains.
As of November 30, 2023, the following Funds had capital loss carry forwards for federal income tax purposes available to offset future capital gains as follows:
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| Non-Expiring | |||
| Fund | Short-Term | Long-Term | Total |
| Active Asset Allocation Fund | $24,243,075 | $6,005,524 | $30,248,599 |
| Active Risk Assist Fund | $39,729,373 | $16,829,176 | $56,558,549 |
| Active Income Fund | $42,274,715 | $33,436,413 | $75,711,128 |
| Equity Premium Income Fund | $6,005,707 | $1,008,612 | $7,014,319 |
| Defined Risk Fund | $5,881,869 | $4,933,713 | $10,815,582 |
| Multi-Factor U.S. Equity Fund | $— | $— | $— |
| Defensive Core Fund | $3,440,594 | $3,214,927 | $6,655,521 |
| Tactical Fixed Income Fund* | $4,290,376 | $— | $4,290,376 |
| Multi-Factor Small/Mid Cap Fund* | $— | $— | $— |
| * | Multi-Factor Small/Mid Cap Fund and Tactical Income Fund commenced operations on December 20, 2022. |
The Multi-Factor U.S. Equity Fund and the Defensive Core Fund utilized capital loss carry forwards of $1,352,233 and $7,605,172, respectively, during the fiscal year.
Foreign currency gains and losses, including the portion of gain or loss on the sale of debt securities attributable to foreign exchange rate fluctuations are taxable as ordinary income. If the net effect of these transactions is a gain, the dividend paid by a Fund will be increased; if the result is a loss, the income dividend paid by a Fund will be decreased. Adjustments to reflect these gains and losses will be made at the end of a Fund’s taxable year.
Foreign Taxes.
Income received by a Fund from sources within various foreign countries may be subject to foreign income taxes withheld at the source. The United States has entered into tax treaties with many foreign countries that may entitle the Fund to a reduced rate of tax or exemption from tax on such income. It is impossible to determine the effective rate of foreign tax in advance since the amount of the Fund’s assets to be invested within various countries is not known. Under the Code, if more than 50% of the value of a Fund’s total assets at the close of its taxable year comprises securities issued by foreign corporations, a Fund may file an election with the Internal Revenue Service (the “IRS”) to “pass through” to that Fund’s shareholders the amount of any foreign income taxes paid by that Fund. Pursuant to this election, shareholders will be required to: (i) include in gross income, even though not actually received, their respective pro rata share of foreign taxes paid by a Fund; (ii) treat their pro rata share of foreign taxes as paid by them; and (iii) either deduct their pro rata share of foreign taxes in computing their taxable income, or use it as a foreign tax credit against U.S. income taxes (but not both). No deduction for foreign taxes may be claimed by a shareholder who does not itemize deductions.
Even if the Fund were eligible to make such an election for a given year, it may determine not to do so. Shareholders that are not subject to U.S. federal income tax, and those who invest in the Fund through tax-advantaged accounts (including those who invest through IRAs or other tax-advantaged retirement plans), generally will receive no benefit from any tax credit or deduction passed through by a Fund.
Backup Withholding.
A Fund will be required in certain cases to withhold and remit to the U.S. Treasury a percentage (currently 24%) of taxable dividends or gross proceeds realized upon a sale to shareholders who: (i) have failed to provide a correct tax identification number in the manner required, (ii) are subject to withholding by the IRS for failure to properly include on their return payments of taxable interest or dividends, (iii) have failed to certify to the Fund that they are not subject to backup withholding when required to do so, or (iv) are “exempt recipients.”
State and Local Taxes.
Depending upon the extent of a Fund’s activities in states and localities in which its offices are maintained, in which its agents or independent contractors are located, or in which it is otherwise deemed to be conducting business, a Fund may be subject to the tax laws of such states or localities. In addition, in those states and localities that have income tax laws, the treatment of a Fund and its shareholders under such laws may differ from their treatment under federal income tax laws.
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Foreign Shareholders.
The foregoing discussion relates only to U.S. federal income tax law as applicable to U.S. shareholders (i.e., U.S. citizens and residents and U.S. domestic corporations, partnerships, trusts, and estates). Non-U.S. shareholders who are not U.S. persons should consult their tax advisers regarding U.S. and foreign tax consequences of ownership of shares of a Fund including the likelihood that taxable distributions to them (including any deemed distributions with respect to a repurchase offer) would be subject to withholding of U.S. tax at a rate of 30% (or a lower treaty rate for eligible investors).
Dividends paid by a Fund to non-U.S. shareholders may be subject to U.S. withholding tax at the rate of 30% unless reduced by treaty (and the shareholder files a valid Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), Form W-8 BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), or other applicable form, with the Funds certifying foreign status and treaty eligibility) or the non-U.S. shareholder files a Form W-8 ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States, or other applicable form, with the Fund certifying that the investment to which the distribution relates is effectively connected to a United States trade or business of such non-U.S. shareholder (and, if certain tax treaties apply, is attributable to a United States permanent establishment maintained by such non-U.S. shareholder). The Fund may elect not to withhold the applicable withholding tax on any distribution representing a capital gains dividend to a non-U.S. shareholder.
Payments to a shareholder that is either a foreign financial institution (“FFI”) or a non-financial foreign entity (“NFFE”) within the meaning of the Foreign Account Tax Compliance Act (“FATCA”) may be subject to a generally nonrefundable 30% withholding tax on: (a) income dividends paid by a Fund after June 30, 2014, and (b) certain capital gain distributions and the proceeds arising from the sale of Fund shares paid by a Fund after December 31, 2016. FATCA withholding tax generally can be avoided: (a) by an FFI, subject to any applicable intergovernmental agreement or other exemption, if it enters into a valid agreement with the IRS to, among other requirements, report required information about certain direct and indirect ownership of foreign financial accounts held by U.S. persons with the FFI, and (b) by an NFFE, if it: (i) certifies that it has no substantial U.S. persons as owners, or (ii) if it does have such owners, reports information relating to them. A Fund may disclose the information that it receives from its shareholders to the IRS, non-U.S. taxing authorities, or other parties as necessary to comply with FATCA. Withholding also may be required if a foreign entity that is a shareholder of a Fund fails to provide that Fund with appropriate certifications or other documentation concerning its status under FATCA.
Tax Shelter Reporting Regulations.
Under U.S. Treasury regulations, generally, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886, Reportable Transaction Disclosure Statement. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC such as the Fund are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
Cost Basis Reporting.
Mutual funds are required to report to the IRS and furnish to fund shareholders the cost basis information for fund shares purchased and/or sold on or after January 1, 2012. In addition to the requirement to report the gross proceeds from the sale of shares in a Fund, a Fund is also required to report the cost basis information for such shares and indicate whether these shares had a short-term or long-term holding period. In the absence of an election by a shareholder to elect from available IRS accepted cost basis methods, a Fund will use a default cost basis method. The cost basis method elected or applied may not be changed after the settlement date of a sale of shares in a Fund. Fund shareholders should consult with their tax advisers concerning the most desirable IRS-accepted cost basis method for their tax situation and to obtain more information about how the new cost basis reporting law applies to them.
Prospective investors should consult with their own tax advisors regarding the application of these provisions to their situation.
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ORGANIZATION OF THE TRUST
The Trust is organized as a Delaware business trust. As a Delaware business trust, the Trust need not hold regular annual shareholder meetings and, in the normal course, does not expect to hold such meetings. The Trust, however, must hold shareholder meetings for such purposes as, for example: (1) approving certain agreements as required by the 1940 Act; (2) changing fundamental investment objectives, policies, and restrictions of a Fund; and (3) filling vacancies on the Board of Trustees of the Trust in the event that less than two-thirds of the Trustees were elected by shareholders. The Trust expects that there will be no meetings of shareholders for the purpose of electing Trustees unless and until such time as less than two-thirds of the Trustees holding office have been elected by shareholders. At such time, the Trustees then in office will call a shareholders’ meeting for the election of Trustees. In addition, holders of record of not less than two-thirds of the outstanding shares of the Trust may remove a Trustee from office by a vote cast in person or by proxy at a shareholder meeting called for that purpose at the request of holders of 10% or more of the outstanding shares of the Trust. The Funds have the obligation to assist in such shareholder communications. Except as set forth above, Trustees will continue in office and may appoint successor Trustees.
In the event of a liquidation or dissolution of the Trust or a Fund, shareholders of the Fund would be entitled to receive the assets available for distribution belonging to such Fund. Shareholders of a Fund are entitled to participate equally in the net distributable assets of the Fund upon liquidation, based on the number of shares of the Fund that are held by each shareholder. If there are any assets, income, earnings, proceeds, funds, or payments that are not readily identifiable as belonging to any particular Fund, the Board shall allocate them among any one or more of the Funds as they, in their sole discretion, deem fair and equitable. Shareholders of all series of the Trust, including the Funds, will vote together and not separately on a series-by-series or class-by-class basis, except as otherwise required by law or when the Board determines that the matter to be voted upon affects only the interests of the shareholders of a particular series or class. The Trust has adopted a Rule 18f-3 Multi-Class Plan that contains the general characteristics of, and conditions under which the Trust may offer multiple classes of shares of each series. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted to the holders of the outstanding voting securities of an investment company such as the Trust shall not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each series or class affected by the matter. A series or class is affected by a matter unless it is clear that the interests of each series or class in the matter are substantially identical or that the matter does not affect any interest of the series or class. Under Rule 18f-2, the approval of an investment advisory agreement or any change in a fundamental investment policy would be effectively acted upon with respect to a series only if approved by a majority of the outstanding shares of such series. However, the Rule 18f-2 also provides that the ratification of the appointment of independent accountants, the approval of principal underwriting contracts and the election of Trustees may be effectively acted upon by shareholders of the Trust voting together, without regard to a particular series or class. Rights of shareholders cannot be modified by less than a majority vote.
Shareholders are entitled to one vote for each full share and a fractional vote for each fractional share held. Shares of all series of the Trust have equal voting rights and liquidation rights. Shares have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of Trustees can elect 100% of the Trustees and, in this event, the holders of the remaining shares voting will not be able to elect any Trustees. Rights of shareholders cannot be modified by less than a majority vote. The Trust will comply with the provisions of Section 16(c) of the 1940 Act in order to facilitate communications among shareholders. The Trustees will hold office indefinitely, except that: (i) any Trustee may resign or retire; and (ii) any Trustee may be removed: (a) any time by written instrument signed by at least two-thirds of the number of Trustees prior to such removal; (b) at any meeting of shareholders of the Trust by a vote of two-thirds of the outstanding shares of the Trust; or (c) by a written declaration signed by shareholders holding not less than two-thirds of the outstanding shares of the Trust. In case a vacancy on the Board shall for any reason exist, the vacancy shall be filled by the affirmative vote of a majority of the remaining Trustees, subject to certain restrictions under the 1940 Act.The Trust Instrument provides that the Trustees will not be liable in any event in connection with the affairs of the Trust, except as such liability may arise from a Trustee’s bad faith, willful misfeasance, gross negligence, or reckless disregard of duties. It also provides that all third parties shall look solely to the Trust property for satisfaction of claims arising in connection with the affairs of the Trust. With the exceptions stated, the Trust Instrument provides that a Trustee or officer is entitled to be indemnified against all liability in connection with the affairs of the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Cohen & Company, Ltd., 342 North Water Street, Suite 830, Milwaukee, Wisconsin 53202, serves as the Funds’ independent registered public accounting firm and is responsible for auditing the financial statements of the Funds.
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LEGAL MATTERS
Legal advice regarding certain matters relating to the federal securities laws applicable to the Funds and the offer and sale of the Funds’ shares has been provided by Kilpatrick Townsend & Stockton LLP, 1001 West 4th Street, Winston-Salem, North Carolina 27101.
FINANCIAL STATEMENTS
The financial statements of Active Asset Allocation Fund, Risk Assist Fund, Active Income Fund, Equity Premium Income Fund, Defined Risk Fund, Multi-Factor U.S. Equity Fund, Defensive Core Fund, Multi-Factor Small/Mid Cap Fund, and Tactical Fixed Income Fund for the fiscal year/period ended November 30, 2023, which are included in the Funds’ Annual Report to Shareholders dated November 30, 2023, are incorporated herein by reference. These financial statements include the portfolios of investments, statements of assets and liabilities, statements of operations, statements of changes in net assets, financial highlights, notes and the opinion of independent registered public accounting firm. You can obtain a copy of the financial statements contained in each Fund’s Annual or Semi-Annual Report without charge by calling the Funds at 1-855-754-7932.
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APPENDIX A
Proxy Voting Policy
of
Horizon Funds
The Board of Trustees of Horizon Funds (the “Trust”) has adopted a Proxy Voting Policy (the “Proxy Voting Policy”) used to determine how each series of the Trust (each a “Fund”) votes proxies relating to its portfolio securities. Under the Trust’s Proxy Voting Policy, the Board has, subject to its oversight, delegated to Horizon Investments, LLC (the “Adviser”) the following duties: (1) to make the proxy voting decisions for the Trust, subject to the exceptions described below; and (2) to assist the Trust in disclosing their respective proxy voting record as required by Rule 30b1-4 under the Investment Company Act of 1940, as amended (“1940 Act”) (the “Proxy Duties”).
The Trust’s CCO shall ensure that the Adviser has adopted a Proxy Voting Policy, which it uses to vote proxies for its clients, including the Trust.
| A. | General |
The Board and the Trust believe that the voting of proxies is an important part of portfolio management as it represents an opportunity for shareholders to make their voices heard and to influence the direction of a company. The Trust is committed to voting corporate proxies in the manner that best serves the interests of the Fund’s shareholders.
| B. | Delegation to the Investment Adviser |
The Board and the Trust believe that the Adviser is in the best position to make individual voting decisions for the Trust consistent with this Proxy Voting Policy. Therefore, subject to the oversight of the Board, the Adviser is hereby delegated the following duties:
| 1. | to make the proxy voting decisions for the Trust, in accordance with the Adviser’s Proxy Voting Policy (the “Adviser Voting Policy”); and |
| 2. | to assist the Trust in disclosing its proxy voting record as required by Rule 30b1-4 under the 1940 Act, including (a) categorizing the subject matter of each of the reported proxy voting matters using the categories specified in Form N-PX, and (b) providing the information for each matter with respect to which the Trust is entitled to vote, as required by Form N-PX, including: (i) information identifying the matter voted on; (iii) whether the matter was proposed by the issuer or by a security holder; (iv) whether and how the Trust cast its vote; (v) whether the Trust cast its vote for or against management; (vi) the number of shares that were voted and how they were voted, and (vii) the number of shares that the Trust loaned and did not recall. |
The Board, including a majority of the Independent Trustees of the Board, must approve the Adviser Voting Policy as it relates to the Trust. The Board must also approve any material changes to the Adviser Voting Policy no later than six (6) months after adoption by the Adviser.
| C. | Delegation to Sub-Adviser. |
The Adviser may, but is not required to, further delegate the responsibility for voting proxies relating to portfolio securities held by a Fund to one or more of the sub-advisers retained to provide investment advisory services to such Fund, if any (each a “Sub-Adviser”). If such responsibility is delegated to a Sub-Adviser, then the Sub-Adviser shall assume the fiduciary duty and reporting responsibilities of the Adviser under these policy guidelines. As used in these Policies and Procedures, the term “Adviser” includes any and all Sub-Advisers.
| D. | Conflicts |
In cases where a matter with respect to which the Trust was entitled to vote presents a conflict between the interest of the Trust’s shareholders, on the one hand, and those of the Adviser, or an affiliated person of the Trust, or the Adviser, on the other hand, the Trust shall always vote in the best interest of the Trust’s shareholders. For purposes of this Proxy Voting Policy a vote shall be considered in the best interest of the Trust’s shareholders when a vote is cast consistent with the specific voting policy as set forth in the Adviser Voting Policy, provided such specific voting policy was approved by the Board, including a majority of the Independent Trustees of the Board.
| A-1 |
| E. | Disclosure |
The Adviser will ensure that the Trust discloses in its annual and semi-annual reports to shareholders that a description (or copy) of the Trust’s proxy voting policies and procedures is available without charge, upon request by calling a specified toll-free telephone number and by accessing the Securities and Exchange Commission’s website at http://www.sec.gov.
The Adviser will file the Trust’s complete proxy voting record with the SEC on Form N-PX on an annual basis, by not later than August 31, of each year. The Trust will also disclose in its annual and semi-annual reports to shareholders that its proxy voting record is available without charge, upon request by calling a specified toll-free telephone number and by accessing the Securities and Exchange Commission’s website at http://www.sec.gov. The Trust must send the information disclosed in the Trust’s most recently filed Form N-PX within three business days of receipt of a request.
| A-2 |
APPENDIX B
Proxy Voting Policy
of
Horizon Investments, LLC (“Horizon”)
For separately managed accounts, Horizon generally does not vote proxies. However, Horizon votes proxies for the mutual funds (the “Funds”) and Collective Investment Trusts (“Collectives”, and together with the Funds, "Funds Clients") it advises, and therefore has adopted and implemented this Proxy Voting Policy and Procedures.
Policy
Horizon, as a matter of policy and practice, has no authority to vote proxies on behalf of advisory clients unless otherwise agreed to in writing. Horizon’s policy of having no proxy voting responsibility is disclosed to its advisory clients. However, Horizon may agree to vote proxies for Fund Clients and may, with the approval of the particular Fund Client’s Board, delegate to a sub-adviser for the applicable Fund Client the obligation to vote such proxies. Horizon may retain third party proxy voting services for a variety of proxy-related services. These services may include research, tracking, voting, proxy guidelines, and reporting, among others. Horizon’s general policy with respect to its proxy and corporate action obligations are set forth below.
Procedure
Horizon has adopted the following procedures to implement the firm’s policy:
| • | Horizon discloses its proxy voting policy of generally not having proxy voting authority in the firm’s Form ADV Part 2A Disclosure Brochure. |
| • | Horizon’s advisory agreements with natural person clients provide that the firm has no proxy voting responsibilities and that the advisory clients expressly retain such voting authority. |
Proxies for Fund Clients
Horizon serves as investment adviser to certain Fund Clients. To the extent that a Fund Client’s portfolio contains common stock or other securities of issuers that are not Underlying Funds, proxies received from such issuers will be voted in accordance with Horizon’s Proxy Voting Guidelines (“Guidelines”), set forth below.
Notwithstanding the foregoing, Fund Clients may be “funds of funds”, meaning that these Fund Clients pursue their investment goals by investing primarily in other investment companies that are not affiliated with Horizon (“Underlying Funds”).Consistent with certain requirements applicable to Fund Clients under Section 12(d)(1)(F) of the Investment Company Act, it is the policy of Horizon to vote all proxies received from the Underlying Funds in the same proportion that all other shares of the Underlying Funds are voted (i.e., “mirror” or “echo” voting), or in accordance with instructions received from Underlying Fund shareholders, pursuant to Section 12(d)(1)(F) of the Investment Company Act. After voting, the proxy materials are maintained for future reference.
Proxy Voting Guidelines
Horizon has adopted and implemented the following Guidelines, which it believes are reasonably designed to ensure that proxies are voted in the best economic interest of clients and in accordance with its fiduciary duties and local regulation.
In light of Horizon’s fiduciary duties, and given the complexity of the issues that may be raised in connection with proxy votes, Horizon has retained Institutional Shareholder Services Inc. (“ISS”) to assist in the coordination and voting of client proxies, which specializes in providing a variety of fiduciary-level proxy-related services to investment managers, to assist in the coordination and voting of client proxies. The services provided to Horizon will include timely delivery of meeting and record date information; proxy analysis through an electronic web-based vote execution platform; and detailed recordkeeping needs of Horizon’s proxy voting function.
ISS votes Horizon’s advisory clients’ proxies in accordance with Horizon’s proxy guidelines or Horizon’s specific instructions. Where a Fund Client has given specific instructions as to how a proxy should be voted, Horizon will notify ISS to carry out those instructions. Where no specific instruction exists, Horizon will follow the procedures in voting the proxies set forth in this document.
| B-1 |
A copy of Horizon’s current specific voting guidelines with respect to certain categories of proxy votes is attached hereto as Schedule 1. Horizon has adopted separate guidelines with respect to the Horizon Defensive Core Fund, the current version of which is attached hereto as Schedule 2.
The CCO or the CCO’s designee is responsible for managing the relationship with ISS and for ensuring that proxies are being properly voted and that ISS is retaining appropriate proxy voting records regarding the same.
Proxies solicited by issuers other than Underlying Funds (whose proxies may be voted consistent with other shareholders as discussed above) are voted in accordance with the predetermined guidelines of ISS, unless the Fund Client directs Horizon to vote differently on a specific proxy or specific categories of proxies.
Although the majority of proxy proposals can be handled in accordance with Horizon’s established proxy policies, Horizon recognizes that some proposals require special consideration that may dictate that exceptions are made to its general procedures. In this regard, Horizon recognizes that under certain circumstances where Horizon is required to vote a proxy without the assistance of ISS, such as where the Guidelines do not address a particular category of proxy or where ISS is otherwise unable to provide a recommendation, Horizon may have a conflict of interest in voting proxies on behalf of a Fund Client. Such circumstances may include, but are not limited to, situations where Horizon or one or more of its affiliates, including, without limitation, officers, directors or employees, has or is seeking a client relationship with the issuer of the security that is the subject of the proxy vote. Horizon personnel should identify such conflicts and bring them to the attention of the Fund Client’s Board. In such a case, the Fund Client’s Board will then determine whether the conflict is “material” based on whether, under the facts and circumstances of the case, the conflict has the potential to influence Horizon’ s decision-making in voting the proxy. If the Fund Client’s Board determines that the conflict is material, then: (i) the Fund Client’s Proxy Voting Committee will vote the proxy; or (ii) at the Board’s direction, Horizon shall vote the proxy based upon the recommendation of the Board or its designee. Horizon will keep a record of all materiality decisions and report them to the Fund Client’s Board on an annual basis.
Horizon is not required to vote a proxy for a Fund Client if Horizon reasonably determines that refraining from voting the proxy is in the best interest of the Fund Client, such as when the cost to the Fund Client of voting the proxy exceeds the expected benefit to the Fund Client.
Oversight of Proxy Services
Horizon will periodically evaluate the performance of ISS in performing proxy services. The SEC has provided guidance that evaluations of proxy services should include:
| • | Evaluating whether the proxy service has adequate policies and procedures to identify, disclose and address conflicts of interest, including conflicts arising from recommendations and services to issuers or proponents of shareholder proposals that may be the subject of a vote, or affiliations with third parties that have significant influence over the proxy service (such as lenders or shareholders). In this regard, an adviser should consider the proxy service’s policies for disclosing actual and potential conflicts to the adviser and any technology used by the proxy service to facilitate such disclosure. |
| • | Evaluating whether the proxy service has the capacity and competency to adequately analyze the matters for which it is responsible, including the proxy service’s staffing, personnel and technology. |
| • | Reviewing proxy voting guidelines to ensure that they are reasonably designed to vote proxies in the best interest of each client. |
| • | Evaluating whether proxies are being voted in a manner consistent with proxy voting guidelines, which may be performed by sampling votes before or after votes are cast. |
| • | To the extent an adviser becomes aware of any potential factual errors, incompleteness or methodological weaknesses in the proxy service’s analysis that it deems credible and relevant to its voting decisions, assessing the extent to which any pf the foregoing materially affected the proxy service’s research or recommendations. |
| • | Evaluating any material changes in the services provided by, or the operations of, the proxy service to ensure that the proxy service continues to vote proxies in the best interest of clients. |
| B-2 |
Record Keeping
In accordance with Rule 204-2 under the Act, Horizon will maintain for the time periods set forth in the Rule (i) these proxy voting procedures and policies, and all amendments thereto; (ii) proxy statements received regarding client securities (provided however, that Horizon may rely on the proxy statement filed on EDGAR as its records); (iii) a record of votes cast on behalf of clients; (iv) records of client requests for proxy voting information; (v) documents prepared by Horizon that were material to making a decision how to vote or that memorialized the basis for the decision; and (vi) records relating to requests made to clients regarding conflicts of interest in voting the proxy.
Horizon describes its proxy voting policies and procedures in its Part 2A of Form ADV for (or other brochure fulfilling the requirement of Rule 204-3), which description will inform clients that they may obtain information on how their securities were voted or a copy of Horizon’s Policies and Procedures by written request addressed to Horizon. Horizon will coordinate with mutual fund Clients to assist in the provision of applicable information required to be filed by on Form N-PX.
| B-3 |
Schedule 1
SPECIFIC PROXY VOTING GUIDELINES
(ATTACHED)
| B-4 |
UNITED STATES Proxy Voting Guidelines |
 |
TABLE OF CONTENTS
| Coverage | 8 |
| 1. Board of Directors | 9 |
| Voting on Director Nominees in Uncontested Elections | 9 |
| Independence | 9 |
| ISS Classification of Directors – U.S. | 10 |
| Composition | 12 |
| Attendance | 12 |
| Overboarded Directors | 12 |
| Gender Diversity | 12 |
| Racial and/or Ethnic Diversity | 12 |
| Responsiveness | 13 |
| Accountability | 14 |
| Poison Pills | 14 |
| Unequal Voting Rights | 14 |
| Classified Board Structure | 14 |
| Removal of Shareholder Discretion on Classified Boards | 15 |
| Problematic Governance Structure | 15 |
| Unilateral Bylaw/Charter Amendments | 15 |
| Restricting Binding Shareholder Proposals | 15 |
| Director Performance Evaluation | 16 |
| Management Proposals to Ratify Existing Charter or Bylaw Provisions | 16 |
| Problematic Audit-Related Practices | 16 |
| Problematic Compensation Practices | 17 |
| Problematic Pledging of Company Stock | 17 |
| Climate Accountability | 17 |
| Governance Failures | 18 |
| Voting on Director Nominees in Contested Elections | 18 |
| Vote-No Campaigns | 18 |
| Proxy Contests/Proxy Access | 18 |
| Other Board-Related Proposals | 19 |
| Adopt Anti-Hedging/Pledging/Speculative Investments Policy | 19 |
| Board Refreshment | 19 |
| Term/Tenure Limits | 19 |
| Age Limits | 19 |
| Board Size | 20 |
| Classification/Declassification of the Board | 20 |
| CEO Succession Planning | 20 |
| Cumulative Voting | 20 |
| Director and Officer Indemnification, Liability Protection, and Exculpation | 21 |
| Establish/Amend Nominee Qualifications | 21 |
| Establish Other Board Committee Proposals | 22 |
| Filling Vacancies/Removal of Directors | 22 |
| Independent Board Chair | 22 |
| Majority of Independent Directors/Establishment of Independent Committees | 23 |
| Majority Vote Standard for the Election of Directors | 23 |
| W W W . I S S G O V E R N A N C E . C O M | 2 of 87 |
UNITED STATES Proxy Voting Guidelines |
|
| Proxy Access | 23 |
| Require More Nominees than Open Seats | 23 |
| Shareholder Engagement Policy (Shareholder Advisory Committee) | 24 |
| 2. Audit-Related | 25 |
| Auditor Indemnification and Limitation of Liability | 25 |
| Auditor Ratification | 25 |
| Shareholder Proposals Limiting Non-Audit Services | 25 |
| Shareholder Proposals on Audit Firm Rotation | 26 |
| 3. Shareholder Rights & Defenses | 27 |
| Advance Notice Requirements for Shareholder Proposals/Nominations | 27 |
| Amend Bylaws without Shareholder Consent | 27 |
| Control Share Acquisition Provisions | 27 |
| Control Share Cash-Out Provisions | 28 |
| Disgorgement Provisions | 28 |
| Fair Price Provisions | 28 |
| Freeze-Out Provisions | 28 |
| Greenmail | 28 |
| Shareholder Litigation Rights | 29 |
| Federal Forum Selection Provisions | 29 |
| Exclusive Forum Provisions for State Law Matters | 29 |
| Fee shifting | 29 |
| Net Operating Loss (NOL) Protective Amendments | 30 |
| Poison Pills (Shareholder Rights Plans) | 30 |
| Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy | 30 |
| Management Proposals to Ratify a Poison Pill | 31 |
| Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs) | 31 |
| Proxy Voting Disclosure, Confidentiality, and Tabulation | 31 |
| Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions | 32 |
| Reimbursing Proxy Solicitation Expenses | 32 |
| Reincorporation Proposals | 33 |
| Shareholder Ability to Act by Written Consent | 33 |
| Shareholder Ability to Call Special Meetings | 33 |
| Stakeholder Provisions | 34 |
| State Antitakeover Statutes | 34 |
| Supermajority Vote Requirements | 34 |
| Virtual Shareholder Meetings | 34 |
| 4. Capital/Restructuring | 35 |
| Capital | 35 |
| Adjustments to Par Value of Common Stock | 35 |
| Common Stock Authorization | 35 |
| General Authorization Requests | 35 |
| Specific Authorization Requests | 36 |
| Dual Class Structure | 36 |
| Issue Stock for Use with Rights Plan | 36 |
| W W W . I S S G O V E R N A N C E . C O M | 3 of 87 |
UNITED STATES Proxy Voting Guidelines |
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| Preemptive Rights | 36 |
| Preferred Stock Authorization | 37 |
| General Authorization Requests | 37 |
| Recapitalization Plans | 38 |
| Reverse Stock Splits | 38 |
| Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S. | 38 |
| Share Repurchase Programs | 39 |
| Share Repurchase Programs Shareholder Proposals | 39 |
| Stock Distributions: Splits and Dividends | 39 |
| Tracking Stock | 40 |
| Restructuring | 40 |
| Appraisal Rights | 40 |
| Asset Purchases | 40 |
| Asset Sales | 40 |
| Bundled Proposals | 41 |
| Conversion of Securities | 41 |
| Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans | 41 |
| Formation of Holding Company | 41 |
| Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs) | 42 |
| Joint Ventures | 42 |
| Liquidations | 43 |
| Mergers and Acquisitions | 43 |
| Private Placements/Warrants/Convertible Debentures | 43 |
| Reorganization/Restructuring Plan (Bankruptcy) | 45 |
| Special Purpose Acquisition Corporations (SPACs) | 45 |
| Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions | 45 |
| Spin-offs | 46 |
| Value Maximization Shareholder Proposals | 46 |
| 5. Compensation | 47 |
| Executive Pay Evaluation | 47 |
| Advisory Votes on Executive Compensation—Management Proposals (Say-on-Pay) | 47 |
| Pay-for-Performance Evaluation | 48 |
| Problematic Pay Practices | 49 |
| Compensation Committee Communications and Responsiveness | 50 |
| Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”) | 50 |
| Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale | 50 |
| Equity-Based and Other Incentive Plans | 51 |
| Shareholder Value Transfer (SVT) | 52 |
| Three-Year Value-Adjusted Burn Rate | 52 |
| Egregious Factors | 53 |
| Liberal Change in Control Definition | 53 |
| Repricing Provisions | 53 |
| Problematic Pay Practices or Significant Pay-for-Performance Disconnect | 53 |
| Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m)) | 54 |
| W W W . I S S G O V E R N A N C E . C O M | 4 of 87 |
UNITED STATES Proxy Voting Guidelines |
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| Specific Treatment of Certain Award Types in Equity Plan Evaluations | 54 |
| Dividend Equivalent Rights | 54 |
| Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs) | 55 |
| Other Compensation Plans | 55 |
| 401(k) Employee Benefit Plans | 55 |
| Employee Stock Ownership Plans (ESOPs) | 55 |
| Employee Stock Purchase Plans—Qualified Plans | 55 |
| Employee Stock Purchase Plans—Non-Qualified Plans | 55 |
| Option Exchange Programs/Repricing Options | 56 |
| Stock Plans in Lieu of Cash | 56 |
| Transfer Stock Option (TSO) Programs | 57 |
| Director Compensation | 57 |
| Shareholder Ratification of Director Pay Programs | 57 |
| Equity Plans for Non-Employee Directors | 58 |
| Non-Employee Director Retirement Plans | 58 |
| Shareholder Proposals on Compensation | 58 |
| Bonus Banking/Bonus Banking “Plus” | 58 |
| Compensation Consultants—Disclosure of Board or Company’s Utilization | 59 |
| Disclosure/Setting Levels or Types of Compensation for Executives and Directors | 59 |
| Golden Coffins/Executive Death Benefits | 59 |
| Hold Equity Past Retirement or for a Significant Period of Time | 59 |
| Pay Disparity | 60 |
| Pay for Performance/Performance-Based Awards | 60 |
| Pay for Superior Performance | 61 |
| Pre-Arranged Trading Plans (10b5-1 Plans) | 61 |
| Prohibit Outside CEOs from Serving on Compensation Committees | 61 |
| Recoupment of Incentive or Stock Compensation in Specified Circumstances | 62 |
| Severance Agreements for Executives/Golden Parachutes | 62 |
| Share Buyback Impact on Incentive Program Metrics | 62 |
| Supplemental Executive Retirement Plans (SERPs) | 63 |
| Tax Gross-Up Proposals | 63 |
| Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity | 63 |
| 6. Routine/Miscellaneous | 64 |
| Adjourn Meeting | 64 |
| Amend Quorum Requirements | 64 |
| Amend Minor Bylaws | 64 |
| Change Company Name | 64 |
| Change Date, Time, or Location of Annual Meeting | 65 |
| Other Business | 65 |
| 7. Social and Environmental Issues | 66 |
| Global Approach – E&S Shareholder Proposals | 66 |
| Endorsement of Principles | 66 |
| Animal Welfare | 66 |
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| Animal Welfare Policies | 66 |
| Animal Testing | 67 |
| Animal Slaughter | 67 |
| Consumer Issues | 67 |
| Genetically Modified Ingredients | 67 |
| Reports on Potentially Controversial Business/Financial Practices | 68 |
| Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation | 68 |
| Product Safety and Toxic/Hazardous Materials | 68 |
| Tobacco-Related Proposals | 69 |
| Climate Change | 70 |
| Say on Climate (SoC) Management Proposals | 70 |
| Say on Climate (SoC) Shareholder Proposals | 70 |
| Climate Change/Greenhouse Gas (GHG) Emissions | 70 |
| Energy Efficiency | 71 |
| Renewable Energy | 71 |
| Diversity | 72 |
| Board Diversity | 72 |
| Equality of Opportunity | 72 |
| Gender Identity, Sexual Orientation, and Domestic Partner Benefits | 72 |
| Gender, Race/Ethnicity Pay Gap | 73 |
| Racial Equity and/or Civil Rights Audit Guidelines | 73 |
| Environment and Sustainability | 73 |
| Facility and Workplace Safety | 73 |
| General Environmental Proposals and Community Impact Assessments | 74 |
| Hydraulic Fracturing | 74 |
| Operations in Protected Areas | 74 |
| Recycling | 75 |
| Sustainability Reporting | 75 |
| Water Issues | 75 |
| General Corporate Issues | 75 |
| Charitable Contributions | 75 |
| Data Security, Privacy, and Internet Issues | 76 |
| ESG Compensation-Related Proposals | 76 |
| Human Rights, Human Capital Management, and International Operations | 76 |
| Human Rights Proposals | 76 |
| Mandatory Arbitration | 77 |
| Operations in High-Risk Markets | 77 |
| Outsourcing/Offshoring | 77 |
| Sexual Harassment | 78 |
| Weapons and Military Sales | 78 |
| Political Activities | 78 |
| Lobbying | 78 |
| Political Contributions | 79 |
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| Political Expenditures and Lobbying Congruency | 79 |
| Political Ties | 79 |
| 8. Mutual Fund Proxies | 81 |
| Election of Directors | 81 |
| Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes | 81 |
| Converting Closed-end Fund to Open-end Fund | 81 |
| Proxy Contests | 81 |
| Investment Advisory Agreements | 82 |
| Approving New Classes or Series of Shares | 82 |
| Preferred Stock Proposals | 82 |
| 1940 Act Policies | 82 |
| Changing a Fundamental Restriction to a Nonfundamental Restriction | 82 |
| Change Fundamental Investment Objective to Nonfundamental | 83 |
| Name Change Proposals | 83 |
| Change in Fund’s Subclassification | 83 |
| Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value | 83 |
| Disposition of Assets/Termination/Liquidation | 84 |
| Changes to the Charter Document | 84 |
| Changing the Domicile of a Fund | 84 |
| Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval | 84 |
| Distribution Agreements | 85 |
| Master-Feeder Structure | 85 |
| Mergers | 85 |
| Shareholder Proposals for Mutual Funds | 85 |
| Establish Director Ownership Requirement | 85 |
| Reimburse Shareholder for Expenses Incurred | 85 |
| Terminate the Investment Advisor | 86 |
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Coverage
The U.S. research team provides proxy analyses and voting recommendations for the common shareholder meetings of U.S. - incorporated companies that are publicly-traded on U.S. exchanges, as well as certain OTC companies, if they are held in our institutional investor clients' portfolios. Coverage generally includes corporate actions for common equity holders, such as written consents and bankruptcies. ISS’ U.S. coverage includes investment companies (including open-end funds, closed-end funds, exchange-traded funds, and unit investment trusts), limited partnerships (“LPs”), master limited partnerships (“MLPs”), limited liability companies (“LLCs”), and business development companies. ISS reviews its universe of coverage on an annual basis, and the coverage is subject to change based on client need and industry trends.
Foreign-incorporated companies
In addition to U.S.- incorporated, U.S.- listed companies, ISS’ U.S. policies are applied to certain foreign- incorporated company analyses. Like the SEC, ISS distinguishes two types of companies that list but are not incorporated in the U.S.:
| ■ | U.S. Domestic Issuers – which have a majority of outstanding shares held in the U.S. and meet other criteria, as determined by the SEC, and are subject to the same disclosure and listing standards as U.S. incorporated companies (e.g. they are required to file DEF14A proxy statements) – are generally covered under standard U.S. policy guidelines. |
| ■ | Foreign Private Issuers (FPIs) – which are allowed to take exemptions from most disclosure requirements (e.g., they are allowed to file 6-K for their proxy materials) and U.S. listing standards – are generally covered under a combination of policy guidelines: |
| ■ | FPI Guidelines (see the Americas Regional Proxy Voting Guidelines), may apply to companies incorporated in governance havens, and apply certain minimum independence and disclosure standards in the evaluation of key proxy ballot items, such as the election of directors; and/or |
| ■ | Guidelines for the market that is responsible for, or most relevant to, the item on the ballot. |
U.S. incorporated companies listed only on non-U.S. exchanges are generally covered under the ISS guidelines for the market on which they are traded.
An FPI is generally covered under ISS’ approach to FPIs outlined above, even if such FPI voluntarily files a proxy statement and/or other filing normally required of a U.S. Domestic Issuer, so long as the company retains its FPI status.
In all cases – including with respect to other companies with cross-market features that may lead to ballot items related to multiple markets – items that are on the ballot solely due to the requirements of another market (listing, incorporation, or national code) may be evaluated under the policy of the relevant market, regardless of the “assigned” primary market coverage.
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1. Board of Directors
Voting on Director Nominees in Uncontested Elections
Four fundamental principles apply when determining votes on director nominees:
Independence: Boards should be sufficiently independent from management (and significant shareholders) to ensure that they are able and motivated to effectively supervise management's performance for the benefit of all shareholders, including in setting and monitoring the execution of corporate strategy, with appropriate use of shareholder capital, and in setting and monitoring executive compensation programs that support that strategy. The chair of the board should ideally be an independent director, and all boards should have an independent leadership position or a similar role in order to help provide appropriate counterbalance to executive management, as well as having sufficiently independent committees that focus on key governance concerns such as audit, compensation, and nomination of directors.
Composition: Companies should ensure that directors add value to the board through their specific skills and expertise and by having sufficient time and commitment to serve effectively. Boards should be of a size appropriate to accommodate diversity, expertise, and independence, while ensuring active and collaborative participation by all members. Boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.
Responsiveness: Directors should respond to investor input, such as that expressed through significant opposition to management proposals, significant support for shareholder proposals (whether binding or non-binding), and tender offers where a majority of shares are tendered.
Accountability: Boards should be sufficiently accountable to shareholders, including through transparency of the company's governance practices and regular board elections, by the provision of sufficient information for shareholders to be able to assess directors and board composition, and through the ability of shareholders to remove directors.
General Recommendation: Generally vote for director nominees, except under the following circumstances (with new nominees1 considered on case-by-case basis):
Independence
Vote against2 or withhold from non-independent directors (Executive Directors and Non-Independent Non-Executive Directors per ISS’ Classification of Directors) when:
| ■ | Independent directors comprise 50 percent or less of the board; |
| ■ | The non-independent director serves on the audit, compensation, or nominating committee; |
| ■ | The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or |
| 1 | A "new nominee" is a director who is being presented for election by shareholders for the first time. Recommendations on new nominees who have served for less than one year are made on a case-by-case basis depending on the timing of their appointment and the problematic governance issue in question. |
| 2 | In general, companies with a plurality vote standard use “Withhold” as the contrary vote option in director elections; companies with a majority vote standard use “Against”. However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company. |
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| ■ | The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee. |
ISS Classification of Directors – U.S.
| 1. | Executive Director |
| 1.1. | Current officer1 of the company or one of its affiliates2. |
| 2. | Non-Independent Non-Executive Director |
Board Identification
| 2.1. | Director identified as not independent by the board. |
Controlling/Significant Shareholder
| 2.2. | Beneficial owner of more than 50 percent of the company's voting power (this may be aggregated if voting power is distributed among more than one member of a group). |
Current Employment at Company or Related Company
| 2.3. | Non-officer employee of the firm (including employee representatives). |
| 2.4. | Officer1, former officer, or general or limited partner of a joint venture or partnership with the company. |
Former Employment
| 2.5. | Former CEO of the company. 3, 4 |
| 2.6. | Former non-CEO officer1 of the company or an affiliate2 within the past five years. |
| 2.7. | Former officer1 of an acquired company within the past five years.4 |
| 2.8. | Officer1 of a former parent or predecessor firm at the time the company was sold or split off within the past five years. |
| 2.9. | Former interim officer if the service was longer than 18 months. If the service was between 12 and 18 months an assessment of the interim officer’s employment agreement will be made.5 |
Family Members
| 2.10. | Immediate family member6 of a current or former officer1 of the company or its affiliates2 within the last five years. |
| 2.11. | Immediate family member6 of a current employee of company or its affiliates2 where additional factors raise concern (which may include, but are not limited to, the following: a director related to numerous employees; the company or its affiliates employ relatives of numerous board members; or a non-Section 16 officer in a key strategic role). |
Professional, Transactional, and Charitable Relationships
| 2.12. | Director who (or whose immediate family member6) currently provides professional services7 in excess of $10,000 per year to: the company, an affiliate2, or an individual officer of the company or an affiliate; or who is (or whose immediate family member6 is) a partner, employee, or controlling shareholder of an organization which provides the services. |
| 2.13. | Director who (or whose immediate family member6) currently has any material transactional relationship8 with the company or its affiliates2; or who is (or whose immediate family member6 is) a partner in, or a controlling shareholder or an executive officer of, an organization which has the material transactional relationship8 (excluding investments in the company through a private placement). |
| 2.14. | Director who (or whose immediate family member6) is a trustee, director, or employee of a charitable or non-profit organization that receives material grants or endowments8 from the company or its affiliates2. |
Other Relationships
| 2.15. | Party to a voting agreement9 to vote in line with management on proposals being brought to shareholder vote. |
| 2.16. | Has (or an immediate family member6 has) an interlocking relationship as defined by the SEC involving members of the board of directors or its Compensation Committee.10 |
| 2.17. | Founder11 of the company but not currently an employee. |
| 2.18. | Director with pay comparable to Named Executive Officers. |
| 2.19. | Any material12 relationship with the company. |
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| 3. | Independent Director |
| 3.1. | No material12 connection to the company other than a board seat. |
Footnotes:
| 1. | The definition of officer will generally follow that of a “Section 16 officer” (officers subject to Section 16 of the Securities and Exchange Act of 1934) and includes the chief executive, operating, financial, legal, technology, and accounting officers of a company (including the president, treasurer, secretary, controller, or any vice president in charge of a principal business unit, division, or policy function). Current interim officers are included in this category. For private companies, the equivalent positions are applicable. A non-employee director serving as an officer due to statutory requirements (e.g. corporate secretary) will generally be classified as a Non-Independent Non-Executive Director under “Any material relationship with the company.” However, if the company provides explicit disclosure that the director is not receiving additional compensation exceeding $10,000 per year for serving in that capacity, then the director will be classified as an Independent Director. |
| 2. | “Affiliate” includes a subsidiary, sibling company, or parent company. ISS uses 50 percent control ownership by the parent company as the standard for applying its affiliate designation. The manager/advisor of an externally managed issuer (EMI) is considered an affiliate. |
| 3. | Includes any former CEO of the company prior to the company’s initial public offering (IPO). |
| 4. | When there is a former CEO of a special purpose acquisition company (SPAC) serving on the board of an acquired company, ISS will generally classify such directors as independent unless determined otherwise taking into account the following factors: the applicable listing standards determination of such director’s independence; any operating ties to the firm; and the existence of any other conflicting relationships or related party transactions. |
| 5. | ISS will look at the terms of the interim officer’s employment contract to determine if it contains severance pay, long-term health and pension benefits, or other such standard provisions typically contained in contracts of permanent, non-temporary CEOs. ISS will also consider if a formal search process was under way for a full-time officer at the time. |
| 6. | “Immediate family member” follows the SEC’s definition of such and covers spouses, parents, children, step-parents, step-children, siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director, nominee for director, executive officer, or significant shareholder of the company. |
| 7. | Professional services can be characterized as advisory in nature, generally involve access to sensitive company information or to strategic decision-making, and typically have a commission- or fee-based payment structure. Professional services generally include but are not limited to the following: investment banking/financial advisory services, commercial banking (beyond deposit services), investment services, insurance services, accounting/audit services, consulting services, marketing services, legal services, property management services, realtor services, lobbying services, executive search services, and IT consulting services. The following would generally be considered transactional relationships and not professional services: deposit services, IT tech support services, educational services, and construction services. The case of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject to the associated materiality test) rather than a professional relationship. “Of Counsel” relationships are only considered immaterial if the individual does not receive any form of compensation (in excess of $10,000 per year) from, or is a retired partner of, the firm providing the professional service. The case of a company providing a professional service to one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional rather than a professional relationship. Insurance services and marketing services are assumed to be professional services unless the company explains why such services are not advisory. |
| 8. | A material transactional relationship, including grants to non-profit organizations, exists if the company makes annual payments to, or receives annual payments from, another entity, exceeding the greater of: $200,000 or 5 percent of the recipient’s gross revenues, for a company that follows NASDAQ listing standards; or the greater of $1,000,000 or 2 percent of the recipient’s gross revenues, for a company that follows NYSE listing standards. For a company that follows neither of the preceding standards, ISS will apply the NASDAQ-based materiality test. (The recipient is the party receiving the financial proceeds from the transaction). |
| 9. | Dissident directors who are parties to a voting agreement pursuant to a settlement or similar arrangement may be classified as Independent Directors if an analysis of the following factors indicates that the voting agreement does not compromise their alignment with all shareholders’ interests: the terms of the agreement; the duration of the standstill provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director nominee(s) is subject to the standstill; and if there any conflicting relationships or related party transactions. |
| 10. | Interlocks include: executive officers serving as directors on each other’s compensation or similar committees (or, in the absence of such a committee, on the board); or executive officers sitting on each other’s boards and at least one serves on the other’s compensation or similar committees (or, in the absence of such a committee, on the board). |
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| 11. | The operating involvement of the founder with the company will be considered; if the founder was never employed by the company, ISS may deem him or her an Independent Director. |
| 12. | For purposes of ISS’s director independence classification, “material” will be defined as a standard of relationship (financial, personal, or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a manner that would have a meaningful impact on an individual's ability to satisfy requisite fiduciary standards on behalf of shareholders. |
Composition
Attendance at Board and Committee Meetings: Generally vote against or withhold from directors (except nominees who served only part of the fiscal year3) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
| ■ | Medical issues/illness; |
| ■ | Family emergencies; and |
| ■ | Missing only one meeting (when the total of all meetings is three or fewer). |
In cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, generally vote against or withhold from appropriate members of the nominating/governance committees or the full board.
If the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold from the director(s) in question.
Overboarded Directors: Generally vote against or withhold from individual directors who:
| ■ | Sit on more than five public company boards; or |
| ■ | Are CEOs of public companies who sit on the boards of more than two public companies besides their own—withhold only at their outside boards4. |
Gender Diversity: Generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies where there are no women on the company's board. An exception will be made if there was at least one woman on the board at the preceding annual meeting and the board makes a firm commitment to return to a gender-diverse status within a year.
Racial and/or Ethnic Diversity: For companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members5. An exception will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or ethnic diverse member within a year.
| 3 | Nominees who served for only part of the fiscal year are generally exempted from the attendance policy. |
| 4 | Although all of a CEO’s subsidiary boards with publicly-traded common stock will be counted as separate boards, ISS will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships. |
| 5 | Aggregate diversity statistics provided by the board will only be considered if specific to racial and/or ethnic diversity. |
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Responsiveness
Vote case-by-case on individual directors, committee members, or the entire board of directors as appropriate if:
| ■ | The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year or failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year. Factors that will be considered are: |
| ■ | Disclosed outreach efforts by the board to shareholders in the wake of the vote; |
| ■ | Rationale provided in the proxy statement for the level of implementation; |
| ■ | The subject matter of the proposal; |
| ■ | The level of support for and opposition to the resolution in past meetings; |
| ■ | Actions taken by the board in response to the majority vote and its engagement with shareholders; |
| ■ | The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and |
| ■ | Other factors as appropriate. |
| ■ | The board failed to act on takeover offers where the majority of shares are tendered; or |
| ■ | At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote. |
Vote case-by-case on Compensation Committee members (or, in exceptional cases, the full board) and the Say on Pay proposal if:
| ■ | The company’s previous say-on-pay received the support of less than 70 percent of votes cast. Factors that will be considered are: |
| ■ | The company's response, including: |
| ■ | Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated); |
| ■ | Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; and |
| ■ | Disclosure of specific and meaningful actions taken to address shareholders' concerns; |
| ■ | Other recent compensation actions taken by the company; |
| ■ | Whether the issues raised are recurring or isolated; |
| ■ | The company's ownership structure; and |
| ■ | Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness. |
| ■ | The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the plurality of votes cast. |
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Accountability
Problematic Takeover Defenses, Capital Structure, and Governance Structure
Poison Pills: Generally vote against or withhold from all nominees (except new nominees1, who should be considered case-by-case) if:
| ■ | The company has a poison pill with a deadhand or slowhand feature6; |
| ■ | The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or lowering the trigger, without shareholder approval; or |
| ■ | The company has a long-term poison pill (with a term of over one year) that was not approved by the public shareholders7. |
Vote case-by-case on nominees if the board adopts an initial short-term pill6 (with a term of one year or less) without shareholder approval, taking into consideration:
| ■ | The disclosed rationale for the adoption; |
| ■ | The trigger; |
| ■ | The company's market capitalization (including absolute level and sudden changes); |
| ■ | A commitment to put any renewal to a shareholder vote; and |
| ■ | Other factors as relevant. |
Unequal Voting Rights: Generally vote withhold or against directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case), if the company employs a common stock structure with unequal voting rights8.
Exceptions to this policy will generally be limited to:
| ■ | Newly-public companies9 with a sunset provision of no more than seven years from the date of going public; |
| ■ | Limited Partnerships and the Operating Partnership (OP) unit structure of REITs; |
| ■ | Situations where the super-voting shares represent less than 5% of total voting power and therefore considered to be de minimis; or |
| ■ | The company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular binding vote on whether the capital structure should be maintained. |
Classified Board Structure: The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.
| 6 | If a short-term pill with a deadhand or slowhand feature is enacted but expires before the next shareholder vote, ISS will generally still recommend withhold/against nominees at the next shareholder meeting following its adoption. |
| 7 | Approval prior to, or in connection, with a company’s becoming publicly-traded, or in connection with a de-SPAC transaction, is insufficient. |
| 8 | This generally includes classes of common stock that have additional votes per share than other shares; classes of shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights (“loyalty shares”). |
| 9 | Includes companies that emerge from bankruptcy, SPAC transactions, spin-offs, direct listings, and those who complete a traditional initial public offering. |
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Removal of Shareholder Discretion on Classified Boards : The company has opted into, or failed to opt out of, state laws requiring a classified board structure.
Problematic Governance Structure : For companies that hold or held their first annual meeting9 of public shareholders after Feb. 1, 2015, generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case) if, prior to or in connection with the company's public offering, the company or its board adopted the following bylaw or charter provisions that are considered to be materially adverse to shareholder rights:
| ■ | Supermajority vote requirements to amend the bylaws or charter; |
| ■ | A classified board structure; or |
| ■ | Other egregious provisions. |
A provision which specifies that the problematic structure(s) will be sunset within seven years of the date of going public will be considered a mitigating factor.
Unless the adverse provision is reversed or removed, vote case-by-case on director nominees in subsequent years.
Unilateral Bylaw/Charter Amendments: Generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case) if the board amends the company's bylaws or charter without shareholder approval in a manner that materially diminishes shareholders' rights or that could adversely impact shareholders, considering the following factors:
| ■ | The board's rationale for adopting the bylaw/charter amendment without shareholder ratification; |
| ■ | Disclosure by the company of any significant engagement with shareholders regarding the amendment; |
| ■ | The level of impairment of shareholders' rights caused by the board's unilateral amendment to the bylaws/charter; |
| ■ | The board's track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions; |
| ■ | The company's ownership structure; |
| ■ | The company's existing governance provisions; |
| ■ | The timing of the board's amendment to the bylaws/charter in connection with a significant business development; and |
| ■ | Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders. |
Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees. Generally vote against (except new nominees1, who should be considered case-by-case) if the directors:
| ■ | Classified the board; |
| ■ | Adopted supermajority vote requirements to amend the bylaws or charter; |
| ■ | Eliminated shareholders' ability to amend bylaws; |
| ■ | Adopted a fee-shifting provision; or |
| ■ | Adopted another provision deemed egregious. |
Restricting Binding Shareholder Proposals: Generally vote against or withhold from the members of the governance committee if:
| ■ | The company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. Such restrictions include but are not limited to: outright prohibition on the submission of binding shareholder proposals or share ownership requirements, subject matter restrictions, or time holding requirements in excess of SEC Rule 14a-8. Vote against or withhold on an ongoing basis. |
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Submission of management proposals to approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders' rights. Generally continue to vote against or withhold on an ongoing basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
Director Performance Evaluation: The board lacks mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one-, three-, and five-year total shareholder returns in the bottom half of a company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s operational metrics and other factors as warranted. Problematic provisions include but are not limited to:
| ■ | A classified board structure; |
| ■ | A supermajority vote requirement; |
| ■ | Either a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections; |
| ■ | The inability of shareholders to call special meetings; |
| ■ | The inability of shareholders to act by written consent; |
| ■ | A multi-class capital structure; and/or |
| ■ | A non-shareholder-approved poison pill. |
Management Proposals to Ratify Existing Charter or Bylaw Provisions: Vote against/withhold from individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering the following factors:
| ■ | The presence of a shareholder proposal addressing the same issue on the same ballot; |
| ■ | The board's rationale for seeking ratification; |
| ■ | Disclosure of actions to be taken by the board should the ratification proposal fail; |
| ■ | Disclosure of shareholder engagement regarding the board’s ratification request; |
| ■ | The level of impairment to shareholders' rights caused by the existing provision; |
| ■ | The history of management and shareholder proposals on the provision at the company’s past meetings; |
| ■ | Whether the current provision was adopted in response to the shareholder proposal; |
| ■ | The company's ownership structure; and |
| ■ | Previous use of ratification proposals to exclude shareholder proposals. |
Problematic Audit-Related Practices
Generally vote against or withhold from the members of the Audit Committee if:
| ■ | The non-audit fees paid to the auditor are excessive; |
| ■ | The company receives an adverse opinion on the company’s financial statements from its auditor; or |
| ■ | There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm. |
Vote case-by-case on members of the Audit Committee and potentially the full board if:
| ■ | Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether withhold/against votes are warranted. |
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Problematic Compensation Practices
In the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, vote against or withhold from the members of the Compensation Committee and potentially the full board if:
| ■ | There is an unmitigated misalignment between CEO pay and company performance (pay for performance); |
| ■ | The company maintains significant problematic pay practices; or |
| ■ | The board exhibits a significant level of poor communication and responsiveness to shareholders. |
Generally vote against or withhold from the Compensation Committee chair, other committee members, or potentially the full board if:
| ■ | The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s declared frequency of say on pay; or |
| ■ | The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions. |
Generally vote against members of the board committee responsible for approving/setting non-employee director compensation if there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation without disclosing a compelling rationale or other mitigating factors.
Problematic Pledging of Company Stock : Vote against the members of the committee that oversees risks related to pledging, or the full board, where a significant level of pledged company stock by executives or directors raises concerns. The following factors will be considered:
| ■ | The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity; |
| ■ | The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume; |
| ■ | Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time; |
| ■ | Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged company stock; and |
| ■ | Any other relevant factors. |
Climate Accountability
For companies that are significant greenhouse gas (GHG) emitters, through their operations or value chain10, generally vote against or withhold from the incumbent chair of the responsible committee (or other directors on a case-by-case basis) in cases where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy.
Minimum steps to understand and mitigate those risks are considered to be the following. Both minimum criteria will be required to be in alignment with the policy :
| ■ | Detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on Climate-related Financial Disclosures (TCFD), including: |
| ■ | Board governance measures; |
| ■ | Corporate strategy; |
| ■ | Risk management analyses; and |
| ■ | Metrics and targets. |
| 10 | Companies defined as “significant GHG emitters” will be those on the current Climate Action 100+ Focus Group list. |
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| ■ | Appropriate GHG emissions reduction targets. |
At this time, “appropriate GHG emissions reductions targets” will be medium-term GHG reduction targets or Net Zero-by-2050 GHG reduction targets for a company's operations (Scope 1) and electricity use (Scope 2). Targets should cover the vast majority of the company’s direct emissions.
Governance Failures
Under extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
| ■ | Material failures of governance, stewardship, risk oversight11, or fiduciary responsibilities at the company; |
| ■ | Failure to replace management as appropriate; or |
| ■ | Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company. |
Voting on Director Nominees in Contested Elections
Vote-No Campaigns
General Recommendation: In cases where companies are targeted in connection with public “vote-no” campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by shareholders and other publicly available information.
Proxy Contests/Proxy Access
General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors:
| ■ | Long-term financial performance of the company relative to its industry; |
| ■ | Management’s track record; |
| ■ | Background to the contested election; |
| ■ | Nominee qualifications and any compensatory arrangements; |
| ■ | Strategic plan of dissident slate and quality of the critique against management; |
| ■ | Likelihood that the proposed goals and objectives can be achieved (both slates); and |
| ■ | Stock ownership positions. |
In the case of candidates nominated pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the nominee(s) and/or to the nature of the election (such as whether there are more candidates than board seats).
| 11 | Examples of failure of risk oversight include but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; demonstrably poor risk oversight of environmental and social issues, including climate change; significant adverse legal judgments or settlement; or hedging of company stock. |
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Other Board-Related Proposals
Adopt Anti-Hedging/Pledging/Speculative Investments Policy
General Recommendation: Generally vote for proposals seeking a policy that prohibits named executive officers from engaging in derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or pledging stock as collateral for a loan. However, the company’s existing policies regarding responsible use of company stock will be considered.
Board Refreshment
Board refreshment is best implemented through an ongoing program of individual director evaluations, conducted annually, to ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity as needed.
Term/Tenure Limits
General Recommendation: Vote case-by-case on management proposals regarding director term/tenure limits, considering:
| ■ | The rationale provided for adoption of the term/tenure limit; |
| ■ | The robustness of the company’s board evaluation process; |
| ■ | Whether the limit is of sufficient length to allow for a broad range of director tenures; |
| ■ | Whether the limit would disadvantage independent directors compared to non-independent directors; and |
| ■ | Whether the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner. |
Vote case-by-case on shareholder proposals asking for the company to adopt director term/tenure limits, considering:
| ■ | The scope of the shareholder proposal; and |
| ■ | Evidence of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment. |
Age Limits
General Recommendation: Generally vote against management and shareholder proposals to limit the tenure of independent directors through mandatory retirement ages. Vote for proposals to remove mandatory age limits.
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Board Size
General Recommendation: Vote for proposals seeking to fix the board size or designate a range for the board size.
Vote against proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval.
Classification/Declassification of the Board
General Recommendation: Vote against proposals to classify (stagger) the board.
Vote for proposals to repeal classified boards and to elect all directors annually.
CEO Succession Planning
General Recommendation: Generally vote for proposals seeking disclosure on a CEO succession planning policy, considering, at a minimum, the following factors:
| ■ | The reasonableness/scope of the request; and |
| ■ | The company’s existing disclosure on its current CEO succession planning process. |
Cumulative Voting
General Recommendation: Generally vote against management proposals to eliminate cumulate voting, and for shareholder proposals to restore or provide for cumulative voting, unless:
| ■ | The company has proxy access12, thereby allowing shareholders to nominate directors to the company’s ballot; and |
| ■ | The company has adopted a majority vote standard, with a carve-out for plurality voting in situations where there are more nominees than seats, and a director resignation policy to address failed elections. |
Vote for proposals for cumulative voting at controlled companies (insider voting power > 50%).
| 12 | A proxy access right that meets the recommended guidelines. |
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Director and Officer Indemnification, Liability Protection, and Exculpation
General Recommendation: Vote case-by-case on proposals on director and officer indemnification, liability protection, and exculpation13.
Consider the stated rationale for the proposed change. Also consider, among other factors, the extent to which the proposal would:
| ■ | Eliminate directors' and officers' liability for monetary damages for violating the duty of care; |
| ■ | Eliminate directors’ and officers’ liability for monetary damages for violating the duty of loyalt; |
| ■ | Expand coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation than mere carelessness; and |
| ■ | Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts that previously the company was permitted to provide indemnification for, at the discretion of the company's board (i.e., "permissive indemnification"), but that previously the company was not required to indemnify. |
Vote for those proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was unsuccessful if both of the following apply:
| ■ | If the individual was found to have acted in good faith and in a manner that the individual reasonably believed was in the best interests of the company; and |
| ■ | If only the individual’s legal expenses would be covered. |
Establish/Amend Nominee Qualifications
General Recommendation: Vote case-by-case on proposals that establish or amend director qualifications. Votes should be based on the reasonableness of the criteria and the degree to which they may preclude dissident nominees from joining the board.
Vote case-by-case on shareholder resolutions seeking a director nominee who possesses a particular subject matter expertise, considering:
| ■ | The company’s board committee structure, existing subject matter expertise, and board nomination provisions relative to that of its peers; |
| ■ | The company’s existing board and management oversight mechanisms regarding the issue for which board oversight is sought; |
| ■ | The company’s disclosure and performance relating to the issue for which board oversight is sought and any significant related controversies; and |
| ■ | The scope and structure of the proposal. |
| 13 | Indemnification: the condition of being secured against loss or damage. |
Limited liability: a person's financial liability is limited to a fixed sum, or personal financial assets are not at risk if the individual loses a lawsuit that results in financial award/damages to the plaintiff.
Exculpation: to eliminate or limit the personal liability of a director or officer to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director or officer.
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Establish Other Board Committee Proposals
General Recommendation: Generally vote against shareholder proposals to establish a new board committee, as such proposals seek a specific oversight mechanism/structure that potentially limits a company’s flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered:
| ■ | Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is sought; |
| ■ | Level of disclosure regarding the issue for which board oversight is sought; |
| ■ | Company performance related to the issue for which board oversight is sought; |
| ■ | Board committee structure compared to that of other companies in its industry sector; and |
| ■ | The scope and structure of the proposal. |
Filling Vacancies/Removal of Directors
General Recommendation: Vote against proposals that provide that directors may be removed only for cause.
Vote for proposals to restore shareholders’ ability to remove directors with or without cause.
Vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies. Vote for proposals that permit shareholders to elect directors to fill board vacancies.
Independent Board Chair
General Recommendation: Generally vote for shareholder proposals requiring that the board chair position be filled by an independent director, taking into consideration the following:
| ■ | The scope and rationale of the proposal; |
| ■ | The company's current board leadership structure; |
| ■ | The company's governance structure and practices; |
| ■ | Company performance; and |
| ■ | Any other relevant factors that may be applicable. |
The following factors will increase the likelihood of a “for” recommendation:
| ■ | A majority non-independent board and/or the presence of non-independent directors on key board committees; |
| ■ | A weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role; |
| ■ | The presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair; |
| ■ | Evidence that the board has failed to oversee and address material risks facing the company; |
| ■ | A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or |
| ■ | Evidence that the board has failed to intervene when management’s interests are contrary to shareholders' interests. |
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Majority of Independent Directors/Establishment of Independent Committees
General Recommendation: Vote for shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS’ definition of Independent Director (See ISS' Classification of Directors.)
Vote for shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors unless they currently meet that standard.
Majority Vote Standard for the Election of Directors
General Recommendation: Generally vote for management proposals to adopt a majority of votes cast standard for directors in uncontested elections. Vote against if no carve-out for a plurality vote standard in contested elections is included.
Generally vote for precatory and binding shareholder resolutions requesting that the board change the company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a plurality vote standard when there are more nominees than board seats.
Companies are strongly encouraged to also adopt a post-election policy (also known as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director.
Proxy Access
General Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions:
| ■ | Ownership threshold: maximum requirement not more than three percent (3%) of the voting power; |
| ■ | Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group; |
| ■ | Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group; and |
| ■ | Cap: cap on nominees of generally twenty-five percent (25%) of the board. |
Review for reasonableness any other restrictions on the right of proxy access. Generally vote against proposals that are more restrictive than these guidelines.
Require More Nominees than Open Seats
General Recommendation: Vote against shareholder proposals that would require a company to nominate more candidates than the number of open board seats.
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Shareholder Engagement Policy (Shareholder Advisory Committee)
General Recommendation: Generally vote for shareholder proposals requesting that the board establish an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate:
| ■ | Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information between shareholders and members of the board; |
| ■ | Effectively disclosed information with respect to this structure to its shareholders; |
| ■ | Company has not ignored majority-supported shareholder proposals, or a majority withhold vote on a director nominee; and |
| ■ | The company has an independent chair or a lead director, according to ISS’ definition. This individual must be made available for periodic consultation and direct communication with major shareholders. |
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| 2. | Audit-Related |
Auditor Indemnification and Limitation of Liability
General Recommendation: Vote case-by-case on the issue of auditor indemnification and limitation of liability. Factors to be assessed include, but are not limited to:
| ■ | The terms of the auditor agreement—the degree to which these agreements impact shareholders' rights; |
| ■ | The motivation and rationale for establishing the agreements; |
| ■ | The quality of the company’s disclosure; and |
| ■ | The company’s historical practices in the audit area. |
Vote against or withhold from members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
Auditor Ratification
General Recommendation: Vote for proposals to ratify auditors unless any of the following apply:
| ■ | An auditor has a financial interest in or association with the company, and is therefore not independent; |
| ■ | There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of the company’s financial position; |
| ■ | Poor accounting practices are identified that rise to a serious level of concern, such as fraud or misapplication of GAAP; or |
| ■ | Fees for non-audit services (“Other” fees) are excessive. |
Non-audit fees are excessive if:
| ■ | Non-audit (“other”) fees > audit fees + audit-related fees + tax compliance/preparation fees |
Tax compliance and preparation include the preparation of original and amended tax returns and refund claims, and tax payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added to “Other” fees. If the breakout of tax fees cannot be determined, add all tax fees to “Other” fees.
In circumstances where "Other" fees include fees related to significant one-time capital structure events (such as initial public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and nature of those fees that are an exception to the standard "non-audit fee" category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
Shareholder Proposals Limiting Non-Audit Services
General Recommendation: Vote case-by-case on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services.
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Shareholder Proposals on Audit Firm Rotation
General Recommendation: Vote case-by-case on shareholder proposals asking for audit firm rotation, taking into account:
| ■ | The tenure of the audit firm; |
| ■ | The length of rotation specified in the proposal; |
| ■ | Any significant audit-related issues at the company; |
| ■ | The number of Audit Committee meetings held each year; |
| ■ | The number of financial experts serving on the committee; and |
| ■ | Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive price. |
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| 3. | Shareholder Rights & Defenses |
Advance Notice Requirements for Shareholder Proposals/Nominations
General Recommendation: Vote case-by-case on advance notice proposals, giving support to those proposals which allow shareholders to submit proposals/nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review.
To be reasonable, the company’s deadline for shareholder notice of a proposal/nominations must be no earlier than 120 days prior to the anniversary of the previous year’s meeting and have a submittal window of no shorter than 30 days from the beginning of the notice period (also known as a 90-120-day window). The submittal window is the period under which shareholders must file their proposals/nominations prior to the deadline.
In general, support additional efforts by companies to ensure full disclosure in regard to a proponent’s economic and voting position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposals.
Amend Bylaws without Shareholder Consent
General Recommendation: Vote against proposals giving the board exclusive authority to amend the bylaws.
Vote case-by-case on proposals giving the board the ability to amend the bylaws in addition to shareholders, taking into account the following:
| ■ | Any impediments to shareholders' ability to amend the bylaws (i.e. supermajority voting requirements); |
| ■ | The company's ownership structure and historical voting turnout; |
| ■ | Whether the board could amend bylaws adopted by shareholders; and |
| ■ | Whether shareholders would retain the ability to ratify any board-initiated amendments. |
Control Share Acquisition Provisions
General Recommendation: Vote for proposals to opt out of control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to shareholders.
Vote against proposals to amend the charter to include control share acquisition provisions. Vote for proposals to restore voting rights to the control shares.
Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds. Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to put its offer to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares.
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Control Share Cash-Out Provisions
General Recommendation: Vote for proposals to opt out of control share cash-out statutes.
Control share cash-out statutes give dissident shareholders the right to "cash-out" of their position in a company at the expense of the shareholder who has taken a control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price.
Disgorgement Provisions
General Recommendation: Vote for proposals to opt out of state disgorgement provisions.
Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a company's stock to disgorge, or pay back, to the company any profits realized from the sale of that company's stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of time (between 18 months and 24 months) prior to the investor's gaining control status are subject to these recapture-of-profits provisions.
Fair Price Provisions
General Recommendation: Vote case-by-case on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price.
Generally vote against fair price provisions with shareholder vote requirements greater than a majority of disinterested shares.
Freeze-Out Provisions
General Recommendation: Vote for proposals to opt out of state freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time before gaining control of the company.
Greenmail
General Recommendation: Vote for proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments.
Vote case-by-case on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
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Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.
Shareholder Litigation Rights
Federal Forum Selection Provisions
Federal forum selection provisions require that U.S. federal courts be the sole forum for shareholders to litigate claims arising under federal securities law.
General Recommendation: Generally vote for federal forum selection provisions in the charter or bylaws that specify "the district courts of the United States" as the exclusive forum for federal securities law matters, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.
Vote against provisions that restrict the forum to a particular federal district court; unilateral adoption (without a shareholder vote) of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Exclusive Forum Provisions for State Law Matters
Exclusive forum provisions in the charter or bylaws restrict shareholders’ ability to bring derivative lawsuits against the company, for claims arising out of state corporate law, to the courts of a particular state (generally the state of incorporation).
General Recommendation: Generally vote for charter or bylaw provisions that specify courts located within the state of Delaware as the exclusive forum for corporate law matters for Delaware corporations, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.
For states other than Delaware, vote case-by-case on exclusive forum provisions, taking into consideration:
| ■ | The company's stated rationale for adopting such a provision; |
| ■ | Disclosure of past harm from duplicative shareholder lawsuits in more than one forum; |
| ■ | The breadth of application of the charter or bylaw provision, including the types of lawsuits to which it would apply and the definition of key terms; and |
| ■ | Governance features such as shareholders' ability to repeal the provision at a later date (including the vote standard applied when shareholders attempt to amend the charter or bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections. |
Generally vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate law matters, or that specify a particular local court within the state; unilateral adoption of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Fee shifting
Fee-shifting provisions in the charter or bylaws require that a shareholder who sues a company unsuccessfully pay all litigation expenses of the defendant corporation and its directors and officers.
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General Recommendation: Generally vote against provisions that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., including cases where the plaintiffs are partially successful).
Unilateral adoption of a fee-shifting provision will generally be considered an ongoing failure under the Unilateral Bylaw/Charter Amendments policy.
Net Operating Loss (NOL) Protective Amendments
General Recommendation: Vote against proposals to adopt a protective amendment for the stated purpose of protecting a company's net operating losses (NOL) if the effective term of the protective amendment would exceed the shorter of three years and the exhaustion of the NOL.
Vote case-by-case, considering the following factors, for management proposals to adopt an NOL protective amendment that would remain in effect for the shorter of three years (or less) and the exhaustion of the NOL:
| ■ | The ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result in a new 5-percent holder or increase the stock ownership percentage of an existing 5-percent holder); |
| ■ | The value of the NOLs; |
| ■ | Shareholder protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon exhaustion or expiration of the NOL); |
| ■ | The company's existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and |
| ■ | Any other factors that may be applicable. |
Poison Pills (Shareholder Rights Plans)
Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy
General Recommendation: Vote for shareholder proposals requesting that the company submit its poison pill to a shareholder vote or redeem it unless the company has: (1) A shareholder-approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill in the future specifying that the board will only adopt a shareholder rights plan if either:
| ■ | Shareholders have approved the adoption of the plan; or |
| ■ | The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders under the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval (i.e., the “fiduciary out” provision). A poison pill adopted under this fiduciary out will be put to a shareholder ratification vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate. |
If the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, vote for the proposal, but add the caveat that a vote within 12 months would be considered sufficient implementation.
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Management Proposals to Ratify a Poison Pill
General Recommendation: Vote case-by-case on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following attributes:
| ■ | No lower than a 20 percent trigger, flip-in or flip-over; |
| ■ | A term of no more than three years; |
| ■ | No deadhand, slowhand, no-hand, or similar feature that limits the ability of a future board to redeem the pill; and |
| ■ | Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill. |
In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into consideration the company’s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.
Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)
General Recommendation: Vote against proposals to adopt a poison pill for the stated purpose of protecting a company's net operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.
Vote case-by-case on management proposals for poison pill ratification, considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
| ■ | The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent); |
| ■ | The value of the NOLs; |
| ■ | Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or expiration of NOLs); |
| ■ | The company's existing governance structure, including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and |
| ■ | Any other factors that may be applicable. |
Proxy Voting Disclosure, Confidentiality, and Tabulation
General Recommendation: Vote case-by-case on proposals regarding proxy voting mechanics, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder rights. Specific issues covered under the policy include, but are not limited to, confidential voting of individual proxies and ballots, confidentiality of running vote tallies, and the treatment of abstentions and/or broker non-votes in the company's vote-counting methodology.
While a variety of factors may be considered in each analysis, the guiding principles are: transparency, consistency, and fairness in the proxy voting process. The factors considered, as applicable to the proposal, may include:
| ■ | The scope and structure of the proposal; |
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| ■ | The company's stated confidential voting policy (or other relevant policies) and whether it ensures a "level playing field" by providing shareholder proponents with equal access to vote information prior to the annual meeting; |
| ■ | The company's vote standard for management and shareholder proposals and whether it ensures consistency and fairness in the proxy voting process and maintains the integrity of vote results; |
| ■ | Whether the company's disclosure regarding its vote counting method and other relevant voting policies with respect to management and shareholder proposals are consistent and clear; |
| ■ | Any recent controversies or concerns related to the company's proxy voting mechanics; |
| ■ | Any unintended consequences resulting from implementation of the proposal; and |
| ■ | Any other factors that may be relevant. |
Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions
General Recommendation: Generally vote against management proposals to ratify provisions of the company’s existing charter or bylaws, unless these governance provisions align with best practice.
In addition, voting against/withhold from individual directors, members of the governance committee, or the full board may be warranted, considering:
| ■ | The presence of a shareholder proposal addressing the same issue on the same ballot; |
| ■ | The board's rationale for seeking ratification; |
| ■ | Disclosure of actions to be taken by the board should the ratification proposal fail; |
| ■ | Disclosure of shareholder engagement regarding the board’s ratification request; |
| ■ | The level of impairment to shareholders' rights caused by the existing provision; |
| ■ | The history of management and shareholder proposals on the provision at the company’s past meetings; |
| ■ | Whether the current provision was adopted in response to the shareholder proposal; |
| ■ | The company's ownership structure; and |
| ■ | Previous use of ratification proposals to exclude shareholder proposals. |
Reimbursing Proxy Solicitation Expenses
General Recommendation: Vote case-by-case on proposals to reimburse proxy solicitation expenses.
When voting in conjunction with support of a dissident slate, vote for the reimbursement of all appropriate proxy solicitation expenses associated with the election.
Generally vote for shareholder proposals calling for the reimbursement of reasonable costs incurred in connection with nominating one or more candidates in a contested election where the following apply:
| ■ | The election of fewer than 50 percent of the directors to be elected is contested in the election; |
| ■ | One or more of the dissident’s candidates is elected; |
| ■ | Shareholders are not permitted to cumulate their votes for directors; and |
| ■ | The election occurred, and the expenses were incurred, after the adoption of this bylaw. |
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Reincorporation Proposals
General Recommendation: Management or shareholder proposals to change a company's state of incorporation should be evaluated case-by-case, giving consideration to both financial and corporate governance concerns including the following:
| ■ | Reasons for reincorporation; |
| ■ | Comparison of company's governance practices and provisions prior to and following the reincorporation; and |
| ■ | Comparison of corporation laws of original state and destination state. |
Vote for reincorporation when the economic factors outweigh any neutral or negative governance changes.
Shareholder Ability to Act by Written Consent
General Recommendation: Generally vote against management and shareholder proposals to restrict or prohibit shareholders' ability to act by written consent.
Generally vote for management and shareholder proposals that provide shareholders with the ability to act by written consent, taking into account the following factors:
| ■ | Shareholders' current right to act by written consent; |
| ■ | The consent threshold; |
| ■ | The inclusion of exclusionary or prohibitive language; |
| ■ | Investor ownership structure; and |
| ■ | Shareholder support of, and management's response to, previous shareholder proposals. |
Vote case-by-case on shareholder proposals if, in addition to the considerations above, the company has the following governance and antitakeover provisions:
| ■ | An unfettered14 right for shareholders to call special meetings at a 10 percent threshold; |
| ■ | A majority vote standard in uncontested director elections; |
| ■ | No non-shareholder-approved pill; and |
| ■ | An annually elected board. |
Shareholder Ability to Call Special Meetings
General Recommendation: Vote against management or shareholder proposals to restrict or prohibit shareholders’ ability to call special meetings.
Generally vote for management or shareholder proposals that provide shareholders with the ability to call special meetings taking into account the following factors:
| ■ | Shareholders’ current right to call special meetings; |
| 14 | "Unfettered" means no restrictions on agenda items, no restrictions on the number of shareholders who can group together to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than 30 days after the last annual meeting and no greater than 90 prior to the next annual meeting. |
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| ■ | Minimum ownership threshold necessary to call special meetings (10 percent preferred); |
| ■ | The inclusion of exclusionary or prohibitive language; |
| ■ | Investor ownership structure; and |
| ■ | Shareholder support of, and management’s response to, previous shareholder proposals. |
Stakeholder Provisions
General Recommendation: Vote against proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination.
State Antitakeover Statutes
General Recommendation: Vote case-by-case on proposals to opt in or out of state takeover statutes (including fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, and anti-greenmail provisions).
Supermajority Vote Requirements
General Recommendation: Vote against proposals to require a supermajority shareholder vote.
Vote for management or shareholder proposals to reduce supermajority vote requirements. However, for companies with shareholder(s) who have significant ownership levels, vote case-by-case, taking into account:
| ■ | Ownership structure; |
| ■ | Quorum requirements; and |
| ■ | Vote requirements. |
Virtual Shareholder Meetings
General Recommendation: Generally vote for management proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances under which virtual-only15 meetings would be held, and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting.
Vote case-by-case on shareholder proposals concerning virtual-only meetings, considering:
| ■ | Scope and rationale of the proposal; and |
| ■ | Concerns identified with the company’s prior meeting practices. |
| 15 | Virtual-only shareholder meeting” refers to a meeting of shareholders that is held exclusively using technology without a corresponding in-person meeting. |
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| 4. | Capital/Restructuring |
Capital
Adjustments to Par Value of Common Stock
General Recommendation: Vote for management proposals to reduce the par value of common stock unless the action is being taken to facilitate an anti-takeover device or some other negative corporate governance action.
Vote for management proposals to eliminate par value.
Common Stock Authorization
General Authorization Requests
General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of common stock that are to be used for general corporate purposes:
| ■ | If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to 50% of current authorized share; |
| ■ | If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized shares; |
| ■ | If share usage is greater than current authorized shares, vote for an increase of up to the current share usage; or |
| ■ | In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization. |
Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
| ■ | The proposal seeks to increase the number of authorized shares of the class of common stock that has superior voting rights to other share classes; |
| ■ | On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result in an excessive increase in the share authorization; |
| ■ | The company has a non-shareholder approved poison pill (including an NOL pill); or |
| ■ | The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
| ■ | In, or subsequent to, the company's most recent 10-K filing, the company discloses that there is substantial doubt about its ability to continue as a going concern; |
| ■ | The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the increase in authorized capital; or |
| ■ | A government body has in the past year required the company to increase its capital ratios. |
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For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific Authorization Requests
General Recommendation: Generally vote for proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:
| ■ | twice the amount needed to support the transactions on the ballot, and |
| ■ | the allowable increase as calculated for general issuances above. |
Dual Class Structure
General Recommendation: Generally vote against proposals to create a new class of common stock unless:
| ■ | The company discloses a compelling rationale for the dual-class capital structure, such as: |
| ■ | The company's auditor has concluded that there is substantial doubt about the company's ability to continue as a going concern; or |
| ■ | The new class of shares will be transitory; |
| ■ | The new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short term and long term; and |
| ■ | The new class is not designed to preserve or increase the voting power of an insider or significant shareholder. |
Issue Stock for Use with Rights Plan
General Recommendation: Vote against proposals that increase authorized common stock for the explicit purpose of implementing a non-shareholder-approved shareholder rights plan (poison pill).
Preemptive Rights
General Recommendation: Vote case-by-case on shareholder proposals that seek preemptive rights, taking into consideration:
| ■ | The size of the company; |
| ■ | The shareholder base; and |
| ■ | The liquidity of the stock. |
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Preferred Stock Authorization
General Authorization Requests
General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of preferred stock that are to be used for general corporate purposes:
| ■ | If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to 50% of current authorized shares; |
| ■ | If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized shares; |
| ■ | If share usage is greater than current authorized shares, vote for an increase of up to the current share usage. |
| ■ | In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization; or |
| ■ | If no preferred shares are currently issued and outstanding, vote against the request, unless the company discloses a specific use for the shares. |
Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
| ■ | If the shares requested are blank check preferred shares that can be used for antitakeover purposes;16 |
| ■ | The company seeks to increase a class of non-convertible preferred shares entitled to more than one vote per share on matters that do not solely affect the rights of preferred stockholders "supervoting shares"); |
| ■ | The company seeks to increase a class of convertible preferred shares entitled to a number of votes greater than the number of common shares into which they are convertible ("supervoting shares") on matters that do not solely affect the rights of preferred stockholders; |
| ■ | The stated intent of the increase in the general authorization is to allow the company to increase an existing designated class of supervoting preferred shares; |
| ■ | On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result in an excessive increase in the share authorization; |
| ■ | The company has a non-shareholder approved poison pill (including an NOL pill); and |
| ■ | The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
| ■ | In, or subsequent to, the company's most recent 10-K filing, the company discloses that there is substantial doubt about its ability to continue as a going concern; |
| ■ | The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the increase in authorized capital; or |
| ■ | A government body has in the past year required the company to increase its capital ratios. |
For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.
| 16 | To be acceptable, appropriate disclosure would be needed that the shares are “declawed”: i.e., representation by the board that it will not, without prior stockholder approval, issue or use the preferred stock for any defensive or anti-takeover purpose or for the purpose of implementing any stockholder rights plan. |
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Specific Authorization Requests
General Recommendation: Generally vote for proposals to increase the number of authorized preferred shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:
| ■ | twice the amount needed to support the transactions on the ballot, and |
| ■ | the allowable increase as calculated for general issuances above. |
Recapitalization Plans
General Recommendation: Vote case-by-case on recapitalizations (reclassifications of securities), taking into account the following:
| ■ | More simplified capital structure; |
| ■ | Enhanced liquidity; |
| ■ | Fairness of conversion terms; |
| ■ | Impact on voting power and dividends; |
| ■ | Reasons for the reclassification; |
| ■ | Conflicts of interest; and |
| ■ | Other alternatives considered. |
Reverse Stock Splits
General Recommendation: Vote for management proposals to implement a reverse stock split if:
| ■ | The number of authorized shares will be proportionately reduced; or |
| ■ | The effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS' Common Stock Authorization policy. |
Vote case-by-case on proposals that do not meet either of the above conditions, taking into consideration the following factors:
| ■ | Stock exchange notification to the company of a potential delisting; |
| ■ | Disclosure of substantial doubt about the company's ability to continue as a going concern without additional financing; |
| ■ | The company's rationale; or |
| ■ | Other factors as applicable. |
Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S.
General Recommendation: For U.S. domestic issuers incorporated outside the U.S. and listed solely on a U.S. exchange, generally vote for resolutions to authorize the issuance of common shares up to 20 percent of currently issued common share capital, where not tied to a specific transaction or financing proposal.
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For pre-revenue or other early-stage companies that are heavily reliant on periodic equity financing, generally vote for resolutions to authorize the issuance of common shares up to 50 percent of currently issued common share capital. The burden of proof will be on the company to establish that it has a need for the higher limit.
Renewal of such mandates should be sought at each year’s annual meeting.
Vote case-by-case on share issuances for a specific transaction or financing proposal.
Share Repurchase Programs
General Recommendation: For U.S.-incorporated companies, and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the board authority to conduct open-market repurchases, in the absence of company-specific concerns regarding:
| ■ | Greenmail; |
| ■ | The use of buybacks to inappropriately manipulate incentive compensation metrics; |
| ■ | Threats to the company's long-term viability; or |
| ■ | Other company-specific factors as warranted. |
Vote case-by-case on proposals to repurchase shares directly from specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.
Share Repurchase Programs Shareholder Proposals
General Recommendation: Generally vote against shareholder proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock. Vote for the proposal when there is a pattern of abuse by executives exercising options or selling shares during periods of share buybacks.
Stock Distributions: Splits and Dividends
General Recommendation: Generally vote for management proposals to increase the common share authorization for stock split or stock dividend, provided that the effective increase in authorized shares is equal to or is less than the allowable increase calculated in accordance with ISS' Common Stock Authorization policy.
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Tracking Stock
General Recommendation: Vote case-by-case on the creation of tracking stock, weighing the strategic value of the transaction against such factors as:
| ■ | Adverse governance changes; |
| ■ | Excessive increases in authorized capital stock; |
| ■ | Unfair method of distribution; |
| ■ | Diminution of voting rights; |
| ■ | Adverse conversion features; |
| ■ | Negative impact on stock option plans; and |
| ■ | Alternatives such as spin-off. |
Restructuring
Appraisal Rights
General Recommendation: Vote for proposals to restore or provide shareholders with rights of appraisal.
Asset Purchases
General Recommendation: Vote case-by-case on asset purchase proposals, considering the following factors:
| ■ | Purchase price; |
| ■ | Fairness opinion; |
| ■ | Financial and strategic benefits; |
| ■ | How the deal was negotiated; |
| ■ | Conflicts of interest; |
| ■ | Other alternatives for the business; and |
| ■ | Non-completion risk. |
Asset Sales
General Recommendation: Vote case-by-case on asset sales, considering the following factors:
| ■ | Impact on the balance sheet/working capital; |
| ■ | Potential elimination of diseconomies; |
| ■ | Anticipated financial and operating benefits; |
| ■ | Anticipated use of funds; |
| ■ | Value received for the asset; |
| ■ | Fairness opinion; |
| ■ | How the deal was negotiated; and |
| ■ | Conflicts of interest. |
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Bundled Proposals
General Recommendation: Vote case-by-case on bundled or “conditional” proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, vote against the proposals. If the combined effect is positive, support such proposals.
Conversion of Securities
General Recommendation: Vote case-by-case on proposals regarding conversion of securities. When evaluating these proposals, the investor should review the dilution to existing shareholders, the conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest.
Vote for the conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the transaction is not approved.
Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans
General Recommendation: Vote case-by-case on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, after evaluating:
| ■ | Dilution to existing shareholders' positions; |
| ■ | Terms of the offer - discount/premium in purchase price to investor, including any fairness opinion; termination penalties; exit strategy; |
| ■ | Financial issues - company's financial situation; degree of need for capital; use of proceeds; effect of the financing on the company's cost of capital; |
| ■ | Management's efforts to pursue other alternatives; |
| ■ | Control issues - change in management; change in control, guaranteed board and committee seats; standstill provisions; voting agreements; veto power over certain corporate actions; and |
| ■ | Conflict of interest - arm's length transaction, managerial incentives. |
Vote for the debt restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved.
Formation of Holding Company
General Recommendation: Vote case-by-case on proposals regarding the formation of a holding company, taking into consideration the following:
| ■ | The reasons for the change; |
| ■ | Any financial or tax benefits; |
| ■ | Regulatory benefits; |
| ■ | Increases in capital structure; and |
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| ■ | Changes to the articles of incorporation or bylaws of the company. |
Absent compelling financial reasons to recommend for the transaction, vote against the formation of a holding company if the transaction would include either of the following:
| ■ | Increases in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”); or |
| ■ | Adverse changes in shareholder rights. |
Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs)
General Recommendation: Vote case-by-case on going private transactions, taking into account the following:
| ■ | Offer price/premium; |
| ■ | Fairness opinion; |
| ■ | How the deal was negotiated; |
| ■ | Conflicts of interest; |
| ■ | Other alternatives/offers considered; and |
| ■ | Non-completion risk. |
Vote case-by-case on going dark transactions, determining whether the transaction enhances shareholder value by taking into consideration:
| ■ | Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market research of the stock); and |
| ■ | Balanced interests of continuing vs. cashed-out shareholders, taking into account the following: |
| ■ | Are all shareholders able to participate in the transaction? |
| ■ | Will there be a liquid market for remaining shareholders following the transaction? |
| ■ | Does the company have strong corporate governance? |
| ■ | Will insiders reap the gains of control following the proposed transaction? and |
| ■ | Does the state of incorporation have laws requiring continued reporting that may benefit shareholders? |
Joint Ventures
General Recommendation: Vote case-by-case on proposals to form joint ventures, taking into account the following:
| ■ | Percentage of assets/business contributed; |
| ■ | Percentage ownership; |
| ■ | Financial and strategic benefits; |
| ■ | Governance structure; |
| ■ | Conflicts of interest; |
| ■ | Other alternatives; and |
| ■ | Non-completion risk. |
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Liquidations
General Recommendation: Vote case-by-case on liquidations, taking into account the following:
| ■ | Management’s efforts to pursue other alternatives; |
| ■ | Appraisal value of assets; and |
| ■ | The compensation plan for executives managing the liquidation. |
Vote for the liquidation if the company will file for bankruptcy if the proposal is not approved.
Mergers and Acquisitions
General Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including:
| ■ | Valuation - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction, and strategic rationale. |
| ■ | Market reaction - How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal. |
| ■ | Strategic rationale - Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions. |
| ■ | Negotiations and process - Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation "wins" can also signify the deal makers' competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value. |
| ■ | Conflicts of interest - Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the "ISS Transaction Summary" section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists. |
| ■ | Governance - Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance. |
Private Placements/Warrants/Convertible Debentures
General Recommendation: Vote case-by-case on proposals regarding private placements, warrants, and convertible debentures taking into consideration:
| ■ | Dilution to existing shareholders' position: The amount and timing of shareholder ownership dilution should be weighed against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common stock, absent preemptive rights, is typically dilutive to existing shareholders, share price appreciation is often the necessary event to trigger the exercise of "out of the money" warrants and convertible debt. In these instances from a value standpoint, the negative impact of dilution is mitigated by the increase in the company's stock price that must occur to trigger the dilutive event. |
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| ■ | Terms of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features, termination penalties, exit strategy): |
| ■ | The terms of the offer should be weighed against the alternatives of the company and in light of company's financial condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be at a premium to the then prevailing stock price at the time of private placement. |
| ■ | When evaluating the magnitude of a private placement discount or premium, consider factors that influence the discount or premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information asymmetry, and anticipation of future performance. |
| ■ | Financial issues: |
| ■ | The company's financial condition; |
| ■ | Degree of need for capital; |
| ■ | Use of proceeds; |
| ■ | Effect of the financing on the company's cost of capital; |
| ■ | Current and proposed cash burn rate; and |
| ■ | Going concern viability and the state of the capital and credit markets. |
| ■ | Management's efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint ventures, partnership, merger, or sale of part or all of the company. |
| ■ | Control issues: |
| ■ | Change in management; |
| ■ | Change in control; |
| ■ | Guaranteed board and committee seats; |
| ■ | Standstill provisions; |
| ■ | Voting agreements; |
| ■ | Veto power over certain corporate actions; and |
| ■ | Minority versus majority ownership and corresponding minority discount or majority control premium. |
| ■ | Conflicts of interest: |
| ■ | Conflicts of interest should be viewed from the perspective of the company and the investor; and |
| ■ | Were the terms of the transaction negotiated at arm's length? Are managerial incentives aligned with shareholder interests? |
| ■ | Market reaction: |
| ■ | The market's response to the proposed deal. A negative market reaction is a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price. |
Vote for the private placement, or for the issuance of warrants and/or convertible debentures in a private placement, if it is expected that the company will file for bankruptcy if the transaction is not approved.
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Reorganization/Restructuring Plan (Bankruptcy)
General Recommendation: Vote case-by-case on proposals to common shareholders on bankruptcy plans of reorganization, considering the following factors including, but not limited to:
| ■ | Estimated value and financial prospects of the reorganized company; |
| ■ | Percentage ownership of current shareholders in the reorganized company; |
| ■ | Whether shareholders are adequately represented in the reorganization process (particularly through the existence of an Official Equity Committee); |
| ■ | The cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s); |
| ■ | Existence of a superior alternative to the plan of reorganization; and |
| ■ | Governance of the reorganized company. |
Special Purpose Acquisition Corporations (SPACs)
General Recommendation: Vote case-by-case on SPAC mergers and acquisitions taking into account the following:
| ■ | Valuation - Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness opinion and the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target if it is a private entity. |
| ■ | Market reaction - How has the market responded to the proposed deal? A negative market reaction may be a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price. |
| ■ | Deal timing - A main driver for most transactions is that the SPAC charter typically requires the deal to be complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date. |
| ■ | Negotiations and process - What was the process undertaken to identify potential target companies within specified industry or location specified in charter? Consider the background of the sponsors. |
| ■ | Conflicts of interest - How are sponsors benefiting from the transaction compared to IPO shareholders? Potential conflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80 percent rule (the charter requires that the fair market value of the target is at least equal to 80 percent of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a transaction to be completed within the 18-24-month timeframe. |
| ■ | Voting agreements - Are the sponsors entering into enter into any voting agreements/tender offers with shareholders who are likely to vote against the proposed merger or exercise conversion rights? |
| ■ | Governance - What is the impact of having the SPAC CEO or founder on key committees following the proposed merger? |
Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions
General Recommendation: Vote case-by-case on SPAC extension proposals taking into account the length of the requested extension, the status of any pending transaction(s) or progression of the acquisition process, any added incentive for non-redeeming shareholders, and any prior extension requests.
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| ■ | Length of request: Typically, extension requests range from two to six months, depending on the progression of the SPAC's acquistion process. |
| ■ | Pending transaction(s) or progression of the acquisition process: Sometimes an intial business combination was already put to a shareholder vote, but, for varying reasons, the transaction could not be consummated by the termination date and the SPAC is requesting an extension. Other times, the SPAC has entered into a definitive transaction agreement, but needs additional time to consummate or hold the shareholder meeting. |
| ■ | Added incentive for non-redeeming shareholders: Sometimes the SPAC sponsor (or other insiders) will contribute, typically as a loan to the company, additional funds that will be added to the redemption value of each public share as long as such shares are not redeemed in connection with the extension request. The purpose of the "equity kicker" is to incentivize shareholders to hold their shares through the end of the requested extension or until the time the transaction is put to a shareholder vote, rather than electing redeemption at the extension proposal meeting. |
| ■ | Prior extension requests: Some SPACs request additional time beyond the extension period sought in prior extension requests. |
Spin-offs
General Recommendation: Vote case-by-case on spin-offs, considering:
| ■ | Tax and regulatory advantages; |
| ■ | Planned use of the sale proceeds; |
| ■ | Valuation of spinoff; |
| ■ | Fairness opinion; |
| ■ | Benefits to the parent company; |
| ■ | Conflicts of interest; |
| ■ | Managerial incentives; |
| ■ | Corporate governance changes; and |
| ■ | Changes in the capital structure. |
Value Maximization Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals seeking to maximize shareholder value by:
| ■ | Hiring a financial advisor to explore strategic alternatives; |
| ■ | Selling the company; or |
| ■ | Liquidating the company and distributing the proceeds to shareholders. |
These proposals should be evaluated based on the following factors:
| ■ | Prolonged poor performance with no turnaround in sight; |
| ■ | Signs of entrenched board and management (such as the adoption of takeover defenses); |
| ■ | Strategic plan in place for improving value; |
| ■ | Likelihood of receiving reasonable value in a sale or dissolution; and |
| ■ | The company actively exploring its strategic options, including retaining a financial advisor. |
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| 5. | Compensation |
Executive Pay Evaluation
Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:
| 1. | Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs; |
| 2. | Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation; |
| 3. | Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed); |
| 4. | Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly; and |
| 5. | Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors is reasonable and does not compromise their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level, it may incorporate a variety of generally accepted best practices. |
Advisory Votes on Executive Compensation—Management Proposals (Say-on-Pay)
General Recommendation: Vote case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation.
Vote against Advisory Votes on Executive Compensation (Say-on-Pay or “SOP”) if:
| ■ | There is an unmitigated misalignment between CEO pay and company performance (pay for performance); |
| ■ | The company maintains significant problematic pay practices; or |
| ■ | The board exhibits a significant level of poor communication and responsiveness to shareholders. |
Vote against or withhold from the members of the Compensation Committee and potentially the full board if:
| ■ | There is no SOP on the ballot, and an against vote on an SOP would otherwise be warranted due to pay-for-performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof; |
| ■ | The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes cast; |
| ■ | The company has recently practiced or approved problematic pay practices, such as option repricing or option backdating; or |
| ■ | The situation is egregious. |
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Primary Evaluation Factors for Executive Pay
Pay-for-Performance Evaluation
ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the S&P1500, Russell 3000, or Russell 3000E Indices17, this analysis considers the following:
| 1. | Peer Group18 Alignment: |
| ■ | The degree of alignment between the company's annualized TSR rank and the CEO's annualized total pay rank within a peer group, each measured over a three-year period. |
| ■ | The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year period. |
| ■ | The multiple of the CEO's total pay relative to the peer group median in the most recent fiscal year. |
| 2. | Absolute Alignment19 – the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years – i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period. |
If the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of companies outside the Russell indices, a misalignment between pay and performance is otherwise suggested, our analysis may include any of the following qualitative factors, as relevant to an evaluation of how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
| ■ | The ratio of performance- to time-based incentive awards; |
| ■ | The overall ratio of performance-based compensation to fixed or discretionary pay; |
| ■ | The rigor of performance goals; |
| ■ | The complexity and risks around pay program design; |
| ■ | The transparency and clarity of disclosure; |
| ■ | The company's peer group benchmarking practices; |
| ■ | Financial/operational results, both absolute and relative to peers; |
| ■ | Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards); |
| ■ | Realizable pay20 compared to grant pay; and |
| ■ | Any other factors deemed relevant. |
| 17 | The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities. |
| 18 | The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company's selected peers' GICS industry group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market-cap bucket that is reflective of the company's market cap. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant. |
| 19 | Only Russell 3000 Index companies are subject to the Absolute Alignment analysis. |
| 20 | ISS research reports include realizable pay for S&P1500 companies. |
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Problematic Pay Practices
Problematic pay elements are generally evaluated case-by-case considering the context of a company's overall pay program and demonstrated pay-for-performance philosophy. The focus is on executive compensation practices that contravene the global pay principles, including:
| ■ | Problematic practices related to non-performance-based compensation elements; |
| ■ | Incentives that may motivate excessive risk-taking or present a windfall risk; and |
| ■ | Pay decisions that circumvent pay-for-performance, such as options backdating or waiving performance requirements. |
The list of examples below highlights certain problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:
| ■ | Repricing or replacing of underwater stock options/SARs without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options); |
| ■ | Extraordinary perquisites or tax gross-ups; |
| ■ | New or materially amended agreements that provide for: |
| ■ | Excessive termination or CIC severance payments (generally exceeding 3 times base salary and average/target/most recent bonus); |
| ■ | CIC severance payments without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers) or in connection with a problematic Good Reason definition; |
| ■ | CIC excise tax gross-up entitlements (including "modified" gross-ups); and/or |
| ■ | Multi-year guaranteed awards that are not at risk due to rigorous performance conditions; |
| ■ | Liberal CIC definition combined with any single-trigger CIC benefits; |
| ■ | Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI's executives is not possible; |
| ■ | Severance payments made when the termination is not clearly disclosed as involuntary (for example, a termination without cause or resignation for good reason); and/or |
| ■ | Any other provision or practice deemed to be egregious and present a significant risk to investors. |
The above examples are not an exhaustive list. Please refer to ISS' U.S. Compensation Policies FAQ document for additional detail on specific pay practices that have been identified as problematic and may lead to negative vote recommendations.
Options Backdating
The following factors should be examined case-by-case to allow for distinctions to be made between “sloppy” plan administration versus deliberate action or fraud:
| ■ | Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes; |
| ■ | Duration of options backdating; |
| ■ | Size of restatement due to options backdating; |
| ■ | Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and |
| ■ | Adoption of a grant policy that prohibits backdating and creates a fixed grant schedule or window period for equity grants in the future. |
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Compensation Committee Communications and Responsiveness
Consider the following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:
| ■ | Failure to respond to majority-supported shareholder proposals on executive pay topics; or |
| ■ | Failure to adequately respond to the company's previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account: |
| ■ | Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated); |
| ■ | Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; |
| ■ | Disclosure of specific and meaningful actions taken to address shareholders' concerns; |
| ■ | Other recent compensation actions taken by the company; |
| ■ | Whether the issues raised are recurring or isolated; |
| ■ | The company's ownership structure; and |
| ■ | Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness. |
Frequency of Advisory Vote on Executive Compensation ("Say When on Pay")
General Recommendation: Vote for annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies' executive pay programs.
Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale
General Recommendation: Vote case-by-case on say on Golden Parachute proposals, including consideration of existing change-in-control arrangements maintained with named executive officers but also considering new or extended arrangements.
Features that may result in an “against” recommendation include one or more of the following, depending on the number, magnitude, and/or timing of issue(s):
| ■ | Single- or modified-single-trigger cash severance; |
| ■ | Single-trigger acceleration of unvested equity awards; |
| ■ | Full acceleration of equity awards granted shortly before the change in control; |
| ■ | Acceleration of performance awards above the target level of performance without compelling rationale; |
| ■ | Excessive cash severance (generally >3x base salary and bonus); |
| ■ | Excise tax gross-ups triggered and payable; |
| ■ | Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or |
| ■ | Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or |
| ■ | The company's assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote. |
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Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis. However, the presence of multiple legacy problematic features will also be closely scrutinized.
In cases where the golden parachute vote is incorporated into a company's advisory vote on compensation (management say-on-pay), ISS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.
Equity-Based and Other Incentive Plans
Please refer to ISS' U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan Scorecard policy.
General Recommendation: Vote case-by-case on certain equity-based compensation plans21 depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an "Equity Plan Scorecard" (EPSC) approach with three pillars:
| ■ | Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company's estimated Shareholder Value Transfer (SVT) in relation to peers and considering both: |
| ■ | SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; and |
| ■ | SVT based only on new shares requested plus shares remaining for future grants. |
| ■ | Plan Features: |
| ■ | Quality of disclosure around vesting upon a change in control (CIC); |
| ■ | Discretionary vesting authority; |
| ■ | Liberal share recycling on various award types; |
| ■ | Lack of minimum vesting period for grants made under the plan; and |
| ■ | Dividends payable prior to award vesting. |
| ■ | Grant Practices: |
| ■ | The company’s three-year burn rate relative to its industry/market cap peers; |
| ■ | Vesting requirements in CEO's recent equity grants (3-year look-back); |
| ■ | The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years); |
| ■ | The proportion of the CEO's most recent equity grants/awards subject to performance conditions; |
| ■ | Whether the company maintains a sufficient claw-back policy; and |
| ■ | Whether the company maintains sufficient post-exercise/vesting share-holding requirements. |
Generally vote against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders' interests, or if any of the following egregious factors ("overriding factors") apply:
| ■ | Awards may vest in connection with a liberal change-of-control definition; |
| ■ | The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it – for NYSE and Nasdaq listed companies – or by not prohibiting it when the company has a history of repricing – for non-listed companies); |
| 21 | Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further evaluated case-by-case. |
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| ■ | The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances; |
| ■ | The plan is excessively dilutive to shareholders' holdings; |
| ■ | The plan contains an evergreen (automatic share replenishment) feature; or |
| ■ | Any other plan features are determined to have a significant negative impact on shareholder interests. |
Further Information on certain EPSC Factors:
Shareholder Value Transfer (SVT)
The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the amount of shareholders’ equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed, shares available under existing plans, and shares granted but unexercised (using two measures, in the case of plans subject to the Equity Plan Scorecard evaluation, as noted above). All award types are valued. For omnibus plans, unless limitations are placed on the most expensive types of awards (for example, full-value awards), the assumption is made that all awards to be granted will be the most expensive types.
For proposals that are not subject to the Equity Plan Scorecard evaluation, Shareholder Value Transfer is reasonable if it falls below a company-specific benchmark. The benchmark is determined as follows: The top quartile performers in each industry group (using the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for each industry are established based on these top performers’ historic SVT. Regression analyses are run on each industry group to identify the variables most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging the company- specific performance measures, size, and cash compensation into the industry cap equations to arrive at the company’s benchmark.22
Three-Year Value-Adjusted Burn Rate
A "Value-Adjusted Burn Rate" is used for stock plan evaluations. Value-Adjusted Burn Rate benchmarks are calculated as the greater of: (1) an industry-specific threshold based on three-year burn rates within the company's GICS group segmented by S&P 500, Russell 3000 index (less the S&P 500) and non-Russell 3000 index; and (2) a de minimis threshold established separately for each of the S&P 500, the Russell 3000 index less the S&P 500, and the non-Russell 3000 index. Year-over-year burn-rate benchmark changes will be limited to a predetermined range above or below the prior year's burn-rate benchmark.
The Value-Adjusted Burn Rate is calculated as follows:
Value-Adjusted Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards * stock price)) / (Weighted average common shares * stock price).
| 22 | For plans evaluated under the Equity Plan Scorecard policy, the company's SVT benchmark is considered along with other factors. |
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Egregious Factors
Liberal Change in Control Definition
Generally vote against equity plans if the plan has a liberal definition of change in control and the equity awards could vest upon such liberal definition of change in control, even though an actual change in control may not occur. Examples of such a definition include, but are not limited to, announcement or commencement of a tender offer, provisions for acceleration upon a “potential” takeover, shareholder approval of a merger or other transactions, or similar language.
Repricing Provisions
Vote against plans that expressly permit the repricing or exchange of underwater stock options/stock appreciate rights (SARs) without prior shareholder approval. "Repricing" typically includes the ability to do any of the following:
| ■ | Amend the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs; |
| ■ | Cancel outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise price of the original options or SARs; |
| ■ | Cancel underwater options in exchange for stock awards; or |
| ■ | Provide cash buyouts of underwater options. |
While the above cover most types of repricing, ISS may view other provisions as akin to repricing depending on the facts and circumstances.
Also, vote against or withhold from members of the Compensation Committee who approved repricing (as defined above or otherwise determined by ISS), without prior shareholder approval, even if such repricings are allowed in their equity plan.
Vote against plans that do not expressly prohibit repricing or cash buyout of underwater options without shareholder approval if the company has a history of repricing/buyouts without shareholder approval, and the applicable listing standards would not preclude them from doing so.
Problematic Pay Practices or Significant Pay-for-Performance Disconnect
If the equity plan on the ballot is a vehicle for problematic pay practices, vote against the plan.
ISS may recommend a vote against the equity plan if the plan is determined to be a vehicle for pay-for-performance misalignment. Considerations in voting against the equity plan may include, but are not limited to:
| ■ | Severity of the pay-for-performance misalignment; |
| ■ | Whether problematic equity grant practices are driving the misalignment; and/or |
| ■ | Whether equity plan awards have been heavily concentrated to the CEO and/or the other NEOs. |
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Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m))
General Recommendation: Vote case-by-case on amendments to cash and equity incentive plans.
Generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
| ■ | Addresses administrative features only; or |
| ■ | Seeks approval for Section 162(m) purposes only, and the plan administering committee consists entirely of independent directors, per ISS’ Classification of Directors. Note that if the company is presenting the plan to shareholders for the first time for any reason (including after the company’s initial public offering), or if the proposal is bundled with other material plan amendments, then the recommendation will be case-by-case (see below). |
Vote against proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
| ■ | Seeks approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of independent directors, per ISS’ Classification of Directors. |
Vote case-by-case on all other proposals to amend cash incentive plans. This includes plans presented to shareholders for the first time after the company's IPO and/or proposals that bundle material amendment(s) other than those for Section 162(m) purposes.
Vote case-by-case on all other proposals to amend equity incentive plans, considering the following:
| ■ | If the proposal requests additional shares and/or the amendments include a term extension or addition of full value awards as an award type, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of the amendments; |
| ■ | If the plan is being presented to shareholders for the first time (including after the company's IPO), whether or not additional shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of any amendments; and |
| ■ | If there is no request for additional shares and the amendments do not include a term extension or addition of full value awards as an award type, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the EPSC evaluation will be shown only for informational purposes. |
In the first two case-by-case evaluation scenarios, the EPSC evaluation/score is the more heavily weighted consideration.
Specific Treatment of Certain Award Types in Equity Plan Evaluations
Dividend Equivalent Rights
Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder equity to employees and non-employee directors and this cost should be captured.
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Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs)
For Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion of outstanding Operating Partnership (OP) units in the share count for the purposes of determining: (1) market capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.
Other Compensation Plans
401(k) Employee Benefit Plans
General Recommendation: Vote for proposals to implement a 401(k) savings plan for employees.
Employee Stock Ownership Plans (ESOPs)
General Recommendation: Vote for proposals to implement an ESOP or increase authorized shares for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares).
Employee Stock Purchase Plans—Qualified Plans
General Recommendation: Vote case-by-case on qualified employee stock purchase plans. Vote for employee stock purchase plans where all of the following apply:
| ■ | Purchase price is at least 85 percent of fair market value; |
| ■ | Offering period is 27 months or less; and |
| ■ | The number of shares allocated to the plan is 10 percent or less of the outstanding shares. |
Vote against qualified employee stock purchase plans where when the plan features do not meet all of the above criteria.
Employee Stock Purchase Plans—Non-Qualified Plans
General Recommendation: Vote case-by-case on nonqualified employee stock purchase plans. Vote for nonqualified employee stock purchase plans with all the following features:
| ■ | Broad-based participation; |
| ■ | Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary; |
| ■ | Company matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of 20 percent from market value; and |
| ■ | No discount on the stock price on the date of purchase when there is a company matching contribution. |
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Vote against nonqualified employee stock purchase plans when the plan features do not meet all of the above criteria. If the matching contribution or effective discount exceeds the above, ISS may evaluate the SVT cost of the plan as part of the assessment.
Option Exchange Programs/Repricing Options
General Recommendation: Vote case-by-case on management proposals seeking approval to exchange/reprice options taking into consideration:
| ■ | Historic trading patterns--the stock price should not be so volatile that the options are likely to be back “in-the-money” over the near term; |
| ■ | Rationale for the re-pricing--was the stock price decline beyond management's control?; |
| ■ | Is this a value-for-value exchange?; |
| ■ | Are surrendered stock options added back to the plan reserve?; |
| ■ | Timing--repricing should occur at least one year out from any precipitous drop in company's stock price; |
| ■ | Option vesting--does the new option vest immediately or is there a black-out period?; |
| ■ | Term of the option--the term should remain the same as that of the replaced option; |
| ■ | Exercise price--should be set at fair market or a premium to market; and |
| ■ | Participants--executive officers and directors must be excluded. |
If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration the company’s total cost of equity plans and its three-year average burn rate.
In addition to the above considerations, evaluate the intent, rationale, and timing of the repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous drop in the company’s stock price demonstrates poor timing and warrants additional scrutiny. Also, consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to suggest that repricings are being done to take advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the 52-week high for the stock price.
Vote for shareholder proposals to put option repricings to a shareholder vote.
Stock Plans in Lieu of Cash
General Recommendation: Vote case-by-case on plans that provide participants with the option of taking all or a portion of their cash compensation in the form of stock.
Vote for non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.
Vote case-by-case on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is not dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture the total cost of total compensation, ISS will not make any adjustments to carve out the in-lieu-of cash compensation.
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Transfer Stock Option (TSO) Programs
General Recommendation: One-time Transfers: Vote against or withhold from compensation committee members if they fail to submit one-time transfers to shareholders for approval.
Vote case-by-case on one-time transfers. Vote for if:
| ■ | Executive officers and non-employee directors are excluded from participating; |
| ■ | Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; and |
| ■ | There is a two-year minimum holding period for sale proceeds (cash or stock) for all participants. |
Additionally, management should provide a clear explanation of why options are being transferred to a third-party institution and whether the events leading up to a decline in stock price were beyond management's control. A review of the company's historic stock price volatility should indicate if the options are likely to be back “in-the-money” over the near term.
Ongoing TSO program: Vote against equity plan proposals if the details of ongoing TSO programs are not provided to shareholders. Since TSOs will be one of the award types under a stock plan, the ongoing TSO program, structure, and mechanics must be disclosed to shareholders. The specific criteria to be considered in evaluating these proposals include, but not limited, to the following:
| ■ | Eligibility; |
| ■ | Vesting; |
| ■ | Bid-price; |
| ■ | Term of options; |
| ■ | Cost of the program and impact of the TSOs on company’s total option expense; and |
| ■ | Option repricing policy. |
Amendments to existing plans that allow for introduction of transferability of stock options should make clear that only options granted post-amendment shall be transferable.
Director Compensation
Shareholder Ratification of Director Pay Programs
General Recommendation: Vote case-by-case on management proposals seeking ratification of non-employee director compensation, based on the following factors:
| ■ | If the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support; and |
| ■ | An assessment of the following qualitative factors: |
| ■ | The relative magnitude of director compensation as compared to companies of a similar profile; |
| ■ | The presence of problematic pay practices relating to director compensation; |
| ■ | Director stock ownership guidelines and holding requirements; |
| ■ | Equity award vesting schedules; |
| ■ | The mix of cash and equity-based compensation; |
| ■ | Meaningful limits on director compensation; |
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| ■ | The availability of retirement benefits or perquisites; and |
| ■ | The quality of disclosure surrounding director compensation. |
Equity Plans for Non-Employee Directors
General Recommendation: Vote case-by-case on compensation plans for non-employee directors, based on:
| ■ | The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; |
| ■ | The company’s three-year burn rate relative to its industry/market cap peers (in certain circumstances); and |
| ■ | The presence of any egregious plan features (such as an option repricing provision or liberal CIC vesting risk). |
On occasion, non-employee director stock plans will exceed the plan cost or burn-rate benchmarks when combined with employee or executive stock plans. In such cases, vote case-by-case on the plan taking into consideration the following qualitative factors:
| ■ | The relative magnitude of director compensation as compared to companies of a similar profile; |
| ■ | The presence of problematic pay practices relating to director compensation; |
| ■ | Director stock ownership guidelines and holding requirements; |
| ■ | Equity award vesting schedules; |
| ■ | The mix of cash and equity-based compensation; |
| ■ | Meaningful limits on director compensation; |
| ■ | The availability of retirement benefits or perquisites; and |
| ■ | The quality of disclosure surrounding director compensation. |
Non-Employee Director Retirement Plans
General Recommendation: Vote against retirement plans for non-employee directors. Vote for shareholder proposals to eliminate retirement plans for non-employee directors.
Shareholder Proposals on Compensation
Bonus Banking/Bonus Banking “Plus”
General Recommendation: Vote case-by-case on proposals seeking deferral of a portion of annual bonus pay, with ultimate payout linked to sustained results for the performance metrics on which the bonus was earned (whether for the named executive officers or a wider group of employees), taking into account the following factors:
| ■ | The company’s past practices regarding equity and cash compensation; |
| ■ | Whether the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio (at least 50 percent for full tenure); and |
| ■ | Whether the company has a rigorous claw-back policy in place. |
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Compensation Consultants—Disclosure of Board or Company’s Utilization
General Recommendation: Generally vote for shareholder proposals seeking disclosure regarding the company, board, or compensation committee’s use of compensation consultants, such as company name, business relationship(s), and fees paid.
Disclosure/Setting Levels or Types of Compensation for Executives and Directors
General Recommendation: Generally vote for shareholder proposals seeking additional disclosure of executive and director pay information, provided the information requested is relevant to shareholders' needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company.
Generally vote against shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of compensation (such as types of compensation elements or specific metrics) to be used for executive or directors.
Generally vote against shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
Vote case-by-case on all other shareholder proposals regarding executive and director pay, taking into account relevant factors, including but not limited to: company performance, pay level and design versus peers, history of compensation concerns or pay-for-performance disconnect, and/or the scope and prescriptive nature of the proposal.
Golden Coffins/Executive Death Benefits
General Recommendation: Generally vote for proposals calling for companies to adopt a policy of obtaining shareholder approval for any future agreements and corporate policies that could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses, accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals for which the broad-based employee population is eligible.
Hold Equity Past Retirement or for a Significant Period of Time
General Recommendation: Vote case-by-case on shareholder proposals asking companies to adopt policies requiring senior executive officers to retain a portion of net shares acquired through compensation plans. The following factors will be taken into account:
| ■ | The percentage/ratio of net shares required to be retained; |
| ■ | The time period required to retain the shares; |
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| ■ | Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness of such requirements; |
| ■ | Whether the company has any other policies aimed at mitigating risk taking by executives; |
| ■ | Executives' actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding period/retention ratio or the company’s existing requirements; and |
| ■ | Problematic pay practices, current and past, which may demonstrate a short-term versus long-term focus. |
Pay Disparity
General Recommendation: Vote case-by-case on proposals calling for an analysis of the pay disparity between corporate executives and other non-executive employees. The following factors will be considered:
| ■ | The company’s current level of disclosure of its executive compensation setting process, including how the company considers pay disparity; |
| ■ | If any problematic pay practices or pay-for-performance concerns have been identified at the company; and |
| ■ | The level of shareholder support for the company's pay programs. |
Generally vote against proposals calling for the company to use the pay disparity analysis or pay ratio in a specific way to set or limit executive pay.
Pay for Performance/Performance-Based Awards
General Recommendation: Vote case-by-case on shareholder proposals requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be performance-based and requesting that the board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps:
| ■ | First, vote for shareholder proposals advocating the use of performance-based equity awards, such as performance contingent options or restricted stock, indexed options, or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a “substantial” portion of performance-based awards for its top executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a meaningful premium to be considered performance-based awards; and |
| ■ | Second, assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based program is too low based on the company’s historical or peer group comparison, generally vote for the proposal. Furthermore, if target performance results in an above target payout, vote for the shareholder proposal due to program’s poor design. If the company does not disclose the performance metric of the performance-based equity program, vote for the shareholder proposal regardless of the outcome of the first step to the test. |
In general, vote for the shareholder proposal if the company does not meet both of the above two steps.
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Pay for Superior Performance
General Recommendation: Vote case-by-case on shareholder proposals that request the board establish a pay-for-superior performance standard in the company's executive compensation plan for senior executives. These proposals generally include the following principles:
| ■ | Set compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group median; |
| ■ | Deliver a majority of the plan’s target long-term compensation through performance-vested, not simply time-vested, equity awards; |
| ■ | Provide the strategic rationale and relative weightings of the financial and non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the plan; |
| ■ | Establish performance targets for each plan financial metric relative to the performance of the company’s peer companies; and |
| ■ | Limit payment under the annual and performance-vested long-term incentive components of the plan to when the company’s performance on its selected financial performance metrics exceeds peer group median performance. |
Consider the following factors in evaluating this proposal:
| ■ | What aspects of the company’s annual and long-term equity incentive programs are performance driven? |
| ■ | If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates disclosed to shareholders or are they benchmarked against a disclosed peer group? |
| ■ | Can shareholders assess the correlation between pay and performance based on the current disclosure? and |
| ■ | What type of industry and stage of business cycle does the company belong to? |
Pre-Arranged Trading Plans (10b5-1 Plans)
General Recommendation: Generally vote for shareholder proposals calling for the addition of certain safeguards in prearranged trading plans (10b5-1 plans) for executives. Safeguards may include:
| ■ | Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed in a Form 8-K; |
| ■ | Amendment or early termination of a 10b5-1 Plan allowed only under extraordinary circumstances, as determined by the board; |
| ■ | Request that a certain number of days that must elapse between adoption or amendment of a 10b5-1 Plan and initial trading under the plan; |
| ■ | Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan; |
| ■ | An executive may not trade in company stock outside the 10b5-1 Plan; and |
| ■ | Trades under a 10b5-1 Plan must be handled by a broker who does not handle other securities transactions for the executive. |
Prohibit Outside CEOs from Serving on Compensation Committees
General Recommendation: Generally vote against proposals seeking a policy to prohibit any outside CEO from serving on a company’s compensation committee, unless the company has demonstrated problematic pay practices that raise concerns about the performance and composition of the committee.
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Recoupment of Incentive or Stock Compensation in Specified Circumstances
General Recommendation: Vote case-by-case on proposals to recoup incentive cash or stock compensation made to senior executives if it is later determined that the figures upon which incentive compensation is earned turn out to have been in error, or if the senior executive has breached company policy or has engaged in misconduct that may be significantly detrimental to the company's financial position or reputation, or if the senior executive failed to manage or monitor risks that subsequently led to significant financial or reputational harm to the company. Many companies have adopted policies that permit recoupment in cases where an executive's fraud, misconduct, or negligence significantly contributed to a restatement of financial results that led to the awarding of unearned incentive compensation. However, such policies may be narrow given that not all misconduct or negligence may result in significant financial restatements. Misconduct, negligence, or lack of sufficient oversight by senior executives may lead to significant financial loss or reputational damage that may have long-lasting impact.
In considering whether to support such shareholder proposals, ISS will take into consideration the following factors:
| ■ | If the company has adopted a formal recoupment policy; |
| ■ | The rigor of the recoupment policy focusing on how and under what circumstances the company may recoup incentive or stock compensation; |
| ■ | Whether the company has chronic restatement history or material financial problems; |
| ■ | Whether the company’s policy substantially addresses the concerns raised by the proponent; |
| ■ | Disclosure of recoupment of incentive or stock compensation from senior executives or lack thereof; and |
| ■ | Any other relevant factors. |
Severance and Golden Parachute Agreements
General Recommendation: Vote case-by-case on shareholder proposals requiring that executive severance (including change-in-control related) arrangements or payments be submitted for shareholder ratification.
Factors that will be considered include, but are not limited to:
| ■ | The company’s severance or change-in-control agreements in place, and the presence of problematic features (such as excessive severance entitlements, single triggers, excise tax gross-ups, etc.); |
| ■ | Any existing limits on cash severance payouts or policies which require shareholder ratification of severance payments exceeding a certain level; |
| ■ | Any recent severance-related controversies; and |
| ■ | Whether the proposal is overly prescriptive, such as requiring shareholder approval of severance that does not exceed market norms. |
Share Buyback Impact on Incentive Program Metrics
General Recommendation: Vote case-by-case on proposals requesting the company exclude the impact of share buybacks from the calculation of incentive program metrics, considering the following factors:
| ■ | The frequency and timing of the company's share buybacks; |
| ■ | The use of per-share metrics in incentive plans; |
| ■ | The effect of recent buybacks on incentive metric results and payouts; and |
| ■ | Whether there is any indication of metric result manipulation. |
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Supplemental Executive Retirement Plans (SERPs)
General Recommendation: Generally vote for shareholder proposals requesting to put extraordinary benefits contained in SERP agreements to a shareholder vote unless the company’s executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
Generally vote for shareholder proposals requesting to limit the executive benefits provided under the company’s supplemental executive retirement plan (SERP) by limiting covered compensation to a senior executive’s annual salary or those pay elements covered for the general employee population.
Tax Gross-Up Proposals
General Recommendation: Generally vote for proposals calling for companies to adopt a policy of not providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement applicable to management employees of the company, such as a relocation or expatriate tax equalization policy.
Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity
General Recommendation: Vote case-by-case on shareholder proposals seeking a policy requiring termination of employment prior to severance payment and/or eliminating accelerated vesting of unvested equity.
The following factors will be considered:
| ■ | The company's current treatment of equity upon employment termination and/or in change-in-control situations (i.e., vesting is double triggered and/or pro rata, does it allow for the assumption of equity by acquiring company, the treatment of performance shares, etc.); and |
| ■ | Current employment agreements, including potential poor pay practices such as gross-ups embedded in those agreements. |
Generally vote for proposals seeking a policy that prohibits automatic acceleration of the vesting of equity awards to senior executives upon a voluntary termination of employment or in the event of a change in control (except for pro rata vesting considering the time elapsed and attainment of any related performance goals between the award date and the change in control).
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| 6. | Routine/Miscellaneous |
Adjourn Meeting
General Recommendation: Generally vote against proposals to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal.
Vote for proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. Vote against proposals if the wording is too vague or if the proposal includes "other business."
Amend Quorum Requirements
General Recommendation: Vote case-by-case on proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding, taking into consideration:
| ■ | The new quorum threshold requested; |
| ■ | The rationale presented for the reduction; |
| ■ | The market capitalization of the company (size, inclusion in indices); |
| ■ | The company's ownership structure; |
| ■ | Previous voter turnout or attempts to achieve quorum; |
| ■ | Any provisions or commitments to restore quorum to a majority of shares outstanding, should voter turnout improve sufficiently; and |
| ■ | Other factors as appropriate. |
In general, a quorum threshold kept as close to a majority of shares outstanding as is achievable is preferred.
Vote case-by-case on directors who unilaterally lower the quorum requirements below a majority of the shares outstanding, taking into consideration the factors listed above.
Amend Minor Bylaws
General Recommendation: Vote for bylaw or charter changes that are of a housekeeping nature (updates or corrections).
Change Company Name
General Recommendation: Vote for proposals to change the corporate name unless there is compelling evidence that the change would adversely impact shareholder value.
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Change Date, Time, or Location of Annual Meeting
General Recommendation: Vote for management proposals to change the date, time, or location of the annual meeting unless the proposed change is unreasonable.
Vote against shareholder proposals to change the date, time, or location of the annual meeting unless the current scheduling or location is unreasonable.
Other Business
General Recommendation: Vote against proposals to approve other business when it appears as a voting item.
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| 7. | Social and Environmental Issues |
Global Approach – E&S Shareholder Proposals
ISS applies a common approach globally to evaluating social and environmental proposals which cover a wide range of topics, including consumer and product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a variety of factors goes into each analysis, the overall principle guiding all vote recommendations focuses on how the proposal may enhance or protect shareholder value in either the short or long term.
General Recommendation: Generally vote case-by-case, examining primarily whether implementation of the proposal is likely to enhance or protect shareholder value. The following factors will be considered:
| ■ | If the issues presented in the proposal are being appropriately or effectively dealt with through legislation or government regulation; |
| ■ | If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal; |
| ■ | Whether the proposal's request is unduly burdensome (scope or timeframe) or overly prescriptive; |
| ■ | The company's approach compared with any industry standard practices for addressing the issue(s) raised by the proposal; |
| ■ | Whether there are significant controversies, fines, penalties, or litigation associated with the company's practices related to the issue(s) raised in the proposal; |
| ■ | If the proposal requests increased disclosure or greater transparency, whether reasonable and sufficient information is currently available to shareholders from the company or from other publicly available sources; and |
| ■ | If the proposal requests increased disclosure or greater transparency, whether implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage. |
Endorsement of Principles
General Recommendation: Generally vote against proposals seeking a company's endorsement of principles that support a particular public policy position. Endorsing a set of principles may require a company to take a stand on an issue that is beyond its own control and may limit its flexibility with respect to future developments. Management and the board should be afforded the flexibility to make decisions on specific public policy positions based on their own assessment of the most beneficial strategies for the company.
Animal Welfare
Animal Welfare Policies
General Recommendation: Generally vote for proposals seeking a report on a company’s animal welfare standards, or animal welfare-related risks, unless:
| ■ | The company has already published a set of animal welfare standards and monitors compliance; |
| ■ | The company’s standards are comparable to industry peers; and |
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| ■ | There are no recent significant fines, litigation, or controversies related to the company’s and/or its suppliers' treatment of animals. |
Animal Testing
General Recommendation: Generally vote against proposals to phase out the use of animals in product testing, unless:
| ■ | The company is conducting animal testing programs that are unnecessary or not required by regulation; |
| ■ | The company is conducting animal testing when suitable alternatives are commonly accepted and used by industry peers; or |
| ■ | There are recent, significant fines or litigation related to the company’s treatment of animals. |
Animal Slaughter
General Recommendation: Generally vote against proposals requesting the implementation of Controlled Atmosphere Killing (CAK) methods at company and/or supplier operations unless such methods are required by legislation or generally accepted as the industry standard.
Vote case-by-case on proposals requesting a report on the feasibility of implementing CAK methods at company and/or supplier operations considering the availability of existing research conducted by the company or industry groups on this topic and any fines or litigation related to current animal processing procedures at the company.
Consumer Issues
Genetically Modified Ingredients
General Recommendation: Generally vote against proposals requesting that a company voluntarily label genetically engineered (GE) ingredients in its products. The labeling of products with GE ingredients is best left to the appropriate regulatory authorities.
Vote case-by-case on proposals asking for a report on the feasibility of labeling products containing GE ingredients, taking into account:
| ■ | The potential impact of such labeling on the company's business; |
| ■ | The quality of the company’s disclosure on GE product labeling, related voluntary initiatives, and how this disclosure compares with industry peer disclosure; and |
| ■ | Company’s current disclosure on the feasibility of GE product labeling. |
Generally vote against proposals seeking a report on the social, health, and environmental effects of genetically modified organisms (GMOs). Studies of this sort are better undertaken by regulators and the scientific community.
Generally vote against proposals to eliminate GE ingredients from the company's products, or proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the company’s products. Such decisions are more appropriately made by management with consideration of current regulations.
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Reports on Potentially Controversial Business/Financial Practices
General Recommendation: Vote case-by-case on requests for reports on a company’s potentially controversial business or financial practices or products, taking into account:
| ■ | Whether the company has adequately disclosed mechanisms in place to prevent abuses; |
| ■ | Whether the company has adequately disclosed the financial risks of the products/practices in question; |
| ■ | Whether the company has been subject to violations of related laws or serious controversies; and |
| ■ | Peer companies’ policies/practices in this area. |
Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation
General Recommendation: Generally vote against proposals requesting that companies implement specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry norms in its product pricing practices.
Vote case-by-case on proposals requesting that a company report on its product pricing or access to medicine policies, considering:
| ■ | The potential for reputational, market, and regulatory risk exposure; |
| ■ | Existing disclosure of relevant policies; |
| ■ | Deviation from established industry norms; |
| ■ | Relevant company initiatives to provide research and/or products to disadvantaged consumers; |
| ■ | Whether the proposal focuses on specific products or geographic regions; |
| ■ | The potential burden and scope of the requested report; and |
| ■ | Recent significant controversies, litigation, or fines at the company. |
Generally vote for proposals requesting that a company report on the financial and legal impact of its prescription drug reimportation policies unless such information is already publicly disclosed.
Generally vote against proposals requesting that companies adopt specific policies to encourage or constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and may place the company at a competitive disadvantage relative to its peers.
Product Safety and Toxic/Hazardous Materials
General Recommendation: Generally vote for proposals requesting that a company report on its policies, initiatives/procedures, and oversight mechanisms related to toxic/hazardous materials or product safety in its supply chain, unless:
| ■ | The company already discloses similar information through existing reports such as a supplier code of conduct and/or a sustainability report; |
| ■ | The company has formally committed to the implementation of a toxic/hazardous materials and/or product safety and supply chain reporting and monitoring program based on industry norms or similar standards within a specified time frame; or |
| ■ | The company has not been recently involved in relevant significant controversies, fines, or litigation. |
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Vote case-by-case on resolutions requesting that companies develop a feasibility assessment to phase-out of certain toxic/hazardous materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials, considering:
| ■ | The company’s current level of disclosure regarding its product safety policies, initiatives, and oversight mechanisms; |
| ■ | Current regulations in the markets in which the company operates; and |
| ■ | Recent significant controversies, litigation, or fines stemming from toxic/hazardous materials at the company. |
Generally vote against resolutions requiring that a company reformulate its products.
Tobacco-Related Proposals
General Recommendation: Vote case-by-case on resolutions regarding the advertisement of tobacco products, considering:
| ■ | Recent related fines, controversies, or significant litigation; |
| ■ | Whether the company complies with relevant laws and regulations on the marketing of tobacco; |
| ■ | Whether the company’s advertising restrictions deviate from those of industry peers; |
| ■ | Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth; and |
| ■ | Whether restrictions on marketing to youth extend to foreign countries. |
Vote case-by-case on proposals regarding second-hand smoke, considering;
| ■ | Whether the company complies with all laws and regulations; |
| ■ | The degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness; and |
| ■ | The risk of any health-related liabilities. |
Generally vote against resolutions to cease production of tobacco-related products, to avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such business decisions are better left to company management or portfolio managers.
Generally vote against proposals regarding tobacco product warnings. Such decisions are better left to public health authorities.
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Climate Change
Say on Climate (SoC) Management Proposals
General Recommendation: Vote case-by-case on management proposals that request shareholders to approve
the company’s climate transition action plan23, taking into account the completeness and rigor of the plan. Information that will be considered where available includes the following:
| ■ | The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other market standards; |
| ■ | Disclosure of its operational and supply chain GHG emissions (Scopes 1, 2, and 3); |
| ■ | The completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply chain GHG emissions (Scopes 1, 2, and 3 if relevant); |
| ■ | Whether the company has sought and received third-party approval that its targets are science-based; |
| ■ | Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2, and 3) by 2050; |
| ■ | Whether the company discloses a commitment to report on the implementation of its plan in subsequent years; |
| ■ | Whether the company’s climate data has received third-party assurance; |
| ■ | Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy; |
| ■ | Whether there are specific industry decarbonization challenges; and |
| ■ | The company’s related commitment, disclosure, and performance compared to its industry peers. |
Say on Climate (SoC) Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan, taking into account information such as the following:
| ■ | The completeness and rigor of the company’s climate-related disclosure; |
| ■ | The company’s actual GHG emissions performance; |
| ■ | Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to its GHG emissions; and |
| ■ | Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive. |
Climate Change/Greenhouse Gas (GHG) Emissions
General Recommendation: Generally vote for resolutions requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its operations and investments or on how the company identifies, measures, and manages such risks, considering:
| ■ | Whether the company already provides current, publicly-available information on the impact that climate change may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; |
| 23 | Variations of this request also include climate transition related ambitions, or commitment to reporting on the implementation of a climate plan. |
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| ■ | The company's level of disclosure compared to industry peers; and |
| ■ | Whether there are significant controversies, fines, penalties, or litigation associated with the company's climate change-related performance. |
Generally vote for proposals requesting a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless:
| ■ | The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; |
| ■ | The company's level of disclosure is comparable to that of industry peers; or |
| ■ | There are no significant, controversies, fines, penalties, or litigation associated with the company's GHG emissions. |
Vote case-by-case on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:
| ■ | Whether the company provides disclosure of year-over-year GHG emissions performance data; |
| ■ | Whether company disclosure lags behind industry peers; |
| ■ | The company's actual GHG emissions performance; |
| ■ | The company's current GHG emission policies, oversight mechanisms, and related initiatives; and |
| ■ | Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions. |
Energy Efficiency
General Recommendation: Generally vote for proposals requesting that a company report on its energy efficiency policies, unless:
| ■ | The company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or |
| ■ | The proponent requests adoption of specific energy efficiency goals within specific timelines. |
Renewable Energy
General Recommendation: Generally vote for requests for reports on the feasibility of developing renewable energy resources unless the report would be duplicative of existing disclosure or irrelevant to the company’s line of business.
Generally vote against proposals requesting that the company invest in renewable energy resources. Such decisions are best left to management’s evaluation of the feasibility and financial impact that such programs may have on the company.
Generally vote against proposals that call for the adoption of renewable energy goals, taking into account:
| ■ | The scope and structure of the proposal; |
| ■ | The company's current level of disclosure on renewable energy use and GHG emissions; and |
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| ■ | The company's disclosure of policies, practices, and oversight implemented to manage GHG emissions and mitigate climate change risks. |
Diversity
Board Diversity
General Recommendation: Generally vote for requests for reports on a company's efforts to diversify the board, unless:
| ■ | The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; or |
| ■ | The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company. |
Vote case-by-case on proposals asking a company to increase the gender and racial minority representation on its board, taking into account:
| ■ | The degree of existing gender and racial minority diversity on the company’s board and among its executive officers; |
| ■ | The level of gender and racial minority representation that exists at the company’s industry peers; |
| ■ | The company’s established process for addressing gender and racial minority board representation; |
| ■ | Whether the proposal includes an overly prescriptive request to amend nominating committee charter language; |
| ■ | The independence of the company’s nominating committee; |
| ■ | Whether the company uses an outside search firm to identify potential director nominees; and |
| ■ | Whether the company has had recent controversies, fines, or litigation regarding equal employment practices. |
Equality of Opportunity
General Recommendation: Generally vote for proposals requesting a company disclose its diversity policies or initiatives, or proposals requesting disclosure of a company’s comprehensive workforce diversity data, including requests for EEO-1 data, unless:
| ■ | The company publicly discloses equal opportunity policies and initiatives in a comprehensive manner; |
| ■ | The company already publicly discloses comprehensive workforce diversity data; or |
| ■ | The company has no recent significant EEO-related violations or litigation. |
Generally vote against proposals seeking information on the diversity efforts of suppliers and service providers. Such requests may pose a significant burden on the company.
Gender Identity, Sexual Orientation, and Domestic Partner Benefits
General Recommendation: Generally vote for proposals seeking to amend a company’s EEO statement or diversity policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would be unduly burdensome.
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Generally vote against proposals to extend company benefits to, or eliminate benefits from, domestic partners. Decisions regarding benefits should be left to the discretion of the company.
Gender, Race/Ethnicity Pay Gap
General Recommendation: Vote case-by-case on requests for reports on a company's pay data by gender or race/ethnicity, or a report on a company’s policies and goals to reduce any gender or race/ethnicity pay gaps, taking into account:
| ■ | The company's current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy on fair and equitable compensation practices; |
| ■ | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race, or ethnicity pay gap issues; |
| ■ | The company’s disclosure regarding gender, race, or ethnicity pay gap policies or initiatives compared to its industry peers; and |
| ■ | Local laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities. |
Racial Equity and/or Civil Rights Audit Guidelines
General Recommendation: Vote case-by-case on proposals asking a company to conduct an independent racial equity and/or civil rights audit, taking into account:
| ■ | The company’s established process or framework for addressing racial inequity and discrimination internally; |
| ■ | Whether the company adequately discloses workforce diversity and inclusion metrics and goals; |
| ■ | Whether the company has issued a public statement related to its racial justice efforts in recent years, or has committed to internal policy review; |
| ■ | Whether the company has engaged with impacted communities, stakeholders, and civil rights experts; |
| ■ | The company’s track record in recent years of racial justice measures and outreach externally; and |
| ■ | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to racial inequity or discrimination. |
Environment and Sustainability
Facility and Workplace Safety
General Recommendation: Vote case-by-case on requests for workplace safety reports, including reports on accident risk reduction efforts, taking into account:
| ■ | The company’s current level of disclosure of its workplace health and safety performance data, health and safety management policies, initiatives, and oversight mechanisms; |
| ■ | The nature of the company’s business, specifically regarding company and employee exposure to health and safety risks; |
| ■ | Recent significant controversies, fines, or violations related to workplace health and safety; and |
| ■ | The company's workplace health and safety performance relative to industry peers. |
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Vote case-by-case on resolutions requesting that a company report on safety and/or security risks associated with its operations and/or facilities, considering:
| ■ | The company’s compliance with applicable regulations and guidelines; |
| ■ | The company’s current level of disclosure regarding its security and safety policies, procedures, and compliance monitoring; and |
| ■ | The existence of recent, significant violations, fines, or controversy regarding the safety and security of the company’s operations and/or facilities. |
General Environmental Proposals and Community Impact Assessments
General Recommendation: Vote case-by-case on requests for reports on policies and/or the potential (community) social and/or environmental impact of company operations, considering:
| ■ | Current disclosure of applicable policies and risk assessment report(s) and risk management procedures; |
| ■ | The impact of regulatory non-compliance, litigation, remediation, or reputational loss that may be associated with failure to manage the company’s operations in question, including the management of relevant community and stakeholder relations; |
| ■ | The nature, purpose, and scope of the company’s operations in the specific region(s); |
| ■ | The degree to which company policies and procedures are consistent with industry norms; and |
| ■ | The scope of the resolution. |
Hydraulic Fracturing
General Recommendation: Generally vote for proposals requesting greater disclosure of a company's (natural gas) hydraulic fracturing operations, including measures the company has taken to manage and mitigate the potential community and environmental impacts of those operations, considering:
| ■ | The company's current level of disclosure of relevant policies and oversight mechanisms; |
| ■ | The company's current level of such disclosure relative to its industry peers; |
| ■ | Potential relevant local, state, or national regulatory developments; and |
| ■ | Controversies, fines, or litigation related to the company's hydraulic fracturing operations. |
Operations in Protected Areas
General Recommendation: Generally vote for requests for reports on potential environmental damage as a result of company operations in protected regions, unless:
| ■ | Operations in the specified regions are not permitted by current laws or regulations; |
| ■ | The company does not currently have operations or plans to develop operations in these protected regions; or |
| ■ | The company’s disclosure of its operations and environmental policies in these regions is comparable to industry peers. |
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Recycling
General Recommendation: Vote case-by-case on proposals to report on an existing recycling program, or adopt a new recycling program, taking into account:
| ■ | The nature of the company’s business; |
| ■ | The current level of disclosure of the company's existing related programs; |
| ■ | The timetable and methods of program implementation prescribed by the proposal; |
| ■ | The company’s ability to address the issues raised in the proposal; and |
| ■ | How the company's recycling programs compare to similar programs of its industry peers. |
Sustainability Reporting
General Recommendation: Generally vote for proposals requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental sustainability, unless:
| ■ | The company already discloses similar information through existing reports or policies such as an environment, health, and safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report; or |
| ■ | The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI) guidelines or a similar standard within a specified time frame. |
Water Issues
General Recommendation: Vote case-by-case on proposals requesting a company report on, or adopt a new policy on, water-related risks and concerns, taking into account:
| ■ | The company's current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics; |
| ■ | Whether or not the company's existing water-related policies and practices are consistent with relevant internationally recognized standards and national/local regulations; |
| ■ | The potential financial impact or risk to the company associated with water-related concerns or issues; and |
| ■ | Recent, significant company controversies, fines, or litigation regarding water use by the company and its suppliers. |
General Corporate Issues
Charitable Contributions
General Recommendation: Vote against proposals restricting a company from making charitable contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence, management should determine which, and if, contributions are in the best interests of the company.
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Data Security, Privacy, and Internet Issues
General Recommendation: Vote case-by-case on proposals requesting the disclosure or implementation of data security, privacy, or information access and management policies and procedures, considering:
| ■ | The level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech, information access and management, and Internet censorship; |
| ■ | Engagement in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow of information on the Internet; |
| ■ | The scope of business involvement and of investment in countries whose governments censor or monitor the Internet and other telecommunications; |
| ■ | Applicable market-specific laws or regulations that may be imposed on the company; and |
| ■ | Controversies, fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship. |
ESG Compensation-Related Proposals
General Recommendation: Vote case-by-case on proposals seeking a report or additional disclosure on the company's approach, policies, and practices on incorporating environmental and social criteria into its executive compensation strategy, considering:
| ■ | The scope and prescriptive nature of the proposal; |
| ■ | The company's current level of disclosure regarding its environmental and social performance and governance; |
| ■ | The degree to which the board or compensation committee already discloses information on whether it has considered related E&S criteria; and |
| ■ | Whether the company has significant controversies or regulatory violations regarding social or environmental issues. |
Human Rights, Human Capital Management, and International Operations
Human Rights Proposals
General Recommendation: Generally vote for proposals requesting a report on company or company supplier labor and/or human rights standards and policies unless such information is already publicly disclosed.
Vote case-by-case on proposals to implement company or company supplier labor and/or human rights standards and policies, considering:
| ■ | The degree to which existing relevant policies and practices are disclosed; |
| ■ | Whether or not existing relevant policies are consistent with internationally recognized standards; |
| ■ | Whether company facilities and those of its suppliers are monitored and how; |
| ■ | Company participation in fair labor organizations or other internationally recognized human rights initiatives; |
| ■ | Scope and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse; |
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| ■ | Recent, significant company controversies, fines, or litigation regarding human rights at the company or its suppliers; |
| ■ | The scope of the request; and |
| ■ | Deviation from industry sector peer company standards and practices. |
Vote case-by-case on proposals requesting that a company conduct an assessment of the human rights risks in its operations or in its supply chain, or report on its human rights risk assessment process, considering:
| ■ | The degree to which existing relevant policies and practices are disclosed, including information on the implementation of these policies and any related oversight mechanisms; |
| ■ | The company’s industry and whether the company or its suppliers operate in countries or areas where there is a history of human rights concerns; |
| ■ | Recent significant controversies, fines, or litigation regarding human rights involving the company or its suppliers, and whether the company has taken remedial steps; and |
| ■ | Whether the proposal is unduly burdensome or overly prescriptive. |
Mandatory Arbitration
General Recommendation: Vote case-by-case on requests for a report on a company’s use of mandatory arbitration on employment-related claims, taking into account:
| ■ | The company's current policies and practices related to the use of mandatory arbitration agreements on workplace claims; |
| ■ | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of mandatory arbitration agreements on workplace claims; and |
| ■ | The company's disclosure of its policies and practices related to the use of mandatory arbitration agreements compared to its peers. |
Operations in High-Risk Markets
General Recommendation: Vote case-by-case on requests for a report on a company’s potential financial and reputational risks associated with operations in “high-risk” markets, such as a terrorism-sponsoring state or politically/socially unstable region, taking into account:
| ■ | The nature, purpose, and scope of the operations and business involved that could be affected by social or political disruption; |
| ■ | Current disclosure of applicable risk assessment(s) and risk management procedures; |
| ■ | Compliance with U.S. sanctions and laws; |
| ■ | Consideration of other international policies, standards, and laws; and |
| ■ | Whether the company has been recently involved in recent, significant controversies, fines, or litigation related to its operations in "high-risk" markets. |
Outsourcing/Offshoring
General Recommendation: Vote case-by-case on proposals calling for companies to report on the risks associated with outsourcing/plant closures, considering:
| ■ | Controversies surrounding operations in the relevant market(s); |
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| ■ | The value of the requested report to shareholders; |
| ■ | The company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and |
| ■ | The company’s existing human rights standards relative to industry peers. |
Sexual Harassment
General Recommendation: Vote case-by-case on requests for a report on company actions taken to strengthen policies and oversight to prevent workplace sexual harassment, or a report on risks posed by a company’s failure to prevent workplace sexual harassment, taking into account:
| ■ | The company's current policies, practices, oversight mechanisms related to preventing workplace sexual harassment; |
| ■ | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace sexual harassment issues; and |
| ■ | The company's disclosure regarding workplace sexual harassment policies or initiatives compared to its industry peers. |
Weapons and Military Sales
General Recommendation: Vote against reports on foreign military sales or offsets. Such disclosures may involve sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales.
Generally vote against proposals asking a company to cease production or report on the risks associated with the use of depleted uranium munitions or nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and non-military uses, and withdrawal from these contracts could have a negative impact on the company’s business.
Political Activities
Lobbying
General Recommendation: Vote case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures, considering:
| ■ | The company’s current disclosure of relevant lobbying policies, and management and board oversight; |
| ■ | The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage in lobbying activities; and |
| ■ | Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities. |
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Political Contributions
General Recommendation: Generally vote for proposals requesting greater disclosure of a company's political contributions and trade association spending policies and activities, considering:
| ■ | The company's policies, and management and board oversight related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes; |
| ■ | The company's disclosure regarding its support of, and participation in, trade associations or other groups that may make political contributions; and |
| ■ | Recent significant controversies, fines, or litigation related to the company's political contributions or political activities. |
Vote against proposals barring a company from making political contributions. Businesses are affected by legislation at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.
Vote against proposals to publish in newspapers and other media a company's political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
Political Expenditures and Lobbying Congruency
General Recommendation: Generally vote case-by-case on proposals requesting greater disclosure of a company’s alignment of political contributions, lobbying, and electioneering spending with a company’s publicly stated values and policies, considering:
| ■ | The company’s policies, management, board oversight, governance processes, and level of disclosure related to direct political contributions, lobbying activities, and payments to trade associations, political action committees, or other groups that may be used for political purposes; |
| ■ | The company’s disclosure regarding: the reasons for its support of candidates for public offices; the reasons for support of and participation in trade associations or other groups that may make political contributions; and other political activities; |
| ■ | Any incongruencies identified between a company’s direct and indirect political expenditures and its publicly stated values and priorities; and |
| ■ | Recent significant controversies related to the company’s direct and indirect lobbying, political contributions, or political activities. |
Generally vote case-by-case on proposals requesting comparison of a company’s political spending to objectives that can mitigate material risks for the company, such as limiting global warming.
Political Ties
General Recommendation: Generally vote against proposals asking a company to affirm political nonpartisanship in the workplace, so long as:
| ■ | There are no recent, significant controversies, fines, or litigation regarding the company’s political contributions or trade association spending; and |
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| ■ | The company has procedures in place to ensure that employee contributions to company-sponsored political action committees (PACs) are strictly voluntary and prohibit coercion. |
Vote against proposals asking for a list of company executives, directors, consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful information to shareholders.
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| 8. | Mutual Fund Proxies |
Election of Directors
General Recommendation: Vote case-by-case on the election of directors and trustees, following the same guidelines for uncontested directors for public company shareholder meetings. However, mutual fund boards do not usually have compensation committees, so do not withhold for the lack of this committee.
Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes
General Recommendation: For closed-end management investment companies (CEFs), vote against or withhold from nominating/governance committee members (or other directors on a case-by-case basis) at CEFs that have not provided a compelling rationale for opting-in to a Control Share Acquisition statute, nor submitted a by-law amendment to a shareholder vote.
Converting Closed-end Fund to Open-end Fund
General Recommendation: Vote case-by-case on conversion proposals, considering the following factors:
| ■ | Past performance as a closed-end fund; |
| ■ | Market in which the fund invests; |
| ■ | Measures taken by the board to address the discount; and |
| ■ | Past shareholder activism, board activity, and votes on related proposals. |
Proxy Contests
General Recommendation: Vote case-by-case on proxy contests, considering the following factors:
| ■ | Past performance relative to its peers; |
| ■ | Market in which the fund invests; |
| ■ | Measures taken by the board to address the issues; |
| ■ | Past shareholder activism, board activity, and votes on related proposals; |
| ■ | Strategy of the incumbents versus the dissidents; |
| ■ | Independence of directors; |
| ■ | Experience and skills of director candidates; |
| ■ | Governance profile of the company; and |
| ■ | Evidence of management entrenchment. |
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Investment Advisory Agreements
General Recommendation: Vote case-by-case on investment advisory agreements, considering the following factors:
| ■ | Proposed and current fee schedules; |
| ■ | Fund category/investment objective; |
| ■ | Performance benchmarks; |
| ■ | Share price performance as compared with peers; |
| ■ | Resulting fees relative to peers; and |
| ■ | Assignments (where the advisor undergoes a change of control). |
Approving New Classes or Series of Shares
General Recommendation: Vote for the establishment of new classes or series of shares.
Preferred Stock Proposals
General Recommendation: Vote case-by-case on the authorization for or increase in preferred shares, considering the following factors:
| ■ | Stated specific financing purpose; |
| ■ | Possible dilution for common shares; and |
| ■ | Whether the shares can be used for antitakeover purposes. |
1940 Act Policies
General Recommendation: Vote case-by-case on policies under the Investment Advisor Act of 1940, considering the following factors:
| ■ | Potential competitiveness; |
| ■ | Regulatory developments; |
| ■ | Current and potential returns; and |
| ■ | Current and potential risk. |
Generally vote for these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the current SEC interpretation.
Changing a Fundamental Restriction to a Nonfundamental Restriction
General Recommendation: Vote case-by-case on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors:
| ■ | The fund's target investments; |
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| ■ | The reasons given by the fund for the change; and |
| ■ | The projected impact of the change on the portfolio. |
Change Fundamental Investment Objective to Nonfundamental
General Recommendation: Vote against proposals to change a fund’s fundamental investment objective to non-fundamental.
Name Change Proposals
General Recommendation: Vote case-by-case on name change proposals, considering the following factors:
| ■ | Political/economic changes in the target market; |
| ■ | Consolidation in the target market; and |
| ■ | Current asset composition. |
Change in Fund's Subclassification
General Recommendation: Vote case-by-case on changes in a fund's sub-classification, considering the following factors:
| ■ | Potential competitiveness; |
| ■ | Current and potential returns; |
| ■ | Risk of concentration; and |
| ■ | Consolidation in target industry. |
Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value
General Recommendation: Vote for proposals authorizing the board to issue shares below Net Asset Value (NAV) if:
| ■ | The proposal to allow share issuances below NAV has an expiration date no more than one year from the date shareholders approve the underlying proposal, as required under the Investment Company Act of 1940; |
| ■ | The sale is deemed to be in the best interests of shareholders by (1) a majority of the company's independent directors and (2) a majority of the company's directors who have no financial interest in the issuance; and |
| ■ | The company has demonstrated responsible past use of share issuances by either: |
| ■ | Outperforming peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or |
| ■ | Providing disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts to NAV and economic dilution to existing non-participating shareholders. |
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Disposition of Assets/Termination/Liquidation
General Recommendation: Vote case-by-case on proposals to dispose of assets, to terminate or liquidate, considering the following factors:
| ■ | Strategies employed to salvage the company; |
| ■ | The fund’s past performance; and |
| ■ | The terms of the liquidation. |
Changes to the Charter Document
General Recommendation: Vote case-by-case on changes to the charter document, considering the following factors:
| ■ | The degree of change implied by the proposal; |
| ■ | The efficiencies that could result; |
| ■ | The state of incorporation; and |
| ■ | Regulatory standards and implications. |
Vote against any of the following changes:
| ■ | Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series; |
| ■ | Removal of shareholder approval requirement for amendments to the new declaration of trust; |
| ■ | Removal of shareholder approval requirement to amend the fund's management contract, allowing the contract to be modified by the investment manager and the trust management, as permitted by the 1940 Act; |
| ■ | Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales charges and redemption fees that may be imposed upon redemption of a fund's shares; |
| ■ | Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements; or |
| ■ | Removal of shareholder approval requirement to change the domicile of the fund. |
Changing the Domicile of a Fund
General Recommendation: Vote case-by-case on re-incorporations, considering the following factors:
| ■ | Regulations of both states; |
| ■ | Required fundamental policies of both states; and |
| ■ | The increased flexibility available. |
Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval
General Recommendation: Vote against proposals authorizing the board to hire or terminate subadvisers without shareholder approval if the investment adviser currently employs only one subadviser.
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Distribution Agreements
General Recommendation: Vote case-by-case on distribution agreement proposals, considering the following factors:
| ■ | Fees charged to comparably sized funds with similar objectives; |
| ■ | The proposed distributor’s reputation and past performance; |
| ■ | The competitiveness of the fund in the industry; and |
| ■ | The terms of the agreement. |
Master-Feeder Structure
General Recommendation: Vote for the establishment of a master-feeder structure.
Mergers
General Recommendation: Vote case-by-case on merger proposals, considering the following factors:
| ■ | Resulting fee structure; |
| ■ | Performance of both funds; |
| ■ | Continuity of management personnel; and |
| ■ | Changes in corporate governance and their impact on shareholder rights. |
Shareholder Proposals for Mutual Funds
Establish Director Ownership Requirement
General Recommendation: Generally vote against shareholder proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
Reimburse Shareholder for Expenses Incurred
General Recommendation: Vote case-by-case on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote for the reimbursement of the proxy solicitation expenses.
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Terminate the Investment Advisor
General Recommendation: Vote case-by-case on proposals to terminate the investment advisor, considering the following factors:
| ■ | Performance of the fund’s Net Asset Value (NAV); |
| ■ | The fund’s history of shareholder relations; and |
| ■ | The performance of other funds under the advisor’s management. |
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We empower investors and companies to build for long-term and sustainable growth by providing high-quality data, analytics, and insight.
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Email sales@issgovernance.com or visit www.issgovernance.com for more information.
Founded in 1985, Institutional Shareholder Services group of companies (ISS) empowers investors and companies to build for long-term and sustainable growth by providing high-quality data, analytics and insight. ISS, which is majority owned by Deutsche Bourse Group, along with Genstar Capital and ISS management, is a leading provider of corporate governance and responsible investment solutions, market intelligence, fund services, and events and editorial content for institutional investors and corporations, globally. ISS’ 2,600 employees operate worldwide across 29 global locations in 15 countries. Its approximately 3,400 clients include many of the world’s leading institutional investors who rely on ISS’ objective and impartial offerings, as well as public companies focused on ESG and governance risk mitigation as a shareholder value enhancing measure. Clients rely on ISS’ expertise to help them make informed investment decisions. This document and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the "Information") is the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party suppliers.
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Schedule 2
PROXY VOTING GUIDELINES FOR THE
HORIZON DEFENSIVE CORE
FUND
(ATTACHED)
| B-87 |
UNITED STATES 2024 SUSTAINABILITY PROXY VOTING GUIDELINES |
 |
TABLE OF CONTENTS
| Introduction | 8 |
| 1. Routine/Miscellaneous | 9 |
| Adjourn Meeting | 9 |
| Amend Quorum Requirements | 9 |
| Amend Minor Bylaws | 9 |
| Change Company Name | 9 |
| Change Date, Time, or Location of Annual Meeting | 9 |
| Other Business | 10 |
| Audit-Related | 10 |
| Auditor Indemnification and Limitation of Liability | 10 |
| Auditor Ratification | 10 |
| Shareholder Proposals Limiting Non-Audit Services | 11 |
| Shareholder Proposals on Audit Firm Rotation | 11 |
| 2. Board of Directors | 12 |
| Voting on Director Nominees in Uncontested Elections | 12 |
| Accountability | 12 |
| Problematic Takeover Defenses, Capital Structure, and Governance Structures | 12 |
| Problematic Audit-Related Practices | 15 |
| Problematic Compensation Practices | 15 |
| Environmental, Social and Governance (ESG) Failures | 16 |
| Climate Risk Mitigation and Net Zero | 16 |
| Responsiveness | 17 |
| Composition | 18 |
| Gender Diversity | 18 |
| Racial and/or Ethnic Diversity | 18 |
| Independence | 19 |
| Sustainability Policy Classification of Directors – U.S. | 19 |
| Other Board-Related Proposals | 22 |
| Board Refreshment | 22 |
| Board Size | 22 |
| Classification/Declassification of the Board | 22 |
| CEO Succession Planning | 23 |
| Cumulative Voting | 23 |
| Director and Officer Indemnification, Liability Protection, and Exculpation | 23 |
| Establish/Amend Nominee Qualifications | 24 |
| Establish Other Board Committee Proposals | 24 |
| Filling Vacancies/Removal of Directors | 24 |
| Independent Board Chair | 24 |
| Majority of Independent Directors/Establishment of Independent Committees | 25 |
| Majority Vote Standard for the Election of Directors | 25 |
| Proxy Access | 25 |
| Require More Nominees than Open Seats | 25 |
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| Shareholder Engagement Policy (Shareholder Advisory Committee) | 26 |
| Proxy Contests/Proxy Access -Voting for Director Nominees in Contested Elections | 26 |
| Vote-No Campaigns | 26 |
| 3. Shareholder Rights & Defenses | 27 |
| Advance Notice Requirements for Shareholder Proposals/Nominations | 27 |
| Amend Bylaws without Shareholder Consent | 27 |
| Control Share Acquisition Provisions | 27 |
| Control Share Cash-Out Provisions | 27 |
| Disgorgement Provisions | 28 |
| Fair Price Provisions | 28 |
| Freeze-Out Provisions | 28 |
| Greenmail | 28 |
| Shareholder Litigation Rights | 28 |
| Federal Forum Selection Provisions | 28 |
| Exclusive Forum Provisions for State Law Matters | 29 |
| Fee Shifting | 29 |
| Net Operating Loss (NOL) Protective Amendments | 29 |
| Poison Pills (Shareholder Rights Plans) | 30 |
| Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy | 30 |
| Management Proposals to Ratify a Poison Pill | 30 |
| Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs) | 31 |
| Proxy Voting Disclosure, Confidentiality, and Tabulation | 31 |
| Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions | 31 |
| Reimbursing Proxy Solicitation Expenses | 32 |
| Reincorporation Proposals | 32 |
| Shareholder Ability to Act by Written Consent | 32 |
| Shareholder Ability to Call Special Meetings | 33 |
| Stakeholder Provisions | 33 |
| State Antitakeover Statutes | 33 |
| Supermajority Vote Requirements | 33 |
| Virtual Shareholder Meetings | 34 |
| 4. Capital/Restructuring | 35 |
| Capital | 35 |
| Adjustments to Par Value of Common Stock | 35 |
| Common Stock Authorization | 35 |
| General Authorization Requests | 35 |
| Specific Authorization Requests | 36 |
| Dual Class Structure | 36 |
| Issue Stock for Use with Rights Plan | 36 |
| Preemptive Rights | 36 |
| Preferred Stock Authorization | 36 |
| General Authorization Requests | 36 |
| Specific Authorization Requests | 37 |
| Recapitalization Plans | 38 |
| Reverse Stock Splits | 38 |
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| Share Repurchase Programs | 38 |
| Stock Distributions: Splits and Dividends | 39 |
| Tracking Stock | 39 |
| Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S. | 39 |
| Restructuring | 39 |
| Appraisal Rights | 39 |
| Asset Purchases | 40 |
| Asset Sales | 40 |
| Bundled Proposals | 40 |
| Conversion of Securities | 40 |
| Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans | 41 |
| Formation of Holding Company | 41 |
| Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs) | 42 |
| Joint Ventures | 42 |
| Liquidations | 42 |
| Mergers and Acquisitions | 43 |
| Private Placements/Warrants/Convertible Debentures | 43 |
| Reorganization/Restructuring Plan (Bankruptcy) | 44 |
| Special Purpose Acquisition Corporations (SPACs) | 45 |
| Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions | 45 |
| Spin-offs | 46 |
| Value Maximization Shareholder Proposals | 46 |
| 5. Compensation | 47 |
| Executive Pay Evaluation | 47 |
| Advisory Votes on Executive Compensation—Management Proposals (Management Say-on-Pay) | 47 |
| Pay-for-Performance Evaluation | 48 |
| Problematic Pay Practices | 49 |
| Compensation Committee Communications and Responsiveness | 49 |
| Frequency of Advisory Vote on Executive Compensation ("Say When on Pay") | 50 |
| Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale | 50 |
| Equity-Based and Other Incentive Plans | 51 |
| Shareholder Value Transfer (SVT) | 52 |
| Three-Year Value-Adjusted Burn Rate | 52 |
| Egregious Factors | 52 |
| Liberal Change in Control Definition | 52 |
| Repricing Provisions | 53 |
| Problematic Pay Practices or Significant Pay-for-Performance Disconnect | 53 |
| Specific Treatment of Certain Award Types in Equity Plan Evaluations | 53 |
| Dividend Equivalent Rights | 53 |
| Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs) | 54 |
| Other Compensation Plans | 54 |
| 401(k) Employee Benefit Plans | 54 |
| Employee Stock Ownership Plans (ESOPs) | 54 |
| Employee Stock Purchase Plans—Qualified Plans | 54 |
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| Employee Stock Purchase Plans—Non-Qualified Plans | 54 |
| Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m)) | 55 |
| Option Exchange Programs/Repricing Options | 55 |
| Stock Plans in Lieu of Cash | 56 |
| Transfer Stock Option (TSO) Programs | 56 |
| Director Compensation | 57 |
| Shareholder Ratification of Director Pay Programs | 57 |
| Equity Plans for Non-Employee Directors | 57 |
| Non-Employee Director Retirement Plans | 58 |
| Shareholder Proposals on Compensation | 58 |
| Adopt Anti-Hedging/Pledging/Speculative Investments Policy | 58 |
| Bonus Banking/Bonus Banking “Plus” | 58 |
| Compensation Consultants—Disclosure of Board or Company’s Utilization | 58 |
| Disclosure/Setting Levels or Types of Compensation for Executives and Directors | 58 |
| Golden Coffins/Executive Death Benefits | 59 |
| Hold Equity Past Retirement or for a Significant Period of Time | 59 |
| Pay Disparity | 59 |
| Pay for Performance/Performance-Based Awards | 59 |
| Pay for Superior Performance | 60 |
| Pre-Arranged Trading Plans (10b5-1 Plans) | 60 |
| Prohibit Outside CEOs from Serving on Compensation Committees | 60 |
| Recoupment of Incentive or Stock Compensation in Specified Circumstances | 61 |
| Severance Agreements for Executives/Golden Parachutes | 61 |
| Share Buyback Proposals | 62 |
| Supplemental Executive Retirement Plans (SERPs) | 62 |
| Tax Gross-Up Proposals | 62 |
| Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity | 62 |
| 6. Social and Environmental Issues | 63 |
| Global Approach | 63 |
| Animal Welfare | 63 |
| Animal Welfare Policies | 63 |
| Animal Testing | 64 |
| Animal Slaughter | 64 |
| Consumer Issues | 64 |
| Genetically Modified Ingredients | 64 |
| Reports on Potentially Controversial Business/Financial Practices | 65 |
| Consumer Lending | 65 |
| Pharmaceutical Pricing, Access to Medicines, Product Reimportation and Health Pandemics | 65 |
| Health Pandemics | 66 |
| Product Safety and Toxic/Hazardous Materials | 66 |
| Tobacco-Related Proposals | 66 |
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| Climate Change | 67 |
| Climate Change/Greenhouse Gas (GHG) Emissions | 67 |
| Say on Climate (SoC) Management Proposals | 67 |
| Say on Climate (SoC) Shareholder Proposals | 68 |
| Energy Efficiency | 68 |
| Renewable Energy | 68 |
| Diversity | 68 |
| Board Diversity | 68 |
| Equality of Opportunity | 69 |
| Gender Identity, Sexual Orientation, and Domestic Partner Benefits | 69 |
| Gender, Race/Ethnicity Pay Gap | 69 |
| Racial Equity and/or Civil Rights Audits | 69 |
| Environment and Sustainability | 69 |
| Facility and Workplace Safety | 69 |
| Hydraulic Fracturing | 70 |
| Operations in Protected Areas | 70 |
| Recycling | 70 |
| Sustainability Reporting | 70 |
| Water Issues | 71 |
| Equator Principles | 71 |
| General Corporate Issues | 71 |
| Charitable Contributions | 71 |
| Data Security, Privacy, and Internet Issues | 72 |
| Environmental, Social, and Governance (ESG) Compensation-Related Proposals | 72 |
| Human Rights, Labor Issues, and International Operations | 72 |
| Human Rights Proposals | 73 |
| Mandatory Arbitration | 73 |
| MacBride Principles | 73 |
| Community Social and Environmental Impact Assessments | 74 |
| Operations in High-Risk Markets | 74 |
| Outsourcing/Offshoring | 74 |
| Sexual Harassment | 75 |
| Weapons and Military Sales | 75 |
| Political Activities | 75 |
| Lobbying | 75 |
| Political Contributions | 75 |
| Political Ties | 76 |
| Political Expenditures and Lobbying Congruency | 76 |
| 7. Mutual Fund Proxies | 77 |
| Election of Directors | 77 |
| Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes | 77 |
| Converting Closed-end Fund to Open-end Fund | 77 |
| Proxy Contests | 77 |
| Investment Advisory Agreements | 77 |
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| Approving New Classes or Series of Shares | 78 |
| Preferred Stock Proposals | 78 |
| 1940 Act Policies | 78 |
| Changing a Fundamental Restriction to a Nonfundamental Restriction | 78 |
| Change Fundamental Investment Objective to Nonfundamental | 78 |
| Name Change Proposals | 78 |
| Change in Fund's Subclassification | 79 |
| Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value | 79 |
| Disposition of Assets/Termination/Liquidation | 79 |
| Changes to the Charter Document | 79 |
| Changing the Domicile of a Fund | 80 |
| Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval | 80 |
| Distribution Agreements | 80 |
| Master-Feeder Structure | 80 |
| Mergers | 80 |
| Shareholder Proposals for Mutual Funds | 81 |
| Establish Director Ownership Requirement | 81 |
| Reimburse Shareholder for Expenses Incurred | 81 |
| Terminate the Investment Advisor | 81 |
| 8. Foreign Private Issuers Listed on U.S. Exchanges | 82 |
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Introduction
ISS recognizes the growing view among investment professionals that sustainability or environmental, social, and corporate governance (ESG) factors could present material risks to portfolio investments. Whereas investment managers have traditionally analyzed topics such as board accountability and executive compensation to mitigate risk, greater numbers are incorporating ESG performance into their investment making decisions in order to have a more comprehensive understanding of the overall risk profile of the companies in which they invest and ensure sustainable long-term profitability for their beneficiaries.
Investors concerned with portfolio value preservation and enhancement through the incorporation of sustainability factors can also carry out this active ownership approach through their proxy voting activity. In voting their shares, sustainability-minded investors are concerned not only with economic returns to shareholders and good corporate governance, but also with ensuring corporate activities and practices are aligned with the broader objectives of society. These investors seek standardized reporting on ESG issues, request information regarding an issuer’s adoption of, or adherence to, relevant norms, standards, codes of conduct or universally recognized international initiatives including affirmative support for related shareholder resolutions advocating enhanced disclosure and transparency.
ISS' Sustainability Proxy Voting Guidelines
ISS has, therefore, developed proxy voting guidelines that are consistent with the objectives of sustainability- minded investors and fiduciaries. On matters of ESG import, ISS' Sustainability Policy seeks to promote support for recognized global governing bodies promoting sustainable business practices advocating for stewardship of environment, fair labor practices, non-discrimination, and the protection of human rights. Generally, ISS' Sustainability Policy will take as its frame of reference internationally recognized sustainability-related initiatives such as the United Nations Environment Programme Finance Initiative (UNEP FI), United Nations Principles for Responsible Investment (UNPRI), United Nations Global Compact, Global Reporting Initiative (GRI), Carbon Principles, International Labour Organization Conventions (ILO), Ceres Roadmap 2030, Global Sullivan Principles, MacBride Principles, and environmental and social European Union Directives. Each of these efforts promote a fair, unified and productive reporting and compliance environment which advances positive corporate ESG actions that promote practices that present new opportunities or that mitigate related financial and reputational risks.
On matters of corporate governance, executive compensation, and corporate structure, the Sustainability Policy guidelines are based on a commitment to create and preserve economic value and to advance principles of good corporate governance.
These guidelines provide an overview of how ISS approaches proxy voting issues for subscribers of the Sustainability Policy. We note there may be cases in which the final vote recommendation at a particular company varies from the voting guidelines due to the fact that we closely examine the merits of each proposal and consider relevant information and company-specific circumstances in arriving at our decisions. To that end, ISS engages with both interested shareholders as well as issuers to gain further insight into contentious issues facing the company. Where ISS acts as voting agent for clients, it follows each client’s voting policy, which may differ in some cases from the policies outlined in this document. ISS updates its guidelines on an annual basis to take into account emerging issues and trends on environmental, social and corporate governance topics, as well as the evolution of market standards, regulatory changes and client feedback.
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1. Routine/Miscellaneous
Adjourn Meeting
Sustainability Policy Recommendation: Generally vote against proposals to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal.
| ■ | Vote for proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. |
| ■ | Vote against proposals if the wording is too vague or if the proposal includes "other business." |
Amend Quorum Requirements
Sustainability Policy Recommendation: Vote case-by-case on proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding, taking into consideration:
| ■ | The new quorum threshold requested; |
| ■ | The rationale presented for the reduction; |
| ■ | The market capitalization of the company (size, inclusion in indices); |
| ■ | The company's ownership structure; |
| ■ | Previous voter turnout or attempts to achieve quorum; |
| ■ | Any provisions or commitments to restore quorum to a majority of shares outstanding, should voter turnout improve sufficiently; and |
| ■ | Other factors as appropriate. |
In general, a quorum threshold kept as close to a majority of shares outstanding as is achievable is preferred.
Vote case-by-case on directors who unilaterally lower the quorum requirements below a majority of the shares outstanding, taking into consideration the factors listed above.
Amend Minor Bylaws
Sustainability Policy Recommendation: Vote for bylaw or charter changes that are of a housekeeping nature (updates or corrections).
Change Company Name
Sustainability Policy Recommendation: Vote for proposals to change the corporate name unless there is compelling evidence that the change would adversely impact shareholder value.
Change Date, Time, or Location of Annual Meeting
Sustainability Policy Recommendation: Vote for management proposals to change the date, time, or location of the annual meeting unless the proposed change is unreasonable.
Vote against shareholder proposals to change the date, time, or location of the annual meeting unless the current scheduling or location is unreasonable.
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Other Business
Sustainability Policy Recommendation: Vote against proposals to approve other business when it appears as voting item.
Audit-Related
Auditor Indemnification and Limitation of Liability
Sustainability Policy Recommendation: Vote case-by-case on the issue of auditor indemnification and limitation of liability. Factors to be assessed include, but are not limited to:
| ■ | The terms of the auditor agreement--the degree to which these agreements impact shareholders' rights; |
| ■ | The motivation and rationale for establishing the agreements; |
| ■ | The quality of the company’s disclosure; and |
| ■ | The company’s historical practices in the audit area. |
Vote against or withhold from members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
Auditor Ratification
Sustainability Policy Recommendation: Vote for proposals to ratify auditors unless any of the following apply:
| ■ | An auditor has a financial interest in or association with the company, and is therefore not independent; |
| ■ | There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of the company’s financial position; |
| ■ | Poor accounting practices are identified that rise to a serious level of concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures; or |
| ■ | Fees for non-audit services (“Other” fees) are excessive. |
Non-audit fees are excessive if:
| ■ | Non-audit (“other”) fees > audit fees + audit-related fees + tax compliance/preparation fees |
Tax compliance and preparation include the preparation of original and amended tax returns and refund claims, and tax payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added to “Other” fees. If the breakout of tax fees cannot be determined, add all tax fees to “Other” fees.
In circumstances where "Other" fees include fees related to significant one-time capital structure events (such as initial public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and nature of those fees that are an exception to the standard "non-audit fee" category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
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Shareholder Proposals Limiting Non-Audit Services
Sustainability Policy Recommendation: Vote case-by-case on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services.
Shareholder Proposals on Audit Firm Rotation
Sustainability Policy Recommendation: Vote case-by-case on shareholder proposals asking for audit firm rotation, taking into account:
| ■ | The tenure of the audit firm; |
| ■ | The length of rotation specified in the proposal; |
| ■ | Any significant audit-related issues at the company; |
| ■ | The number of audit committee meetings held each year; |
| ■ | The number of financial experts serving on the committee; and |
| ■ | Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive price. |
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2. Board of Directors
Voting on Director Nominees in Uncontested Elections
Four fundamental principles apply when determining votes on director nominees:
| ■ | Accountability: Boards should be sufficiently accountable to shareholders, including through transparency of the company's governance practices and regular board elections, by the provision of sufficient information for shareholders to be able to assess directors and board composition, and through the ability of shareholders to remove directors. |
| ■ | Responsiveness: Directors should respond to investor input, such as that expressed through significant opposition to management proposals, significant support for shareholder proposals (whether binding or non-binding), and tender offers where a majority of shares are tendered. |
| ■ | Composition: Companies should seek directors who can add value to the board through specific skills or expertise and who can devote sufficient time and commitment to serve effectively. Boards should be of a size appropriate to accommodate diversity, expertise, and independence, while ensuring active and collaborative participation by all members. Boards should be sufficiently diverse to ensure consideration of a wide range of perspectives. |
| ■ | Independence: Boards should be sufficiently independent from management (and significant shareholders) so as to ensure that they are able and motivated to effectively supervise management's performance for the benefit of all shareholders, including in setting and monitoring the execution of corporate strategy, with appropriate use of shareholder capital, and in setting and monitoring executive compensation programs that support that strategy. The chair of the board should ideally be an independent director, and all boards should have an independent leadership position or a similar role in order to help provide appropriate counterbalance to executive management, as well as having sufficiently independent committees that focus on key governance concerns such as audit, compensation, and nomination of directors. |
Sustainability Policy Recommendation: Generally vote for director nominees, except under the following circumstances (with new nominees1 considered on a case-by-case basis):
Accountability
Problematic Takeover Defenses, Capital Structure, and Governance Structures
Classified Board Structure: The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.
Removal of Shareholder Discretion on Classified Boards: The company has opted into, or failed to opt out of, state laws requiring a classified board structure.
Director Performance Evaluation: The board lacks mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one-, three-, and five-year total shareholder returns in the bottom half of a company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s operational metrics and other factors as warranted. Problematic provisions include but are not limited to:
| 1 | A "new nominee" is a director who is being presented for election by shareholders for the first time. Recommendations on new nominees who have served for less than one year are made on a case-by-case basis depending on the timing of their appointment and the problematic governance issue in question. |
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| ■ | A classified board structure; |
| ■ | A supermajority vote requirement; |
| ■ | Either a plurality vote standard in uncontested director elections or a majority vote standard with no plurality carve-out for contested elections; |
| ■ | The inability of shareholders to call special meetings; |
| ■ | The inability of shareholders to act by written consent; |
| ■ | A multi-class capital structure; and/or |
| ■ | A non–shareholder-approved poison pill. |
Poison Pills: Generally vote against or withhold from all nominees (except new nominees1, who should be considered case-by-case) if:
| ■ | The company has a poison pill with a deadhand or slowhand feature2; |
| ■ | The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or lowering the trigger, without shareholder approval; or |
| ■ | The company has a long-term poison pill (with a term of over one year) that was not approved by the public shareholders3. |
Vote case-by-case on nominees if the board adopts an initial short-term pill3 (with a term of one year or less) without shareholder approval, taking into consideration:
| ■ | The disclosed rationale for the adoption; |
| ■ | The trigger; |
| ■ | The company's market capitalization (including absolute level and sudden changes); |
| ■ | A commitment to put any renewal to a shareholder vote; and |
| ■ | Other factors as relevant. |
Unilateral Bylaw/Charter Amendments: Generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees2, who should be considered case-by-case) if the board amends the company's bylaws or charter without shareholder approval in a manner that materially diminishes shareholders' rights or that could adversely impact shareholders, considering the following factors:
| ■ | The board's rationale for adopting the bylaw/charter amendment without shareholder ratification; |
| ■ | Disclosure by the company of any significant engagement with shareholders regarding the amendment; |
| ■ | The level of impairment of shareholders' rights caused by the board's unilateral amendment to the bylaws/charter; |
| ■ | The board's track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions; |
| ■ | The company's ownership structure; |
| ■ | The company's existing governance provisions; |
| ■ | The timing of the board's amendment to the bylaws/charter in connection with a significant business development; and, |
| 2 | If the short-term pill with a deadhand or slowhand feature is enacted but expires before the next shareholder vote, Sustainability Advisory Services will generally still recommend withhold/against nominees at the next shareholder meeting following its adoption. |
| 3 | Approval prior to, or in connection, with a company’s becoming publicly-traded, or in connection with a de-SPAC transaction, is insufficient. |
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| ■ | Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders. |
Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees.
Generally vote against (except new nominees, who should be considered case-by-case) if the directors:
| ■ | Classified the board; |
| ■ | Adopted supermajority vote requirements to amend the bylaws or charter; |
| ■ | Eliminated shareholders' ability to amend bylaws; |
| ■ | Adopted a fee-shifting provision; or |
| ■ | Adopted another provision deemed egregious. |
Problematic Governance Structure: For companies that hold or held their first annual meeting7 of public shareholders after Feb. 1, 2015, generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case) if, prior to or in connection with the company's public offering, the company or its board adopted the following bylaw or charter provisions that are considered to be materially adverse to shareholder rights
| ■ | Supermajority vote requirements to amend the bylaws or charter; |
| ■ | A classified board structure; or |
| ■ | Other egregious provisions. |
A provision which specifies that the problematic structure(s) will be sunset within seven years of the date of going public will be considered a mitigating factor.
Unless the adverse provision is reversed or removed, vote case-by-case on director nominees in subsequent years.
Unequal Voting Rights: Generally vote withhold or against directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case), if the company employs a common stock structure with unequal voting rights5.
Exceptions to this policy will generally be limited to:
| ■ | Newly-public companies6 with a sunset provision of no more than seven years from the date of going public; |
| ■ | Limited Partnerships and the Operating Partnership (OP) unit structure of REITs; |
| ■ | Situations where the unequal voting rights are considered de minimis; or |
| ■ | The company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular binding vote on whether the capital structure should be maintained. |
| 4 | Includes companies that emerge from bankruptcy, SPAC transactions, spin-offs, direct listings, and those who complete a traditional initial public offering. |
| 5 | This generally includes classes of common stock that have additional votes per share than other shares; classes of shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights (“loyalty shares”). |
| 6 | Newly-public companies generally include companies that emerge from bankruptcy, SPAC transactions, spin-offs, direct listings, and those who complete a traditional initial public offering. |
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Management Proposals to Ratify Existing Charter or Bylaw Provisions: Vote against/withhold from individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering the following factors:
| ■ | The presence of a shareholder proposal addressing the same issue on the same ballot; |
| ■ | The board's rationale for seeking ratification; |
| ■ | Disclosure of actions to be taken by the board should the ratification proposal fail; |
| ■ | Disclosure of shareholder engagement regarding the board’s ratification request; |
| ■ | The level of impairment to shareholders' rights caused by the existing provision; |
| ■ | The history of management and shareholder proposals on the provision at the company’s past meetings; |
| ■ | Whether the current provision was adopted in response to the shareholder proposal; |
| ■ | The company's ownership structure; and |
| ■ | Previous use of ratification proposals to exclude shareholder proposals. |
Restricting Binding Shareholder Proposals: Generally vote against or withhold from members of the governance committee if:
| ■ | The company's governing documents impose undue restrictions on shareholders' ability to amend the bylaws. Such restrictions include but are not limited to: outright prohibition on the submission of binding shareholder proposals, or share ownership requirements, subject matter restrictions, or time holding requirement in excess of SEC Rule 14a-8. Vote against or withhold on an ongoing basis. |
Submission of management proposals to approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders' rights. Generally, continue to vote against or withhold on an ongoing basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
Problematic Audit-Related Practices
Generally, vote against or withhold from the members of the audit committee if:
| ■ | The non-audit fees paid to the auditor are excessive (see discussion under “Auditor Ratification”); |
| ■ | The company receives an adverse opinion on the company’s financial statements from its auditor; or |
| ■ | There is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm. |
Vote case-by-case on members of the audit committee and potentially the full board if:
| ■ | Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether withhold/against votes are warranted. |
Problematic Compensation Practices
In the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, vote against or withhold from the members of the compensation committee and potentially the full board if:
| ■ | There is a significant misalignment between CEO pay and company performance (pay for performance); |
| ■ | The company maintains significant problematic pay practices; |
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| ■ | The board exhibits a significant level of poor communication and responsiveness to shareholders; |
| ■ | The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s declared frequency of say on pay; or |
| ■ | The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions. |
Generally vote against members of the board committee responsible for approving/setting non-employee director compensation if there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation without disclosing a compelling rationale or other mitigating factors.
Problematic Pledging of Company Stock: Vote against the members of the committee that oversees risks related to pledging, or the full board, where a significant level of pledged company stock by executives or directors raises concerns. The following factors will be considered:
| ■ | The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity; |
| ■ | The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume; |
| ■ | Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time; |
| ■ | Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged company stock; and |
| ■ | Any other relevant factors. |
Environmental, Social and Governance (ESG) Failures
Under extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
| ■ | Material failures of governance, stewardship, risk oversight7, or fiduciary responsibilities at the company, including failure to adequately guard against or manage ESG risks; |
| ■ | A lack of sustainability reporting in the company's public documents and/or website in conjunction with a failure to adequately manage or mitigate ESG risks; |
| ■ | Failure to replace management as appropriate; or |
| ■ | Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company. |
Climate Risk Mitigation and Net Zero
For companies that are significant greenhouse gas (GHG) emitters, through their operations or value chain8, generally vote against or withhold from the incumbent chair of the responsible committee (or other directors on a case-by-case basis) in cases where Sustainability Advisory Services determines that the company is not taking the minimum steps need to be aligned with a Net Zero by 2050 trajectory.
For 2024, the minimum steps needed to be considered to be aligned with a Net Zero by 2050 trajectory are (all minimum criteria will be required to be in alignment with the policy):
| 7 | Examples of failure of risk oversight include, but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; demonstrably poor risk oversight of environmental and social issues, including climate change; significant environmental incidents including spills and pollution; large scale or repeat workplace fatalities or injuries; significant adverse legal judgments or settlements; or hedging of company stock. |
| 8 | For 2024, companies defined as "significant GHG emitters" will be those on the current Climate Action 100+ Focus Group list. |
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| ■ | The company has detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on Climate-related Financial Disclosures (TCFD), including: |
| ■ | Board governance measures; |
| ■ | Corporate strategy; |
| ■ | Risk management analyses; and |
| ■ | Metrics and targets. |
| ■ | The company has declared a Net Zero target by 2050 or sooner and the target includes scope 1, 2, and relevant scope 3 emissions. |
| ■ | The company has set a medium-term target for reducing its GHG emissions. |
Expectations about what constitutes "minimum steps needed to be aligned with a Net Zero by 2050 trajectory" will increase over time.
Responsiveness
Vote case-by-case on individual directors, committee members, or the entire board of directors as appropriate if:
| ■ | The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year or failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year. Factors that will be considered are: |
| ■ | Disclosed outreach efforts by the board to shareholders in the wake of the vote; |
| ■ | Rationale provided in the proxy statement for the level of implementation; |
| ■ | The subject matter of the proposal; |
| ■ | The level of support for and opposition to the resolution in past meetings; |
| ■ | Actions taken by the board in response to the majority vote and its engagement with shareholders; |
| ■ | The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and |
| ■ | Other factors as appropriate. |
| ■ | The board failed to act on takeover offers where the majority of shares are tendered; |
| ■ | At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote. |
Vote case-by-case on compensation committee members (or, in exceptional cases, the full board) and the Say on Pay proposal if:
| ■ | The company’s previous say-on-pay received the support of less than 70 percent of votes cast. Factors that will be considered are: |
| ■ | The company's response, including: |
| ■ | Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support (including the timing and frequency of engagements and whether independent directors participated); |
| ■ | Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; |
| ■ | Disclosure of specific and meaningful actions taken to address shareholders' concerns; |
| ■ | Other recent compensation actions taken by the company; |
| ■ | Whether the issues raised are recurring or isolated; |
| ■ | The company's ownership structure; and |
| ■ | Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness. |
| ■ | The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the plurality of votes cast. |
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Composition
Attendance at Board and Committee Meetings: Generally vote against or withhold from directors (except nominees who served only part of the fiscal year9) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
| ■ | Medical issues/illness; |
| ■ | Family emergencies; and |
| ■ | Missing only one meeting (when the total of all meetings is three or fewer). |
| ■ | In cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, generally vote against or withhold from appropriate members of the nominating/governance committees or the full board. |
If the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold from the director(s) in question.
Overboarded Directors: Generally, vote against or withhold from individual directors who:
| ■ | Sit on more than five public company boards; or |
| ■ | Are CEOs of public companies who sit on the boards of more than two public companies besides their own—withhold only at their outside boards10. |
Gender Diversity
Sustainability Policy Recommendation: Generally vote against or withhold from the chair of the nominating committee, or other nominees on a case-by-case basis, if the board lacks at least one director of an underrepresented gender identity11.
Racial and/or Ethnic Diversity
Sustainability Policy Recommendation: Generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members12.
| 9 | Nominees who served for only part of the fiscal year are generally exempted from the attendance policy. |
| 10 | Although all of a CEO’s subsidiary boards will be counted as separate boards, Sustainability Advisory Services will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent, but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships. |
| 11 | Underrepresented gender identity includes directors who identify as women or as non-binary. |
| 12 | Aggregate diversity statistics provided by the board will only be considered if specific to racial and/or ethnic diversity. |
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Independence
Vote against or withhold from non-independent directors (Executive Directors and Non-Independent Non-Executive Directors per Sustainability Advisory Services’ Classification of Directors) when:
| ■ | Independent directors comprise 50 percent or less of the board; |
| ■ | The non-independent director serves on the audit, compensation, or nominating committee; |
| ■ | The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or |
| ■ | The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee. |
Sustainability Policy Classification of Directors – U.S.
| 1. | Executive Director |
| 1.1. | Current officer[1] of the company or one of its affiliates[2]. |
| 2. | Non-Independent Non-Executive Director |
Board Identification
| 2.1. | Director identified as not independent by the board. |
Controlling/Significant Shareholder
| 2.2. | Beneficial owner of more than 50 percent of the company's voting power (this may be aggregated if voting power is distributed among more than one member of a group). |
Current Employment at Company or Partnership
| 2.3. | Non-officer employee of the firm (including employee representatives). |
| 2.4. | Officer[1], former officer, or general or limited partner of a joint venture or partnership with the company. |
Former Employment
| 2.5. | Former CEO of the company.[3],[4] |
| 2.6. | Former non-CEO officer[1] of the company or an affiliate[2] within the past five years. |
| 2.7. | Former officer[1] of an acquired company within the past five years[4]. |
| 2.8. | Officer [1] of a former parent or predecessor firm at the time the company was sold or split off within the past five years. |
| 2.9. | Former interim officer if the service was longer than 18 months. If the service was between 12 and 18 months an assessment of the interim officer’s employment agreement will be made.[5] |
Family Members
| 2.10. | Immediate family member[6] of a current or former officer[1] of the company or its affiliates[2] within the last five years. |
| 2.11. | Immediate family member[6] of a current employee of company or its affiliates[2] where additional factors raise concern (which may include, but are not limited to, the following: a director related to numerous employees; the company or its affiliates employ relatives of numerous board members; or a non-Section 16 officer in a key strategic role). |
Professional, Transactional, and Charitable Relationships
| 2.12. | Director who (or whose immediate family member[6]) currently provides professional services[7] in excess of $10,000 per year to: the company, an affiliate[2], or an individual officer of the company or an affiliate; either directly or is (or whose family member is) a partner, employee, or controlling shareholder of an organization which provides the services. |
| 2.13. | Director who (or whose immediate family member[6]) currently has any material transactional relationship[8] with the company or its affiliates[2]; or who is (or whose immediately family member[6] is) a partner in, or a controlling shareholder or an executive officer of, an organization which has the material transactional relationship[8] (excluding investments in the company through a private placement). |
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| 2.14. | Director who (or whose immediate family member[6]) is a trustee, director, or employee of a charitable or non-profit organization that receives material grants or endowments[8] from the company or its affiliates[2]. |
Other Relationships
| 2.15. | Party to a voting agreement[9] to vote in line with management on proposals being brought to shareholder vote. |
| 2.16. | Has (or an immediate family member[6] has) an interlocking relationship as defined by the SEC involving members of the board of directors or its Compensation Committee[10]. |
| 2.17. | Founder[11] of the company but not currently an employee. |
| 2.18. | Director with pay comparable to Named Executive Officers. |
| 2.19. | Any material[12] relationship with the company. |
| 3. | Independent Director |
| 3.1. | No material[12] connection to the company other than a board seat. |
Footnotes:
| [1] | The definition of officer will generally follow that of a “Section 16 officer” (officers subject to Section 16 of the Securities and Exchange Act of 1934) and includes the chief executive, operating, financial, legal, technology, and accounting officers of a company (including the president, treasurer, secretary, controller, or any vice president in charge of a principal business unit, division, or policy function). Current interim officers are included in this category. For private companies, the equivalent positions are applicable. A non-employee director serving as an officer due to statutory requirements (e.g. corporate secretary) will be classified as an Affiliated Outsider under “Any material relationship with the company.” However, if the company provides explicit disclosure that the director is not receiving additional compensation in excess of $10,000 per year for serving in that capacity, then the director will be classified as an Independent Outsider. |
| [2] | “Affiliate” includes a subsidiary, sibling company, or parent company. Sustainability Advisory Services uses 50 percent control ownership by the parent company as the standard for applying its affiliate designation. The manager/advisor of an externally managed issuer (EMI) is considered an affiliate. |
| [3] | Includes any former CEO of the company prior to the company’s initial public offering (IPO). |
| [4] | When there is a former CEO of a special purpose acquisition company (SPAC) serving on the board of an acquired company, Sustainability Advisory Services will generally classify such directors as independent unless determined otherwise taking into account the following factors: the applicable listing standards determination of such director’s independence; any operating ties to the firm; and the existence of any other conflicting relationships or related party transactions. |
| [5] | Sustainability Advisory Services will look at the terms of the interim officer’s employment contract to determine if it contains severance pay, long-term health and pension benefits, or other such standard provisions typically contained in contracts of permanent, non-temporary CEOs. Sustainability Advisory Services will also consider if a formal search process was under way for a full-time officer at the time. |
| [6] | “Immediate family member” follows the SEC’s definition of such and covers spouses, parents, children, step- parents, step-children, siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director, nominee for director, executive officer, or significant shareholder of the company. |
| [7] | Professional services can be characterized as advisory in nature, generally involve access to sensitive company information or to strategic decision-making, and typically have a commission- or fee-based payment structure. Professional services generally include, but are not limited to the following: investment banking/financial advisory services; commercial banking (beyond deposit services); investment services; insurance services; accounting/audit services; consulting services; marketing services; legal services; property management services; realtor services; lobbying services; executive search services; and IT consulting services. The following would generally be considered transactional relationships and not professional services: deposit services; IT tech support services; educational services; and construction services. The case of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject to the associated materiality test) rather than a professional relationship. “Of Counsel” relationships are only considered immaterial if the individual does not receive any form of compensation (in excess of $10,000 per year) from, or is a retired partner of, the firm providing the professional service. The case of a company providing a professional service to one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional rather than a professional relationship. Insurance services and marketing services are assumed to be professional services unless the company explains why such services are not advisory. |
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| [8] | A material transactional relationship, including grants to non-profit organizations, exists if the company makes annual payments to, or receives annual payments from, another entity exceeding the greater of $200,000 or 5 percent of the recipient’s gross revenues, in the case of a company which follows NASDAQ listing standards; or the greater of $1,000,000 or 2 percent of the recipient’s gross revenues, in the case of a company which follows NYSE listing standards. In the case of a company which follows neither of the preceding standards, Sustainability Advisory Services will apply the NASDAQ-based materiality test. (The recipient is the party receiving the financial proceeds from the transaction). |
| [9] | Dissident directors who are parties to a voting agreement pursuant to a settlement or similar arrangement may be classified as independent outsiders if an analysis of the following factors indicates that the voting agreement does not compromise their alignment with all shareholders’ interests: the terms of the agreement; the duration of the standstill provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director nominee(s) is subject to the standstill; and if there any conflicting relationships or related party transactions. |
| [10] | Interlocks include: executive officers serving as directors on each other’s compensation or similar committees (or, in the absence of such a committee, on the board); or executive officers sitting on each other’s boards and at least one serves on the other’s compensation or similar committees (or, in the absence of such a committee, on the board). |
| [11] | The operating involvement of the founder with the company will be considered; if the founder was never employed by the company, Sustainability Advisory Services may deem him or her an independent outsider. |
| [12] | For purposes of Sustainability Advisory Services’ director independence classification, “material” will be defined as a standard of relationship (financial, personal or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a manner that would have a meaningful impact on an individual's ability to satisfy requisite fiduciary standards on behalf of shareholders. |
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Other Board-Related Proposals
Board Refreshment
Board refreshment is best implemented through an ongoing program of individual director evaluations, conducted annually, to ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity as needed.
Term/Tenure Limits
Sustainability Policy Recommendation: Vote case-by-case on management proposals regarding director term/tenure limits, considering:
| ■ | The rationale provided for adoption of the term/tenure limit; |
| ■ | The robustness of the company’s board evaluation process; |
| ■ | Whether the limit is of sufficient length to allow for a broad range of director tenures; |
| ■ | Whether the limit would disadvantage independent directors compared to non-independent directors; and |
| ■ | Whether the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner. |
Vote case-by-case on shareholder proposals asking for the company to adopt director term/tenure limits, considering:
| ■ | The scope of the shareholder proposal; and |
| ■ | Evidence of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment. |
Age Limits
Sustainability Policy Recommendation: Generally vote against management and shareholder proposals to limit the tenure of independent directors through mandatory retirement ages. Vote for proposals to remove mandatory age limits.
Board Size
Sustainability Policy Recommendation: Vote for proposals seeking to fix the board size or designate a range for the board size.
Vote against proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval.
Classification/Declassification of the Board
Sustainability Policy Recommendation: Vote against proposals to classify (stagger) the board.
Vote for proposals to repeal classified boards and to elect all directors annually.
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CEO Succession Planning
Sustainability Policy Recommendation: Generally vote for proposals seeking disclosure on a CEO succession planning policy, considering, at a minimum, the following factors:
| ■ | The reasonableness/scope of the request; and |
| ■ | The company’s existing disclosure on its current CEO succession planning process. |
Cumulative Voting
Sustainability Policy Recommendation: Generally vote against management proposals to eliminate cumulate voting, and for shareholder proposals to restore or provide for cumulative voting, unless:
| ■ | The company has proxy access, thereby allowing shareholders to nominate directors to the company’s ballot; and |
| ■ | The company has adopted a majority vote standard, with a carve-out for plurality voting in situations where there are more nominees than seats, and a director resignation policy to address failed elections. |
Vote for proposals for cumulative voting at controlled companies (insider voting power > 50%).
Director and Officer Indemnification, Liability Protection, and Exculpation
Sustainability Policy Recommendation: Vote case-by-case on proposals on director and officer indemnification liability protection, and exculpation13.
Consider the stated rationale for the proposed change. Also consider, among other factors, the extent to which the proposal would:
| ■ | Eliminate entirely directors' and officers' liability for monetary damages for violating the duty of care. |
| ■ | Eliminate directors’ and officers’ liability for monetary damages for violating the duty of loyalty. |
| ■ | Expand coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation than mere carelessness. |
| ■ | Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts that previously the company was permitted to provide indemnification for, at the discretion of the company's board (i.e., "permissive indemnification"), but that previously the company was not required to indemnify. |
Vote for only those proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was unsuccessful if both of the following apply:
| ■ | If the individual was found to have acted in good faith and in a manner that the individual reasonably believed was in the best interests of the company; and |
| ■ | If only the director’s legal expenses would be covered. |
| 13 | Indemnification: the condition of being secured against loss or damage. |
| Limited liability: a person's financial liability is limited to a fixed sum, or personal financial assets are not at risk if the individual loses a lawsuit that results in financial award/damages to the plaintiff. | |
| Exculpation: to eliminate or limit the personal liability of a director or officer to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director or officer. |
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Establish/Amend Nominee Qualifications
Sustainability Policy Recommendation: Vote case-by-case on proposals that establish or amend director qualifications. Votes should be based on the reasonableness of the criteria and the degree to which they may preclude dissident nominees from joining the board.
Vote case-by-case on shareholder resolutions seeking a director nominee who possesses a particular subject matter expertise, considering:
| ■ | The company’s board committee structure, existing subject matter expertise, and board nomination provisions relative to that of its peers; |
| ■ | The company’s existing board and management oversight mechanisms regarding the issue for which board oversight is sought; |
| ■ | The company’s disclosure and performance relating to the issue for which board oversight is sought and any significant related controversies; and |
| ■ | The scope and structure of the proposal. |
Establish Other Board Committee Proposals
Sustainability Policy Recommendation: Generally vote against shareholder proposals to establish a new board committee, as such proposals seek a specific oversight mechanism/structure that potentially limits a company’s flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered:
| ■ | Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is sought; |
| ■ | Level of disclosure regarding the issue for which board oversight is sought; |
| ■ | Company performance related to the issue for which board oversight is sought; |
| ■ | Board committee structure compared to that of other companies in its industry sector; and |
| ■ | The scope and structure of the proposal. |
Filling Vacancies/Removal of Directors
Sustainability Policy Recommendation: Vote against proposals that provide that directors may be removed only for cause.
| ■ | Vote for proposals to restore shareholders’ ability to remove directors with or without cause. |
| ■ | Vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies. |
| ■ | Vote for proposals that permit shareholders to elect directors to fill board vacancies. |
Independent Board Chair
One of the principal functions of the board is to monitor and evaluate the performance of the CEO and other executive officers. The board chair’s duty to oversee management may be compromised when he/she is connected to or a part of the management team. Generally, Sustainability Advisory Services recommends supporting shareholder proposals that would require that the position of board chair be held by an individual with no materials ties to the company other than their board seat.
Sustainability Policy Recommendation: Generally, support shareholder proposals that would require the board chair to be independent of management.
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Majority of Independent Directors/Establishment of Independent Committees
Sustainability Policy Recommendation: Vote for shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by the Sustainability policy's definition of independent outsider. (See Sustainability Policy Classification of Directors – U.S.)
Vote for shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors unless they currently meet that standard.
Majority Vote Standard for the Election of Directors
Sustainability Policy Recommendation: Generally vote for management proposals to adopt a majority of votes cast standard for directors in uncontested elections. Vote against if no carve-out for a plurality vote standard in contested elections is included.
Generally vote for precatory and binding shareholder resolutions requesting that the board change the company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve- out for a plurality vote standard when there are more nominees than board seats.
Companies are strongly encouraged to also adopt a post-election policy (also known as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director.
Proxy Access
Sustainability Policy Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions:
| ■ | Ownership threshold: maximum requirement not more than three percent (3%) of the voting power; |
| ■ | Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group; |
| ■ | Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group; |
| ■ | Cap: cap on nominees of generally twenty-five percent (25%) of the board. |
Review for reasonableness any other restrictions on the right of proxy access.
Generally vote against proposals that are more restrictive than these guidelines.
Require More Nominees than Open Seats
Sustainability Policy Recommendation: Vote against shareholder proposals that would require a company to nominate more candidates than the number of open board seats.
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Shareholder Engagement Policy (Shareholder Advisory Committee)
Sustainability Policy Recommendation: Generally vote for shareholder proposals requesting that the board establish an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate:
| ■ | Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information between shareholders and members of the board; |
| ■ | Effectively disclosed information with respect to this structure to its shareholders; |
| ■ | Company has not ignored majority-supported shareholder proposals or a majority withhold vote on a director nominee; and |
| ■ | The company has an independent chair or a lead director, according to Sustainability Advisory Services' policy definition. This individual must be made available for periodic consultation and direct communication with major shareholders. |
Proxy Contests/Proxy Access -Voting for Director Nominees in Contested Elections
Sustainability Policy Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors:
| ■ | Long-term financial performance of the company relative to its industry; |
| ■ | Management’s track record; |
| ■ | Background to the contested election; |
| ■ | Nominee qualifications and any compensatory arrangements; |
| ■ | Strategic plan of dissident slate and quality of the critique against management; |
| ■ | Likelihood that the proposed goals and objectives can be achieved (both slates); and |
| ■ | Stock ownership positions. |
In the case of candidates nominated pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the nominee(s) and/or to the nature of the election (such as whether or not there are more candidates than board seats).
Vote-No Campaigns
Sustainability Policy Recommendation: In cases where companies are targeted in connection with public “vote- no” campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by shareholders and other publicly available information.
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3. Shareholder Rights & Defenses
Advance Notice Requirements for Shareholder Proposals/Nominations
Sustainability Policy Recommendation: Vote case-by-case on advance notice proposals, giving support to those proposals which allow shareholders to submit proposals/nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review.
To be reasonable, the company’s deadline for shareholder notice of a proposal/nominations must be no earlier than 120 days prior to the anniversary of the previous year’s meeting and have a submittal window of no shorter than 30 days from the beginning of the notice period (also known as a 90-120 day window). The submittal window is the period under which shareholders must file their proposal/nominations prior to the deadline.
In general, support additional efforts by companies to ensure full disclosure in regard to a proponent’s economic and voting position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposals.
Amend Bylaws without Shareholder Consent
Sustainability Policy Recommendation: Vote against proposals giving the board exclusive authority to amend the bylaws.
Vote for proposals giving the board the ability to amend the bylaws in addition to shareholders.
Control Share Acquisition Provisions
Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds. Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to put its offer to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares.
Sustainability Policy Recommendation: Vote for proposals to opt out of control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to shareholders.
Vote against proposals to amend the charter to include control share acquisition provisions.
Vote for proposals to restore voting rights to the control shares.
Control Share Cash-Out Provisions
Control share cash-out statutes give dissident shareholders the right to "cash-out" of their position in a company at the expense of the shareholder who has taken a control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price.
Sustainability Policy Recommendation: Vote for proposals to opt out of control share cash-out statutes.
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Disgorgement Provisions
Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a company's stock to disgorge, or pay back, to the company any profits realized from the sale of that company's stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of time (between 18 months and 24 months) prior to the investor's gaining control status are subject to these recapture-of-profits provisions.
Sustainability Policy Recommendation: Vote for proposals to opt out of state disgorgement provisions.
Fair Price Provisions
Sustainability Policy Recommendation: Vote case-by-case on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price.
Generally vote against fair price provisions with shareholder vote requirements greater than a majority of disinterested shares.
Freeze-Out Provisions
Sustainability Policy Recommendation: Vote for proposals to opt out of state freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time before gaining control of the company.
Greenmail
Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.
Sustainability Policy Recommendation: Vote for proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments.
Vote case-by-case on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
Shareholder Litigation Rights
Federal Forum Selection Provisions
Federal forum selection provisions require that U.S. federal courts be the sole forum for shareholders to litigate claims arising under federal securities law.
Sustainability Policy Recommendation: Generally vote for federal forum selection provisions in the charter or bylaws that specify "the district courts of the United States" as the exclusive forum for federal securities law matters, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.
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Vote against provisions that restrict the forum to a particular federal district court; unilateral adoption (without a shareholder vote) of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Exclusive Forum Provisions for State Law Matters
Exclusive forum provisions in the charter or bylaws restrict shareholders’ ability to bring derivative lawsuits against the company, for claims arising out of state corporate law, to the courts of a particular state (generally the state of incorporation).
Sustainability Policy Recommendation: Generally vote for charter or bylaw provisions that specify courts located within the state of Delaware as the exclusive forum for corporate law matters for Delaware corporations, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.
For states other than Delaware, vote case-by-case on exclusive forum provisions, taking into consideration:
| ■ | The company's stated rationale for adopting such a provision; |
| ■ | Disclosure of past harm from duplicative shareholder lawsuits in more than one forum; |
| ■ | The breadth of application of the charter or bylaw provision, including the types of lawsuits to which it would apply and the definition of key terms; and |
| ■ | Governance features such as shareholders' ability to repeal the provision at a later date (including the vote standard applied when shareholders attempt to amend the charter or bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections. |
Generally vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate law matters, or that specify a particular local court within the state; unilateral adoption of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Fee Shifting
Fee-shifting provisions in the charter or bylaws require that a shareholder who sues a company unsuccessfully pay all litigation expenses of the defendant corporation and its directors and officers.
Sustainability Policy Recommendation: Generally vote against provisions that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., including cases where the plaintiffs are partially successful).
Unilateral adoption of a fee-shifting provision will generally be considered an ongoing failure under the Unilateral Bylaw/Charter Amendments and Problematic Capital Structures policy.
Net Operating Loss (NOL) Protective Amendments
Sustainability Policy Recommendation: Vote against proposals to adopt a protective amendment for the stated purpose of protecting a company's net operating losses (NOL) if the effective term of the protective amendment would exceed the shorter of three years and the exhaustion of the NOL.
Vote case-by-case, considering the following factors, for management proposals to adopt an NOL protective amendment that would remain in effect for the shorter of three years (or less) and the exhaustion of the NOL:
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| ■ | The ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result in a new 5-percent holder or increase the stock ownership percentage of an existing 5-percent holder); |
| ■ | The value of the NOLs; |
| ■ | Shareholder protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon exhaustion or expiration of the NOL); |
| ■ | The company's existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and |
| ■ | Any other factors that may be applicable. |
Poison Pills (Shareholder Rights Plans)
Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy
Sustainability Policy Recommendation: Vote for shareholder proposals requesting that the company submit its poison pill to a shareholder vote or redeem it unless the company has: (1) A shareholder approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill in the future specifying that the board will only adopt a shareholder rights plan if either:
| ■ | Shareholders have approved the adoption of the plan; or |
| ■ | The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders under the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval (i.e., the “fiduciary out” provision). A poison pill adopted under this fiduciary out will be put to a shareholder ratification vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate. |
If the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, vote for the proposal, but add the caveat that a vote within 12 months would be considered sufficient implementation.
Management Proposals to Ratify a Poison Pill
Sustainability Policy Recommendation: Vote case-by-case on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following attributes:
| ■ | No lower than a 20% trigger, flip-in or flip-over; |
| ■ | A term of no more than three years; |
| ■ | No dead-hand, slow-hand, no-hand or similar feature that limits the ability of a future board to redeem the pill; |
| ■ | Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill. |
In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into consideration the company’s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.
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Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)
Sustainability Policy Recommendation: Vote against proposals to adopt a poison pill for the stated purpose of protecting a company's net operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.
Vote case-by-case on management proposals for poison pill ratification, considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
| ■ | The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent); |
| ■ | The value of the NOLs; |
| ■ | Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or expiration of NOLs); |
| ■ | The company's existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and |
| ■ | Any other factors that may be applicable. |
Proxy Voting Disclosure, Confidentiality, and Tabulation
Sustainability Policy Recommendation: Vote case-by-case on proposals regarding proxy voting mechanics, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder rights. Specific issues covered under the policy include, but are not limited to, confidential voting of individual proxies and ballots, confidentiality of running vote tallies, and the treatment of abstentions and/or broker non-votes in the company's vote-counting methodology.
While a variety of factors may be considered in each analysis, the guiding principles are: transparency, consistency, and fairness in the proxy voting process. The factors considered, as applicable to the proposal, may include:
| ■ | The scope and structure of the proposal; |
| ■ | The company's stated confidential voting policy (or other relevant policies) and whether it ensures a "level playing field" by providing shareholder proponents with equal access to vote information prior to the annual meeting; |
| ■ | The company's vote standard for management and shareholder proposals and whether it ensures consistency and fairness in the proxy voting process and maintains the integrity of vote results; |
| ■ | Whether the company's disclosure regarding its vote counting method and other relevant voting policies with respect to management and shareholder proposals are consistent and clear; |
| ■ | Any recent controversies or concerns related to the company's proxy voting mechanics; |
| ■ | Any unintended consequences resulting from implementation of the proposal; and |
| ■ | Any other factors that may be relevant. |
Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions
Sustainability Policy Recommendation: Generally vote against management proposals to ratify provisions of the company’s existing charter or bylaws, unless these governance provisions align with best practice.
In addition, voting against/withhold from individual directors, members of the governance committee, or the full board may be warranted, considering:
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| ■ | The presence of a shareholder proposal addressing the same issue on the same ballot; |
| ■ | The board's rationale for seeking ratification; |
| ■ | Disclosure of actions to be taken by the board should the ratification proposal fail; |
| ■ | Disclosure of shareholder engagement regarding the board’s ratification request; |
| ■ | The level of impairment to shareholders' rights caused by the existing provision; |
| ■ | The history of management and shareholder proposals on the provision at the company’s past meetings; |
| ■ | Whether the current provision was adopted in response to the shareholder proposal; |
| ■ | The company's ownership structure; and |
| ■ | Previous use of ratification proposals to exclude shareholder proposals. |
Reimbursing Proxy Solicitation Expenses
Sustainability Policy Recommendation: Vote case-by-case on proposals to reimburse proxy solicitation expenses.
When voting in conjunction with support of a dissident slate, vote for the reimbursement of all appropriate proxy solicitation expenses associated with the election.
Generally vote for shareholder proposals calling for the reimbursement of reasonable costs incurred in connection with nominating one or more candidates in a contested election where the following apply:
| ■ | The election of fewer than 50% of the directors to be elected is contested in the election; |
| ■ | One or more of the dissident’s candidates is elected; |
| ■ | Shareholders are not permitted to cumulate their votes for directors; and |
| ■ | The election occurred, and the expenses were incurred, after the adoption of this bylaw. |
Reincorporation Proposals
Sustainability Policy Recommendation: Management or shareholder proposals to change a company's state of incorporation should be evaluated case-by-case, giving consideration to both financial and corporate governance concerns including the following:
| ■ | Reasons for reincorporation; |
| ■ | Comparison of company's governance practices and provisions prior to and following the reincorporation; and |
| ■ | Comparison of corporation laws of original state and destination state. |
| ■ | Vote for reincorporation when the economic factors outweigh any neutral or negative governance changes. |
Shareholder Ability to Act by Written Consent
Sustainability Policy Recommendation: Generally vote against management and shareholder proposals to restrict or prohibit shareholders' ability to act by written consent.
Generally vote for management and shareholder proposals that provide shareholders with the ability to act by written consent, taking into account the following factors:
| ■ | Shareholders' current right to act by written consent; |
| ■ | The consent threshold; |
| ■ | The inclusion of exclusionary or prohibitive language; |
| ■ | Investor ownership structure; and |
| ■ | Shareholder support of, and management's response to, previous shareholder proposals. |
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Vote case-by-case on shareholder proposals if, in addition to the considerations above, the company has the following governance and antitakeover provisions:
| ■ | An unfettered14 right for shareholders to call special meetings at a 10 percent threshold; |
| ■ | A majority vote standard in uncontested director elections; |
| ■ | No non-shareholder-approved pill; and |
| ■ | An annually elected board. |
Shareholder Ability to Call Special Meetings
Sustainability Policy Recommendation: Vote against management or shareholder proposals to restrict or prohibit shareholders’ ability to call special meetings.
Generally vote for management or shareholder proposals that provide shareholders with the ability to call special meetings taking into account the following factors:
| ■ | Shareholders’ current right to call special meetings; |
| ■ | Minimum ownership threshold necessary to call special meetings (10% preferred); |
| ■ | The inclusion of exclusionary or prohibitive language; |
| ■ | Investor ownership structure; and |
| ■ | Shareholder support of, and management’s response to, previous shareholder proposals. |
Stakeholder Provisions
Sustainability Policy Recommendation: Vote against proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination.
State Antitakeover Statutes
Sustainability Policy Recommendation: Vote case-by-case on proposals to opt in or out of state takeover statutes (including fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, and anti-greenmail provisions).
Supermajority Vote Requirements
Sustainability Policy Recommendation: Vote against proposals to require a supermajority shareholder vote.
Vote for management or shareholder proposals to reduce supermajority vote requirements. However, for companies with shareholder(s) who have significant ownership levels, vote case-by-case, taking into account:
| ■ | Ownership structure; |
| ■ | Quorum requirements; and |
| ■ | Vote requirements. |
| 14 | "Unfettered" means no restrictions on agenda items, no restrictions on the number of shareholders who can group together to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than 30 days after the last annual meeting and no greater than 90 prior to the next annual meeting. |
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Virtual Shareholder Meetings
Sustainability Policy Recommendation: Generally vote for management proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances under which virtual-only15 meetings would be held, and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in- person meeting.
Vote case-by-case on shareholder proposals concerning virtual-only meetings, considering:
| ■ | Scope and rationale of the proposal; and |
| ■ | Concerns identified with the company’s prior meeting practices. |
| 15 | Virtual-only shareholder meeting” refers to a meeting of shareholders that is held exclusively using technology without a corresponding in-person meeting. |
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4. Capital/Restructuring
Capital
Adjustments to Par Value of Common Stock
Sustainability Policy Recommendation: Vote for management proposals to reduce the par value of common stock unless the action is being taken to facilitate an anti-takeover device or some other negative corporate governance action.
Vote for management proposals to eliminate par value.
Common Stock Authorization
General Authorization Requests
Sustainability Policy Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of common stock that are to be used for general corporate purposes:
| ■ | If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to 50% of current authorized shares. |
| ■ | If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized shares. |
| ■ | If share usage is greater than current authorized shares, vote for an increase of up to the current share usage. |
| ■ | In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization. |
Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
| ■ | The proposal seeks to increase the number of authorized shares of the class of common stock that has superior voting rights to other share classes; |
| ■ | On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result in an excessive increase in the share authorization; |
| ■ | The company has a non-shareholder approved poison pill (including an NOL pill); or |
| ■ | The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
| ■ | In, or subsequent to, the company's most recent 10-K filing, the company discloses that there is substantial doubt about its ability to continue as a going concern; |
| ■ | The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the increase in authorized capital; or |
| ■ | A government body has in the past year required the company to increase its capital ratios. |
For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.
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Specific Authorization Requests
Sustainability Policy Recommendation: Generally vote for proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:
| ■ | twice the amount needed to support the transactions on the ballot, and |
| ■ | the allowable increase as calculated for general issuances above. |
Dual Class Structure
Sustainability Policy Recommendation: Generally vote against proposals to create a new class of common stock unless:
| ■ | The company discloses a compelling rationale for the dual-class capital structure, such as: |
| ■ | The company's auditor has concluded that there is substantial doubt about the company's ability to continue as a going concern; or |
| ■ | The new class of shares will be transitory; |
| ■ | The new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short term and long term; and |
| ■ | The new class is not designed to preserve or increase the voting power of an insider or significant shareholder. |
Issue Stock for Use with Rights Plan
Sustainability Policy Recommendation: Vote against proposals that increase authorized common stock for the explicit purpose of implementing a non-shareholder- approved shareholder rights plan (poison pill).
Preemptive Rights
Sustainability Policy Recommendation: Vote case-by-case on shareholder proposals that seek preemptive rights, taking into consideration:
| ■ | The size of the company; |
| ■ | The shareholder base; and |
| ■ | The liquidity of the stock. |
Preferred Stock Authorization
General Authorization Requests
Sustainability Policy Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of preferred stock that are to be used for general corporate purposes:
| ■ | If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to 50% of current authorized shares. |
| ■ | If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized shares. |
| ■ | If share usage is greater than current authorized shares, vote for an increase of up to the current share usage. |
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| ■ | In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization. |
| ■ | If no preferred shares are currently issued and outstanding, vote against the request, unless the company discloses a specific use for the shares. |
Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
| ■ | If the shares requested are blank check preferred shares that can be used for antitakeover purposes;16 |
| ■ | The company seeks to increase a class of non-convertible preferred shares entitled to more than one vote per share on matters that do not solely affect the rights of preferred stockholders "supervoting shares"); |
| ■ | The company seeks to increase a class of convertible preferred shares entitled to a number of votes greater than the number of common shares into which they're convertible ("supervoting shares") on matters that do not solely affect the rights of preferred stockholders; |
| ■ | The stated intent of the increase in the general authorization is to allow the company to increase an existing designated class of supervoting preferred shares; |
| ■ | On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result in an excessive increase in the share authorization; |
| ■ | The company has a non-shareholder approved poison pill (including an NOL pill); or |
| ■ | The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below market value, or with problematic voting rights, without shareholder approval. |
However, generally vote for proposed increases beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
| ■ | In, or subsequent to, the company's most recent 10-K filing, the company discloses that there is substantial doubt about its ability to continue as a going concern; |
| ■ | The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the increase in authorized capital; or |
| ■ | A government body has in the past year required the company to increase its capital ratios. |
For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific Authorization Requests
Sustainability Policy Recommendation: Generally vote for proposals to increase the number of authorized preferred shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:
| ■ | twice the amount needed to support the transactions on the ballot, and |
| ■ | the allowable increase as calculated for general issuances above. |
| 16 | To be acceptable, appropriate disclosure would be needed that the shares are “declawed”: i.e., representation by the board that it will not, without prior stockholder approval, issue or use the preferred stock for any defensive or anti-takeover purpose or for the purpose of implementing any stockholder rights plan. |
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Recapitalization Plans
Sustainability Policy Recommendation: Vote case-by-case on recapitalizations (reclassifications of securities), taking into account the following:
| ■ | More simplified capital structure; |
| ■ | Enhanced liquidity; |
| ■ | Fairness of conversion terms; |
| ■ | Impact on voting power and dividends; |
| ■ | Reasons for the reclassification; |
| ■ | Conflicts of interest; and |
| ■ | Other alternatives considered. |
Reverse Stock Splits
Sustainability Policy Recommendation: Vote for management proposals to implement a reverse stock split if:
| ■ | The number of authorized shares will be proportionately reduced; or |
| ■ | The effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with Sustainability Advisory Services' Common Stock Authorization policy. |
Vote case-by-case on proposals that do not meet either of the above conditions, taking into consideration the following factors:
| ■ | Stock exchange notification to the company of a potential delisting; |
| ■ | Disclosure of substantial doubt about the company's ability to continue as a going concern without additional financing; |
| ■ | The company's rationale; or |
| ■ | Other factors as applicable. |
Share Repurchase Programs
Sustainability Policy Recommendation: For U.S.-incorporated companies, and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the board authority to conduct open-market repurchases, in the absence of company-specific concerns regarding:
| ■ | Greenmail, |
| ■ | The use of buybacks to inappropriately manipulate incentive compensation metrics, |
| ■ | Threats to the company's long-term viability, or |
| ■ | Other company-specific factors as warranted. |
Vote case-by-case on proposals to repurchase shares directly from specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.
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Stock Distributions: Splits and Dividends
Sustainability Policy Recommendation: Generally vote for management proposals to increase the common share authorization for stock split or stock dividend, provided that the effective increase in authorized shares is equal to or is less than the allowable increase calculated in accordance with Sustainability Advisory Services' Common Stock Authorization policy.
Tracking Stock
Sustainability Policy Recommendation: Vote case-by-case on the creation of tracking stock, weighing the strategic value of the transaction against such factors as:
| ■ | Adverse governance changes; |
| ■ | Excessive increases in authorized capital stock; |
| ■ | Unfair method of distribution; |
| ■ | Diminution of voting rights; |
| ■ | Adverse conversion features; |
| ■ | Negative impact on stock option plans; and |
| ■ | Alternatives such as spin-off. |
Share Issuance Mandates at U.S. Domestic Issuers Incorporated Outside the U.S.
Sustainability Policy Recommendation: For U.S. domestic issuers incorporated outside the U.S. and listed solely on a U.S. exchange, generally vote for resolutions to authorize the issuance of common shares up to 20 percent of currently issued common share capital, where not tied to a specific transaction or financing proposal.
For pre-revenue or other early-stage companies that are heavily reliant on periodic equity financing, generally vote for resolutions to authorize the issuance of common shares up to 50 percent of currently issued common share capital. The burden of proof will be on the company to establish that it has a need for the higher limit.
Renewal of such mandates should be sought at each year’s annual meeting.
Vote case-by-case on share issuances for a specific transaction or financing proposal.
Restructuring
Appraisal Rights
Sustainability Policy Recommendation: Vote for proposals to restore or provide shareholders with rights of appraisal.
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Asset Purchases
Sustainability Policy Recommendation: Vote case-by-case on asset purchase proposals, considering the following factors:
| ■ | Purchase price; |
| ■ | Fairness opinion; |
| ■ | Financial and strategic benefits; |
| ■ | How the deal was negotiated; |
| ■ | Conflicts of interest; |
| ■ | Other alternatives for the business; |
| ■ | Non-completion risk. |
Asset Sales
Sustainability Policy Recommendation: Vote case-by-case on asset sales, considering the following factors:
| ■ | Impact on the balance sheet/working capital; |
| ■ | Potential elimination of diseconomies; |
| ■ | Anticipated financial and operating benefits; |
| ■ | Anticipated use of funds; |
| ■ | Value received for the asset; |
| ■ | Fairness opinion; |
| ■ | How the deal was negotiated; |
| ■ | Conflicts of interest. |
Bundled Proposals
Sustainability Policy Recommendation: Vote case-by-case on bundled or “conditional” proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, vote against the proposals. If the combined effect is positive, support such proposals.
Conversion of Securities
Sustainability Policy Recommendation: Vote case-by-case on proposals regarding conversion of securities. When evaluating these proposals, the investor should review the dilution to existing shareholders, the conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest.
Vote for the conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the transaction is not approved.
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Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans
Sustainability Policy Recommendation: Vote case-by-case on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, after evaluating:
| ■ | Dilution to existing shareholders' positions; |
| ■ | Terms of the offer - discount/premium in purchase price to investor, including any fairness opinion; termination penalties; exit strategy; |
| ■ | Financial issues - company's financial situation; degree of need for capital; use of proceeds; effect of the financing on the company's cost of capital; |
| ■ | Management's efforts to pursue other alternatives; |
| ■ | Control issues - change in management; change in control, guaranteed board and committee seats; standstill provisions; voting agreements; veto power over certain corporate actions; and |
| ■ | Conflict of interest - arm's length transaction, managerial incentives. |
Vote for the debt restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved.
Formation of Holding Company
Sustainability Policy Recommendation: Vote case-by-case on proposals regarding the formation of a holding company, taking into consideration the following:
| ■ | The reasons for the change; |
| ■ | Any financial or tax benefits; |
| ■ | Regulatory benefits; |
| ■ | Increases in capital structure; and |
| ■ | Changes to the articles of incorporation or bylaws of the company. |
Absent compelling financial reasons to recommend for the transaction, vote against the formation of a holding company if the transaction would include either of the following:
| ■ | Increases in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”); |
or
| ■ | Adverse changes in shareholder rights. |
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Going Private and Going Dark Transactions (LBOs and Minority Squeeze- outs)
Sustainability Policy Recommendation: Vote case-by-case on going private transactions, taking into account the following:
| ■ | Offer price/premium; |
| ■ | Fairness opinion; |
| ■ | How the deal was negotiated; |
| ■ | Conflicts of interest; |
| ■ | Other alternatives/offers considered; and |
| ■ | Non-completion risk. |
Vote case-by-case on going dark transactions, determining whether the transaction enhances shareholder value by taking into consideration:
| ■ | Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market research of the stock); |
| ■ | Balanced interests of continuing vs. cashed-out shareholders, taking into account the following: |
| ■ | Are all shareholders able to participate in the transaction? |
| ■ | Will there be a liquid market for remaining shareholders following the transaction? |
| ■ | Does the company have strong corporate governance? |
| ■ | Will insiders reap the gains of control following the proposed transaction? |
| ■ | Does the state of incorporation have laws requiring continued reporting that may benefit shareholders? |
Joint Ventures
Sustainability Policy Recommendation: Vote case-by-case on proposals to form joint ventures, taking into account the following:
| ■ | Percentage of assets/business contributed; |
| ■ | Percentage ownership; |
| ■ | Financial and strategic benefits; |
| ■ | Governance structure; |
| ■ | Conflicts of interest; |
| ■ | Other alternatives; and |
| ■ | Non-completion risk. |
Liquidations
Sustainability Policy Recommendation: Vote case-by-case on liquidations, taking into account the following:
| ■ | Management’s efforts to pursue other alternatives; |
| ■ | Appraisal value of assets; and |
| ■ | The compensation plan for executives managing the liquidation. |
Vote for the liquidation if the company will file for bankruptcy if the proposal is not approved.
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Mergers and Acquisitions
Sustainability Policy Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including:
| ■ | Valuation - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction and strategic rationale. |
| ■ | Market reaction - How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal. |
| ■ | Strategic rationale - Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions. |
| ■ | Negotiations and process - Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation "wins" can also signify the deal makers' competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value. |
| ■ | Conflicts of interest - Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. |
| ■ | Governance - Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance. |
Private Placements/Warrants/Convertible Debentures
Sustainability Policy Recommendation: Vote case-by-case on proposals regarding private placements, warrants, and convertible debentures taking into consideration:
| ■ | Dilution to existing shareholders' position: The amount and timing of shareholder ownership dilution should be weighed against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common stock, absent preemptive rights, is typically dilutive to existing shareholders, share price appreciation is often the necessary event to trigger the exercise of "out of the money" warrants and convertible debt. In these instances from a value standpoint, the negative impact of dilution is mitigated by the increase in the company's stock price that must occur to trigger the dilutive event. |
| ■ | Terms of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features, termination penalties, exit strategy): |
| ■ | The terms of the offer should be weighed against the alternatives of the company and in light of company's financial condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be at a premium to the then prevailing stock price at the time of private placement. |
| ■ | When evaluating the magnitude of a private placement discount or premium, consider factors that influence the discount or premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information asymmetry and anticipation of future performance. |
| ■ | Financial issues: |
| ■ | The company's financial condition; |
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| ■ | Degree of need for capital; |
| ■ | Use of proceeds; |
| ■ | Effect of the financing on the company's cost of capital; |
| ■ | Current and proposed cash burn rate; |
| ■ | Going concern viability and the state of the capital and credit markets. |
| ■ | Management's efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint ventures, partnership, merger or sale of part or all of the company. |
| ■ | Control issues: |
| ■ | Change in management; |
| ■ | Change in control; |
| ■ | Guaranteed board and committee seats; |
| ■ | Standstill provisions; |
| ■ | Voting agreements; |
| ■ | Veto power over certain corporate actions; and |
| ■ | Minority versus majority ownership and corresponding minority discount or majority control premium |
| ■ | Conflicts of interest: |
| ■ | Conflicts of interest should be viewed from the perspective of the company and the investor. |
| ■ | Were the terms of the transaction negotiated at arm's length? Are managerial incentives aligned with shareholder interests? |
| ■ | Market reaction: |
| ■ | The market's response to the proposed deal. A negative market reaction is a cause for concern. Market reaction may be addressed by analyzing the one day impact on the unaffected stock price. |
Vote for the private placement, or for the issuance of warrants and/or convertible debentures in a private placement, if it is expected that the company will file for bankruptcy if the transaction is not approved.
Reorganization/Restructuring Plan (Bankruptcy)
Sustainability Policy Recommendation: Vote case-by-case on proposals to common shareholders on bankruptcy plans of reorganization, considering the following factors including, but not limited to:
| ■ | Estimated value and financial prospects of the reorganized company; |
| ■ | Percentage ownership of current shareholders in the reorganized company; |
| ■ | Whether shareholders are adequately represented in the reorganization process (particularly through the existence of an official equity committee); |
| ■ | The cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s); |
| ■ | Existence of a superior alternative to the plan of reorganization; and |
| ■ | Governance of the reorganized company. |
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Special Purpose Acquisition Corporations (SPACs)
Sustainability Policy Recommendation: Vote case-by-case on SPAC mergers and acquisitions taking into account the following:
| ■ | Valuation—Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness opinion and the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target, if it is a private entity. |
| ■ | Market reaction—How has the market responded to the proposed deal? A negative market reaction may be a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price. |
| ■ | Deal timing—A main driver for most transactions is that the SPAC charter typically requires the deal to be complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date. |
| ■ | Negotiations and process—What was the process undertaken to identify potential target companies within specified industry or location specified in charter? Consider the background of the sponsors. |
| ■ | Conflicts of interest—How are sponsors benefiting from the transaction compared to IPO shareholders? Potential conflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80% rule (the charter requires that the fair market value of the target is at least equal to 80% of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a transaction to be completed within the 18-24 month timeframe. |
| ■ | Voting agreements—Are the sponsors entering into enter into any voting agreements/ tender offers with shareholders who are likely to vote against the proposed merger or exercise conversion rights? |
| ■ | Governance—What is the impact of having the SPAC CEO or founder on key committees following the proposed merger? |
Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions
Sustainability Policy Recommendation: Vote case-by-case on SPAC extension proposals taking into account the length of the requested extension, the status of any pending transaction(s) or progression of the acquisition process, any added incentive for non-redeeming shareholders, and any prior extension requests.
| ■ | Length of request: Typically, extension requests range from two to six months, depending on the progression of the SPAC's acquistion process. |
| ■ | Pending transaction(s) or progression of the acquisition process: Sometimes an intial business combination was already put to a shareholder vote, but, for varying reasons, the transaction could not be consummated by the termination date and the SPAC is requesting an extension. Other times, the SPAC has entered into a definitive transaction agreement, but needs additional time to consummate or hold the shareholder meeting. |
| ■ | Added incentive for non-redeeming shareholders: Sometimes the SPAC sponsor (or other insiders) will contribute, typically as a loan to the company, additional funds that will be added to the redemption value of each public share as long as such shares are not redeemed in connection with the extension request. The purpose of the "equity kicker" is to incentivize shareholders to hold their shares through the end of the requested extension or until the time the transaction is put to a shareholder vote, rather than electing redeemption at the extension proposal meeting. |
| ■ | Prior extension requests: Some SPACs request additional time beyond the extension period sought in prior extension requests. |
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Spin-offs
Sustainability Policy Recommendation: Vote case-by-case on spin-offs, considering:
| ■ | Tax and regulatory advantages; |
| ■ | Planned use of the sale proceeds; |
| ■ | Valuation of spinoff; |
| ■ | Fairness opinion; |
| ■ | Benefits to the parent company; |
| ■ | Conflicts of interest; |
| ■ | Managerial incentives; |
| ■ | Corporate governance changes; |
| ■ | Changes in the capital structure. |
Value Maximization Shareholder Proposals
Sustainability Policy Recommendation: Vote case-by-case on shareholder proposals seeking to maximize shareholder value by:
| ■ | Hiring a financial advisor to explore strategic alternatives; |
| ■ | Selling the company; or |
| ■ | Liquidating the company and distributing the proceeds to shareholders. |
These proposals should be evaluated based on the following factors:
| ■ | Prolonged poor performance with no turnaround in sight; |
| ■ | Signs of entrenched board and management (such as the adoption of takeover defenses); |
| ■ | Strategic plan in place for improving value; |
| ■ | Likelihood of receiving reasonable value in a sale or dissolution; and |
| ■ | The company actively exploring its strategic options, including retaining a financial advisor. |
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5. Compensation
Executive Pay Evaluation
Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:
| 1. | Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs; |
| 2. | Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation; |
| 3. | Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed); |
| 4. | Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly; |
| 5. | Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors does not compromise their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level, it may incorporate a variety of generally accepted best practices. |
Advisory Votes on Executive Compensation—Management Proposals (Management Say-on-Pay)
Sustainability Policy Recommendation: Vote case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation.
Vote against Advisory Votes on Executive Compensation (Say-on-Pay or "SOP") if:
| ■ | There is an unmitigated misalignment between CEO pay and company performance (pay for performance); |
| ■ | The company maintains significant problematic pay practices; |
| ■ | The board exhibits a significant level of poor communication and responsiveness to shareholders. |
Vote against or withhold from the members of the compensation committee and potentially the full board if:
| ■ | There is no SOP on the ballot, and an against vote on an SOP is warranted due to pay for performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof; |
| ■ | The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes cast; |
| ■ | The company has recently practiced or approved problematic pay practices, such as option repricing or option backdating; or |
| ■ | The situation is egregious. |
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Primary Evaluation Factors for Executive Pay
Pay-for-Performance Evaluation
Sustainability Advisory Services annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the Russell 3000 or Russell 3000E Indices17, this analysis considers the following:
| 1. | Peer Group18 Alignment: |
| ■ | The degree of alignment between the company's annualized TSR rank and the CEO's annualized total pay rank within a peer group, each measured over a three-year period. |
| ■ | The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year period. |
| ■ | The multiple of the CEO's total pay relative to the peer group median in the most recent fiscal year. |
| 2. | Absolute Alignment19 – the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years – i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period. |
If the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of companies outside the Russell indices, misaligned pay and performance are otherwise suggested, our analysis may include any of the following qualitative factors, as relevant to evaluating how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
| ■ | The ratio of performance- to time-based incentive awards; |
| ■ | The overall ratio of performance-based compensation; |
| ■ | The rigor of performance goals; |
| ■ | The complexity and risks around pay program design; |
| ■ | The transparency and clarity of disclosure; |
| ■ | The company's peer group benchmarking practices; |
| ■ | Financial/operational results, both absolute and relative to peers; |
| ■ | Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards); |
| ■ | Realizable pay20 compared to grant pay; and |
| ■ | Any other factors deemed relevant. |
| 17 | The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities. |
| 18 | The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company's selected peers' GICS industry group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market cap bucket that is reflective of the company's. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant. |
| 19 | Only Russell 3000 Index companies are subject to the Absolute Alignment analysis. |
| 20 | Sustainability Advisory Services research reports include realizable pay for S&P1500 companies. |
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Problematic Pay Practices
Problematic pay elements are generally evaluated case-by-case considering the context of a company's overall pay program and demonstrated pay-for-performance philosophy. The focus is on executive compensation practices that contravene the global pay principles, including:
| ■ | Problematic practices related to non-performance-based compensation elements; |
| ■ | Incentives that may motivate excessive risk-taking or present a windfall risk; and |
| ■ | Pay decisions that circumvent pay-for-performance, such as options backdating or waiving performance requirements. |
The list of examples below highlights certain problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:
| ■ | Repricing or replacing of underwater stock options/SARs without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options); |
| ■ | Extraordinary perquisites or tax gross-ups; |
| ■ | New or materially amended agreements that provide for: |
| ■ | Excessive termination or CIC severance payments (generally exceeding 3 times base salary and average/target/most recent bonus); |
| ■ | CIC severance payments without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers) or in connection with a problematic Good Reason definition; |
| ■ | CIC excise tax gross-up entitlements (including "modified" gross-ups); |
| ■ | Multi-year guaranteed awards that are not at risk due to rigorous performance conditions; |
| ■ | Liberal CIC definition combined with any single-trigger CIC benefits; |
| ■ | Severance payments made when the termination is not clearly disclosed as involuntary (for example, a termination without cause or resignation for good reason); |
| ■ | Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI's executives is not possible; |
| ■ | Any other provision or practice deemed to be egregious and present a significant risk to investors. |
The above examples are not an exhaustive list. Please refer to ISS' U.S. Compensation Policies FAQ document for additional detail on specific pay practices that have been identified as problematic and may lead to negative vote recommendations.
Options Backdating
The following factors should be examined case-by-case to allow for distinctions to be made between “sloppy” plan administration versus deliberate action or fraud:
| ■ | Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes; |
| ■ | Duration of options backdating; |
| ■ | Size of restatement due to options backdating; |
| ■ | Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and |
| ■ | Adoption of a grant policy that prohibits backdating, and creates a fixed grant schedule or window period for equity grants in the future. |
Compensation Committee Communications and Responsiveness
Consider the following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:
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| ■ | Failure to respond to majority-supported shareholder proposals on executive pay topics; or |
| ■ | Failure to adequately respond to the company's previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account: |
| ■ | The company's response, including: |
| ■ | Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support (including the timing and frequency of engagements and whether independent directors participated); |
| ■ | Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition; |
| ■ | Disclosure of specific and meaningful actions taken to address shareholders' concerns; |
| ■ | Other recent compensation actions taken by the company; |
| ■ | Whether the issues raised are recurring or isolated; |
| ■ | The company's ownership structure; and |
| ■ | Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness. |
Frequency of Advisory Vote on Executive Compensation ("Say When on Pay")
Sustainability Policy Recommendation: Vote for annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies' executive pay programs.
Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale
Sustainability Policy Recommendation: Vote case-by-case on say on Golden Parachute proposals, including consideration of existing change-in-control arrangements maintained with named executive officers rather than focusing primarily on new or extended arrangements.
Features that may result in an “against” recommendation include one or more of the following, depending on the number, magnitude, and/or timing of issue(s):
| ■ | Single- or modified-single-trigger cash severance; |
| ■ | Single-trigger acceleration of unvested equity awards; |
| ■ | Full acceleration of equity awards granted shortly before the change in control; |
| ■ | Acceleration of performance awards above the target level of performance without compelling rationale; |
| ■ | Excessive cash severance (>3x base salary and bonus); |
| ■ | Excise tax gross-ups triggered and payable; |
| ■ | Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or |
| ■ | Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or |
| ■ | The company's assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote. |
Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis. However, the presence of multiple legacy problematic features will also be closely scrutinized.
In cases where the golden parachute vote is incorporated into a company's advisory vote on compensation (management say-on-pay), the say-on-pay proposal will be evaluated in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.
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Equity-Based and Other Incentive Plans
Please refer to Sustainability Advisory Services' U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan Scorecard policy.
Sustainability Policy Recommendation: Vote case-by-case on certain equity-based compensation plans21 depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an "Equity Plan Scorecard" (EPSC) approach with three pillars:
| ■ | Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company's estimated Shareholder Value Transfer (SVT) in relation to peers and considering both: |
| ■ | SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; and |
| ■ | SVT based only on new shares requested plus shares remaining for future grants. |
| ■ | Plan Features: |
| ■ | Quality of disclosure around vesting upon a change in control (CIC); |
| ■ | Discretionary vesting authority; |
| ■ | Liberal share recycling on various award types; |
| ■ | Lack of minimum vesting period for grants made under the plan; |
| ■ | Dividends payable prior to award vesting. |
| ■ | Grant Practices: |
| ■ | The company’s three year burn rate relative to its industry/market cap peers; |
| ■ | Vesting requirements in CEO'S recent equity grants (3-year look-back); |
| ■ | The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years); |
| ■ | The proportion of the CEO's most recent equity grants/awards subject to performance conditions; |
| ■ | Whether the company maintains a sufficient claw-back policy; |
| ■ | Whether the company maintains sufficient post exercise/vesting share-holding requirements. |
Generally vote against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders' interests, or if any of the following egregious factors ("overriding factors") apply:
| ■ | Awards may vest in connection with a liberal change-of-control definition; |
| ■ | The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it – for NYSE and Nasdaq listed companies -- or by not prohibiting it when the company has a history of repricing – for non-listed companies); |
| ■ | The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances; |
| ■ | The plan is excessively dilutive to shareholders' holdings; |
| ■ | The plan contains an evergreen (automatic share replenishment) feature; or |
| ■ | Any other plan features are determined to have a significant negative impact on shareholder interests. |
| 21 | Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further evaluated case-by-case. |
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Further Information on certain EPSC Factors
Shareholder Value Transfer (SVT)
The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the amount of shareholders’ equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed, shares available under existing plans, and shares granted but unexercised (using two measures, in the case of plans subject to the Equity Plan Scorecard evaluation, as noted above). All award types are valued. For omnibus plans, unless limitations are placed on the most expensive types of awards (for example, full value awards), the assumption is made that all awards to be granted will be the most expensive types.
For proposals subject to Equity Plan Scorecard evaluation, Shareholder Value Transfer is reasonable if it falls below a company-specific benchmark. The benchmark is determined as follows: The top quartile performers in each industry group (using the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for each industry are established based on these top performers’ historic SVT. Regression analyses are run on each industry group to identify the variables most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging the company-specific performance measures, size and cash compensation into the industry cap equations to arrive at the company’s benchmark.22
Three-Year Value-Adjusted Burn Rate
A "Value-Adjusted Burn Rate" is used for stock plan evaluations. Value-Adjusted Burn Rate benchmarks are calculated as the greater of: (1) an industry-specific threshold based on three-year burn rates within the company's GICS group segmented by S&P 500, Russell 3000 index (less the S&P 500) and non-Russell 3000 index; and (2) a de minimis threshold established separately for each of the S&P 500, the Russell 3000 index less the S&P 500, and the non-Russell 3000 index. Year-over-year burn-rate benchmark changes will be limited to a predetermined range above or below the prior year's burn-rate benchmark.
The Value-Adjusted Burn Rate will be calculated as follows:
Value-Adjusted Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards * stock price)) / (Weighted average common shares * stock price).
Egregious Factors
Liberal Change in Control Definition
Generally vote against equity plans if the plan has a liberal definition of change in control and the equity awards could vest upon such liberal definition of change-in-control, even though an actual change in control may not occur. Examples of such a definition include, but are not limited to, announcement or commencement of a tender offer, provisions for acceleration upon a “potential” takeover, shareholder approval of a merger or other transactions, or similar language.
| 22 | For plans evaluated under the Equity Plan Scorecard policy, the company's SVT benchmark is considered along with other factors. |
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Repricing Provisions
Vote against plans that expressly permit the repricing or exchange of underwater stock options/stock appreciate rights (SARs) without prior shareholder approval. "Repricing" includes the ability to do any of the following:
| ■ | Amend the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs; |
| ■ | Cancel outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise price of the original options or SARs; |
| ■ | Cancel underwater options in exchange for stock awards; or |
| ■ | Provide cash buyouts of underwater options. |
While the above cover most types of repricing, Sustainability Advisory Services may view other provisions as akin to repricing depending on the facts and circumstances.
Also, vote against or withhold from members of the Compensation Committee who approved repricing (as defined above or otherwise determined by Sustainability Advisory Services) without prior shareholder approval, even if such repricings are allowed in their equity plan.
Vote against plans that do not expressly prohibit repricing or cash buyout of underwater options without shareholder approval if the company has a history of repricing/buyouts without shareholder approval, and the applicable listing standards would not preclude them from doing so.
Problematic Pay Practices or Significant Pay-for-Performance Disconnect
If the equity plan on the ballot is a vehicle for problematic pay practices, vote against the plan.
If a significant portion of the CEO’s misaligned pay is attributed to non-performance-based equity awards, and there is an equity plan on the ballot with the CEO as one of the participants, Sustainability Advisory Services may recommend a vote against the equity plan. Considerations in voting against the equity plan may include, but are not limited to:
| ■ | Magnitude of pay misalignment; |
| ■ | Contribution of non–performance-based equity grants to overall pay; and |
| ■ | The proportion of equity awards granted in the last three fiscal years concentrated at the named executive officer level. |
Specific Treatment of Certain Award Types in Equity Plan Evaluations
Dividend Equivalent Rights
Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder equity to employees and non-employee directors and this cost should be captured.
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Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs)
For Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion of outstanding Operating Partnership (OP) units in the share count for the purposes of determining: (1) market capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.
Other Compensation Plans
401(k) Employee Benefit Plans
Sustainability Policy Recommendation: Vote for proposals to implement a 401(k) savings plan for employees.
Employee Stock Ownership Plans (ESOPs)
Sustainability Policy Recommendation: Vote for proposals to implement an ESOP or increase authorized shares for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares).
Employee Stock Purchase Plans—Qualified Plans
Sustainability Policy Recommendation: Vote case-by-case on qualified employee stock purchase plans. Vote for employee stock purchase plans where all of the following apply:
| ■ | Purchase price is at least 85 percent of fair market value; |
| ■ | Offering period is 27 months or less; and |
| ■ | The number of shares allocated to the plan is 10 percent or less of the outstanding shares. |
Vote against qualified employee stock purchase plans where any of the following apply:
| ■ | Purchase price is less than 85 percent of fair market value; or |
| ■ | Offering period is greater than 27 months; or |
| ■ | The number of shares allocated to the plan is more than ten percent of the outstanding shares. |
Employee Stock Purchase Plans—Non-Qualified Plans
Sustainability Policy Recommendation: Vote case-by-case on nonqualified employee stock purchase plans. Vote for nonqualified employee stock purchase plans with all the following features:
| ■ | Broad-based participation (i.e., all employees of the company with the exclusion of individuals with 5 percent or more of beneficial ownership of the company); |
| ■ | Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary; |
| ■ | Company matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of 20 percent from market value; |
| ■ | No discount on the stock price on the date of purchase when there is a company matching contribution. |
Vote against nonqualified employee stock purchase plans when any of the plan features do not meet the above criteria. If the company matching contribution or effective discount exceeds the above, Sustainability Advisory Services may evaluate the SVT cost as part of the assessment.
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Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m))
Sustainability Policy Recommendation: Vote case-by-case on amendments to cash and equity incentive plans.
Generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
| ■ | Addresses administrative features only; or |
| ■ | Seeks approval for Section 162(m) purposes only, and the plan administering committee consists entirely of independent outsiders, per Sustainability Advisory Services’ Classification of Directors. Note that if the company is presenting the plan to shareholders for the first time after the company’s initial public offering (IPO), or if the proposal is bundled with other material plan amendments, then the recommendation will be case-by-case (see below). |
Vote against such proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
| ■ | Seeks approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of independent outsiders, per Sustainability Advisory Services’ Classification of Directors. |
Vote case-by-case on all other proposals to amend cash incentive plans. This includes plans presented to shareholders for the first time after the company's IPO and/or proposals that bundle material amendment(s) other than those for Section 162(m) purposes
Vote case-by-case on all other proposals to amend equity incentive plans, considering the following:
| ■ | If the proposal requests additional shares and/or the amendments may potentially increase the transfer of shareholder value to employees, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of the amendments. |
| ■ | If the plan is being presented to shareholders for the first time after the company's IPO, whether or not additional shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of any amendments. |
| ■ | If there is no request for additional shares and the amendments are not deemed to potentially increase the transfer of shareholder value to employees, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the EPSC evaluation will be shown for informational purposes. |
Option Exchange Programs/Repricing Options
Sustainability Policy Recommendation: Vote case-by-case on management proposals seeking approval to exchange/reprice options taking into consideration:
| ■ | Historic trading patterns--the stock price should not be so volatile that the options are likely to be back “in- the-money” over the near term; |
| ■ | Rationale for the re-pricing--was the stock price decline beyond management's control? |
| ■ | Is this a value-for-value exchange? |
| ■ | Are surrendered stock options added back to the plan reserve? |
| ■ | Timing--repricing should occur at least one year out from any precipitous drop in company's stock price; |
| ■ | Option vesting--does the new option vest immediately or is there a black-out period? |
| ■ | Term of the option--the term should remain the same as that of the replaced option; |
| ■ | Exercise price--should be set at fair market or a premium to market; |
| ■ | Participants--executive officers and directors must be excluded. |
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If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration the company’s total cost of equity plans and its three-year average burn rate.
In addition to the above considerations, evaluate the intent, rationale, and timing of the repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous drop in the company’s stock price demonstrates poor timing. and warrants additional scrutiny. Also, consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to suggest that repricings are being done to take advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the 52-week high for the stock price.
Vote for shareholder proposals to put option repricings to a shareholder vote.
Stock Plans in Lieu of Cash
Sustainability Policy Recommendation: Vote case-by-case on plans that provide participants with the option of taking all or a portion of their cash compensation in the form of stock.
Vote for non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.
Vote case-by-case on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is not dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture the total cost of total compensation, no adjustments will be made to carve out the in-lieu-of cash compensation.
Transfer Stock Option (TSO) Programs
Sustainability Policy Recommendation: One-time Transfers: Vote against or withhold from compensation committee members if they fail to submit one-time transfers to shareholders for approval.
Vote case-by-case on one-time transfers. Vote for if:
| ■ | Executive officers and non-employee directors are excluded from participating; |
| ■ | Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; |
| ■ | There is a two-year minimum holding period for sale proceeds (cash or stock) for all participants. |
Additionally, management should provide a clear explanation of why options are being transferred to a third-party institution and whether the events leading up to a decline in stock price were beyond management's control. A review of the company's historic stock price volatility should indicate if the options are likely to be back “in-the-money” over the near term.
Ongoing TSO program: Vote against equity plan proposals if the details of ongoing TSO programs are not provided to shareholders. Since TSOs will be one of the award types under a stock plan, the ongoing TSO program, structure and mechanics must be disclosed to shareholders. The specific criteria to be considered in evaluating these proposals include, but not limited, to the following:
| ■ | Eligibility; |
| ■ | Vesting; |
| ■ | Bid-price; |
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| ■ | Term of options; |
| ■ | Cost of the program and impact of the TSOs on company’s total option expense |
| ■ | Option repricing policy. |
Amendments to existing plans that allow for introduction of transferability of stock options should make clear that only options granted post-amendment shall be transferable.
Director Compensation
Shareholder Ratification of Director Pay Programs
Sustainability Policy Recommendation: Vote case-by-case on management proposals seeking ratification of non- employee director compensation, based on the following factors:
| ■ | If the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support; and |
| ■ | An assessment of the following qualitative factors: |
| ■ | The relative magnitude of director compensation as compared to companies of a similar profile; |
| ■ | The presence of problematic pay practices relating to director compensation; |
| ■ | Director stock ownership guidelines and holding requirements; |
| ■ | Equity award vesting schedules; |
| ■ | The mix of cash and equity-based compensation; |
| ■ | Meaningful limits on director compensation; |
| ■ | The availability of retirement benefits or perquisites; and |
| ■ | The quality of disclosure surrounding director compensation. |
Equity Plans for Non-Employee Directors
Sustainability Policy Recommendation: Vote case-by-case on compensation plans for non-employee directors, based on:
| ■ | The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; |
| ■ | The company’s three-year burn rate relative to its industry/market cap peers; and |
| ■ | The presence of any egregious plan features (such as an option repricing provision or liberal CIC vesting risk). |
On occasion, director stock plans will exceed the plan cost or burn rate benchmarks when combined with employee or executive stock plans. In such cases, vote case-by-case on the plan taking into consideration the following qualitative factors:
| ■ | The relative magnitude of director compensation as compared to companies of a similar profile; |
| ■ | The presence of problematic pay practices relating to director compensation; |
| ■ | Director stock ownership guidelines and holding requirements; |
| ■ | Equity award vesting schedules; |
| ■ | The mix of cash and equity-based compensation; |
| ■ | Meaningful limits on director compensation; |
| ■ | The availability of retirement benefits or perquisites; and |
| ■ | The quality of disclosure surrounding director compensation. |
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Non-Employee Director Retirement Plans
Sustainability Policy Recommendation: Vote against retirement plans for non-employee directors. Vote for shareholder proposals to eliminate retirement plans for non-employee directors.
Shareholder Proposals on Compensation
Adopt Anti-Hedging/Pledging/Speculative Investments Policy
Sustainability Policy Recommendation: Generally vote for proposals seeking a policy that prohibits named executive officers from engaging in derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or pledging stock as collateral for a loan. However, the company’s existing policies regarding responsible use of company stock will be considered.
Bonus Banking/Bonus Banking “Plus”
Sustainability Policy Recommendation: Vote case-by-case on proposals seeking deferral of a portion of annual bonus pay, with ultimate payout linked to sustained results for the performance metrics on which the bonus was earned (whether for the named executive officers or a wider group of employees), taking into account the following factors:
| ■ | The company’s past practices regarding equity and cash compensation; |
| ■ | Whether the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio (at least 50 percent for full tenure); and |
| ■ | Whether the company has a rigorous claw-back policy in place. |
Compensation Consultants—Disclosure of Board or Company’s Utilization
Sustainability Policy Recommendation: Generally vote for shareholder proposals seeking disclosure regarding the company, board, or compensation committee’s use of compensation consultants, such as company name, business relationship(s), and fees paid.
Disclosure/Setting Levels or Types of Compensation for Executives and Directors
Sustainability Policy Recommendation: Generally vote for shareholder proposals seeking additional disclosure of executive and director pay information, provided the information requested is relevant to shareholders' needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company.
Vote against shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of compensation.
Vote against shareholder proposals seeking to eliminate stock options or any other equity grants to employees or directors.
Vote against shareholder proposals requiring director fees be paid in stock only.
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Generally vote against shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
Vote case-by-case on all other shareholder proposals regarding executive and director pay, taking into account company performance, pay level versus peers, pay level versus industry, and long-term corporate outlook.
Golden Coffins/Executive Death Benefits
Sustainability Policy Recommendation: Generally vote for proposals calling companies to adopt a policy of obtaining shareholder approval for any future agreements and corporate policies that could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses, accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals that the broad-based employee population is eligible.
Hold Equity Past Retirement or for a Significant Period of Time
Sustainability Policy Recommendation: Vote case-by-case on shareholder proposals asking companies to adopt policies requiring senior executive officers to retain a portion of net shares acquired through compensation plans. The following factors will be taken into account:
| ■ | The percentage/ratio of net shares required to be retained; |
| ■ | The time period required to retain the shares; |
| ■ | Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness of such requirements; |
| ■ | Whether the company has any other policies aimed at mitigating risk taking by executives; |
| ■ | Executives' actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding period/retention ratio or the company’s existing requirements; and |
Pay Disparity
Sustainability Policy Recommendation: Generally vote case-by-case on proposals calling for an analysis of the pay disparity between corporate executives and other non-executive employees.
Pay for Performance/Performance-Based Awards
Sustainability Policy Recommendation: Vote case-by-case on shareholder proposals requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be performance-based and requesting that the board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps:
| ■ | First, vote for shareholder proposals advocating the use of performance-based equity awards, such as performance contingent options or restricted stock, indexed options or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a “substantial” portion of performance-based awards for its top executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a meaningful premium to be considered performance-based awards. |
| ■ | Second, assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based program is too low based on the company’s historical or peer group comparison, generally vote for the proposal. Furthermore, if target performance results in an above target payout, vote for the shareholder proposal due to program’s poor design. If the company does not disclose the performance metric of the performance-based equity program, vote for the shareholder proposal regardless of the outcome of the first step to the test. |
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In general, vote for the shareholder proposal if the company does not meet both of the above two steps.
Pay for Superior Performance
Sustainability Policy Recommendation: Vote case-by-case on shareholder proposals that request the board establish a pay-for-superior performance standard in the company's executive compensation plan for senior executives. These proposals generally include the following principles:
| ■ | Set compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group median; |
| ■ | Deliver a majority of the plan’s target long-term compensation through performance-vested, not simply time- vested, equity awards; |
| ■ | Provide the strategic rationale and relative weightings of the financial and non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the plan; |
| ■ | Establish performance targets for each plan financial metric relative to the performance of the company’s peer companies; |
| ■ | Limit payment under the annual and performance-vested long-term incentive components of the plan to when the company’s performance on its selected financial performance metrics exceeds peer group median performance. |
Consider the following factors in evaluating this proposal:
| ■ | What aspects of the company’s annual and long-term equity incentive programs are performance driven? |
| ■ | If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates disclosed to shareholders or are they benchmarked against a disclosed peer group? |
| ■ | Can shareholders assess the correlation between pay and performance based on the current disclosure? |
| ■ | What type of industry and stage of business cycle does the company belong to? |
Pre-Arranged Trading Plans (10b5-1 Plans)
Sustainability Policy Recommendation: Generally vote for shareholder proposals calling for the addition of certain safeguards in prearranged trading plans (10b5-1 plans) for executives. Safeguards may include:
| ■ | Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed in a Form 8-K; |
| ■ | Amendment or early termination of a 10b5-1 Plan allowed only under extraordinary circumstances, as determined by the board; |
| ■ | Request that a certain number of days that must elapse between adoption or amendment of a 10b5-1 Plan and initial trading under the plan; |
| ■ | Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan; |
| ■ | An executive may not trade in company stock outside the 10b5-1 Plan; |
| ■ | Trades under a 10b5-1 Plan must be handled by a broker who does not handle other securities transactions for the executive. |
Prohibit Outside CEOs from Serving on Compensation Committees
Sustainability Policy Recommendation: Generally vote against proposals seeking a policy to prohibit any outside CEO from serving on a company’s compensation committee, unless the company has demonstrated problematic pay practices that raise concerns about the performance and composition of the committee.
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Recoupment of Incentive or Stock Compensation in Specified Circumstances
Sustainability Policy Recommendation: Vote case-by-case on proposals to recoup incentive cash or stock compensation made to senior executives if it is later determined that the figures upon which incentive compensation is earned turn out to have been in error, or if the senior executive has breached company policy or has engaged in misconduct that may be significantly detrimental to the company's financial position or reputation, or if the senior executive failed to manage or monitor risks that subsequently led to significant financial or reputational harm to the company. Many companies have adopted policies that permit recoupment in cases where an executive's fraud, misconduct, or negligence significantly contributed to a restatement of financial results that led to the awarding of unearned incentive compensation. However, such policies may be narrow given that not all misconduct or negligence may result in significant financial restatements. Misconduct, negligence or lack of sufficient oversight by senior executives may lead to significant financial loss or reputational damage that may have long-lasting impact.
In considering whether to support such shareholder proposals, the following factors will be taken into consideration:
| ■ | If the company has adopted a formal recoupment policy; |
| ■ | The rigor of the recoupment policy focusing on how and under what circumstances the company may recoup incentive or stock compensation; |
| ■ | Whether the company has chronic restatement history or material financial problems; |
| ■ | Whether the company’s policy substantially addresses the concerns raised by the proponent; |
| ■ | Disclosure of recoupment of incentive or stock compensation from senior executives or lack thereof; or |
| ■ | Any other relevant factors. |
Severance Agreements for Executives/Golden Parachutes
Sustainability Policy Recommendation: Vote case-by-case on shareholder proposals requiring that executive severance (including change-in-control related) arrangements or payments be submitted for shareholder ratification.
Factors that will be considered include, but are not limited to:
| ■ | The company’s severance or change-in-control agreements in place, and the presence of problematic features (such as excessive severance entitlements, single triggers, excise tax gross-ups, etc.); |
| ■ | Any existing limits on cash severance payouts or policies which require shareholder ratification of severance payments exceeding a certain level; |
| ■ | Any recent severance-related controversies; and |
| ■ | Whether the proposal is overly prescriptive, such as requiring shareholder approval of severance that does not exceed market norms. |
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Share Buyback Proposals
Sustainability Policy Recommendation: Generally vote against shareholder proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock. Vote for the proposal when there is a pattern of abuse by executives exercising options or selling shares during periods of share buybacks.
Vote case-by-case on proposals requesting the company exclude the impact of share buybacks from the calculation of incentive program metrics, considering the following factors:
| ■ | The frequency and timing of the company's share buybacks; |
| ■ | The use of per-share metrics in incentive plans; |
| ■ | The effect of recent buybacks on incentive metric results and payouts; and |
| ■ | Whether there is any indication of metric result manipulation. |
Supplemental Executive Retirement Plans (SERPs)
Sustainability Policy Recommendation: Generally vote for shareholder proposals requesting to put extraordinary benefits contained in SERP agreements to a shareholder vote unless the company’s executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
Generally vote for shareholder proposals requesting to limit the executive benefits provided under the company’s supplemental executive retirement plan (SERP) by limiting covered compensation to a senior executive’s annual salary or those pay elements covered for the general employee population.
Tax Gross-Up Proposals
Sustainability Policy Recommendation: Generally vote for proposals calling for companies to adopt a policy of not providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement applicable to management employees of the company, such as a relocation or expatriate tax equalization policy.
Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity
Sustainability Policy Recommendation: Vote case-by-case on shareholder proposals seeking a policy requiring termination of employment prior to severance payment and/or eliminating accelerated vesting of unvested equity.
The following factors will be considered:
| ■ | The company's current treatment of equity in change-of-control situations (i.e. is it double triggered, does it allow for the assumption of equity by acquiring company, the treatment of performance shares, etc.); |
| ■ | Current employment agreements, including potential poor pay practices such as gross-ups embedded in those agreements. |
Generally vote for proposals seeking a policy that prohibits acceleration of the vesting of equity awards to senior executives in the event of a change in control (except for pro rata vesting considering the time elapsed and attainment of any related performance goals between the award date and the change in control).
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6. Social and Environmental Issues
Global Approach
Socially responsible shareholder resolutions receive a great deal more attention from institutional shareholders today than in the past. While focusing on value enhancement through risk mitigation and exposure to new sustainability-related opportunities, these resolutions also seek standardized reporting on ESG issues, request information regarding an issuer’s adoption of, or adherence to, relevant norms, standards, codes of conduct or universally recognized international initiatives to promote disclosure and transparency. Sustainability Advisory Services generally supports standards-based ESG shareholder proposals that enhance long-term shareholder and stakeholder value while aligning the interests of the company with those of society at large. In particular, the policy will focus on resolutions seeking greater transparency and/or adherence to internationally recognized standards and principles.
Sustainability Policy Recommendation: In determining our vote recommendation on standardized ESG reporting shareholder proposals, we also analyze the following factors:
| ■ | Whether the proposal itself is well framed and reasonable; |
| ■ | Whether adoption of the proposal would have either a positive or negative impact on the company's short- term or long-term share value; |
| ■ | The percentage of sales, assets and earnings affected; |
| ■ | Whether the company has already responded in some appropriate manner to the request embodied in a proposal; |
| ■ | Whether the company's analysis and voting recommendation to shareholders is persuasive; |
| ■ | Whether there are significant controversies, fines, penalties, or litigation associated with the company's environmental or social practices; |
| ■ | What other companies have done in response to the issue addressed in the proposal; |
| ■ | Whether implementation of the proposal would achieve the objectives sought in the proposal; and |
| ■ | The degree to which the company's stated position on the issues raised in the proposal could affect its reputation or sales, or leave it vulnerable to a boycott or selective purchasing. |
Animal Welfare
Animal Welfare Policies
Sustainability Policy Recommendation: Generally vote for proposals seeking a report on a company’s animal welfare standards, or animal welfare-related risks, unless:
| ■ | The company has already published a set of animal welfare standards and monitors compliance; |
| ■ | The company’s standards are comparable to industry peers; and |
| ■ | There are no recent significant fines, litigation, or controversies related to the company’s and/or its suppliers' treatment of animals. |
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Animal Testing
Sustainability Policy Recommendation: Generally vote against proposals to phase out the use of animals in product testing, unless:
| ■ | The company is conducting animal testing programs that are unnecessary or not required by regulation; |
| ■ | The company is conducting animal testing when suitable alternatives are commonly accepted and used by industry peers; or |
| ■ | There are recent, significant fines or litigation related to the company’s treatment of animals. |
Animal Slaughter
Sustainability Policy Recommendation: Generally vote against proposals requesting the implementation of Controlled Atmosphere Killing (CAK) methods at company and/or supplier operations unless such methods are required by legislation or generally accepted as the industry standard.
Vote case-by-case on proposals requesting a report on the feasibility of implementing CAK methods at company and/or supplier operations considering the availability of existing research conducted by the company or industry groups on this topic and any fines or litigation related to current animal processing procedures at the company.
Consumer Issues
Genetically Modified Ingredients
Sustainability Policy Recommendation: Generally vote against proposals requesting that a company voluntarily label genetically engineered (GE) ingredients in its products. The labeling of products with GE ingredients is best left to the appropriate regulatory authorities.
Vote case-by-case on proposals asking for a report on the feasibility of labeling products containing GE ingredients, taking into account:
| ■ | The potential impact of such labeling on the company's business; |
| ■ | The quality of the company’s disclosure on GE product labeling, related voluntary initiatives, and how this disclosure compares with industry peer disclosure; and |
| ■ | Company’s current disclosure on the feasibility of GE product labeling. |
Generally vote FOR proposals seeking a report on the social, health, and environmental effects of genetically modified organism (GMOs).
Generally vote against proposals to eliminate GE ingredients from the company's products, or proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the company’s products. Such decisions are more appropriately made by management with consideration of current regulations.
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Reports on Potentially Controversial Business/Financial Practices
Sustainability Policy Recommendation: Vote case-by-case on requests for reports on a company’s potentially controversial business or financial practices or products, taking into account:
| ■ | Whether the company has adequately disclosed mechanisms in place to prevent abuses; |
| ■ | Whether the company has adequately disclosed the financial risks of the products/practices in question; |
| ■ | Whether the company has been subject to violations of related laws or serious controversies; and |
| ■ | Peer companies’ policies/practices in this area. |
Consumer Lending
Sustainability Policy Recommendation: Vote case-by-case on requests for reports on the company’s lending guidelines and procedures taking into account:
| ■ | Whether the company has adequately disclosed mechanisms in place to prevent abusive lending practices; |
| ■ | Whether the company has adequately disclosed the financial risks of the lending products in question; |
| ■ | Whether the company has been subject to violations of lending laws or serious lending controversies; and |
| ■ | Peer companies’ policies to prevent abusive lending practices. |
Pharmaceutical Pricing, Access to Medicines, Product Reimportation and Health Pandemics
Sustainability Policy Recommendation: Generally vote against proposals requesting that companies implement specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry norms in its product pricing practices.
Vote case-by-case on proposals requesting that a company report on its product pricing or access to medicine policies, considering:
| ■ | The potential for reputational, market, and regulatory risk exposure; |
| ■ | Existing disclosure of relevant policies; |
| ■ | Deviation from established industry norms; |
| ■ | Relevant company initiatives to provide research and/or products to disadvantaged consumers; |
| ■ | Whether the proposal focuses on specific products or geographic regions; |
| ■ | The potential burden and scope of the requested report; and |
| ■ | Recent significant controversies, litigation, or fines at the company. |
Generally vote for proposals requesting that a company report on the financial and legal impact of its prescription drug reimportation policies unless such information is already publicly disclosed.
Generally vote against proposals requesting that companies adopt specific policies to encourage or constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and may place the company at a competitive disadvantage relative to its peers.
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Health Pandemics
Sustainability Policy Recommendation: Vote case-by-case on requests for reports outlining the impact of health pandemics (such as COVID-19, HIV/AIDS, malaria, tuberculosis, and avian flu) on the company’s operations and how the company is responding to the situation, taking into account:
| ■ | The scope of the company’s operations in the affected/relevant area(s); |
| ■ | The company’s existing healthcare policies, including benefits and healthcare access; and |
| ■ | Company donations to relevant healthcare providers. |
Vote against proposals asking companies to establish, implement, and report on a standard of response to health pandemics (such as HIV/AIDS, malaria, tuberculosis, and avian flu), unless the company has significant operations in the affected markets and has failed to adopt policies and/or procedures to address these issues comparable to those of industry peers.
Product Safety and Toxic/Hazardous Materials
Sustainability Policy Recommendation: Generally vote for proposals requesting that a company report on its policies, initiatives/procedures, and oversight mechanisms related to toxic/hazardous materials or product safety in its supply chain.
Generally vote for resolutions requesting that companies develop a feasibility assessment to phase-out of certain toxic/hazardous materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials.
Generally vote against resolutions requiring that a company reformulate its products.
Tobacco-Related Proposals
Sustainability Policy Recommendation: Vote case-by-case on resolutions regarding the advertisement of tobacco products, considering:
| ■ | Recent related fines, controversies, or significant litigation; |
| ■ | Whether the company complies with relevant laws and regulations on the marketing of tobacco; |
| ■ | Whether the company’s advertising restrictions deviate from those of industry peers; |
| ■ | Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth; and |
| ■ | Whether restrictions on marketing to youth extend to foreign countries. |
Vote case-by-case on proposals regarding second-hand smoke, considering;
| ■ | Whether the company complies with all laws and regulations; |
| ■ | The degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness; and |
| ■ | The risk of any health-related liabilities. |
Generally vote against resolutions to cease production of tobacco-related products, to avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such business decisions are better left to company management or portfolio managers.
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Generally vote against proposals regarding tobacco product warnings. Such decisions are better left to public health authorities.
Climate Change
Climate Change/Greenhouse Gas (GHG) Emissions
Climate change has emerged as the most significant environmental threat to the planet to date. Scientists agree that gases released by chemical reactions including the burning of fossil fuels contribute to a “greenhouse effect” that traps the planet’s heat. Environmentalists claim that the greenhouse gases produced by the industrial age have caused recent weather crises such as heat waves, rainstorms, melting glaciers, rising sea levels and receding coastlines. With notable exceptions, business leaders have described the rise and fall of global temperatures as naturally occurring phenomena and depicted corporate impact on climate change as minimal. Shareholder proposals asking a company to issue a report to shareholders, “at reasonable cost and omitting proprietary information,” on greenhouse gas emissions ask that the report include descriptions of efforts within companies to reduce emissions, their financial exposure and potential liability from operations that contribute to global warming, their direct or indirect efforts to promote the view that global warming is not a threat and their goals in reducing these emissions from their operations. Proponents argue that there is scientific proof that the burning of fossil fuels causes global warming, that future legislation may make companies financially liable for their contributions to global warming, and that a report on the company’s role in global warming can be assembled at reasonable cost.
Sustainability Policy Recommendation:
| ■ | Vote for shareholder proposals seeking information on the financial, physical, or regulatory risks it faces related to climate change- on its operations and investments, or on how the company identifies, measures, and manage such risks. |
| ■ | Vote for shareholder proposals calling for the reduction of GHG emissions. |
| ■ | Vote for shareholder proposals seeking reports on responses to regulatory and public pressures surrounding climate change, and for disclosure of research that aided in setting company policies around climate change. |
| ■ | Vote for shareholder proposals requesting a report/disclosure of goals on GHG emissions from company operations and/or products. |
Say on Climate (SoC) Management Proposals
Sustainability Policy Recommendation: Vote case-by-case on management proposals that request shareholders to approve the company’s climate transition action plan23, taking into account the completeness and rigor of the plan. Information that will be considered where available includes the following:
| ■ | The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other market standards; |
| ■ | Disclosure of its operational and supply chain GHG emissions (Scopes 1, 2, and 3); |
| ■ | The completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply chain GHG emissions (Scopes 1, 2, and 3 if relevant); |
| ■ | Whether the company has sought and received third-party approval that its targets are science-based; |
| ■ | Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2, and 3) by 2050; |
| 23 | Variations of this request also include climate transition related ambitions, or commitment to reporting on the implementation of a climate plan. |
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| ■ | Whether the company discloses a commitment to report on the implementation of its plan in subsequent years; |
| ■ | Whether the company’s climate data has received third-party assurance; |
| ■ | Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy; |
| ■ | Whether there are specific industry decarbonization challenges; and |
| ■ | The company’s related commitment, disclosure, and performance compared to its industry peers. |
Say on Climate (SoC) Shareholder Proposals
Sustainability Policy Recommendation: Vote case-by-case on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan, taking into account information such as the following:
| ■ | The completeness and rigor of the company’s climate-related disclosure; |
| ■ | The company’s actual GHG emissions performance; |
| ■ | Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to its GHG emissions; and |
| ■ | Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive. |
Energy Efficiency
Sustainability Policy Recommendation: Generally vote for proposals requesting that a company report on its energy efficiency policies.
Renewable Energy
Sustainability Policy Recommendation: Generally vote for requests for reports on the feasibility of developing renewable energy resources.
Generally vote for proposals requesting that the company invest in renewable energy resources.
Diversity
Board Diversity
Sustainability Policy Recommendation: Generally vote for requests for reports on a company's efforts to diversify the board, unless:
| ■ | The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; and |
| ■ | The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company. |
Generally vote for shareholder proposals that ask the company to take reasonable steps to increase the levels of underrepresented gender identities and racial minorities on the board.
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Equality of Opportunity
Sustainability Policy Recommendation: Generally vote for proposals requesting a company disclose its diversity policies or initiatives, or proposals requesting disclosure of a company’s comprehensive workforce diversity data, including requests for EEO-1 data.
Generally vote for proposals seeking information on the diversity efforts of suppliers and service providers.
Gender Identity, Sexual Orientation, and Domestic Partner Benefits
Sustainability Policy Recommendation: Generally vote for proposals seeking to amend a company’s EEO statement or diversity policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would be unduly burdensome.
Generally vote for proposals to extend company benefits to domestic partners.
Gender, Race/Ethnicity Pay Gap
Sustainability Policy Recommendation: Vote case-by-case on requests for reports on a company's pay data by gender or race/ethnicity or a report on a company’s policies and goals to reduce any gender or race/ethnicity pay gaps, taking into account:
| ■ | The company's current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy and fair and equitable compensation practices; |
| ■ | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race, or ethnicity pay gap issues; |
| ■ | The company’s disclosure regarding gender, race, or ethnicity pay gap policies or initiatives compared to its industry peers; and |
| ■ | Local laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities. |
Racial Equity and/or Civil Rights Audits
Sustainability Policy Recommendation: Generally vote for proposals requesting that a company conduct an independent racial equity and/or civil rights audit, considering company disclosures, policies, actions, and engagements.
Environment and Sustainability
Facility and Workplace Safety
Sustainability Policy Recommendation: Vote case-by-case on resolutions requesting that a company report on safety and/or security risks associated with its operations and/or facilities, considering:
| ■ | The company’s compliance with applicable regulations and guidelines; |
| ■ | The company’s current level of disclosure regarding its security and safety policies, procedures, and compliance monitoring; and |
| ■ | The existence of recent, significant violations, fines, or controversy regarding the safety and security of the company’s operations and/or facilities. |
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Hydraulic Fracturing
Sustainability Policy Recommendation: Generally vote for proposals requesting greater disclosure of a company's (natural gas) hydraulic fracturing operations, including measures the company has taken to manage and mitigate the potential community and environmental impacts of those operations.
Operations in Protected Areas
Sustainability Policy Recommendation: Generally vote for requests for reports on potential environmental damage as a result of company operations in protected regions, unless:
| ■ | Operations in the specified regions are not permitted by current laws or regulations; |
| ■ | The company does not currently have operations or plans to develop operations in these protected regions; or |
| ■ | The company’s disclosure of its operations and environmental policies in these regions is comparable to industry peers. |
Recycling
Sustainability Policy Recommendation: Vote FOR proposals to adopt a comprehensive recycling strategy, taking into account:
| ■ | The nature of the company’s business; |
| ■ | The current level of disclosure of the company's existing related programs; |
| ■ | The timetable and methods of program implementation prescribed by the proposal; |
| ■ | The company’s ability to address the issues raised in the proposal; and |
| ■ | How the company's recycling programs compare to similar programs of its industry peers. |
Sustainability Reporting
Shareholders may request general environmental disclosures or reports on a specific location/operation, often requesting that the company detail the environmental risks and potential liabilities of a specific project.
Increasingly, companies have begun reporting on environmental and sustainability issues using the Global Reporting Initiative (GRI) standards. The GRI was established in 1997 with the mission of developing globally applicable guidelines for reporting on economic, environmental, and social performance. The GRI was developed by Ceres (formerly known as the Coalition for Environmentally Responsible Economies, CERES) in partnership with the United Nations Environment Programme (UNEP).
Ceres was formed in the wake of the March 1989 Exxon Valdez oil spill, when a consortium of investors, environmental groups, and religious organizations drafted what were originally named the Valdez Principles. Later to be renamed the CERES Principles, and now branded as the Ceres Roadmap to 2030, corporate signatories to the Ceres Roadmap to 2030 pledge to publicly report on environmental issues, including protection of the biosphere, sustainable use of natural resources, reduction and disposal of wastes, energy conservation, and employee and community risk reduction in a standardized form.
The Equator Principles are the financial industry’s benchmark for determining, assessing and managing social and environmental risk in project financing. The Principles were first launched in June 2003 and were ultimately adopted by over forty financial institutions during a three year implementation period. The principles were subsequently revised in July 2006 to take into account the new performance standards approved by the World Bank Group’s International Finance Corporation (IFC). The third iteration of the Principles was launched in June 2013 and it amplified the banks' commitments to social responsibility, including human rights, climate change, and transparency. Financial institutions adopt these principles to ensure that the projects they venture in are developed in a socially responsible manner and reflect sound environmental management practices.
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Sustainability Policy Recommendation:
| ■ | Vote for shareholder proposals seeking greater disclosure on the company’s environmental and social practices, and/or associated risks and liabilities. |
| ■ | Vote for shareholder proposals asking companies to report in accordance with the Global Reporting Initiative (GRI). |
| ■ | Vote for shareholder proposals seeking the preparation of sustainability reports. |
| ■ | Vote for shareholder proposals to study or implement the CERES Roadmap 2030. |
| ■ | Vote for shareholder proposals to study or implement the Equator Principles. |
Water Issues
Sustainability Policy Recommendation: Generally vote for on proposals requesting a company to report on, or to adopt a new policy on, water-related risks and concerns, taking into account:
| ■ | The company's current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics; |
| ■ | Whether or not the company's existing water-related policies and practices are consistent with relevant internationally recognized standards and national/local regulations; |
| ■ | The potential financial impact or risk to the company associated with water-related concerns or issues; and |
| ■ | Recent, significant company controversies, fines, or litigation regarding water use by the company and its suppliers. |
Equator Principles
The Equator Principles are the financial industry’s benchmark for determining, assessing and managing social and environmental risk in project financing. First launched in June 2003, the Principles were ultimately adopted by over forty financial institutions over a three-year implementation period. Since its adoption, the Principles have undergone a number of revisions, expanding the use of performance standards and signatory banks’ banks' commitments to social responsibility, including human rights, climate change, and transparency. The fourth iteration of the Principles was launched in November 2019, incorporating amendments and new commitment to human rights, climate change, Indigenous Peoples and biodiversity related topics. Financial institutions adopt these principles to ensure that the projects they finance are developed in a socially responsible manner and reflect sound environmental management practices. As of 2019, 101 financial institutions have officially adopted the Equator Principles.
Sustainability Policy Recommendation: Vote for shareholder proposals to study or implement the Equator Principles.
General Corporate Issues
Charitable Contributions
Sustainability Policy Recommendation: Vote against proposals restricting a company from making charitable contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence, management should determine which, and if, contributions are in the best interests of the company.
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Data Security, Privacy, and Internet Issues
Sustainability Policy Recommendation: Vote case-by-case on proposals requesting the disclosure or implementation of data security, privacy, or information access and management policies and procedures, considering:
| ■ | The level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech, information access and management, and Internet censorship; |
| ■ | Engagement in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow of information on the Internet; |
| ■ | The scope of business involvement and of investment in countries whose governments censor or monitor the Internet and other telecommunications; |
| ■ | Applicable market-specific laws or regulations that may be imposed on the company; and |
| ■ | Controversies, fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship. |
Environmental, Social, and Governance (ESG) Compensation-Related Proposals
Sustainability Policy Recommendation: Generally vote for proposals to link, or report on linking, executive compensation to environmental and social criteria (such as corporate downsizings, customer or employee satisfaction, community involvement, human rights, environmental performance, or predatory lending).
Human Rights, Labor Issues, and International Operations
Investors, international human rights groups, and labor advocacy groups have long been making attempts to safeguard worker rights in the international marketplace. In instances where companies themselves operate factories in developing countries for example, these advocates have asked that the companies adopt global corporate human rights standards that guarantee sustainable wages and safe working conditions for their workers abroad. Companies that contract out portions of their manufacturing operations to foreign companies have been asked to ensure that the products they receive from those contractors have not been made using forced labor, child labor, or sweatshop labor. These companies are asked to adopt formal vendor standards that, among other things, include monitoring or auditing mechanisms. Globalization, relocation of production overseas, and widespread use of subcontractors and vendors, often make it difficult to obtain a complete picture of a company’s labor practices in global markets. Many Investors believe that companies would benefit from adopting a human rights policy based on the Universal Declaration of Human Rights and the International Labor Organization’s Core Labor Standards. Efforts that seek greater disclosure on a company’s labor practices and that seek to establish minimum standards for a company’s operations will be supported. In addition, requests for independent monitoring of overseas operations will be supported.
The Sustainability Policy generally supports proposals that call for the adoption and/or enforcement of principles or codes relating to countries in which there are systematic violations of human rights; such as the use of slave, child, or prison labor; a government that is illegitimate; or there is a call by human rights advocates, pro- democracy organizations, or legitimately-elected representatives for economic sanctions. The use of child, sweatshop, or forced labor is unethical and can damage corporate reputations. Poor labor practices can lead to litigation against the company, which can be costly and time consuming.
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Human Rights Proposals
Sustainability Policy Recommendation:
| ■ | Generally vote for proposals requesting a report on company or company supplier labor and/or human rights standards and policies. |
| ■ | Vote for shareholder proposals to implement human rights standards and workplace codes of conduct. |
| ■ | Vote for shareholder proposals calling for the implementation and reporting on ILO codes of conduct, SA 8000 Standards, or the Global Sullivan Principles. |
| ■ | Vote for shareholder proposals that call for the adoption and/or enforcement of principles or codes relating to countries in which there are systematic violations of human rights. |
| ■ | Vote for shareholder proposals that call for independent monitoring programs in conjunction with local and respected religious and human rights groups to monitor supplier and licensee compliance with codes. |
| ■ | Vote for shareholder proposals that seek publication of a “Code of Conduct” to the company’s foreign suppliers and licensees, requiring they satisfy all applicable standards and laws protecting employees’ wages, benefits, working conditions, freedom of association, and other rights. |
| ■ | Vote for shareholder proposals seeking reports on, or the adoption of, vendor standards including: reporting on incentives to encourage suppliers to raise standards rather than terminate contracts and providing public disclosure of contract supplier reviews on a regular basis. |
| ■ | Vote for shareholder proposals to adopt labor standards for foreign and domestic suppliers to ensure that the company will not do business with foreign suppliers that manufacture products for sale using forced labor, child labor, or that fail to comply with applicable laws protecting employee’s wages and working conditions. |
| ■ | Vote for proposals requesting that a company conduct an assessment of the human rights risks in its operations or in its supply chain, or report on its human rights risk assessment process. |
Mandatory Arbitration
Sustainability Policy Recommendation: Vote case-by-case on requests for a report on a company’s use of mandatory arbitration on employment-related claims, taking into account:
| ■ | The company's current policies and practices related to the use of mandatory arbitration agreements on workplace claims; |
| ■ | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of mandatory arbitration agreements on workplace claims; and |
| ■ | The company's disclosure of its policies and practices related to the use of mandatory arbitration agreements compared to its peers. |
MacBride Principles
These resolutions have called for the adoption of the MacBride Principles for operations located in Northern Ireland. They request companies operating abroad to support the equal employment opportunity policies that apply in facilities they operate domestically. The principles were established to address the sectarian hiring problems between Protestants and Catholics in Northern Ireland. It is well documented that Northern Ireland’s Catholic community faced much higher unemployment figures than the Protestant community. In response to this problem, the U.K. government instituted the New Fair Employment Act of 1989 (and subsequent amendments) to address the sectarian hiring problems.
Many companies believe that the Act adequately addresses the problems and that further action, including adoption of the MacBride Principles, only duplicates the efforts already underway. In evaluating a proposal to adopt the MacBride Principles, shareholders must decide whether the principles will cause companies to divest, and therefore worsen the unemployment problem, or whether the principles will promote equal hiring practices. Proponents believe that the Fair Employment Act does not sufficiently address the sectarian hiring problems. They argue that the MacBride Principles serve to stabilize the situation and promote further investment.
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Sustainability Policy Recommendation: Support the MacBride Principles for operations in Northern Ireland that request companies to abide by equal employment opportunity policies.
Community Social and Environmental Impact Assessments
Sustainability Policy Recommendation: Generally vote for requests for reports outlining policies and/or the potential (community) social and/or environmental impact of company operations considering:
| ■ | Current disclosure of applicable policies and risk assessment report(s) and risk management procedures; |
| ■ | The impact of regulatory non-compliance, litigation, remediation, or reputational loss that may be associated with failure to manage the company’s operations in question, including the management of relevant community and stakeholder relations; |
| ■ | The nature, purpose, and scope of the company’s operations in the specific region(s); |
| ■ | The degree to which company policies and procedures are consistent with industry norms; and |
| ■ | Scope of the resolution. |
Operations in High-Risk Markets
Sustainability Policy Recommendation: Vote case-by-case on requests for a report on a company’s potential financial and reputational risks associated with operations in “high-risk” markets, such as a terrorism-sponsoring state or politically/socially unstable region, taking into account:
| ■ | The nature, purpose, and scope of the operations and business involved that could be affected by social or political disruption; |
| ■ | Current disclosure of applicable risk assessment(s) and risk management procedures; |
| ■ | Compliance with U.S. sanctions and laws; |
| ■ | Consideration of other international policies, standards, and laws; and |
| ■ | Whether the company has been recently involved in recent, significant controversies, fines or litigation related to its operations in "high-risk" markets. |
Outsourcing/Offshoring
Sustainability Policy Recommendation: Vote case-by-case on proposals calling for companies to report on the risks associated with outsourcing/plant closures, considering:
| ■ | Controversies surrounding operations in the relevant market(s); |
| ■ | The value of the requested report to shareholders; |
| ■ | The company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and |
| ■ | The company’s existing human rights standards relative to industry peers. |
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Sexual Harassment
Sustainability Policy Recommendation: Vote case-by-case on requests for a report on company actions taken to strengthen policies and oversight to prevent workplace sexual harassment, or a report on risks posed by a company’s failure to prevent workplace sexual harassment, taking into account:
| ■ | The company's current policies, practices, oversight mechanisms related to preventing workplace sexual harassment; |
| ■ | Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace sexual harassment issues; and |
| ■ | The company's disclosure regarding workplace sexual harassment policies or initiatives compared to its industry peers. |
Weapons and Military Sales
Sustainability Policy Recommendation: Vote against reports on foreign military sales or offsets. Such disclosures may involve sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales.
Generally vote against proposals asking a company to cease production or report on the risks associated with the use of depleted uranium munitions or nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and non-military uses, and withdrawal from these contracts could have a negative impact on the company’s business.
Political Activities
Lobbying
Sustainability Policy Recommendation: Vote case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures, considering:
| ■ | The company’s current disclosure of relevant lobbying policies, and management and board oversight; |
| ■ | The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage in lobbying activities; and |
| ■ | Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities. |
Political Contributions
Sustainability Policy Recommendation: Generally vote for proposals requesting greater disclosure of a company's political contributions and trade association spending policies and activities, considering:
| ■ | The company's policies, and management and board oversight related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes; |
| ■ | The company's disclosure regarding its support of, and participation in, trade associations or other groups that may make political contributions; and |
| ■ | Recent significant controversies, fines, or litigation related to the company's political contributions or political activities. |
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Vote against proposals barring a company from making political contributions. Businesses are affected by legislation at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.
Vote against proposals to publish in newspapers and other media a company's political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
Political Ties
Sustainability Policy Recommendation: Generally vote against proposals asking a company to affirm political nonpartisanship in the workplace, so long as:
| ■ | There are no recent, significant controversies, fines, or litigation regarding the company’s political contributions or trade association spending; and |
| ■ | The company has procedures in place to ensure that employee contributions to company-sponsored political action committees (PACs) are strictly voluntary and prohibit coercion. |
Vote against proposals asking for a list of company executives, directors, consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful information to shareholders.
Political Expenditures and Lobbying Congruency
Sustainability Policy Recommendation: Generally vote for proposals requesting greater disclosure of a company’s alignment of political contributions, lobbying, and electioneering spending with a company’s publicly stated values and policies, unless the terms of the proposal are unduly restrictive. Additionally, Sustainability Advisory Services will consider whether:
| ■ | The company’s policies, management, board oversight, governance processes, and level of disclosure related to direct political contributions, lobbying activities, and payments to trade associations, political action committees, or other groups that may be used for political purposes; |
| ■ | The company’s disclosure regarding: the reasons for its support of candidates for public offices; the reasons for support of and participation in trade associations or other groups that may make political contributions; and other political activities; |
| ■ | Any incongruencies identified between a company’s direct and indirect political expenditures and its publicly stated values and priorities; |
| ■ | Recent significant controversies related to the company’s direct and indirect lobbying, political contributions, or political activities. |
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7. Mutual Fund Proxies
Election of Directors
Sustainability Policy Recommendation: Vote case-by-case on the election of directors and trustees, following the same guidelines for uncontested directors for public company shareholder meetings. However, mutual fund boards do not usually have compensation committees, so do not withhold for the lack of this committee.
Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes
Sustainability Policy Recommendation: For closed-end management investment companies (CEFs), vote against or withhold from nominating/governance committee members (or other directors on a case-by-case basis) at CEFs that have not provided a compelling rationale for opting-in to a Control Share Acquisition statute, nor submitted a by-law amendment to a shareholder vote.
Converting Closed-end Fund to Open-end Fund
Sustainability Policy Recommendation: Vote case-by-case on conversion proposals, considering the following factors:
| ■ | Past performance as a closed-end fund; |
| ■ | Market in which the fund invests; |
| ■ | Measures taken by the board to address the discount; and |
| ■ | Past shareholder activism, board activity, and votes on related proposals. |
Proxy Contests
Sustainability Policy Recommendation: Vote case-by-case on proxy contests, considering the following factors:
| ■ | Past performance relative to its peers; |
| ■ | Market in which fund invests; |
| ■ | Measures taken by the board to address the issues; |
| ■ | Past shareholder activism, board activity, and votes on related proposals; |
| ■ | Strategy of the incumbents versus the dissidents; |
| ■ | Independence of directors; |
| ■ | Experience and skills of director candidates; |
| ■ | Governance profile of the company; |
| ■ | Evidence of management entrenchment. |
Investment Advisory Agreements
Sustainability Policy Recommendation: Vote case-by-case on investment advisory agreements, considering the following factors:
| ■ | Proposed and current fee schedules; |
| ■ | Fund category/investment objective; |
| ■ | Performance benchmarks; |
| ■ | Share price performance as compared with peers; |
| ■ | Resulting fees relative to peers; |
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| ■ | Assignments (where the advisor undergoes a change of control). |
Approving New Classes or Series of Shares
Sustainability Policy Recommendation: Vote for the establishment of new classes or series of shares.
Preferred Stock Proposals
Sustainability Policy Recommendation: Vote case-by-case on the authorization for or increase in preferred shares, considering the following factors:
| ■ | Stated specific financing purpose; |
| ■ | Possible dilution for common shares; |
| ■ | Whether the shares can be used for antitakeover purposes. |
1940 Act Policies
Sustainability Policy Recommendation: Vote case-by-case on policies under the Investment Advisor Act of 1940, considering the following factors:
| ■ | Potential competitiveness; |
| ■ | Regulatory developments; |
| ■ | Current and potential returns; and |
| ■ | Current and potential risk. |
Generally vote for these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the current SEC interpretation.
Changing a Fundamental Restriction to a Nonfundamental Restriction
Sustainability Policy Recommendation: Vote case-by-case on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors:
| ■ | The fund's target investments; |
| ■ | The reasons given by the fund for the change; and |
| ■ | The projected impact of the change on the portfolio. |
Change Fundamental Investment Objective to Nonfundamental
Sustainability Policy Recommendation: Vote against proposals to change a fund’s fundamental investment objective to non-fundamental.
Name Change Proposals
Sustainability Policy Recommendation: Vote case-by-case on name change proposals, considering the following factors:
| ■ | Political/economic changes in the target market; |
| ■ | Consolidation in the target market; and |
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| ■ | Current asset composition. |
Change in Fund's Subclassification
Sustainability Policy Recommendation: Vote case-by-case on changes in a fund's sub-classification, considering the following factors:
| ■ | Potential competitiveness; |
| ■ | Current and potential returns; |
| ■ | Risk of concentration; |
| ■ | Consolidation in target industry. |
Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value
Sustainability Policy Recommendation: Vote for proposals authorizing the board to issue shares below Net Asset Value (NAV) if:
| ■ | The proposal to allow share issuances below NAV has an expiration date no more than one year from the date shareholders approve the underlying proposal, as required under the Investment Company Act of 1940; |
| ■ | The sale is deemed to be in the best interests of shareholders by (1) a majority of the company's independent directors and (2) a majority of the company's directors who have no financial interest in the issuance; and |
| ■ | The company has demonstrated responsible past use of share issuances by either: |
| ■ | Outperforming peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or |
| ■ | Providing disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts to NAV and economic dilution to existing non-participating shareholders. |
Disposition of Assets/Termination/Liquidation
Sustainability Policy Recommendation: Vote case-by-case on proposals to dispose of assets, to terminate or liquidate, considering the following factors:
| ■ | Strategies employed to salvage the company; |
| ■ | The fund’s past performance; |
| ■ | The terms of the liquidation. |
Changes to the Charter Document
Sustainability Policy Recommendation: Vote case-by-case on changes to the charter document, considering the following factors:
| ■ | The degree of change implied by the proposal; |
| ■ | The efficiencies that could result; |
| ■ | The state of incorporation; |
| ■ | Regulatory standards and implications. |
Vote against any of the following changes:
| ■ | Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series; |
| ■ | Removal of shareholder approval requirement for amendments to the new declaration of trust; |
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| ■ | Removal of shareholder approval requirement to amend the fund's management contract, allowing the contract to be modified by the investment manager and the trust management, as permitted by the 1940 Act; |
| ■ | Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales charges and redemption fees that may be imposed upon redemption of a fund's shares; |
| ■ | Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements; |
| ■ | Removal of shareholder approval requirement to change the domicile of the fund. |
Changing the Domicile of a Fund
Sustainability Policy Recommendation: Vote case-by-case on re-incorporations, considering the following factors:
| ■ | Regulations of both states; |
| ■ | Required fundamental policies of both states; |
| ■ | The increased flexibility available. |
Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval
Sustainability Policy Recommendation: Vote against proposals authorizing the board to hire or terminate subadvisers without shareholder approval if the investment adviser currently employs only one subadviser.
Distribution Agreements
Sustainability Policy Recommendation: Vote case-by-case on distribution agreement proposals, considering the following factors:
| ■ | Fees charged to comparably sized funds with similar objectives; |
| ■ | The proposed distributor’s reputation and past performance; |
| ■ | The competitiveness of the fund in the industry; |
| ■ | The terms of the agreement. |
Master-Feeder Structure
Sustainability Policy Recommendation: Vote for the establishment of a master-feeder structure.
Mergers
Sustainability Policy Recommendation: Vote case-by-case on merger proposals, considering the following factors:
| ■ | Resulting fee structure; |
| ■ | Performance of both funds; |
| ■ | Continuity of management personnel; |
| ■ | Changes in corporate governance and their impact on shareholder rights. |
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Shareholder Proposals for Mutual Funds
Establish Director Ownership Requirement
Sustainability Policy Recommendation: Generally vote against shareholder proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
Reimburse Shareholder for Expenses Incurred
Sustainability Policy Recommendation: Vote case-by-case on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote for the reimbursement of the proxy solicitation expenses.
Terminate the Investment Advisor
Sustainability Policy Recommendation: Vote case-by-case on proposals to terminate the investment advisor, considering the following factors:
| ■ | Performance of the fund’s Net Asset Value (NAV); |
| ■ | The fund’s history of shareholder relations; |
| ■ | The performance of other funds under the advisor’s management. |
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8. Foreign Private Issuers Listed on U.S. Exchanges
Sustainability Policy Recommendation: Vote against (or withhold from) non-independent director nominees at companies which fail to meet the following criteria: a majority-independent board, and the presence of an audit, a compensation, and a nomination committee, each of which is entirely composed of independent directors.
Where the design and disclosure levels of equity compensation plans are comparable to those seen at U.S. companies, U.S. compensation policy will be used to evaluate the compensation plan proposals. Otherwise, they, and all other voting items, will be evaluated using the relevant regional or market approach under the Sustainability proxy voting guidelines.
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Email sales@issgovernance.com or visit www.issgovernance.com for more information.
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The Information has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or instruments or trading strategies.
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© 2024 | Institutional Shareholder Services and/or its affiliates
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PART C
OTHER INFORMATION
Item 28. Exhibits.
Item 29. Persons Controlled by or Under Common Control with Registrant
None.
Item 30. Indemnification
Reference is made to Article VII, Sections 2 and 3 of the Registrant’s Declaration of Trust with respect to the Registrant. The general effect of this provision is to indemnify the Trustees, officers, employees and other agents of the Trust who are parties pursuant to any proceeding by reason of their actions performed in their scope of service on behalf of the Trust.
Pursuant to Rule 484 under the Securities Act of 1933, as amended (the “Securities Act”), the Registrant furnishes the following undertaking: “Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant 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 in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities 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 Investment Adviser
Incorporated by reference to the Statement of Additional Information pursuant to Rule 411 under the Securities Act of 1933.
Item 32. Principal Underwriter.
| (a) | Quasar Distributors, LLC, the Registrant’s principal underwriter, acts as principal underwriter for the following investment companies: |
| 1. | Advisor Managed Portfolios |
| 2. | Capital Advisors Growth Fund, Series of Advisors Series Trust |
| 3. | Chase Growth Fund, Series of Advisors Series Trust |
| 4. | Davidson Multi Cap Equity Fund, Series of Advisors Series Trust |
| 5. | Edgar Lomax Value Fund, Series of Advisors Series Trust |
| 6. | First Sentier American Listed Infrastructure Fund, Series of Advisors Series Trust |
| 7. | First Sentier Global Listed Infrastructure Fund, Series of Advisors Series Trust |
| 8. | Fort Pitt Capital Total Return Fund, Series of Advisors Series Trust |
| 9. | Huber Large Cap Value Fund, Series of Advisors Series Trust |
| 10. | Huber Mid Cap Value Fund, Series of Advisors Series Trust |
| 11. | Huber Select Large Cap Value Fund, Series of Advisors Series Trust |
| 12. | Huber Small Cap Value Fund, Series of Advisors Series Trust |
| 13. | Logan Capital Broad Innovative Growth ETF, Series of Advisors Series Trust |
| 14. | Medalist Partners MBS Total Return Fund, Series of Advisors Series Trust |
| 15. | Medalist Partners Short Duration Fund, Series of Advisors Series Trust |
| 16. | O'Shaughnessy Market Leaders Value Fund, Series of Advisors Series Trust |
| 17. | PIA BBB Bond Fund, Series of Advisors Series Trust |
| 18. | PIA High Yield (MACS) Fund, Series of Advisors Series Trust |
| 19. | PIA High Yield Fund, Series of Advisors Series Trust |
| 20. | PIA MBS Bond Fund, Series of Advisors Series Trust |
| 21. | PIA Short-Term Securities Fund, Series of Advisors Series Trust |
| 22. | Poplar Forest Cornerstone Fund, Series of Advisors Series Trust |
| 23. | Poplar Forest Partners Fund, Series of Advisors Series Trust |
| 24. | Pzena Emerging Markets Value Fund, Series of Advisors Series Trust |
| 25. | Pzena International Small Cap Value Fund, Series of Advisors Series Trust |
| 26. | Pzena International Value Fund, Series of Advisors Series Trust |
| 27. | Pzena Mid Cap Value Fund, Series of Advisors Series Trust |
| 28. | Pzena Small Cap Value Fund, Series of Advisors Series Trust |
| 29. | Reverb ETF, Series of Advisors Series Trust |
| 30. | Scharf Fund, Series of Advisors Series Trust |
| 31. | Scharf Global Opportunity Fund, Series of Advisors Series Trust |
| 32. | Scharf Multi-Asset Opportunity Fund, Series of Advisors Series Trust |
| 33. | Shenkman Capital Floating Rate High Income Fund, Series of Advisors Series Trust |
| 34. | Shenkman Capital Short Duration High Income Fund, Series of Advisors Series Trust |
| 35. | VegTech Plant-based Innovation & Climate ETF, Series of Advisors Series Trust |
| 36. | The Aegis Funds |
| 37. | Allied Asset Advisors Funds |
| 38. | Angel Oak Funds Trust |
| 39. | Angel Oak Strategic Credit Fund |
| 40. | Barrett Opportunity Fund, Inc. |
| 41. | Brookfield Infrastructure Income Fund, Inc. |
| 42. | Brookfield Investment Funds |
| 43. | Buffalo Funds |
| 44. | DoubleLine Funds Trust |
| 45. | EA Series Trust (f/k/a Alpha Architect ETF Trust) |
| 46. | Ecofin Tax-Advantaged Social Impact Fund, Inc. |
| 47. | AAM Bahl & Gaynor Small/Mid Cap Income Growth ETF, Series of ETF Series Solutions |
| 48. | AAM Low Duration Preferred and Income Securities ETF, Series of ETF Series Solutions |
| 49. | AAM S&P 500 Emerging Markets High Dividend Value ETF, Series of ETF Series Solutions |
| 50. | AAM S&P 500 High Dividend Value ETF, Series of ETF Series Solutions |
| 51. | AAM S&P Developed Markets High Dividend Value ETF, Series of ETF Series Solutions |
| 52. | AAM Transformers ETF, Series of ETF Series Solutions |
| 53. | AlphaMark Actively Managed Small Cap ETF, Series of ETF Series Solutions |
| 54. | Aptus Collared Income Opportunity ETF, Series of ETF Series Solutions |
| 55. | Aptus Defined Risk ETF, Series of ETF Series Solutions |
| 56. | Aptus Drawdown Managed Equity ETF, Series of ETF Series Solutions |
| 57. | Aptus Enhanced Yield ETF, Series of ETF Series Solutions |
| 58. | Aptus Large Cap Enhanced Yield ETF, Series of ETF Series Solutions |
| 59. | Bahl & Gaynor Income Growth ETF, Series of ETF Series Solutions |
| 60. | Blue Horizon BNE ETF, Series of ETF Series Solutions |
| 61. | BTD Capital Fund, Series of ETF Series Solutions |
| 62. | Carbon Strategy ETF, Series of ETF Series Solutions |
| 63. | Cboe Vest 10 Year Interest Rate Hedge ETF, Series of ETF Series Solutions |
| 64. | ClearShares OCIO ETF, Series of ETF Series Solutions |
| 65. | ClearShares Piton Intermediate Fixed Income Fund, Series of ETF Series Solutions |
| 66. | ClearShares Ultra-Short Maturity ETF, Series of ETF Series Solutions |
| 67. | Distillate International Fundamental Stability & Value ETF, Series of ETF Series Solutions |
| 68. | Distillate Small/Mid Cash Flow ETF, Series of ETF Series Solutions |
| 69. | Distillate U.S. Fundamental Stability & Value ETF, Series of ETF Series Solutions |
| 70. | ETFB Green SRI REITs ETF, Series of ETF Series Solutions |
| 71. | Hoya Capital High Dividend Yield ETF, Series of ETF Series Solutions |
| 72. | Hoya Capital Housing ETF, Series of ETF Series Solutions |
| 73. | iBET Sports Betting & Gaming ETF, Series of ETF Series Solutions |
| 74. | International Drawdown Managed Equity ETF, Series of ETF Series Solutions |
| 75. | LHA Market State Alpha Seeker ETF, Series of ETF Series Solutions |
| 76. | LHA Market State Tactical Beta ETF, Series of ETF Series Solutions |
| 77. | LHA Market State Tactical Q ETF, Series of ETF Series Solutions |
| 78. | LHA Risk-Managed Income ETF, Series of ETF Series Solutions |
| 79. | Loncar Cancer Immunotherapy ETF, Series of ETF Series Solutions |
| 80. | Loncar China BioPharma ETF, Series of ETF Series Solutions |
| 81. | McElhenny Sheffield Managed Risk ETF, Series of ETF Series Solutions |
| 82. | Nationwide Dow Jones® Risk-Managed Income ETF, Series of ETF Series Solutions |
| 83. | Nationwide Nasdaq-100 Risk-Managed Income ETF, Series of ETF Series Solutions |
| 84. | Nationwide Russell 2000® Risk-Managed Income ETF, Series of ETF Series Solutions |
| 85. | Nationwide S&P 500® Risk-Managed Income ETF, Series of ETF Series Solutions |
| 86. | NETLease Corporate Real Estate ETF, Series of ETF Series Solutions |
| 87. | Opus Small Cap Value ETF, Series of ETF Series Solutions |
| 88. | Roundhill Acquirers Deep Value ETF, Series of ETF Series Solutions |
| 89. | The Acquirers Fund, Series of ETF Series Solutions |
| 90. | U.S. Global GO GOLD and Precious Metal Miners ETF, Series of ETF Series Solutions |
| 91. | U.S. Global JETS ETF, Series of ETF Series Solutions |
| 92. | U.S. Global Sea to Sky Cargo ETF, Series of ETF Series Solutions |
| 93. | US Vegan Climate ETF, Series of ETF Series Solutions |
| 94. | First American Funds, Inc. |
| 95. | FundX Investment Trust |
| 96. | The Glenmede Fund, Inc. |
| 97. | The Glenmede Portfolios |
| 98. | The GoodHaven Funds Trust |
| 99. | Harding, Loevner Funds, Inc. |
| 100. | Hennessy Funds Trust |
| 101. | Horizon Funds |
| 102. | Hotchkis & Wiley Funds |
| 103. | Intrepid Capital Management Funds Trust |
| 104. | Jacob Funds Inc. |
| 105. | The Jensen Quality Growth Fund Inc. |
| 106. | Kirr, Marbach Partners Funds, Inc. |
| 107. | Leuthold Funds, Inc. |
| 108. | Core Alternative ETF, Series of Listed Funds Trust |
| 109. | Wahed Dow Jones Islamic World ETF, Series of Listed Funds Trust |
| 110. | Wahed FTSE USA Shariah ETF, Series of Listed Funds Trust |
| 111. | LKCM Funds |
| 112. | LoCorr Investment Trust |
| 113. | MainGate Trust |
| 114. | ATAC Rotation Fund, Series of Managed Portfolio Series |
| 115. | Coho Relative Value Equity Fund, Series of Managed Portfolio Series |
| 116. | Coho Relative Value ESG Fund, Series of Managed Portfolio Series |
| 117. | Cove Street Capital Small Cap Value Fund, Series of Managed Portfolio Series |
| 118. | Ecofin Global Energy Transition Fund, Series of Managed Portfolio Series |
| 119. | Ecofin Global Renewables Infrastructure Fund, Series of Managed Portfolio Series |
| 120. | Ecofin Global Water ESG Fund, Series of Managed Portfolio Series |
| 121. | Ecofin Sustainable Water Fund, Series of Managed Portfolio Series |
| 122. | Jackson Square Large-Cap Growth Fund, Series of Managed Portfolio Series |
| 123. | Jackson Square SMID-Cap Growth Fund, Series of Managed Portfolio Series |
| 124. | Kensington Active Advantage Fund, Series of Managed Portfolio Series |
| 125. | Kensington Defender Fund, Series of Managed Portfolio Series |
| 126. | Kensington Dynamic Growth Fund, Series of Managed Portfolio Series |
| 127. | Kensington Managed Income Fund, Series of Managed Portfolio Series |
| 128. | LK Balanced Fund, Series of Managed Portfolio Series |
| 129. | Muhlenkamp Fund, Series of Managed Portfolio Series |
| 130. | Nuance Concentrated Value Fund, Series of Managed Portfolio Series |
| 131. | Nuance Concentrated Value Long Short Fund, Series of Managed Portfolio Series |
| 132. | Nuance Mid Cap Value Fund, Series of Managed Portfolio Series |
| 133. | Olstein All Cap Value Fund, Series of Managed Portfolio Series |
| 134. | Olstein Strategic Opportunities Fund, Series of Managed Portfolio Series |
| 135. | Port Street Quality Growth Fund, Series of Managed Portfolio Series |
| 136. | Principal Street High Income Municipal Fund, Series of Managed Portfolio Series |
| 137. | Principal Street Short Term Municipal Fund, Series of Managed Portfolio Series |
| 138. | Reinhart Genesis PMV Fund, Series of Managed Portfolio Series |
| 139. | Reinhart International PMV Fund, Series of Managed Portfolio Series |
| 140. | Reinhart Mid Cap PMV Fund, Series of Managed Portfolio Series |
| 141. | Tortoise Energy Infrastructure and Income Fund, Series of Managed Portfolio Series |
| 142. | Tortoise Energy Infrastructure Total Return Fund, Series of Managed Portfolio Series |
| 143. | Tortoise North American Pipeline Fund, Series of Managed Portfolio Series |
| 144. | Greenspring Income Opportunities Fund, Series of Manager Directed Portfolios |
| 145. | Hood River International Opportunity Fund, Series of Manager Directed Portfolios |
| 146. | Hood River Small-Cap Growth Fund, Series of Manager Directed Portfolios |
| 147. | Mar Vista Strategic Growth Fund, Series of Manager Directed Portfolios |
| 148. | Vert Global Sustainable Real Estate ETF, Series of Manager Directed Portfolios |
| 149. | Matrix Advisors Funds Trust |
| 150. | Matrix Advisors Value Fund, Inc. |
| 151. | Monetta Trust |
| 152. | Nicholas Equity Income Fund, Inc. |
| 153. | Nicholas Fund, Inc. |
| 154. | Nicholas II, Inc. |
| 155. | Nicholas Limited Edition, Inc. |
| 156. | Oaktree Diversified Income Fund Inc. |
| 157. | Permanent Portfolio Family of Funds |
| 158. | Perritt Funds, Inc. |
| 159. | Procure ETF Trust II |
| 160. | Professionally Managed Portfolios |
| 161. | Prospector Funds, Inc. |
| 162. | Provident Mutual Funds, Inc. |
| 163. | Abbey Capital Futures Strategy Fund, Series of The RBB Fund, Inc. |
| 164. | Abbey Capital Multi-Asset Fund, Series of The RBB Fund, Inc. |
| 165. | Adara Smaller Companies Fund, Series of The RBB Fund, Inc. |
| 166. | Aquarius International Fund, Series of The RBB Fund, Inc. |
| 167. | Boston Partners All Cap Value Fund, Series of The RBB Fund, Inc. |
| 168. | Boston Partners Emerging Markets Dynamic Equity Fund, Series of The RBB Fund, Inc. |
| 169. | Boston Partners Emerging Markets Fund, Series of The RBB Fund, Inc. |
| 170. | Boston Partners Global Equity Fund, Series of The RBB Fund, Inc. |
| 171. | Boston Partners Global Long/Short Fund, Series of The RBB Fund, Inc. |
| 172. | Boston Partners Global Sustainability Fund, Series of The RBB Fund, Inc. |
| 173. | Boston Partners Long/Short Equity Fund, Series of The RBB Fund, Inc. |
| 174. | Boston Partners Long/Short Research Fund, Series of The RBB Fund, Inc. |
| 175. | Boston Partners Small Cap Value Fund II, Series of The RBB Fund, Inc. |
| 176. | Campbell Systematic Macro Fund, Series of The RBB Fund, Inc. |
| 177. | F/m Opportunistic Income ETF, Series of The RBB Fund, Inc. |
| 178. | Motley Fool 100 Index ETF, Series of The RBB Fund, Inc. |
| 179. | Motley Fool Capital Efficiency 100 Index ETF, Series of The RBB Fund, Inc. |
| 180. | Motley Fool Global Opportunities ETF, Series of The RBB Fund, Inc. |
| 181. | Motley Fool Mid-Cap Growth ETF, Series of The RBB Fund, Inc. |
| 182. | Motley Fool Next Index ETF, Series of The RBB Fund, Inc. |
| 183. | Motley Fool Small-Cap Growth ETF, Series of The RBB Fund, Inc. |
| 184. | Optima Strategic Credit Fund, Series of The RBB Fund, Inc. |
| 185. | SGI Global Equity Fund, Series of The RBB Fund, Inc. |
| 186. | SGI Peak Growth Fund, Series of The RBB Fund, Inc. |
| 187. | SGI Prudent Growth Fund, Series of The RBB Fund, Inc. |
| 188. | SGI Small Cap Core Fund, Series of The RBB Fund, Inc. |
| 189. | SGI U.S. Large Cap Equity Fund, Series of The RBB Fund, Inc. |
| 190. | SGI U.S. Small Cap Equity Fund, Series of The RBB Fund, Inc. |
| 191. | US Treasury 10 Year Note ETF, Series of The RBB Fund, Inc. |
| 192. | US Treasury 12 Month Bill ETF, Series of The RBB Fund, Inc. |
| 193. | US Treasury 2 Year Note ETF, Series of The RBB Fund, Inc. |
| 194. | US Treasury 20 Year Bond ETF, Series of The RBB Fund, Inc. |
| 195. | US Treasury 3 Month Bill ETF, Series of The RBB Fund, Inc. |
| 196. | US Treasury 3 Year Note ETF, Series of The RBB Fund, Inc. |
| 197. | US Treasury 30 Year Bond ETF, Series of The RBB Fund, Inc. |
| 198. | US Treasury 5 Year Note ETF, Series of The RBB Fund, Inc. |
| 199. | US Treasury 6 Month Bill ETF, Series of The RBB Fund, Inc. |
| 200. | US Treasury 7 Year Note ETF, Series of The RBB Fund, Inc. |
| 201. | WPG Partners Select Small Cap Value Fund, Series of The RBB Fund, Inc. |
| 202. | WPG Partners Small Cap Value Diversified Fund, Series of The RBB Fund, Inc. |
| 203. | The RBB Fund Trust |
| 204. | RBC Funds Trust |
| 205. | Series Portfolios Trust |
| 206. | Thompson IM Funds, Inc. |
| 207. | TrimTabs ETF Trust |
| 208. | Trust for Advised Portfolios |
| 209. | Barrett Growth Fund, Series of Trust for Professional Managers |
| 210. | Bright Rock Mid Cap Growth Fund, Series of Trust for Professional Managers |
| 211. | Bright Rock Quality Large Cap Fund, Series of Trust for Professional Managers |
| 212. | CrossingBridge Low Duration High Yield Fund, Series of Trust for Professional Managers |
| 213. | CrossingBridge Responsible Credit Fund, Series of Trust for Professional Managers |
| 214. | CrossingBridge Ultra-Short Duration Fund, Series of Trust for Professional Managers |
| 215. | RiverPark Strategic Income Fund, Series of Trust for Professional Managers |
| 216. | Dearborn Partners Rising Dividend Fund, Series of Trust for Professional Managers |
| 217. | Jensen Global Quality Growth Fund, Series of Trust for Professional Managers |
| 218. | Jensen Quality Value Fund, Series of Trust for Professional Managers |
| 219. | Rockefeller Climate Solutions Fund, Series of Trust for Professional Managers |
| 220. | Rockefeller US Small Cap Core Fund, Series of Trust for Professional Managers |
| 221. | Terra Firma US Concentrated Realty Fund, Series of Trust for Professional Managers |
| 222. | USQ Core Real Estate Fund |
| 223. | Wall Street EWM Funds Trust |
| 224. | Wisconsin Capital Funds, Inc. |
| (b) | To the best of Registrant’s knowledge, the directors and executive officers of Quasar Distributors, LLC are as follows: |
| Name | Address | Position with Underwriter | Position with Registrant |
| Teresa Cowan | Three Canal Plaza, Suite 100, Portland, ME 04101 |
President/Manager | None |
| Chris Lanza | Three Canal Plaza, Suite 100, Portland, ME 04101 |
Vice President | None |
| Kate Macchia | Three Canal Plaza, Suite 100, Portland, ME 04101 |
Vice President | None |
| Weston Sommers | Three Canal Plaza, Suite 100, Portland ME 04101 |
Financial and Operations Principal and Chief Financial Officer | None |
| Kelly B. Whetstone | Three Canal Plaza, Suite 100, Portland, ME 04101 |
Secretary | None |
| Susan L. LaFond | Three Canal Plaza, Suite 100, Portland, ME 04101 |
Vice President and Chief Compliance Officer and Treasurer | None |
| (c) | Not applicable. |
Item 33. Location of Accounts and Records
The books, accounts and other documents required by Section 31(a) under the Investment Company Act of 1940, as amended, and the rules promulgated thereunder will be maintained at the offices of:
Horizon Investments, LLC, 6210 Ardrey Kell Road, Suite 300, Charlotte, North Carolina 28277 (records relating to its function as investment adviser of the Horizon Funds).
U.S. Bancorp Fund Services, LLC, 615 East Michigan Street, Milwaukee, Wisconsin 53202 (records relating to its function as administrator, transfer agent and dividend disbursing agent).
U.S. Bank, N.A., 1555 North River Center Drive, Suite 302, Milwaukee, Wisconsin, 53212 (records relating to its function as custodian).
Quasar Distributors, LLC, Three Canal Plaza, Suite 100, Portland, ME 04101 (records relating to its function as distributor).
Item 34. Management Services
Not applicable.
Item 35. Undertakings
The Registrant hereby undertakes to furnish each person to whom a Prospectus for one or more of the series of the Registrant is delivered with a copy of the relevant latest annual report to shareholders, upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant certifies that it meets all of the requirements for effectiveness of this Amendment to the Registration Statement under Rule 485(b) under the Securities Act of 1933, and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Charlotte, and State of North Carolina on March 27, 2024.
| Horizon Funds | |||
| By: | /s/ John Drahzal | ||
| John Drahzal | |||
| President | |||
Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the date(s) indicated.
| Signature | Title | Date | |
| /s/ John Drahzal | President and Trustee | March 27, 2024 | |
| John Drahzal | |||
| John W. Davidson* | Trustee | March 27, 2024 | |
| John W. Davidson | |||
| Todd W. Gaylord* | Trustee | March 27, 2024 | |
| Todd W. Gaylord | |||
| Thomas W. Okel* | Trustee | March 27, 2024 | |
| Thomas W. Okel | |||
| /s/ Steve Terry | Treasurer | March 27, 2024 | |
| Steve Terry |
| *By | /s/ Matthew Chambers | |
| Matthew Chambers |
As Attorney-in-Fact pursuant to Powers of Attorney previously filed and incorporated herein by reference.