485APOS 1 fp0036280_485apos.htm

File No.  333-191495

File No.  811-22895

 

 

U.S. 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. 57   
     
  and/or  
     
  REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
     
  AMENDMENT NO. 58  

 

Capitol Series Trust

(Exact Name of Registrant as Specified in Charter)

 

225 Pictoria Drive, Suite 450, Cincinnati, Ohio 45246

 (Address of Principal Executive Offices, Zip Code)

 

513-587-3400

(Registrant’s Telephone Number, including Area Code)

 

Matthew J. Miller

President and Chief Executive Officer

Capitol Series Trust

225 Pictoria Drive, Suite 450, Cincinnati, Ohio 45246

 (Name and Address of Agent for Service)

 

Copy to:

Caleb C.B. DuBois

Bernstein, Shur, Sawyer & Nelson, P.A.

100 Middle Street

P.O. Box 9729

Portland, Maine 04104-5029

  

 

It is proposed that this filing will become effective:

    immediately upon filing pursuant to paragraph (b)
    on ______________ pursuant to paragraph (b)
    60 days after filing pursuant to paragraph (a)(i)
    on pursuant to paragraph (a)(i)
  X 75 days after filing pursuant to paragraph (a)(ii)
    on pursuant to paragraph (a)(ii) 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.

 

 

The information in this Prospectus is not complete and may be changed. The Funds may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, dated October 5, 2018 

 

PROSPECTUS

 

December __, 2018

 

(LOGO)

 

Fuller & Thaler Behavioral Small-Cap Fuller & Thaler Behavioral Unconstrained
Equity Fund Equity Fund
A Shares – [       ] A Shares – [           ]
C Shares - [       ] Investor Shares - [________]
Investor Shares – FTHNX Institutional Shares - [_________]
Institutional Shares – FTHSX R6 Shares - [________]
R6 Shares – FTHFX  
Fuller & Thaler Behavioral Small-Cap  
Growth Fund Fuller & Thaler Behavioral Small–Mid Core
A Shares – [       ] Equity Fund
C Shares - [       ] A Shares – [           ]
Investor Shares – FTXNX Investor Shares - [________]
Institutional Shares – FTXSX Institutional Shares - [_________]
R6 Shares – FTXFX R6 Shares - [________]
   
Fuller & Thaler Behavioral Mid-Cap Value Fund  
A Shares – [       ] Fuller & Thaler Behavioral Micro-Cap
Investor Shares – FTVNX Equity Fund
Institutional Shares – FTVSX A Shares – [           ]
R6 Shares – FTVZX Investor Shares - [________]
  Institutional Shares - [_________]
  R6 Shares - [________]

 

Fuller & Thaler Asset Management, Inc.  

411 Borel Avenue, Suite 300  

San Mateo, CA 94402  

1-888-912-4562

 

The Securities and Exchange Commission (“SEC”) has not approved or disapproved
these securities or passed upon the adequacy or accuracy of this Prospectus.  

Any representation to the contrary is a criminal offense.

 

The Prospectus gives you important information about the funds that you should know
before you invest. Please read this Prospectus carefully before investing and  

use it for future reference.

 

 

TABLE OF CONTENTS

 

SECTION PAGE
SUMMARY SECTION – FULLER & THALER BEHAVIORAL SMALL-CAP EQUITY FUND  2
Investment Objective  2
Fees and Expenses of the Small-Cap Equity Fund  2
Principal Investment Strategies  3
Principal Investment Risks  4
Performance Information  5
Management of the Fund  7
Purchase and Sale of Fund Shares  7
Tax Information  7
Payments to Brokers-Dealers and Other Financial Intermediaries  7
SUMMARY SECTION – FULLER & THALER BEHAVIORAL SMALL-CAP GROWTH FUND  8
Investment Objective  8
Fees and Expenses of the Small-Cap Growth Fund  8
Principal Investment Strategies  9
Principal Investment Risks  10
Performance Information  11
Management of the Fund  12
Purchase and Sale of Fund Shares  12
Tax Information 12
Payments to Brokers-Dealers and Other Financial Intermediaries  12
SUMMARY SECTION – FULLER & THALER BEHAVIORAL MID-CAP VALUE FUND  13
Investment Objective  13
Fees and Expenses of the Mid-Cap Value Fund  13
Principal Investment Strategies  14
Principal Investment Risks  15
Performance Information  16
Management of the Fund  16
Purchase and Sale of Fund Shares  16
Tax Information  17
Payments to Brokers-Dealers and Other Financial Intermediaries  17
SUMMARY SECTION – FULLER  & THALER BEHAVIORAL UNCONSTRAINED EQUITY FUND  18
Investment Objective  18
Fees and Expenses of the Unconstrained Equity Fund  18
Principal Investment Strategies  19
Principal Investment Risks  20
Performance Information  22
Management of the Fund  22
Purchase and Sale of Fund Shares  22
Tax Information  23
Payments to Brokers-Dealers and Other Financial Intermediaries  23

ii

 

SECTION PAGE
SUMMARY SECTION – FULLER  & THALER BEHAVIORAL SMALL–MID CORE EQUITY FUND  24
Investment Objective  24
Fees and Expenses of the Small-Mid Core Equity Fund  24
Principal Investment Strategies  25
Principal Investment Risks  26
Performance Information  28
Management of the Fund  28
Purchase and Sale of Fund Shares  28
Tax Information  28
Payments to Brokers-Dealers and Other Financial Intermediaries  28
SUMMARY SECTION – FULLER  & THALER BEHAVIORAL MICRO-CAP EQUITY FUND  29
Investment Objective  29
Fees and Expenses of the Micro-Cap Equity Fund  29
Principal Investment Strategies  30
Principal Investment Risks  31
Performance Information  32
Management of the Fund  32
Purchase and Sale of Fund Shares  33
Tax Information  33
Payments to Brokers-Dealers and Other Financial Intermediaries  33
ADDITIONAL INFORMATION REGARDING PRINCIPAL INVESTMENT STRATEGIES OF THE FUNDS  34
Overview of the Funds  34
Investment Objective Updates  34
Additional Information About Fuller & Thaler’s Investment Process  35
Temporary Defensive Position  35
Portfolio Holdings Information  35
ADDITIONAL INFORMATION REGARDING PRINCIPAL RISKS OF THE FUNDS  36
Account Information  40
CLASSES OF SHARES  41
HOW TO BUY SHARES  46
HOW TO EXCHANGE SHARES  48
HOW TO REDEEM SHARES  48
DETERMINATION OF NET ASSET VALUE  51
DIVIDENDS, DISTRIBUTIONS, AND TAXES  51
Dividends and Distributions  51
Taxes  51
ADDITIONAL INFORMATION ABOUT MANAGEMENT OF THE FUNDS  53
The Adviser  53
Portfolio Managers  55

iii

 

SECTION PAGE
PAST PERFORMANCE OF THE ADVISER  57
FINANCIAL HIGHLIGHTS  62

APPENDIX A - FINANCIAL INTERMEDIARY SALES CHARGE VARIATIONS

 63
FOR MORE INFORMATION Back Cover

iv

 

SUMMARY SECTION

 

FULLER & THALER BEHAVIORAL SMALL-CAP EQUITY FUND

 

Investment Objective

 

The Fuller & Thaler Behavioral Small-Cap Equity Fund (the “Small-Cap Equity Fund” or the “Fund”) seeks long-term capital appreciation.

 

Fees and Expenses of the Small-Cap Equity Fund

 

The tables below describe the fees and expenses that you may pay if you buy and hold shares of the Fund. Investors may also pay commissions or other fees to their financial intermediary when they buy and hold shares of the Fund which are not reflected below. Certain financial intermediaries also may offer variations in Fund sales charges to their customers as described in Appendix A – Financial Intermediary Sales Charge Variations in this Prospectus. More information about these and other discounts is available from your financial intermediary and as described in this prospectus under “CLASSES OF SHARES” and in the Fund’s Statement of Additional Information. The Fund also permits you to reduce the front-end sales charge you pay on Class A Shares by exercising your Rights of Accumulation or Letter of Intent privileges with respect to your investments in Fuller & Thaler Funds, as described in the prospectus under “CLASSES OF SHARES – A Shares”.

 

  Share Class
  A C Investor Institutional R6

Shareholder Fees 

(fees paid directly from your investments) 

         

Maximum Sales Charge (Load) Imposed on Purchases

(as a percentage of the offering price) 

5.75%(1) None None None None

Maximum Deferred Sales Charge (Load) Imposed on Redemptions (as a percentage of the sale price) 

1.00% 1.00% None None None

 

  

Share Class 

  A C Investor Institutional R6

Annual Fund Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

         
Management Fees 0.60% 0.60% 0.60% 0.60% 0.60%
Distribution and/or Service (12b-1) Fees 0.25% [1.00%] 0.25% None None
Other Expenses(2) [_.__%](3) [_.__%](3) [_.__%] [_.__%] [_.__%]
Acquired Fund Fees and Expenses [_.__%] [_.__%] [_.__%] [_.__%] [_.__%]
Total Annual Fund Operating Expenses [_.__%] [_.__%] [_.__%] [_.__%] [_.__%]
Expense Reductions(4) [(_.__)%] [(_.__)%] [(_.__)%] [(_.__)%] [(_.__)%]
Total Annual Fund Operating Expenses After Expense Reductions(4) [1.30%]

[1.80%] 

1.25% 0.99% 0.80%

 

 

 

(1)No initial sales charge is assessed on aggregated purchases of $1 million or more in all Fuller & Thaler Funds.

(2)Pursuant to an Administrative Services Plan, the Fund may pay financial intermediaries that provide certain administrative, recordkeeping and other non-distribution related services to Fund shareholders a service fee not to exceed 0.25% of the average daily net assets of the Fund’s A Share Class and C Share Class and 0.20% of the Fund’s Investor and Institutional Share Classes. The Administrative Services Plan does not apply to the R6 Share Class, and that class does not pay any administrative services fees.

2

 

(3)“Other Expenses” on A Shares and C Shares are based on estimated expenses for the current fiscal year.

(4)The Fund’s investment adviser, Fuller & Thaler Asset Management, Inc. (“Fuller & Thaler” or the “Adviser”) has contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 1.30%, 1.80%, 1.25%, 0.99% and 0.80% for A Shares, C Shares, Investor Shares, Institutional Shares and R6 Shares, respectively, of the Fund’s average daily net assets through January 31, 2020. Previously, effective February 1, 2018 through the effective date of this prospectus, the Adviser had contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 1.25%, 0.97% and 0.80% for Investor Shares, Institutional Shares and R6 Shares, respectively, of the Fund's average daily net assets. Previously effective February 1, 2017 to January 1, 2018, the Adviser had contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 1.05%, 0.90%, and 0.80% for Investor Shares, Institutional Shares and R6 Shares, respectively, of the Fund’s average daily net assets. The expense limitation does not apply to (i)  interest; (ii)  taxes; (iii)  brokerage fees and commissions; (iv) other extraordinary expenses not incurred in the ordinary course of the Fund’s business; and (v) indirect expenses such as acquired fund fees and expenses. During any fiscal year that the Investment Advisory Agreement between the Adviser and Capitol Series Trust (the “Trust”) is in effect, the Adviser may recoup the sum of all fees previously waived or expenses reimbursed during any of the previous 36 months, less any reimbursement previously paid, provided that the Adviser is only permitted to recoup fees or expenses within 36 months from the date the fee waiver or expense reimbursement first took effect and provided further that such recoupment can be achieved within the Expense Limitation Agreement currently in effect and the Expense Limitation Agreement in place when the waiver/reimbursement occurred. This Expense Limitation Agreement may be terminated by the Board of Trustees (the “Board”) at any time.

 

Example:

 

The Example is intended to help you compare the cost of investing in shares of the Fund with the costs of investing in other mutual funds. The Example assumes that you invest $10,000 in the noted class of shares for the time periods indicated and then redeem all of your shares at the end of these periods. The Example also assumes that your investment has a 5% return each year, and the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, the Example shows what your costs would be based on these assumptions. The Example is based, for the first year, on Total Annual Fund Operating Expenses After Expense Reductions and, for all other periods, on Total Annual Fund Operating Expenses.

 

  Example: Assuming you redeem your shares at the end of each  period

Share Class 

1 Year 

3 Years 

5 Years

10 Years

A Shares $___ $___ $___ $___
C Shares $___ $___ $___ $___
Investor Shares $___ $___ $___ $___
Institutional Shares $___ $___ $___ $___
R6 Shares $___ $___ $___ $___

 

Portfolio Turnover

 

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). The Fund’s portfolio turnover rate for the fiscal year ended September 30, 2018 was [ ]% of the average value of its portfolio. High levels of portfolio turnover may indicate higher transaction costs and may result in higher taxes for you if your Fund shares are held in a taxable account. These costs, which are not reflected in Total Annual Fund Operating Expenses or in the Example above, can adversely affect the Fund’s investment performance.

 

Principal Investment Strategies

 

Under normal circumstances, the Fund seeks to achieve its objective by investing at least 80% of its net assets (plus borrowings for investment purposes) in common stocks of small capitalization (“small-cap”) companies based in the U.S. (“80% Policy”). The Fund must provide shareholders with 60 days’ prior written notice if it changes its 80% Policy. The Fund considers a company to be based in the U.S. if it is publicly traded in the U.S. and it satisfies one or more of the following additional criteria: it is incorporated in the U.S., it is headquartered in the U.S., its reported assets are primarily located in the U.S., or it derives the majority of its revenue from the U.S. The Fund defines small-cap companies as companies whose market capitalizations are generally in the lowest 10% of total market capitalization or companies whose market capitalizations are smaller than the largest company in the Russell 2000® index, whichever results in the higher market capitalization break. Total market capitalization is based on the market capitalization of U.S. operating companies listed on the New York Stock Exchange (“NYSE”), NYSE American LLC, Nasdaq Global Market(r), Nasdaq Capital Market(r), or such other securities exchanges deemed appropriate by the Adviser. Under the Adviser’s market capitalization guidelines described above, based on market capitalization data as of September 30, 2018, the market capitalization of a small cap company would be $7.672 billion or below. This dollar amount will change due to market conditions. The size of the companies included in the Russell 2000® Index will change as a result of market conditions and reconstitution of the Index.

3

 

The Fund seeks to achieve its investment objective by building a diversified portfolio of U.S. stocks in a disciplined process that applies the proprietary research of Fuller & Thaler, the Fund’s investment adviser, on the behavioral biases of other investors. Fuller & Thaler’s investment process is based on decades of research into behavioral finance. Behavioral finance is the study of how investors actually behave, as opposed to how they should behave, when making investment decisions. Professional investors are human, and like all humans, they make mistakes. Investors make mistakes because they have emotions, use imperfect rules of thumb, and have priorities beyond risk and return. Fuller & Thaler’s process identifies and exploits those mistakes. The Adviser’s analysis includes making educated predictions of when other investors – the “market” – have likely made a behavioral mistake, and in turn, have created a buying opportunity. There are two kinds of mistakes that produce buying opportunities: over-reaction and under-reaction. Investors may over-react to bad news and losses (e.g., panic) that may present opportunities in typically value-oriented stocks, or they may under-react to good news (e.g., not pay attention) that may present opportunities in typically growth-oriented stocks. At the individual stock level, Fuller & Thaler searches for events related to insider buying, earnings announcements, and other news that suggest these types of investor misbehavior (over-reaction or under-reaction) and draws from its more than 20 years of experience in analyzing events that suggest investor misbehavior. If these behaviors are present, Fuller & Thaler then proceeds to its fundamental analysis of the company. In summary, if an investor mistake is likely and the company has solid fundamentals, the portfolio managers buy the stock. The portfolio managers generally sell when they believe investor misbehavior has reversed or the firm’s fundamentals deteriorate. There is no set length of time that the Fund expects to hold a particular security. The Fund seeks to deliver similar risk characteristics to the Russell 2000® Index.

 

The final portfolio is expected to have diversification with respect to sectors. Before trading, the portfolio managers review the portfolio’s characteristics relative to its benchmark, and may adjust position sizes to control exposures to sectors, market beta, and other characteristics. The Fund may also invest a portion of its assets in real estate investment trusts (REITs). REITs are pooled investment vehicles that generally invest in income-producing real estate or real estate-related loans or interests.

 

The Fund may also lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Fund’s Board of Trustees. Loans of portfolio securities will be collateralized by liquid securities and cash. The Fund may invest cash collateral received in securities consistent with its principal investment strategy.

 

Investment Risks

 

The principal risks of investing in the Fund, which could adversely affect its net asset value, yield and total return, are listed below (in alphabetical order).

 

Please see “Additional Information Regarding Principal Risks” in the Fund’s prospectus for a more detailed description of the Fund’s risks. It is possible to lose money on an investment in the Fund. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

Behavioral Strategy Risk. When taking investment positions, Fuller & Thaler will apply principles based on behavioral finance. In order to take advantage of behavioral biases, Fuller & Thaler generally focuses on certain markers of possible under- and over-reaction. Securities identified using this type of strategy may perform differently from the market as a whole as a result of the criteria used in the analysis, whether the criteria used are successful in predicting investor behavior, the weight placed on each criteria, and changes in the criteria’s historical trends. The criteria used in implementing this strategy and the weight placed on those criteria may not be predictive of a security’s value, and the effectiveness of the criteria can change over time. These changes may not be reflected in the current analytical approach used to implement the behavioral strategy. There can be no guarantee that Fuller & Thaler will be successful in applying behavioral finance principles to successfully predict investor behavior to exploit stock price anomalies.

 

Equity Securities Risk. Equity securities may react more strongly to changes in an issuer’s financial condition or prospects than other securities of the same issuer.

 

Growth Investing Risk. To the extent that the Fund invests in growth-oriented securities, the Adviser’s perception of the underlying companies’ growth potentials may be wrong, or the securities purchased may not perform as expected.

 

Investment Company Risk. The Investment Company Act of 1940, as amended (the “1940 Act”) and the Internal Revenue Code (“IRC”) impose numerous constraints on the operations of registered investment companies, like the Fund. These restrictions may prohibit the Fund from making certain investments thus potentially limiting its profitability. Moreover, failure to satisfy certain requirements required under the IRC may prevent the Fund from qualifying as a registered investment company thus requiring the Fund to pay unexpected taxes and penalties, which could be material.

4

 

Issuer Risk. The Fund will be affected by factors specific to the issuers of securities and other instruments in which the Fund invests, including actual or perceived changes in the financial condition or business prospects of such issuers.

 

Liquidity Risk. The lack of an active market for investments may cause delay in disposition or force a sale below fair value.

 

Management Risk. The Fund will be affected by the allocation determinations, investment decisions and techniques of the Fund’s management.

 

Market Risk. The Fund will be affected by factors influencing the U.S. or global economies and securities markets or relevant industries or sectors within them.

 

Regulatory Risk. Changes in government regulations may adversely affect the operations and value of the Fund or the companies in which it invests. Industries and markets that are not adequately regulated may be susceptible to the initiation of inappropriate practices that adversely affect the Fund or the companies in which it invests.

 

REIT and Real Estate-Related Investment Risk. Adverse changes in the real estate markets may affect the value of REIT investments or real estate-linked derivatives.

 

Securities Lending Risk. The Fund may make secured loans of its portfolio securities in an amount not exceeding 33 ⅓% of the value of the Fund’s total assets. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities and possible loss of rights in the collateral should the borrower fail financially, including possible impairment of the Fund’s ability to vote the securities on loan. If a loan is collateralized by cash, the Fund typically will invest the cash collateral for its own account and may pay a fee to the borrower that normally represents a portion of the Fund’s earnings on the collateral. Because the Fund may invest collateral in any investments in accordance with its investment objective, the Fund’s securities lending transactions will result in investment leverage. The Fund bears the risk that the value of the investments made with collateral may decline.

 

Small-Cap Company Risk. Investments in securities of small-cap companies may be riskier, more volatile and more vulnerable to economic, market and industry changes than investments in larger, more established companies. As a result, share price changes may be more sudden or erratic than the prices of other equity securities, especially over the short term. Small-cap companies often have less predictable earnings, more limited product lines, markets, distribution channels, or financial resources, and the management of such companies may be dependent on one or a few key people. Small-cap companies may be unable to generate funds necessary for growth or potential development, or may be developing or marketing new products or services for markets that are not yet firmly established. In addition, such companies may become subject to intense competition from larger more established companies. The equity securities of small-cap companies are generally less liquid than the equity securities of larger companies. In many instances, the securities of smaller companies are traded only over-the-counter or on a regional securities exchange, and the frequency and volume of their trading is substantially less than is typical of larger companies. Some securities may be inactively traded and thus may not be readily bought or sold.

 

Value Investing Risk. The determination that a security is undervalued is subjective. The market may not agree with the Adviser’s determination and the security’s price may not rise to what the Adviser believes is its full fair value.

 

Performance Information

 

The performance information below provides some indication of the risks of investing in the Fund. The bar chart shows changes in the performance of the Investor Shares from year to year. The performance of each of the Institutional Shares and R6 Shares is higher than the performance of the Investor Shares during the same periods because of lower fees and expenses paid by these classes.

 

The table shows the average annual returns of the Investor Shares, Institutional Shares (formerly, Select Shares) and R6 Shares (formerly, Institutional Shares), for the periods of 1 Year, 5 Years and Since Inception compared to a broad-based market index.

 

Visit www.fullerthalerfunds.com for more current performance information.

 

Past performance, before and after taxes, is not necessarily predictive of future performance.

5

 

Small-Cap Equity Fund(1) 

Calendar Year Total Returns – Investor Shares

 

(GRAPHIC)

 

Highest and Lowest Quarter  Returns 

(for periods shown in the bar chart) 

     
Highest 1/1/2012 –  3/31/2012 14.47%
Lowest 7/1/2015 –  9/30/2015 (5.32)%

 

AVERAGE ANNUAL TOTAL RETURNS(1) 

(for periods ended 12/31/2017)

 

 

1 Year

5 Years

Since Inception
(9/8/11)

Small-Cap Equity Fund      
Investor Shares - Before Taxes 17.25% 17.13% 17.89%
Investor Shares - After Taxes on Distributions(2) 17.22%  14.20% 15.09%
Investor Shares - After Tax on Distributions and Sale of Fund Shares(2) 9.79%  12.77% 13.58%
A Shares -  Before Taxes NA NA NA
C Shares – Before Taxes NA NA NA
Institutional Shares -  Before Taxes 17.35% 17.31% 18.08%
R6 Shares - Before Taxes  17.47% 17.47% 18.24%
Russell 2000® Index (reflects no deduction for fees, expenses or taxes)(3) 14.65% 14.12% 14.99%

 

(1)The Fund is the accounting successor to a series of Allianz Funds Multi-Strategy Trust, which commenced operations on September 8, 2011, and for which the Adviser served as the sole sub-adviser (the “Predecessor Fund”). In a transaction that was consummated on October 23, 2015 (the “Reorganization”), the Fund acquired the assets and liabilities of: the A, C, and D Classes of the Predecessor Fund (tickers- AZFAX, AZFCX, and AZFDX respectively), which became the Investor Shares of the Fund; the Class P Shares of the Predecessor Fund (ticker AZFPX), which became the Institutional Shares of the Fund; and the Institutional Shares of the Predecessor Fund (ticker AZFIX), which became the R6 Shares of the Fund. Accordingly, the performance results shown above in the bar chart and the average annual total returns table for periods prior to October 23, 2015 represent the performance of the Predecessor Fund and its classes. The Fund’s performance has not been restated to reflect any differences in expenses paid by the Predecessor Fund and those paid by the Fund. In addition, the Fund’s performance during the periods reflected in the bar chart and table may have been different from that of the Predecessor Fund due to some differences in their principal investment strategies.

 

(2)After-tax returns are estimated using the highest historical individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown. After-tax returns are not relevant to investors who hold Fund shares through tax- deferred arrangements such as 401(k) plans or individual retirement accounts. After-tax returns are for Investor shares only. The Return After Taxes on Distributions and Sale of Fund Shares for a period may be greater than the Return After Taxes on Distributions for the same period if there was a loss realized on the sale of Fund shares. The benefit of the tax loss (to the extent it can be used to offset other gains) may result in a higher return. After-tax returns for other share classes will vary.

6

 

(3)The Russell 2000® Index is a widely recognized unmanaged index of equity securities and is representative of a broader domestic equity market and range of securities than is found in the Fund’s portfolio. The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe and is a subset of the Russell 3000® Index. Individuals cannot invest directly in an Index; however, an individual can invest in exchange traded funds or other investment vehicles that attempt to track the performance of a benchmark index.

 

Management of the Fund

 

Investment Manager. Fuller & Thaler Asset Management, Inc. (“Fuller & Thaler” or the “Adviser”)

 

Portfolio Managers

 

Raife Giovinazzo, Ph.D., CFA, Partner and Lead Portfolio Manager of the Fund, has managed the Fund and its predecessor since 2013.

 

Russell Fuller, Ph.D., CFA, Founder, Chief Investment Officer and Back-up Portfolio Manager, has managed the Fund and its predecessor since 2011.

 

Frederick Stanske, CFA, Partner and Back-up Portfolio Manager, has served as Back-Up Portfolio Manager of the Fund since its inception.

 

Purchase and Sale of Fund Shares

 

Minimum Initial Investment Minimum Subsequent Investment

A Shares: $1,000 for most account types 

C Shares: $1,000 for most account types 

Investor Shares: $1,000 for most account types 

Institutional Shares: $100,000 for most account types 

R6 Shares: $1,000,000 for most account types 

A Shares: $50 for all account types 

C Shares: $50 for all account types 

Investor Shares: $50 for all account types 

Institutional Shares: $50 for all account types 

R6 Shares: $50 for all account types

  

Investments in A Shares and C Shares may be made only through your dealer or financial adviser. Other share classes may also be purchased directly from the Fund.

Minimum investment requirements are waived for any qualified group retirement plan. Minimum investment requirements may be modified for certain financial intermediaries that aggregate trades on behalf of investors. For additional information regarding waiver of investment minimums, please see “Classes of Shares” in this Prospectus.

 

To Place Buy or Sell Orders

By mail: Fuller & Thaler Behavioral Small-Cap Equity Fund

c/o Ultimus Asset Services, LLC

PO Box 46707

Cincinnati, OH 45246-0707

By Phone: 1-888-912-4562  

 

You may also purchase and redeem shares through your dealer or financial adviser. Please contact your financial intermediary directly to find out if additional requirements apply.

 

Tax Information

 

The Fund’s distributions are generally taxable to you 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. You should be aware that investments in tax-deferred accounts may be taxable at withdrawal. You should discuss any tax-related concerns with your tax adviser or attorney.

 

Payments to Broker-Dealers and Other Financial Intermediaries

 

If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund, its distributor, its investment manager or their affiliates 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 intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.

7

 

SUMMARY SECTION

 

FULLER & THALER BEHAVIORAL SMALL-CAP GROWTH FUND

 

Investment Objective

 

The Fuller & Thaler Behavioral Small-Cap Growth Fund (the “Small-Cap Growth Fund” or the “Fund”) seeks long-term capital appreciation.

 

Fees and Expenses of the Small-Cap Growth Fund

 

The tables below describe the fees and expenses that you may pay if you buy and hold shares of the Fund. Investors may also pay commissions or other fees to their financial intermediary when they buy and hold shares of the Fund which are not reflected below. . Certain financial intermediaries also may offer variations in Fund sales charges to their customers as described in Appendix A – Financial Intermediary Sales Charge Variations in this Prospectus. More information about these and other discounts is available from your financial intermediary and as described in this prospectus under “CLASSES OF SHARES” and in the Fund’s Statement of Additional Information. The Fund also permits you to reduce the front-end sales charge you pay on Class A Shares by exercising your Rights of Accumulation or Letter of Intent privileges with respect to your investments in Fuller & Thaler Funds, as described in the prospectus under “CLASSES OF SHARES – A Shares”.

 

  Share Class
  A C Investor Institutional R6

Shareholder Fees 

(fees paid directly from your investments) 

         

Maximum Sales Charge (Load) Imposed on Purchases 

(as a percentage of the offering price) 

5.75%(1) None None None None

Maximum Deferred Sales Charge (Load) Imposed on Redemptions (as a percentage of the sale price) 

1.00% 1.00% None None None

 

 

Share Class 

  A C Investor Institutional  R6 

Annual Fund Operating Expenses  

(expenses that you pay each year as a percentage of the value of your investment

         
Management Fees 0.85% 0.85% 0.85% 0.85% 0.85%
Distribution and/or Service (12b-1) Fees 0.25% [_.__%] 0.25% None None
Other Expenses(2) [_.__%](3) [_.__%](3) [_.__%] [_.__%] [_.__%]
Acquired Fund Fees and Expenses [_.__%] [_.__%] [_.__%] [_.__%] [_.__%]
Total Annual Fund Operating Expenses [_.__%] [_.__%] [_.__%] [_.__%] [_.__%]
Expense Reductions(4) [(_.__)%] [(_.__)%] [(_.__)%] [(_.__)%] [(_.__)%]
Total Annual Fund Operating Expenses After Expense Reductions(3) 1.30% 1.80% 1.25% 0.99% 0.90%

 

 

(1)No initial sales charge is assessed on aggregated purchases of $1 million or more in all Fuller & Thaler Funds.

(2)Pursuant to an Administrative Services Plan, the Fund may pay financial intermediaries that provide certain administrative, recordkeeping and other non-distribution related services to Fund shareholders a service fee not to exceed 0.25% of the average daily net assets of the Fund’s A and C Share Classes and 0.20% of the Fund’s Investor and Institutional Share Classes. The Administrative Services Plan does not apply to the R6 Share Class, and that class does not pay any administrative services fees.

(3)Other expenses on A Shares and C Shares are based on estimated expenses for the current fiscal year.

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(4)The Fund’s investment adviser, Fuller & Thaler Asset Management, Inc. (“Fuller & Thaler” or the “Adviser”) has contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 1.30%, 1.80% 1.25%, 0.99%, and 0.90% for A Shares, C Shares, Investor Shares, Institutional Shares and R6 Shares, respectively, of the Fund’s average daily net assets through January 31, 2020. Previously, effective December 20, 2017 through the effective date of this prospectus, the Adviser had contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 1.24%, 0.99% and 0.90% for Investor Shares, Institutional Shares and R6 Shares, respectively, of the Fund's average daily net assets. The expense limitation does not apply to (i) interest; (ii)  taxes; (iii)  brokerage fees and commissions; (iv) other extraordinary expenses not incurred in the ordinary course of the Fund’s business; and (v) indirect expenses such as acquired fund fees and expenses. During any fiscal year that the Investment Advisory Agreement between the Adviser and Capitol Series Trust (the “Trust”) is in effect, the Adviser may recoup the sum of all fees previously waived or expenses reimbursed, less any reimbursement previously paid, provided that the Adviser is only permitted to recoup fees or expenses within 36 months from the date the fee waiver or expense reimbursement first took effect and provided further that such recoupment can be achieved within the Expense Limitation Agreement currently in effect and the Expense Limitation Agreement in place when the waiver/reimbursement occurred. This Expense Limitation Agreement may be terminated by the Board of Trustees (the “Board”) at any time.

 

Example:

 

The Example is intended to help you compare the cost of investing in shares of the Fund with the costs of investing in other mutual funds. The Example assumes that you invest $10,000 in the noted class of shares for the time periods indicated and then redeem all of your shares at the end of these periods. The Example also assumes that your investment has a 5% return each year, and the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, the Example shows what your costs would be based on these assumptions. The Example is based, for the first year, on Total Annual Fund Operating Expenses After Expense Reductions and, for all other periods, on Total Annual Fund Operating Expenses.

 

  Example: Assuming you redeem your shares at the end of each  period

Share Class

1 Year

3 Years

5 Years

10 Years

A Shares $___ $___ $___ $___
C Shares $___ $___ $___ $___
Investor Shares $___ $___ $___ $___
Institutional Shares $___ $___ $___ $___
R6 Shares $___ $___ $___ $___

 

Portfolio Turnover

 

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). The Fund’s portfolio turnover rate from its inception on December 21, 2017 through the September 30, 2018 end of its fiscal year was [ ]% of the average value of its portfolio (non-annualized). High levels of portfolio turnover may indicate higher transaction costs and may result in higher taxes for you if your Fund shares are held in a taxable account. These costs, which are not reflected in Total Annual Fund Operating Expenses or in the Example above, can adversely affect the Fund’s investment performance.

 

Principal Investment Strategies

 

Under normal circumstances, the Fund seeks to achieve its objective by investing at least 80% of its net assets (plus borrowings for investment purposes) in common stocks of small capitalization (“small-cap”) companies based in the U.S. (“80% Policy”). The Fund must provide shareholders with 60 days’ prior written notice if it changes its 80% Policy. The Fund considers a company to be based in the U.S. if it is publicly traded in the U.S. and it satisfies one or more of the following additional criteria: it is incorporated in the U.S., it is headquartered in the U.S., its reported assets are primarily located in the U.S., or it derives the majority of its revenue from the U.S. The Fund defines small-cap companies as companies whose market capitalizations are generally in the lowest 10% of total market capitalization or companies whose market capitalizations are smaller than the largest company in the Russell 2000® index, whichever results in the higher market capitalization break. Total market capitalization is based on the market capitalization of U.S. operating companies listed on the New York Stock Exchange (“NYSE”), NYSE American LLC, Nasdaq Global Market(r), Nasdaq Capital Market(r), or such other securities exchanges deemed appropriate by the Adviser. Under the Adviser’s market capitalization guidelines described above, based on market capitalization data as of September 30, 2018, the market capitalization of a small cap company would be $7.672 billion or below. This dollar amount will change due to market conditions. The size of the companies included in the Russell 2000® Index will change as a result of market conditions and reconstitution of the Index. The Fund screens for companies that historically have above average earnings or sales growth and retention of earnings. Often such companies have above average price to earnings ratios.

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The Fund seeks to achieve its investment objective by building a diversified portfolio of U.S. stocks in a disciplined process that applies the proprietary research of Fuller & Thaler, the Fund’s investment adviser, on the behavioral biases of other investors. Fuller & Thaler’s investment process is based on decades of research into behavioral finance. Behavioral finance is the study of how investors actually behave, as opposed to how they should behave, when making investment decisions. Professional investors are human, and like all humans, they make mistakes. Investors make mistakes because they have emotions, use imperfect rules of thumb, and have priorities beyond risk and return. Fuller & Thaler’s process identifies and exploits those mistakes. The Adviser’s analysis includes making educated predictions of when other investors – the “market” – have likely made a behavioral mistake, and in turn, have created a buying opportunity. There are two kinds of mistakes that produce buying opportunities: over-reaction and under-reaction. Investors may over-react to bad news and losses (e.g., panic) that may present opportunities in typically value-oriented stocks, or they may under-react to good news (e.g., not pay attention) that may present opportunities in typically growth-oriented stocks. At the individual stock level, Fuller & Thaler searches for events related to earnings announcements and other news that suggest investor under-reaction and draws from its more than 20 years of experience in analyzing events that suggest investor misbehavior. If these behaviors are present, Fuller & Thaler then proceeds to its fundamental analysis of the company. The Fund screens for companies that historically have above average earnings or sales growth and retention of earnings. The portfolio managers generally sell when they believe investor misbehavior has reversed or the firm’s fundamentals deteriorate. There is no set length of time that the Fund expects to hold a particular security. The Fund seeks to deliver similar risk characteristics to the Russell 2000® Growth Index.

 

The final portfolio is expected to have diversification with respect to sectors. Before trading, the portfolio managers review the portfolio’s characteristics relative to its benchmark, and may adjust position sizes to control exposures to sectors, market beta, and other characteristics. The Fund may also invest a portion of its assets in real estate investment trusts (“REITs”). REITs are pooled investment vehicles that generally invest in income-producing real estate or real estate-related loans or interests.

 

The Fund may also lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Fund’s Board of Trustees. Loans of portfolio securities will be collateralized by liquid securities and cash. The Fund may invest cash collateral received in securities consistent with its principal investment strategy.

 

Principal Investment Risks

 

The principal risks of investing in the Fund, which could adversely affect its net asset value, yield and total return, are listed below (in alphabetical order).

 

Please see “Additional Information Regarding Principal Risks” in the Fund’s prospectus for a more detailed description of the Fund’s risks. It is possible to lose money on an investment in the Fund. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

Behavioral Strategy Risk. When taking investment positions, Fuller & Thaler will apply principles based on behavioral finance. In order to take advantage of behavioral biases, Fuller & Thaler generally focuses on certain markers of possible under-reaction. Securities identified using this type of strategy may perform differently from the market as a whole as a result of the criteria used in the analysis, whether the criteria used are successful in predicting investor behavior, the weight placed on each criteria, and changes in the criteria’s historical trends. The criteria used in implementing this strategy and the weight placed on those criteria may not be predictive of a security’s value, and the effectiveness of the criteria can change over time. These changes may not be reflected in the current analytical approach used to implement the behavioral strategy. There can be no guarantee that Fuller & Thaler will be successful in applying behavioral finance principles to successfully predict investor behavior to exploit stock price anomalies.

 

Equity Securities Risk. Equity securities may react more strongly to changes in an issuer’s financial condition or prospects than other securities of the same issuer.

 

Growth Investing Risk. To the extent that the Fund invests in growth-oriented securities, the Adviser’s perception of the underlying companies’ growth potentials may be wrong, or the securities purchased may not perform as expected.

 

Investment Company Risk. The Investment Company Act of 1940, as amended (the “1940 Act”) and the Internal Revenue Code (“IRC”) impose numerous constraints on the operations of registered investment companies, like the Fund. These restrictions may prohibit the Fund from making certain investments thus potentially limiting its profitability. Moreover, failure to satisfy certain requirements required under the IRC may prevent the Fund from qualifying as a registered investment company thus requiring the Fund to pay unexpected taxes and penalties, which could be material.

 

Issuer Risk. The Fund will be affected by factors specific to the issuers of securities and other instruments in which the Fund invests, including actual or perceived changes in the financial condition or business prospects of such issuers.

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Liquidity Risk. The lack of an active market for investments may cause delay in disposition or force a sale below fair value.

 

Management Risk. The Fund will be affected by the allocation determinations, investment decisions and techniques of the Fund’s management.

 

Market Risk. The Fund will be affected by factors influencing the U.S. or global economies and securities markets or relevant industries or sectors within them.

 

New Fund Risk. The Fund has limited operating history and there can be no assurance that the Fund will grow to or maintain an economically viable size, in which case the Trust’s Board of Trustees may determine to liquidate the Fund.

 

Regulatory Risk. Changes in government regulations may adversely affect the operations and value of the Fund or the companies in which it invests. Industries and markets that are not adequately regulated may be susceptible to the initiation of inappropriate practices that adversely affect the Fund or the companies in which it invests.

 

REIT and Real Estate-Related Investment Risk. Adverse changes in the real estate markets may affect the value of REIT investments or real estate-linked derivatives.

 

Securities Lending Risk. The Fund may make secured loans of its portfolio securities in an amount not exceeding 33 ⅓% of the value of the Fund’s total assets. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities and possible loss of rights in the collateral should the borrower fail financially, including possible impairment of the Fund’s ability to vote the securities on loan. If a loan is collateralized by cash, the Fund typically will invest the cash collateral for its own account and may pay a fee to the borrower that normally represents a portion of the Fund’s earnings on the collateral. Because the Fund may invest collateral in any investments in accordance with its investment objective, the Fund’s securities lending transactions will result in investment leverage. The Fund bears the risk that the value of the investments made with collateral may decline.

 

Small-Cap Company Risk. Investments in securities of small-cap companies may be riskier, more volatile and more vulnerable to economic, market and industry changes than investments in larger, more established companies. As a result, share price changes may be more sudden or erratic than the prices of other equity securities, especially over the short term. Small-cap companies often have less predictable earnings, more limited product lines, markets, distribution channels, or financial resources, and the management of such companies may be dependent on one or a few key people. Small-cap companies may be unable to generate funds necessary for growth or potential development, or may be developing or marketing new products or services for markets that are not yet firmly established. In addition, such companies may become subject to intense competition from larger more established companies. The equity securities of small-cap companies are generally less liquid than the equity securities of larger companies. In many instances, the securities of smaller companies are traded only over-the-counter or on a regional securities exchange, and the frequency and volume of their trading is substantially less than is typical of larger companies. Some securities may be inactively traded and thus may not be readily bought or sold.

 

Turnover Risk. High levels of portfolio turnover increase transaction costs and taxes and may lower investment performance.

 

Performance Information

 

Annual return information will be incorporated once the Fund has operated for a full calendar year. This performance information will provide some indication of the risks of investing in the Fund by showing changes in the Fund’s performance from year-to-year and by showing how the Fund’s average annual returns for 1, 5, and 10 years compare with those of a broad measure of market performance. Visit www.fullerthalerfunds.com for current performance information.

 

Management of the Fund

 

Investment Manager. Fuller & Thaler Asset Management, Inc. (“Fuller & Thaler” or the “Adviser”)

 

Portfolio Managers

 

Frederick Stanske, CFA, Partner and Lead Portfolio Manager, has managed the Fund since its inception.

Raymond Lin, CFA, Partner and Back-up Portfolio Manager, has been the back-up portfolio manager of this strategy since 2006 and has been the back-up portfolio manager of the Fund since its inception.

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Purchase and Sale of Fund Shares

 

Minimum Initial Investment Minimum Subsequent Investment

A Shares: $1,000 for most account types 

C Shares: $1,000 for most account types 

Investor Shares: $1,000 for most account types 

Institutional Shares: $100,000 for most account types 

R6 Shares: $1,000,000 for most account types

A Shares: $50 for all account types 

C Shares: $50 for all account types 

Investor Shares: $50 for all account types 

Institutional Shares: $50 for all account types 

R6 Shares: $50 for all account types 

 

Investments in A Shares and C Shares may be made only through your dealer or financial adviser. Other share classes may also be purchased directly from the Fund.

Minimum investment requirements are waived for any qualified group retirement plan. Minimum investment requirements may be modified for certain financial intermediaries that aggregate trades on behalf of investors. For additional information regarding waiver of investment minimums, please see “Classes of Shares” in this Prospectus.

 

To Place Buy or Sell Orders

By mail: Fuller & Thaler Behavioral Small-Cap Growth Fund

c/o Ultimus Asset Services, LLC

PO Box 46707  

Cincinnati, OH 45246-0707  

By Phone: 1-888-912-4562  

 

You may also purchase and redeem shares through your dealer or financial adviser. Please contact your financial intermediary directly to find out if additional requirements apply.

 

Tax Information

 

The Fund’s distributions are generally taxable to you 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. You should be aware that investments in tax-deferred accounts may be taxable at withdrawal. You should discuss any tax-related concerns with your tax adviser or attorney.

 

Payments to Broker-Dealers and Other Financial Intermediaries

 

If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund, its distributor, its investment manager or their affiliates 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 intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.

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SUMMARY SECTION

 

FULLER & THALER BEHAVIORAL MID-CAP VALUE FUND

 

Investment Objective

 

The Fuller & Thaler Behavioral Mid-Cap Value Fund (the “Mid-Cap Value Fund” or the “Fund”) seeks long-term capital appreciation.

 

Fees and Expenses of the Mid-Cap Value Fund

 

The tables below describe the fees and expenses that you may pay if you buy and hold shares of the Fund. Investors may also pay commissions or other fees to their financial intermediary when they buy and hold shares of the Fund, which are not reflected below.

 

Certain financial intermediaries also may offer variations in Fund sales charges to their customers as described in Appendix A – Financial Intermediary Sales Charge Variations in this Prospectus. More information about these and other discounts is available from your financial intermediary and as described in this prospectus under “CLASSES OF SHARES” and in the Fund’s Statement of Additional Information. The Fund also permits you to reduce the front-end sales charge you pay on Class A Shares by exercising your Rights of Accumulation or Letter of Intent privileges with respect to your investments in Fuller & Thaler Funds, as described in the prospectus under “CLASSES OF SHARES – A Shares”.

 

 

Share Class

  A(1) Investor Institutional R6

Shareholder Fees

(fees paid directly from your investments)

       

Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of the offering price)

5.75%(2) None None None
Maximum Deferred Sales Charge (Load) Imposed on Redemptions (as a percentage of the sale price) 1.00% None None None

 

 

Share Class

  A(1)  Investor Institutional  R6

Annual Fund Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

       
Management Fees 0.75% 0.75% 0.75% 0.75%
Distribution and/or Service (12b-1) Fees 0.25 % 0.25 % None None
Other Expenses(3) [_.__%](4) [_.__%] [_.__%] [_.__%]
Acquired Fund Fees and Expenses [_.__%] [_.__%] [_.__%] [_.__%]
Total Annual Fund Operating Expenses [_.__%] [_.__%] [_.__%] [_.__%]
Expense Reductions(5) [(_.__)%] [(_.__)%] [(_.__)%] [(_.__)%]
Total Annual Fund Operating Expenses After Expense Reductions(5) 1.20% 1.15% 0.90% 0.80%

 

 
(1)The Fund’s A Shares have been approved by the Trust’s Board of Trustees but are not yet available for purchase and are not being offered at this time. The Fund’s A Shares will be registered and offered for sale at a later date.

(2)No initial sales charge is assessed on aggregated purchases of $1 million or more in all Fuller & Thaler Funds.

(3)Pursuant to an Administrative Services Plan, the Fund may pay financial intermediaries that provide certain administrative, recordkeeping and other non-distribution related services to Fund shareholders a service fee not to exceed 0.25% of the average daily net assets of the Fund’s A Share Class and 0.20% of the Fund’s Investor and Institutional Share Classes. The Administrative Services Plan does not apply to the R6 Share Class, and that class does not pay any administrative services fees.

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(4)Other expenses on A Shares are based on estimated expenses for the current fiscal year.

(5)The Fund’s investment adviser, Fuller & Thaler Asset Management, Inc. (“Fuller & Thaler” or the “Adviser”) has contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 1.20%, 1.15%, 0.90%, and 0.80% for A Shares, Investor Shares, Institutional Shares and R6 Shares, respectively, of the Fund’s average daily net assets through January 31, 2020. Previously, effective December 20, 2017 through the effective date of this prospectus, the Adviser had contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 1.14%, 0.89% and 0.80% for Investor Shares, Institutional Shares and R6 Shares, respectively, of the Fund's average daily net assets. The expense limitation does not apply to: (i)  interest; (ii)  taxes; (iii)  brokerage fees and commissions; (iv) other extraordinary expenses not incurred in the ordinary course of the Fund’s business; and (v) indirect expenses such as acquired fund fees and expenses. During any fiscal year that the Investment Advisory Agreement between the Adviser and Capitol Series Trust (the “Trust”) is in effect, the Adviser may recoup the sum of all fees previously waived or expenses reimbursed during any of the previous 36 months, less any reimbursement previously paid, provided that the Adviser is only permitted to recoup fees or expenses within 36 months from the date the fee waiver or expense reimbursement first took effect and provided further that such recoupment can be achieved within the Expense Limitation Agreement currently in effect and the Expense Limitation Agreement in place when the waiver/reimbursement occurred. This Expense Limitation Agreement may be terminated by the Board of Trustees (the “Board”) at any time.

 

Example:

 

The Example is intended to help you compare the cost of investing in shares of the Fund with the costs of investing in other mutual funds. The Example assumes that you invest $10,000 in the noted class of shares for the time periods indicated and then redeem all of your shares at the end of these periods. The Example also assumes that your investment has a 5% return each year, and the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, the Example shows what your costs would be based on these assumptions. The Example is based, for the first year, on Total Annual Fund Operating Expenses After Expense Reductions and, for all other periods, on Total Annual Fund Operating Expenses.

 

  Example: Assuming you redeem your shares at the end of each  period

Share Class

1 Year 3 Years 5 Years 10 Years
A Shares $___ $___ $___ $___
Investor Shares $___ $___ $___ $___
Institutional Shares $___ $___ $___ $___
R6 Shares $___ $___ $___ $___

 

Portfolio Turnover

 

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). The Fund’s portfolio turnover rate from its inception on December 21, 2017 through the September 30, 2018 end of its fiscal year was []% of the average value of its portfolio. High levels of portfolio turnover may indicate higher transaction costs and may result in higher taxes for you if your Fund shares are held in a taxable account. These costs, which are not reflected in Total Annual Fund Operating Expenses or in the Example above, can adversely affect the Fund’s investment performance.

 

Principal Investment Strategies

 

The Fund seeks to achieve its objective by investing at least 80% of its net assets (plus borrowings for investment purposes) in common stocks of medium capitalization (“mid-cap”) companies based in the U.S. (“80% Policy”). The Fund must provide shareholders with 60 days’ prior written notice if it changes its 80% Policy. The Fund considers a company to be based in the U.S. if it is publicly traded in the U.S. and it satisfies one or more of the following additional criteria: it is incorporated in the U.S., it is headquartered in the U.S., its reported assets are primarily located in the U.S., or it derives the majority of its revenue from the U.S. The Fund defines mid-cap companies as companies whose market capitalizations are generally in the lowest 40% of total market capitalization or companies whose market capitalizations are smaller than the largest company in the Russell MidCap® index, whichever results in the higher market capitalization break. Total market capitalization is based on the market capitalization of U.S. operating companies listed on the New York Stock Exchange (“NYSE”), NYSE American LLC, Nasdaq Global Market®, Nasdaq Capital Market®, or such other securities exchanges deemed appropriate by the Adviser. Under the Adviser’s market capitalization guidelines described above, based on market capitalization data as of September 30, 2018, the market capitalization of a mid-cap company would be $42.68 billion or below. This dollar amount will change due to market conditions. The size of the companies included in the Russell MidCap® Index will change as a result of market conditions and reconstitution of the Index.

 

The Fund seeks to achieve its investment objective by building a diversified portfolio of U.S. stocks in a disciplined process that applies the proprietary research of Fuller & Thaler, the Fund’s investment adviser, on the behavioral biases of other investors. Fuller & Thaler’s investment process is based on decades of research into behavioral finance. Behavioral finance is the study of how investors actually behave, as opposed to how they should behave, when making investment decisions. Professional investors are human, and like all humans, they make mistakes. Investors make mistakes because they have emotions, use imperfect rules of thumb, and have priorities beyond risk and return. Fuller & Thaler’s process identifies and exploits those mistakes. The Adviser’s analysis includes making educated predictions of when other investors – the “market” – have likely made a behavioral mistake, and in turn, have created a buying opportunity. There are two kinds of mistakes that produce buying opportunities: over-reaction and under-reaction. Investors may over-react to bad news and losses (e.g., panic) that may present opportunities in typically value-oriented stocks, or they may under-react to good news (e.g., not pay attention) that may present opportunities in typically growth-oriented stocks. At the individual stock level, Fuller & Thaler searches for events related to insider buying and other news that suggest investor over-reaction and draws from its more than 20 years of experience in analyzing events that suggest investor misbehavior. If these behaviors are present, Fuller & Thaler then proceeds to its fundamental analysis of the company. The portfolio managers generally sell when they believe investor misbehavior has reversed or the firm’s fundamentals deteriorate. There is no set length of time that the Fund expects to hold a particular security. The Fund seeks to deliver similar risk characteristics to the Russell MidCap® Value Index.

14

 

The final portfolio is expected to have diversification with respect to sectors. Before trading, the portfolio managers review the portfolio’s characteristics relative to its benchmark, and may adjust position sizes to control exposures to sectors, market beta, and other characteristics. The Fund may also invest a portion of its assets in real estate investment trusts (“REITs”). REITs are pooled investment vehicles that generally invest in income-producing real estate or real estate-related loans or interests.

 

The Fund may also lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Fund’s Board of Trustees. Loans of portfolio securities will be collateralized by liquid securities and cash. The Fund may invest cash collateral received in securities consistent with its principal investment strategy.

 

Principal Investment Risks

 

The principal risks of investing in the Fund, which could adversely affect its net asset value, yield and total return, are listed below (in alphabetical order).

 

Please see “Additional Information Regarding Principal Risks” in the Fund’s prospectus for a more detailed description of the Fund’s risks. It is possible to lose money on an investment in the Fund. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

Behavioral Strategy Risk. When taking investment positions, Fuller & Thaler will apply principles based on behavioral finance. In order to take advantage of behavioral biases, Fuller & Thaler generally focuses on certain markers of possible over-reaction. Securities identified using this type of strategy may perform differently from the market as a whole as a result of the criteria used in the analysis, whether the criteria used are successful in predicting investor behavior, the weight placed on each criteria, and changes in the criteria’s historical trends. The criteria used in implementing this strategy and the weight placed on those criteria may not be predictive of a security’s value, and the effectiveness of the criteria can change over time. These changes may not be reflected in the current analytical approach used to implement the behavioral strategy. There can be no guarantee that Fuller & Thaler will be successful in applying behavioral finance principles to successfully predict investor behavior to exploit stock price anomalies.

 

Equity Securities Risk. Equity securities may react more strongly to changes in an issuer’s financial condition or prospects than other securities of the same issuer.

 

Investment Company Risk. The Investment Company Act of 1940, as amended (the “1940 Act”) and the Internal Revenue Code (“IRC”) impose numerous constraints on the operations of registered investment companies, like the Fund. These restrictions may prohibit the Fund from making certain investments thus potentially limiting its profitability. Moreover, failure to satisfy certain requirements required under the IRC may prevent the Fund from qualifying as a registered investment company thus requiring the Fund to pay unexpected taxes and penalties, which could be material.

 

Issuer Risk. The Fund will be affected by factors specific to the issuers of securities and other instruments in which the Fund invests, including actual or perceived changes in the financial condition or business prospects of such issuers.

 

Liquidity Risk. The lack of an active market for investments may cause delay in disposition or force a sale below fair value.

 

Management Risk. The Fund will be affected by the allocation determinations, investment decisions and techniques of the Fund’s management.

 

Market Risk. The Fund will be affected by factors influencing the U.S. or global economies and securities markets or relevant industries or sectors within them.

15

 

Mid-Cap Company Risk. Investments in securities of mid-cap companies may be riskier, more volatile and more vulnerable to economic, market and industry changes than investments in larger, more established companies. As a result, share price changes may be more sudden or erratic than the prices of other equity securities, especially over the short term. Mid-cap companies may have less predictable earnings, more limited product lines, markets, distribution channels, or financial resources, and the management of such companies may be dependent on one or a few key people. Mid-cap companies may be unable to generate funds necessary for growth or potential development, or may be developing or marketing new products or services for markets that are not yet firmly established. In addition, such companies may become subject to intense competition from larger more established companies. The equity securities of mid-cap companies are generally less liquid than the equity securities of larger companies. In many instances, the securities of mid-cap companies are traded only over-the-counter or on a regional securities exchange, and the frequency and volume of their trading is substantially less than is typical of larger companies. Some securities may be inactively traded and thus may not be readily bought or sold.

 

New Fund Risk. The Fund has limited operating history and there can be no assurance that the Fund will grow to or maintain an economically viable size, in which case the Trust’s Board of Trustees may determine to liquidate the Fund.

 

Regulatory Risk. Changes in government regulations may adversely affect the operations and value of the Fund or the companies in which it invests. Industries and markets that are not adequately regulated may be susceptible to the initiation of inappropriate practices that adversely affect the Fund or the companies in which it invests.

 

REIT and Real Estate-Related Investment Risk. Adverse changes in the real estate markets may affect the value of REIT investments or real estate-linked derivatives.

 

Securities Lending Risk. The Fund may make secured loans of its portfolio securities in an amount not exceeding 33 ⅓% of the value of the Fund’s total assets. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities and possible loss of rights in the collateral should the borrower fail financially, including possible impairment of the Fund’s ability to vote the securities on loan. If a loan is collateralized by cash, the Fund typically will invest the cash collateral for its own account and may pay a fee to the borrower that normally represents a portion of the Fund’s earnings on the collateral. Because the Fund may invest collateral in any investments in accordance with its investment objective, the Fund’s securities lending transactions will result in investment leverage. The Fund bears the risk that the value of the investments made with collateral may decline.

 

Value Investing Risk. The determination that a security is undervalued is subjective. The market may not agree with the Adviser’s determination and the security’s price may not rise to what the Adviser believes is its full fair value.  

 

Performance Information

 

Annual return information will be incorporated once the Fund has operated for a full calendar year. This performance information will provide some indication of the risks of investing in the Fund by showing changes in the Fund’s performance from year-to-year and by showing how the Fund’s average annual returns for 1, 5, and 10 years compare with those of a broad measure of market performance. Visit www.fullerthalerfunds.com for current performance information.

 

Management of the Fund

 

Investment Manager. Fuller & Thaler Asset Management, Inc. (“Fuller & Thaler” or the “Adviser”)

 

Portfolio Managers

 

David Potter, CFA, Partner and Lead Portfolio Manager, has managed the Fund since its inception.

 

Ryam Lee, CFA, Analyst, has been an analyst on the Fund since its inception.

 

Purchase and Sale of Fund Shares

 

Minimum Initial Investment Minimum Subsequent Investment

A Shares: $1,000 for most account types

Investor Shares: $1,000 for most account types

Institutional Shares: $100,000 for most account types

R6 Shares: $1,000,000 for most account types

A Shares: $50 for all account types

Investor Shares: $50 for all account types

Institutional Shares: $50 for all account types

R6 Shares: $50 for all account types

16

 

Investments in A Shares, when available, may be made only through your dealer or financial adviser. Other share classes may also be purchased directly from the Fund.

Minimum investment requirements are waived for any qualified group retirement plan. Minimum investment requirements may be modified for certain financial intermediaries that aggregate trades on behalf of investors. For additional information regarding waiver of investment minimums, please see “Classes of Shares” in this Prospectus.

 

To Place Buy or Sell Orders

By mail: Fuller & Thaler Behavioral Mid-Cap Value Fund

c/o Ultimus Asset Services, LLC

PO Box 46707

Cincinnati, OH 45246-0707

By Phone: 1-888-912-4562

 

You may also purchase and redeem shares through your dealer or financial adviser. Please contact your financial intermediary directly to find out if additional requirements apply.

 

Tax Information

 

The Fund’s distributions are generally taxable to you 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. You should be aware that investments in tax-deferred accounts may be taxable at withdrawal. You should discuss any tax-related concerns with your tax adviser or attorney.

 

Payments to Broker-Dealers and Other Financial Intermediaries

 

If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund, its distributor, its investment manager or their affiliates 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 intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.

17

 

SUMMARY SECTION

 

FULLER & THALER BEHAVIORAL UNCONSTRAINED EQUITY FUND

 

Investment Objective

 

The Fuller & Thaler Behavioral Unconstrained Equity Fund (the “Unconstrained Equity Fund” or the “Fund”) seeks long-term capital appreciation.

 

Fees and Expenses of the Unconstrained Equity Fund

 

The tables below describe the fees and expenses that you may pay if you buy and hold shares of the Unconstrained Equity Fund. Investors may also pay commissions or other fees to their financial intermediary when they buy and hold shares of the Fund, which are not reflected below. Certain financial intermediaries also may offer variations in Fund sales charges to their customers as described in Appendix A – Financial Intermediary Sales Charge Variations in this Prospectus. More information about these and other discounts is available from your financial intermediary and as described in this prospectus under “CLASSES OF SHARES” and in the Fund’s Statement of Additional Information. The Fund also permits you to reduce the front-end sales charge you pay on Class A Shares by exercising your Rights of Accumulation or Letter of Intent privileges with respect to your investments in Fuller & Thaler Funds, as described in the prospectus under “CLASSES OF SHARES – A Shares”.

 

 

Share Class

  A(1) Investor(1) Institutional R6

Shareholder Fees

(fees paid directly from your investments)

       

Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of the offering price)

5.75%(2) None None None
Maximum Deferred Sales Charge (Load) Imposed on Redemptions (as a percentage of the sale price) 1.00% None None None

 

 

Share Class

  A(1)  Investor(1) Institutional R6

Annual Fund Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

       
Management Fees 0.85% 0.85% 0.85% 0.85%
Distribution and/or Service (12b-1) Fees 0.25 % 0.25 % None None
Other Expenses(3)(4) [_.__%] [_.__%] [_.__%] [_.__%]
Acquired Fund Fees and Expenses [_.__%] [_.__%] [_.__%] [_.__%]
Total Annual Fund Operating Expenses [_.__%] [_.__%] [_.__%] [_.__%]
Expense Reductions(5) [(_.__)%] [(_.__)%] [(_.__)%] [(_.__)%]
Total Annual Fund Operating Expenses After Expense Reductions(5) [1.30%] [1.25%] [0.99%] [0.90%]

 

 
(1)The Fund’s A Shares and Investor Shares have been approved by the Trust’s Board of Trustees but are not yet available for purchase and are not being offered at this time. The Fund’s A Shares and Investor Shares will be registered and offered for sale at a later date.

(2)No initial sales charge is assessed on aggregated purchases of $1 million or more in all Fuller & Thaler Funds.

(3)Other expenses are based on estimated expenses for the current fiscal year.

(4)Pursuant to an Administrative Services Plan, the Fund may pay financial intermediaries that provide certain administrative, recordkeeping and other non-distribution related services to Fund shareholders a service fee not to exceed 0.25% of the average daily net assets of the Fund’s A Share Class and 0.20% of the Fund’s Investor and Institutional Share Classes. The Administrative Services Plan does not apply to the R6 Share Class, and that class does not pay any administrative services fees.

18

 

(5)The Fund’s investment adviser, Fuller & Thaler Asset Management, Inc. (“Fuller & Thaler” or the “Adviser”) has contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 1.30%, 1.25%, 0.99% and 0.90% for A Shares, Investor Shares, Institutional Shares and R6 Shares, respectively, of the Fund’s average daily net assets through January 31, 2020. The expense limitation does not apply to: (i)  interest; (ii)  taxes; (iii)  brokerage fees and commissions; (iv) other extraordinary expenses not incurred in the ordinary course of the Fund’s business; and (v) indirect expenses such as acquired fund fees and expenses. During any fiscal year that the Investment Advisory Agreement between the Adviser and Capitol Series Trust (the “Trust”) is in effect, the Adviser may recoup the sum of all fees previously waived or expenses reimbursed during any of the previous 36 months, less any reimbursement previously paid, provided that the Adviser is only permitted to recoup fees or expenses within 36 months from the date the fee waiver or expense reimbursement first took effect and provided further that such recoupment can be achieved within the Expense Limitation Agreement currently in effect and the Expense Limitation Agreement in place when the waiver/reimbursement occurred. This Expense Limitation Agreement may be terminated by the Board of Trustees (the “Board”) at any time.

 

Example:

 

The Example is intended to help you compare the cost of investing in shares of the Fund with the costs of investing in other mutual funds. The Example assumes that you invest $10,000 in the noted class of shares for the time periods indicated and then redeem all of your shares at the end of these periods. The Example also assumes that your investment has a 5% return each year, and the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, the Example shows what your costs would be based on these assumptions. The Example is based, for the first year, on Total Annual Fund Operating Expenses After Expense Reductions and, for all other periods, on Total Annual Fund Operating Expenses.

 

Example: Assuming you redeem your shares at the end of each period

Share Class

1 Year

3 Years

A Shares $___ $___
Investor Shares $___ $___
Institutional Shares $___ $___
R6 Shares $___ $___

 

Portfolio Turnover

 

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). High levels of portfolio turnover may indicate higher transaction costs and may result in higher taxes for you if your Fund shares are held in a taxable account. These costs, which are not reflected in Total Annual Fund Operating Expenses or in the Example above, can adversely affect the Fund’s investment performance. The Unconstrained Equity Fund’s portfolio turnover rate is normally expected to be below 50%. Since the Fund has yet to commence operations, no portfolio turnover information is available for its most recently completed fiscal year.

 

Principal Investment Strategies

 

The Fund seeks to achieve its objective by investing at least 80% of its net assets (plus borrowings for investment purposes) in common stocks of companies of all market capitalizations based in the U.S. (“80% Policy”),. The Fund must provide shareholders with 60 days’ prior written notice if it changes its 80% Policy. The Fund considers a company to be based in the U.S. if it is publicly traded in the U.S. and it satisfies one or more of the following additional criteria: it is incorporated in the U.S., it is headquartered in the U.S., its reported assets are primarily located in the U.S., or it derives the majority of its revenue from the U.S.

 

The Fund seeks to achieve its investment objective by building a non-diversified portfolio of U.S. stocks in a disciplined process that applies the proprietary research of Fuller & Thaler, the Fund’s investment adviser, on the behavioral biases of other investors.

 

Fuller & Thaler’s investment process is based on decades of research into behavioral finance. Behavioral finance is the study of how investors actually behave, as opposed to how they should behave, when making investment decisions. Professional investors are human, and like all humans, they make mistakes. Investors make mistakes because they have emotions, use imperfect rules of thumb, and have priorities beyond risk and return. Fuller & Thaler’s process identifies and exploits those mistakes. The Adviser’s analysis includes making educated predictions of when other investors – the “market” – have likely made a behavioral mistake, and in turn, have created a buying opportunity. There are two kinds of mistakes that produce buying opportunities: over-reaction and under-reaction. Investors may over-react to bad news and losses (e.g., panic) that may present opportunities in typically value-oriented stocks, or they may under-react to good news (e.g., not pay attention) that may present opportunities in typically growth-oriented stocks. For example, investor over-reaction may occur when investors become extremely pessimistic about a particular company’s stock due to negative information about that company, e.g. a falling share price, unfavorable news reports, analyst downgrades, etc. Fuller & Thaler regards this negative investor sentiment as excessive and an over-reaction when it persists despite significant bullish signals coming from a company’s management. Similarly, investor under-reaction occurs when investors’ anchoring and over-confidence biases cause them to under-react to new information--especially new information that is inconsistent with their previous analysis of a stock. For example, one type of situation that Fuller & Thaler looks for is significant positive earnings surprises versus consensus earnings forecasts, where sustainable, company-specific improvements have driven better-than-expected earnings. Because of its long-term investment orientation, the Fund further narrows its universe by only investing in a small subset of these under-reaction stocks: those where under-reaction has historically occurred with unusual consistency and frequency.

19

 

At the individual stock level, Fuller & Thaler employs proprietary screening tools to help identify stocks where such behavioral biases are occurring. This is not a quantitative strategy, and no quantitative factor model is used in the investment process. Through its screening tools, Fuller & Thaler searches for events related to insider buying, earnings announcements, and other news that suggest these types of investor misbehavior (over-reaction or under-reaction) and draws from its more than 20 years of experience in analyzing events that suggest investor misbehavior. If these behaviors are present, Fuller & Thaler then proceeds to its fundamental analysis of the company, which includes a credit-style/downside analysis of the company to determine whether it is suitable for a long-term, multi-year holding period. The portfolio manager performs this stock-specific research and makes all buy and sell decisions for the strategy. In summary, if an investor mistake is likely and the company has solid fundamentals, the portfolio managers buy the stock. The portfolio managers generally sell when they believe investor misbehavior has reversed or the firm’s fundamentals deteriorate. There is no set length of time that the Fund expects to hold a particular security.

 

The Fund may invest a portion of its assets in real estate investment trusts (“REITs”). REITs are pooled investment vehicles that generally invest in income-producing real estate or real estate-related loans or interests. The Fund will invest in liquid REITs that generally are included in the Russell 3000®, the Fund’s benchmark index.

 

The Fund is non-diversified and therefore may invest a greater percentage of its net assets in the securities of fewer issuers than a diversified Fund. The Fund may also invest greater than 25% of the Fund’s total assets in a particular industry or group of industries and in particular sectors.

 

The Fund may also lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Fund’s Board of Trustees. Loans of portfolio securities will be collateralized by liquid securities and cash. The Fund may invest cash collateral received in securities consistent with its principal investment strategy.

 

Principal Investment Risks

 

The principal risks of investing in the Fund, which could adversely affect its net asset value, yield and total return, are listed below (in alphabetical order). Please see “Additional Information Regarding Principal Risks” in the Fund’s prospectus for a more detailed description of the Fund’s risks. It is possible to lose money on an investment in the Fund. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

Behavioral Strategy Risk. When taking investment positions, Fuller & Thaler will apply principles based on behavioral finance. In order to take advantage of behavioral biases, Fuller & Thaler generally focuses on certain markers of possible under- and over-reaction. Securities identified using this type of strategy may perform differently from the market as a whole as a result of the criteria used in the analysis, whether the criteria used are successful in predicting investor behavior, the weight placed on each criteria, and changes in the criteria’s historical trends. The criteria used in implementing this strategy and the weight placed on those criteria may not be predictive of a security’s value, and the effectiveness of the criteria can change over time. These changes may not be reflected in the current analytical approach used to implement the behavioral strategy. There can be no guarantee that Fuller & Thaler will be successful in applying behavioral finance principles to successfully predict investor behavior to exploit stock price anomalies.

 

Concentration Risk. Greater than 25% of the Fund’s total assets may be exposed to a particular industry. By concentrating its investments in an industry or sector, the Fund may face more risks than if it were diversified broadly over numerous industries or sectors.

 

Equity Securities Risk. Equity securities may react more strongly to changes in an issuer’s financial condition or prospects than other securities of the same issuer.

20

 

Growth Investing Risk. To the extent that the Fund invests in growth-oriented securities, the Adviser’s perception of the underlying companies’ growth potentials may be wrong, or the securities purchased may not perform as expected.

 

Investment Company Risk. The Investment Company Act of 1940, as amended (the “1940 Act”) and the Internal Revenue Code (“IRC”) impose numerous constraints on the operations of registered investment companies, like the Fund. These restrictions may prohibit the Fund from making certain investments thus potentially limiting its profitability. Moreover, failure to satisfy certain requirements required under the IRC may prevent the Fund from qualifying as a registered investment company thus requiring the Fund to pay unexpected taxes and penalties, which could be material. When the Fund invests in another investment company such as a business development company or an ETF, the Fund will indirectly bear its proportionate share of any fees and expenses payable directly by the investment company. Therefore, the Fund will incur additional expenses, some of which are duplicative of the Fund’s own operational expenses. In addition, the Fund will be affected by losses incurred by these investment companies and the level of risk arising from the investment practices of the investment companies (such as the use of leverage). The Fund has no control over the investments made by these investment companies. Business development companies and ETFs are subject to additional risks such as the fact their shares may trade at a market price above or below their net asset values or an active market may not develop.

 

Issuer Risk. The Fund will be affected by factors specific to the issuers of securities and other instruments in which the Fund invests, including actual or perceived changes in the financial condition or business prospects of such issuers.

 

Large Cap Company Risk. Larger, more established companies may be unable to attain the high growth rates of successful, smaller companies, especially during extended periods of economic expansion. Larger, more established companies may be unable to respond quickly to new competitive challenges such as changes in consumer tastes or innovative smaller competitors, potentially resulting in lower market prices for their common stock.

 

Liquidity Risk. The lack of an active market for investments may cause delay in disposition or force a sale below fair value.

 

Management Risk. The Fund will be affected by the allocation determinations, investment decisions and techniques of the Fund’s management.

 

Market Risk. The Fund will be affected by factors influencing the U.S. or global economies and securities markets or relevant industries or sectors within them.

 

Micro-Cap Company Risk: Returns from small and micro-capitalization growth stocks may trail returns from the overall stock market. Historically, small and micro-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently. Small and microcap-size companies tend to have greater stock volatility because, among other things, these companies are more sensitive to changing economic conditions.

 

Mid-Cap Company Risk. Investments in securities of mid-cap companies may be riskier, more volatile and more vulnerable to economic, market and industry changes than investments in larger, more established companies. As a result, share price changes may be more sudden or erratic than the prices of other equity securities, especially over the short term. Mid-cap companies may have less predictable earnings, more limited product lines, markets, distribution channels, or financial resources, and the management of such companies may be dependent on one or a few key people. Mid-cap companies may be unable to generate funds necessary for growth or potential development, or may be developing or marketing new products or services for markets that are not yet firmly established. In addition, such companies may become subject to intense competition from larger more established companies. The equity securities of mid-cap companies are generally less liquid than the equity securities of larger companies. In many instances, the securities of mid-cap companies are traded only over-the-counter or on a regional securities exchange, and the frequency and volume of their trading is substantially less than is typical of larger companies. Some securities may be inactively traded and thus may not be readily bought or sold.

 

New Fund Risk. The Fund has limited operating history and there can be no assurance that the Fund will grow to or maintain an economically viable size, in which case the Trust’s Board of Trustees may determine to liquidate the Fund.

 

Non-Diversification Risk. Investment in the securities of a limited number of issuers or sectors exposes the Fund to greater market risk and potentially greater market losses than if its investments were diversified in securities and sectors.

 

Regulatory Risk. Changes in government regulations may adversely affect the operations and value of the Fund or the companies in which it invests. Industries and markets that are not adequately regulated may be susceptible to the initiation of inappropriate practices that adversely affect the Fund or the companies in which it invests.

 

REIT and Real Estate-Related Investment Risk. Adverse changes in the real estate markets may affect the value of REIT investments or real estate-linked derivatives.

21

 

Sector Risk. The Adviser may allocate more of the Fund’s investments to a particular sector or sectors in the market. If the Fund invests a significant portion of its total assets in certain sectors, its investment portfolio will be more susceptible to the financial, economic, business, and political developments that affect those sectors.

 

Securities Lending Risk. The Fund may make secured loans of its portfolio securities in an amount not exceeding 33 ⅓% of the value of the Fund’s total assets. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities and possible loss of rights in the collateral should the borrower fail financially, including possible impairment of the Fund’s ability to vote the securities on loan. If a loan is collateralized by cash, the Fund typically will invest the cash collateral for its own account and may pay a fee to the borrower that normally represents a portion of the Fund’s earnings on the collateral. Because the Fund may invest collateral in any investments in accordance with its investment objective, the Fund’s securities lending transactions will result in investment leverage. The Fund bears the risk that the value of the investments made with collateral may decline.

 

Small-Cap Company Risk. Investments in securities of small-cap companies may be riskier, more volatile and more vulnerable to economic, market and industry changes than investments in larger, more established companies. As a result, share price changes may be more sudden or erratic than the prices of other equity securities, especially over the short term. Small-cap companies often have less predictable earnings, more limited product lines, markets, distribution channels, or financial resources, and the management of such companies may be dependent on one or a few key people. Small-cap companies may be unable to generate funds necessary for growth or potential development, or may be developing or marketing new products or services for markets that are not yet firmly established. In addition, such companies may become subject to intense competition from larger more established companies. The equity securities of small-cap companies are generally less liquid than the equity securities of larger companies. In many instances, the securities of smaller companies are traded only over-the-counter or on a regional securities exchange, and the frequency and volume of their trading is substantially less than is typical of larger companies. Some securities may be inactively traded and thus may not be readily bought or sold.

 

Value Investing Risk. The determination that a security is undervalued is subjective. The market may not agree with the Adviser’s determination and the security’s price may not rise to what the Adviser believes is its full fair value.

 

Performance Information

 

Annual return information will be incorporated once the Fund has operated for a full calendar year. This performance information will provide some indication of the risks of investing in the Fund by showing changes in the Fund’s performance from year-to-year and by showing how the Fund’s average annual returns for 1, 5, and 10 years compare with those of a broad measure of market performance. Visit www.fullerthalerfunds.com for current performance information.

 

Management of the Fund

 

Investment Manager. Fuller & Thaler Asset Management, Inc. (“Fuller & Thaler” or the “Adviser”)

 

Portfolio Managers

 

Raymond Lin, CFA, Partner and Lead Portfolio Manager, has been the Portfolio Manager of the Fund since its inception.

 

Raife Giovinazzo, Ph.D., CFA, Partner and Back-up Portfolio Manager, has been the back-up portfolio manager of the Fund since its inception.

 

Purchase and Sale of Fund Shares

 

Minimum Initial Investment Minimum Subsequent Investment

A Shares: $1,000 for most account types

Investor Shares: $1,000 for most account types

Institutional Shares: $100,000 for most account types

R6 Shares: $1,000,000 for most account types

A Shares: $50 for all account types

Investor Shares: $50 for all account types

Institutional Shares: $50 for all account types

R6 Shares: $50 for all account types

 

Investments in A Shares, when available, may be made only through your dealer or financial adviser. Other share classes may also be purchased directly from the Fund.

22

 

Minimum investment requirements are waived for any qualified group retirement plan. Minimum investment requirements may be modified for certain financial intermediaries that aggregate trades on behalf of investors. For additional information regarding waiver of investment minimums, please see “Classes of Shares” in this Prospectus.

 

To Place Buy or Sell Orders

By mail: Fuller & Thaler Behavioral Unconstrained Equity Fund

c/o Ultimus Asset Services, LLC

PO Box 46707

Cincinnati, OH 45246-0707

By Phone: 1-888-912-4562

 

You may also purchase and redeem shares through your dealer or financial adviser. Please contact your financial intermediary directly to find out if additional requirements apply.

 

Tax Information

 

The Fund’s distributions are generally taxable to you 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. You should be aware that investments in tax-deferred accounts may be taxable at withdrawal. You should discuss any tax-related concerns with your tax adviser or attorney.

 

Payments to Broker-Dealers and Other Financial Intermediaries

 

If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund, its distributor, its investment manager or their affiliates 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 intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.

23

 

SUMMARY SECTION

 

FULLER & THALER BEHAVIORAL SMALL–MID CORE EQUITY FUND

 

Investment Objective

 

The Fuller & Thaler Behavioral Small–Mid Core Equity Fund (the “Small-Mid Core Equity Fund” or the “Fund”) seeks long-term capital appreciation.

 

Fees and Expenses of the Small–Mid Core Equity Fund

 

The tables below describe the fees and expenses that you may pay if you buy and hold shares of the Small-Mid Core Equity Fund. Investors may also pay commissions or other fees to their financial intermediary when they buy and hold shares of the Fund, which are not reflected below. Certain financial intermediaries also may offer variations in Fund sales charges to their customers as described in Appendix A – Financial Intermediary Sales Charge Variations in this Prospectus. More information about these and other discounts is available from your financial intermediary and as described in this prospectus under “CLASSES OF SHARES” and in the Fund’s Statement of Additional Information. The Fund also permits you to reduce the front-end sales charge you pay on Class A Shares by exercising your Rights of Accumulation or Letter of Intent privileges with respect to your investments in Fuller & Thaler Funds, as described in the prospectus under “CLASSES OF SHARES – A Shares”.

 

 

Share Class

  A(1) Investor(1) Institutional R6(1)

Shareholder Fees

(fees paid directly from your investments)

       

Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of the offering price)

5.75%(2) None None None
Maximum Deferred Sales Charge (Load) Imposed on Redemptions (as a percentage of the sale price)  1.00% None None None

 

 

Share Class

  A(1)  Investor(1) Institutional R6(1)

Annual Fund Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

       
Management Fees 0.80% 0.80% 0.80% 0.80%
Distribution and/or Service (12b-1) Fees 0.25 % 0.25 % None None
Other Expenses(3)(4) [_.__%] [_.__%] [_.__%] [_.__%]
Acquired Fund Fees and Expenses [_.__%] [_.__%] [_.__%] [_.__%]
Total Annual Fund Operating Expenses [_.__%] [_.__%] [_.__%] [_.__%]
Expense Reductions(5) [(_.__)%] [(_.__)%] [(_.__)%] [(_.__)%]
Total Annual Fund Operating Expenses After Expense Reductions(5) [1.26%] [1.21%] [0.95%] [0.85%]

 

 

 

(1)The Fund’s A Shares, Investor Shares and R6 shares have been approved by the Trust’s Board of Trustees but are not yet available for purchase and are not being offered at this time. The Fund’s A Shares, Investor Shares, and R6 Shares will be registered and offered for sale at a later date.

(2)No initial sales charge is assessed on aggregated purchases of $1 million or more in all Fuller & Thaler Funds.

(3)“Other Expenses” are based on estimated expenses for the current fiscal year.

(4)Pursuant to an Administrative Services Plan, the Fund may pay financial intermediaries that provide certain administrative, recordkeeping and other non-distribution related services to Fund shareholders a service fee not to exceed 0.25% of the average daily net assets of the Fund’s A Share Class and 0.20% of the Fund’s Investor and Institutional Share Classes. The Administrative Services Plan does not apply to the R6 Share Class, and that class does not pay any administrative services fees.

24

 

(5)The Fund’s investment adviser, Fuller & Thaler Asset Management, Inc. (“Fuller & Thaler” or the “Adviser”) has contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 1.26%, 1.21%, 0.95% and 0.85% for A Shares, Investor Shares Institutional Shares and R6 Shares, respectively, of the Fund’s average daily net assets through January 31, 2020 The expense limitation does not apply to: (i)  interest; (ii)  taxes; (iii)  brokerage fees and commissions; (iv) other extraordinary expenses not incurred in the ordinary course of the Fund’s business; and (v) indirect expenses such as acquired fund fees and expenses. During any fiscal year that the Investment Advisory Agreement between the Adviser and Capitol Series Trust (the “Trust”) is in effect, the Adviser may recoup the sum of all fees previously waived or expenses reimbursed, less any reimbursement previously paid, provided that the Adviser is only permitted to recoup fees or expenses within 36 months from the date the fee waiver or expense reimbursement first took effect and provided further that such recoupment can be achieved within the Expense Limitation Agreement currently in effect and the Expense Limitation Agreement in place when the waiver/reimbursement occurred. This Expense Limitation Agreement may be terminated by the Board of Trustees (the “Board”) at any time.

 

Example:

 

The Example is intended to help you compare the cost of investing in shares of the Fund with the costs of investing in other mutual funds. The Example assumes that you invest $10,000 in the noted class of shares for the time periods indicated and then redeem all of your shares at the end of these periods. The Example also assumes that your investment has a 5% return each year, and the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, the Example shows what your costs would be based on these assumptions. The Example is based, for the first year, on Total Annual Fund Operating Expenses After Expense Reductions and, for all other periods, on Total Annual Fund Operating Expenses.

 

Example: Assuming you redeem your shares at the end of each period

Share Class

1 Year

3 Years

A Shares $___ $___
Investor Shares $___ $___
Institutional Shares $___ $___
R6 Shares $___ $___

 

Portfolio Turnover

 

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). High levels of portfolio turnover may indicate higher transaction costs and may result in higher taxes for you if your Fund shares are held in a taxable account. These costs, which are not reflected in Total Annual Fund Operating Expenses or in the Example above, can adversely affect the Fund’s investment performance. The Fund is typically expected to have a portfolio turnover rate of less than 80%. Since the Fund has yet to commence operations, no portfolio turnover information is available for its most recently completed fiscal year.

 

Principal Investment Strategies

 

Under normal circumstances, the Fund seeks to achieve its objective by investing at least 80% of its net assets (plus borrowings for investment purposes) in common stocks of small to medium capitalization (“smid cap”) companies based in the U.S. (“80% Policy”). The Fund must provide shareholders with 60 days’ prior written notice if it changes its 80% Policy. The Fund considers a company to be based in the U.S. if it is publicly traded in the U.S. and it satisfies one or more of the following additional criteria: it is incorporated in the U.S., it is headquartered in the U.S., its reported assets are primarily located in the U.S., or it derives the majority of its revenue from the U.S. The Fund defines small/mid-cap companies as companies whose market capitalizations are generally in the bottom 30% of total market capitalization or companies whose market capitalizations are smaller than the largest company in the Russell 2500® Index, whichever results in the higher market capitalization break. Total market capitalization is based on the market capitalization of U.S. operating companies listed on the New York Stock Exchange (“NYSE”), NYSE American LLC, Nasdaq Global Market®, Nasdaq Capital Market®, or such other securities exchanges deemed appropriate by the Adviser. Under the Adviser’s market capitalization guidelines described above, based on market capitalization data as of September 30, 2018, the market capitalization of a small- or mid-cap company would be $30.12 billion or below. This dollar amount will change due to market conditions. The size of the companies included in the Russell 2500® Index will change as a result of market conditions and reconstitution of the Index.

25

 

The Fund seeks to achieve its investment objective by building a diversified portfolio of U.S. stocks in a disciplined process that applies the proprietary research of Fuller & Thaler, the Fund’s investment adviser, on the behavioral biases of other investors. Fuller & Thaler’s investment process is based on decades of research into behavioral finance. Behavioral finance is the study of how investors actually behave, as opposed to how they should behave, when making investment decisions. Professional investors are human, and like all humans, they make mistakes. Investors make mistakes because they have emotions, use imperfect rules of thumb, and have priorities beyond risk and return. Fuller & Thaler’s process identifies and exploits those mistakes. The Adviser’s analysis includes making educated predictions of when other investors – the “market” – have likely made a behavioral mistake, and in turn, have created a buying opportunity. There are two kinds of mistakes that produce buying opportunities: over-reaction and under-reaction. Investors may over-react to bad news and losses (e.g., panic) that may present opportunities in typically value-oriented stocks, or they may under-react to good news (e.g., not pay attention) that may present opportunities in typically growth-oriented stocks. At the individual stock level, Fuller & Thaler searches for events related to insider buying, earnings announcements, and other news that suggest these types of investor misbehavior (over-reaction or under-reaction) and draws from its more than 20 years of experience in analyzing events that suggest investor misbehavior. If these behaviors are present, Fuller & Thaler then proceeds to its fundamental analysis of the company. In summary, if an investor mistake is likely and the company has solid fundamentals, the portfolio managers buy the stock. The portfolio managers generally sell when they believe investor misbehavior has reversed or the firm’s fundamentals deteriorate. There is no set length of time that the Fund expects to hold a particular security. The Fund seeks to deliver similar risk characteristics to the Russell 2500® Index.

 

The Fund may invest a portion of its assets in real estate investment trusts (“REITs”). REITs are pooled investment vehicles that generally invest in income-producing real estate or real estate-related loans or interests. The Fund may invest greater than 25% of the Fund’s total assets in particular sectors.

 

The Fund may also lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Fund’s Board of Trustees. Loans of portfolio securities will be collateralized by liquid securities and cash. The Fund may invest cash collateral received in securities consistent with its principal investment strategy.

 

Principal Investment Risks

 

The principal risks of investing in the Fund, which could adversely affect its net asset value, yield and total return, are listed below (in alphabetical order).

 

Please see “Additional Information Regarding Principal Risks” in the Fund’s prospectus for a more detailed description of the Fund’s risks. It is possible to lose money on an investment in the Fund. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

Behavioral Strategy Risk. When taking investment positions, Fuller & Thaler will apply principles based on behavioral finance. In order to take advantage of behavioral biases, Fuller & Thaler generally focuses on certain markers of possible over-reaction. Securities identified using this type of strategy may perform differently from the market as a whole as a result of the criteria used in the analysis, whether the criteria used are successful in predicting investor behavior, the weight placed on each criteria, and changes in the criteria’s historical trends. The criteria used in implementing this strategy and the weight placed on those criteria may not be predictive of a security’s value, and the effectiveness of the criteria can change over time. These changes may not be reflected in the current analytical approach used to implement the behavioral strategy. There can be no guarantee that Fuller & Thaler will be successful in applying behavioral finance principles to successfully predict investor behavior to exploit stock price anomalies.

 

Equity Securities Risk. Equity securities may react more strongly to changes in an issuer’s financial condition or prospects than other securities of the same issuer.

 

Growth Investing Risk. To the extent that the Fund invests in growth-oriented securities, the Adviser’s perception of the underlying companies’ growth potentials may be wrong, or the securities purchased may not perform as expected.

 

Investment Company Risk. The Investment Company Act of 1940, as amended (the “1940 Act”) and the Internal Revenue Code (“IRC”) impose numerous constraints on the operations of registered investment companies, like the Fund. These restrictions may prohibit the Fund from making certain investments thus potentially limiting its profitability. Moreover, failure to satisfy certain requirements required under the IRC may prevent the Fund from qualifying as a registered investment company thus requiring the Fund to pay unexpected taxes and penalties, which could be material.

 

Issuer Risk. The Fund will be affected by factors specific to the issuers of securities and other instruments in which the Fund invests, including actual or perceived changes in the financial condition or business prospects of such issuers.

26

 

Liquidity Risk. The lack of an active market for investments may cause delay in disposition or force a sale below fair value.

 

Management Risk. The Fund will be affected by the allocation determinations, investment decisions and techniques of the Fund’s management.

 

Market Risk. The Fund will be affected by factors influencing the U.S. or global economies and securities markets or relevant industries or sectors within them.

 

Mid-Cap Company Risk. Investments in securities of mid-cap companies may be riskier, more volatile and more vulnerable to economic, market and industry changes than investments in larger, more established companies. As a result, share price changes may be more sudden or erratic than the prices of other equity securities, especially over the short term. Mid-cap companies may have less predictable earnings, more limited product lines, markets, distribution channels, or financial resources, and the management of such companies may be dependent on one or a few key people. Mid-cap companies may be unable to generate funds necessary for growth or potential development, or may be developing or marketing new products or services for markets that are not yet firmly established. In addition, such companies may become subject to intense competition from larger more established companies. The equity securities of mid-cap companies are generally less liquid than the equity securities of larger companies. In many instances, the securities of mid-cap companies are traded only over-the-counter or on a regional securities exchange, and the frequency and volume of their trading is substantially less than is typical of larger companies. Some securities may be inactively traded and thus may not be readily bought or sold.

 

New Fund Risk. The Fund has limited operating history and there can be no assurance that the Fund will grow to or maintain an economically viable size, in which case the Trust’s Board of Trustees may determine to liquidate the Fund.

 

Regulatory Risk. Changes in government regulations may adversely affect the operations and value of the Fund or the companies in which it invests. Industries and markets that are not adequately regulated may be susceptible to the initiation of inappropriate practices that adversely affect the Fund or the companies in which it invests.

 

REIT and Real Estate-Related Investment Risk. Adverse changes in the real estate markets may affect the value of REIT investments or real estate-linked derivatives.

 

Sector Risk. The Adviser may allocate more of the Fund’s investments to a particular sector or sectors in the market. If the Fund invests a significant portion of its total assets in certain sectors, its investment portfolio will be more susceptible to the financial, economic, business, and political developments that affect those sectors.

 

Securities Lending Risk. The Fund may make secured loans of its portfolio securities in an amount not exceeding 33 ⅓% of the value of the Fund’s total assets. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities and possible loss of rights in the collateral should the borrower fail financially, including possible impairment of the Fund’s ability to vote the securities on loan. If a loan is collateralized by cash, the Fund typically will invest the cash collateral for its own account and may pay a fee to the borrower that normally represents a portion of the Fund’s earnings on the collateral. Because the Fund may invest collateral in any investments in accordance with its investment objective, the Fund’s securities lending transactions will result in investment leverage. The Fund bears the risk that the value of the investments made with collateral may decline.

 

Small-Cap Company Risk. Investments in securities of small-cap companies may be riskier, more volatile and more vulnerable to economic, market and industry changes than investments in larger, more established companies. As a result, share price changes may be more sudden or erratic than the prices of other equity securities, especially over the short term. Small-cap companies often have less predictable earnings, more limited product lines, markets, distribution channels, or financial resources, and the management of such companies may be dependent on one or a few key people. Small-cap companies may be unable to generate funds necessary for growth or potential development, or may be developing or marketing new products or services for markets that are not yet firmly established. In addition, such companies may become subject to intense competition from larger more established companies. The equity securities of small-cap companies are generally less liquid than the equity securities of larger companies. In many instances, the securities of smaller companies are traded only over-the-counter or on a regional securities exchange, and the frequency and volume of their trading is substantially less than is typical of larger companies. Some securities may be inactively traded and thus may not be readily bought or sold.

 

Value Investing Risk. The determination that a security is undervalued is subjective. The market may not agree with the Adviser’s determination and the security’s price may not rise to what the Adviser believes is its full fair value.

27

 

Performance Information

 

Annual return information will be incorporated once the Fund has operated for a full calendar year. This performance information will provide some indication of the risks of investing in the Fund by showing changes in the Fund’s performance from year-to-year and by showing how the Fund’s average annual returns for 1, 5, and 10 years compare with those of a broad measure of market performance. Visit www.fullerthalerfunds.com for current performance information.

 

Management of the Fund

 

Investment Manager. Fuller & Thaler Asset Management, Inc. (“Fuller & Thaler” or the “Adviser”)

 

Portfolio Managers

 

Raymond Lin, CFA, Partner and Lead Portfolio Manager, has been the Portfolio Manager of the Fund since its inception.

 

Raife Giovinazzo, Ph.D., CFA, Partner and Back-up Portfolio Manager, has been the back-up portfolio manager of the Fund since its inception.

 

Purchase and Sale of Fund Shares

 

Minimum Initial Investment Minimum Subsequent Investment

A Shares: $1,000 for most account types

Investor Shares: $1,000 for most account types

Institutional Shares: $100,000 for most account types

R6 Shares: $1,000,000 for most account types

A Shares: $50 for all account types

Investor Shares: $50 for all account types

Institutional Shares: $50 for all account types

R6 Shares: $50 for all account types

 

Investments in A Shares, when available, may be made only through your dealer or financial adviser. Other share classes may also be purchased directly from the Fund.

 

Minimum investment requirements are waived for any qualified group retirement plan. Minimum investment requirements may be modified for certain financial intermediaries that aggregate trades on behalf of investors. For additional information regarding waiver of investment minimums, please see “Classes of Shares” in this Prospectus.

 

To Place Buy or Sell Orders

By mail: Fuller & Thaler Behavioral Small–Mid Core Equity Fund

c/o Ultimus Asset Services, LLC

PO Box 46707

Cincinnati, OH 45246-0707

By Phone: 1-888-912-4562

 

You may also purchase and redeem shares through your dealer or financial adviser. Please contact your financial intermediary directly to find out if additional requirements apply.

 

Tax Information

 

The Fund’s distributions are generally taxable to you 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. You should be aware that investments in tax-deferred accounts may be taxable at withdrawal. You should discuss any tax-related concerns with your tax adviser or attorney.

 

Payments to Broker-Dealers and Other Financial Intermediaries

 

If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund, its distributor, its investment manager or their affiliates 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 intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.

28

 

SUMMARY SECTION

 

FULLER & THALER BEHAVIORAL MICRO-CAP EQUITY FUND

 

Investment Objective

 

The Fuller & Thaler Behavioral Micro-Cap Equity Fund (the “Micro-Cap Equity Fund” or the “Fund”) seeks long-term capital appreciation.

 

Fees and Expenses of the Micro-Cap Equity Fund(1)

 

The tables below describe the fees and expenses that you may pay if you buy and hold shares of the Micro-Cap Equity Fund. Investors may also pay commissions or other fees to their financial intermediary when they buy and hold shares of the Fund, which are not reflected below. Certain financial intermediaries also may offer variations in Fund sales charges to their customers as described in Appendix A – Financial Intermediary Sales Charge Variations in this Prospectus. More information about these and other discounts is available from your financial intermediary and as described in this prospectus under “CLASSES OF SHARES” and in the Fund’s Statement of Additional Information. The Fund also permits you to reduce the front-end sales charge you pay on Class A Shares by exercising your Rights of Accumulation or Letter of Intent privileges with respect to your investments in Fuller & Thaler Funds, as described in the prospectus under “CLASSES OF SHARES – A Shares”.

 

 

Share Class

  A(1) Investor(1) Institutional R6(1)

Shareholder Fees

(fees paid directly from your investments)

       

Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of the offering price)

5.75%(2) None None None
Maximum Deferred Sales Charge (Load) Imposed on Redemptions (as a percentage of the sale price) 1.00% None None None

 

 

Share Class 

  A(1)  Investor(1) Institutional R6(1)

Annual Fund Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

       
Management Fees 1.50% 1.50% 1.50% 1.50%
Distribution and/or Service (12b-1) Fees 0.25 % 0.25 % None None
Other Expenses(3) [_.__%] [_.__%] [_.__%] [_.__%]
Acquired Fund Fees and Expenses [_.__%] [_.__%] [_.__%] [_.__%]
Total Annual Fund Operating Expenses [_.__%] [_.__%] [_.__%] [_.__%]
Expense Reductions(4) [(_.__)%] [(_.__)%] [(_.__)%] [(_.__)%]
Total Annual Fund Operating Expenses After Expense Reductions(4) [2.04%]

[1.99%]

[1.75%] [1.65%]

 

 

 

(1)The Fund and all of its classes have been approved by the Trust’s Board of Trustees but are not yet available for purchase and are not being offered at this time. The Fund will commence operations, and its A Shares, Investor Shares, Institutional Shares and R6 Shares, will each be registered and offered for sale at a later date.

(2)No initial sales charge is assessed on aggregated purchases of $1 million or more in all Fuller & Thaler Funds.

29

 

(3)Other expenses are based on estimated expenses for the current fiscal year.

(4)The Fund’s investment adviser, Fuller & Thaler Asset Management, Inc. (“Fuller & Thaler” or the “Adviser”) has contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 2.04%, 1.99%, 1.75% and 1.65% for A Shares, Investor Shares, Institutional Shares and R6 Shares, respectively, of the Fund’s average daily net assets through January 31, 2020. The expense limitation does not apply to: (i)  interest; (ii)  taxes; (iii)  brokerage fees and commissions; (iv) other extraordinary expenses not incurred in the ordinary course of the Fund’s business; and (v) indirect expenses such as acquired fund fees and expenses. During any fiscal year that the Investment Advisory Agreement between the Adviser and Capitol Series Trust (the “Trust”) is in effect, the Adviser may recoup the sum of all fees previously waived or expenses reimbursed, less any reimbursement previously paid, provided that the Adviser is only permitted to recoup fees or expenses within 36 months from the date the fee waiver or expense reimbursement first took effect and provided further that such recoupment can be achieved within the Expense Limitation Agreement currently in effect and the Expense Limitation Agreement in place when the waiver/reimbursement occurred. This Expense Limitation Agreement may be terminated by the Board of Trustees (the “Board”) at any time.

 

Example:

 

The Example is intended to help you compare the cost of investing in shares of the Fund with the costs of investing in other mutual funds. The Example assumes that you invest $10,000 in the noted class of shares for the time periods indicated and then redeem all of your shares at the end of these periods. The Example also assumes that your investment has a 5% return each year, and the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, the Example shows what your costs would be based on these assumptions. The Example is based, for the first year, on Total Annual Fund Operating Expenses After Expense Reductions and, for all other periods, on Total Annual Fund Operating Expenses.

 

Example: Assuming you redeem your shares at the end of each period

Share Class

1 Year

3 Years

A Shares $___ $___
Investor Shares $___ $___
Institutional Shares $___ $___
R6 Shares $___ $___

 

Portfolio Turnover

 

The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). High levels of portfolio turnover may indicate higher transaction costs and may result in higher taxes for you if your Fund shares are held in a taxable account. These costs, which are not reflected in Total Annual Fund Operating Expenses or in the Example above, can adversely affect the Fund’s investment performance. The Fund is typically expected to have a portfolio turnover rate of approximately 100% or more. Since the Fund has yet to commence operations, no portfolio turnover information is available for its most recently completed fiscal year.

 

Principal Investment Strategies

 

Under normal circumstances, the Fund seeks to achieve its objective by investing at least 80% of its net assets (plus borrowings for investment purposes) in common stocks of micro capitalization (“micro-cap”) companies based in the U.S. (“80% Policy”). The Fund must provide shareholders with 60 days’ prior written notice if it changes its 80% Policy. The Fund considers a company to be based in the U.S. if it is publicly traded in the U.S. and it satisfies one or more of the following additional criteria: it is incorporated in the U.S., it is headquartered in the U.S., its reported assets are primarily located in the U.S., or it derives the majority of its revenue from the U.S. The Fund defines micro-cap companies as companies whose market capitalizations are generally in the lowest 5% of total market capitalization or companies whose market capitalizations are smaller than the 1,500th largest U.S. company or smaller than the largest stock in the Russell Microcap® Index, whichever results in the higher market capitalization break. Total market capitalization is based on the market capitalization of U.S. operating companies listed on the New York Stock Exchange (“NYSE”), NYSE American LLC, Nasdaq Global Market(r), Nasdaq Capital Market(r), or such other securities exchanges deemed appropriate by the Adviser. Under the Adviser’s market capitalization guidelines described above, based on market capitalization data as of September 30, 2018, the market capitalization of a micro-cap company would be $2.432 billion or below. This dollar amount will change due to market conditions. The size of the companies included in the Russell Microcap® Index will change as a result of market conditions and reconstitution of the Index and universe.

 

The Fund seeks to achieve its investment objective by building a diversified portfolio of U.S. stocks in a disciplined process that applies the proprietary research of Fuller & Thaler, the Fund’s investment adviser, on the behavioral biases of other investors. Fuller & Thaler’s investment process is based on decades of research into behavioral finance. Behavioral finance is the study of how investors actually behave, as opposed to how they should behave, when making investment decisions. Professional investors are human, and like all humans, they make mistakes. Investors make mistakes because they have emotions, use imperfect rules of thumb, and have priorities beyond risk and return. Fuller & Thaler’s process identifies and exploits those mistakes. The Adviser’s analysis includes making educated predictions of when other investors – the “market” – have likely made a behavioral mistake, and in turn, have created a buying opportunity. There are two kinds of mistakes that produce buying opportunities: over-reaction and under-reaction. Investors may over-react to bad news and losses (e.g., panic) that may present opportunities in typically value-oriented stocks, or they may under-react to good news (e.g., not pay attention) that may present opportunities in typically growth-oriented stocks. At the individual stock level, Fuller & Thaler searches for events related to insider buying, earnings announcements, and other news that suggest these types of investor misbehavior (over-reaction or under-reaction) and draws from its more than 20 years of experience in analyzing events that suggest investor misbehavior. If these behaviors are present, Fuller & Thaler then proceeds to its fundamental analysis of the company. In summary, if an investor mistake is likely and the company has solid fundamentals, the portfolio managers buy the stock. The portfolio managers generally sell when they believe investor misbehavior has reversed or the firm’s fundamentals deteriorate. There is no set length of time that the Fund expects to hold a particular security.

30

 

The Fund may invest a portion of its assets in real estate investment trusts (“REITs”). REITs are pooled investment vehicles that generally invest in income-producing real estate or real estate-related loans or interests. The Fund may also invest greater than 25% of the Fund’s total assets in a particular industry or group of industries and in particular sectors.

 

The Fund may also lend portfolio securities to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established by the Fund’s Board of Trustees. Loans of portfolio securities will be collateralized by liquid securities and cash. The Fund may invest cash collateral received in securities consistent with its principal investment strategy.

 

Principal Investment Risks

 

The principal risks of investing in the Fund, which could adversely affect its net asset value, yield and total return, are listed below (in alphabetical order).

 

Please see “Additional Information Regarding Principal Risks” in the Fund’s prospectus for a more detailed description of the Fund’s risks. It is possible to lose money on an investment in the Fund. An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

 

Behavioral Strategy Risk. When taking investment positions, Fuller & Thaler will apply principles based on behavioral finance. In order to take advantage of behavioral biases, Fuller & Thaler generally focuses on certain markers of possible under-reaction. Securities identified using this type of strategy may perform differently from the market as a whole as a result of the criteria used in the analysis, whether the criteria used are successful in predicting investor behavior, the weight placed on each criteria, and changes in the criteria’s historical trends. The criteria used in implementing this strategy and the weight placed on those criteria may not be predictive of a security’s value, and the effectiveness of the criteria can change over time. These changes may not be reflected in the current analytical approach used to implement the behavioral strategy. There can be no guarantee that Fuller & Thaler will be successful in applying behavioral finance principles to successfully predict investor behavior to exploit stock price anomalies.

 

Concentration Risk. Greater than 25% of a Fund’s total assets may be exposed to a particular industry. By concentrating its investments in an industry or sector, the Fund may face more risks than if it were diversified broadly over numerous industries or sectors.

 

Equity Securities Risk. Equity securities may react more strongly to changes in an issuer’s financial condition or prospects than other securities of the same issuer.

 

Growth Investing Risk. To the extent that the Fund invests in growth-oriented securities, the Adviser’s perception of the underlying companies’ growth potentials may be wrong, or the securities purchased may not perform as expected.

 

Investment Company Risk. The Investment Company Act of 1940, as amended (the “1940 Act”) and the Internal Revenue Code (“IRC”) impose numerous constraints on the operations of registered investment companies, like the Fund. These restrictions may prohibit the Fund from making certain investments thus potentially limiting its profitability. Moreover, failure to satisfy certain requirements required under the IRC may prevent the Fund from qualifying as a registered investment company thus requiring the Fund to pay unexpected taxes and penalties, which could be material.

 

Issuer Risk. The Fund will be affected by factors specific to the issuers of securities and other instruments in which the Fund invests, including actual or perceived changes in the financial condition or business prospects of such issuers.

 

Liquidity Risk. The lack of an active market for investments may cause delay in disposition or force a sale below fair value.

31

 

Management Risk. The Fund will be affected by the allocation determinations, investment decisions and techniques of the Fund’s management.

 

Market Risk. The Fund will be affected by factors influencing the U.S. or global economies and securities markets or relevant industries or sectors within them.

 

Micro-Cap Company Risk: Returns from small and micro-capitalization growth stocks may trail returns from the overall stock market. Historically, small and micro-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently. Small and microcap-size companies tend to have greater stock volatility because, among other things, these companies are more sensitive to changing economic conditions.

 

New Fund Risk. The Fund has limited operating history and there can be no assurance that the Fund will grow to or maintain an economically viable size, in which case the Trust’s Board of Trustees may determine to liquidate the Fund.

 

Regulatory Risk. Changes in government regulations may adversely affect the operations and value of the Fund or the companies in which it invests. Industries and markets that are not adequately regulated may be susceptible to the initiation of inappropriate practices that adversely affect the Fund or the companies in which it invests.

 

REIT and Real Estate-Related Investment Risk. Adverse changes in the real estate markets may affect the value of REIT investments or real estate-linked derivatives.

 

Sector Risk. The Adviser may allocate more of the Fund’s investments to a particular sector or sectors in the market. If the Fund invests a significant portion of its total assets in certain sectors, its investment portfolio will be more susceptible to the financial, economic, business, and political developments that affect those sectors.

 

Securities Lending Risk. The Fund may make secured loans of its portfolio securities in an amount not exceeding 33 ⅓% of the value of the Fund’s total assets. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities and possible loss of rights in the collateral should the borrower fail financially, including possible impairment of the Fund’s ability to vote the securities on loan. If a loan is collateralized by cash, the Fund typically will invest the cash collateral for its own account and may pay a fee to the borrower that normally represents a portion of the Fund’s earnings on the collateral. Because the Fund may invest collateral in any investments in accordance with its investment objective, the Fund’s securities lending transactions will result in investment leverage. The Fund bears the risk that the value of the investments made with collateral may decline.

 

Small-Cap Company Risk. Investments in securities of small-cap companies may be riskier, more volatile and more vulnerable to economic, market and industry changes than investments in larger, more established companies. As a result, share price changes may be more sudden or erratic than the prices of other equity securities, especially over the short term. Small-cap companies often have less predictable earnings, more limited product lines, markets, distribution channels, or financial resources, and the management of such companies may be dependent on one or a few key people. Small-cap companies may be unable to generate funds necessary for growth or potential development, or may be developing or marketing new products or services for markets that are not yet firmly established. In addition, such companies may become subject to intense competition from larger more established companies. The equity securities of small-cap companies are generally less liquid than the equity securities of larger companies. In many instances, the securities of smaller companies are traded only over-the-counter or on a regional securities exchange, and the frequency and volume of their trading is substantially less than is typical of larger companies. Some securities may be inactively traded and thus may not be readily bought or sold.

 

Turnover Risk. High levels of portfolio turnover increase transaction costs and taxes and may lower investment performance.

 

Value Investing Risk. The determination that a security is undervalued is subjective. The market may not agree with the Adviser’s determination and the security’s price may not rise to what the Adviser believes is its full fair value.

 

Performance Information

 

Annual return information will be incorporated once the Fund has operated for a full calendar year. This performance information will provide some indication of the risks of investing in the Fund by showing changes in the Fund’s performance from year-to-year and by showing how the Fund’s average annual returns for 1, 5, and 10 years compare with those of a broad measure of market performance. Visit www.fullerthalerfunds.com for current performance information.

 

Management of the Fund

 

Investment Manager. Fuller & Thaler Asset Management, Inc. (“Fuller & Thaler” or the “Adviser”)

32

 

Portfolio Managers

 

Frederick Stanske, CFA, Partner and Lead Portfolio Manager, has managed the Fund since its inception.

 

Raymond Lin, CFA, Partner and Back-up Portfolio Manager, has been the back-up portfolio manager of the Fund since its inception.

 

Purchase and Sale of Fund Shares

 

Minimum Initial Investment Minimum Subsequent Investment

A Shares: $1,000 for most account types

Investor Shares: $1,000 for most account types

Institutional Shares: $100,000 for most account types

R6 Shares: $1,000,000 for most account types

A Shares: $50 for all account types

Investor Shares: $50 for all account types

Institutional Shares: $50 for all account types

R6 Shares: $50 for all account types

 

Investments in A Shares, when available, may be made only through your dealer or financial adviser. Other share classes may also be purchased directly from the Fund.

 

Minimum investment requirements are waived for any qualified group retirement plan. Minimum investment requirements may be modified for certain financial intermediaries that aggregate trades on behalf of investors. For additional information regarding waiver of investment minimums, please see “Classes of Shares” in this Prospectus.

 

To Place Buy or Sell Orders

 

By mail: Fuller & Thaler Behavioral Micro-Cap Equity Fund

c/o Ultimus Asset Services, LLC

PO Box 46707

Cincinnati, OH 45246-0707

By Phone: 1-888-912-4562

 

You may also purchase and redeem shares through your dealer or financial adviser. Please contact your financial intermediary directly to find out if additional requirements apply.

 

Tax Information

 

The Fund’s distributions are generally taxable to you 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. You should be aware that investments in tax-deferred accounts may be taxable at withdrawal. You should discuss any tax-related concerns with your tax adviser or attorney.

 

Payments to Broker-Dealers and Other Financial Intermediaries

 

If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund, its distributor, its investment manager or their affiliates 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 intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.

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ADDITIONAL INFORMATION REGARDING

PRINCIPAL INVESTMENT STRATEGIES OF THE FUNDS

 

Overview of Funds

 

  Small-Cap Equity Fund Small-Cap Growth Fund Mid-Cap Value Fund
Objective Long-term capital appreciation Long-term capital appreciation Long–term capital appreciation
Principal Investments

      At least 80% of net assets (plus borrowings for investment purposes) are invested in common stocks of small-cap companies based in the U.S.

 

      REITs are also permissible investments

      At least 80% of net assets (plus borrowings for investment purposes) are invested in common stocks of small-cap companies based in the U.S.

 

      REITs are also permissible investments

      At least 80% of net assets (plus borrowings for investment purposes) are invested in common stocks of mid-cap companies based in the U.S.

 

      REITs are also permissible investments

Number of Positions Typically 70 - 140 positions Typically 25 - 50 positions Typically 25 - 75 positions
Position Size Typically up to 5% of total assets Typically up to 7% of total assets Typically up to 7% of total assets

 

  Unconstrained Equity Fund Small–Mid Core Equity Fund Micro-Cap Equity Fund
Objective Long-term capital appreciation Long-term capital appreciation Long-term capital appreciation
Principal Investments

        At least 80% of net assets (plus borrowings for investment purposes) are invested in common stocks of any capitalization companies based in the U.S.

 

        REITs are also permissible investments

 

        Sector-concentrated securities are also permissible investments

 

        Industry-concentrated securities are also permissible investments

      At least 80% of net assets (plus borrowings for investment purposes) are invested in common stocks of small to medium capitalization companies based in the U.S.

 

      REITs are also permissible investments

 

      Sector-concentrated securities are also permissible investments

      At least 80% of net assets (plus borrowings for investment purposes) are invested in common stocks of micro-cap companies based in the U.S.

 

      REITs are also permissible investments

 

      Sector-concentrated securities are also permissible investments

 

      Industry-concentrated securities are also permissible investments

Number of Positions Typically 15 – 25 positions Typically 25 – 100 positions Typically 40 – 150 positions
Position Size Typically up to 8% of total assets Typically up to 7% of total assets Typically up to 7% of total assets

 

Investment Objective Updates

 

The investment objective of the Funds may be changed upon notice to shareholders without shareholder approval.

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Additional Information About Fuller & Thaler’s Investment Process

 

Fuller & Thaler’s investment process is based on decades of research into behavioral finance. Behavioral finance is the study of how investors actually behave, as opposed to how they should behave, when making investment decisions. Professional investors are human, and like all humans, they make mistakes. Investors make mistakes because they have emotions, use imperfect rules of thumb, and have priorities beyond risk and return. Fuller & Thaler’s process identifies and exploits those mistakes. The Adviser’s analysis includes making educated predictions of when other investors – the “market” – have likely made a behavioral mistake, and in turn, have created a buying opportunity. There are two kinds of mistakes that produce buying opportunities: over-reaction and under-reaction. Other investors may over-react to bad news and losses (e.g., panic) that may present opportunities in typically value-oriented stocks, or they may under-react to good news (e.g., not pay attention) that may present opportunities in typically growth-oriented stocks. At the individual stock level, Fuller & Thaler searches for events related to insider buying, earnings announcements, and other news that suggest these types of investor misbehavior and draws from its more than 20 years of experience in analyzing events that suggest investor misbehavior. If these behaviors are present, Fuller & Thaler then proceeds to its fundamental analysis of the company. In summary, if an investor mistake is likely and the company has solid fundamentals, the portfolio managers buy the stock. The portfolio managers generally sell when they believe investor misbehavior has reversed or the firm’s fundamentals deteriorate. There is no set length of time that the Funds expect to hold a particular security.

 

Small-Cap Equity Fund

 

The Small-Cap Equity Fund will primarily use both behavioral under-reaction and over-reaction strategies to invest in domestic small-cap stocks.

 

Small-Cap Growth Fund

 

The Small-Cap Growth Fund will primarily use a behavioral under-reaction strategy to invest in domestic small-cap growth stocks.

 

Mid-Cap Value Fund

 

The Mid-Cap Value Fund will primarily use a behavioral over-reaction strategy to invest in domestic mid-cap value stocks.

 

Unconstrained Equity Fund

 

The Unconstrained Equity Fund will primarily use both behavioral under-reaction and over-reaction strategies to invest in domestic stocks with unconstrained capitalizations.

 

Small–Mid Core Equity Fund

 

The Small–Mid Core Equity Fund will primarily use both behavioral under-reaction and over-reaction strategies to invest in domestic small to medium cap stocks.

 

Micro-Cap Equity Fund

 

The Micro-Cap Fund will primarily use both behavioral under-reaction and over-reaction strategies to invest in domestic micro-cap stocks.

 

Temporary Defensive Position

 

From time to time, the Funds may take temporary defensive positions that are inconsistent with their respective principal investment strategies, in attempting to respond to adverse market, economic, political or other conditions. For example, a Fund may hold all or a portion of its assets in cash, money market mutual funds, investment grade short-term money market instruments, U.S. Government and agency securities, commercial paper, certificates of deposit, repurchase agreements and other cash equivalents. The Funds also may invest in such instruments at any time to maintain liquidity or pending selection of investments in accordance with their respective principal investment strategies. As a result of engaging in these temporary measures, the Funds may not achieve their respective investment objective.

 

Portfolio Holdings Information

 

A description of the Funds’ policies and procedures with respect to the disclosure of portfolio securities is available in the Funds’ Statement of Additional Information (“SAI”).

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ADDITIONAL INFORMATION REGARDING PRINCIPAL RISKS OF THE FUNDS

 

Among the principal risks of investing in each of the Funds, which could adversely affect its net asset value, yield and total return, are:

 

Behavioral Strategy Risk

Equity Securities Risk

Investment Company Risk

Issuer Risk

Liquidity Risk

Management Risk

Market Risk

Regulatory Risk

REIT and Real Estate-Related Investment Risk

Securities Lending Risk

 

In addition, the Small-Cap Equity Fund is subject to the following principal risk:

 

Growth Investing Risk
Securities Lending Risk
Small-Cap Company Risk
Value Investing Risk

 

In addition, the Small-Cap Growth Fund is subject to the following principal risks:

 

Growth Investing Risk
New Fund Risk
Small-Cap Company Risk
Turnover Risk

 

In addition, the Mid-Cap Value Fund is subject to the following principal risks:

 

Mid-Cap Company Risk
New Fund Risk
Value Investing Risk

 

In addition, the Unconstrained Equity Fund is subject to the following principal risks:

 

Concentration Risk.
Growth Investing Risk
Large-Cap Company Risk
Micro-Cap Company Risk
Mid-Cap Company Risk
New Fund Risk
Non-Diversification Risk
Sector Risk
Small-Cap Company Risk
Value Investing Risk

 

In addition, the Small–Mid Core Equity Fund is subject to the following principal risks:

 

Growth Investing Risk
Mid-Cap Company Risk
New Fund Risk
Sector Risk
Small-Cap Company Risk
Value Investing Risk

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In addition, the Micro-Cap Equity Fund is subject to the following principal risks:

 

Concentration Risk
Growth Investing Risk
Micro-Cap Company Risk
New Fund Risk
Sector Risk
Small-Cap Company Risk
Turnover Risk
Value Investing Risk

 

The value of your investment in the Funds changes with the values of each Fund’s investments. Many factors can affect those values. The factors that are most likely to have a material effect on each Fund’s portfolio as a whole are called “principal risks.” The principal risks of the Funds are summarized in each Fund’s Summary and are described in more detail in this section (including a designation of the Funds to which each risk is applicable). The Funds may be subject to additional risks other than those described below because the types of investments made by the Funds may change over time. The section “Investment Objectives and Policies” in the SAI also includes more information about the Funds, their respective investments and the related risks. There is no guarantee that the Funds will be able to achieve their respective investment objective. It is possible to lose money by investing in the Funds.

 

The summary is not intended to be exhaustive. For more information about these risks and the securities and investment techniques used by the Funds, please refer to the SAI.

 

Behavioral Strategy Risk. (All Funds.) When taking investment positions, Fuller & Thaler will apply principles based on behavioral finance. In order to take advantage of behavioral biases, Fuller & Thaler generally focuses on certain markers of possible under- and over-reaction. Securities identified using this type of strategy may perform differently from the market as a whole as a result of the criteria used in the analysis, whether the criteria used are successful in predicting investor behavior, the weight placed on each criteria, and changes in the criteria’s historical trends. The criteria used in implementing this strategy and the weight placed on those criteria may not be predictive of a security’s value, and the effectiveness of the criteria can change over time. These changes may not be reflected in the current analytical approach used to implement the behavioral strategy. There can be no guarantee that Fuller & Thaler will be successful in applying behavioral finance principles to successfully predict investor behavior to exploit stock price anomalies.

 

Concentration Risk. (Additional Principal Risk of Unconstrained Equity Fund and Micro-Cap Equity Fund). Greater than 25% of a Fund’s total assets may be exposed to a particular industry. By concentrating its investments in an industry or sector, the Fund may face more risks than if it were diversified broadly over numerous industries or sectors.

 

Equity Securities Risk. (All Funds.) Equity securities represent an ownership interest, or the right to acquire an ownership interest, in an issuer. Equity securities may take the form of shares of common stock of a corporation, membership interests in a limited liability company, limited partnership interests, or other forms of ownership interests. Equity securities also include, among other things, preferred stocks, convertible securities and warrants. The value of a company’s equity securities may fall as a result of factors directly relating to that company, such as decisions made by its management or lower demand for the company’s products or services. The value of an equity security may also fall because of factors affecting not just the company, but also companies in the same industry or in a number of different industries, such as increases in production costs. The value of a company’s equity securities may also be affected by changes in financial markets that are relatively unrelated to the company or its industry, such as changes in interest rates or adverse circumstances involving the credit markets. In addition, because a company’s equity securities rank junior in priority to the interests of bond holders and other creditors, a company’s equity securities will usually react more strongly than its bonds and other debt to actual or perceived changes in the company’s financial condition or prospects. To the extent the Funds invest in equity-related instruments, they will also be subject to these risks.

 

The Funds may invest in equity securities of companies that its portfolio managers believe will experience relatively rapid earnings growth (growth securities) or that its portfolio managers believe are selling at a price lower than their true value (value securities). Growth securities typically trade at higher multiples of current earnings than other securities. Therefore, the value of growth securities may be more sensitive to changes in current or expected earnings than the value of other securities. Companies that issue value securities may have experienced adverse business developments or may be subject to special risks that have caused their securities to be out of favor. If a portfolio manager’s assessment of a company’s prospects is wrong, or if the market does not recognize the value of the company, the price of its securities may decline or may not approach the value that the portfolio manager anticipates.

 

Growth Investing Risk. (Additional Principal Risk of All Funds Except Mid-Cap Value Fund). To the extent that the Fund invests in growth-oriented securities, the Adviser’s perception of the issuers’ growth potentials may be wrong, or the securities purchased may not perform as expected. Because of their perceived growth potential, growth stocks typically trade at higher price to earnings multiples. Generally, the value of growth stocks change in response to the markets’ perceptions of the issuers’ growth potentials and of the broader economic picture.

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Investment Company Risk. (All Funds). The 1940 Act and the IRC impose numerous constraints on the operations of registered investment companies, like a Fund. For example, the 1940 Act limits the amount of Fund assets that can be invested in other investment companies (registered and unregistered) and the amount of leverage that can be utilized. If a registered investment company is “diversified,” the 1940 Act limits the amount of assets that can be invested in another entity. These restrictions may prohibit a Fund from making certain investments thus potentially limiting its profitability. Moreover, in order to qualify for registered investment company tax treatment under subchapter M of the RIC (e.g. to be treated as a corporation for tax purposes and to pass through income and capital gains to investors), a Fund must satisfy source-of-income, asset diversification and other requirements. The failure to comply with these provisions in a timely manner may prevent a Fund from qualifying as a registered investment company thus requiring the Fund to pay unexpected taxes and penalties, which could be material. When a Fund invests in another investment company such as a business development company or an ETF, the Fund will indirectly bear its proportionate share of any fees and expenses payable directly by the investment company. Therefore, the Fund will incur additional expenses, many of which are duplicative of the Fund’s own operational expenses. In addition, the Fund will be affected by losses incurred by these investment companies and the level of risk arising from the investment practices of the investment companies (such as the use of leverage). The Fund has no control over the investments made by these investment companies. Business development companies and ETFs are subject to additional risks such as the fact their shares may trade at a market price above or below their net asset values or an active market may not develop.

 

Issuer Risk. (All Funds). The value of a security may decline for a number of reasons that directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer’s goods or services as well as the historical and prospective earnings of the issuer and the value of its assets.

 

Large Cap Company Risk. (Additional Principal Risk of Unconstrained Equity Fund). Larger, more established companies may be unable to attain the high growth rates of successful, smaller companies, especially during extended periods of economic expansion. Larger, more established companies may be unable to respond quickly to new competitive challenges such as changes in consumer tastes or innovative smaller competitors, potentially resulting in lower market prices for their common stock.

 

Liquidity Risk. (All Funds). Liquidity risk exists when particular investments are difficult to purchase or sell, possibly preventing the Funds from purchasing or selling such illiquid securities at an advantageous time or price, or possibly requiring the Funds to dispose of other investments at unfavorable times or prices in order to satisfy its obligations. Additionally, the market for certain investments may become illiquid under adverse market or economic conditions independent of any specific adverse changes in the conditions of a particular issuer. In such cases, the Funds, due to limitations on investments in illiquid securities and the difficulty in purchasing and selling such securities or instruments, may be unable to achieve desired levels of exposure to a certain issuer or sector.

 

Micro-Cap Company Risk. (Additional Principal Risk of the Micro-Cap Equity Fund and Unconstrained Equity Fund.)Returns from small and micro-capitalization growth stocks may trail returns from the overall stock market. Historically, small and micro-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently. Small and microcap-size companies tend to have greater stock volatility because, among other things, these companies are more sensitive to changing economic conditions.

 

Management Risk. (All Funds). The Funds are subject to management risk because they are actively managed investment portfolios. The Adviser will apply investment techniques and risk analyses in making investment decisions for the Funds, but there can be no guarantee that these will produce the desired results. To the extent the Adviser uses a variety of data inputs into its behavioral processes, whether proprietary or maintained by third parties, there can be no assurance that such processes will behave as expected in all market conditions. In addition, the computer programming used to construct, or the data employed by, the Adviser’s behavioral processes may contain errors, which may cause losses for the Funds or reduce performance. The Funds are also subject to the risk that deficiencies in the operational systems or controls of the Adviser or another service provider will cause losses for the Funds or hinder Fund operations. For example, trading delays or errors (both human and systemic) could prevent the Funds from purchasing a security expected to appreciate in value. Additionally, legislative, regulatory, or tax developments may affect the investment techniques available to the Adviser in connection with managing the Funds and may also adversely affect the ability of the Funds to achieve their respective investment objectives.

 

Market Risk. (All Funds). The market prices of securities owned by the Funds may go up or down, sometimes rapidly or unpredictably. A principal risk of investing in the Funds is that the investments in each Fund’s portfolio will decline in value due to factors affecting securities markets generally or particular industries or sectors represented in those markets. The values of securities may decline due to general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates, adverse changes to credit markets or adverse investor sentiment generally. They may also decline due to factors that disproportionately affect a particular industry, group of related industries or sector, such as labor shortages or increased production costs and competitive conditions within an industry or sector. The market price of equity securities and other types of investments may decline due to changes in interest rates or other factors affecting the applicable markets generally. Equity securities generally have greater price volatility than fixed income securities, although under certain market conditions fixed income securities may have comparable or greater price volatility. During a general downturn in securities markets, multiple asset classes may decline in value simultaneously.

38

 

The Funds are subject to the risk that geopolitical and other events will disrupt securities markets, adversely affect global economies and markets and thereby decrease the value of each Fund’s investments. The wars in Iraq and Afghanistan have had a substantial effect on the economies and securities markets of the U.S. and other countries. Terrorism in the U.S. and around the world has had a similar global impact and has increased geopolitical risk. The terrorist attacks on September 11, 2001 resulted in the closure of some U.S. securities markets for four days, and similar attacks are possible in the future. Securities markets may be susceptible to market manipulation (e.g., the potential manipulation of the London Interbank Offered Rate (LIBOR)) or other fraudulent trade practices, which could disrupt the orderly functioning of these markets or adversely affect the value of investments traded in these markets, including investments of the Funds. While the U.S. government has honored its credit obligations continuously for the last 200 years, it remains possible that the U.S. could default on its obligations. While it is impossible to predict the consequences of such an unprecedented event, it is likely that a default by the U.S. would be highly disruptive to the U.S. and global securities markets and could significantly impair the value of a Fund’s investments. Similarly, political events within the U.S. at times have resulted, and may in the future result, in a shutdown of government services, which could negatively affect the U.S. economy, decrease the value of many Fund investments, and increase uncertainty in or impair the operation of the U.S. or other securities markets. The uncertainty surrounding the sovereign debt of a significant number of European Union countries, as well as the continued existence of the European Union itself, have disrupted and may continue to disrupt markets in the U.S. and around the world. If one or more countries leave the European Union or the European Union dissolves, the world’s securities markets likely will be significantly disrupted. Substantial government interventions (e.g., currency controls) also could negatively impact the Funds. War, terrorism, economic uncertainty, and related geopolitical events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and world economies and markets generally. Likewise, natural and environmental disasters, such as the earthquake and tsunami in Japan in early 2011, and systemic market dislocations of the kind surrounding the insolvency of Lehman Brothers in 2008, if repeated, would be highly disruptive to economies and markets, adversely affecting individual companies and industries, securities markets, interest rates, credit ratings, inflation, investor sentiment, and other factors affecting the value of a Fund’s investments. During such market disruptions, a Fund’s exposure to the risks described elsewhere in this section will likely increase. Market disruptions, including sudden government interventions, can also prevent a Fund from implementing its investment program for a period of time and achieving its investment objective. To the extent a Fund has focused its investments in the securities index of a particular region, adverse geopolitical and other events could have a disproportionate impact on the Fund.

 

Mid-Cap Company Risk. (Additional Principal Risk of Mid-Cap Value Fund, Unconstrained Equity Fund, and Small–Mid Core Equity Fund). Smaller companies involve greater risk of loss and price fluctuation than larger companies. Many of these companies are young and have a limited track record. Their securities may trade less frequently and in more limited volume than those of more mature companies making them more volatile and more difficult to buy or sell at an acceptable price. These companies may also lack the managerial, financial or other resources necessary to implement their business plans or succeed in the face of competition.

 

New Fund Risk. (Additional Principal Risk of Small-Cap Growth Fund, Mid-Cap Value Fund, Unconstrained Equity Fund, Small–Mid Core Equity Fund, and Micro-Cap Equity Fund) There can be no assurance that the Fund will grow to or maintain an economically viable size, in which case the Board of Trustees may determine to liquidate the Fund. Liquidation of the Fund can be initiated without shareholder approval by the Board of Trustees if it determines it is in the best interest of shareholders. As a result, the timing of any Fund liquidation may not be favorable to certain individual shareholders.

 

Non-Diversification Risk. (Additional Principal Risk of Unconstrained Equity Fund). Investment in the securities of a limited number of issuers or sectors exposes the Fund to greater market risk and potentially greater market losses than if its investments were diversified in securities and sectors.

 

Regulatory Risk. (All Funds). Changes in government regulations may adversely affect the operations and value of a Fund or the companies in which it invests. Federal, state, and other governments, their regulatory agencies, or self-regulatory organizations may take actions that affect the regulation of the securities in which a Fund invests, or the issuers of such instruments, in ways that are unforeseeable. Legislation or regulation may also change the way in which a Fund itself is regulated. Such legislation or regulation could limit or preclude a Fund’s ability to achieve its investment objective. Industries and markets that are not adequately regulated may be susceptible to the initiation of inappropriate practices that adversely affect a Fund or the companies in which it invests.

 

REIT and Real Estate-Related Investment Risk. (All Funds). To the extent that the Funds invest in real estate-related investments, such as securities of real estate-related companies, REITs, real estate operating companies (REOCs) and related instruments and derivatives, they will be subject to the risks associated with owning real estate and with the real estate industry generally. These include difficulties in valuing and disposing of real estate, the possibility of declines in the value of real estate, risks related to fluctuations in general and local economic conditions, the possibility of adverse changes in the climate for real estate, environmental liability risks, the risk of increases in property taxes and operating expenses, possible adverse changes in zoning laws, the risk of casualty or condemnation losses, limitations on rents, the possibility of adverse changes in interest rates and in the credit markets and the possibility of borrowers paying off mortgages sooner than expected, which may lead to reinvestment of assets at lower prevailing interest rates. The value of investments in the real estate sector also may be affected by macroeconomic developments, and social and economic trends. To the extent the Funds invest in REITs and/or REOCs, they will also be subject to the risk that a REIT or REOC will default on its obligations or go bankrupt. By investing in REITs and/or REOCs indirectly through the Funds, a shareholder will bear not only his or her proportionate share of the expenses of the Funds, but also, indirectly, similar expenses of such REITs or REOCs.

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Sector Risk. (Additional Principal Risk of Unconstrained Equity Fund, Small-Mid Core Equity Fund, and Micro-Cap Equity Fund) The Adviser may allocate more of the Fund’s investments to a particular sector or sectors in the market. If the Fund invests a significant portion of its total assets in certain sectors, its investment portfolio will be more susceptible to the financial, economic, business, and political developments that affect those sectors.

 

Securities Lending Risk. (All Funds) Each Fund may make secured loans of its portfolio securities in an amount not exceeding 33 ⅓% of the value of the Fund’s total assets. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities and possible loss of rights in the collateral should the borrower fail financially, including possible impairment of the Fund’s ability to vote the securities on loan. If a loan is collateralized by cash, a Fund typically will invest the cash collateral for its own account and may pay a fee to the borrower that normally represents a portion of the Fund’s earnings on the collateral. Because a Fund may invest collateral in any investments in accordance with its investment objective, the Fund’s securities lending transactions will result in investment leverage. Each Fund bears the risk that the value of the investments made with collateral may decline.

 

Small-Cap Company Risk. (Additional Principal Risk of the Small-Cap Equity Fund, Small-Cap Growth Fund, Unconstrained Equity Fund, Small–Mid Core Equity Fund, and Micro-Cap Equity Fund.) Investments in securities of small-cap companies may be riskier, more volatile and more vulnerable to economic, market and industry changes than investments in larger, more established companies. As a result, share price changes may be more sudden or erratic than the prices of other equity securities, especially over the short term. Small-cap companies often have less predictable earnings, more limited product lines, markets, distribution channels, or financial resources, and the management of such companies may be dependent on one or a few key people. Small-cap companies may be unable to generate funds necessary for growth or potential development, or may be developing or marketing new products or services for markets that are not yet firmly established. In addition, such companies may become subject to intense competition from larger more established companies. The equity securities of small-cap companies are generally less liquid than the equity securities of larger companies. In many instances, the securities of smaller companies are traded only over-the-counter or on a regional securities exchange, and the frequency and volume of their trading is substantially less than is typical of larger companies. Some securities may be inactively traded and thus may not be readily bought or sold.

 

Turnover Risk. (Additional Principal Risk of Small-Cap Growth Fund and Micro-Cap Equity Fund.) A change in the securities held by the Fund is known as “portfolio turnover.” Higher portfolio turnover involves correspondingly greater expenses to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. Such sales may also result in realization of taxable capital gains, including short-term capital gains (which are taxed as ordinary income when distributed to individual shareholders), and may adversely impact the Fund’s after-tax returns. The trading costs and tax effects associated with portfolio turnover may adversely affect the Fund’s performance.

 

Value Investing Risk. (Additional Principal Risks of All Funds Except Small-Cap Growth Fund.) The determination that a security is undervalued is subjective. Investments in “value” securities may never reach what the Adviser believes are their full fair market values, either because the market fails to recognize what the Adviser considers to be the companies’ true business values or because the Adviser misjudges those values. In addition, value stocks may fall out of favor with investors, decrease in value, and underperform growth stocks during given periods.

 

Account Information

 

To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. This means that when you open an account, we will ask for your name, residential address, date of birth, government identification number and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents, and may take additional steps to verify your identity. If we do not receive these required pieces of information, there may be a delay in processing your investment request, which could subject your investment to market risk. If we are unable to immediately verify your identity, the Funds may restrict further investment until your identity is verified. However, if we are unable to verify your identity, the Funds reserve the right to close your account without notice and return your investment to you at the net asset value (“NAV”) determined on the day in which your account is closed. If we close your account because we are unable to verify your identity, your investment will be subject to market fluctuation, which could result in a loss of a portion of your principal investment.

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CLASSES OF SHARES

 

Set forth below is information about the manner in which each Fund offers shares, including its share class structure

 

The Funds currently offer five share classes: A Shares, C Shares, Investor Shares, Institutional Shares and R6 Shares. Not all share classes are currently available for each Fund. Each class of the Funds invests in the same portfolio securities, but each class has its own expense structure, as illustrated in each Fund’s Summary Section – Fees and Expenses of the Fund. Before purchasing shares of the Funds directly, an investor should inquire about the other classes of shares offered by the Funds. As described herein, each class of shares has particular investment eligibility criteria and is subject to different types and levels of charges, fees and expenses than the other classes. Subject to eligibility, the class of shares that is best for you depends upon a number of factors, including the amount and the intended length of your investment. For example, while R6 Shares require a larger initial investment, they have lower annual expenses than Investor Shares because there are no 12b-1 fees, and thus will cost you less over time. The following summarizes key information about each class to help you make your investment decision, including the various expenses associated with each class and the payments made to financial intermediaries for distribution and other services. Some share classes may not be currently available for investment, as described in each Fund’s Fees and Expenses Table.

 

Intermediary-Defined Sales Charge Waiver Policies

 

The availability of certain initial or deferred sales charge waivers and discounts may depend on the particular financial intermediary or type of account through which you purchase or hold Fund shares.

 

Intermediaries may have different policies and procedures regarding the availability of front-end sales load waivers or contingent deferred (back-end) sales load (“CDSC”) waivers, which are discussed below. In all instances, it is the purchaser’s responsibility to notify the Fund or the purchaser’s financial intermediary at the time of purchase of any relationship or other facts qualifying the purchaser for sales charge waivers or discounts. For waivers and discounts not available through a particular intermediary, shareholders will have to purchase fund shares directly from the fund or through another intermediary to receive these waivers or discounts.

 

A financial intermediary may offer Fund shares subject to variations in or elimination of the Fund sales charges (“variations”), provided such variations are described in this prospectus. For the variations applicable to shares offered through certain intermediary platforms, please see Appendix A – Financial Intermediary Sales Charge Variations. All variations described in Appendix A are applied by, and the responsibility of, the identified financial intermediary. Sales charge variations may apply to purchases, sales, exchanges and reinvestments of Fund shares and a shareholder transacting in Fund shares through an intermediary identified on Appendix A should read the terms and conditions of Appendix A carefully. A variation that is specific to a particular financial intermediary is not applicable to shares held directly with a Fund or through another intermediary.

 

A Shares. A Shares are available for purchase only through broker-dealers and other financial intermediaries, subject to the satisfaction of the investment minimums described below.

 

A Shares are available for purchase for a minimum initial investment of $1,000. The minimum subsequent investment is $50.

 

A Shares are purchased at NAV, plus an initial sales charge of up to 5.75%.

 

A Shares are subject to a Contingent Deferred Sales Charge (“CDSC”) when redeemed within the following specified times from the date of purchase. If shares are purchased with a sales charge and redeemed within 12 months from the date of purchase, a CDSC of 1.00% will apply. If shares are purchased with a sales charge and redeemed within more than 12 but less than 18 months from the date of purchase, a CDSC of 0.50% will apply. CDSC charges may be waived in certain circumstances, as described below.

 

12b-1 fees for the A Share Class are equal to 0.25% of the class’ average annual daily net assets. After the sale of Class A shares, the principal underwriter receives the Class A distribution and service fees for one year. Thereafter financial intermediaries generally receive from the principal underwriter 0.25% annually of average daily net assets based on the value of outstanding shares sold by such financial intermediaries for personal services and maintenance of shareholder accounts performed by such intermediaries.

 

Administrative Service Fees are equal to up to 0.25% of the class’ average annual daily net assets.

 

Sales charges are waived for purchases over $1 million and for purchases of any amount by shareholders who are employees or affiliates of the Adviser.

 

Sales Charges for A Share Purchases are as follows:

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Breakpoints Sales charge % Dealer Concession %
$0 - $49,999 5.75% 5.00%
$50,000 – $99,999 4.75% 4.25%
$100,000 – $249,999 3.75% 3.25%
$250,000 – $499,999 2.75% 2.25%
$500,000 – $999,999 2.00% 1.75%
$1,000,000  – $2,999.999 0.00% 1.00%
$3,000,000  – $9,999.999 0.00% 0.50%
$10,000,000 and greater 0.00% 0.25%

 

Reducing Your Class A Sales Charges. The Fund permits you to reduce the front-end sales charge you pay on Class A Shares by exercising your Rights of Accumulation or Letter of Intent privileges with respect to your investments in Fuller & Thaler Funds, as described below.

 

Rights of Accumulation:

 

For Class A Shares, a front-end sales charge can be reduced by breakpoint discounts based on the amount of a single purchase or through Rights of Accumulation. By using Rights of Accumulation, you may combine the current market value of any existing qualifying holdings and account types (as described below) with the amount of the current purchase to qualify for a breakpoint and reduced sales charge on the current purchase.

 

The amount of the sales charge will be calculated based on the higher of (a) the market value of your qualified holdings as of the last calculated NAV prior to your investment or (b) if you purchased shares after [December __, 2018], the initial value of total share purchases, or if you already held shares on [December __, 2018], the market value of the shares on that date, provided that, in either case, the value will be reduced by the market value on the applicable redemption date of any shares you have redeemed. Depending on their operational capabilities, Financial Intermediaries may utilize one or both of the methods described above so your holdings could be valued differently depending on where you hold your shares.

 

Letter of Intent:

 

By signing a Letter of Intent, you may combine the current market value of any existing qualifying holdings and account types with the value that you intend to buy over a 13 month period to calculate the front-end sales charge and any breakpoint discounts. Each purchase that you make during that 13 month period will receive the sales charge and breakpoint discount that applies to the total amount. The 13 month Letter of Intent period commences on the day that the Letter of Intent is received by the Fuller & Thaler Funds or your Financial Intermediary, and you must inform your Financial Intermediary or the Fuller & Thaler Funds that you have a Letter of Intent each time you make an investment. Purchases submitted prior to the date on which the Letter of Intent is received by the Fuller & Thaler Funds or your Financial Intermediary are considered only in determining the level of sales charge that will be paid. The Letter of Intent will not result in a reduction in the amount of any previously paid sales charges.

 

A percentage of your investment will be held in escrow until the full amount covered by the Letter of Intent has been invested. If the terms of the Letter of Intent are not fulfilled by the end of the 13th month, you must pay the Distributor the difference between the sales charges applicable to the purchases at the time they were made and the reduced sales charges previously paid or the Distributor will liquidate sufficient escrowed shares to obtain the difference and/or adjust the shareholder’s account to reflect the correct number of shares that would be held after deduction of the sales charge. The Letter of Intent will be considered completed if the shareholder dies within the 13 month period covered by the Letter of Intent. Commissions to dealers will not be adjusted or paid on the difference between the Letter of Intent amount and the amount actually invested before the shareholder’s death. Calculations made to determine whether a Letter of Intent commitment has been fulfilled will be made on the basis of the amount invested prior to the deduction of any applicable sales charge.

 

Below are the qualifying holdings and account types that may be aggregated in order to exercise your Rights of Accumulation and Letter of Intent privileges to qualify for a reduced front-end sales charge on Class A Shares.

 

Qualifying Holdings:

A Shares, Investor Shares, C Shares, Institutional Shares and R6 Shares of Fuller and Thaler Funds.

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Qualifying Accounts:

 

1.Your account(s);
2.Account(s) of your spouse or domestic partner;
3.Account(s) of children under the age of 21 who share your residential address;
4.Trust accounts established by any of the individuals in items (1) through (3) above. If the person(s) who established the trust is deceased, the trust account may be aggregated with the account(s) of the primary beneficiary of the trust;
5.Solely controlled business accounts; and
6.Single-participant retirement plans of any of the individuals in items (1) through (3) above.

 

You may use your qualifying holdings and account types even if they are held at different Financial Intermediaries. In order to obtain any reduction in the sales charge by utilizing either the Rights of Accumulation or Letter of Intent privileges, you must, before each purchase of Class A Shares, inform your Financial Intermediary or the Fuller & Thaler Funds if you have any existing holdings that may be aggregated with your current purchase in order to qualify for a reduced front-end sales charge. In order to verify your eligibility for a reduced sales charge, you may be required to provide appropriate documentation, such as an account statement or the social security or tax identification number on an account, so that Fuller & Thaler Funds may confirm (1) the value of each of your accounts invested in Fuller & Thaler Funds [or in the NY 529 Advisor-Guided Plan] and (2) the value of the accounts owned by your spouse or domestic partner and by children under the age of 21 who share your residential address.

 

Certain Financial Intermediaries may not participate in extending the Rights of Accumulation or Letter of Intent privileges to your holdings in the NY529 Advisor-Guided Plan. Please check with your Financial Intermediary to determine whether the Financial Intermediary makes these privileges available with respect to NY 529 Advisor-Guided Plan investments.

 

Additional information regarding the reduction of Class A sales charges is available in the Fund’s Statement of Additional Information. To determine if you are eligible for Rights of Accumulation or Letter of Intent privileges or to request a copy of the Statement of Additional Information, call 1-888-912-4562. These programs may be terminated or amended at any time.

 

C Shares. C Shares are available for purchase only through broker-dealers and other financial intermediaries.

 

C Shares are available for purchase for a minimum initial investment of $1,000. The minimum subsequent investment is $50.
C shares do not have an initial sales charge but carry an ongoing distribution and service (12b-1) fee, and a Contingent Deferred Sales Charge (“CDSC”) when redeemed within t purchase. If shares are purchased with a dealer commission and redeemed within [12] months of purchase, the CDSC of 1.00% will apply.
12b-1 fees for the C Share Class are equal to [1.00%] of the class’ average annual daily net assets. The distribution and service (12b-1) fee is not paid until the CDSC period has expired (it is retained by the distributor).
[If C Class shares are purchased in an employer-sponsored retirement plan (other than SEP IRAs, SIMPLE IRAs or SARSEPs), no dealer commission will be paid. Shares purchased in this way are not subject to a CDSC, and the financial professional begins receiving the distribution and service (12b-1) fee at the time of purchase.]
Administrative Service Fees for the C Share Class are equal to up to 0.25% of the class’ average annual daily net assets.

 

CDSC Waivers on Class C Shares: Any applicable CDSC for C Shares accounts may be waived for the following reasons:

 

Redemptions through systematic withdrawal plans not exceeding annually 12% of the lesser of the original purchase cost or current market value for C Share accounts.
Redemptions through employer-sponsored retirement plans. The 12b-1 fee starts immediately. For this purpose, employer-sponsored retirement plans do not include SEP IRAs, SIMPLE IRAs and SARSEPs.
Distributions from IRAs due to attainment of age 59½ for A Class shares and for C Class shares.
Required minimum distributions from retirement accounts upon reaching age 70½.
Tax-free returns of excess contributions to IRAs
Redemptions due to death or post-purchase disability.
Exchanges, unless the shares acquired by the exchange are redeemed within the original CDSC period.
IRA Rollovers from any Funds held in an employer-sponsored retirement plan, for A Class shares only.
If no dealer commission was paid to the financial professional on the purchase for any other reason.

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Conversion of Class C Shares to Class A Shares: C Shares will be converted to Class A shares in the following instances:

 

Beginning [_________,__ 2018], C share positions will convert to A Shares after 10 years; or
If Shares held in an account with a third-party broker of record are transferred to an account with the Distributor after [_________,__ 2018], those C Share accounts will be converted to A Share accounts in the month following the transfer.

 

Investor Shares. Investor Shares are generally available for purchase by all investors, subject to the satisfaction of the investment minimums described below.

 

Investor Shares are available for purchase for a minimum initial investment of $1,000. The minimum subsequent investment is $50 ($50 for automatic investment plan contributions).
Minimums are waived for the following investors: qualified retirement plans, including, but not limited to, 401(k) plans, 457 plans, employer sponsored 403(b) plans, defined benefit plans and other accounts or plans whereby R6 Shares are held on the books of the Funds through plan level or omnibus accounts; bank and trust companies; insurance companies; registered investment companies; Fuller & Thaler employees and affiliates; and non-qualified deferred compensation plans.
The Funds do not charge any sales charges (loads) or other fees in connection with purchases or sales (redemptions) of Investor Shares.
12b-1 fees are equal to 0.25% of the class’ average annual daily net assets.
Administrative Service Fees are equal to up to 0.20% of the class’ average annual daily net assets.
Investor Shares do not convert into any other class of shares.

 

Institutional Shares. Institutional Shares are offered primarily through certain asset allocation, wrap fee and other similar programs offered by broker-dealers and other intermediaries, and the Funds pay service fees to these entities for services they provide to Institutional Share shareholders. Institutional Shares may also be offered for direct investment by other investors such as pension and profit sharing plans, employee benefit trusts and plan alliances, endowments, foundations, corporations and high net worth individuals. Institutional Shares are subject to the satisfaction of investment minimums described below.

 

Institutional Shares are available for purchase for a minimum initial investment of $100,000. The minimum subsequent investment is $50. Minimums may be modified for certain financial intermediaries that aggregate trades on behalf of investors.

 

Minimums are waived for the following investors: qualified retirement plans, including, but not limited to, 401(k) plans, 457 plans, employer sponsored 403(b) plans, defined benefit plans and other accounts or plans whereby R6 Shares are held on the books of the Funds through plan level or omnibus accounts; bank and trust companies; insurance companies; registered investment companies; Fuller & Thaler employees and affiliates; and non-qualified deferred compensation plans.

 

The Funds do not charge any sales charges (loads) or other fees in connection with purchases or sales (redemptions) of Institutional Shares.

 

Institutional Shares are not subject to any 12b-1 fees.

 

Administrative Service Fees are equal to up to 0.20% of the class’ average annual daily net assets.

 

R6 Shares. R6 Shares are available for purchase by eligible institutional investors, including employer sponsored retirement plans, pension plans, endowments and foundations, eligible high net worth investors, and Fuller & Thaler employees and affiliates as described below.

 

R6 Shares are available for purchase for a minimum initial investment of $1,000,000. The minimum subsequent investment is $50 ($50 for automatic investment plan contributions). Minimums may be modified for certain financial intermediaries that aggregate trades on behalf of investors.

 

Minimums are waived for the following investors: qualified retirement plans, including, but not limited to, 401(k) plans, 457 plans, employer sponsored 403(b) plans, defined benefit plans and other accounts or plans whereby R6 Shares are held on the books of the Funds through plan level or omnibus accounts; bank and trust companies; insurance companies; registered investment companies; Fuller & Thaler employees and affiliates; and non-qualified deferred compensation plans.

 

The Funds do not charge any sales charges (loads) or other fees in connection with purchases or sales (redemptions) of R6 Shares.

 

R6 Shares are not subject to any 12b-1 fees or Administrative Service Fees.

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R6 Shares are offered primarily to investors who do not require or expect to receive any payments with respect to R6 Shares, and neither the Fund, the Adviser, nor any of the Adviser’s affiliates will pay any shareholder servicing or revenue sharing payments with respect to R6 Shares. The Adviser or its affiliates may however, from their own resources, make administrative payments necessary to establish or maintain the availability of R6 Shares for the investor. Other investors not included in the list above may be permitted to purchase R6 Shares subject to the Adviser’s determination of eligibility and may be subject to a $1,000,000 minimum initial investment requirement. The minimum initial investment amount may be waived subject to the Adviser’s discretion.

 

If your account is subject to the minimum investment requirement, and the value of your account falls below the minimum initial investment requirements for R6 Shares as a result of share redemptions or you no longer meet one of the waiver criteria set forth above, your account may be subject to involuntary conversion or involuntary redemption, as applicable. You will be notified prior to any such conversions or redemptions.

 

A. Shares and C Shares may be purchased only through broker dealers or other financial intermediaries. Investor Shares, Institutional Shares and R6 Shares can be purchased directly through the Funds’ distributor or other financial institutions, which may charge transaction fees with respect to your purchase. The Funds reserve the right to change the above eligibility criteria. For any share class, the Adviser may waive the minimum investment amounts at its discretion, including for existing clients of the Adviser. The Funds may waive or lower investment minimums for investors who invest in the Funds through an asset-based fee program made available through a financial intermediary. If your investment is aggregated into an omnibus account established by an investment adviser, broker or other financial intermediary, the account minimums apply to the omnibus account, not to your individual investment; however, the financial intermediary may also impose minimum requirements that are different from those set forth in this Prospectus. If you purchase or redeem shares through a broker-dealer or another intermediary, you may be charged a fee by that intermediary.

 

Rule 12b-1 Plan

 

The Funds have adopted a plan under Rule 12b-1 of the 1940 Act that allows the Funds’ Investor Shares, A Shares, and C Shares to pay distribution fees for the sale and distribution of their respective shares and for shareholder services provided to shareholders of each Fund’s Investor Shares (the “12b-1 Plan”). The 12b-1 Plan allows the Funds’ Investor Shares and A Shares to pay annual 12b-1 expenses of 0.25% of the average daily net assets in the Investor and A Share classes, respectively, and 1.00% of the average daily net assets in the C Share class. Over time, 12b-1 fees will increase the cost of your investment in a Fund’s Investor, A, and C Shares and may cost you more than paying other types of sales charges because these fees are paid out of the Fund’s Investor, A, and C Shares on an on-going basis.

 

Service Fees – A Shares, C Shares, Investor Shares and Institutional Shares

 

The Trust has adopted an Administrative Services Plan (the “Plan”) for A Shares, Investor Shares, and Institutional Shares of the Funds. The Plan allows the Funds to use A Shares, C Shares, Investor Shares or Institutional Shares to pay financial intermediaries that provide services relating to A Shares, C Shares, Investor Shares and Institutional Shares. The Plan permits payments for the provision of certain administrative, recordkeeping and other non-distribution related services to A Share, Investor Share and Institutional Share shareholders. The Plan permits the Funds to make service fee payments at an annual rate of up to 0.25% of each Fund’s average daily net assets attributable to its A Shares, 0.25%- of each Fund’s average daily net assets attributable to its C Shares and up to 0.20% of each Fund’s average daily net assets attributable to its Investor Shares or Institutional Shares. Because these fees are paid out of a Fund’s A Shares’, Investor Shares’ and Institutional Shares’ Class assets on an ongoing basis, respectively, over time they will increase the cost of an investment in A Shares, Investor Shares and Institutional Shares.

 

Arrangements with Service Agents — A Shares, C Shares, Investor Shares and Institutional Shares. A Shares, C Shares, Investor Shares and Institutional Shares of the Funds may be offered through certain brokers and financial intermediaries (“service agents”) that have established a shareholder servicing relationship with respect to the Funds on behalf of their customers. Service agents may impose additional or different conditions than the Funds on purchases and redemptions of Fund shares by their customers. Service agents may also independently establish and charge their customers transaction fees, account fees and other amounts in connection with purchases, sales and redemptions of Fund shares in addition to any fees charged by the Funds. These additional fees may vary over time and would increase the cost of the customer’s investment and lower investment returns. Each service agent is responsible for transmitting to its customers a schedule of any such fees and information regarding any additional or different conditions regarding purchases and redemptions. Shareholders who are customers of service agents should consult their service agents for information regarding these fees and conditions. Among the service agents with whom the Funds may enter into a shareholder servicing relationship are firms whose business involves or includes investment consulting, or whose parent or affiliated companies are in the investment consulting business, that may recommend that their clients utilize the Adviser’s investment advisory services or invest in the Funds or in other products sponsored by the Adviser.

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For A Shares, C Shares, Investor Shares and Institutional Shares, the Adviser may make arrangements for the Funds to make payments, directly or through the Adviser, the Funds’ distributor and/or their affiliates, for providing certain sub-transfer agency and related administrative services with respect to A Shares, C Shares, Investor Shares and Institutional Shares of the Funds held through such service agents, including, without limitation, the following services: receiving, aggregating and processing purchase, redemption and exchange orders at the service agent level; furnishing shareholder sub-accounting; providing and maintaining elective services with respect to Investor Shares and Institutional Shares such as check writing and wire transfer services; providing and maintaining pre-authorized investment plans; communicating periodically with shareholders; acting as the sole shareholder of record and nominee for holders of A Shares, C Shares, Investor Shares and Institutional Shares; maintaining accounting records for shareholders; answering questions and handling correspondence from shareholders about their accounts; issuing confirmations for transactions by shareholders; and performing similar account administrative services. These payments are made to financial intermediaries selected by the Adviser. The actual services provided, and the payments made for such services, may vary from firm to firm. For these services, each Fund may pay an annual fee of up to 0.25% of the value of assets in A Share accounts and C Share accounts, and 0.20% of the value of assets in Investor Share and Institutional Share accounts. In the event the Funds’ distributor provides similar services to certain A Shares, C Shares, Investor Shares or Institutional Share shareholders, it may receive service agent fees under the Administrative Services Plan for Investor Shares or Institutional Shares, respectively. The Adviser and/or its affiliates, may make payments to service agents for the services described in this paragraph on top of the service fees that the Funds may pay to such agents. The aggregate rate of such payments by the Funds and the Adviser and/or its affiliates with regard to A Shares, C Shares, Investor Shares and Institutional Shares may vary from service agent to service agent and, in certain circumstances, may, for any individual service agent, exceed .25% for A Share accounts and C Share accounts, and 0.20% for Investor Share and Institutional Share accounts.. These amounts would be in addition to amounts paid by the Funds to the Funds’ transfer agent or other service providers. The Adviser and its affiliates rely primarily on contractual arrangements with the service agents to verify whether they are providing the services for which they are receiving such payments. Although the Adviser and its affiliates do not audit such service agents, they may make periodic information requests to verify certain information about the services provided.

 

HOW TO BUY SHARES

 

Requests to purchase shares are processed at the NAV of a Fund class, plus the applicable sales charge, next calculated after we receive your order in proper form. “Proper form” means that you have provided sufficient information to process your request as outlined in this Prospectus, including any required signatures, documents and payment.

 

Initial Purchase

 

By Mail – Your initial purchase request must include:

 

a completed and signed investment application form;

 

a personal check with name pre-printed (in the applicable minimum amount) made payable to the applicable Fund; reference Investor Shares, Institutional Shares or R6 Shares to ensure proper crediting to your account.

 

Mail the application and check to:

 

U.S. Mail: Overnight:

Fuller & Thaler Behavioral Small-Cap Equity Fund or

Fuller & Thaler Behavioral Small-Cap Growth Fund or

Fuller & Thaler Behavioral Mid-Cap Value Fund or

Fuller & Thaler Behavioral Unconstrained Equity Fund or

Fuller & Thaler Behavioral Small–Mid Core Equity Fund or

Fuller & Thaler Behavioral Micro-Cap Equity Fund

 

c/o Ultimus Asset Services, LLC

PO Box 46707

Cincinnati, OH 45246-0707 

Fuller & Thaler Behavioral Small-Cap Equity Fund or

Fuller & Thaler Behavioral Small-Cap Growth Fund or

Fuller & Thaler Behavioral Mid-Cap Value Fund or

Fuller & Thaler Behavioral Unconstrained Equity Fund or

Fuller & Thaler Behavioral Small–Mid Core Equity Fund or

Fuller & Thaler Behavioral Micro-Cap Equity Fund

 

c/o Ultimus Asset Services, LLC

225 Pictoria Drive, Suite 450

Cincinnati, OH 45246

 

By Wire – You may also purchase shares of the Funds by wiring federal funds from your bank, which may charge you a fee for doing so. To wire money, you must call Shareholder Services at 1-888-912-4562 to obtain instructions on how to set up your account and to obtain an account number.

 

You must provide a signed application to Ultimus Asset Services, LLC (formerly Huntington Asset Services, Inc.), the Funds’ transfer agent, at the above address in order to complete your initial wire purchase. Wire orders will be accepted only on a day on which the Funds and their custodian and transfer agent are open for business. Any delays, which may occur in wiring money, including delays that may occur in processing by banks, are not the responsibility of the Funds or the transfer agent. There is presently no fee for the receipt of wired funds, but the Funds may charge shareholders for this service in the future.

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A purchase will not be considered made until the corresponding check or wired money is received and the purchase is accepted by the Funds.

 

Additional Investments

 

You may purchase additional shares of a Fund class at any time by mail, wire, telephone, automated clearing house (ACH) or automatic investment. Each additional mail purchase request must contain:

 

1.Your name;

 

2.The name on your account(s);

 

3.Your account number(s);

 

4.A wire or a check (in the applicable minimum amount) made payable to the Fund in which you want to invest.

 

Checks should be sent to the Funds at the address listed under the heading “Initial Purchase – By Mail” above. To send a bank wire or make telephone purchases, call Shareholder Services at 1-888-912-4562 to obtain instructions.

 

Automated Clearing House (ACH)

 

Once an account is open, shares may be purchased or redeemed through ACH in minimum amounts of $100. ACH is the electronic transfer of funds directly from an account you maintain with a financial institution to a Fund. In order to use the ACH service, the ACH Authorization section of the account application must be completed. For existing accounts, an ACH Authorization Form may be obtained by calling the Funds’ transfer agent at 1-888-912-4562. Allow at least two weeks for processing before using ACH. To place a purchase or redemption order by ACH, call the Funds’ transfer agent at 1-888-912-4562. There are no charges for ACH transactions imposed by the Funds or the transfer agent. ACH share purchase transactions are completed when payment is received, approximately two business days following the placement of your order. When shares are purchased through ACH, the proceeds from the redemption of those shares may not be paid until the ACH transfer has been converted to federal funds, which could take up to 15 calendar days. The shareholder will be held responsible for any fees incurred or losses suffered by the Funds as a result of any ACH transaction rejected for insufficient funds. Failure to notify the Funds in advance of an ACH transfer could result in a delay in completing your transaction.

 

Automatic Investment Plan

 

You may make regular investments in the Funds with an Automatic Investment Plan by completing the appropriate section of the account application or completing a systematic investment plan form with the proper signature guarantee and attaching a voided personal check. Investments may be made monthly to allow dollar-cost averaging by automatically deducting $50 or more from your bank checking account. You may change the amount of your monthly purchase at any time. If an Automatic Investment Plan purchase is rejected by your bank, your shareholder account will be charged a fee to defray bank charges.

 

Tax Sheltered Retirement Plans

 

Fund shares may be an appropriate investment for tax-sheltered retirement plans, including: individual retirement plans (IRAs); simplified employee pension plans (SEPs); 401(k) plans; qualified corporate pension and profit-sharing plans (for employees); tax deferred investment plans (for employees of public school systems and certain types of charitable organizations); and other qualified retirement plans. You should contact Shareholder Services at 1-888-912-4562 for the procedure to open an IRA or SEP plan directly with the Funds, as well as more specific information regarding these retirement plan options. Please consult with an attorney or tax adviser regarding these plans. You must pay custodial fees for your IRA by redemption of sufficient shares of the Funds from the IRA unless you pay the fees directly to the IRA custodian. Call Shareholder Services about the IRA custodial fees at 1-888-912-4562. In addition, you should be aware that investments in tax-deferred accounts may be taxable at withdrawal. You should discuss any tax-related concerns with your tax adviser or attorney.

 

Other Purchase Information

 

The Funds may limit the amount of purchases and refuse to sell shares to any person. If your check or wire does not clear, you will be responsible for any loss incurred by the Funds. You may be prohibited or restricted from making future purchases in the Funds. The Funds and their transfer agent may refuse any purchase order for any reason. All purchase checks must be written in U.S. dollars and drawn on a U.S. bank. The Funds do not accept cash, drafts, “starter” checks, traveler’s checks, credit card checks, post-dated checks, cashier’s checks under $10,000, or money orders. In addition, to protect the Funds from check fraud, the Funds do not accept checks made payable to third parties.

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The Funds have authorized certain broker-dealers and other financial institutions (including their designated intermediaries) to accept on their behalf purchase and sell orders. The Funds are deemed to have received an order when the authorized person or designee accepts the order. Any such order will be processed at the NAV of the applicable Fund class, plus the applicable sales charge, next calculated. It is the responsibility of the broker-dealer or other financial institution to transmit orders promptly to the Funds’ transfer agent. For purchase requests received from persons “authorized to consummate transactions,” the Funds are required to do so at a price based on NAV next computed after the authorized representative’s receipt of the order to buy or sell.

 

HOW TO EXCHANGE SHARES

 

Shares of the Funds may be exchanged for the same class of another Fuller & Thaler Fund, which includes the Fuller & Thaler Behavioral Small-Cap Equity Fund, the Fuller & Thaler Behavioral Small-Cap Growth Fund, the Fuller & Thaler Behavioral Mid-Cap Value Fund, the Fuller & Thaler Behavioral Unconstrained Equity Fund, the Fuller & Thaler Behavioral Small–Mid Core Equity Fund, and the Fuller & Thaler Behavioral Micro-Cap Equity Fund. Before making an exchange into another Fuller & Thaler Fund, you should obtain and read the prospectus for that Fund. No transaction fees are charged for exchanges. You must meet the minimum investment requirements for the class of the Fund into which you are exchanging. The exchange of shares of one Fuller & Thaler Fund for shares of another Fuller & Thaler Fund is treated, for federal income tax purposes, as a sale on which you may realize a taxable gain or loss. Shares of the Fund acquired by means of an exchange will be purchased at the NAV next determined after acceptance of the exchange request by the transfer agent. Exchanges that establish a new account may be made by sending a written request to the transfer agent. Exchanges into an existing account may be made by sending a written request to the transfer agent, or by calling 1-888-912-4562. Please provide the following information:

 

Your name and telephone number

 

The exact name of your account and account number

 

Taxpayer identification number (usually your Social Security number)

 

Dollar value or number of shares to be exchanged

 

The name of the Fuller & Thaler Fund from which the exchange is to be made

 

The name of the Fuller & Thaler Fund into which the exchange is being made

 

The registration and taxpayer identification numbers of the two accounts involved in the exchange must be identical. To prevent the abuse of the exchange privilege to the disadvantage of other shareholders, the Funds reserve the right to terminate or modify the exchange privilege upon 60 days’ notice to shareholders. The transfer agent requires personal identification before accepting any exchange request by telephone, and telephone exchange instructions may be recorded. If reasonable procedures are followed by the transfer agent to determine that the instructions are genuine, neither the transfer agent nor the Funds will be liable for losses due to unauthorized or fraudulent telephone instructions. In the event of drastic economic or market changes, a shareholder may experience difficulty in exchanging shares by telephone. If such a case should occur, sending exchange instructions by mail should be considered.

 

Shares of the Funds may be exchanged on any day on which the Funds compute its NAV. Shares are exchanged at their NAV next determined after the transfer agent receives your exchange request in proper form. Exchange requests may be made by mail or by telephone. If you qualify as a purchaser of Institutional Class shares, but your account is invested in Investor Class shares, you may convert your Investor Class shares to Institutional Class shares based on the relative NAV of the two Classes on the conversion date. If you are an Institutional Class shareholder you may convert your shares to Investor Class shares at any time. If you are purchaser of C Class Shares, beginning in [ __, 201_____] your shares will be converted to A Shares after 10 years, or, if C Shares held in an account with a third-party broker of record are transferred to an account with the Distributor after [_________,__ 201_], those C Share accounts will be converted to A Share accounts in the month following the transfer.

 

HOW TO REDEEM SHARES

 

Requests to sell shares are processed at the NAV of the applicable Fund class, next calculated after we receive your order in proper form. “Proper form” means that you have provided sufficient information to process your request as outlined in this Prospectus, including any required signatures, documents, payment and any applicable signature guarantees.

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You may receive redemption payments in the form of a check, ACH or federal wire transfer. The proceeds may be more or less than the purchase price of your shares, depending on the market value of a Fund’s securities at the time of your redemption. A wire transfer fee of $15 is charged to defray custodial charges for redemptions paid by wire transfer. This fee is subject to change. Any charges for wire redemptions will be deducted from the shareholder’s Fund account by redemption of shares. The Funds do not intend to redeem shares in any form except cash. However, if the amount you are redeeming during any 90-day period for any one shareholder is over the lesser of $250,000 or 1% of a Fund’s NAV, the Fund has the right to redeem your shares by giving you the amount that exceeds the lesser of $250,000 or 1% of the Fund’s NAV in securities instead of cash, which is referred to as a “redemption in kind.” In the event that a redemption in kind is made, a shareholder may incur additional expenses, such as the payment of brokerage commissions, on the sale or other disposition of the securities received from a Fund. For additional information regarding redemptions in kind, please refer to the sub-section below titled “Additional Information.”

 

If you redeem your shares through a broker-dealer or other institution, you may be charged a fee by that institution.

 

By Mail. You may redeem any part of your account in a Fund at no charge by mail. Your request should be addressed to:

 

U.S. Mail: Overnight:

Fuller & Thaler Behavioral Small-Cap Equity Fund or

Fuller & Thaler Behavioral Small-Cap Growth Fund or

Fuller & Thaler Behavioral Mid-Cap Value Fund or

Fuller & Thaler Behavioral Unconstrained Equity Fund or

Fuller & Thaler Behavioral Small–Mid Core Equity Fund or

Fuller & Thaler Behavioral Micro-Cap Equity Fund

 

c/o Ultimus Asset Services, LLC

PO Box 46707

Cincinnati, OH 45246-0707

Fuller & Thaler Behavioral Small-Cap Equity Fund or

Fuller & Thaler Behavioral Small-Cap Growth Fund or

Fuller & Thaler Behavioral Mid-Cap Value Fund or

Fuller & Thaler Behavioral Unconstrained Equity Fund or

Fuller & Thaler Behavioral Small–Mid Core Equity Fund or

Fuller & Thaler Behavioral Micro-Cap Equity Fund

 

c/o Ultimus Asset Services, LLC

225 Pictoria Drive, Suite 450

Cincinnati, OH 45246

 

Your request for a redemption must include your letter of instruction, including the Fund class’ name, account number, account name(s), the address, and the dollar amount or number of shares you wish to redeem. Your request must also be signed by all registered share owner(s) in the exact name(s) and any special capacity in which they are registered. The Funds may require that signatures be guaranteed if you request the redemption check be made payable to any person other than the shareholder(s) of record or mailed to an address other than the address of record, if the mailing address has been changed within 15 days of the redemption request, or in certain other circumstances, such as to prevent unauthorized account transfers or redemptions. The Funds may also require a signature guarantee for redemptions of $50,000 or more. Signature guarantees are for the protection of shareholders. All redemptions requiring signature guarantees must utilize a New Technology Medallion stamp, generally available from the bank where you maintain your checking or savings account. You can obtain a signature guarantee from most banks and securities dealers, but not from a notary public. For joint accounts, both signatures must be guaranteed. Please call Shareholder Services at 1-888-912-4562 if you have questions. At the discretion of the Funds or the Funds’ transfer agent, a shareholder, prior to redemption, may be required to furnish additional legal documents to ensure proper authorization.

 

By Telephone. You may redeem any part of your account (up to $50,000) in a Fund by calling Shareholder Services at 1-888-912-4562. Neither the Funds, the transfer agent, nor the custodian are liable for following redemption instructions communicated by telephone that they reasonably believe to be genuine. Procedures employed may include recording telephone instructions and requiring a form of personal identification from the caller.

 

The Funds or their transfer agent may terminate the telephone redemption procedures at any time. During periods of extreme market activity it is possible that shareholders may encounter some difficulty in telephoning the Funds, although neither the Funds nor the transfer agent anticipates difficulties in receiving and in a timely fashion responding to telephone requests for redemptions. If you are unable to reach the Funds by telephone, you may request a redemption by mail.

 

Policy on Market Timing. The Funds discourage market timing. Market timing is an investment strategy using frequent purchases and redemptions in an attempt to profit from short-term market movements. Market timing may result in dilution of the value of Fund shares held by long-term shareholders, disrupt portfolio management and increase Fund expenses for all shareholders. The Board has adopted a policy directing the Funds to reject any purchase order with respect to one investor, a related group of investors or their agent(s), where it detects a pattern of purchases and sales of the Funds that indicate market timing or trading that it determines is abusive. This policy generally applies to all Fund shareholders. Ultimus Asset Services, LLC, the Funds’ transfer agent, performs automated monitoring of short-term trading activity with respect to the Funds. Instances of suspected short-term trading are investigated by the compliance department. If an instance is deemed a violation of the short-term trading policies of the Funds, then the Adviser is notified and action, such as suspending future purchases, is taken.

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While the Funds attempt to deter market timing, there is no assurance that it will be able to identify and eliminate all market timers. For example, certain accounts called “omnibus accounts” include multiple shareholders. Despite the Funds’ efforts to detect and prevent abusive trading activities, it may be difficult to identify such activity in certain omnibus accounts traded through a bank, broker-dealer, 401(k) plan, financial adviser or financial supermarket (each a Financial Intermediary). Omnibus accounts typically provide the Funds with a net purchase or redemption request on any given day where purchasers of Fund shares and redeemers of Fund shares are netted against one another and the identities of individual purchasers and redeemers whose orders are aggregated are not known by the Funds. Consequently, the Funds may not have knowledge of the identity of investors and their transactions. Under a federal rule, the Funds are required to have an agreement with many of their Financial Intermediaries obligating the Intermediaries to provide, upon a Fund’s request, information regarding the Financial Intermediaries’ customers and their transactions. However, there can be no guarantee that all excessive, short-term or other abusive trading activities will be detected, even with such an agreement in place. Certain Financial Intermediaries, in particular retirement plan sponsors and administrators, may have less restrictive policies regarding short-term trading. The Funds reserve the right to reject any purchase order for any reason, including purchase orders that they do not think are in the best interests of the Funds or their respective shareholders, or if the Funds think that the trading is abusive. The Funds have not entered into any arrangements with any person to permit frequent purchases and redemptions of Fund shares.

 

Additional Information

 

If you are not certain of the requirements for a redemption, please call Shareholder Services at 1-888-912-4562. Redemptions specifying a certain date or share price cannot be accepted and will be returned.

 

The length of time the Funds typically expect to pay redemption proceeds is similar regardless of whether the payment is made by check, wire, or ACH. The Funds typically expect to pay redemption proceeds for shares redeemed within the following days after receipt by the transfer agent of a redemption request in proper form:

 

For payment by check, the Funds typically expect to mail the check within one to three business days;

 

For payment by wire or ACH, the Funds typically expect to process the payment within one to three business days.

 

Payment of redemption proceeds may take longer than the time the Funds typically expect and may take up to seven days as permitted under the 1940 Act. Under unusual circumstances as permitted by the SEC, the Funds may suspend the right of redemption or delay payment of redemption proceeds for more than 7 days. When shares are purchased by check or through ACH, the proceeds from the redemption of those shares will not be paid until the purchase check or ACH transfer has been converted to federal funds, which could take up to 15 calendar days.

 

Generally, all redemptions will be paid in cash. The Funds typically expect to satisfy redemption requests by using holdings of cash or cash equivalents or selling portfolio assets. On a less regular basis, and if the Adviser believes it is in the best interest of a Fund and its shareholders not to sell portfolio assets, the Fund may satisfy redemption requests by using short-term borrowing from the Fund’s custodian. These methods normally will be used during both regular and stressed market conditions. In addition to paying redemption proceeds in cash, the Funds reserve the right to make redemptions via redemptions in kind (by exchanging shares for securities rather than cash). Redemptions in kind will be made only under extraordinary circumstances and if the Funds deem it advisable for the benefit of all shareholders, such as a very large redemption that could affect Fund operations (for example, more than 1% of a Fund’s net assets). A redemption in kind will consist of securities equal in market value to the Fund shares being redeemed, using the same valuation procedures that the Funds used to compute their NAV. Pursuant to procedures adopted by the Board, redemption in kind transactions will typically be made by delivering readily marketable securities to the redeeming shareholder within seven days after a Fund’s receipt of the redemption order in proper form. Marketable securities are assets that are regularly traded or where updated price quotations are available. Illiquid securities are investments that the Fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. Certain illiquid securities may be valued using estimated prices from one of the Trust’s approved pricing agents. If a Fund redeems your shares in kind, it will value the securities pursuant to the policies and procedures adopted by the Board. You will bear the market risks associated with maintaining or selling the securities that are transferred as redemption proceeds. In addition, when you sell these securities, you will pay taxes and brokerage charges associated with selling the securities.

 

Redemption proceeds sent by check by a Fund and not cashed within 180 days will be reinvested in the Fund at the current day’s NAV. Redemption proceeds that are reinvested are subject to the risk of loss like any other investment in the Funds. Because the Funds incur certain fixed costs in maintaining shareholder accounts, the Funds may require you to redeem all of your shares in a Fund on 30 days’ written notice if the value of your shares in the Fund is less than $1,000 in Investor Shares, $100,000 in Institutional Shares or $1,000,000 in R6 Shares due to redemptions, or such other minimum amount as the Fund may determine from time to time. You may increase the value of your shares in the Funds to the minimum amount within the 30-day period. All shares of a Fund also are subject to involuntary redemption if the Board determines to liquidate the Fund. In such event, the Fund will provide notice to shareholders, but the Fund will not be required to obtain shareholder approval prior to such liquidation. An involuntary liquidation will create a capital gain or capital loss, which may have tax consequences about which you should consult your tax adviser.

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For redemption requests received from persons “authorized to consummate transactions,” the Funds are required to do so at a price based on NAV next computed after the authorized representative’s receipt of the order to buy or sell.

 

DETERMINATION OF NET ASSET VALUE

 

The price you pay for your shares is based on a Fund’s NAV for the applicable class. The NAV of each Fund class is calculated at the close of trading (normally 4:00 p.m. Eastern time) on each day the New York Stock Exchange is open for business (the Stock Exchange is closed on weekends, most Federal holidays and Good Friday). The NAV of each Fund class is calculated by dividing the value of its total assets (including interest and dividends accrued but not yet received) minus liabilities (including accrued expenses) by the total number of shares outstanding. Requests to purchase and sell shares are processed at the applicable NAV next calculated after a Fund receives your order in proper form.

 

Each Fund’s assets generally are valued at their market value. If market quotations are not readily available (including when they are not reliable), or if an event occurs after the close of the trading market but before the calculation of the NAV that materially affects the value of a security, the security will be valued at a fair value, pursuant to procedures approved by the Board. Under the procedures adopted by the Board, the Board may delegate fair value determinations to the Adviser or third-party pricing services, subject to the supervision of the Board. When pricing securities using the fair value procedures established by the Board, the Funds (with the assistance of its service providers) seek to assign the value that represents the amount that the Funds might reasonably expect to receive upon a current sale of the securities. However, given the subjectivity inherent in fair valuation and the fact that events could occur after NAV calculation, the actual market prices for a security may differ from the fair value of that security at the time of NAV calculation. Thus, discrepancies between fair values and actual market prices may occur on a regular and recurring basis. These discrepancies do not necessarily indicate that the Funds’ fair value methodology is inappropriate. The Funds will adjust the fair values assigned to securities in each Fund’s portfolio, to the extent necessary, as soon as market prices become available. The Funds (and their service providers) monitor and evaluate the appropriateness of their fair value methodologies.

 

To the extent the Funds invest in other mutual funds, the Fund class’ NAV is calculated based, in part, upon the NAVs of such mutual funds; the Prospectuses for those mutual funds in which the Funds will invest describe the circumstances under which those mutual funds will use fair value pricing, which, in turn, affects their NAVs.

 

DIVIDENDS, DISTRIBUTIONS, AND TAXES

 

Dividends and Distributions. The Funds typically distribute to its shareholders, as dividends, substantially all of its net investment income and any realized net capital gains. These distributions are automatically reinvested in the Fund class in which you are invested unless you request cash distributions on your application or through a written request to the appropriate Fund. The Funds expect that its distributions will consist primarily of income and/or realized net capital gains.

 

Taxes. Net investment income distributed by the Funds generally will consist of interest income, if any, and dividends received on investments, less expenses. The dividends you receive, whether or not reinvested, will be taxed as ordinary income, except as described below. Please see the table below for additional information. Dividends normally will be distributed by the Funds on an annual basis.

 

The Funds will normally distribute net realized capital gains, if any, to its shareholders once a year. Capital gains are generated when a Fund sells its capital assets for a profit. Capital gains are taxed differently depending on how long a Fund has held the capital asset sold. Distributions of gains recognized on the sale of capital assets held for one year or less are taxed at ordinary income rates; distributions of gains recognized on the sale of capital assets held longer than one year are taxed at long-term capital gains rates regardless of how long you have held your shares. If a Fund distributes an amount exceeding its income and gains, this excess will generally be treated as a non-taxable return of capital.

 

To the extent the Funds invest in REITs, each Fund’s distributions may be taxable as ordinary income to investors because most REIT distributions come from mortgage interest and rents. For this reason each Fund’s distributions may be taxed at the 35% ordinary income rate, rather than qualifying for the 20%/15% rates on qualified dividend accounts.

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Each Fund’s distributions, whether received in cash or reinvested in additional shares of the Fund, may be subject to federal income tax. Unless you indicate another option on your account application, any dividends and capital gain distributions paid to you by a Fund automatically will be invested in additional shares of the applicable Fund class in which you invest. Alternatively, you may elect to have: (1) dividends paid to you in cash and the amount of any capital gain distributions reinvested; or (2) the full amount of any dividends and capital gain distributions paid to you in cash. The Funds will send dividends and capital gain distributions elected to be received as cash to the address of record or bank of record on the applicable account. Your distribution option will automatically be converted to having all dividends and other distributions reinvested in additional shares if any of the following occur:

 

Postal or other delivery service is unable to deliver checks to the address of record;

 

Dividends and capital gain distributions are not cashed within 180 days; or

 

Bank account of record is no longer valid.

 

Dividends and capital gain distribution checks issued by the Funds which are not cashed within 180 days will be reinvested in the applicable Fund class at the current day’s NAV for that Fund class. When reinvested, those amounts are subject to market risk like any other investment in the Funds.

 

You may want to avoid making a substantial investment when the Funds are about to make a taxable distribution because you would be responsible for any taxes on the distribution regardless of how long you have owned your shares.

 

Selling shares (including redemptions and exchanges) and receiving distributions (whether reinvested or taken in cash) usually are taxable events to a Fund’s shareholders, as described in the chart below.

 

Summary of Certain Federal Income Tax Consequences for Taxable Accounts. The following discussion reflects current law.

 

Type of Transaction

Tax Status

Qualified dividend income Generally maximum 15% rate on non-corporate taxpayers whose income is equal to or less than $500,000 (individual filers) or $600,000 (married filing jointly) and 20% on individual taxpayers whose income exceeds these thresholds and on most trusts and estates.
Net short-term capital gain distributions Ordinary income rates.
Net long-term capital gain distributions Generally maximum 15% rate on non-corporate taxpayers whose income is equal to or less than $500,000 (individual filers) or $600,000 (married filing jointly) and 20% on individual taxpayers whose income exceeds these thresholds and on most trusts and estates.
Sales of shares (including redemptions and exchanges) owned more than one year Gains taxed at generally maximum 15% rate on non-corporate taxpayers whose income is equal to or less than $500,000 (individual filers) or $600,000 (married filing jointly) and 20% on individual taxpayers whose income exceeds these thresholds and on most trusts and estates.  Losses are subject to special rules concerning the use of long-term capital losses.
Sales of shares (including redemptions and exchanges) owned for one year or less Gains are taxed at the same rate as ordinary income; losses are subject to special rules.

 

An additional 3.8% Medicare tax generally will be imposed on certain net investment income of non-corporate taxpayers whose modified adjusted gross income exceeds $200,000 (individual filers) or $250,000 (married filing jointly). Net investment income includes dividends and capital gain distributions received from the Fund and gains from the sale of shares, including redemptions.

 

As described generally above, designated dividends paid by the Funds to non-corporate shareholders generally will qualify for a maximum federal income tax rate of 15% or 20% to the extent such dividends are attributable to qualified dividend income from a Fund’s investment in common and preferred stock of U.S. and qualified foreign corporations, provided that certain holding period and other requirements are met. However, to the extent that the Funds have ordinary income from investments in debt securities, for example, such as interest income, income dividends paid by the Funds and attributable to that will not qualify for the reduced tax rate.

 

If shares of the Funds are purchased within 30 days before or after redeeming other shares of the Funds at a loss, all or a portion of that loss will not be deductible and will increase the basis of the newly purchased shares. If shares of the Funds are sold at a loss after being held by a shareholder for six months or less, the loss will be long-term, instead of short-term, capital loss to the extent of any capital gain distributions received on the shares.

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If you are a non-corporate shareholder and if the Funds do not have your correct social security or other taxpayer identification number, federal law requires us to withhold and pay to the Internal Revenue Service (“IRS”) 28% of your distributions and sales proceeds. If you are subject to back up withholding, we also will withhold and pay to the IRS 28% of your distributions (under current law). Any tax withheld may be applied against the tax liability on your federal income tax return.

 

Because your tax situation is unique, you should consult your tax professional about federal, state and local tax consequences.

 

Cost Basis Reporting. Federal law requires mutual fund companies to report their shareholders’ cost basis, gain/loss, and holding period to the IRS on Fund shareholders’ Form 1099s when “covered” securities are sold. Covered securities are any regulated investment company and/or dividend reinvestment plan shares. The Funds have chosen Average Cost as its standing (default) tax lot identification method for all shareholders. A tax lot identification method is the way the Funds will determine which specific shares are deemed to be sold when there are multiple purchases on different dates at differing NAVs, and the entire position is not sold at one time. The Funds’ standing tax lot identification method is the method covered shares will be reported on your Form 1099 if you do not select a specific tax lot identification method. You may choose a method different than the Funds’ standing method and will be able to do so at the time of your purchase or upon the sale of covered shares. Please refer to the appropriate IRS regulations or consult your tax adviser with regard to your personal circumstances. For those securities defined as “covered” under current IRS cost basis tax reporting regulations, the Funds are responsible for maintaining accurate cost basis and tax lot information for tax reporting purposes. The Funds are not responsible for the reliability or accuracy of the information for those securities that are not “covered.” The Funds and their service providers do not provide tax advice.

 

You should consult independent sources, which may include a tax professional, with respect to any decisions you may make with respect to choosing a tax lot identification method.

 

ADDITIONAL INFORMATION ABOUT MANAGEMENT OF THE FUNDS

 

The Adviser. Fuller & Thaler Asset Management, Inc. (“Fuller & Thaler” or the “Adviser”) is an independent investment management firm that is not affiliated with any parent organization. Fuller & Thaler serves as the investment manager or Adviser for the Funds. In this capacity, the Adviser provides investment advisory and certain administrative services to the Funds.

 

The Adviser is located at 411 Borel Avenue, Suite 300, San Mateo, CA 94402. Organized in 1993, the Adviser provides investment management and advisory services to open-end mutual funds, institutions, and intermediaries. As of September 30, 2018 the Adviser had [$9.87] billion in assets under management.

 

The Adviser is responsible for providing general investment advice and guidance to the Funds. The Adviser also provides trading, proxy voting, record-keeping and other administrative services for each Fund. For its advisory services to the Funds, the Adviser is entitled to receive an annual fee calculated on the respective Fund’s average daily net assets as denoted immediately below.

 

Fund Annual Management Fee
Small-Cap Equity Fund 0.60%
Small-Cap Growth Fund 0.85%
Mid-Cap Value Fund 0.75%
Unconstrained Equity Fund 0.85%
Small–Mid Core Equity Fund 0.80%
Micro-Cap Equity Fund 1.50%

 

The Adviser has contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 1.30%, 1.80%, 1.25%, 0.99% and 0.80% for A Shares, C Shares, Investor Shares, Institutional Shares and R6 Shares, respectively, of the Fund’s average daily net assets through January 31, 2020. For the period February 1, 2018 through the effective date of this prospectus, the Adviser had contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 1.25%, 0.97% and 0.80% for Investor Shares, Institutional Shares and R6 Shares, respectively, of the Small-Cap Equity Fund’s average daily net assets. For the period February 1, 2017 through January 31, 2018, the Adviser contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 1.05%, 0.90%, and 0.80% for Investor Shares, Institutional Shares and R6 Shares, respectively, of the Small-Cap Equity Fund’s average daily net assets.

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The Adviser has contractually agreed to waive its management fee and/or reimburse Fund expenses so that total annual operating expenses do not exceed 1.30%, 1.80%, 1.25%, 0.99%, and 0.90% for A Shares, C Shares, Investor Shares, Institutional Shares and R6 Shares, respectively, of the Small Cap Growth Fund’s average daily net assets through January 31, 2020. Effective December 20, 2017 through the effective date of this prospectus, the Adviser had agreed to contractually waive its management fee and/or reimburse expenses so that total annual operating expenses do not exceed 1.24%, 0.99%, and 0.90% for Investor Shares, Institutional Shares and R6 Shares, respectively, of the Small Cap Growth Fund’s average daily net assets.

 

The Adviser has agreed to contractually waive its management fee and/or reimburse expenses so that total annual operating expenses do not exceed 1.20%, 1.15%, 0.90%, and 0.80% for A Shares, Investor Shares, Institutional Shares and R6 Shares, respectively, of the Mid-Cap Value Fund’s average daily net assets through January 31, 2020. Effective December 20, 2017 through the effective date of this prospectus, the Adviser had agreed to contractually waive its management fee and/or reimburse expenses so that total annual operating expenses do not exceed 1.14%, 0.89% and 0.80% for Investor Shares, Institutional Shares and R6 Shares, respectively, of the Mid-Cap Value Fund’s average daily net assets.

 

Effective December __, 2018, the Adviser has agreed to contractually waive its management fee and/or reimburse expenses so that total annual operating expenses do not exceed 1.30%, 1.25%, 0.99% and 0.90% for A Shares, Investor Shares, Institutional Shares and R6 Shares, respectively, of the Unconstrained Equity Fund’s average daily net assets through January 31, 2020.

 

Effective December __, 2018, the Adviser has agreed to contractually waive its management fee and/or reimburse expenses so that total annual operating expenses do not exceed 1.26%, 1.21%, 0.95% and 0.85% for A Shares, Investor Shares, Institutional Shares and R6 Shares, respectively, of the Small–Mid Core Equity Fund’s average daily net assets through January 31, 2020.

 

Effective December __, 2018, the Adviser has agreed to contractually waive its management fee and/or reimburse expenses so that total annual operating expenses do not exceed 2.04%, 1.99%, 1.75% and 1.65% for A Shares, Investor Shares, Institutional Shares and R6 Shares, respectively, of the Micro-Cap Equity Fund’s average daily net assets through January 31, 2020.

 

The expense limitations of the Funds do not apply to: (i)  interest; (ii)  taxes; (iii)  brokerage fees and commissions; (iv) other extraordinary expenses not incurred in the ordinary course of each Fund’s business; and (v) indirect expenses such as acquired fund fees and expenses. During any fiscal year that the Investment Advisory Agreement between the Adviser and Capitol Series Trust (the “Trust”) is in effect, the Adviser may recoup the sum of all fees previously waived or expenses reimbursed, less any reimbursement previously paid, provided that the Adviser is only permitted to recoup fees or expenses within 36 months from the date the fee waiver or expense reimbursement first took effect and provided further that such recoupment can be achieved within the Expense Limitation Agreement currently in effect and the Expense Limitation Agreement in place when the waiver/reimbursement occurred. This expense limitation agreement may be terminated by the Board at any time.

 

For the fiscal year ended September 30, 2018, the Small-Cap Equity Fund paid the Adviser a management fee, after fee waivers and expense reimbursements, equal to 0.[]% of its average daily net assets. For the fiscal year ended September 30, 2018, the Small Cap Growth Fund paid the Adviser a management fee, after fee waivers and expense reimbursements, equal to 0.__ % of its average daily net assets. For the fiscal year ended September 30, 2018, the Mid-Cap Value Fund paid the Adviser a management fee, after fee waivers and expense reimbursements, equal to 0.__ % of its average daily net assets. As of the date of this Prospectus, neither the Long–Term Unconstrained Equity Fund nor the Small–Mid Core Equity Fund nor the Micro-Cap Equity Fund had commenced operations and therefore each Fund has yet to pay the Adviser a management fee.

 

A discussion regarding the basis for the Board’s approval of the investment advisory agreement with the Adviser on behalf of the Small-Cap Equity Fund will be included in the Fund’s [annual report to shareholders for the fiscal period ended September 30, 2018]. A discussion regarding the basis for the Board’s approval of the investment advisory agreement with the Adviser on behalf of the Small-Cap Growth Fund and the Mid-Cap Value Fund was included in the Funds’ semi-annual reports to shareholders for the fiscal period ended March 31, 2018.  A discussion regarding the basis for the Board’s approval of the investment advisory agreement with the Adviser on behalf of the Unconstrained Equity Fund, the Small–Mid Core Equity Fund, and the Micro-Cap Equity Fund will be included in the Funds’ semi-annual reports to shareholders for the fiscal period ended March 31, 2019.  

 

If you invest in the Funds through an investment adviser, bank, broker-dealer, 401(k) plan, trust company or other financial intermediary, the policies and fees for transacting business may be different than those described in this Prospectus. Some financial intermediaries may charge transaction fees and may set different minimum investments or limitations on buying or selling shares. Some financial intermediaries do not charge a direct transaction fee, but instead charge a fee for services such as sub-transfer agency, accounting and/or shareholder services that the financial intermediary provides on a Fund’s behalf. This fee may be based on the number of accounts or may be a percentage of the average value of a Fund’s shareholder accounts for which the financial intermediary provides services. The Funds may pay a portion of this fee, which is intended to compensate the financial intermediary for providing the same services that would otherwise be provided by the Funds’ transfer agent or other service providers if the shares were purchased directly from the Funds. To the extent that these fees are not paid by the Funds, the Adviser may pay a fee to financial intermediaries for such services.

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To the extent that the Adviser pays a fee, sometimes referred to as “revenue sharing,” to a financial intermediary for distribution or shareholder servicing, the Adviser may consider a number of factors in determining the amount of payment associated with such distribution or services, including the amount of sales, assets invested in the respective Fund and the nature of the services provided by the financial intermediary. Although neither the Funds nor the Adviser pays for a Fund to be included in a financial intermediary’s “preferred list” or other promotional program, some Financial Intermediaries that receive compensation as described above may have such programs in which the Funds may be included. The Adviser may pay for the opportunity to distribute the Funds through a financial intermediary’s system. Financial intermediaries that receive these types of payments may have a conflict of interest in recommending or selling a Fund’s shares rather than other mutual funds, particularly where such payments exceed those associated with other funds.

 

The Funds may from time to time purchase securities issued by financial intermediaries that provide such services; however, in selecting investments for the Funds, no preference will be shown for such securities.

 

Portfolio Managers. The individuals listed below are primarily responsible for the day-to-day management of the Funds at the Adviser.

 

Raife Giovinazzo, Ph.D., CFA, Partner and Lead Portfolio Manager, is responsible for managing the Small-Cap Equity Fund. He has managed the Small-Cap Equity Fund and its predecessor since 2013. He also serves as the Back-up Portfolio Manager for the Unconstrained Equity Fund and the Small-Mid Core Equity Fund. He has more than 14 years of investment-industry experience. Dr. Giovinazzo was previously a co-portfolio manager and researcher with Blackrock’s Scientific Active Equity group (formerly Barclays Global Investors) from 2008 to 2013. Before that, he worked at Wellington Management, Marsh & McLennan and Mercer Management Consulting. Dr. Giovinazzo has a B.A. from Princeton; he also has an M.B.A. and a Ph.D. from the Booth School of Business at the University of Chicago. Dr. Giovinazzo is a member of the CFA Institute and the CFA Society of San Francisco. He holds the Chartered Financial Analyst designation. He is an owner of Fuller & Thaler and a member of its Board of Directors. 

 

Russell J. Fuller, Ph.D., CFA, Founder, Chief Investment Officer and Back-up Portfolio Manager, has been the co- and/or back-up portfolio manager of the Small-Cap Equity Fund and its predecessor since 2011. He is a Founder of Fuller & Thaler and oversees its research and investment activities. Dr. Fuller has more than 46 years of investment-industry experience. He was previously chairman of the finance department at Washington State University and has also held positions at the University of British Columbia, Canada, and the University of Auckland, New Zealand. He has a B.A., an M.B.A. and a Ph.D. from the University of Nebraska. Dr. Fuller is a member of the CFA Institute and the CFA Society of San Francisco. He holds the Chartered Financial Analyst designation. He is an owner of Fuller & Thaler and Chairman of its Board of Directors.

 

Frederick W. Stanske, CFA, Partner and Lead Portfolio Manager, has been responsible for managing the Small-Cap Growth Fund and the Micro-Cap Fund since each fund’s respective inception. He also serves as the Back-up Portfolio Manager for the Small-Cap Equity Fund. He has managed Fuller & Thaler’s small-cap growth strategy since 1996, previously available in institutional separately managed accounts (SMAs), and also manages the firm’s Micro-Cap strategy. He has over 30 years of investment experience. Prior to joining Fuller & Thaler, Mr. Stanske spent over ten years as an analyst and portfolio manager at Farmers Insurance Group and then at Fisher Investments. Earlier in his career, he worked in the corporate sector as an analyst. He received his BS from the University of Denver and his MBA from the University of Chicago. Mr. Stanske is a member of the CFA Institute and the CFA Society of San Francisco. He holds the Chartered Financial Analyst designation. Mr. Stanske is an owner of Fuller & Thaler and a member of its Board of Directors.

 

Raymond Lin, CFA, Partner and Portfolio Manager, has been the portfolio manager of both the Unconstrained Equity Fund and the Small–Mid Core Equity Fund since their inception. He also has served as the back-up portfolio manager of the Small-Cap Growth Fund and Micro-Cap Fund since their inception and the back-up portfolio manager of Fuller & Thaler’s small-cap growth and micro-cap strategies since 2006. He also manages Fuller & Thaler’s Behavioral Equity Market Neutral strategy. Mr. Lin has over 25 years of investment experience. Prior to joining Fuller & Thaler, Mr. Lin was a portfolio manager for a long-short equity fund at Tricera Capital. He previously was a principal and portfolio manager at Sit Investment Associates and an options trader at JP Morgan. He holds the Chartered Financial Analyst designation and is a member of the CFA Society of San Francisco. He received his BS in Computer Science from the University of Michigan and his MBA and MA from the University of California, Berkeley. Mr. Lin is an owner of Fuller & Thaler and a member of the Board of Directors.

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David M. Potter, CFA, Partner and Lead Portfolio Manager, is responsible for managing the Mid-Cap Value Fund since its inception. The Mid-Cap Value Fund uses a similar behavioral over-reaction investment process as the Fuller & Thaler small-cap value strategy managed by Mr. Potter since 2005, previously available in institutional separately managed accounts (SMAs). Mr. Potter has also managed the Undiscovered Managers Behavioral Value Fund (ticker: UBVLX) since its inception, which employs the same behavioral investment techniques as the Mid-Cap Value Fund. Prior to joining Fuller & Thaler, Mr. Potter was a Vice President at Goldman Sachs. Previously, he was an Associate Director at Scotia Capital Markets. Mr. Potter received his BA (honors) in Economics and Finance from McGill University in Montreal and his MBA (honors) in Finance from the University of Chicago. Mr. Potter holds the Chartered Financial Analyst designation and is a member of the CFA Society of San Francisco. He is an owner of Fuller & Thaler and a member of its Board of Directors.

 

Ryam Lee, CFA, Analyst, has been an analyst on the Mid-Cap Value Fund since inception.  He has over seven years of financial industry experience.  Prior to joining Fuller & Thaler, he was a private equity analyst at McCarthy Capital.  Previously, he worked in corporate development at a commodity management firm and business valuation at an independent valuation firm.  Mr. Lee received his BA (honors) in Economics and Finance from Creighton University and an MBA in Accounting, Economics, and Finance from the University of Chicago Booth School of Business.  He holds the Chartered Financial Analyst designation and is a member of the CFA Society of San Francisco.

 

The Funds’ 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.

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PAST PERFORMANCE OF THE ADVISER

 

In this section of past performance, the Adviser refers to Fuller & Thaler Asset Management, the GIPS firm. The performance information has been provided by the Adviser and relates to the historical performance of the client accounts (“each a Composite” and together the “Composites”) managed by the Adviser pursuant to the following strategies: the small-cap growth strategy (the “Small Cap Growth Composite”), the strategy used by the Adviser to manage the assets of the Small-Cap Growth Fund; the behavioral unconstrained equity strategy (the “Unconstrained Equity Composite”), the strategy used by the Adviser to manage the assets of the Unconstrained Equity Fund; and the micro-cap equity strategy (the “Micro-Cap Equity Composite”), the strategy used by the Adviser to manage the assets of the Micro-Cap Equity Fund. The investment objectives, policies and restrictions of the Small-Cap Growth Fund, the Unconstrained Equity Fund, and the Micro-Cap Equity Fund are substantially similar to those of the accounts included in the Adviser’s respective Composite in the same strategy. The Adviser has managed the assets of each of the Small-Cap Growth Fund, the Unconstrained Equity Fund, and the Micro-Cap Equity Fund since its inception.

 

While the Adviser is primarily responsible for the performance of each Fund, the performance of the strategies reflected by the Composites do not represent the past performance of the Funds. If the performance of the Composite had been readjusted to reflect the first year expenses of a Fund managed pursuant to the corresponding strategy, the performance of the Composite would have been lower. You should not consider this performance data for the strategies reflected by the Composite as an indication of future performance of the corresponding Fund.

 

Transactions are recorded on the trade date. Cash balances and cash equivalents are included in the performance. All returns presented are calculated in U.S. dollars on a total return basis, include the reinvestment of all dividends and interest, and take into account accrued income and realized and unrealized gains and losses. All returns are calculated by deducting the Adviser’s actual fee on a monthly or quarterly basis as well as all brokerage commissions and execution costs paid by the Composite accounts without provision for Federal or state income taxes. Custodial fees, if any, were not included in the calculations. The standard management fee for the small-cap growth strategy is 1.10% per annum on the first $5 million, 1.00% per annum on the next $10 million, 0.90% per annum on the next $10 million and 0.70% per annum on assets over $25 million. The standard management fee for the unconstrained equity strategy is 1.20% per annum on the first $5 million, 1.10% per annum on the next $10 million, and 1.00% per annum on assets over $15 million. The standard management fee for the micro-cap equity strategy is 1.30% per annum on the first $5 million, 1.15% per annum on the next $10 million, and 1.05% per annum on assets over $15 million. Actual investment management fees incurred by clients may vary. Policies for valuing portfolios, calculating performance and preparing compliant presentations are available upon request.

 

Each Fund’s performance is calculated using the method required by the SEC, which differs from the method used to calculate the performance of the private accounts comprising the Composite. The private accounts are not subject to the same types of expenses to which the Fund is subject nor to the diversification requirements, specific tax restrictions and investment limitations imposed on the Fund by the 1940 Act and the IRC. Consequently, the performance results for the private accounts could have been adversely affected (i.e., lower) if the private accounts included in the Composites had been regulated as an investment company under the Federal securities laws.

 

The following tables show the annual returns of the Composite for each of the last ten calendar years and for the 1-Year, 5-Year and 10-Year periods ended December 31, 2017 for the Small-Cap Growth and Micro-Cap Equity Composites and the last two calendar years for the Unconstrained Equity Composite. Fuller & Thaler Asset Management claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Fuller & Thaler Asset Management has been independently verified for the periods January 1, 1992 through December 31, 2017. ACA Performance Services, LLC provided the verification for the periods January 1, 1992 through March 31, 2016 and January 1, 2017 through December 31, 2017. Ashland Partners & Company, LLP provided the verification for the period March 31, 2016 through December 31, 2016. On June 28, 2017, ACA Performance Services, LLC acquired the investment performance service business of Ashland Partners & Company, LLP. Verification assesses whether: (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis; and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The verification report is available upon request. A complete list and description of Fuller & Thaler’s Composite is available upon request. The data presented herein is not intended to predict or suggest the returns that might be experienced by the Fund or an individual investor investing in the Fund. You should be aware that the use of a methodology different from that used to calculate the performance below could result in different performance data.

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Adviser’s Small-Cap Growth Strategy Composite

 

Net Annual Calendar Year Returns

 

  Small-Cap Growth Composite Returns(1)   Annualized Ex-Post Composite Assets
Year Ended Gross Composite Returns Net Composite Returns Composite Dispersion(2) Benchmark(3)*

Composite 3-Yr. Std. Dev.(4)

Benchmark 3-Yr Std. Dev.(4)

End of Period (MM)  Firm Assets (MM)
12/31/08 -43.59% -43.99% 0.16% -41.50% N/A N/A 289 995
12/31/09 38.76% 37.87% 0.21% 41.66% N/A N/A 345 1,002
12/31/10 30.08% 29.31% 0.33% 28.86% N/A N/A 387 1,168
12/31/11 -9.74% -10.34% 0.24% -2.91% 23.19% 23.63% 122 976
12/31/12 9.34% 8.51% N/A 14.59% 21.41% 20.63% 74 1,122
12/31/13 44.26% 43.16% N/A 43.30% 18.37% 17.52% 32 1,977
12/31/14 11.76% 10.91% N/A 5.60% 13.17% 14.02% 29 2,855
12/31/15 4.77% 3.98% N/A -1.38% 13.68% 15.16% 33 4,746
12/31/16 16.92% 16.03% N/A 11.32% 15.12% 16.91% 38 7,451
12/31/17 20.56% 19.65% N/A 22.17% 14.09% 14.80% 43 8,741

 

Annualized Net Returns for the Period Ended

December 31, 2017

 

  Small-Cap Growth Composite Benchmark*
1 Year (2017) 19.65% 22.17%
5 Years (2013-2017) 18.04% 15.21%
10 Years (2008-2017) 8.33% 9.20%

 

*The Russell 2500 Growth® was the benchmark from 1/1/92 through 12/31/10 and the Russell 2000® Growth has been the benchmark since 1/1/11. The reported 10 year benchmark performance is a blend of the Russell 2500 Growth® and the Russell 2000® Growth indices.

 

(1)The Small-Cap Growth Composite is an actively managed small-cap growth strategy that evaluates small-cap companies with a capitalization consistent with the capitalization ranges of the Russell 2000® Growth Index and is driven by the Adviser’s proprietary research on the behavioral biases of other investors. The portfolio managers buy when other investors are likely to make behavioral mistakes. The Composite was created in April 1993, and comprises all discretionary accounts that are managed pursuant to the Adviser’s small-cap growth strategy. At 12/31/13, 12/31/14, 12/31/15, 12/31/16, and 12/31/17, non-fee paying accounts comprised <1% of composite assets.

 

The Composite does not reflect accounts that have been removed from the Composite pursuant to the Adviser’s removal policy (the “Excluded Accounts”). Accounts are excluded from a composite so that a composite remains representative of a strategy; the exclusion is intended to prevent a composite from being misleading. It is the Adviser’s position that the Excluded Accounts cannot be managed in a manner substantially consistent with its small-cap growth strategy.

 

Accounts are included in the Composite at the beginning of the first full calendar month of performance earned after the account is invested such that the holdings and percentage of cash are comparable to the holdings and percentage of cash for other accounts in the Composite and no later than three (3) months from the inception of the account. Accounts are excluded from the Composite as of the beginning of the calendar month in which the account is no longer under management (i.e., where the account begins liquidation) by Fuller & Thaler or fails to meet the composite definition or other inclusion criteria.

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(2)Composite dispersion is calculated using the equal-weighted standard deviation of all accounts included in the Composite for the full year; it is not presented for periods less than one year or when there were five or fewer accounts in the Composite for the full year.

 

(3)The benchmark, the Russell 2000® Growth Index, is a market-cap weighted index and measures the performance of the small-cap growth segment of the U.S. equity universe. It includes Russell 2000® Index companies with higher price-to-book ratios and higher forecasted growth values. The index is unmanaged and does not incur management fees, transaction costs or other expenses and is not available for direct investment. Index returns reflect the reinvestment of dividends. Benchmark indices and related statistics are presented gross-of-fee.

 

(4)Valuation and returns are computed and stated in U.S. Dollars. Returns reflect the reinvestment of dividends and other earnings. Gross returns are presented before management and custodial fees and withholding taxes (except for ADRs), but after all trading expenses. Net returns are netted down from gross returns by the actual management fees that were paid. The standard management fee for this strategy is 1.10% per annum on the first $5 million, 1.00% per annum on the next$10 million, 0.90% per annum on the next $10 million, and 0.70% per annum on assets over $25 million.

 

(5)The 3-year standard deviation is a measure of the volatility of an investment’s returns – the greater the 3-year standard deviation, the larger the differences between the investment’s actual returns and average return. It was calculated over the most recent past 36 months of returns, if available. The 3-year standard deviation was calculated by using the Russell 2500 Growth® Index for 2010 and the Russell 2000® Growth Index for 2011 and 2012. This information was required to be presented as of 2011.

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Adviser’s Unconstrained Equity Composite

 

Net Annual Calendar Year Returns

 

  Behavioral Unconstrained Equity Composite Returns (1)   Annualized Ex-Post Composite Assets
Year Ended Gross Composite Returns Net Composite Returns Composite Dispersion(2) Benchmark(3)*

Composite 3-Yr. Std. Dev.(4)

Benchmark 3-Yr Std. Dev.(4)

End of Period (MM)  Firm Assets (MM)

12/31/16

25.03% 25.03% NA 12.74% NA NA 3 7,451
12/31/17 25.07% 25.07% NA 21.13% NA NA 4 8,741

 

Annualized Net Returns for the Period Ended

December 31, 2017

 

  Unconstrained Equity Composite Benchmark*
1 Year (2017) 25.07% 21.13%

 

*The Russell 3000® has been the composite’s benchmark since its creation.

 

(1)The Behavioral Unconstrained Equity Composite is an actively managed strategy that primarily invests in the equities of U.S. companies of all market capitalizations and is driven by the Adviser’s proprietary research on the behavioral biases of other investors. The portfolio managers buy when other investors are likely to make behavioral mistakes. The Composite was created in July 2018, and comprises all discretionary accounts that are managed pursuant to the Adviser’s behavioral unconstrained equity strategy. At 12/31/16 and 12/31/17, non-fee paying accounts comprised 100% of composite assets

 

Accounts are included in the Composite at the beginning of the first full calendar month of performance earned after the account is invested such that the holdings and percentage of cash are comparable to the holdings and percentage of cash for other accounts in the Composite and no later than three (3) months from the inception of the account. Accounts are excluded from the Composite as of the beginning of the calendar month in which the account is no longer under management (i.e., where the account begins liquidation) by Fuller & Thaler or fails to meet the composite definition or other inclusion criteria.

 

(2)Composite dispersion is calculated using the equal-weighted standard deviation of all accounts included in the Composite for the full year; it is not presented for periods less than one year or when there were five or fewer accounts in the Composite for the full year. There were fewer than 5 accounts in the composite for both 2016 and 2017.

 

(3)The benchmark, the Russell 3000® Index, measures the performance of the broad U.S. equity market. The index represents the 3000 largest U.S. publicly traded companies as measured by market capitalization. The index is unmanaged and does not incur management fees, transaction costs or other expenses and is not available for direct investment. Index returns reflect the reinvestment of dividends. Benchmark indices and related statistics are presented gross-of-fee.

 

(4)Valuation and returns are computed and stated in U.S. Dollars. Returns reflect the reinvestment of dividends and other earnings. Gross returns are presented before management and custodial fees and withholding taxes (except for ADRs), but after all trading expenses. Net returns are netted down from gross returns by the actual management fees that were paid. The standard management fee for this strategy is 1.20% per annum on the first $5 million, 1.10% per annum on the next $10 million, and 1.00% per annum on assets over $15 million.

 

(5)The 3-year standard deviation is a measure of the volatility of an investment’s returns – the greater the 3-year standard deviation, the larger the differences between the investment’s actual returns and average return. It was calculated over the most recent past 36 months of returns, if available.

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Adviser’s Micro-Cap Equity Composite

 

Net Annual Calendar Year Returns

 

  Micro-Cap Returns(1)   Annualized Ex-Post Composite Assets
Year Ended Gross Composite Returns Net Composite Returns Composite Dispersion(2) Benchmark(3)*

Composite 3-Yr. Std. Dev.(4)

Benchmark 3-Yr Std. Dev.(4)

End of Period (MM)  Firm Assets (MM)
12/31/08 -45.26% -45.80% NA -39.78% NA NA 94 995
12/31/09 63.03% 61.42% NA 27.48% NA NA 114 1,002
12/31/10 42.70% 41.27% NA 28.89% NA NA 153 1,168
12/31/11 -22.73% -23.48% NA -9.27% 31.03% 26.47% 136 976
12/31/12 30.50% 29.20% NA 19.75% 27.14% 21.50% 173 1,122
12/31/13 64.42% 62.80% NA 45.62% 21.81% 17.33% 280 1,977
12/31/14 1.41% 0.40% 0.43% 3.65% 17.38% 14.51% 220 2,855
12/31/15 -10.79% -11.66% 0.49% -5.16% 17.55% 15.04% 208 4,746
12/31/16 13.08% 11.95% 0.35% 20.37% 17.78% 17.08% 174 7,451
12/31/17 28.34% 27.04% 0.63% 13.17% 16.82% 15.54% 168 8,741

 

Annualized Net Returns for the Period Ended

December 31, 2017

 

  Micro-Cap Equity Composite Benchmark*
1 Year (2017) 27.04% 13.17%
5 Years (2013-2017) 15.48%% 14.29%
10 Years (2008-2017) 9.64% 7.68%

 

*The composite’s benchmark is the Russell Microcap® Index. Prior to October 2010, the Russell Microcap® Index was used for returns as of July 1, 2005. The Russell Microcap® Index returns going back to July 1, 2000 became available in 3Q10,

 

(1)The Micro-Cap composite is an actively managed strategy that evaluates companies with a capitalization consistent with the capitalization ranges of the/ Russell Microcap ® Index sizes and is driven by the Adviser’s proprietary research on the behavioral biases of other investors. The portfolio managers buy when other investors are likely to make behavioral mistakes. The Composite was created in January 1999, and contains all actual discretionary accounts primarily invested in the equities of U.S. companies with market capitalizations generally in the range of companies included in its benchmark, the Russell Microcap® Index. At 12/31/10, 12/31/12, 12/31/13, 12/31/14, 12/31/15, 12/31/16, and 12/31/17, non-fee paying accounts comprised ≤3% of composite assets.

 

The Composite does not reflect accounts that have been removed from the Composite pursuant to the Adviser’s removal policy (the “Excluded Accounts”). Accounts are excluded from a composite so that a composite remains representative of a strategy; the exclusion is intended to prevent a composite from being misleading. It is the Adviser’s position that the Excluded Accounts cannot be managed in a manner substantially consistent with its small-cap growth strategy.

 

Accounts are included in the Composite at the beginning of the first full calendar month of performance earned after the account is invested such that the holdings and percentage of cash are comparable to the holdings and percentage of cash for other accounts in the Composite and no later than three (3) months from the inception of the account. Accounts are excluded from the Composite as of the beginning of the calendar month in which the account is no longer under management (i.e., where the account begins liquidation) by Fuller & Thaler or fails to meet the composite definition or other inclusion criteria.

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(2)Composite dispersion is calculated using the equal-weighted standard deviation of all accounts included in the Composite for the full year; it is not presented for periods less than one year or when there were five or fewer accounts in the Composite for the full year.

 

(3)The Russell Microcap® Index measures the performance of the microcap segment of the U.S. equity market. Microcap stocks make up less than 3% of the U.S. equity market (by market cap) and consist of the smallest 1,000 securities in the small cap Russell 2000® Index, plus the next smallest eligible securities by market cap. The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000® Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell Microcap® Index is unmanaged and does not incur management fees, transaction costs or other expenses and is not available for direct investment. Index returns reflect the reinvestment of dividends. Benchmark indices and related statistics are presented gross-of-fee.

 

(4)Valuation and returns are computed and stated in U.S. Dollars. Returns reflect the reinvestment of dividends and other earnings. Gross returns are presented before management and custodial fees and withholding taxes (except for ADRs), but after all trading expenses. Net returns are netted down from gross returns by the actual management fees that were paid. The standard management fee for this strategy is 1.30% per annum on the first $5 million, 1.15% per annum on the next $10 million, and 1.05% per annum on amounts over $15 million.

 

(5)The 3-year standard deviation is a measure of the volatility of an investment’s returns - the greater the 3-year standard deviation, the larger the differences between the investment’s actual returns and average return. It was calculated over the most recent past 36 months of returns, if available. No 3-year standard deviation is shown where 36 months of returns are unavailable.

 

FINANCIAL HIGHLIGHTS  

 

The financial highlights tables below are intended to help you understand the financial performance of each class of shares of the Funds since the date that each class of shares was first offered. Effective January 30, 2017, the Fuller & Thaler Behavioral Core Equity Fund was renamed the Fuller & Thaler Behavioral Small-Cap Equity Fund. Financial highlights for the Fuller & Thaler Behavioral Small-Cap Equity Fund, the Fuller & Thaler Behavioral Small-Cap Growth Fund, and the Fuller & Thaler Behavioral Mid-Cap Value Fund for the period ended September 30, 2018 will be included by amendment filed on or prior to registration statement effectiveness.

 

The Small-Cap Equity Fund is a continuation of the Predecessor Fund and, therefore, some of the financial information presented below is for the Predecessor Fund. The Predecessor Fund’s shareholders approved the reorganization into the Fuller & Thaler Behavioral Core Equity Fund on October 21, 2015 and the reorganization took place on October 23, 2015. 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 a particular class of shares of the Fund, assuming reinvestment of all dividends and distributions. This information for the fiscal years ended September 30, 2018 and 2017 has been audited by [], independent registered public accounting firm, whose reports, along with the Funds’ financial statements, are included in the Funds’ annual report to shareholders. Financial statements of the Small-Cap Equity Fund for the fiscal periods ended September 30, 2016, and 2015, and November 30, 2014 and 2013 were audited by another independent registered public accounting firm. The annual and semi-annual reports are incorporated by reference in the SAI and are available free of charge upon request from the Fund’s distributor. The following information should be read in conjunction with the financial statements and notes thereto.

 

Because the Unconstrained Equity Fund, the Small–Mid Core Equity Fund and the Micro-Cap Equity Fund have not commenced operations as of the date of this Prospectus, there are no financial highlights available at this time.

 

[Financial Highlights Tables to be included by amendment.]

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Appendix A

 

Financial Intermediary Sales Charge Variations

 

As noted under “Classes of Shares,” a financial intermediary may offer Fuller & Thaler Fund shares subject to variations in or elimination of the Fund sales charges (“variations”), provided such variations are described in this prospectus. Set forth below are the variations in sales charges applicable to shares purchased through the noted financial intermediary. All variations described below are applied by, and the responsibility of, the identified financial intermediary. Variations may apply to purchases, sales, exchanges and reinvestments of Fund shares and a shareholder transacting in Fund shares through the intermediary identified below should read the terms and conditions of the variations carefully. A variation that is specific to a particular financial intermediary is not applicable to shares held directly with the Fund or through another intermediary.

 

Fund Purchases through Merrill Lynch

 

Effective _____ __, 2018, shareholders purchasing Fuller & Thaler Fund shares through a Merrill Lynch platform or account are eligible only for the following sales charge waivers (front-end sales charge waivers and contingent deferred, or back-end, sales charge waivers) and discounts, which may differ from those disclosed elsewhere in this prospectus or in the Statement of Additional Information. Front-end Sales Load Waivers on Class A Shares The front-end sales charges applicable to purchases of Class A shares will be waived for:

 

Shares purchased by employer-sponsored retirement, deferred compensation and employee benefit plans (including health savings accounts) and trusts used to fund those plans, provided that the shares are not held in a commission-based brokerage account and shares are held for the benefit of the plan

 

Shares purchased by or through a 529 Plan

 

Shares purchased through a Merrill Lynch affiliated investment advisory program

 

Shares purchased by third party investment advisors on behalf of their advisory clients through Merrill Lynch’s platform

 

Shares of funds purchased through the Merrill Edge Self-Directed platform (if applicable)

 

Shares purchased through reinvestment of capital gains distributions and dividend reinvestment when purchasing shares of the same fund (but not any other fund within the fund family)

 

Shares exchanged from Class C shares of the same fund in the month of or following the 10-year anniversary of the purchase date

 

Shares purchased by employees and registered representatives of Merrill Lynch or its affiliates and their family members

 

Shares purchased from the proceeds of redemptions within the same fund family, provided (1) the repurchase occurs within 90 days following the redemption, (2) the redemption and purchase occur in the same account, and (3) redeemed shares were subject to a front-end or deferred sales load (known as Rights of Reinstatement)

 

CDSC Waivers on Class C Shares (if applicable)

 

The CDSC payable on redemptions of Class A, Class B and Class C (if applicable) will be waived in connection with:

 

Shares sold on the death or disability of the shareholder

 

Shares sold as part of a systematic withdrawal plan as described in “Shareholder Account Features”

 

Shares sold to return excess contributions from an IRA Account

 

Shares sold as part of a required minimum distribution for IRA and retirement accounts due to the shareholder reaching age 70½

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Shares sold to pay Merrill Lynch fees but only if the transaction is initiated by Merrill Lynch

 

The sale of Fund shares acquired pursuant to the Rights of Reinstatement privilege as described above

 

Shares held in retirement brokerage accounts, that are exchanged for a lower cost share class due to transfer to a fee based account or platform (applicable to Class A and Class C shares only)

 

An exchange for shares of another class of the same fund through a fee-based individual retirement account on the Merrill Lynch platform. In such circumstances, Merrill Lynch will remit the portion of the CDSC to be paid to the principal underwriter equal to the number of months remaining on the CDSC period divided by the total number of months of the CDSC period

 

Front-end load Discounts Available: Discounts, Rights of Accumulation & Letters of Intent

 

Front-end sales charges may be subject to discounts, rights of accumulation and letters of intent as follows:

 

The front-end sales charge applicable to Class A shares may be subject to breakpoint discounts for purchases in excess of $50,000 for Class A as described under “Sales Charges”

 

Rights of Accumulation (ROA) which entitle shareholders to breakpoint discounts will be automatically calculated based on the aggregated holding of fund family assets held by accounts within the purchaser’s household at Merrill Lynch. Eligible fund family assets not held at Merrill Lynch may be included in the ROA calculation only if the shareholder notifies his or her financial advisor about such assets

 

Letters of Intent (LOI) through Merrill Lynch, over a 13-month period of time (if applicable)

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Fund Purchases through Morgan Stanley Wealth Management

 

Effective _____ __, 2018, shareholders purchasing Fund shares through a Morgan Stanley Wealth Management transactional brokerage account will be eligible only for the following front-end sales charge waivers with respect to Class A shares, which may differ from and may be more limited than those disclosed elsewhere in this Prospectus or SAI. Front-end Sales Charge Waivers on Class A Shares available at Morgan Stanley Wealth Management

 

Employer-sponsored retirement plans (e.g., 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit sharing and money purchase pension plans and defined benefit plans). For purposes of this provision, employer-sponsored retirement plans do not include SEP IRAs, Simple IRAs, SAR-SEPs or Keogh plans

 

Morgan Stanley employee and employee-related accounts according to Morgan Stanley’s account linking rules

 

Shares purchased through reinvestment of dividends and capital gains distributions when purchasing shares of the same fund

 

Shares purchased through a Morgan Stanley self-directed brokerage account

 

Class C (i.e., level-load) shares that are no longer subject to a contingent deferred sales charge and are converted to Class A shares of the same fund pursuant to Morgan Stanley Wealth Management’s share class conversion program

 

Shares purchased from the proceeds of redemptions within the same fund family, provided (i)  the repurchase occurs within 90 days following the redemption, (ii)  the redemption and purchase occur in the same account, and (iii)  redeemed shares were subject to a front-end or deferred sales charge.

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Fund Purchases through Raymond James & Associates, Inc., Raymond James Financial Services & Raymond James affiliates (“Raymond James”)

 

Effective March 1, 2019, 2018, shareholders purchasing Fuller & Thaler Fund shares through a Raymond James platform or account are eligible only for the following sales charge waivers (front-end sales charge waivers and contingent deferred, or back-end, sales charge waivers) and discounts, which may differ from those disclosed elsewhere in this prospectus or in the Statement of Additional Information.

 

Front-end sales load waivers on Class A shares available at Raymond James

 

Shares purchased in an investment advisory program.

 

Shares purchased through reinvestment of capital gains distributions and dividend reinvestment when purchasing shares of the same fund (but not any other fund within the fund family).

 

Employees and registered representatives of Raymond James or its affiliates and their family members as designated by Raymond James.

 

Shares purchased from the proceeds of redemptions within the same fund family, provided (1) the repurchase occurs within 90 days following the redemption, (2) the redemption and purchase occur in the same account, and (3) redeemed shares were subject to a front-end or deferred sales load (known as Rights of Reinstatement).

 

A shareholder in the Fund’s Class C shares will have their shares converted at net asset value to Class A shares (or the appropriate share class) of the Fund if the shares are no longer subject to a CDSC and the conversion is in line with the policies and procedures of Raymond James.

 

CDSC Waivers on Classes A, B and C shares available at Raymond James

 

Death or disability of the shareholder.

 

Shares sold as part of a systematic withdrawal plan as described in the fund’s prospectus.

 

Return of excess contributions from an IRA Account.

 

Shares sold as part of a required minimum distribution for IRA and retirement accounts due to the shareholder reaching age 70½ as described in the fund’s prospectus.

 

Shares sold to pay Raymond James fees but only if the transaction is initiated by Raymond James.

 

Shares acquired through a right of reinstatement.

 

Front-end load discounts available at Raymond James: breakpoints, and/or rights of accumulation

 

Breakpoints as described in this prospectus.

 

Rights of accumulation which entitle shareholders to breakpoint discounts will be automatically calculated based on the aggregated holding of fund family assets held by accounts within the purchaser’s household at Raymond James. Eligible fund family assets not held at Raymond James may be included in the rights of accumulation calculation only if the shareholder notifies his or her financial advisor about such assets.

66

 

FOR MORE INFORMATION

 

You can find additional information about the Funds in the following documents:

 

Annual and Semi-Annual Reports: While the Prospectus describes each Fund’s potential investments, the Annual and Semi-Annual Reports detail each Fund’s actual investments as of the report dates. The reports include a discussion by management of recent market conditions, economic trends, and investment strategies that significantly affected Fund performance during the reporting period.

 

SAI: The SAI supplements the Prospectus and contains additional information about the Funds and their respective investment restrictions, risks, policies, and operations, including the Funds’ policies and procedures relating to the disclosure of portfolio holdings. A current SAI for the Funds is on file with the SEC and is incorporated into this Prospectus by reference, which means it is considered part of this Prospectus.

 

How to Obtain Copies of Other Fund Documents

 

You can obtain free copies of the current SAI and the Funds’ Annual and Semi-Annual Reports, and request other information about the Funds or make shareholder inquiries, in any of the following ways:

 

On the Internet: Download these documents from the Funds’ Internet site at: www.fullerthalerfunds.com
   
By Telephone: Call Shareholder Services at 1-888-912-4562
   
By Mail:

Send a written request to:

Fuller & Thaler Behavioral Small-Cap Equity Fund or

Fuller & Thaler Behavioral Small-Cap Growth Fund or

Fuller & Thaler Behavioral Mid-Cap Value Fund or

Fuller & Thaler Behavioral Unconstrained Equity Fund or

Fuller & Thaler Behavioral Small–Mid Core Equity Fund or

Fuller & Thaler Behavioral Micro-Cap Equity

 

c/o Ultimus Asset Services, LLC

PO Box 46707

Cincinnati, Ohio 45246-0707

 

You may review and copy information about each Fund (including the SAI and other reports) at the SEC Public Reference Room in Washington, D.C. Call the SEC at 1-202-551-8090 for room hours and operation. You may also obtain reports and other information about each Fund on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-1520.

 

(FULLER & THALER LOGO) 

 

Investment Company Act No. 811-22895

67

 

 

Fuller & Thaler Behavioral Small-Cap Equity Fund  

A Shares – [     ] 

C Shares- [     ] 

Investor Shares – FTHNX  

Institutional Shares – FTHSX  

R6 Shares – FTHFX

 

Fuller & Thaler Behavioral Small-Cap Growth Fund  

A Shares – [     ] 

C Shares- [     ] 

Investor Shares – FTXNX  

Institutional Shares – FTXSX  

R6 Shares – FTXFX

 

Fuller & Thaler Behavioral Mid-Cap Value Fund  

A Shares – [           ] 

Investor Shares – FTVNX  

Institutional Shares – FTVSX 

R6 Shares - FTVZX

Fuller & Thaler Behavioral Unconstrained Equity Fund 

A Shares – [           ] 

Investor Shares - [______] 

Institutional Shares - [______] 

R6 Shares - [______]

 

Fuller & Thaler Behavioral Small–Mid Core Equity Fund 

A Shares – [           ] 

Investor Shares - [______] 

Institutional Shares - [______] 

R6 Shares - [______]

 

Fuller & Thaler Behavioral Micro-Cap Equity Fund  

A Shares – [           ] 

Investor Shares - [______] 

Institutional Shares - [______]

R6 Shares - [______]

 

Each a series of Capitol Series Trust

 

STATEMENT OF ADDITIONAL INFORMATION

 

December__, 2018

 

This Statement of Additional Information (“SAI”) provides general information about the Fuller & Thaler Behavioral Small-Cap Equity Fund (the “Small-Cap Equity Fund”), the Fuller & Thaler Behavioral Small-Cap Growth Fund (the “Small-Cap Growth Fund”) the Fuller & Thaler Behavioral Mid-Cap Value Fund (the “Mid-Cap Value Fund”), the Fuller & Thaler Behavioral Unconstrained Equity Fund (the “Unconstrained Equity Fund”), the Fuller & Thaler Behavioral Small–Mid Core Equity Fund (the “Small–Mid Core Equity Fund), and the Fuller & Thaler Behavioral Micro-Cap Equity Fund (the “Micro-Cap Equity Fund”) (collectively referred to hereinafter as the “Funds”), each a series of the Capitol Series Trust (the “Trust”). This SAI is not a prospectus and should be read in conjunction with the Funds’ current prospectus dated December __, 2018 (the “Prospectus”), as supplemented and amended from time to time, which is incorporated herein by reference. Financial statements for the Small-Cap Equity Fund, the Small-Cap Growth Fund, and the Mid-Cap Value Fund for the fiscal year ended September 30, 2018 are included in the Annual Report to shareholders and are incorporated into this SAI by reference. To obtain a copy of the Annual Report or the Funds’ Prospectus, free of charge, please write the transfer agent at Ultimus Asset Services, LLC, 225 Pictoria Drive, Suite 450, P.O. Box 46707, Cincinnati, Ohio 45246, call Shareholder Services at 888-912-4562, or visit the Fund’s website at www.fullerthalerfunds.com.

 

 

TABLE OF CONTENTS

PAGE

DESCRIPTION OF THE TRUST AND FUNDS 3
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS AND RISK CONSIDERATIONS 4
INVESTMENT LIMITATIONS 42
INVESTMENT MANAGEMENT 44
TRUSTEES AND OFFICERS 48
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES 54
PORTFOLIO TURNOVER 56
ANTI-MONEY LAUNDERING COMPLIANCE PROGRAM 57
PORTFOLIO TRANSACTIONS AND BROKERAGE 57
CODE OF ETHICS 58
DISCLOSURE OF PORTFOLIO HOLDINGS 58
DETERMINATION OF NET ASSET VALUE 59
REDEMPTION IN-KIND 61
TAXATION 61
CUSTODIAN 70
TRANSFER AGENT, FUND ACCOUNTING AGENT, AND ADMINISTRATOR 70
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 71
DISTRIBUTOR 71
PROXY VOTING POLICIES 72
FINANCIAL STATEMENTS 73

2

 

DESCRIPTION OF THE TRUST AND FUNDS

 

A.General Information

 

The Trust is an open-end investment company established under the laws of Ohio by an Agreement and Declaration of Trust dated September 18, 2013 (the “Trust Agreement”). The Small-Cap Equity Fund was organized as a diversified series of the Trust on March 18, 2015. The Small-Cap Growth Fund and the Mid-Cap Value Fund were organized as diversified series of the Trust on December 14, 2017. The Unconstrained Equity Fund was organized as a non-diversified series of the Trust on December __, 2018. The Small–Mid Core Equity Fund and the Micro-Cap Equity Fund were organized as a diversified series of the Trust on December __, 2018. The Small-Cap Equity Fund and Small-Cap Growth Fund currently offer four classes of shares, A Shares, Investor Shares, Institutional Shares, and R6 Shares. The Mid-Cap Value Fund currently offers three classes of shares, Investor Shares, Institutional Shares, and R6 Shares. The Unconstrained Equity Fund currently offers two classes of shares, Institutional Shares, and R6 Shares. The Small–Mid Core Equity Fund currently offers one class of shares, Institutional Shares. The Micro-Cap Equity Fund and all of its classes are not yet available for purchase and are not being offered at this time. The Fuller & Thaler Behavioral Small-Cap Equity Fund changed its name from the Fuller & Thaler Behavioral Core Equity Fund effective January 30, 2017. Fuller & Thaler Asset Management, Inc. (the “Adviser”), serves as investment adviser to the Funds.

 

The Small-Cap Equity Fund is the accounting successor to a series of Allianz Funds Multi-Strategy Trust, which commenced operations on September 8, 2011, and for which the Adviser served as the sole sub-adviser (the “Predecessor Fund”). In a transaction that was consummated on October 23, 2015 (the “Reorganization”), the Fund acquired the assets and liabilities of: the A, C, and D Classes of the Predecessor Fund (tickers- AZFAX, AZFCX, and AZFDX respectively), which became the Investor Shares of the Fund; the Class P Shares of the Predecessor Fund (ticker AZFPX), which became the Institutional Shares of the Fund; and the Institutional Shares of the Predecessor Fund (ticker AZFIX), which became the R6 Shares of the Fund.

 

Expenses attributable to any series or class are borne by that series or class. Any general expenses of the Trust not readily identifiable as belonging to a particular series or class are allocated by or under the direction of the Trustees in such manner as the Trustees determine to be fair and equitable. No shareholder is liable to further calls or to assessment by the Trust without his or her express consent.

 

The Funds do not issue share certificates. Rather, all shares are held in non-certificated form registered on the books of the Funds and Ultimus Asset Services, LLC, the Funds’ transfer agent (the “Transfer Agent”) for the account of the shareholder.

 

B.Shareholder Voting and Other Rights

 

The Trust Agreement permits the Trust’s Board of Trustees (the “Board”), without shareholder approval, to issue an unlimited number of shares of beneficial interest in separate series without par value and to divide series into classes of shares. The Board may from time to time, and without shareholder approval, divide or combine the shares of the Funds or classes thereof into a greater or lesser number of shares of that Fund or class so long as the proportionate beneficial interest in the assets belonging to that Fund or class and the rights of shares of any other series or class are in no way affected.

 

Each share of a Fund represents an equal proportionate interest in the assets and liabilities belonging to that Fund and in such dividends and distributions out of income belonging to that Fund as are declared by the Board.

 

Each Fund share has the same voting and other rights and preferences as any other shares of the Trust with respect to matters that affect the Trust as a whole. The Funds or classes thereof vote separately with respect to the provisions of any Rule 12b-1 plan which pertains to that Fund or class and other matters for which separate series or class voting is appropriate under applicable law. Generally, shares will be voted separately by individual series except if: (1) the Investment Company Act of 1940, as amended (the “1940 Act”) requires shares to be voted in the aggregate and not by individual series; and (2) when the Trustees determine that the matter affects more than one series and all affected series must vote. The Trustees may also determine that a matter only affects certain series or classes of the Trust and thus only those series or classes are entitled to vote on the matter.

 

Ohio law does not require the Trust to hold annual meetings of shareholders, and it is anticipated that shareholder meetings will be held only when specifically required by Federal or state law. When matters are submitted to shareholders for a vote, each shareholder is entitled to one vote for each whole share owned and fractional votes for each fractional share owns.

 

The Fund shares do not have cumulative voting rights, any preemptive or conversion rights, or any sinking fund provisions. Any Trustee may be removed by vote of the shareholders holding not less than two-thirds of the outstanding shares of the Trust.

3

 

The Trust Agreement can be amended by the Trustees, except that certain amendments that could adversely affect the rights of shareholders must be approved by the shareholders affected.

 

C.Redemptions

 

Voluntary Redemptions. A shareholder may redeem shares of a Fund class at the net asset value per share of that Fund class next-calculated, plus any applicable sales charge, after the Fund receives the shareholder’s redemption request in proper form.

 

Mandatory Redemption. Each share of each series and class thereof is subject to redemption by the Trust at the net asset value per share of that series or class next calculated, plus any applicable sales charge: (1) after the Trustees determine, in their sole discretion, that failure to so redeem may have materially adverse consequences to any holders of Trust shares, or any series of class thereof or the applicable Fund or Fund class, or (2) upon such other conditions as may from time to time be determined by the Trustees and set forth in the then current Prospectus of the Trust with respect to maintenance of shareholder accounts of a minimum amount.

 

D.Termination or Reorganization

 

Termination. The Trust may be terminated at any time by an instrument executed by a majority of the Trustees then in office upon prior written notice to the Trust’s shareholders. Any series or class may be terminated at any time by an instrument executed by a majority of the Trustees upon prior written notice to the shareholders of that series or class.

 

Reorganization. The Trustees may sell, convey and transfer the assets of the Trust, or the assets belonging to any one or more series, to another trust, partnership, association or corporation organized under the laws of any state of the United States, or to the Trust to be held as assets belonging to another series of the Trust, in exchange for cash, shares or other securities (including, in the case of a transfer to another series of the Trust, shares of such other series) with such transfer being made subject to, or with the assumption by the transferee of, the liabilities belonging to each series the assets of which are being transferred. If required by the 1940 Act, any such transfer shall be subject to approval of the shareholders of the affected series.

 

In case of any liquidation of a series or class, the holders of shares of the series or class being liquidated will be entitled to receive as a class a distribution out of the assets, net of the liabilities, belonging to that series or class.

 

ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS AND RISK CONSIDERATIONS

 

In addition to the principal investment strategies and the principal risks of the Funds as described in the Prospectus, the Funds may employ secondary investment practices and may be subject to additional secondary risks, which are described below. The following is a description of secondary investment strategies and secondary risks for how the Funds might evolve, not necessarily how each Fund currently operates. Unless a strategy or policy described below is specifically prohibited by the investment restrictions, under “Investment Restrictions” in this SAI, or by applicable law, the Funds may engage in each of the practices described below. However, the Funds are not required to engage in any particular transaction or purchase any particular type of securities or investment even if to do so might benefit a Fund. Unless otherwise stated herein, all investment policies of the Funds may be changed by the Board without shareholder approval or notice. In addition, the Funds may be subject to restriction on their respective ability to utilize certain investments or investment techniques. Unless otherwise stated herein, these additional restrictions may be changed with the consent of the Board but without approval by or notice to shareholders.

 

A.Preferred Stock

 

Each Fund has the ability to invest up to 20% of its net assets in preferred stock, bonds, foreign stocks and/or commodities.

 

Preferred stock represents an equity interest in a company that generally entitles the holder to receive, in preference to the holders of other stocks such as common stocks, dividends and a fixed share of the proceeds resulting from a liquidation of the company. Some preferred stocks also entitle their holders to receive additional liquidation proceeds on the same basis as holders of a company’s common stock, and thus also represent an ownership interest in that company.

 

Each Fund may invest in preferred stocks that pay fixed or adjustable rates of return. Preferred shares are subject to issuer-specific and market risks applicable generally to equity securities. The value of a company’s preferred stock may fall as a result of factors relating directly to that company’s products or services. A preferred stock’s value may also fall because of factors affecting not just the company, but companies in the same industry or in a number of different industries, such as increases in production costs. The value of preferred stock may also be affected by changes in financial markets that are relatively unrelated to the company or its industry, such as changes in interest rates or currency exchange rates. In addition, a company’s preferred stock generally pays dividends only after the company makes required payments to holders of its bonds and other debt. For this reason, the value of preferred stocks will usually react more strongly than bonds and other debt to actual or perceived changes in the company’s financial condition or prospects. Preferred stocks of smaller companies may be more vulnerable to adverse developments than those of larger companies.

4

 

Fixed Rate Preferred Stocks. Some fixed rate preferred stocks in which the Funds may invest, known as perpetual preferred stocks, offer a fixed return with no maturity date. Because they never mature, perpetual preferred stocks act like long-term bonds and can be more volatile than and more sensitive to changes in interest rates than other types of preferred stocks that have a maturity date. The Funds may also invest in sinking fund preferred stocks. These preferred stocks also offer a fixed return, but have a maturity date and are retired or redeemed on a predetermined schedule. The shorter duration of sinking fund preferred stocks makes them perform somewhat like intermediate-term bonds and they typically have lower yields than perpetual preferred stocks.

 

Adjustable Rate and Auction Preferred Stocks. Typically, the dividend rate on an adjustable rate preferred stock is determined prospectively each quarter by applying an adjustment formula established at the time of issuance of the stock. Although adjustment formulas vary among issues, they typically involve a fixed premium or discount relative to rates on specified debt securities issued by the U.S. Treasury. Typically, an adjustment formula will provide for a fixed premium or discount adjustment relative to the highest base yield of three specified U.S. Treasury securities: the 90-day Treasury bill, the 10-year Treasury note and the 20-year Treasury bond. The premium or discount adjustment to be added to or subtracted from this highest U.S. Treasury base rate yield is fixed at the time of issue and cannot be changed without the approval of the holders of the stock. The dividend rate on another type of preferred stocks in which a Fund may invest, commonly known as auction preferred stocks, is adjusted at intervals that may be more frequent than quarterly, such as every 7 or 49 days, based on bids submitted by holders and prospective purchasers of such stocks and may be subject to stated maximum and minimum dividend rates. The issues of most adjustable rate and auction preferred stocks currently outstanding are perpetual, but are redeemable after a specified date, or upon notice, at the option of the issuer. Certain issues supported by the credit of a high-rated financial institution provide for mandatory redemption prior to expiration of the credit arrangement. No redemption can occur if full cumulative dividends are not paid. Although the dividend rates on adjustable and auction preferred stocks are generally adjusted or reset frequently, the market values of these preferred stocks may still fluctuate in response to changes in interest rates. Market values of adjustable preferred stocks also may substantially fluctuate if interest rates increase or decrease once the maximum or minimum dividend rate for a particular stock is approached. Auctions for U.S. auction preferred stocks have failed since early 2008, and the dividend rates payable on such preferred shares since that time typically have been paid at their maximum applicable rate (typically a function of a reference rate of interest). The Adviser expects that auction preferred stocks will continue to pay dividends at their maximum applicable rate for the foreseeable future and cannot predict whether or when the auction markets for auction preferred stocks may resume normal functioning.

 

B.Convertible Securities and Synthetic Convertible Securities

 

Convertible securities are generally bonds, debentures, notes, preferred stocks or other securities or investments that may be converted or exchanged (by the holder or by the issuer) into shares of common stock or other equity securities (or cash or securities of equivalent value) of the same or a different issuer at a stated exchange ratio or predetermined price (the “conversion price”). A convertible security is designed to provide current income and also the potential for capital appreciation through the conversion feature, which enables the holder to benefit from increases in the market price of the underlying common stock. A convertible security may be called for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon issue. If a convertible security held by a Fund is called for redemption or conversion, the Fund could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party, which may have an adverse effect on the Fund’s ability to achieve its investment objectives. Convertible securities have general characteristics similar to both debt and equity securities.

 

A convertible security generally entitles the holder to receive interest paid or accrued until the convertible security matures or is redeemed, converted or exchanged. Convertible securities rank senior to common stock in a corporation’s capital structure and, therefore, generally entail less risk than the corporation’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a debt obligation. Before conversion, convertible securities have characteristics similar to non-convertible debt obligations and are designed to provide for a stable stream of income with generally higher yields than common stocks. However, there can be no assurance of current income because the issuers of the convertible securities may default on their obligations. Convertible securities are subordinate in rank to any senior debt obligations of the issuer, and, therefore, an issuer’s convertible securities entail more risk than its debt obligations. Moreover, convertible securities are often rated below investment grade or not rated because they fall below debt obligations and just above common equity in order of preference or priority on an issuer’s balance sheet.

 

Convertible securities generally offer lower interest or dividend yields than non-convertible debt securities of similar credit quality because of the potential for capital appreciation. The common stock underlying convertible securities may be issued by a different entity than the issuer of the convertible securities.

5

 

The value of convertible securities is influenced by both the yield of non-convertible securities of comparable issuers and by the value of the underlying common stock. The value of a convertible security viewed without regard to its conversion feature (i.e., strictly on the basis of its yield) is sometimes referred to as its “investment value.” The investment value of the convertible security typically will fluctuate based on the credit quality of the issuer and will fluctuate inversely with changes in prevailing interest rates. However, at the same time, the convertible security will be influenced by its “conversion value,” which is the market value of the underlying common stock that would be obtained if the convertible security were converted. Conversion value fluctuates directly with the price of the underlying common stock, and will therefore be subject to risks relating to the activities of the issuer and/or general market and economic conditions. Depending upon the relationship of the conversion price to the market value of the underlying security, a convertible security may trade more like an equity security than a debt instrument.

 

If, because of a low price of the common stock, the conversion value is substantially below the investment value of the convertible security, the price of the convertible security is governed principally by its investment value. Generally, if the conversion value of a convertible security increases to a point that approximates or exceeds its investment value, the value of the security will be principally influenced by its conversion value. A convertible security will sell at a premium over its conversion value to the extent investors place value on the right to acquire the underlying common stock while holding an income-producing security.

 

To the extent consistent with its other investment policies, the Funds may also create a “synthetic” convertible security by combining separate securities that possess the two principal characteristics of a traditional convertible security, i.e., an income-producing security (“income-producing element”) and the right to acquire an equity security (“convertible element”). The income-producing element is achieved by investing in non-convertible, income-producing securities such as bonds, preferred stocks and money market instruments. The convertible element is achieved by investing in warrants or options to buy common stock at a certain exercise price, or options on a stock index. Unlike a traditional convertible security, which is a single security having a unitary market value, a synthetic convertible comprises two or more separate securities, each with its own market value. Therefore, the “market value” of a synthetic convertible security is the sum of the values of its income-producing element and its convertible element. For this reason, the values of a synthetic convertible security and a traditional convertible security may respond differently to market fluctuations.

 

More flexibility is possible in the assembly of a synthetic convertible security than in the purchase of a convertible security. Although synthetic convertible securities may be selected where the two elements are issued by a single issuer, thus making the synthetic convertible security similar to the traditional convertible security, the character of a synthetic convertible security allows the combination of components representing distinct issuers, when the Adviser believes that such a combination may better achieve the Fund’s investment objective. A synthetic convertible security also is a more flexible investment in that its two components may be purchased separately. For example, a Fund may purchase a warrant for inclusion in a synthetic convertible security but temporarily hold short-term investments while postponing the purchase of a corresponding bond pending development of more favorable market conditions.

 

A holder of a synthetic convertible security faces the risk of a decline in the price of the security or the level of the index or security involved in the convertible element, causing a decline in the value of the call option or warrant purchased to create the synthetic convertible security. Should the price of the stock fall below the exercise price and remain there throughout the exercise period, the entire amount paid for the call option or warrant would be lost. Because a synthetic convertible security includes the income-producing element as well, the holder of a synthetic convertible security also faces the risk that interest rates will rise, causing a decline in the value of the income-producing element.

 

The Funds may also purchase synthetic convertible securities created by other parties, including convertible structured notes. Convertible structured notes are income-producing debentures linked to equity, and are typically issued by investment banks. Convertible structured notes have the attributes of a convertible security; however, the investment bank that issued the convertible note, rather than the issuer of the underlying common stock into which the note is convertible, assumes the credit risk associated with the underlying investment and the Funds, in turn, assume credit risk associated with the convertible note.

 

C.Non-U.S. Securities

 

The Funds may invest in non-U.S. securities. Non-U.S. securities may include, but are not limited to, securities of companies that are organized and headquartered outside the U.S.; non-U.S. equity securities as designated by commonly-recognized market data services; U.S. dollar- or non-U.S. currency-denominated corporate debt securities of non-U.S. issuers; securities of U.S. issuers traded principally in non-U.S. markets; non-U.S. bank obligations; U.S. dollar- or non-U.S. currency-denominated obligations of non-U.S. governments or their subdivisions, agencies and instrumentalities, international agencies and supranational entities; and securities of other investment companies investing primarily in non-U.S. securities. When assessing compliance with investment policies that designate a minimum or maximum level of investment in “non-U.S. securities” for each Fund, the Adviser may apply a variety of factors (either, in addition to, or in lieu of, one or more of the categories described in the preceding sentence) in order to determine whether a particular security or instrument should be treated as U.S. or non-U.S. Some non-U.S. securities may be restricted against transfer within the United States or to a United States person.

6

 

The non-U.S. securities in which the Funds may invest include Eurodollar obligations and “Yankee Dollar” obligations. Eurodollar obligations are U.S. dollar-denominated certificates of deposit and time deposits issued outside the U.S. capital markets by non-U.S. branches of U.S. banks and by non-U.S. banks. Yankee Dollar obligations are U.S. dollar-denominated obligations issued in the U.S. capital markets by non-U.S. banks. Eurodollar and Yankee Dollar obligations are generally subject to the same risks that apply to domestic debt issues, notably credit risk, market risk and liquidity risk. Additionally, Eurodollar (and to a limited extent, Yankee Dollar) obligations are subject to certain sovereign risks. One such risk is the possibility that a sovereign country might prevent capital, in the form of U.S. dollars, from flowing across its borders. Other risks include adverse political and economic developments; the extent and quality of government regulation of financial markets and institutions; the imposition of non-U.S. withholding taxes; and the expropriation or nationalization of non-U.S. issuers.

 

American Depositary Receipts. The Funds may invest in American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”) or Global Depositary Receipts (“GDRs”). ADRs are U.S. dollar-denominated receipts issued generally by domestic banks and represent the deposit with the bank of a security of a non-U.S. issuer. EDRs are foreign currency-denominated receipts similar to ADRs and are issued and traded in Europe, and are publicly traded on exchanges or over-the-counter in the United States. GDRs may be offered privately in the United States and also trade in public or private markets in other countries. ADRs, EDRs and GDRs 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, EDRs or GDRs. 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 has participated in the creation of a sponsored program.

 

Brady Bonds. The Funds may invest in Brady Bonds. Brady Bonds are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the “Brady Plan”). Brady Plan debt restructurings have been implemented in a number of countries, including: Albania, Argentina, Bolivia, Brazil, Bulgaria, Columbia, Costa Rica, the Dominican Republic, Ecuador, Ivory Coast, Jordan, Mexico, Morocco, Niger, Nigeria, Panama, Peru, the Philippines, Poland, Uruguay, Venezuela and Vietnam.

 

Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (primarily the U.S. dollar) and are actively traded in the over-the-counter secondary market. Brady Bonds are not considered to be U.S. Government securities. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds, are generally collateralized in full as to principal by U.S. Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interest payments on these Brady Bonds generally are collateralized on a one-year or longer rolling-forward basis by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of interest payments or, in the case of floating rate bonds, initially is equal to at least one year’s interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to “value recovery payments” in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. Brady Bonds are often viewed as having three or four valuation components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at maturity (the uncollateralized amounts constitute the “residual risk”).

 

Most Mexican Brady Bonds issued to date have principal repayments at final maturity fully collateralized by U.S. Treasury zero-coupon bonds (or comparable collateral denominated in other currencies) and interest coupon payments collateralized on an 18-month rolling-forward basis by funds held in escrow by an agent for the bondholders. A significant portion of the Venezuelan Brady Bonds and the Argentine Brady Bonds issued to date have repayments at final maturity collateralized by U.S. Treasury zero-coupon bonds (or comparable collateral denominated in other currencies) and/or interest coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for Argentina) rolling-forward basis by securities held by the Federal Reserve Bank of New York as collateral agent.

 

Brady Bonds involve various risk factors including residual risk and the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds. There can be no assurance that Brady Bonds in which each Fund may invest will not be subject to restructuring arrangements or to requests for new credit, which may cause a Fund to suffer a loss of interest or principal on any of its holdings.

 

Investing in non-U.S. securities involves special risks and considerations not typically associated with investing in U.S. securities. These include: differences in accounting, auditing and financial reporting standards, generally higher commission rates on non-U.S. portfolio transactions, the possibility of expropriation or confiscatory taxation, adverse changes in investment or exchange control regulations (which may include suspension of the ability to transfer currency from a country), market disruption, the possibility of security suspensions, political instability that affects U.S. investments in non-U.S. countries and potential restrictions on the flow of international capital. In addition, non-U.S. securities and income derived from those securities may be subject to non-U.S. taxes, including withholding taxes which will reduce investment returns. See “Taxation.” Non-U.S. securities often trade with less frequency and volume than domestic securities and therefore may exhibit greater price volatility. Changes in foreign exchange rates will affect the value of those securities that are denominated or quoted in currencies other than the U.S. dollar. The currencies of non-U.S. countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by the Fund.

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Each Fund’s investments in foreign currency-denominated debt obligations and hedging activities will likely produce a difference between its book income and its taxable income. This difference could cause a portion of each Fund’s income distributions to constitute returns of capital for tax purposes or require the Fund to make distributions exceeding book income to qualify as a regulated investment company for U.S. federal tax purposes. Each Fund’s use of non-U.S. securities may increase or accelerate the amount of ordinary income recognized by taxable shareholders. See “Taxation.”

 

Emerging Market Securities. The risks of investing in non-U.S. securities are particularly high when the issuers are tied economically to countries with developing (or “emerging market”) economies. Countries with “emerging market” economies are those with securities markets that are, in the opinion of the Funds’ Adviser, less sophisticated than more developed markets in terms of participation by investors, analyst coverage, liquidity and regulation. Investing in emerging market countries involves certain risks not typically associated with investing in U.S. securities, and imposes risks greater than, or in addition to, risks of investing in non-U.S., developed countries. These risks include: greater risks of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic and political uncertainty and instability (including the risk of war); more substantial government involvement in the economy; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on each Fund’s ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging market countries; the fact that companies in emerging market countries may be smaller, less seasoned and newly organized companies; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; and greater price volatility, substantially less liquidity and significantly smaller market capitalization of securities markets. In addition, a number of emerging market countries restrict, to various degrees, foreign investment in securities, and high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities.

 

Foreign Debt Obligations. The debt obligations of non-U.S. governments and their agencies and instrumentalities may or may not be supported by the full faith and credit of the non-U.S. government. The Funds may invest in securities issued by certain supranational entities, which include entities designated or supported by governments to promote economic reconstruction or development, international banking organizations and related government agencies. Examples are the International Bank for Reconstruction and Development (commonly called the “World Bank”), the Asian Development Bank and the Inter-American Development Bank.

 

The governmental members of these supranational entities are “stockholders” that typically make capital contributions and may be committed to make additional capital contributions if the entity is unable to repay its borrowings. A supranational entity’s lending activities may be limited to a percentage of its total capital, reserves and net income. There can be no assurance that the constituent non-U.S. governments will be able or willing to honor their capitalization commitments for those entities.

 

Passive Foreign Investment Companies. Some corporations domiciled outside the U.S. in which the Funds may invest may be considered passive foreign investment companies (“PFICs”) under U.S. tax laws. PFICs are those foreign corporations that generate primarily passive income.

 

Investing in PFICs involves the risks associated with investing in foreign securities, as described above. There is also the risk that a Fund may not realize that a foreign corporation in which it invests is a PFIC for federal tax purposes, which could cause the Fund to incur U.S. federal income tax (including interest) charges at the Fund level. See “Taxation” below for a more detailed discussion of the tax consequences of the Funds’ investment in PFICs.

 

Subject to applicable limits under the 1940 Act, the Funds may also invest in foreign mutual funds that are also deemed PFICs (since nearly all of the income of a mutual fund is generally passive income). Investing in these types of PFICs may allow exposure to various countries because some foreign countries limit, or prohibit, all direct foreign investment in the securities of companies domiciled therein. In addition to bearing their proportionate share of a Fund’s expenses (management fees and operating expenses), shareholders will also indirectly bear similar expenses of such entities. Additional risks of investing in other investment companies are described below under “Other Investment Companies.”

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D.Foreign Currencies and Related Transactions

 

Subject to applicable limits set forth in the Prospectus and this SAI, the Funds may invest in or utilize foreign currencies, forward foreign currency exchange contracts, foreign currency futures contracts, options on foreign currencies and foreign currency futures, currency swap transactions and other foreign currency-related transactions may be used for a variety of reasons, including to hedge against foreign exchange risk arising from each Fund’s investment or anticipated investment in securities denominated in foreign currencies, to increase exposure to a foreign currency for investment or hedging purposes, or to shift exposure of foreign currency fluctuations from one currency to another.

 

Each Fund may (but is not required to) hedge some or all of its exposure to foreign currencies derived through its investments to reduce the risk of loss due to fluctuations in currency exchange rates. Suitable currency hedging transactions may not be available in all circumstances and there can be no assurance that the Funds will engage in such transactions at any given time or from time to time when it may be beneficial to do so. Foreign currency transactions may also be unsuccessful and may result in losses or may eliminate any chance for the Funds to benefit from favorable fluctuations in relevant foreign currencies.

 

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. By entering into a forward foreign currency exchange contract, a Fund “locks in” the exchange rate between the currency it will deliver and the currency it will receive for the duration of the contract. As a result, the Fund reduces its exposure to changes in the value of the currency it will deliver and increases its exposure to changes in the value of the currency it will exchange into. Contracts to sell foreign currencies would limit any potential gain that might be realized by the Funds if the value of the hedged currency increases.

 

Forward foreign currency exchange contracts may be used for a variety of reasons, including the following circumstances:

 

Lock In. When the Funds desire to lock in the U.S. dollar price on the purchase or sale of a security denominated in a foreign currency.

 

Cross Hedge. If a particular currency is expected to decrease against another currency, the Funds may sell the currency expected to decrease and purchase a currency that is expected to increase against the currency sold in an amount approximately equal to some or all of a Fund’s portfolio holdings denominated in the currency sold.

 

Direct Hedge. If the Funds want to eliminate substantially all of the risk of owning a particular currency, and/or if the Funds’ Adviser believes that a Fund can benefit from price appreciation in a given country’s currency but does not want to hold the currency, it may employ a direct hedge back into the U.S. dollar. In either case, a Fund would enter into a forward contract to sell the currency in which a portfolio security is denominated and purchase U.S. dollars at an exchange rate established at the time it initiated a contract. The cost of the direct hedge transaction may offset most, if not all, of the yield advantage offered by the foreign security, but the Fund would hope to benefit from an increase (if any) in the value of the security.

 

Proxy Hedge. The Funds might choose to use a proxy hedge, which may be less costly than a direct hedge. In this case, a Fund, having purchased a security, will sell a currency whose value is believed to be closely linked to the currency in which the security is denominated. Interest rates prevailing in the country whose currency was sold would be expected to be close to those in the United States and lower than those of securities denominated in the currency of the original holding. This type of hedging entails greater risk than a direct hedge because it is dependent on a stable relationship between the two currencies paired as proxies and the relationships can be very unstable at times.

 

Costs of Hedging. When the Funds purchase a non-U.S. bond with a higher interest rate than is available on U.S. bonds of a similar maturity, the additional yield on the non-U.S. bond could be substantially reduced or lost if a Fund were to enter into a direct hedge by selling the foreign currency and purchasing the U.S. dollar. This is what is known as the “cost” of hedging. Proxy hedging attempts to reduce this cost through an indirect hedge back to the U.S. dollar.

 

It is important to note that hedging costs are treated as capital transactions and are not, therefore, deducted from a Fund’s dividend distribution and are not reflected in its yield. Instead such costs will, over time, be reflected in a Fund’s net asset value per share.

 

The forecasting of currency market movement is extremely difficult, and whether any hedging strategy will be successful is highly uncertain. Moreover, it is impossible to forecast with precision the market value of portfolio securities at the expiration of a foreign currency forward contract. Accordingly, the Funds may be required to buy or sell additional currency on the spot market (and bear the expense of such transaction) if the Adviser’s predictions regarding the movement of foreign currency or securities markets prove inaccurate. In addition, the use of cross-hedging transactions may involve special risks, and may leave a Fund in a less advantageous position than if such a hedge had not been established. Because foreign currency forward contracts are privately negotiated transactions, there can be no assurance that a Fund will have flexibility to roll-over a foreign currency forward contract upon its expiration if it desires to do so. Additionally, there can be no assurance that the other party to the contract will perform its services thereunder.

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Each Fund may hold a portion of its assets in bank deposits denominated in foreign currencies, so as to facilitate investment in foreign securities as well as to protect against currency fluctuations and the need to convert such assets into U.S. dollars (thereby also reducing transaction costs). To the extent these monies are converted back into U.S. dollars, the value of the assets so maintained will be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations.

 

Tax Consequences of Hedging. Under applicable tax law, each Fund’s hedging activities could result in the application of special tax rules, which could ultimately affect the amount, timing, and character of distributions to shareholders. Some of a Fund’s hedging transactions are also likely to produce a difference between its book income and tax income, which could cause a portion of the Fund’s income distributions to constitute a return of capital for tax purposes or require the Fund to make distributions exceeding book income to qualify as a regulated investment company for U.S. federal tax purposes. See “Taxation” below for further details.

 

Among the risks facing Funds that utilize foreign currencies and related transactions is the risk that the relative value of currencies will be different than anticipated by the particular Fund’s Adviser. The Funds will segregate assets determined to be liquid by the Adviser in accordance with procedures approved by the Board to cover forward currency contracts entered into for non- hedging purposes. Please see “Derivative Instruments” below for a description of other foreign currency related transactions that may be used by the Funds. Certain foreign currency transactions in which the Funds may invest may be over-the-counter transactions (e.g., currency swap transactions). See “Derivative Instruments—Swap Agreements” for a discussion of certain risks associated with such transactions.

 

E.Commodities

 

The Funds may invest in instruments that provide exposure to, and are subject to the risks of, investments in commodities. These may include futures, options, swaps and other instruments, the return on which is dependent upon the return of one or more commodities or commodity indices. Commodities may include, among other things, oil, gas, coal, alternative energy, steel, timber, agricultural products, minerals, precious metals (e.g., gold, silver, platinum, and palladium) and other resources. In addition, the Funds may invest in companies principally engaged in the commodities industries (such as mining, dealing or transportation companies) with significant exposure to commodities markets or investments in commodities, and through these investments may be exposed to the risks of investing in commodities. Commodities generally and particular commodities have, at times been subject to substantial price fluctuations over short periods of time and may be affected by unpredictable monetary and political policies such as currency devaluations or revaluations, economic and social conditions within a country, trade imbalances, or trade or currency restrictions between countries. The prices of commodities may be, however, less subject to local and company-specific factors than securities of individual companies. As a result, commodity prices may be more or less volatile in price than securities of companies engaged in commodity-related businesses. Investments in commodities can also present concerns such as delivery, storage and maintenance, possible illiquidity, and the unavailability of accurate market valuations. To the extent that the Funds invest in companies principally engaged in the commodities industries, the Funds will also be subject to these risks. Commodity investments may not correlate with equity market returns. Investments in commodity-related companies are also subject to the risk that the performance of such companies may not correlate with returns on commodity investments to the extent expected by a Fund’s portfolio managers.

 

In order to qualify for the special U.S. federal income tax treatment accorded regulated investment companies and their shareholders described in “Taxation” below, each Fund must, among other things, derive at least 90% of its income from certain specified sources (such income, “qualifying income”). Income from certain commodity-linked investments does not constitute qualifying income to a Fund. The tax treatment of certain other commodity-linked investments is not certain, in particular with respect to whether income and gains from such investments constitute qualifying income. If such income were determined not to constitute qualifying income and were to cause a Fund’s non-qualifying income to exceed 10% of the Fund’s gross income for any year, the Fund would fail the 90% gross income test and fail to qualify as a regulated investment company unless it were eligible to and did pay a tax at the Fund level. See “Taxation.” A Fund’s intention to so qualify can therefore limit the manner in or extent to which the Fund seeks exposure to commodities.

 

F.Derivative Instruments

 

The Funds may use a number of derivative instruments. Derivatives may be used for a variety of reasons, including for risk management, for leverage and to indirectly gain exposure to other types of investments. Generally, derivatives are financial contracts whose value depends upon, or is derived from, the value of an underlying asset, references rate or index, and may relate to, among other things, stocks, bonds, interest rates, currencies or currency exchange rates, commodities, and related indexes. The derivatives market is always changing and the Funds may invest in derivatives other than those shown below. There is no assurance that any derivatives strategy used by the Funds will succeed. In addition, suitable derivative transactions may not be available in all circumstances and there can be no assurance that a Fund will engage in these transactions to reduce exposure to other risks when that would be beneficial.

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Examples of derivative instruments that the Funds may buy, sell or otherwise utilize include, among others, option contracts, futures contracts, options on futures contracts, forward contracts, warrants and swap agreements, including swap agreements with respect to securities indexes. The Funds may purchase and sell (write) call and put options on securities, securities indexes and foreign currencies; and may also purchase and sell futures contracts and options thereon with respect to securities, securities indexes, interest rates and foreign currencies. Information regarding certain derivatives that the Funds may utilize and their related risks follows below.

 

The value of some derivative instruments in which the Funds may invest may be particularly sensitive to changes in prevailing interest rates, and, like the other investments of the Funds, the ability of the Funds to utilize these instruments successfully may depend in part upon their ability to forecast interest rates and other economic factors correctly. If a Fund incorrectly forecasts such factors and has taken positions in derivative instruments contrary to prevailing market trends, the Fund could suffer losses. If a Fund incorrectly forecasts interest rates, market values or other economic factors in utilizing a derivatives strategy, the Fund might have been in a better position if it had not entered into the transaction at all. Also, suitable derivative transactions may not be available in all circumstances. The use of derivative strategies involves certain special risks, including a possible imperfect correlation, or even no correlation, between price movements of derivative instruments and price movements of related investments. While some strategies involving derivative instruments can reduce the risk of loss, they also can reduce the opportunity for gain or even result in losses by offsetting favorable price movements in related investments or otherwise, due to the possible inability of a Fund to purchase or sell a portfolio security at a time that otherwise would be favorable or the possible need to sell a portfolio security at a disadvantageous time because a Fund is required to maintain asset coverage or offsetting positions in connection with transactions in derivative instruments, and the possible inability of the Fund to close out or to liquidate its derivatives positions. Each Fund’s use of derivatives may increase or accelerate the amount of ordinary income recognized by shareholders.

 

General Risks Associated with Derivatives. Each Fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. If a Fund invests in a derivative instrument, it could lose more than the principal amount invested, and the use of certain derivatives may subject a Fund to the potential for unlimited loss. Derivatives are subject to a number of risks described elsewhere in this section, such as liquidity risk, market risk, credit and counterparty risk and management risk.

 

Derivatives also involve the risk of mispricing or improper valuation, the risk of ambiguous documentation, and the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. In addition, each Fund’s use of derivatives may affect the amount, timing or character of distributions payable to, and thus taxes payable by, shareholders.

 

Among other trading agreements, the Funds may also be party to International Swaps and Derivatives Association, Inc. Master Agreements (“ISDA Agreements”) with select counterparties that generally govern over-the-counter derivative transactions entered into by a Fund. The ISDA Agreements typically include representations and warranties as well as contractual terms related to collateral, events of default, termination events, and other provisions. Termination events include the decline in the net assets of a Fund below a certain level over a specified period of time and entitle a counterparty to elect to terminate early with respect to some or all the transactions under the ISDA Agreement with that counterparty. Depending on the relative size of a Fund’s derivatives positions, such an election by one or more of the counterparties could have a material adverse impact on the Fund’s operations.

 

As further described below, federal legislation has been recently enacted in the U.S. that provides for new clearing, margin, reporting and registration requirements for participants in the derivatives market. While the ultimate impact is not yet clear, these changes could restrict and/or impose significant costs or other burdens upon a Fund’s ability to participate in derivatives transactions. Similarly, these changes could impose limits or restrictions on the counterparties with which the Funds engage in derivatives transactions. As a result, the Funds may be unable to use certain derivative instruments or otherwise execute its respective investment strategy. These risks may be particularly acute to the extent the Funds use commodity-related derivative instruments. Further, the requirements for qualification as a “regulated investment company” under federal income tax law limit the extent to which a Fund may enter into commodity-related derivatives. See “Taxation” below.

 

Options on Securities and Indexes. The Funds may, among other things, purchase and sell put and call options on equity, debt or other securities or indexes in standardized contracts traded on foreign or domestic securities exchanges, boards of trade, or similar entities, or quoted on the National Association of Securities Dealers Automated Quotations (“NASDAQ”) System or on a regulated foreign over- the-counter market, and agreements, sometimes called cash puts, which may accompany the purchase of a new issue from a dealer. Among other reasons, the Funds may purchase put options to protect holdings in an underlying or related security against a decline in market value, and may purchase call options to protect against increases in the prices of securities it intends to purchase pending its ability to invest in such securities in an orderly manner.

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An option on a security (or index) is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a put) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price at any time during the term of the option. The writer of an option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security. Upon exercise, the writer of an option on an index is obligated to pay the difference between the cash value of the index and the exercise price multiplied by the specified multiplier for the index option. (An index is designed to reflect features of a particular financial or securities market, a specific group of financial instruments or securities, or certain economic indicators.)

 

When a Fund writes a call (put) option on an underlying security it owns (is short), the option is sometimes referred to as a “covered option.” The Funds may write such options. When a Fund writes a call (put) option on an underlying security it does not own (is not short), the option is sometimes referred to as a “naked option.” The Funds may not write “naked” call options on individual securities other than exchange traded funds (“ETFs”).

 

However, the Funds may write a call or put option only if the option is “covered” as such term is used in the context of Section 18 of the 1940 Act. In the case of a call option on a security, a call option is covered for these purposes if a Fund segregates assets determined to be liquid by the Adviser in accordance with procedures approved by the Board in an amount equal to the contract value of the position (minus any collateral deposited with a broker-dealer), on a mark-to-market basis. The option is also covered if a Fund owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, cash or other assets determined to be liquid by the Adviser in accordance with procedures approved by the Board in such amount are segregated) upon conversion or exchange of other securities held by a Fund. For a call option on an index, the option is covered if a Fund segregates assets determined to be liquid by the Adviser in accordance with procedures approved by the Board in an amount equal to the contract value of the index. A call option is also covered if a Fund holds a call on the same index or security as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is segregated by a Fund in assets determined to be liquid by the Adviser in accordance with procedures approved by the Board. A put option on a security or an index is “covered” if a Fund segregates assets determined to be liquid by the Adviser in accordance with procedures approved by the Board equal to the exercise price. A put option is also covered if a Fund holds a put on the same security or index as the put written where the exercise price of the put held is (i) equal to or greater than the exercise price of the put written, or (ii) less than the exercise price of the put written, provided the difference is segregated by a Fund in assets determined to be liquid by the Adviser in accordance with procedures approved by the Board.

 

If an option written by a Fund expires unexercised, the Fund realizes a capital gain equal to the premium received at the time the option was written. If an option purchased by a Fund expires unexercised, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security or index, exercise price, and expiration). In addition, the Funds may sell put or call options previously purchased, which could result in a net gain or loss depending on whether the amount realized on the sale is more or less than the premium and other transaction costs paid on the put or call option that is sold. There can be no assurance, however, that a closing purchase or sale transaction can be effected when a Fund desires.

 

The Funds will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Funds will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the Funds will realize a capital gain or, if it is less, the Funds will realize a capital loss. See “Taxation” below. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security or index in relation to the exercise price of the option, the volatility of the underlying security or index, and the time remaining until the expiration date.

 

The premium paid for a put or call option purchased by a Fund is an asset of that Fund. The premium received for an option written by a Fund is recorded as a deferred credit. The value of an option purchased or written is marked to market daily and is valued in accordance with the Trust’s valuation policies and procedures.

 

The Funds may write straddles (covered or uncovered) consisting of a combination of a call and a put written on the same underlying security. A straddle will be covered when sufficient assets are deposited to meet a Fund’s immediate obligations. The Funds may use the same liquid assets to cover both the call and put options where the exercise price of the call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Funds will also segregate liquid assets equivalent to the amount, if any, by which the put is “in the money.”

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OTC Options. The Funds may also purchase and write over-the-counter (“OTC”) options. OTC options differ from traded options in that they are two-party contracts, with price and other terms negotiated between buyer and seller, and generally do not have as much market liquidity as exchange-traded options. The Funds may be required to treat as illiquid OTC options purchased and securities being used to cover certain written OTC options, and they will treat the amount by which such formula price exceeds the intrinsic value of the option (i.e., the amount, if any, by which the market price of the underlying security exceeds the exercise price of the option) as an illiquid investment. The Funds may also purchase and write so-called dealer options.

 

Risks Associated with Options on Securities and Indexes. There are several risks associated with transactions in options on securities, including ETFs, and on indexes. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve the intended result. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful because of market behavior or unexpected events.

 

There can be no assurance that a liquid market will exist when a Fund seeks to close out an option position. If a Fund were unable to close out an option that it had purchased on a security or index, it would have to exercise the option in order to realize any profit or the option may expire worthless. If a Fund were unable to close out a call option that it had written on a security held in its portfolio, it would not be able to sell the underlying security unless the option expired without exercise. As the writer of a call option on an individual security held in a Fund’s portfolio, the Fund foregoes, during the option’s life, the opportunity to profit from increases in the market value of the security or index position covering the call option above the sum of the premium and the exercise price (the “strike price”) of the call but has retained the risk of loss (net of premiums received) should the price of the underlying security or index position decline. Similarly, as the writer of a call option on a securities index or ETF, a Fund forgoes the opportunity to profit from increases in the index or ETF over the strike price of the option, though it retains the risk of loss (net of premiums received) should the price of the Fund’s portfolio securities decline.

 

The value of call options written by the Funds will be affected by, among other factors, changes in the value of underlying securities (including those comprising an index), changes in the dividend rates of underlying securities (including those comprising an index), changes in interest rates, changes in the actual or perceived volatility of the stock market and underlying securities and the remaining time to an option’s expiration. The value of an option also may be adversely affected if the market for the option is reduced or becomes less liquid. The writer of an “American-style” option has no control over the time when it may be required to fulfill its obligation as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying security at the exercise price. 

 

The hours of trading for options may not conform to the hours during which the securities held by the Funds are traded. To the extent that the options markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets that may not be reflected in the options markets. In addition, the Funds’ options transactions will be subject to limitations established by each of the exchanges, boards of trade or other trading facilities on which the options are traded. An exchange, board of trade or other trading facility may order the liquidation of positions found to be in excess of these limits, and it may impose other sanctions that could adversely affect a Fund engaging in options transactions.

 

If a put or call option purchased by a Fund is not sold when it has remaining value, and if the market price of the underlying security or index remains equal to or greater than the exercise price (in the case of a put), or remains less than or equal to the exercise price (in the case of a call), the Fund will lose its entire investment in the option. Also, where a put or call option on a particular security or index is purchased to hedge against price movements in a related security or index, the price of the put or call option may move more or less than the price of the related security or index. Furthermore, if trading restrictions or suspensions are imposed on the options markets, a Fund may be unable to close out a position. Similarly, if restrictions on exercise were imposed, a Fund might be unable to exercise an option it has purchased. Except to the extent that a call option on an index or ETF written by a Fund is covered by an option on the same index or ETF purchased by the Fund, movements in the index or ETF may result in a loss to the Fund; however, such losses may be mitigated by changes in the value of the Fund’s securities during the period the option was outstanding (based, in part, on the extent of correlation (if any) between the performance of the index or ETF and the performance of the Fund’s portfolio securities).

 

Foreign Currency Options. The Funds may buy or sell put and call options on foreign currencies in various circumstances, including, but not limited to, as a hedge against changes in the value of the U.S. dollar (or another currency) in relation to a foreign currency in which each Fund’s securities may be denominated or to cross-hedge or in an attempt to increase the total return when the Adviser anticipates that the currency will appreciate or depreciate in value. In addition, the Funds may buy or sell put and call options on foreign currencies either on exchanges or in the over-the-counter market. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires. A call option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits, which may limit the ability of a Fund to reduce foreign currency risk using such options.

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Futures Contracts and Options on Futures Contracts. The Funds may use interest rate, foreign currency, index and other futures contracts, and options on such contracts. For example, the Funds may invest in foreign exchange futures contracts and options thereon (“futures options”) that are traded on a U.S. or foreign exchange or board of trade, or similar entity, or quoted on an automated quotation system as an adjunct to their securities activities. The Funds may also enter into futures contracts for the purchase or sale of securities. The Funds may purchase and sell futures contracts on various securities indexes (“Index Futures”) and related options for hedging purposes and for investment purposes. For example, the Funds may invest in Index Futures and related options when the Adviser believes that there are not enough attractive securities available to maintain the standards of diversification and liquidity set for a Fund pending investment in such securities if or when they do become available. Through the use of Index Futures and related options, the Funds may diversify risk in their respective portfolios without incurring the substantial brokerage costs that may be associated with investment in the securities of multiple issuers. Each Fund may also minimize potential market and liquidity problems that may result from increases in positions already held by the Fund. Each Fund’s purchase and sale of Index Futures is limited to contracts listed on exchanges that have been approved by the Commodity Futures Trading Commission (“CFTC”).

 

Generally, a futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument, foreign currency or the cash value of an index at a specified price and time.

 

An Index Future is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of a securities index (“Index”) at the close of the last trading day of the contract and the price at which the index contract was originally written. Although the value of an Index might be a function of the value of certain specified securities, no physical delivery of these securities is made. A unit is the value of the relevant Index from time to time. Entering into a contract to buy units is commonly referred to as buying or purchasing a contract or holding a long position in an Index. Index Futures contracts can be traded through all major commodity brokers. The Funds will ordinarily be able to close open positions on the futures exchange on which Index Futures are then traded at any time up to and including the expiration day. As described below, the Funds will be required to segregate initial margin in the name of the futures broker upon entering into an Index Future. Variation margin will be paid to and received from the broker on a daily basis as the contracts are marked to market. For example, when a Fund has purchased an Index Future and the price of the relevant Index has risen, that position will have increased in value and the Fund will receive from the broker a variation margin payment equal to that increase in value. Conversely, when a Fund has purchased an Index Future and the price of the relevant Index has declined, the position would be less valuable and the Fund would be required to make a variation margin payment to the broker.

 

The Funds may close open positions on the futures exchanges on which Index Futures are traded at any time up to and including the expiration day. All positions that remain open at the close of the last business day of the contract’s life are required to settle on the next business day (based upon the value of the relevant index on the expiration day), with settlement made with the appropriate clearing house. Additional or different margin requirements as well as settlement procedures may be applicable to foreign stock Index Futures at the time a Fund purchases such instruments. Positions in Index Futures may be closed out by a Fund only on the futures exchanges upon which the Index Futures are then traded.

 

The following example illustrates generally the manner in which Index Futures operate. The Standard & Poor’s 100 Stock Index is composed of 100 selected common stocks, most of which are listed on the New York Stock Exchange. The S&P 100 Index assigns relative weightings to the common stocks included in the Index, and the Index fluctuates with changes in the market values of those common stocks. In the case of the S&P 100 Index, contracts are to buy or sell 100 units. Thus, if the value of the S&P 100 Index were $180, one contract would be worth $18,000 (100 units x $180). The Index Future specifies that no delivery of the actual stocks making up the Index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the Index at the expiration of the contract. For example, if a Fund enters into a futures contract to buy 100 units of the S&P 100 Index at a specified future date at a contract price of $180 and the S&P 100 Index is at $184 on that future date, the Fund will gain $400 (100 units x gain of $4). If the Fund enters into a futures contract to sell 100 units of the Index at a specified future date at a contract price of $180 and the S&P 100 Index is at $182 on that future date, the Fund will lose $200 (100 units x loss of $2).

 

A public market exists in futures contracts covering a number of Indexes as well as financial instruments and foreign currencies, including but not limited to: the S&P 500; the S&P Midcap 400; the Nikkei 225; the NYSE composite; U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of deposit; Eurodollar certificates of deposit; the Australian dollar; the Canadian dollar; the British pound; the Japanese yen; the Swiss franc; the Mexican peso; and certain multinational currencies, such as the euro. It is expected that other futures contracts in which the Funds may invest will be developed and traded in the future.

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The Funds may purchase and write call and put options on futures contracts (“futures options”). Futures options possess many of the same characteristics as options on securities and indexes (discussed above). A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the holder acquires a short position and the writer is assigned the opposite long position. 

 

When a purchase or sale of a futures contract is made by a Fund, the Fund is required to segregate a specified amount of assets determined to be liquid by the Adviser in accordance with procedures approved by the Board (“initial margin”). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. Margin requirements on foreign exchanges may be different than U.S. exchanges. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract, which is returned to a Fund upon termination of the contract, assuming all contractual obligations have been satisfied. A Fund would ordinarily earn interest income on initial margin deposits. Each day a Fund pays or receives cash, called “variation margin,” equal to the daily change in value of the futures contract. This process is known as “marking to market.” Variation margin does not represent a borrowing or loan by a Fund, but is instead, a settlement between a Fund and the broker of the amount one would owe the other if the futures contract expired. In computing daily net asset value, each Fund will mark to market its open futures positions.

 

Each Fund is also required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option, and other futures positions held by each Fund.

 

Although some futures contracts call for making or taking delivery of the underlying securities, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (i.e., with the same exchange, underlying security or index, and delivery month). If an offsetting purchase price is less than the original sale price, a Fund realizes a capital gain, or if it is more, a Fund realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, a Fund realizes a capital gain, or if it is less, a Fund realizes a capital loss. Any transaction costs must also be included in these calculations.

 

Commodity Futures Contracts and Options on Commodity Futures Contracts. In addition to other futures contracts and options thereon, the Funds may invest in commodity futures contracts and options thereon. A commodity futures contract is an agreement between two parties, in which one party agrees to buy a commodity, such as an energy, agricultural or metal commodity from the other party at a later date at a price and quantity agreed upon when the contract is made.

 

Limitations on Use of Futures and Futures Options. The Funds may enter into positions in futures contracts and related options for hedging purposes, for example, to hedge against changes in interest rates, foreign currency exchange rates or securities prices. In addition, the Funds may utilize futures contracts for investment and/or speculative purposes. For instance, a Fund may invest to a significant degree in Index Futures on stock indexes and related options (including those that may trade outside of the United States) as an alternative to purchasing individual stocks in order to gain or adjust their exposure to a particular market. The Funds may also use these investments to hedge against changes in the value of securities that the Adviser intends to purchase for the portfolio.

 

When purchasing a futures contract, each Fund will segregate (and mark to market on a daily basis) assets determined to be liquid by the Adviser in accordance with procedures approved by the Board that, when added to the amounts deposited with a futures commission merchant as margin, are equal to the total market value of (or in certain cases, such as contracts required to “cash settle,” the Fund’s obligation under) the futures contract. Alternatively, the Fund may “cover” its position by purchasing a put option on the same futures contract with a strike price as high, or higher, than the price of the contract held by the Fund.

 

When selling a futures contract, each Fund will segregate (and mark to market on a daily basis) assets determined to be liquid by the Adviser in accordance with procedures approved by the Board that are equal to the market value of the instruments underlying the contract (or in certain cases, such as contracts required to “cash settle,” a Fund’s obligation under the contract). Alternatively, a Fund may “cover” its position by owning the instruments underlying the contract (or, in the case of an Index Future, a portfolio with a volatility substantially similar to that of the Index on which the futures contract is based), or by holding a call option permitting the Fund to purchase the same futures contract at a price no higher than the price of the contract written by the Fund (or at a higher price if the difference is maintained in liquid assets with the Trust’s custodian). 

 

When selling a call option on a futures contract, each Fund will segregate (and mark to market on a daily basis) assets determined to be liquid by the Adviser in accordance with procedures approved by the Board that, when added to the amounts deposited with a futures commission merchant as margin, equal the total market value of the futures contract underlying the call option. Alternatively, a Fund may cover its position by entering into a long position in the same futures contract at a price no higher than the strike price of the call option, by owning the instruments underlying the futures contract, or by holding a separate call option permitting the Fund to purchase the same futures contract at a price not higher than the strike price of the call option sold by the Fund, or by taking other offsetting positions.

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When selling a put option on a futures contract, each Fund will segregate (and mark to market on a daily basis) assets determined to be liquid by the Adviser in accordance with procedures approved by the Board that equal the purchase price of the futures contract, less any margin on deposit. Alternatively, a Fund may cover the position either by entering into a short position in the same futures contract, or by owning a separate put option permitting it to sell the same futures contract so long as the strike price of the purchased put option is the same or higher than the strike price of the put option sold by the Fund, or by taking other offsetting positions.

 

To the extent that securities with maturities greater than one year are used to segregate liquid assets to cover a Fund’s obligations under futures contracts and related options, such use will not eliminate the leverage risk arising from such use, which may tend to exaggerate the effect on net asset value of any increase or decrease in the market value of the Fund’s portfolio, and may require liquidation of portfolio positions when it is not advantageous to do so.

 

Each Fund’s intention to qualify as a regulated investment company and the requirements for so qualifying also may limit the extent to which each Fund may enter into certain futures, options or forward contracts. Each Fund’s investment in such contracts may affect the amount, timing or character of each Fund’s distributions. See “Taxation” below.

 

Commodity Pool Operators and Commodity Trading Advisors. The CFTC has adopted regulations that subject registered investment companies and their investment advisers to regulation by the CFTC if the registered investment company invests more than a prescribed level of its liquidation value in commodity futures, options on commodities or commodity futures, swaps, or other financial instruments (“commodity interests”) regulated under the Commodity Exchange Act (the “Act”), or if a Fund markets itself as providing investment exposure to such instruments. The Funds have claimed an exclusion from commodity pool operator registration pursuant to CFTC Rule 4.5 with respect to the Funds. To remain eligible for this exclusion, the Funds must comply with certain limitations, including limits on each Fund’s ability to use any commodity interests and limits on the manner in which each Fund holds out its use of such commodity interests. These limitations may restrict each Fund’s ability to pursue its investment strategy, increase the costs of implementing its strategy, increase expenses of the Funds, and/or adversely affect each Fund’s total return.

 

Risks Associated with Futures and Futures Options. There are several risks associated with the use of futures contracts and futures options. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. In the case of futures contracts used for hedging purposes, some of the risk may be caused by an imperfect correlation between movements in the price of the futures contract and the price of a security or other investment being hedged. The hedge will not be fully effective where there is such imperfect correlation. Also, an incorrect correlation could result in a loss on both the hedged securities in a Fund and the hedging vehicle. For example, if the price of the futures contract moves more than the price of the hedged security, a Fund would experience either a loss or gain on the future that is not completely offset by movements in the price of the hedged securities. In addition, there are significant differences between the securities and futures markets that could result in an imperfect correlation between the markets, causing a given hedge not to achieve its objectives. The degree of imperfection of correlation depends on circumstances such as variations in speculative market demand for futures and futures options, including technical influences in futures trading and futures options, and differences between the financial instruments being hedged and the instruments underlying the standard contracts available for trading in such respects as interest rate levels, maturities, and creditworthiness of issuers. To compensate for imperfect correlations, a Fund may purchase or sell futures contracts in a greater dollar amount than the hedged securities if the volatility of the hedged securities is historically greater than the volatility of the futures contracts. Conversely, a Fund may purchase or sell fewer contracts if the volatility of the price of the hedged securities is historically less than that of the futures contracts. The risk of imperfect correlation generally tends to diminish as the maturity date of the futures contract approaches. A decision as to whether, when and how to hedge involves the exercise of skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of market behavior or unexpected interest rate trends. Also, a Fund may not choose to use futures and/or suitable hedging transactions may not be available in all circumstances. Even if a hedge is executed successfully, a Fund’s return may have been higher if no hedging had been attempted.

 

Additionally, the price of Index Futures may not correlate perfectly with movement in the relevant index 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 may close futures contracts through offsetting transactions that could distort the normal relationship between the index and futures markets. Second, the deposit requirements in the futures market are less onerous than margin requirements in the securities market, and as a result, the futures market may attract more speculators than does the securities market. Increased participation by speculators in the futures market may also cause temporary price distortions. In addition, trading hours for foreign stock Index Futures may not correspond perfectly to hours of trading on the foreign exchange to which a particular foreign stock Index Future relates. This may result in a disparity between the price of Index Futures and the value of the relevant index due to the lack of continuous arbitrage between the Index Futures price and the value of the underlying index.

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Futures exchanges may limit the amount of fluctuation permitted in certain 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 the current trading session. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses.

 

There can be no assurance that a liquid market will exist at a time when a Fund seeks to close out a futures position or a futures option position, and the Fund would remain obligated to meet margin requirements until the position is closed. In addition, many of the contracts discussed above are relatively new instruments without a significant trading history. As a result, there can be no assurance that an active secondary market will develop or continue to exist.

 

It is important to note that hedging costs are treated as capital transactions and are not, therefore, deducted from each Fund’s dividend distributions and are not reflected in yield.

 

Additional Risks Associated with Commodity Futures Contracts. There are several additional risks associated with transactions in commodity futures contracts.

 

Storage. Unlike the financial futures markets, in the commodity futures markets there are costs of physical storage associated with purchasing the underlying commodity. The price of the commodity futures contract will reflect the storage costs of purchasing the physical commodity, including the time value of money invested in the physical commodity. To the extent that the storage costs for an underlying commodity change while the Fund is invested in futures contracts on that commodity, the value of the futures contract may change proportionately. 

 

Reinvestment. In the commodity futures markets, producers of the underlying commodity may decide to hedge the price risk of selling the commodity by selling futures contracts today to lock in the price of the commodity at delivery tomorrow. In order to induce speculators to purchase the other side of the same futures contract, the commodity producer generally must sell the futures contract at a lower price than the expected future spot price. Conversely, if most hedgers in the futures market are purchasing futures contracts to hedge against a rise in prices, then speculators will only sell the other side of the futures contract at a higher futures price than the expected future spot price of the commodity. The changing nature of the hedgers and speculators in the commodity markets will influence whether futures prices are above or below the expected future spot price, which can have significant implications for a Fund. If the nature of hedgers and speculators in futures markets has shifted when it is time for a Fund to reinvest the proceeds of a maturing contract in a new futures contract, the Fund might reinvest at higher or lower futures prices, or choose to pursue other investments.

 

Other Economic Factors. The commodities that underlie commodity futures contracts may be subject to additional economic and non-economic variables, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments. These factors may have a larger impact on commodity prices and commodity-linked instruments, including futures contracts, than on traditional securities. Certain commodities are also subject to limited pricing flexibility because of supply and demand factors. Others are subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials and the instability of supplies of other materials. These additional variables may create additional investment risks that subject the Funds’ investments to greater volatility than investments in traditional securities.

 

Additional Risks of Options on Securities or Indexes, Futures Contracts, Options on Futures Contracts and Forward Currency Exchange Contracts and Options Thereon. Options on securities or indexes, futures contracts, options on futures contracts, and options on currencies may be traded on non-U.S. exchanges. Such transactions may not be regulated as effectively as similar transactions in the United States; may not involve a clearing mechanism and related guarantees; and are subject to the risk of governmental actions affecting trading in, or the prices of, non-U.S. securities. Some non-U.S. exchanges may be principal markets so that no common clearing facility exists and a trader may look only to the broker for performance of the contract. The value of such positions also could be adversely affected by (i) other complex non-U.S. political, legal and economic factors, (ii) lesser availability than in the United States of data on which to make trading decisions, (iii) delays in the Trust’s ability to act upon economic events occurring in non-U.S. markets during non-business hours in the United States, (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States and (v) lesser trading volume. In addition, unless a Fund hedges against fluctuations in the exchange rate between the U.S. dollar and the currencies in which trading is done on non-U.S. exchanges, any profits that the Fund might realize in trading could be eliminated by adverse changes in the exchange rate, or the Fund could incur losses as a result of those changes. The value of some derivative instruments in which the Funds may invest may be particularly sensitive to changes in prevailing interest rates, and, like the other investments of the Funds, the ability of each Fund to utilize these instruments successfully may depend in part upon the ability of the Adviser to forecast interest rates and other economic factors correctly. If the Adviser incorrectly forecasts such factors and has taken positions in derivative instruments contrary to prevailing market trends, a Fund could suffer losses. In addition, a Fund’s use of such instruments may increase or accelerate the amount of ordinary income recognized by its shareholders.

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Swap Agreements. The Funds may enter into total return swap agreements, credit default swap agreements and other swap agreements made with respect to interest rates, currencies, indexes or baskets of securities (or a single security), commodities and other assets or measures of risk or return. These transactions are entered into in an attempt to obtain a particular return when it is considered desirable to do so, possibly at a lower cost to the Funds than if the Funds had 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 a number of years. Swap agreements are individually negotiated and structured to include exposure to a variety of types of investments or market factors. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or “swapped” between the parties generally are calculated with respect to a “notional amount,” such as the return on or increase in value of a particular dollar amount invested at a particular interest rate or in a “basket” of securities representing a particular index.

 

Forms of swap agreements include: interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or “cap;” interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or “floor;” and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.

 

The Funds may directly or indirectly use credit default swaps to take an active long or short position with respect to the likelihood of default by a corporate or sovereign issuer of fixed income securities (including asset-backed securities). In a credit default swap, one party pays, in effect, an insurance premium through a stream of payments to another party in exchange for the right to receive a specified return in the event of default (or similar events) by one or more third parties on their obligations. For example, in purchasing a credit default swap, a Fund may pay a premium in return for the right to put specified bonds or loans to the counterparty, such as a U.S. or non-U.S. issuer or basket of such issuers, upon issuer default (or similar events) at their par (or other agreed-upon) value. A Fund, as the purchaser in a credit default swap, bears the risk that the investment might expire worthless. It also would be subject to counterparty risk - the risk that the counterparty may fail to satisfy its payment obligations to the Fund in the event of a default (or similar event). In addition, as a purchaser in a credit default swap, a Fund’s investment would only generate income in the event of an actual default (or similar event) by the issuer of the underlying obligation.

 

The Funds also may use credit default swaps for investment purposes by selling a credit default swap, in which case a Fund will receive one or more premium payments from its counterparty in return for the Fund’s taking on the obligation to pay the par (or other agreed-upon) value to the counterparty upon issuer default (or similar events). As the seller in a credit default swap, a Fund effectively adds economic leverage to its portfolio because, in addition to its total net assets, the Fund is subject to investment exposure on the notional amount of the swap. If no event of default (or similar event) occurs, a Fund would keep the premium payments received from the counterparty and generally would have no payment obligations, with the exception of an initial payment made on the credit default swap or any margin requirements with the credit default swap counterparty. For credit default swap agreements, trigger events for payment under the agreement vary by the type of underlying investment (e.g., corporate and sovereign debt and asset-backed securities) and by jurisdiction (e.g., United States, Europe and Asia).

 

In connection with credit default swaps in which a Fund is the seller, the Fund will typically segregate or “earmark” cash or liquid assets, or enter into certain offsetting positions, with a value at least equal to the full notional amount of the swap (minus any amounts owed to the Fund).

 

If the Funds enter into a credit default swap agreement, the Funds will write insurance protection on the full notional amount of the agreement.

 

The Funds also may enter into options on swap agreements (“swaptions”). A swaption is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. The Funds may write (sell) and purchase put and call swaptions. Depending on the terms of the particular option agreement, a Fund will generally incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When a Fund purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when a Fund writes a swaption, upon exercise of the option, the Fund will become obligated according to the terms of the underlying agreement.

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Most swap agreements entered into by the Funds would calculate the obligations of the parties to the agreement on a “net basis.” Consequently, each Fund’s current obligations (or rights) under a swap agreement generally will be equal only to the net 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”). Each Fund’s current obligations under a swap agreement will be accrued daily (offset against any amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered through the segregation of assets determined to be liquid by the Adviser in accordance with procedures approved by the Board. Obligations under swap agreements so covered will not be construed to be “senior securities” for purposes of each Fund’s investment restriction concerning senior securities.

 

Whether each Fund’s use of swap agreements or swaptions will be successful in furthering its investment objectives will depend on the Adviser’s ability to predict correctly whether certain types of investments are likely to produce greater returns than other investments. Swaps are highly specialized instruments that require investment techniques, risk analyses, and tax planning different from those associated with traditional investments. The use of a swap requires an understanding not only of the referenced asset, reference rate, or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions. Like most other investments, swap agreements are subject to the risk that the market value of the instrument will change in a way detrimental to a Fund’s interest. The Funds bear the risk that the Adviser will not accurately forecast future market trends or the values of assets, reference rates, indexes, or other economic factors in establishing swap positions for the Funds.

 

Because swaps are two-party contracts that may be subject to contractual restrictions on transferability and termination and because, they may have terms of greater than seven days, swap agreements may be considered to be illiquid. If a swap is not liquid, it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses.

 

Moreover, the Funds bear 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. When a counterparty’s obligations are not fully secured by collateral, then a Fund is essentially an unsecured creditor of the counterparty. If the counterparty defaults, a Fund will have contractual remedies, but there is no assurance that a counterparty will be able to meet its obligations pursuant to such contracts or that, in the event of default, the Fund will succeed in enforcing contractual remedies. Counterparty risk still exists even if a counterparty’s obligations are secured by collateral because a Fund’s interest in collateral may not be perfected or additional collateral may not be promptly posted as required. Counterparty risk also may be more pronounced if a counterparty’s obligations exceed the amount of collateral held by a Fund (if any), a Fund is unable to exercise its interest in collateral upon default by the counterparty, or the termination value of the instrument varies significantly from the marked-to-market value of the instrument.

 

New rules and regulations affecting the derivatives market affect counterparty risk with respect to derivatives. Some derivatives transactions are required to be centrally cleared, and a party to a cleared derivatives transaction is subject to the credit risk of the clearing house and the member of the clearing house (“clearing member”) through which it holds its cleared position, rather than the credit risk of its original counterparty to the derivative transaction. Credit risk of market participants with respect to derivatives that are centrally cleared is concentrated in a few clearing houses, and it is not clear how an insolvency proceeding of a clearing house would be conducted and what impact an insolvency of a clearing house would have on the financial system. A clearing member is obligated by contract and by applicable regulation to segregate all funds received from customers with respect to cleared derivatives transactions from the clearing member’s proprietary assets. However, all funds and other property received by a clearing broker from its customers are generally held by the clearing broker on a commingled basis in an omnibus account, and the clearing member may invest those funds in certain instruments permitted under the applicable regulations. The assets of a Fund might not be fully protected in the event of the bankruptcy of a Fund’s clearing member, because the Fund would be limited to recovering only a pro rata share of all available funds segregated on behalf of the clearing broker’s customers for a relevant account class. Also, the clearing member is required to transfer to the clearing organization the amount of margin required by the clearing organization for cleared derivatives, which amounts are generally held in an omnibus account at the clearing organization for all customers of the clearing member. Regulations promulgated by the CFTC require that the clearing member notify the clearing house of the amount of initial margin provided by the clearing member to the clearing organization that is attributable to each customer. However, if the clearing member does not provide accurate reporting, a Fund is subject to the risk that a clearing organization will use the Fund’s assets held in an omnibus account at the clearing organization to satisfy payment obligations of a defaulting customer of the clearing member to the clearing organization. In addition, clearing members generally provide to the clearing organization the net amount of variation margin required for cleared swaps for all of its customers in the aggregate, rather than the gross amount of each customer. Therefore, the Funds are subject to the risk that a clearing organization will not make variation margin payments owed to the Funds if another customer of the clearing member has suffered a loss and is in default, and the risk that the Funds will be required to provide additional variation margin to the clearing house before the clearing house will move a Fund’s cleared derivatives transactions to another clearing member. In addition, if a clearing member does not comply with the applicable regulations or its agreement with a Fund, or in the event of fraud or misappropriation of customer assets by a clearing member, the Fund could have only an unsecured creditor claim in an insolvency of the clearing member with respect to the margin held by the clearing member.

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Centrally cleared derivative arrangements may be less favorable to mutual funds than bilateral arrangements because: (1) the Funds may be required to provide greater amounts of margin for cleared derivatives transactions than for bilateral derivatives transactions; and (2) following a period of notice to a Fund, a clearing member generally can require termination of existing cleared derivatives transactions at any time or increases in margin requirements above the margin that the clearing member required at the beginning of a transaction. Clearing houses also have broad rights to increase margin requirements for existing transactions or to terminate transactions at any time.

 

If the Adviser attempts to use a swap as a hedge against, or as a substitute for, a portfolio investment, the Funds will be exposed to the risk that the swap will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the Funds. While hedging strategies involving swap instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments.

 

Many swaps are complex and often valued subjectively. Many over-the-counter derivatives are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or incorrect valuation. The pricing models used may not produce valuations that are consistent with the values the Funds realize when they close or sell an over-the-counter derivative. Valuation risk is more pronounced when the Funds enter into over-the-counter derivatives with specialized terms because the market value of those derivatives in some cases is determined in part by reference to similar derivatives with more standardized terms. Incorrect valuations may result in increased cash payment requirements to counterparties, undercollateralization and/or errors in calculation of each Fund’s net asset value.

 

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) established a framework for the regulation of OTC swap markets; the framework outlined the joint responsibility of the CFTC and the SEC in regulating swaps. The CFTC is responsible for the regulation of swaps, the SEC is responsible for the regulation of security-based swaps and jointly they are both responsible for the regulation of mixed swaps.

 

Risk of Potential Governmental Regulation of Derivatives. It is possible that government regulation of various types of derivative instruments, including futures and swap agreements, may limit or prevent the Funds from using such instruments as a part of their investment strategy, and could ultimately prevent the Funds from being able to achieve their respective investment objectives. It is impossible to predict fully the effects of legislation and regulation in this area, but the effects could be substantial and adverse.

 

The futures markets are subject to comprehensive statutes, regulations, and margin requirements. The SEC, the CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the implementation or reduction of speculative position limits, the implementation of higher margin requirements, the establishment of daily price limits and the suspension of trading.

 

The regulation of swaps and futures transactions in the U.S. is a rapidly changing area of law and is subject to modification by government and judicial action. There is a possibility of future regulatory changes altering, perhaps to a material extent, the nature of an investment in a Fund or the ability of a Fund to continue to implement its investment strategies. In particular, the Dodd-Frank Act, which was signed into law in July 2010, sets forth a new legislative framework for over-the-counter (“OTC”) derivatives, such as swaps, in which the Fund may invest. Title VII of the Dodd-Frank Act makes broad changes to the OTC derivatives market, grants significant new authority to the SEC and the CFTC to regulate OTC derivatives and market participants, and will require clearing of many OTC derivatives transactions.

 

Under recently adopted rules and regulations, transactions in some types of swaps (including interest rate swaps and credit default swaps on North American and European indices) are required to be centrally cleared. In a transaction involving those swaps (“cleared derivatives”), a Fund’s counterparty is a clearing house, rather than a bank or broker. Since a Fund is not a member of clearing houses and only clearing members can participate directly in the clearing house, a Fund will hold cleared derivatives through accounts at clearing members. In cleared derivatives transactions, a Fund will make payments (including margin payments) to and receive payments from a clearing house through their accounts at clearing members. Clearing members guarantee performance of their clients’ obligations to the clearing house.

 

In many ways, cleared derivative arrangements are less favorable to mutual funds than bilateral arrangements. For example, a Fund may be required to provide more margin for cleared derivatives transactions than for bilateral derivatives transactions. Also, in contrast to a bilateral derivatives transaction, following a period of notice to a Fund, a clearing member generally can require termination of an existing cleared derivatives transaction at any time or an increase in margin requirements above the margin that the clearing member required at the beginning of a transaction. Clearing houses also have broad rights to increase margin requirements for existing transactions or to terminate those transactions at any time. Any increase in margin requirements or termination of existing cleared derivatives transactions by the clearing member or the clearing house could interfere with the ability of a Fund to pursue its investment strategy. Further, any increase in margin requirements by a clearing member could expose a Fund to greater credit risk to its clearing member, because margin for cleared derivatives transactions in excess of a clearing house’s margin requirements typically is held by the clearing member. Also, a Fund is subject to risk if it enters into a derivatives transaction that is required to be cleared (or that the Adviser expects to be cleared), and no clearing member is willing or able to clear the transaction on a Fund’s behalf. In those cases, the transaction might have to be terminated, and the Fund could lose some or all of the benefit of the transaction, including loss of an increase in the value of the transaction and/or loss of hedging protection. In addition, the documentation governing the relationship between a Fund and clearing members is drafted by the clearing members and generally is less favorable to a Fund than typical bilateral derivatives documentation. For example, documentation relating to cleared derivatives generally includes a one-way indemnity by a Fund in favor of the clearing member for losses the clearing member incurs as the Fund’s clearing member and typically does not provide the Fund any remedies if the clearing member defaults or becomes insolvent. While futures contracts entail similar risks, the risks likely are more pronounced for cleared swaps due to their more limited liquidity and market history.

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Some types of cleared derivatives are required to be executed on an exchange or on a swap execution facility. A swap execution facility is a trading platform where multiple market participants can execute derivatives by accepting bids and offers made by multiple other participants in the platform. While this execution requirement is designed to increase transparency and liquidity in the cleared derivatives market, trading on a swap execution facility can create additional costs and risks for the Funds. For example, swap execution facilities typically charge fees, and if a Fund executes derivatives on a swap execution facility through a broker intermediary, the intermediary may impose fees as well. Also, a Fund may indemnify a swap execution facility, or a broker intermediary who executes cleared derivatives on a swap execution facility on the Fund’s behalf, against any losses or costs that may be incurred as a result of the Fund’s transactions on the swap execution facility.

 

These and other new rules and regulations could, among other things, further restrict each Fund’s ability to engage in, or increase the cost to each Fund of, derivatives transactions, for example, by making some types of derivatives no longer available to a Fund, increasing margin or capital requirements, or otherwise limiting liquidity or increasing transaction costs. These regulations are new and evolving, so their potential impact on the Funds and the financial system are not yet known. While the new regulations and central clearing of some derivatives transactions are designed to reduce systemic risk (i.e., the risk that the interdependence of large derivatives dealers could cause them to suffer liquidity, solvency or other challenges simultaneously), there is no assurance that the new clearing mechanisms will achieve that result, and in the meantime, as noted above, central clearing and related requirements expose the Funds to new kinds of risks and costs.

 

G.When-Issued, Delayed Delivery and Forward Commitment Transactions

 

The Funds may purchase or sell securities on a when-issued, delayed delivery or forward commitment basis. Since inception, the Funds have not made any such purchases or sales and each Fund has no immediate plans to do so. These transactions involve a commitment by a Fund to purchase or sell securities for a predetermined price or yield, with payment and delivery taking place more than seven days in the future, or after a period longer than the customary settlement period for that type of security. When delayed delivery purchases are outstanding, a Fund will segregate, until the settlement date, assets determined to be liquid by the Adviser in accordance with procedures approved by the Board in an amount sufficient to meet the purchase price. Typically, no income accrues on securities purchased on a delayed delivery basis prior to the time delivery of the securities is made, although a Fund may earn income on segregated securities.

 

When purchasing a security on a when-issued, delayed delivery or forward commitment basis, a Fund assumes the rights and risks of ownership of the security, including the risk of price and yield fluctuations, and takes such fluctuations into account when determining its net asset value. Because a Fund is not required to pay for the security until the delivery date, these risks are in addition to the risks associated with the Fund’s other investments. If a Fund remains substantially fully invested at a time when delayed delivery purchases are outstanding, the delayed delivery purchases may result in a form of leverage.

 

When a Fund has sold a security on a when-issued, delayed delivery or forward commitment basis, the Fund does not participate in future gains or losses with respect to the security. If the other party to a delayed delivery transaction fails to deliver or pay for the securities, a Fund could miss a favorable price or yield opportunity or could suffer a loss. Additionally, when selling a security on a when-issued, delayed delivery or forward commitment basis without owning the security, a Fund will incur a loss if the security’s price appreciates in value such that the security’s price is above the agreed upon price on the settlement date. The Funds may dispose of or renegotiate a transaction after it is entered into, and may sell when-issued, delayed delivery or forward commitment securities before the settlement date, which may result in a capital gain or loss.

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The Funds may make contracts to purchase securities for a fixed price at a future date beyond customary settlement time (“forward commitments”) if the Fund either (i) segregates until the settlement date assets determined to be liquid by the Adviser in accordance with procedures approved by the Board in an amount sufficient to meet the purchase price or (ii) enters into an offsetting contract for the forward sale of securities of equal value that it owns. The Funds may also enter into forward commitments for the purchase or sale of non-U.S. currencies. Forward commitments may be considered securities themselves. They involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in value of a Fund’s other assets. The Funds may dispose of a commitment prior to settlement and may realize short-term profits or losses upon such disposition.

 

To Be Announced Securities (“TBAs”). As with other delayed delivery transactions, a seller agrees to issue a TBA security at a future date. However, the seller does not specify the particular securities to be delivered. Instead, a Fund agrees to accept any security that meets specified terms. For example, in a TBA mortgage-backed security transaction, a Fund and the seller would agree upon the issuer, interest rate and terms of the underlying mortgages. The seller would not identify the specific underlying mortgages until it issues the security. TBA mortgage-backed securities increase market risks because the underlying mortgages may be less favorable than anticipated by a Fund.

 

H.Rights and Warrants to Purchase Securities

 

Rights normally have a short life, usually two to four weeks, are freely transferable and entitle the holder to buy the new common stock at a lower price than the public offering price. Warrants are securities that are usually issued together with a debt security or preferred stock and that give the holder the right to buy a proportionate amount of common stock at a specified price. Warrants are freely transferable and are often traded on major exchanges. Unlike rights, warrants normally have a life that is measured in years and entitle the holder to buy common stock of a company at a price that is usually higher than the market price at the time the warrant is issued. Corporations often issue warrants to make the accompanying debt security more attractive.

 

Warrants and rights may entail greater risks than certain other types of investments. Generally, rights and warrants do not carry the right to receive dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets of the issuer. In addition, their value does not necessarily change with the value of the underlying securities, and they cease to have value if they are not exercised on or before their expiration date. If the market price of the underlying stock does not exceed the exercise price during the life of the warrant or right, the warrant or right will expire worthless. Rights and warrants may increase the potential profit or loss to be realized from the investment as compared with investing the same amount in the underlying securities. Similarly, the percentage increase or decrease in the value of an equity security warrant may be greater than the percentage increase or decrease in the value of the underlying common stock.

 

Warrants may relate to the purchase of equity or debt securities. Debt obligations with warrants attached to purchase equity securities have many characteristics of convertible securities and their prices may, to some degree, reflect the performance of the underlying stock. Debt obligations also may be issued with warrants attached to purchase additional debt securities at the same coupon rate. A decline in interest rates would permit a Fund to sell such warrants at a profit. If interest rates rise, these warrants would generally expire with no value.

  

I.Repurchase Agreements

 

For the purposes of maintaining liquidity and achieving income, the Funds may enter into repurchase agreements with domestic commercial banks or registered broker/dealers. A repurchase agreement is a contract under which a Fund would acquire a security for a relatively short period (usually not more than one week) subject to the obligation of the seller to repurchase and the Fund to resell such security at a fixed time and price (representing the Fund’s cost plus interest). In the case of repurchase agreements with broker-dealers, the value of the underlying securities (or collateral) will be at least equal at all times to the total amount of the repurchase obligation, including the interest factor. The Funds bear a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Funds are delayed or prevented from exercising their rights to dispose of the collateral securities. This risk includes the risk of procedural costs or delays in addition to a loss on the securities if their value should fall below their repurchase price. The Adviser will monitor the creditworthiness of the counterparties.

 

J.Other Investment Companies

 

The Funds may also invest in securities of other open-end, closed-end or unit investment trust investment companies, business development companies (“BDCs”) and ETFs to the extent that such investments are consistent with each Fund’s investment objective and policies and permissible under the 1940 Act and related rules and any exemptive relief from or interpretations of the SEC.

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In general, under the 1940 Act, an investment company such as each Fund may not: (i) own more than 3% of the outstanding voting securities of any one registered investment company, (ii) invest more than 5% of its total assets in the securities of any single registered investment company or (iii) invest more than 10% of its total assets in securities of other registered investment companies.

 

Each Fund may invest in other investment companies during periods when it has large amounts of uninvested cash, during periods when there is a shortage of attractive securities available in the market, or when the Adviser believes share prices of other investment companies offer attractive values. Each Fund may also invest in other investment companies because the laws of some foreign countries may make it difficult or impossible for a Fund to invest directly in issuers organized or headquartered in those countries, or may limit such investments. The most efficient, and sometimes the only practical, means of investing in such companies may be through investment in other investment companies that in turn are authorized to invest in the securities of such issuers.

 

Investment companies, and in particular ETFs, may be structured to perform in a similar fashion to a broad-based securities index or may focus on a particular strategy or class of assets. ETFs typically seek to track the performance or dividend yield of specific indexes or companies in related industries. These indexes may be broad-based, sector-based or international. Investing in investment companies involves substantially the same risks as investing directly in the underlying instruments, but also involves expenses at the investment company-level, such as portfolio management fees and operating expenses. These expenses are in addition to the Fund’s own fees and expenses, which may lead to duplication of expenses while the Fund owns another investment company’s shares. In addition, investing in investment companies involves the risk that they will not perform in exactly the same fashion, or in response to the same factors, as the underlying instruments or index. For information regarding the tax treatment of ETFs, please see “Taxation” below.

 

Open-end investment companies typically offer their shares continuously at net asset value plus any applicable sales charge and stand ready to redeem shares upon shareholder request. The shares of certain other types of investment companies, such as ETFs and closed-end investment companies, typically trade on a stock exchange or over-the-counter at a premium or a discount to their net asset value. In the case of closed-end investment companies, the number of shares is typically fixed. The securities of closed-end investment companies and ETFs carry the risk that the price a Fund pays or receives may be higher or lower than the investment company’s net asset value. ETFs and closed-end investment companies are also subject to certain additional risks, including the risks of illiquidity and of possible trading halts due to market conditions or other reasons, based on the policies of the relevant exchange. The shares of investment companies, particularly closed-end investment companies, may also be leveraged, which would increase the volatility of a Fund’s net asset value.

 

BDCs are publicly-traded closed-end funds that seek capital appreciation and income by investing in smaller companies during their initial stages of development. With respect to investments in BDCs, the Funds plan to invest only in publicly traded BDCs.

 

Risks Associated with BDCs. A BDC may invest in the equity and debt securities of smaller and developing companies as well as companies that are experiencing financial crises (“Portfolio Companies”). Investments in smaller and developing Portfolio Companies involve a greater risk of loss due to their youth and limited track records and are more susceptible to competition and economic and market changes due to limited products and market shares. Because Portfolio Companies may have limited capital resources, there is also a greater risk of default on debt securities issued and non-payment of dividends on any preferred and common stock issued. Portfolio Companies may also not be able to secure required financing thus potentially limiting the growth and success of these companies. Investments in Portfolio Companies typically have limited liquidity and a BDC may not be able to liquidate investments in Portfolio Companies at their perceived value and may not be able to reduce its exposure to such investments during adverse market or economic conditions. A BDC also may not be able to make investments in Portfolio Companies pursuant to reasonable terms due to the competitive market environment in which such companies operate. A BDC may use leverage (e.g. borrowing and the issuance of debt and preferred securities) to finance its own operations and may suffer significant losses if market fluctuations cause the BDC’s net asset value to decline or if related interest payments exceed investment income. A BDC may also not be able to make desired investments in Portfolio Companies if credit is not available due to, among other things, disruptions in the credit markets, thus limiting the growth and success of the BDC.

 

As a shareholder in an investment company, a Fund will bear its ratable share of that investment company’s expenses, and would remain subject to payment of the Fund’s management fees and other expenses with respect to assets so invested. Each Fund’s shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other investment companies. In addition, the securities of other investment companies may be leveraged and will therefore be subject to the same risks of leverage described in the Prospectus and herein.

 

K.Corporate Debt Securities

 

The Funds may invest in a variety of bonds and related debt obligations of varying maturities issued by U.S. and non-U.S. companies, banks and other corporate entities. Corporate debt securities include bills, notes, debentures, money market instruments and similar instruments and securities, and are generally used by corporations and other issuers to borrow money from investors for such purposes as working capital or capital expenditures. The issuer pays the investor a variable or fixed rate of interest and normally must repay the amount borrowed on or before maturity. Certain bonds are “perpetual” in that they have no maturity date.

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The investment return of corporate debt securities reflects interest earnings and changes in the market value of the security. The market value of a corporate debt obligation may be expected to rise and fall inversely with interest rates generally. In addition to interest rate risk, corporate debt securities also involve the risk that the issuers of the securities may not be able to meet their obligations on interest or principal payments at the time called for by an instrument. The rate of return or return of principal on some debt obligations may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies. 

 

L.U.S. Government Securities

 

U.S. Government securities are obligations of and, in certain cases, guaranteed by, the U.S. Government, its agencies or instrumentalities. The U.S. Government does not guarantee the net asset value of a Fund’s shares. U.S. Government securities are subject to market and interest rate risk, and may be subject to varying degrees of credit risk. Investments in U.S. Government Securities remain subject to the risks associated with downgrade or default. Some U.S. Government securities, such as Treasury bills, notes and bonds, and securities guaranteed by the Government National Mortgage Association (“GNMA”), are supported by the full faith and credit of the United States; others, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Department of the Treasury (the “U.S. Treasury”); others, such as those of the Federal National Mortgage Association (“FNMA”), are supported by the discretionary authority of the U.S. Government to purchase the agency’s obligations; and still others, such as securities issued by members of the Farm Credit System, are supported only by the credit of the agency, instrumentality or corporation. U.S. Government securities may include zero coupon securities, which do not distribute interest on a current basis and tend to be subject to greater risk than interest-paying securities of similar maturities.

 

Securities issued by U.S. Government agencies or government-sponsored enterprises may not be guaranteed by the U.S. Treasury. GNMA, a wholly owned U.S. Government corporation, is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA and backed by pools of mortgages insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. Government-related guarantors (i.e., not backed by the full faith and credit of the U.S. Government) include the FNMA and the Federal Home Loan Mortgage Corporation (“FHLMC”). 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. Government. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but its participation certificates are not backed by the full faith and credit of the U.S. Government.

 

Prior to September 2008, FNMA and FHLMC were government-sponsored enterprises owned entirely by private stockholders. However, the value of these entities’ stock fell sharply in 2008 due to concerns that the entities did not have sufficient capital to offset losses and in mid-2008, the U.S. Treasury was authorized to increase the size of home loans that FNMA and FHLMC could purchase in certain residential areas and, until 2009, to lend FNMA and FHLMC emergency funds and to purchase the entities’ stock. In September 2008, the U.S. Treasury announced that FNMA and FHLMC had been placed in conservatorship by the Federal Housing Finance Agency (“FHFA”), a newly created independent regulator. As the conservator, FHFA succeeded to all rights, titles, powers and privileges of FNMA and FHLMC and of any stockholder, officer or director of FNMA and FHLMC with respect to FNMA and FHLMC and the assets of FNMA and FHLMC. FHFA selected a new chief executive officer and chairman of the board of directors for each of FNMA and FHLMC.

 

In connection with the conservatorship, the U.S. Treasury entered into a Senior Preferred Stock Purchase Agreement with each of FNMA and FHLMC pursuant to which the U.S. Treasury would purchase up to an aggregate of $100 billion of each of FNMA and FHLMC to maintain a positive net worth in each enterprise. This agreement contains various covenants that severely limit each enterprise’s operations. In exchange for entering into these agreements, the U.S. Treasury received $1 billion of each enterprise’s senior preferred stock and warrants to purchase 79.9% of each enterprise’s common stock. In 2009, the U.S. Treasury announced that it was doubling the size of its commitment to each enterprise under the Senior Preferred Stock Program to $200 billion. The U.S. Treasury’s obligations under the Senior Preferred Stock Program are for an indefinite period of time for a maximum amount of $200 billion per enterprise. In 2009, the U.S. Treasury further amended the Senior Preferred Stock Purchase Agreement to allow the cap on the U.S. Treasury’s funding commitment to increase as necessary to accommodate any cumulative reduction in FNMA’s and FHLMC’s net worth through the end of 2012. In August 2012, the Senior Preferred Stock Purchase Agreement was further amended to, among other things, accelerate the wind down of the retained portfolio, terminate the requirement that FNMA and FHLMC each pay a 10% dividend annually on all amounts received under the funding commitment, and require the submission of an annual risk management plan to the U.S. Treasury.

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FNMA and FHLMC are continuing to operate as going concerns while in conservatorship and each remain liable for all of its obligations, including its guaranty obligations, associated with its mortgage-backed securities. The Senior Preferred Stock Purchase Agreement is intended to enhance each of FNMA’s and FHLMC’s ability to meet its obligations. The FHFA has indicated that the conservatorship of each enterprise will end when the director of FHFA determines that FHFA’s plan to restore the enterprise to a safe and solvent condition has been completed.

 

Under the Federal Housing Finance Regulatory Reform Act of 2008 (the “Reform Act”), which was included as part of the Housing and Economic Recovery Act of 2008, FHFA, as conservator or receiver, has the power to repudiate any contract entered into by FNMA or FHLMC prior to FHFA’s appointment as conservator or receiver, as applicable, if FHFA determines, in its sole discretion, that performance of the contract is burdensome and that repudiation of the contract promotes the orderly administration of FNMA’s or FHLMC’s affairs. The Reform Act requires FHFA to exercise its right to repudiate any contract within a reasonable period of time after its appointment as conservator or receiver. FHFA, in its capacity as conservator, has indicated that it has no intention to repudiate the guaranty obligations of FNMA or FHLMC because FHFA views repudiation as incompatible with the goals of the conservatorship. However, in the event that FHFA, as conservator or if it is later appointed as receiver for FNMA or FHLMC, were to repudiate any such guaranty obligation, the conservatorship or receivership estate, as applicable, would be liable for actual direct compensatory damages in accordance with the provisions of the Reform Act. Any such liability could be satisfied only to the extent of FNMA’s or FHLMC’s assets available therefor.

 

In the event of repudiation, the payments of interest to holders of FNMA or FHLMC mortgage-backed securities would be reduced if payments on the mortgage loans represented in the mortgage loan groups related to such mortgage-backed securities are not made by the borrowers or advanced by the servicer. Any actual direct compensatory damages for repudiating these guaranty obligations may not be sufficient to offset any shortfalls experienced by such mortgage-backed security holders. Further, in its capacity as conservator or receiver, FHFA has the right to transfer or sell any asset or liability of FNMA or FHLMC without any approval, assignment or consent. Although FHFA has stated that it has no present intention to do so, if FHFA, as conservator or receiver, were to transfer any such guaranty obligation to another party, holders of FNMA or FHLMC mortgage-backed securities would have to rely on that party for satisfaction of the guaranty obligation and would be exposed to the credit risk of that party.

 

In addition, certain rights provided to holders of mortgage-backed securities issued by FNMA and FHLMC under the operative documents related to such securities may not be enforced against FHFA, or enforcement of such rights may be delayed, during the conservatorship or any future receivership. The operative documents for FNMA and FHLMC mortgage-backed securities may provide (or with respect to securities issued prior to the date of the appointment of the conservator may have provided) that upon the occurrence of an event of default on the part of FNMA or FHLMC, in its capacity as guarantor, which includes the appointment of a conservator or receiver, holders of such mortgage-backed securities have the right to replace FNMA or FHLMC as trustee if the requisite percentage of mortgage-backed securities holders consent. The Reform Act prevents mortgage-backed security holders from enforcing such rights if the event of default arises solely because a conservator or receiver has been appointed. The Reform Act also provides that no person may exercise any right or power to terminate, accelerate or declare an event of default under certain contracts to which FNMA or FHLMC is a party, or obtain possession of or exercise control over any property of FNMA or FHLMC, or affect any contractual rights of FNMA or FHLMC, without the approval of FHFA, as conservator or receiver, for a period of 45 or 90 days following the appointment of FHFA as conservator or receiver, respectively.

 

U.S. Government securities include securities that have no coupons, or have been stripped of their unmatured interest coupons, individual interest coupons from such securities that trade separately, and evidences of receipt of such securities. Such securities may pay no cash income, and are purchased at a deep discount from their value at maturity. Because interest on zero coupon securities is not distributed on a current basis but is, in effect, compounded, zero coupon securities tend to be subject to greater risk than interest-paying securities of similar maturities. Custodial receipts issued in connection with so-called trademark zero coupon securities, such as CATs and TIGRs, are not issued by the U.S. Treasury, and are therefore not U.S. Government securities, although the underlying bond represented by such receipt is a debt obligation of the U.S. Treasury. Other zero coupon Treasury securities (e.g., STRIPs and CUBEs) are direct obligations of the U.S. Government.

 

M.Inflation-Indexed Bonds

 

The Funds may invest in inflation-indexed bonds, which are debt obligations whose value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers utilize a structure that accrues inflation into the principal value of the bond. Many other issuers pay out the Consumer Price Index (“CPI”) accruals as part of a semiannual coupon.

 

Inflation-indexed bonds issued by the U.S. Treasury have maturities of approximately five, ten or thirty years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis equal to a fixed percentage of the inflation-adjusted principal amount. For example, if a Fund purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and the rate of inflation over the first six months was 1%, the mid-year par value of the bond would be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the year resulted in the whole year’s inflation equaling 3%, the end-of-year par value of the bond would be $1,030 and the second semi-annual interest payment would be $15.45 ($1,030 times 1.5%).

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If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed and will fluctuate. The Funds may also invest in other inflation-related bonds that may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal amount.

 

The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds.

 

While these securities are expected to provide protection from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.

 

The periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer Price Index for Urban Consumers (“CPI-U”), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation-indexed bonds issued by a non-U.S. government are generally adjusted to reflect a comparable inflation index calculated by that government. There can be no assurance that the CPI-U or any non-U.S. inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a non-U.S. country will be correlated to the rate of inflation in the United States.

 

Any increase in the principal amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity. 

 

N.Delayed Funding Loans and Revolving Credit Facilities

 

The Funds may enter into, or acquire participations in, delayed funding loans and revolving credit facilities. Delayed funding loans and revolving credit facilities are borrowing arrangements in which the lender agrees to make loans up to a maximum amount upon demand by the borrower during a specified term. A revolving credit facility differs from a delayed funding loan in that as the borrower repays the loan, an amount equal to the repayment may be borrowed again during the term of the revolving credit facility. These commitments may have the effect of requiring a Fund to increase its investment in a company at a time when it might not otherwise decide to do so (including a time when the company’s financial condition makes it unlikely that such amounts will be repaid).

 

The Funds may acquire a participation interest in delayed funding loans or revolving credit facilities from a bank or other financial institution. See “Loan Participations and Assignments” below. The terms of the participation require a Fund to make a pro rata share of all loans extended to the borrower and entitle a Fund to a pro rata share of all payments made by the borrower. Delayed funding loans and revolving credit facilities may be subject to restrictions on transfer, and also limited opportunities may exist to resell such investments. These instruments may often be illiquid. Delayed funding loans and revolving credit facilities usually provide for floating or variable rates of interest. To the extent that the Funds are committed to advance additional funds, they will at all times segregate assets that the Adviser, in accordance with procedures approved by the Board, have determined are liquid in an amount sufficient to meet such commitments. 

 

O.Event-Linked Bonds

 

The Funds may obtain event-linked exposure by investing in “event-linked bonds” or “event-linked swaps,” or may implement “event-linked strategies.” Event-linked exposure results in gains that typically are contingent on the non-occurrence of a specific “trigger” event, such as a hurricane or an earthquake or other physical or weather-related phenomena. Some event-linked bonds are commonly referred to as “catastrophe bonds.” They may be issued by government agencies, insurance companies, reinsurers, special purpose corporations or other on-shore or off-shore entities (such special purpose entities are created to accomplish a narrow and well-defined objective, such as the issuance of a note in connection with a reinsurance transaction). If a trigger event causes losses exceeding a specific amount in the geographic region and time period specified in a bond, a Fund investing in the bond may lose a portion or all of its principal invested in the bond. If no trigger event occurs, a Fund would expect to recover its principal plus interest. For some event-linked bonds, the trigger event or losses may be based on company-wide losses, index-portfolio losses, industry indices or readings of scientific instruments rather than specified actual losses. Often the event-linked bonds provide for extensions of maturity that are mandatory, or optional at the discretion of the issuer, in order to process and audit loss claims in those cases where a trigger event has, or possibly has, occurred. In addition to the specified trigger events, event-linked bonds may also expose a Fund to certain unanticipated risks including but not limited to issuer (credit) default, adverse regulatory or jurisdictional interpretations and adverse tax consequences.

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Event-linked bonds are a relatively new type of financial instrument. As such, there is no significant trading history for many of these securities, and there can be no assurance that a liquid market in these bonds will develop. Lack of a liquid market may impose the risk of higher transaction costs and the possibility that a Fund may be forced to liquidate positions when it would not be advantageous to do so. 

 

P.Loan Participations and Assignments

 

The Funds may invest in fixed- and floating-rate loans arranged through private negotiations between an issuer of debt instruments and one or more financial institutions (“lenders”). Generally, a Fund’s investments in loans are expected to take the form of loan participations and assignments of portions of loans from third parties.

 

Large loans to corporations or governments may be shared or syndicated among several lenders, usually banks. The Funds may participate in such syndicates, or can buy part of a loan, becoming a direct lender. Participations and assignments involve special types of risk, including liquidity risk and the risks of being a lender. If a Fund purchases a participation, it may only be able to enforce its rights through the lender, and may assume the credit risk of the lender in addition to the borrower. With respect to assignments, a Fund’s rights against the borrower may be more limited than those held by the original lender.  

 

Q.Participation on Creditors Committees

 

The Funds may from time to time participate on committees formed by creditors to negotiate with the management of financially troubled issuers of securities held by a Fund. Such participation may subject the Fund to expenses such as legal fees and may make the Funds an “insider” of the issuer for purposes of the federal securities laws, and therefore may restrict each Fund’s ability to trade in or acquire additional positions in a particular security when it might otherwise desire to do so. Participation by the Funds on such committees also may expose the Funds to potential liabilities under the federal bankruptcy laws or other laws governing the rights of creditors and debtors. The Funds would participate in such committees only when the Adviser believes that such participation is necessary or desirable to enforce each Fund’s rights as a creditor or to protect the value of securities held by a Fund.

 

R.Bank Obligations

 

The Funds may invest in bank capital securities. Bank capital securities are issued by banks to help fulfill their regulatory capital requirements. There are three common types of bank capital: Lower Tier II, Upper Tier II and Tier I. Bank capital is generally, but not always, of investment grade quality. Upper Tier II securities are commonly thought of as hybrids of debt and preferred stock. Upper Tier II securities are often perpetual (with no maturity date), callable and have a cumulative interest deferral feature. This means that under certain conditions, the issuer bank can withhold payment of interest until a later date. However, such deferred interest payments generally earn interest. Tier I securities often take the form of trust preferred securities.

 

Bank obligations in which the Funds may invest include certificates of deposit, bankers’ acceptances, and fixed time deposits. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and that earn a specified return. Bankers’ acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are “accepted” by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties that vary depending upon market conditions and the remaining maturity of the obligation. There are generally no contractual restrictions on the right to transfer a beneficial interest in a fixed time deposit to a third party, although there is generally no market for such deposits. Fixed time deposits which (1) are not subject to prepayment or (2) provide for withdrawal penalties upon prepayment (other than overnight deposits) may be considered illiquid for purposes of each Fund’s restrictions on investments in illiquid securities. The Funds may also hold funds in an interest-bearing account for temporary purposes.

 

Obligations of non-U.S. banks involve certain risks associated with investing in non-U.S. securities described under “Non-U.S. Securities” above, including the possibilities that their liquidity could be impaired because of future political and economic developments, that their obligations may be less marketable than comparable obligations of United States banks, that a non-U.S. jurisdiction might impose withholding taxes on interest income payable on those obligations, that non-U.S. deposits may be seized or nationalized, that non-U.S. governmental restrictions such as exchange controls may be adopted and in turn might adversely affect the payment of principal and interest on those obligations and that the selection of those obligations may be more difficult because there may be less publicly available information concerning non-U.S. banks or the accounting, auditing and financial reporting standards, practices and requirements applicable to non-U.S. banks may differ from those applicable to United States banks. Non-U.S. banks are not generally subject to examination by any U.S. Government agency or instrumentality.

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S.Senior and Other Bank Loans

 

The Funds may invest in fixed- and floating-rate loans issued by banks and other financial institutions (including, among others, Senior Loans, delayed funding loans and revolving credit facilities). Loan interests may take the form of direct interests acquired during a primary distribution and may also take the form of assignments of, novations of or participations in a bank loan acquired in secondary markets.

 

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