497 1 a497.htm a497.htm
COMBINED PROXY STATEMENT AND PROSPECTUS
  
FOR THE REORGANIZATION OF
  
 
Bridgeway Large-Cap Value Fund,
a series of Bridgeway Funds, Inc.

20 Greenway Plaza, Suite 450
Houston, Texas 77046
(800) 661-3550

INTO

American Beacon Bridgeway Large Cap Value Fund,
a series of American Beacon Funds

4151 Amon Carter Boulevard, MD 2450
Fort Worth, Texas 76155
(800) 967-9009

 

 
And
 
  
STATEMENT OF ADDITIONAL INFORMATION
 
  TO COMBINED PROXY STATEMENT AND PROSPECTUS
 
 
December 16, 2011
 


 
 

 
 
 
BRIDGEWAY FUNDS, INC.
Bridgeway Large-Cap Value Fund
 
20 Greenway Plaza, Suite 450
Houston, Texas 77046
 


December 16, 2011

To the Shareholders:

We are pleased to announce that the Bridgeway Large-Cap Value Fund (the “Bridgeway Fund”), a series of Bridgeway Funds, Inc. (the “Company”), is proposing to reorganize into the American Beacon Bridgeway Large Cap Value Fund (the “AB Fund”), a newly created series of American Beacon Funds (the “AB Trust”).  The AB Fund is designed to be substantially similar from an investment perspective to the Bridgeway Fund.

A Special Meeting of Shareholders of the Bridgeway Fund is to be held at 11:00 a.m. Central time on Wednesday, February 1, 2012, at 20 Greenway Plaza, Suite 450, Houston, Texas 77046, where you will be asked to vote on the proposal to reorganize the Bridgeway Fund into the AB Fund.  A Combined Proxy Statement and Prospectus (the “Proxy Statement”) regarding the meeting, a proxy card for your vote at the meeting and a postage-prepaid envelope in which to return your proxy card are enclosed.

The primary purpose of the reorganization transaction (the “Reorganization”) is to move the Bridgeway Fund to the American Beacon Family of Funds.  The Reorganization will shift management oversight responsibility for the Bridgeway Fund from Bridgeway Capital Management, Inc. (“Bridgeway”) to American Beacon Advisors, Inc. (the “Manager”).  The Manager is an experienced provider of investment advisory services to institutional and retail investors, with over $16 billion mutual fund and over $44 billion overall assets under management, as of October 31, 2011.  Since 1986, the Manager has offered a variety of services and products, including corporate cash management, separate account management, and mutual funds.  The Reorganization has the potential to expand the Bridgeway Fund’s presence in more distribution channels, increase its asset base and lower operating expenses as a percentage of assets.
 
However, by engaging Bridgeway as the sub-adviser (the “Sub-Adviser”) to the AB Fund, the Manager will provide continuity of the portfolio management team that has been responsible for the Bridgeway Fund’s performance record since its inception in 2003. The portfolio managers of the Sub-Adviser who are primarily responsible for the day-to-day portfolio management of the Bridgeway Fund will remain the same.
 
The Reorganization will not result in any increase in the advisory fees payable by the AB Fund over those advisory fees currently incurred by the Bridgeway Fund.  The Bridgeway Fund assesses no front-end sales charge, contingent deferred sales charge, redemption fees or exchange fees, and no such fees will be assessed by the AB Fund.  The Reorganization will not result in any increase in the overall net expense ratio during the first year as compared to the net expense ratio currently paid by the Bridgeway Fund and will not result in any increase in the gross expense ratio as compared to the gross expense ratio currently paid by the Bridgeway Fund.
 

 
 

 

If Bridgeway Fund shareholders approve the Reorganization, it will take effect on or about February 3, 2012.  At that time, the Bridgeway Fund Class N Shares you currently own would, in effect, be exchanged on a tax-free basis for, respectively, Institutional Class shares of the AB Fund with the same aggregate value, as follows:
 
Bridgeway Large-Cap Value Fund
à
American Beacon Bridgeway Large Cap Value Fund
Class N Shares
à
Institutional Class shares
 
No sales loads, commissions or other transactional fees will be imposed on shareholders in connection with the tax-free exchange of their shares.
 
The Board of Directors of the Company (the “Board”), on behalf of the Bridgeway Fund, unanimously recommends that the shareholders of the Bridgeway Fund vote in favor of the proposed Reorganization.
 
Detailed information about the proposal is contained in the enclosed materials.  Whether or not you plan to attend the meeting in person, we need your vote.  Once you have decided how you will vote, please promptly complete, sign, date and return the enclosed proxy card or vote by telephone or internet.  If you have any questions regarding the proposal to be voted on, please do not hesitate to call (800) 661-3550.
 
Your vote is very important to us. Thank you for your response and for your continued investment in the Bridgeway Large-Cap Value Fund.

Respectfully,
 
/s/ Michael D. Mulcahy
   
   
   
 
Michael D. Mulcahy
President, Bridgeway Funds, Inc.
   
   
   
 

 
 

 

BRIDGEWAY FUNDS, INC.
Bridgeway Large-Cap Value Fund
 
20 Greenway Plaza, Suite 450
Houston, Texas 77046
 
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY 1, 2012.

To the Shareholders of the Bridgeway Large-Cap Value Fund:

NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the “Special Meeting”) of the Bridgeway Large-Cap Value Fund (the “Bridgeway Fund”), a series of Bridgeway Funds, Inc. (the “Company”), is to be held at 11:00 a.m. Central time on Wednesday, February 1, 2012, at 20 Greenway Plaza, Suite 450, Houston, Texas 77046.

The Special Meeting is being held to consider an Agreement and Plan of Reorganization and Termination (the “Plan”) providing for the transfer of all of the assets of the Bridgeway Fund to the American Beacon Bridgeway Large Cap Value Fund (the “AB Fund”), a newly created series of American Beacon Funds (the “AB Trust”).  The transfer effectively would be (a) an exchange of your Class N Shares of the Bridgeway Fund for Institutional Class shares of the AB Fund, which would be distributed pro rata by the Bridgeway Fund to the holders of its shares in complete liquidation of the Bridgeway Fund, and (b) the AB Fund’s assumption of all of the liabilities of the Bridgeway Fund, as follows:

Bridgeway Large-Cap Value Fund
à
American Beacon Bridgeway Large Cap Value Fund
Class N Shares
à
Institutional Class shares

Those present and the appointed proxies also will transact such other business, if any, as may properly come before the Special Meeting or any adjournments or postponements thereof.

Holders of record of the shares of common stock in the Bridgeway Fund as of the close of business on December 7, 2011 are entitled to vote at the Special Meeting or any adjournments or postponements thereof.

If the necessary quorum to transact business or the vote required to approve any proposal is not obtained at the Special Meeting or if quorum is obtained but sufficient votes required to approve the Plan are not obtained, the persons named as proxies on the enclosed proxy card may propose one or more adjournments of the Special Meeting to permit, in accordance with applicable law, further solicitation of proxies with respect to the proposal. Any such adjournment would require the affirmative vote of the holders of a majority of the shares present in person or by proxy.  The persons designated as proxies may use their discretionary authority to vote as instructed by management of the Bridgeway Fund on questions of adjournment and on any other proposals raised at the Special Meeting to the extent permitted by the proxy rules of the Securities and Exchange Commission (the “SEC”), including proposals for which timely notice was not received, as set forth in the SEC’s proxy rules.

By order of the Board of Directors,

/s/ Deborah L. Hanna
Deborah L. Hanna, Secretary
December 16, 2011
 

 
 

 

Important Notice Regarding the Availability of Proxy Materials for the Special Meeting of Shareholders to be Held on Wednesday, February 1, 2012 or any adjournment or postponement thereof.  This Notice and Combined Proxy Statement and Prospectus are available on the internet at www.proxyvote.com. On this website, you will be able to access the Notice, the Combined Proxy Statement and Prospectus, any accompanying materials and any amendments or supplements to the foregoing material that are required to be furnished to shareholders.  We encourage you to access and review all of the important information contained in the proxy materials before voting.
 
 
IMPORTANT — We urge you to sign and date the enclosed proxy card and return it in the enclosed addressed envelope, which requires no postage and is intended for your convenience. You also may vote through the internet, by visiting the website address on your proxy card, or by telephone, by using the toll-free number on your proxy card. Your prompt vote may save the Bridgeway Fund the necessity of further solicitations to ensure a quorum at the Special Meeting. If you can attend the Special Meeting and wish to vote your shares in person at that time, you will be able to do so.

 
 

 

BRIDGEWAY FUNDS, INC.
Bridgeway Large-Cap Value Fund
 
20 Greenway Plaza, Suite 450
Houston, Texas 77046
 

QUESTIONS AND ANSWERS

 
YOUR VOTE IS VERY IMPORTANT!
 
 
 
Dated: December 16, 2011

Question:  What is this document and why did you send it to me?

Answer:  The attached document is a proxy statement for the Bridgeway Large-Cap Value Fund (the “Bridgeway Fund”), a series of Bridgeway Funds, Inc. (the “Company”), and a prospectus for the Institutional Class shares of American Beacon Bridgeway Large Cap Value Fund (the “AB Fund”), a newly created series of the American Beacon Funds (the “AB Trust”).  The purposes of this Combined Proxy Statement and Prospectus (the “Proxy Statement”) are to (1) solicit votes from shareholders of the Bridgeway Fund to approve the proposed reorganization of the Bridgeway Fund into the AB Fund (the “Reorganization”) as described in the Agreement and Plan of Reorganization and Termination between the Company and the AB Trust (the “Plan”) and (2) provide information regarding the Institutional Class shares of the AB Fund.

The Proxy Statement contains information that shareholders of the Bridgeway Fund should know before voting on the Reorganization.  The Proxy Statement should be retained for future reference.

Question:  What is the purpose of the Reorganization?

Answer:  The primary purpose of the Reorganization is to move the Bridgeway Fund to the American Beacon Family of Funds.  Reconstituting the Bridgeway Fund as a series of the AB Trust has the potential to (a) expand the Bridgeway Fund’s presence in more distribution channels, (b) increase its asset base, and (c) lower operating expenses as a percentage of assets.  Bridgeway Capital Management, Inc. (“Bridgeway”), the current adviser to the Bridgeway Fund, will be retained as the sub-adviser to the AB Fund and recommends that the Bridgeway Fund be reorganized as a series of the AB Trust.
 
Question:  How will the Reorganization work?
 
Answer:  In order to reconstitute the Bridgeway Fund as a series of the AB Trust, a substantially similar fund, referred to as the “AB Fund,” has been created as a new series of the AB Trust.  If shareholders of the Bridgeway Fund approve the Plan, the Bridgeway Fund will transfer all of its assets to the AB Fund in return for shares of the AB Fund and the AB Fund’s assumption of the Bridgeway Fund’s liabilities.  The Bridgeway Fund will then distribute the shares it receives from the AB Fund to shareholders.  Existing shareholders of the Bridgeway Fund’s Class N Shares will become shareholders of the AB Fund’s Institutional Class shares, and immediately after the Reorganization each shareholder will hold the same number of Institutional Class shares of the AB Fund, with the same net asset value per

 
 

 
 
share and total value, as the Class N Shares of the Bridgeway Fund that he or she held immediately prior to the Reorganization.  Subsequently, the Bridgeway Fund will be liquidated.

Please refer to the Proxy Statement for a detailed explanation of the proposal.  If the Plan is approved by shareholders of the Bridgeway Fund at the Special Meeting of Shareholders (the “Special Meeting”), the Reorganization presently is expected to be effective on or about February 3, 2012.

Question:  How will this Reorganization affect me as a shareholder?

Answer:  You will become a shareholder of the AB Fund.  The shares of the AB Fund that you receive will have a total net asset value equal to the total net asset value of the shares you hold in the Bridgeway Fund as of the closing date of the Reorganization.  The Reorganization will not affect the value of your investment at the time of the Reorganization. The Reorganization is expected to be tax-free to the Bridgeway Fund and its shareholders.

The Reorganization will shift management oversight responsibility for the Bridgeway Fund from Bridgeway to American Beacon Advisors, Inc. (the “Manager”).  However, by engaging Bridgeway (the “Sub-Adviser”), the current adviser to the Bridgeway Fund, the Manager will provide continuity of the portfolio management team, including the portfolio management team leader, John Montgomery, who has been responsible for the Bridgeway Fund’s performance record since its inception in 2003. The portfolio managers of the Sub-Adviser who are primarily responsible for the day-to-day portfolio management of the Bridgeway Fund will remain the same.  The investment objective and strategies of the AB Fund will be substantially similar to those of the Bridgeway Fund.  However, the AB Fund may make greater use of investments in money market funds and futures contracts to gain market exposure on cash balances or to reduce market exposure in anticipation of liquidity needs than the Bridgeway Fund. The AB Fund’s investment limitations are substantially similar to those of the Bridgeway Fund; however, the investment limitations have been harmonized by the AB Fund to align with the limitations with those of funds in the AB Fund complex.
 
The Manager also will provide continuity of the other services currently provided to the Bridgeway Fund.  Foreside Fund Services, LLC (“Foreside”), which currently serves as the distributor and principal underwriter of the Bridgeway Fund’s shares, also will serve as the distributor and principal underwriter for the AB Fund.  Additionally, the Manager will engage Foreside to provide sub-administrative services in connection with the marketing and distribution of shares of the AB Fund.  Currently, The Bank of New York Mellon (“BNYM”) serves as custodian, BNY Mellon Investment Servicing (US) Inc. (“BNYM Investment Servicing”) provides fund administration, transfer agency and fund accounting services to the Bridgeway Fund and Bridgeway provides certain administrative services to the Bridgeway Fund.  The AB Fund will engage State Street Bank and Trust Company (“State Street”) as custodian and accounting agent and Boston Financial Data Services, a State Street affiliate, as transfer agent.  The Manager will provide administration services for the AB Fund.

The Reorganization will move the assets of the Bridgeway Fund from the Company, a Maryland corporation, to the AB Fund, a series of the AB Trust, a Massachusetts business trust.  As a result of the Reorganization, the AB Fund will operate under the supervision of the AB Trust’s Board of Trustees (“AB Board”).

Question:  Who will manage the AB Fund?

Answer:  The Manager will be responsible for overseeing the management of the AB Fund, and the portfolio managers of the Sub-Adviser who are primarily responsible for the day-to-day portfolio management of the Bridgeway Fund will continue to manage the portfolio of the AB Fund.

 
2

 


The Manager is an experienced provider of investment advisory services to institutional and retail investors, with over $16 billion mutual fund and $44 billion overall assets under management, as of October 31, 2011.  Since 1986, the Manager has offered a variety of services and products, including corporate cash management, separate account management, and mutual funds.  The Manager serves retail clients as well as defined benefit plans, defined contribution plans, foundations, endowments, corporations, and other institutional investors.  There are currently 21 series of the AB Trust.  The American Beacon Family of Funds advised by the Manager currently includes international and domestic equity portfolios spanning a variety of longer-range investment strategies through balanced portfolios, as well as short-term investment options such as bond funds and money market funds.

The Sub-Adviser is a Texas corporation.  The Sub-Adviser was formed in 1993 and had approximately $2.070 billion of assets under management as of October 31, 2011.  The Sub-Adviser is not engaged in any other business of a substantial nature.

Question:  How will the Reorganization affect the fees and expenses I pay as a shareholder of the Bridgeway Fund?

Answer:  The Reorganization will not result in any increase in the advisory fees payable by the AB Fund over those advisory fees currently incurred by the Bridgeway Fund.  There is one primary difference between the advisory fee structure of the AB Fund and the Bridgeway Fund.  The AB Fund’s advisory fee is based on a flat percentage of average annual net assets (0.45%).  However, the Bridgeway Fund’s advisory fee is comprised of a base fee of 0.50% applied to average annual net assets and a performance fee adjustment of plus or minus 0.05% that depends on performance relative to a market index over the last five years that is applied to average net assets over that performance period.  The Bridgeway Fund assesses no front-end sales charge, contingent deferred sales charge, redemption fees or exchange fees, and no such fees will be assessed by the AB Fund.  The Reorganization will not result in any increase in the overall net expense ratios during the first year compared to the net expense ratio currently paid by the Bridgeway Fund and will not result in any increase in the gross expense ratio as compared to the gross expense ratio currently paid by the Bridgeway Fund.  The total annual fund operating expenses of the Class N Shares of the Bridgeway Fund as of the fiscal year ended June 30, 2011 are 1.17% of its average daily net assets before the cap on expenses and 0.84% of its average daily net assets after fee waivers.  The projected total annual fund operating expenses for the Institutional Class shares of the AB Fund, based on the same asset levels, are 1.16% of the AB Fund’s average daily net assets before the cap on expenses and 0.84% of its average daily net assets after fee waivers. The Manager has contractually agreed to cap Fund expenses through March 29, 2013, to the extent that total annual fund operating expenses of the Institutional Class shares exceed the annual rate of 0.84% excluding taxes, interest, portfolio transaction expenses and other extraordinary expenses.  Whereas the expense cap for the Bridgeway Fund can only be changed by a shareholder vote, the expense cap for the AB Fund may be changed by approval of a majority of the AB Board.  The AB Board intends to consider the continuation of the expense cap in one year increments.

Question:  Will the Reorganization result in any taxes?

Answer:  We expect that neither the Bridgeway Fund nor its shareholders will recognize any gain or loss for federal income tax purposes as a direct result of the Reorganization, and the Company and the AB Trust expect to receive a tax opinion confirming this position. Shareholders should consult their tax adviser about possible state and local tax consequences of the Reorganization, if any, because the information about tax consequences in this document relates to the federal income tax consequences of the Reorganization only.
 

 
3

 
 
 
Question:  Will I be charged a sales charge or contingent deferred sales charge (CDSC) as a result of the Reorganization?

Answer:  No sales loads, commissions or other transactional fees will be imposed on shareholders in connection with the Reorganization.

Question:  Why do I need to vote?

Answer:  Your vote is needed to ensure that a quorum and sufficient votes are present at the Special Meeting so that the proposal can be acted upon. Your immediate response on the enclosed Proxy Card will help prevent the need for any further solicitations for a shareholder vote, which will result in additional expenses.  Your vote is very important to us regardless of the number of shares you own.

Question:  How does the Company’s Board of Directors (the “Board”) recommend that I vote?

Answer:  After careful consideration and upon recommendation of Bridgeway, the Board unanimously recommends that shareholders vote “FOR” the Plan.

Question:  Who is paying for expenses related to the Special Meeting and the Reorganization?
 
Answer:  The Manager and Bridgeway will pay all direct costs relating to the Reorganization, including the costs relating to the Special Meeting and the Proxy Statement.  The Bridgeway Fund will not incur any expenses in connection with the Reorganization.

Question:  What will happen if the Plan is not approved by shareholders?

Answer:  If shareholders of the Bridgeway Fund do not approve the Plan, the Bridgeway Fund will not be reorganized into the AB Fund.  The Board will meet to consider other alternatives.

Question:  How do I vote my shares?
 
Answer:  You can vote your shares by mail, telephone or internet by following the instructions on the enclosed proxy card.

Question:  Who do I call if I have questions?

Answer:  If you have any questions about the proposal or the proxy card, please do not hesitate to call Bridgeway at (800) 661-3550.


 
4

 


COMBINED PROXY STATEMENT AND PROSPECTUS


December 16, 2011


FOR THE REORGANIZATION OF
 
Bridgeway Large-Cap Value Fund,
a series of Bridgeway Funds, Inc.
20 Greenway Plaza, Suite 450
Houston, Texas 77046
(800) 661-3550
 

INTO

American Beacon Bridgeway Large Cap Value Fund,
a series of American Beacon Funds
4151 Amon Carter Boulevard, MD 2450
Fort Worth, Texas 76155
(800) 967-9009

_________________________________________


This Combined Proxy Statement and Prospectus (the “Proxy Statement”) is being sent to you in connection with the solicitation of proxies by the Board of Directors (the “Board”) of the Bridgeway Funds, Inc. (the “Company”) for use at a Special Meeting of Shareholders (the “Special Meeting”) of the Bridgeway Large-Cap Value Fund, a series of the Company, managed by Bridgeway Capital Management, Inc. (“Bridgeway”), at the principal executive offices of the Company located at 20 Greenway Plaza, Suite 450, Houston, Texas 77046, Wednesday, February 1, 2012, at 11:00 a.m. Central time.  At the Special Meeting, shareholders of the Bridgeway Fund will be asked:

1.      To approve an Agreement and Plan of Reorganization and Termination (the “Plan”) providing for the transfer of all of the assets of the Bridgeway Fund to the American Beacon Bridgeway Large Cap Value Fund (the “AB Fund”), a newly created series of American Beacon Funds (the “AB Trust”), in exchange for:

(a) Institutional Class shares of the AB Fund equal in number and value to the Bridgeway Fund’s Class N Shares, which will be distributed pro rata by the Bridgeway Fund to the holders of its shares in complete liquidation of the Bridgeway Fund as follows:

Bridgeway Large-Cap Value Fund
à
American Beacon Bridgeway Large Cap Value Fund
Class N Shares
à
Institutional Class shares

(b) the AB Fund’s assumption of all of the liabilities of the Bridgeway Fund (collectively, the “Reorganization”); and

 
 

 

2.           To transact any other business as may properly come before the Special Meeting or any adjournments thereof.

The Bridgeway Fund is a series of the Company, an open-end management investment company registered with the Securities and Exchange Commission (“SEC”) and organized as a Maryland corporation.  The AB Fund is a newly created series of the AB Trust, an open-end management investment company registered with the SEC and organized as a Massachusetts business trust.

This Proxy Statement sets forth the basic information you should know before voting on the proposal. You should read it and keep it for future reference. Additional information relating to the AB Fund and the Proxy Statement is set forth in the Statement of Additional Information to this Proxy Statement dated December 16, 2011, which is incorporated by reference into the Proxy Statement.  Additional information about the AB Fund has been filed with the SEC and is available upon request and without charge by writing to the AB Fund or by calling (800) 658-5811.  The Bridgeway Fund expects that the Proxy Statement will be mailed to shareholders on or about December 28, 2011.

The following documents have been filed with the SEC and are incorporated by this reference into this Proxy Statement, which means that these documents are considered legally to be part of the Proxy Statement:

 
Statement of Additional Information to this Proxy Statement, dated December 16, 2011;

 
Prospectus and Statement of Additional Information of the Bridgeway Fund, each dated October 31, 2011; and

 
Annual Report to Shareholders of the Bridgeway Fund for the fiscal year ended June 30, 2011.

The Bridgeway Fund’s Prospectus dated October 31, 2011 and Annual Report to Shareholders for the fiscal year ended June 30, 2011, containing audited financial statements, have been previously mailed to shareholders.  Copies of these documents are available upon request and without charge by writing to the Company, through the internet at www.bridgeway.com, or by calling (800) 661-3550.

Because the AB Fund has not yet commenced operations as of the date of this Proxy Statement, no annual or semi-annual report is available for the AB Fund at this time.


 
 
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES NOR HAS IT PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
 
The shares offered by this Proxy Statement are not deposits or obligations of any bank, and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.  An investment in the AB Fund involves investment risk, including the possible loss of principal.
 
 



 
 

 

TABLE OF CONTENTS

I.
PROPOSAL – TO APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
1
 
A.
OVERVIEW
1
 
B.
REASONS FOR THE REORGANIZATION
1
 
C.
BRIDGEWAY BOARD CONSIDERATIONS
2
 
D.
COMPARISON OF PRINCIPAL INVESTMENT OBJECTIVES, STRATEGIES AND POLICIES OF THE FUNDS
4
 
E.
COMPARISON OF PRINCIPAL RISKS
12
 
F.
COMPARISON OF THE FUNDS’ INVESTMENT RESTRICTIONS AND LIMITATIONS
13
 
G.
COMPARISON OF FEES AND EXPENSES
19
 
H.
PERFORMANCE INFORMATION
21
 
I.
COMPARISON OF DISTRIBUTION AND PURCHASE, REDEMPTION AND EXCHANGE PROCEDURES
22
 
J.
KEY INFORMATION ABOUT THE PROPOSAL
24
   
1.
SUMMARY OF THE PROPOSED REORGANIZATION
24
   
2.
DESCRIPTION OF THE AB FUND’S SHARES
25
   
3.
FEDERAL INCOME TAX CONSEQUENCES
25
   
4.
COMPARISON OF FORMS OF ORGANIZATION AND SHAREHOLDER RIGHTS
26
   
5.
CAPITALIZATION
27
 
K.
ADDITIONAL INFORMATION ABOUT THE AB FUND
28
   
1.
INVESTMENT ADVISER AND SUB-ADVISER
28
   
2.
OTHER SERVICE PROVIDERS
29
   
3.
TAX CONSIDERATIONS
29
   
4.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
29
II.
VOTING INFORMATION
29
 
A.
RECORD DATE, VOTING RIGHTS AND VOTE REQUIRED
29
 
B.
HOW TO VOTE
30
 
C.
PROXIES
30
 
D.
QUORUM AND ADJOURNMENTS
30
 
E.
EFFECT OF ABSTENTIONS AND BROKER “NON-VOTES”
31
 
F.
SOLICITATION OF PROXIES
31
III.
OTHER INFORMATION
31
 
A.
OTHER BUSINESS
31
 
B.
NEXT MEETING OF SHAREHOLDERS
32
 
C.
LEGAL MATTERS
32
 
D.
INFORMATION FILED WITH THE SEC
32
APPENDIX A FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
A-1
APPENDIX B OWNERSHIP OF SHARES OF THE BRIDGEWAY FUND
B-1
APPENDIX C VALUATION, PURCHASE, REDEMPTION AND TAX INFORMATION FOR THE AB FUND
C-1
APPENDIX D FINANCIAL HIGHLIGHTS OF THE AB FUND
D-1


 
 

 



 
I.           PROPOSAL – TO APPROVE THE AGREEMENT AND
          PLAN OF REORGANIZATION AND TERMINATION
 
A.
OVERVIEW
 
The Board, including all the Directors who are not “interested persons,” as that term is defined in the Investment Company Act of 1940, as amended (the “1940 Act”), of the Company, proposes that the Bridgeway Fund reorganize into the AB Fund and that each Bridgeway Fund shareholder become a shareholder of the AB Fund, pursuant to the Plan attached to this Proxy Statement as Appendix A.  The Board considered the Reorganization at its regularly scheduled meeting held on November 11, 2011.  The Board believes that the Reorganization is in the best interests of the Bridgeway Fund and its shareholders.
 
In order to reorganize the Bridgeway Fund into a series of the AB Trust, a substantially similar fund, referred to as the “AB Fund,” has been created as a new series of the AB Trust.  If the shareholders of the Bridgeway Fund approve the Plan, the Reorganization will have three primary steps:
 
           *           First, the Bridgeway Fund will transfer all of its assets to the AB Fund in exchange solely for Institutional Class shares of the AB Fund and the AB Fund’s assumption of all of the Bridgeway Fund’s liabilities;
 
           *           Second, each holder of the Bridgeway Fund will receive a pro rata distribution of the AB Fund’s Institutional Class shares, as the case may be; and
 
           *           Third, the Bridgeway Fund will be liquidated.
 
Approval of the Plan will constitute approval of the transfer of the Bridgeway Fund’s assets, the assumption of its liabilities, the distribution of the AB Fund’s Institutional Class shares, and liquidation of the Bridgeway Fund.  The Institutional Class shares issued in connection with the Reorganization will have an aggregate net asset value equal to the net value of the assets that the Bridgeway Fund transferred to the AB Fund, less the Bridgeway Fund’s liabilities that the AB Fund assumes.  The value of a Fund shareholder’s account with the AB Fund immediately after the Reorganization will be the same as the value of such shareholder’s account with the Bridgeway Fund immediately prior to the Reorganization.  No sales charge or fee of any kind will be charged to the Bridgeway Fund’s shareholders in connection with the Reorganization.
 
The Company believes that the Reorganization will constitute a tax-free transaction for federal income tax purposes.  The Company and the AB Trust will receive an opinion from tax counsel to the AB Trust substantially to such tax treatment and effect.  Therefore, shareholders should not recognize any gain or loss on their Bridgeway Fund shares for federal income tax purposes as a direct result of the Reorganization.

B.
REASONS FOR THE REORGANIZATION

The primary purpose of the Reorganization is to move the investment portfolio and shareholders presently associated with Bridgeway Fund to the American Beacon Family of Funds.  Reconstituting the Bridgeway Fund as a series of American Beacon has the potential to expand the distribution network and increase the Bridgeway Fund’s assets, as the AB Trust has access to greater resources and distribution channels than does the Company.
 

 
1

 
 
The Reorganization will shift management oversight responsibility for the Bridgeway Fund from Bridgeway Capital Management, Inc. (“Bridgeway”) to American Beacon Advisors, Inc. (the “Manager”).  However, by engaging Bridgeway (the “Sub-Adviser”), the Manager will provide continuity of the portfolio management team, including the portfolio management team leader, John Montgomery, who has been responsible for the Bridgeway Fund’s performance record since its inception in 2003. The portfolio managers of the Sub-Adviser who are primarily responsible for the day-to-day portfolio management of the Bridgeway Fund will remain the same.  The investment objective and strategies of the AB Fund will be substantially similar to those of the Bridgeway Fund.  The AB Fund’s investment limitations are very similar to those of the Bridgeway Fund; however, the AB Fund limitations are in line with current limitations of the other American Beacon Funds.  Bridgeway recommends that the Bridgeway Fund be reorganized as a series of the AB Trust.
 
The Manager also will provide continuity of the other services currently provided to the Bridgeway Fund.  Foreside Fund Services, LLC (“Foreside”), which currently serves as the distributor and principal underwriter of the Bridgeway Fund’s shares, also will serve as the distributor and principal underwriter for the AB Fund.  Additionally, the Manager will engage Foreside to provide sub-administrative services in connection with the marketing and distribution of shares of the AB Fund.  Currently, The Bank of New York Mellon (“BNYM”) serves as custodian, BNY Mellon Investment Servicing (US) Inc. (“BNYM Investment Servicing”) provides fund administration, transfer agency and fund accounting services to the Bridgeway Fund and Bridgeway provides certain administrative services to the Bridgeway Fund.  The AB Fund will engage State Street Bank and Trust Company (“State Street”) as custodian and accounting agent for the AB Fund and Boston Financial Data Services, a State Street affiliate, as transfer agent.  The Manager will provide administration services for the AB Fund.
 
The Reorganization will not result in any increase in the advisory fees payable by the AB Fund over those advisory fees currently incurred by the Bridgeway Fund.  The Bridgeway Fund assesses no front-end sales charge, contingent deferred sales charge, redemption fees or exchange fees, and no such fees will be assessed by the AB Fund.  The Reorganization will not result in any increase in the overall net expense ratios during the first year compared to the net expense ratio currently paid by the Bridgeway Fund and will not result in any increase in the gross expense ratio as compared to the gross expense ratio currently paid by the Bridgeway Fund.  Historically, the cost of investing in mutual funds associated with the AB Trust has generally been below the average of other mutual funds with comparable objectives.
 
C.
BRIDGEWAY BOARD CONSIDERATIONS
 
Bridgeway proposed, and the Board considered, the Reorganization at an in-person meeting of the Board held on November 11, 2011.  In addition, the Board met in person with an officer of the American Beacon Funds, at the Board’s meeting held on September 1, 2011 to receive some preliminary information on the proposed Reorganization.  Based upon the recommendation of Bridgeway, its evaluation of the relevant information presented to it at these meetings, and in light of its fiduciary duties under federal and state law, the Board, including a majority of directors who are not “interested persons” of the Company under the 1940 Act, determined that the Reorganization is in the best interests of the Bridgeway Fund and its shareholders.
 
In approving the proposed Reorganization, the Board carefully considered that Bridgeway considered alternatives to reorganization options with other fund complexes as well as various other alternatives for the Bridgeway Fund that were identified by Bridgeway.  The Board noted that the Bridgeway Fund assets have not achieved economies of scale despite beating its primary benchmark in seven of eight years since inception.  The Board noted further that, as a result, the Bridgeway Fund may not be able to achieve economies of scale unless it can be combined with another fund.  The Board considered the terms of the Reorganization and determined that the Reorganization would provide
 

 
2

 

shareholders with the options of (i) transferring their investment to a similar fund on a tax-free basis in the Reorganization or (ii) redeeming their investment in the Bridgeway Fund, which may have tax consequences for them.  The Board noted that liquidating and terminating the Bridgeway Fund would provide shareholders with only one option that may have adverse tax consequences for them.
 
The Board considered the following additional matters, among others, in approving the Reorganization:
 
The Terms and Conditions of the Reorganization.  The Board considered the terms of the Plan, and, in particular, (1) the requirement that the transfer of the assets of the Bridgeway Fund’s Class N shares be in exchange for Institutional Class shares of the AB Fund and (2) the AB Fund’s assumption of all known liabilities of the Bridgeway Fund.  The Board also took note of the fact that no sales charges would be imposed in connection with the Reorganization.  The Board also noted that the Bridgeway Fund shareholders would receive the same dollar value in Institutional Class shares of the AB Fund as their Bridgeway Fund shares immediately prior to the Reorganization. The Board also noted that the Reorganization would be submitted to the Bridgeway Fund’s shareholders for approval.
 
Strong Similarity of Investment Objectives, Policies and Restrictions and Continuity of Sub-Adviser.  The Board considered that the investment objective and strategies of the Bridgeway Fund and the AB Fund (each sometimes referred to herein as a “Fund”) are substantially similar.  The investment limitations of the Bridgeway Fund have been harmonized and reworded by the AB Fund to be conformed with the current limitations in the AB Fund complex.  A strong consideration was that the similarity of investment strategy, together with the continuation of the Sub-Adviser, provided a continuation of portfolio management expertise not otherwise available to mutual fund investors.
 
Expenses Relating to Reorganization.  The Board considered that the Manager and Bridgeway will bear the direct costs associated with the Reorganization, Special Meeting, and solicitation of proxies, including the expenses associated with preparing and filing the registration statement that includes this Proxy Statement and the cost of copying, printing and mailing proxy materials.
 
Relative Expense Ratios and Continuation of Cap on Expenses.  The Board reviewed information regarding comparative expense ratios (current and pro forma expense ratios are set forth in the “Comparison of Fees and Expenses” section below), which indicated that the net total annual operating expense ratios for the AB Fund for the first year would be equal to the net total operating expense ratios of the Bridgeway Fund.  The Board considered the fact that the Manager would contractually agree to waive through at least March 29, 2013 the advisory fee payable by the AB Fund and/or reimburse expenses of the AB Fund so that the total annual operating expense ratio of Institutional Class shares of the AB Fund would not exceed 0.84%, which equals the expense cap currently in place for the Class N shares of the Bridgeway Fund.  The Board also considered that whereas the expense cap for the Bridgeway Fund can only be changed by a shareholder vote, the expense cap for the AB Fund may be changed by approval of a majority of the AB Board.  The Board noted that the AB Board intends to consider the continuation of the expense cap in one year increments.
 
Economies of Scale.  The Board considered the potential of the AB Fund to experience economies of scale as a result of its being a series of the AB Trust because certain fixed costs, such as legal, accounting, shareholder services and trustee expenses, would be spread over a larger fund complex.  The Board concluded that the structure would benefit shareholders as the AB Fund grows.
 
Distribution and Service Fees. The Board considered the fund distribution capabilities of the Manager and its affiliates and the commitment to distribute the AB Fund.  The Board further considered that the Bridgeway Fund charges no fees for distribution and services under Rule 12b-1 of the 1940 Act
 

 
3

 

(“Rule 12b-1”) for its Class N shares and that no Rule 12b-1 distribution and service fees will be charged for Institutional Class shares of the AB Fund.
 
The Experience and Expertise of the Investment Adviser and Sub-Adviser.  The Board considered the following information regarding the Manager: (i) the Manager is an experienced provider of investment advisory services to institutional and retail markets, with over $16 billion mutual fund and $44 billion overall assets under management; (ii) since 1986, the Manager has offered a variety of services and products, including corporate cash management, separate account management, and mutual funds; and (iii) the Manager serves retail clients as well as defined benefit plans, defined contribution plans, foundations, endowments, corporations, and other institutional investors. The Board also considered that there are currently 21 series of the AB Trust.
 
The Board considered that the current adviser to the Bridgeway Fund, a Texas corporation, would provide sub-advisory services to the AB Fund.  The Board noted that the Sub-Adviser’s team members have significant investment experience related to the investment management of the Bridgeway Fund.
 
Tax Consequences.  The Board considered that the Reorganization is expected to be free from adverse federal income tax consequences.
 
Other Alternatives.  The Board considered several alternatives to the Reorganization that were identified by Bridgeway.  After considering the merits and viability of these other alternatives, the Board concluded that the possible alternatives were less desirable than the Reorganization.
 
Based on the foregoing and additional information presented at the Board meetings discussed above, the Board determined that the Reorganization is the best alternative for the Bridgeway Fund at this time and is in the best interests of the Bridgeway Fund and its shareholders.  The Board approved the Reorganization, subject to approval by shareholders of the Bridgeway Fund and the solicitation of the shareholders of the Bridgeway Fund to vote “FOR” the approval of the Plan, the form of which is attached to this Proxy Statement in Appendix A.

 
D.
COMPARISON OF PRINCIPAL INVESTMENT OBJECTIVES, STRATEGIES AND POLICIES OF THE FUNDS
 
The Bridgeway Fund and the AB Fund have identical investment objectives and substantially similar strategies, which are presented in the table below.  However, the AB Fund may make greater use of investments in money market funds and futures contracts to gain market exposure on cash balances or to reduce market exposure in anticipation of liquidity needs than the Bridgeway Fund.
 
The AB Fund has been created as a shell series of the AB Trust solely for the purpose of acquiring the Bridgeway Fund’s assets and continuing its business investment strategy, and will not conduct any investment operations until after the closing of the Reorganization.  The Manager has reviewed the Bridgeway Fund’s current portfolio holdings and determined that those holdings are compatible with the AB Fund’s investment objectives and policies.  As a result, the Manager believes that, if the Reorganization is approved, all or substantially all of the Bridgeway Fund’s assets will be transferred to and held by the AB Fund.
 

 
4

 


   
Bridgeway Fund
 
AB Fund
 
Investment Objective
 
The Bridgeway Fund seeks to provide long-term total return on capital, primarily through capital appreciation and some income.
 
Same.
 
 
 
 
 
   
The Bridgeway Fund’s investment objective is a non-fundamental policy which may be changed by the Board without shareholder approval.  The Bridgeway Fund will notify shareholders at least 60 days prior to any change in its investment objective.
 
Although the AB Fund will provide shareholders with notice of any change to the investment objective, the AB Fund will not adopt an identical notification policy.
Principal Investment Strategies
     
The AB Fund’s principal investment strategies are substantially similar to the Bridgeway Fund’s principal investment strategies except for:
 
       
The AB Fund’s principal investment strategies include disclosure regarding its cash management investments.
 
       
The AB Fund’s principal investment strategies do not include a discussion of the comparison to portfolio management of other Bridgeway Funds.
 
       
Accordingly, the Principal Investment Strategies section is revised as follows:
 
   
The Bridgeway Fund invests in a diversified portfolio of large stocks that are listed on the New York Stock Exchange, the American Stock Exchange, and NASDAQ. Under normal circumstances, at least 80% of Bridgeway Fund net assets (plus borrowings for investment purposes) are invested in stocks from among those in the large-
 
The AB Fund invests in a diversified portfolio of large stocks that are listed on the New York Stock Exchange, the American Stock Exchange, and NASDAQ. Under normal circumstances, at least 80% of AB Fund net assets (plus borrowings for investment purposes) are invested in stocks from among those in the large-cap category at the time of purchase.
 
 
 
5

 
 
    Bridgeway Fund  
AB Fund
 
   
 cap category at the time of purchase.
 
   
   
For purposes of the Bridgeway Fund’s investments, “large-cap stocks” are those whose market capitalization (stock market worth) falls within the range of the Russell 1000 Index, an unmanaged, market value weighted index, which measures performance of approximately 1,000 of the largest companies in the market with dividends reinvested. The Russell 1000 Index is reconstituted from time to time.  The market capitalization range for the Russell 1000 Index was $1.4 billion to $401 billion as of June 30, 2011.
 
 
For purposes of the AB Fund’s investments, “large-cap stocks” are those whose market capitalization (stock market worth) falls within the range of the Russell 1000 Index, an unmanaged, market value weighted index, which measures performance of approximately 1,000 of the largest companies in the market with dividends reinvested. The Russell 1000 Index is reconstituted from time to time.  The market capitalization range for the Russell 1000 Index was $1.4 billion to $401 billion as of June 30, 2011.
   
Value stocks are those the adviser believes are priced cheaply relative to some financial measures of worth, such as the ratio of price to earnings, price to sales, or price to cash flow. Generally, these are stocks represented in the Russell 1000 Value Index, plus large stocks with similar “value” characteristics. The Russell 1000 Value Index includes those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
 
   
    The adviser selects stocks within the large-cap value    The AB Fund’s sub-advisor, Bridgeway Capital Management, Inc. (“Bridgeway”), selects stocks
 
 
 
6

 
 
    Bridgeway Fund  
AB Fund
 
   
category for the Bridgeway Fund using a proprietary statistically driven approach. Value stocks are those the adviser believes are priced cheaply relative to some financial measures of worth, such as the ratio of price to earnings, price to sales, or price to cash flow.
 
within the large-cap value category for the AB Fund using a proprietary statistically driven approach. Value stocks are those Bridgeway believes are priced cheaply relative to some financial measures of worth, such as the ratio of price to earnings, price to sales, or price to cash flow. Generally, these are stocks represented in the Russell 1000 Value Index, plus large stocks with similar “value” characteristics. The Russell 1000 Value Index includes those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.  The decision to sell a stock is usually made based on the relative attractiveness of new statistical model recommendations, deteriorating financial strength of a company, portfolio risk considerations, and corporation actions or other external factors that may drive a stock’s future price movements.
 
       
The AB Fund may invest cash balances in money market funds and may purchase and sell futures contracts to gain market exposure on cash balances or reduce market exposure in anticipation of liquidity needs.
 
   
While the Bridgeway Fund is actively managed for long-term total return, the adviser seeks to minimize capital gains distributions as part of a tax management strategy. The successful application of this method is intended to result in a more tax-efficient fund than would otherwise be the case.
 
 
While the AB Fund is actively managed for long-term total return, the adviser seeks to minimize capital gains distributions as part of a tax management strategy. The successful application of this method is intended to result in a more tax-efficient fund than would otherwise be the case.
   
The Bridgeway Fund’s long-term investment outlook and its focus on lower turnover and lower operating and trading expenses may impact the speed and frequency in which investment ideas are acted upon compared to the most actively managed Bridgeway
   
 
 
 
7

 
 
    Bridgeway Fund  
AB Fund
 
   
 Funds.
 
   
   
The income objective of the Bridgeway Fund, which is a secondary objective, is achieved almost exclusively from dividends paid by Bridgeway Fund stocks. However, not all Bridgeway Fund stocks pay dividends.
 
 
The income objective of the AB Fund, which is a secondary objective, is achieved almost exclusively from dividend-paying stocks held by the AB Fund.  However, not all stocks held by the AB Fund pay dividends.
   
The Bridgeway Fund will notify shareholders at least 60 days prior to any change in its policy of investing at least 80% of its assets in the types of securities described above.
 
 
The Bridgeway Fund will notify shareholders at least 60 days prior to any change in its policy of investing at least 80% of its assets in the types of securities described above.
Temporary Defensive Position
 
In the event future economic or financial conditions adversely affect equity securities of the type described above, the Bridgeway Fund may take a temporary, defensive investment position and invest all or part of its assets in short-term money market securities. These short-term instruments include securities issued or guaranteed by the U.S. Government and agencies thereof.
 
 
The AB Fund may depart from its principal investment strategy by taking temporary defensive or interim positions in response to adverse market, economic, political or other conditions.  During these times, the AB Fund may not achieve its investment goal.
 
 
 
8

 
 
    Bridgeway Fund  
AB Fund
 
Cash Management Investments
 
The Bridgeway Fund generally will be fully invested in accordance with its objective and strategies. However, the Bridgeway Fund may invest without limit in cash or money market cash equivalents pending investment of cash balances or in anticipation of possible redemptions. The use of temporary investments therefore is not a principal strategy as it prevents the Bridgeway Fund from fully pursuing its investment objective, and the Bridgeway Fund may miss potential market upswings.
 
 
The AB Fund can invest cash balances in money market funds that are registered investment companies under the 1940 Act, including money market funds that are sponsored or advised by the Manager, and in futures contracts.  If the AB Fund invests in money market funds, shareholders will bear their proportionate share of the expenses, including, for example, advisory and administrative fees, of the money market funds in which the AB Fund invests.  Shareholders also would be exposed to the risks associated with money market funds and the portfolio investments of such money market funds, including that a money market fund’s yield will be lower than the return that the AB Fund would have derived from other investments that would provide liquidity.
 
       
To gain market exposure on cash balances or reduce market exposure in anticipation of liquidity needs, the AB Fund also may purchase and sell futures contracts on a daily basis that relate to securities in which it may invest directly and indices comprised of such securities. A futures contact is a contract to purchase or sell a particular security, or the cash value of an index, at a specified future date at a price agreed upon when the contract is made. Under such contracts, no delivery of the actual securities is required. Rather, upon the expiration of the contract, settlement is made by exchanging cash in an amount equal to the difference between the contract price and the closing price of a security or index at expiration, net of the variation margin that was previously paid. As cash balances are invested in securities, the AB Fund may invest simultaneously those balances in futures contracts until the cash balances are delivered to settle the securities transactions.  Because the AB Fund will have market exposure simultaneously in both the invested securities and futures contracts, the AB Fund may have more than 100% of its assets exposed to the markets.  This can magnify gains and losses in the AB Fund. The AB Fund also may have to sell assets at inopportune times to satisfy its settlement or collateral obligations. The risks associated with the use of futures contracts also include that there may be an imperfect correlation between the changes in market value of the securities held by the AB Fund and the prices of futures contracts and that there may not be a liquid secondary market for a futures contract.
 
 
 
 
9

 
 
    Bridgeway Fund  
AB Fund
 
Investment Adviser
 
Bridgeway Capital Management, Inc.
 
American Beacon Advisors, Inc.
 
Investment Sub-Adviser
 
None.
 
Bridgeway Capital Management, Inc.
 
Portfolio Managers
 
John Montgomery is the investment management team leader and lead portfolio manager and has held that position since the Fund’s inception. John founded the Adviser in 1993. He holds a BA in Engineering and Philosophy from Swarthmore College and graduate degrees from MIT and Harvard Business School.
 
Same. In addition:
 
Wyatt L. Crumpler will lead the Manager’s portfolio management team that has joint responsibility for the day-to-day oversight of the AB Fund.  Mr. Crumpler is responsible for developing the AB Fund’s investment program, and recommending sub-advisers to the AB Fund’s Board.  In addition, Mr. Crumpler, Gene L. Needles, Jr. and Adriana R. Posada oversee the sub-advisers, review each sub-adviser’s performance and allocate the AB Fund’s assets among the sub-advisers and the Manager, as applicable.
 
   
Elena Khoziaeva, CFA, is an investment management team member and began working at the Adviser in 1998. Her responsibilities include portfolio management, investment research, and statistical modeling. Elena earned a Bachelor of Economic Sciences degree from Belarussian State Economic University in Minsk and graduated with highest honors from the University of Houston with an MBA in accounting.
 
Mr. Crumpler is Vice President, Asset Management. Mr. Crumpler joined the Manager in January 2007 as Vice President of Trust Investments and a member of the portfolio management team. Mr. Crumpler’s title was redesignated as Vice President, Asset Management in July 2009. From January 2004 to January 2007, Mr. Crumpler was Managing Director of Corporate Accounting at American Airlines, Inc. Prior to that time, he was Director of IT Strategy and Finance for American Airlines, Inc.
 
Mr. Needles has served as President and Chief Executive Officer of the Manager since April 2009 and has served on the portfolio management team since June 2011. Prior to joining the Manager, Mr. Needles was President of Touchstone Investments from 2008 to 2009, President of AIM Distributors from 2003 to 2007 and CEO of AIM Distributors from 2004 to 2007.
 
   
Michael Whipple, CFA, is an investment management team member and began working at the Adviser in 2002. His responsibilities include portfolio management, investment
 
Ms. Posada is Senior Portfolio Manager, Asset Management, and became a member of the team in October 1998.
 
 
 
10

 
 
    Bridgeway Fund  
AB Fund
 
   
research, and statistical modeling. He holds a BS in Accountancy and Finance from Miami University in Ohio. A Certified Public Accountant and Certified Internal Auditor, Michael worked in auditing from 1993 to 2000 before attending the University of Chicago Booth School of Business from 2000 to 2002, where he earned his MBA.
 
Rasool Shaik, CFA, is an investment management team member and began working for the Adviser in 2006 after earning an MBA with Honors from the University of Chicago Booth School of Business, which he attended from 2004 to 2006. His responsibilities include portfolio management, investment research, and statistical modeling. He holds a BS in Engineering from Indian Institute of Technology (IIT) Bombay, India and an MS in Engineering from Michigan Technological University, Houghton, Michigan. Prior to business school, from 1997 to 2004, Rasool developed software algorithms to manage complex supply chains.
 
   

 

 
11

 

E.
COMPARISON OF PRINCIPAL RISKS
 
Risk is the chance that you will lose money on your investment or that it will not earn as much as you expect.  In general, the greater the risk, the more money your investment can earn for you and the more you can lose.  Like other investment companies, the value of each Fund’s shares may be affected by its investment objectives, principal investment strategies and particular risk factors.  The principal risks of investing in the Funds are discussed below.  However, other factors may also affect each Fund’s net asset value.  There is no guarantee that a Fund will achieve its investment objectives or that it will not lose principal value.
 
The main risks of investing in the Funds are substantially similar, as the investment objectives and strategies of the Funds are also substantially similar.  The AB Fund has included certain additional risk disclosures and revised certain risk disclosures in its registration statement to clarify for shareholders the principal risks of investing in the AB Fund.  In addition, certain principal risks of the Bridgeway Fund will not be considered by the AB Fund to be principal risks, including inflation risk.
 
Market Risk
 
Since each Fund invests most of its assets in stocks, each Fund is subject to stock market risk. Market risk involves the possibility that the value of a Fund’s investments in stocks will vary from day to day in response to the activities of individual companies, as well as general market, regulatory, political and economic conditions. From time to time, certain securities held by a Fund may have limited marketability and may be difficult to sell at favorable times or prices. If a Fund is forced to sell such securities to meet redemption requests or other cash needs, the Fund may have to sell them at a loss.
 
Equity Securities Risk
 
Equity securities generally are subject to market risk. A Fund’s investments in equity securities may include common stocks, preferred stocks, securities convertible into or exchangeable for common stocks, real estate investment trusts (“REITs”), American Depositary Receipts (“ADRs”) and U.S. dollar-denominated foreign stocks trading on U.S. exchanges.  Investing in such securities may expose the Fund to additional risks.
 
Common stock generally is subordinate to preferred stock upon the liquidation or bankruptcy of the issuing company. Preferred stocks and convertible securities are sensitive to movements in interest rates.  In addition, convertible securities are subject to the risk that the credit standing of the issuer may have an effect on the convertible securities’ investment value.  Investments in ADRs and U.S. dollar-denominated foreign stocks trading on U.S. exchanges are subject to certain of the risks associated with investing directly in foreign securities.  Investments in REITs are subject to the risks associated with investing in the real estate industry such as adverse developments affecting the real estate industry and real property values.
 
Value Stocks Risk
 
Value stocks are subject to the risk that their intrinsic value may never be realized by the market or that their prices may go down.  While a Fund’s investments in value stocks may limit its downside risk over time, the Fund may produce more modest gains than riskier stock funds as a trade-off for this potentially lower risk.  Different investment styles tend to shift in and out of favor, depending on market

 
12

 
 
conditions and investor sentiment. A Fund’s value style could cause the Fund to underperform funds that use a growth or non-value approach to investing or have a broader investment style.
 
Foreign Exposure Risk
 
Each Fund may invest in securities issued by foreign companies through American Depositary Receipts (“ADRs”) and U.S. dollar-denominated foreign stocks trading on U.S. exchanges. These securities are subject to many of the risks inherent in investing in foreign securities, including, but not limited to, currency fluctuations and political and financial instability in the home country of a particular ADR or foreign stock.
 
Large-Capitalization Company Risk
 
The securities of large market capitalization companies may underperform other segments of the market because such companies may be less responsive to competitive challenges and opportunities and may be unable to attain high growth rates during periods of economic expansion.
 
Capital Gains Risk
 
If the Fund experiences extensive redemptions, the adviser might need to sell some stocks, which could create capital gains. There can be no guarantee that the Fund may not someday distribute substantial capital gains, although the adviser strongly intends to avoid them.
 
Securities Selection Risk
 
Securities selected by an adviser for a Fund may not perform to expectations. This could result in the Fund’s underperformance compared to other funds with similar investment objectives.
 
Investment Risk
 
An investment in a 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. When you sell your shares of the Fund, they could be worth less than what you paid for them.
 
Market Events Risk
 
Turbulence in financial markets and reduced liquidity in equity, credit and fixed-income markets may negatively affect many issuers worldwide which may have an adverse effect on a Fund.
 
F.
COMPARISON OF THE FUNDS’ INVESTMENT RESTRICTIONS AND LIMITATIONS
 
The investment restrictions and limitations of the Funds are substantially similar, except that the investment limitations of the AB Fund differ from those of the Bridgeway Fund to the extent necessary to harmonize them with the investment limitations of other American Beacon Funds.  Unlike the Bridgeway Fund, the AB Fund is expressly permitted to operate as a feeder fund in a master-feeder investment structure.  The AB Fund has no current intention to operate under such a structure.
 
Except as required by the 1940 Act or the Internal Revenue Code of 1986, as amended (the “Code”), if any percentage restriction on investment or utilization of assets is adhered to at the time an investment is made, a later change in percentage resulting from a change in the market values of the

 
13

 
 
Fund’s assets or purchases and redemptions of Fund shares will not be considered a violation of the limitation.
 
A fundamental limitation cannot be changed without the affirmative vote of the lesser of: (1) 50% of the outstanding shares of the Fund; or (2) 67% of the shares present or represented at a shareholders meeting at which the holders of more than 50% of the outstanding shares are present or represented. A non-fundamental limitation may be changed by the Board of Directors without shareholder approval.
 
All of the investment policies noted in the table below are fundamental limitations, which cannot be changed by the Board of Directors without affirmative shareholder approval as described above.  The AB Fund, however, has sought to harmonize the fundamental investment limitations of the Bridgeway Fund with those of the other funds in the AB Fund complex.  Although the wording appears different, the fundamental investment limitations of the Bridgeway Fund and the AB Fund are substantially similar.  Notwithstanding any other limitation on investments in other investment companies, however, the AB Fund, unlike the Bridgeway Fund, is expressly permitted to operate as a feeder fund in a master-feeder investment structure.  The investment limitations for the Bridgeway Fund may be found in the Bridgeway Fund’s Statement of Additional Information (“SAI”), which is incorporated by reference into this Proxy Statement.  The investment limitations for the AB Fund may be found in the SAI to this Proxy Statement, which is incorporated by reference into this Proxy Statement.
 
   
Fundamental Investment Policies
   
Policy
 
Bridgeway Fund
 
AB Fund
 
Differences
Diversification
 
As to 75% of the value of its total assets, the Fund may not invest more than 5% of the value of its total assets in the securities of any one issuer (other than obligations issued or guaranteed by the U.S. Government, its agencies, or instrumentalities), or purchase more than 10% of all outstanding voting securities of any one issuer.
 
 
The AB Fund may not invest more than 5% of its total assets (taken at market value) in securities of any one issuer, other than obligations issued by the U.S. Government, its agencies and instrumentalities, or purchase more than 10% of the voting securities of any one issuer, with respect to 75% of the AB Fund’s total assets.
 
No material difference.
Industry Concentration
 
The Fund may not invest 25% or more of its total assets (calculated at the time of purchase and taken at market value) in any one industry.  For purposes of this calculation, Standard Industrial Classification (SIC) Codes are used to determine into which industry a company falls.
 
The AB Fund may not invest more than 25% of its total assets in the securities of companies primarily engaged in any one industry provided that: (i) this limitation does not apply to obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities; and (ii) municipalities and their agencies and authorities are not deemed to be industries. 
 
 
The Bridgeway Fund notes that for purposes of its calculation, Standard Industrial Classification (SIC) Codes are used to determine into which industry a company falls.
The AB Fund provides that: (i) the limitation does not apply to obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities; and
 
 
 
14

 
 
     Fundamental Investment Policies    
Policy    Bridgeway Fund    AB Fund    Differences
        For purposes of this restriction, the Fund will regard tax-exempt securities issued by municipalities and their agencies not to be an industry.    (ii) municipalities and their agencies and authorities are not deemed to be industries.  In addition, the AB Fund, for purposes of this restriction, does not regard tax-exempt securities issued by municipalities and their agencies not to be an industry.
Senior Securities
 
The Fund may not issue senior securities.
 
The AB Fund may not issue any senior security except as otherwise permitted (i) under the 1940 Act or (ii) pursuant to a rule, order or interpretation issued by the SEC or its staff.
 
The AB Fund may issue senior securities as permitted by the 1940 Act or a rule, order or interpretation issued by the SEC or its staff.
Borrowing
 
The Fund may borrow, on a secured or unsecured basis from banks, up to 5% of its total assets for temporary or emergency purposes.   In addition, The Fund may borrow from banks up to 50% of net assets for the purpose of selling a security short “against the box” on a temporary basis to avoid capital gains distributions.
 
The AB Fund may not borrow money, except as otherwise permitted under the 1940 Act or pursuant to a rule, order or interpretation issued by the SEC or its staff, including (i) as a temporary measure, (ii) by entering into reverse repurchase agreements, and (iii) by lending portfolio securities as collateral. For purposes of this investment limitation, the purchase or sale of options, futures contracts, options on futures contracts, forward contracts, swaps, caps, floors, collars and other similar financial instruments shall not constitute borrowing.
 
The Bridgeway Fund may borrow, on a secured or unsecured basis from banks, up to 5% of its total assets for temporary or emergency purposes.  In addition, the Fund may borrow from banks up to 50% of net assets for the purpose of selling a security short “against the box” on a temporary basis to avoid capital gains distributions.
The AB Fund may borrow money as permitted under the 1940 Act or pursuant to a rule, order or interpretation issued by the SEC or its staff.  The AB Fund specifically does not consider the purchase or sale of certain financial instruments to constitute borrowing.
Underwriting
 
The Fund may not act as an underwriter of securities of other issuers.
 
The AB Fund may not engage in the business of underwriting securities issued by others, except to the extent that, in connection with the
 
The AB Fund clarifies that it may engage in the business of underwriting securities issued by others to the extent that, in
 
 
 
15

 
 
     Fundamental Investment Policies    
Policy    Bridgeway Fund    AB Fund    Differences
       
disposition of securities, the AB Fund may be deemed an underwriter under federal securities law.
 
  connection with the disposition of securities, the AB Fund is deemed an underwriter under federal securities law.
Real Estate
 
The Fund may not buy or sell real estate, real estate limited partnership interests or other interest in real estate (although it may purchase and sell securities that are secured by real estate and securities or companies which invest or deal in real estate.)
 
The AB Fund may not purchase or sell real estate or real estate limited partnership interests, provided, however, that the AB Fund may invest in securities secured by real estate or interests therein or issued by companies which invest in real estate or interests therein when consistent with the other policies and limitations described in the AB Fund’s prospectus.
 
 
No material difference.
 
Commodities
 
The Fund may not invest in any commodity options or futures.  The Fund may not invest in options or futures on individual commodities if the aggregate initial margins and premiums required for establishing such positions exceed 2% of net assets.
 
The AB Fund may not invest in physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Fund from purchasing or selling foreign currency, options, futures contracts, options on futures contracts, forward contracts, swaps, caps, floors, collars, securities on a forward-commitment or delayed-delivery basis, and other similar financial instruments).
 
 
The Bridgeway Fund may not invest in commodity options and futures, and is limited with respect to investments in options and futures on individual commodities.
The AB Fund may not invest in physical commodities unless acquired as a result of ownership of securities or other instruments.
 
 
Loans
 
The Fund may not make loans (except for purchases of publicly traded debt securities consistent with the Fund’s investment policies and pursuant to cash
 
The AB Fund may not lend any security or make any other loan except (i) as otherwise permitted under the 1940 Act, (ii) pursuant to a rule, order or interpretation
 
No material difference.
 
 
 
 
16

 
 
     Fundamental Investment Policies    
Policy    Bridgeway Fund    AB Fund    Differences
   
borrowing and lending agreements between and among affiliated funds whose shareholders have authorized such agreements); however, the Fund may lend its securities to others on a fully collateralized basis as permitted by the Securities and Exchange Commission.
 
  issued by the SEC or its staff, (iii) through the purchase of a portion of an issue of debt securities in accordance with the Fund’s investment objective, policies and limitations, or (iv) by engaging in repurchase agreements with respect to portfolio securities.    
Margin
 
The Fund may not purchase securities on margin, except short-term credits that may be necessary for the clearance of transactions.
 
The AB Fund has a non-fundamental policy regarding purchasing securities on margin.
 
The AB Fund does not have a fundamental policy regarding margin but does have a non-fundamental policy, which states that the AB Fund may not purchase securities on margin except that (i) the AB Fund may obtain such short-term credits as are necessary for the clearance of transactions, and (ii) the AB Fund may make margin payments in connection with foreign currency, futures contracts, options, forward contracts, swaps, caps, floors, collars, securities purchased or sold on a forward-commitment or delayed-delivery basis or other financial instruments.
Short Sales
 
The Fund may not make short sales of securities or maintain a short position if such sales or positions exceed 20% of a Fund’s total assets under management.
 
 
None.
 
The AB Fund does not have a comparable policy.
Investing for Control
 
The Fund may not make investments for the purpose of exercising control or management.
 
 
None.
 
 
The AB Fund does not have a comparable policy.
 
 
 
17

 
 
     Fundamental Investment Policies    
Policy    Bridgeway Fund    AB Fund    Differences
Futures and Options
 
The Fund may not invest in options or futures in individual stocks if the aggregate initial margins and premiums required for establishing such non-hedging positions exceed 5% of net assets.  For purposes of calculating the 5% limit, options and futures on individual stocks are excluded as long as the equivalent stock position in the underlying stock meets all other investment restrictions.
 
 
None.
 
 
The AB Fund does not have a comparable policy.

 
The Bridgeway Fund has adopted the following investment limitations that may be changed by the Board of Directors without shareholder approval.  The AB Fund’s non-fundamental policies also may be changed by the AB Board without shareholder approval.
 
   
Non-Fundamental Investment Policies
 
   
Policy
 
Bridgeway Fund
 
 
AB Fund
 
Differences
Issuer Class
Concentration
 
The Fund may not purchase any security if as a result the Fund would then hold more than 10% of any class of securities of an issuer (taking all common stock issues as a single class, all preferred stock issues as a single class, and all debt issues as a single class).
 
 
None.
 
 
The AB Fund does not have a comparable policy.
 
Management Ownership
 
The Fund may not invest in securities of any issuer if, to the knowledge of the Fund, any of its Officers or Directors, or those of the Adviser, owns more than 1/2 of 1% of the outstanding securities of such issuer, and such Directors who own more than 1/2 of 1% own in
 
None.
 
 
The AB Fund does not have a comparable policy.
 
 
 
18

 
 
   
 Non-Fundamental Investment Policies
 
   
Policy     
Bridgeway Fund
 
   AB Fund    Differences
   
the aggregate more than 5% of the outstanding securities of such issuer.
 
       
Warrants
 
The Fund may not purchase any warrants.
 
None.
 
 
The AB Fund does not have a comparable policy.
Illiquid Securities
 
The Fund may not invest in illiquid securities if, as a result of such investment, more than 15% of its net assets would be invested in illiquid securities, or such other amounts as may be permitted under the 1940 Act.
 
 
The AB Fund may not invest more than 15% of its net assets in illiquid securities, including time deposits and repurchase agreements that mature in more than seven days.
 
No material difference.
 
Margin
 
The Fund has a fundamental policy regarding purchasing securities on margin.
 
The AB Fund may not purchase securities on margin except that (i) the AB Fund may obtain such short-term credits as are necessary for the clearance of transactions, and (ii) the AB Fund may make margin payments in connection with foreign currency, futures contracts, options, forward contracts, swaps, caps, floors, collars, securities purchased or sold on a forward-commitment or delayed-delivery basis or other financial instruments.
 
 
The Bridgeway Fund does not have a non-fundamental policy regarding margin, but does have a fundamental policy, which states that the Bridgeway Fund may not purchase securities on margin, except short-term credits that may be necessary for the clearance of transactions.

 
 
G.
COMPARISON OF FEES AND EXPENSES
 
The tables below describe the fees and expenses that you pay if you buy and hold Class N Shares of the Bridgeway Fund and the pro forma fees and expenses that you may pay if you buy and hold Institutional Class shares of the AB Fund after giving effect to the Reorganization.  Expenses for each Fund are based on the operating expenses incurred by the Bridgeway Fund and estimated to have been incurred by the Institutional Class shares of the AB Fund as of the fiscal year ended June 30, 2011.  The pro forma fees and expenses for the Institutional Class shares of the AB Fund assume that the Reorganization had been in effect for the same period.  The Manager has contractually agreed to cap Fund expenses through March 29, 2013, to the extent that total annual fund operating expenses of the Institutional Class shares exceed the annual rate of 0.84% excluding taxes, interest, portfolio transaction

 
 
19

 
 
expenses and other extraordinary expenses.  In addition, there is one primary difference between the advisory fee structure of the AB Fund and the Bridgeway Fund.  The AB Fund’s advisory fee is based on a flat percentage of average annual net assets (0.45%).  However, the Bridgeway Fund’s advisory fee is comprised of a base fee of 0.50% applied to average annual net assets and a performance fee adjustment of plus or minus 0.05% that depends on performance relative to a market index over the last five years that is applied to average net assets over that performance period.

Fees and Expenses
Bridgeway
Fund
Class N
AB Fund
Institutional Class
(Pro forma)
     
Shareholder Fees
(fees paid directly from your investment)
 
Maximum Sales Charge (Load)
Imposed On Purchases
None
None
Maximum Sales Charge (Load)
Imposed On Re-invested Dividends
None
None
Maximum Deferred Sales Charge (Load) Imposed on Redemptions
None
None
Redemption Fee
None
None
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management Fee
0.54%
0.45%
Distribution and/or Service (Rule 12b-1) Fees
None
None
Other Expenses
0.63%
0.71%
Total Annual Fund
Operating Expenses
 
1.17%
 
1.16%
Fee Waiver and
Expense Reimbursement (1)
 
(0.33)%
 
(0.32)%
Net Expenses(2)
0.84%
0.84%

 
 
(1)
Bridgeway is contractually obligated to waive fees and/or pay Fund expenses, if necessary, to ensure that the Bridgeway Fund’s net expenses do not exceed 0.84%.  Any material change to this agreement would require a vote by shareholders.
 
 
(2)
The Manager has contractually agreed to waive and/or reimburse the Institutional Class of the AB Funds for Other Expenses through March 29, 2013, to the extent that Total Annual Fund Operating Expenses for the AB Fund exceed 0.84%, for the Institutional Class (excluding taxes, brokerage commissions, acquired fund fees and expenses and other extraordinary expenses such as litigation). The contractual expense arrangement can be changed by approval of a majority of the AB Fund’s Board of Trustees. The Manager can be reimbursed by the AB Fund for any contractual or voluntary fee reductions or expense reimbursements if reimbursement to the Manager (a) occurs within three years after the Manager’s own reduction or reimbursement and (b) does not cause the Total Annual Fund Operating Expenses of a class to exceed the percentage limit contractually agreed.
 
Example

The Example below is intended to help you compare the cost of investing in Class N Shares of the Bridgeway Fund with the cost of investing in Institutional Class shares of the AB Fund on a pro forma basis.  The Example assumes that you invest $10,000 in each Fund and then redeem all of your shares at the end of each period.  The Example also assumes that your investment has a 5% annual return and that the Bridgeway Fund’s Total Annual Fund Operating Expenses and Net Expenses remain the same.  In order to reflect the cap on expenses for each Fund in the Example, the Bridgeway Fund uses its Net

 
 
20

 
 
Expenses for years one through ten and the AB Fund uses its Net Expenses for year one and its Total Annual Fund Operating Expenses for years two through ten.  Although your actual costs may be higher or lower, based on these assumptions, your costs would be:
 
 
 
One Year
Three Years
Five Years
Ten Years
Bridgeway Fund – Class N (Pro forma)
$86
$268
$466
$1037
         
AB Fund – Institutional Class (Pro forma)
$86
$337
$607
$1380


H.
PERFORMANCE INFORMATION
 
The AB Fund’s Institutional Class shares will adopt the performance history of the Bridgeway Fund’s Class N Shares.  The bar chart and the performance table below provide some indication of the risks of an investment in the AB Fund by showing the Bridgeway Fund’s performance since its inception and by showing how the Bridgeway Fund’s average annual returns compare with a broad measure of market performance.  Of course, the Bridgeway Fund’s past performance, before and after taxes, does not necessarily represent how the AB Fund will perform in the future.  Updated performance information is available on the Fund’s website at www.bridgeway.com or by calling 800-661-3550.

Bridgeway Fund Class N Shares
Year-By-Year Percentage Returns
as of 12/31 of Each Year
 
 
 

The Bridgeway Fund’s calendar year to date total return for Class N Shares as of September 30, 2011 was -9.16%.
 
During the period shown in the bar chart, the highest quarterly return was 17.15% (for the third quarter of 2009) and the lowest quarterly return was -18.26% (for the fourth quarter of 2008).
 
AVERAGE ANNUAL TOTAL RETURNS
For the periods
Ended 12/31/10
One Year
 
 
Five Years
Since
Inception
(10/31/03)
Bridgeway Fund Class N Shares
     
Return Before Taxes
14.51%
2.27%
6.26%
Return After Taxes on Distributions
14.20%
1.89%
5.88%
 
 
 
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For the periods
Ended 12/31/10
One Year
 
 
Five Years
Since
Inception
(10/31/03)
Return After Taxes on Distributions and Sale of Fund Shares
9.79%
1.89%
5.35%
Russell 1000® Value Index (reflects no deductions for fees, expenses or taxes)
15.51%
1.28%
5.11%
Lipper Large-Cap Value Index (reflects no deductions for fees, expenses or taxes)
13.02%
1.52%
4.58%

After-tax returns are calculated using the historical highest individual federal marginal income tax rate in effect at the time of each distribution and assumed sale, but do not reflect the impact of state and local income taxes.

Actual after-tax returns depend on an investor’s tax situation and may differ from those shown.  Return After Taxes on Distributions and Sale of Fund Shares may be higher than other returns for the same period due to a tax benefit of realizing a capital loss upon the sale of Fund shares.  After-tax returns shown may not be relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement plans.

Portfolio Turnover

Each Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio).  A higher portfolio turnover rate may indicate higher transaction costs and may result in larger Fund distributions of net realized capital gains and, therefore, higher taxes for shareholders whose Fund shares are held in a taxable account.  These costs, which are not reflected in Total Annual Fund Operating Expenses or in the Example, affect each Fund’s performance.  The Bridgeway Fund’s portfolio turnover rate during the most recent fiscal year was 43% of the average value of its portfolio.

I.
COMPARISON OF DISTRIBUTION AND PURCHASE, REDEMPTION AND EXCHANGE PROCEDURES
 
Foreside Fund Services, LLC (“Foreside”) is the Bridgeway Fund’s distributor and principal underwriter. Foreside is located at Three Canal Plaza, Suite 100, Portland, Maine 04101. The Bridgeway Fund has adopted a distribution plan (“Plan”) for its Class N shares under Rule 12b-1 of the 1940 Act.  However, the Bridgeway Fund’s Class N shares currently do not pay any fees under the Plan.  The AB Fund’s Institutional Class shares also will pay no Rule 12b-1 fees.
 
Under a Distribution Agreement with the Company, Foreside acts as the Bridgeway Fund’s agent in connection with the continuous offering of shares of the Bridgeway Fund.  Foreside is a registered broker-dealer and is a member of the Financial Industry Regulatory Authority (“FINRA”).  Foreside continually distributes shares of the Bridgeway Fund on a best efforts basis. Foreside has no obligation to sell any specific quantity of Fund shares.  Foreside may enter into agreements with selected broker-dealers, banks or other financial institutions for distribution of shares of the Bridgeway Fund.  Foreside receives no compensation for its distribution services. Shares are sold with no sales commission; accordingly, Foreside receives no sales commissions.  Bridgeway, at its expense, pays Foreside a fee for certain distribution-related services, which may include Bridgeway employees serving as registered representatives of Foreside to facilitate the distribution of Bridgeway Fund shares.

 
22

 

Foreside also will be the distributor and principal underwriter of the AB Fund’s shares.  Under a Distribution Agreement with the AB Trust, Foreside will provide the same distribution services to the AB Fund as Foreside currently provides to the Bridgeway Fund.  Additionally, pursuant to a Sub-Administration Agreement between Foreside and the Manager, Foreside will receive a separate fee from the Manager for providing administrative services in connection with the marketing and distribution of shares of the AB Fund.

Purchase, Redemption and Exchange Procedures.
 
Purchase Procedures. The purchase procedures for the Bridgeway Fund and the AB Fund are similar.  Investors may invest by contacting the Funds through the internet, through a broker or other financial institution who sells the Funds, or by mail, telephone or wire.

The minimum initial and minimum subsequent investment amounts for the Bridgeway Fund are different than the minimum amounts for the AB Fund.  The minimum initial investment for Class N Shares of the Bridgeway Fund is $2,000, though the minimum initial investment amount for certain retirement accounts may be lower.  The subsequent investment minimum for the Bridgeway Fund is $100, though the minimum subsequent investment through a systematic purchase plan investment is $50.  The minimum initial investment for Institutional Class shares of the AB Fund is $250,000.  However, the AB Fund’s minimum initial investment will not apply to Bridgeway Fund shareholders.  There is no minimum subsequent investment amount for the AB Fund’s Institutional Class shares, other than for purchases by check, in which case the minimum subsequent investment amount is $50.

Redemption Procedures.  The Bridgeway Fund permits, and the AB Fund will permit, redemptions through the internet, by mail, wire, and telephone.  No redemption fee currently applies to shares of the Bridgeway Fund, and the AB Fund will not charge a redemption fee.

Additionally, each Fund has also reserved the right to redeem shares “in kind.” Additional shareholder account information for the AB Fund is set forth in Appendix C to this Proxy Statement.

Exchange Procedures.  An investor in the Bridgeway Fund may sell its shares and buy shares of another of the Company’s funds, also known as an exchange, by telephone or in writing, unless the investor declined telephone privileges on its account application.  Exchange purchases are subject to the same minimum and subsequent investment levels as new accounts and fund closing commitments.  Because exchanges are treated as a sale and purchase, they may have tax consequences.

Shares of any class of the AB Fund may be exchanged for shares of the same class of another American Beacon Fund under certain limited circumstances.  Since an exchange involves a concurrent purchase and redemption, please review the sections titled “Purchase Policies” and “Redemption Policies” in the AB Fund Prospectus for additional limitations that apply to purchases and redemptions.    If shares were purchased by check, to exchange out of one American Beacon Fund and into another, a shareholder must have owned shares of the redeeming American Beacon Fund for at least 10 days.

The minimum investment requirement must be met for the American Beacon Fund into which the shareholder is exchanging.  American Beacon Fund shares may be acquired through exchange only in states in which they can be legally sold.  The American Beacon Funds reserve the right to charge a fee and to modify or terminate the exchange privilege at any time.  Please refer to the section titled “Frequent Trading and Market Timing” in the AB Fund Prospectus for information on the American Beacon Funds’ policies regarding frequent purchases, redemptions, and exchanges.


 
23

 
 
J.    KEY INFORMATION ABOUT THE PROPOSAL
The following is a summary of key information concerning the Reorganization.  Keep in mind that more detailed information appears in the Plan, the form of which is attached to this Proxy Statement as Appendix A.
 
 
 1.
SUMMARY OF THE PROPOSED REORGANIZATION
 
At the Special Meeting, the shareholders of the Bridgeway Fund will be asked to approve the Plan to reorganize the Bridgeway Fund into the AB Fund.  The AB Fund is a newly organized series of the AB Trust that will commence operations upon consummation of the Reorganization.  If the Plan is approved by the shareholders of the Bridgeway Fund and the Reorganization is consummated, the Bridgeway Fund will transfer all of its assets to the AB Fund in exchange solely for (1) the number of full and fractional Institutional Class shares of the AB Fund equal to the number of full and fractional Class N shares of the Bridgeway Fund as of the close of business on the closing date referred to below (the “Closing”) and (2) the AB Fund’s assumption of all of the Bridgeway Fund’s liabilities.  Immediately thereafter, the Bridgeway Fund will distribute the AB Fund shares to its shareholders, by the AB Trust’s transfer agent establishing accounts on the AB Fund’s share records in the names of those shareholders and transferring those AB Fund shares to those accounts, by class, in complete liquidation of the Bridgeway Fund.  As a result, each shareholder of the Bridgeway Fund will receive Institutional Class shares of the AB Fund having an aggregate NAV equal to the aggregate NAV of the shareholder’s Bridgeway Fund’s Class N shares. The expenses associated with the Reorganization will not be borne by the Bridgeway Fund’s shareholders; record of ownership will be held in book entry form only.

Until the Closing, shareholders of the Bridgeway Fund will continue to be able to redeem their shares at the NAV per share next determined after receipt by the Bridgeway Fund’s transfer agent of a redemption request in proper form.  Redemption and purchase requests received by the transfer agent after the Closing will be treated as requests received for the redemption of shares of the AB Fund received by the shareholder in connection with the Reorganization or purchase of AB Fund shares.  After the Reorganization, all of the issued and outstanding shares of the Bridgeway Fund will be canceled on the books of the Bridgeway Fund, and the share transfer books of the Bridgeway Fund will be permanently closed.  If the Reorganization is consummated, shareholders will be free to redeem the shares of the AB Fund that they receive in the transaction at their then-current NAV.  Shareholders of the Bridgeway Fund may wish to consult their tax advisors as to any different consequences of redeeming their shares prior to the Reorganization or exchanging such shares for shares of the AB Fund in the Reorganization.

The Reorganization is subject to a number of conditions, including the approval of the Plan by the shareholders of the Bridgeway Fund and the receipt of a legal opinion from counsel to the AB Trust with respect to certain tax matters (see Federal Income Tax Consequences, below).  Assuming satisfaction of the conditions in the Plan, the closing date of the Reorganization is expected to be February 3, 2012, or another date agreed to by the Company and the AB Trust.

The Manager and Bridgeway have agreed to pay all direct costs relating to the Reorganization, including the costs relating to the Special Meeting and to preparing and filing the registration statement that includes this Proxy Statement.  The Manager and Bridgeway also will incur the direct costs associated with the solicitation of proxies, including the cost of copying, printing and mailing proxy materials.

The Plan may be amended by the mutual agreement of the Company and the AB Trust, notwithstanding approval thereof by the Bridgeway Fund’s shareholders, provided that no such amendment after that approval may have a material adverse effect on those shareholders’ interests.  In
 
24

 
 
addition, the Plan may be terminated at or before the Closing by the mutual agreement of the Company and the AB Trust or by either of them (1) in the event of the other’s material breach of any representation, warranty or covenant contained in the Plan to be performed at or before the Closing, (2) if a condition to its obligations has not been met and it reasonably appears that that condition will not or cannot be met, (3) if a governmental body issues an order, decree or ruling having the effect of permanently enjoining, restraining or otherwise prohibiting consummation of the Reorganization or (4) if the Closing has not occurred by August 31, 2012, or another date as to which they agree.
 
 
2.
DESCRIPTION OF THE AB FUND’S SHARES
 
Institutional Class shares of the AB Fund issued to the shareholders of the Bridgeway Fund pursuant to the Reorganization will be duly authorized, validly issued, fully paid and non-assessable when issued and will be transferable without restriction and will have no preemptive or conversion rights.  Institutional Class shares will be sold and redeemed based upon their NAV next determined after receipt of the purchase or redemption request, as described in Appendix C to this Proxy Statement.
 
 
3.
FEDERAL INCOME TAX CONSEQUENCES
 
The Company believes the Bridgeway Fund has qualified for treatment as a regulated investment company under Part I of Subchapter M of Chapter 1 of Subtitle A of the Code (“Subchapter M”) since its inception. Accordingly, the Company believes the Bridgeway Fund has been, and expects the Bridgeway Fund to continue through the Closing to be, relieved of any federal income tax liability on its taxable income and net gains it distributes to shareholders to the extent provided for in Subchapter M.
 
 
The Reorganization is intended to qualify for federal income tax purposes as a tax-free reorganization under section 368(a) of the Code.  As a condition to the Closing, the Company and the AB Trust will receive an opinion of counsel to the AB Trust substantially to the effect that -- based on certain assumptions and conditioned on the representations set forth in the Plan (and, if such counsel requests, in separate letters from the Company and the AB Trust) being true and complete at the time of the Closing and the Reorganization’s being consummated in accordance with the Plan (without the waiver or modification of any terms or conditions thereof and without taking into account any amendment thereof that counsel has not approved) -- the Reorganization will qualify as such a reorganization and that, accordingly, for federal income tax purposes:

 
Each Fund will be “a party to a reorganization” (within the meaning of section 368(b) of the Code);
 
The Bridgeway Fund will recognize no gain or loss upon the transfer of its assets to the AB Fund in exchange solely for AB Fund shares and the AB Fund’s assumption of the Bridgeway Fund’s liabilities or on the distribution of those shares to the Bridgeway Fund’s shareholders in exchange for their Bridgeway Fund shares;
 
A shareholder will recognize no gain or loss on the exchange of all of its Bridgeway Fund shares solely for AB Fund shares pursuant to the Reorganization;
 
A shareholder’s aggregate tax basis in the AB Fund shares it receives pursuant to the Reorganization will be the same as the aggregate tax basis in its Bridgeway Fund shares it actually or constructively surrenders in exchange for those AB Fund shares, and its holding period for those AB Fund shares will include, in each instance, its holding period for those Bridgeway Fund shares, provided the shareholder holds them as capital assets as of the time of the Closing;
 
The AB Fund will recognize no gain or loss on its receipt of the Bridgeway Fund’s assets in exchange solely for the AB Fund shares and the AB Fund’s assumption of the Bridgeway Fund’s liabilities;

 
25

 

 
The AB Fund’s basis in each transferred asset will be the same as the Bridgeway Fund’s basis therein immediately before the Reorganization, and the AB Fund’s holding period for each such asset will include the Bridgeway Fund’s holding period therefor (except where the AB Fund’s investment activities have the effect of reducing or eliminating an asset’s holding period); and
 
For purposes of section 381 of the Code, the AB Fund will be treated just as the Bridgeway Fund would have been treated if there had been no Reorganization.  Accordingly, the Reorganization will not result in the termination of the Bridgeway Fund’s taxable year, the Bridgeway Fund’s tax attributes enumerated in section 381(c) of the Code will be taken into account by the AB Fund as if there had been no Reorganization, and the part of the Bridgeway Fund’s taxable year before the Reorganization will be included in the AB Fund’s taxable year after the Reorganization.
 
Notwithstanding the above, the opinion of counsel may state that no opinion is expressed as to the effect of the Reorganization of the Funds or any shareholder with respect to any asset as to which any unrealized gain or loss is required to be recognized for federal income tax purposes at the end of a taxable year (or on the termination or transfer thereof) under a mark-to-market system of accounting.
 
Opinions of counsel are not binding upon the Internal Revenue Service (“IRS”) or the courts.  If the Reorganization is consummated but does not qualify as a tax-free reorganization under the Code, the Bridgeway Fund would recognize gain or loss on the transfer of its assets to the AB Fund and each shareholder of the Bridgeway Fund would recognize a taxable gain or loss equal to the difference between its tax basis in the Bridgeway Fund shares and the fair market value of the shares of the AB Fund it receives.
 
Tracking Your Basis and Holding Period; State and Local Taxes.  After the Reorganization, you will continue to be responsible for tracking the adjusted tax basis and holding period of your AB Fund shares for federal income tax purposes.  Pursuant to legislation passed by Congress in 2008, if you want to use the average cost method for determining basis with respect to any AB Fund shares you acquire after December 31, 2011 (“Covered Shares”), you will have to elect to do so in writing (which may be electronic).  If you fail to affirmatively elect that method, the basis determination will be made in accordance with the AB Fund’s default method, which might be a method other than average cost.  If, however, the AB Fund’s default method is average cost and you wish to use a different acceptable method for basis determination (e.g., a specific identification method), you will be able to elect to do so.
 
That legislation also requires the AB Fund (or administrative agent) to report to the IRS and furnish to its shareholders the cost basis information for Covered Shares.  In addition to the current requirement to report the gross proceeds from the redemption of its shares, the AB Fund also will be required to report the cost basis information for Covered Shares and indicate whether they had a short-term or long-term holding period.  You should consult with your tax adviser to determine the best IRS-accepted cost basis method for your tax situation and to obtain more information about how the cost basis reporting law will apply to you.
 
 
4.
COMPARISON OF FORMS OF ORGANIZATION AND SHAREHOLDER RIGHTS
 
Set forth below is a discussion of the material differences between the Funds and the rights of their shareholders.

 
26

 
 
Governing Law.  The Bridgeway Fund is a series of the Company, which is organized as a Maryland corporation.  The AB Fund is a separate series of the AB Trust, which is organized as a Massachusetts business trust.  The AB Fund is authorized to issue an unlimited number of shares of beneficial interest.  The Bridgeway Fund is authorized to issue 140,000,000 shares of common stock.  The Company’s operations are governed by its Articles of Incorporation, including any amendments thereto and By-Laws and applicable state law.  The AB Trust’s operations are governed by its Amended and Restated Declaration of Trust (the “AB Declaration of Trust”) and By-Laws and applicable state law.

Shareholder Liability.  Under Maryland law, no shareholder of the Bridgeway Fund shall be subject to any personal liability in connection with the assets or the affairs of the Company or of any of its series.  In addition, the Bridgeway Fund is required to indemnify shareholders and former shareholders in accordance with Maryland law against losses and expenses arising from any personal liability for any obligation of the Bridgeway Fund solely by reason of being or having been a shareholder of the Bridgeway Fund and not because of his or her acts or omissions or for some other reason.

Under the AB Declaration of Trust, any shareholder or former shareholder of the AB Fund shall not be held to be personally liable for any obligation or liability of the AB Trust solely by reason of being or having been a shareholder and not because of such shareholder’s acts or omissions or for some other reason.  The AB Fund is required to indemnify shareholders and former shareholders against losses and expenses incurred in connection with proceedings relating to his or her being or having been a shareholder of the AB Fund and not because of his or her acts or omissions.

Board of Directors.  The Reorganization will result in a change in the Bridgeway Fund’s Board because the directors of the Company are different from the trustees of the AB Trust.  The Bridgeway Fund’s Board has six directors, two of whom are “interested persons,” as that term is defined under the 1940 Act, of the Company.  For more information, refer to the Statement of Additional Information dated October 31, 2011, for the Bridgeway Fund, which is incorporated by reference into this Proxy Statement.

The AB Board has eight trustees, one of whom is deemed an “interested person” of the AB Trust.  For more information, refer to the Statement of Additional Information to this Proxy Statement dated December 16, 2011, which is incorporated by reference into this Proxy Statement.

The Reorganization also will result in a change in the officers because the officers of the Company are different from the officers of the AB Trust.

Classes.  The Bridgeway Fund offers Class N shares.  The AB Fund is a separate series of the AB Trust that is expected to offer Institutional Class, Investor Class, A Class, C Class and Y Class shares.  It is anticipated that shareholders of the Bridgeway Fund will receive Institutional Class shares of the AB Fund in the Reorganization. Nothing contained herein shall be construed as an offer to purchase or otherwise acquire any other class of shares of the AB Fund.  The AB Board has reserved the right to create and issue additional classes of the AB Fund following the Reorganization.  Each share of a series or class represents an equal proportionate interest in that series or class with each other share of that series or class.  Shares of each series or class generally vote together on fund- or trust-wide matters, except when required under federal securities laws to vote separately on matters that only affect a particular class, such as the approval of a distribution plan for a particular class.  Structurally, there is no difference between Institutional Class shares of the AB Fund and the Bridgeway Fund’s Class N Shares.
 
 
 5.
CAPITALIZATION
 
The capitalization of the Bridgeway Fund as of November 30, 2011, and the AB Fund’s pro forma combined capitalization as of that date after giving effect to the Reorganization are as follows:

 
27

 


(unaudited)
Bridgeway Fund
Class N
Pro forma
AB Fund Institutional Class
Net Assets
$27,403,503.42
$27,403,503.42
     
Shares Outstanding
2,005,541
2,005,541
     
Net Asset Value per Share
$13.66
$13.66


K.
ADDITIONAL INFORMATION ABOUT THE AB FUND
 
 
 1.
INVESTMENT ADVISER AND SUB-ADVISER
 
The Manager, located at 4151 Amon Carter Boulevard, Fort Worth, Texas 76155, is the AB Fund’s investment adviser.  The Manager is a wholly owned subsidiary of Lighthouse Holdings, Inc. (“Lighthouse”).  Lighthouse is indirectly controlled by investment funds affiliated with Pharos Capital Group, LLC and TPG Capital, L.P.  The Manager is paid a management fee as compensation for providing investment advisory fees and for providing the AB Trust with advisory and asset allocation services. Pursuant to management and administrative services agreements, the Manager provides the AB Trust with office space, office equipment and personnel necessary to manage and administer the AB Trust’s operations. This includes:
 
 
complying with reporting requirements;
 
corresponding with shareholders;
 
maintaining internal bookkeeping, accounting and auditing services and records; and
 
supervising the provision of services to the AB Trust by third parties.

The management agreement provides for the Manager to receive an annualized management fee that is calculated and accrued daily, equal to 0.05% of the net assets of the AB Fund, plus amounts paid by the Manager to the Sub-Adviser.
 
In addition to the management fee, the AB Fund pays the Manager an administrative services fee for providing administrative and management services (other than investment advisory services).  The administrative services fee for the AB Fund is equal to 0.30% of the net assets of the AB Fund’s Institutional Class.
 
The AB Fund is responsible for expenses not otherwise assumed by the Manager, including the following: audits by independent auditors; transfer agency, custodian, fund accounting, dividend disbursing agent and shareholder recordkeeping services; taxes, if any, and the preparation of the AB Fund’s tax returns; interest; costs of Trustee and shareholder meetings; printing and mailing prospectuses and reports to existing shareholders; fees for filing reports with regulatory bodies and the maintenance of the AB Fund’s existence; legal fees; fees to federal and state authorities for the registration of shares; fees and expenses of Trustees; insurance and fidelity bond premiums; fees paid to consultants providing reports regarding adherence by the Sub-Adviser to the investment style of the AB Fund; fees paid for brokerage commission analysis for the purpose of monitoring best execution practices of the Sub-Adviser; and any extraordinary expenses of a nonrecurring nature.
 

 
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The AB Fund’s assets may be allocated among one or more sub-advisers in the future by the Manager.  The sub-adviser has discretion to purchase and sell securities for its segment of the AB Fund’s assets in accordance with the AB Fund’s objectives, policies, restrictions and more specific strategies provided by the Manager.  Pursuant to an exemptive order issued by the Securities and Exchange Commission (“SEC”), the Manager is permitted to enter into new or modified investment advisory agreements with existing or new sub-advisers without approval of the AB Fund’s shareholders, but subject to approval of the AB Board.  The prospectus will be supplemented if additional sub-advisers are retained or the contract with any existing sub-adviser is materially changed or terminated. The AB Fund’s advisory arrangements are set forth above.
 
The Sub-Adviser is a Texas corporation that was organized in 1993 and has managed the affairs of the Bridgeway Fund since its inception in 2003.  Bridgeway had approximately $2.070 billion of assets under management as of October 31, 2011.

The SAI to this Proxy Statement, which is incorporated by reference into this Proxy Statement, provides additional information about each portfolio manager’s compensation, other accounts managed by the portfolio managers and the portfolio managers’ ownership of securities in the Bridgeway Fund.
 
 
 2.
OTHER SERVICE PROVIDERS
 
Foreside Fund Services, LLC (“Foreside”), located at Three Canal Plaza, Suite 100, Portland, Maine 04101, is the distributor and principal underwriter of the AB Fund’s shares.  Pursuant to a Sub-Administration Agreement between Foreside and the Manager, Foreside receives a fee from the Manager for providing administrative services in connection with the marketing and distribution of shares of the series of the American Beacon Funds (including the AB Fund) and the American Beacon Select Funds.
 
 
 3.
TAX CONSIDERATIONS
 
The AB Fund intends to make annual distributions that may be taxed to its shareholders as ordinary income or net capital gain.  For a discussion of relevant tax matters, please refer to Appendix C to this Proxy Statement.
 
 
 4.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
 
If you purchase the AB Fund through a broker-dealer or other financial intermediary (such as a bank), the AB Fund and its related companies may pay the intermediary for the sale of AB Fund shares and related services.  These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the AB Fund over another investment.  Ask your salesperson or visit your financial intermediary’s internet site for more information.
 
II.VOTING INFORMATION
 
A.
RECORD DATE, VOTING RIGHTS AND VOTE REQUIRED
 
Proxies are being solicited from the shareholders of the Bridgeway Fund by the Board for the Special Meeting to be held on Wednesday, February 1, 2012, at 11:00 a.m. Central time at principal executive offices of the Company located at 20 Greenway Plaza, Suite 450, Houston, Texas 77046, or at

 
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such later time made necessary by adjournment.  Unless revoked, all valid proxies will be voted in accordance with the specification thereon or, in the absence of specifications, “FOR” approval of the Plan.
 
The Board has fixed the close of business on December 7, 2011 (the “Record Date”) as the record date for the determination of shareholders entitled to notice of and to vote at the Meeting and any adjournments thereof.  Shareholders of record as of the Record Date will be entitled to one vote for each share held and to a proportionate fractional vote for each fractional share held.  As of the Record Date, the total number of issued and outstanding shares of common stock of Class N shares of the Bridgeway Fund was 2,000,748.  Shareholders of record who own five percent or more of the Bridgeway Fund as of the Record Date are set forth on Appendix B to this Proxy Statement.  Approval of the Reorganization will require the affirmative vote in favor of the Reorganization by at least 75% of the voted shares of the Bridgeway Fund.

B.
HOW TO VOTE
 
You may vote in one of three ways:

 
complete and sign the enclosed proxy ballot and mail it to us in the prepaid return envelope (if mailed in the United States);
 
vote on the Internet at the website address listed on your proxy ballot; or
 
call the toll-free number printed on your proxy ballot.

PLEASE NOTE, TO VOTE VIA THE INTERNET OR TELEPHONE, YOU WILL NEED THE “CONTROL NUMBER” THAT APPEARS ON YOUR PROXY BALLOT.

C.
PROXIES
 
All proxies solicited by the Board that are properly executed and received by the Secretary prior to the Special Meeting, and are not revoked, will be voted at the Special Meeting. A proxy with respect to shares held in the name of two or more persons is valid if executed by any one of them unless at or prior to its use the Bridgeway Fund receives written notification to the contrary from any one of such persons.  Shares represented by such proxies will be voted in accordance with the instructions thereon. If no specification is made on a proxy, it will be voted FOR the matters specified on the proxy.  All shares that are voted and votes to ABSTAIN will be counted towards establishing a quorum, as will broker non-votes.  Broker non-votes are shares for which the beneficial owner has not voted and the broker holding the shares does not have discretionary authority to vote on the particular matter.

You may revoke a proxy once it is given.  If you desire to revoke a proxy, you must submit a subsequent later dated proxy or a written notice of revocation to the Bridgeway Fund.  You may also give written notice of revocation in person at the Special Meeting.  Attendance by a shareholder at the Special Meeting does not, by itself, revoke a proxy.

D.
QUORUM AND ADJOURNMENTS
 
One-third, or thirty-three and one-third percent (331/3%), of the issued and outstanding shares of the Bridgeway Fund that are entitled to vote will be considered a quorum for the transaction of business.  If a quorum of shareholders of the Bridgeway Fund is not present at the Special Meeting, or if a quorum is present but sufficient votes to approve the Reorganization described in this Proxy Statement are not received, the persons named as proxies may, but are under no obligation to, propose one or more adjournments of the Special Meeting of the Bridgeway Fund to permit further solicitation of proxies.

 
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Any business that might have been transacted at the Special Meeting with respect to the Bridgeway Fund may be transacted at any such adjourned session(s) at which a quorum is present.  The Special Meeting may be adjourned by vote of the holders of a majority of the shares present, in person or by proxy.  The persons designated as proxies may use their discretionary authority to vote as instructed by management of the Bridgeway Fund on questions of adjournment and on any other proposals raised at the Special Meeting to the extent permitted by the SEC’s proxy rules, including proposals for which timely notice was not received, as set forth in the SEC’s proxy rules.
 
E.
EFFECT OF ABSTENTIONS AND BROKER “NON-VOTES”
 
All proxies voted, including abstentions and broker non-votes (shares held by brokers or nominees where the underlying holder has not voted and the broker does not have discretionary authority to vote the shares), will be counted toward establishing a quorum.  In addition, under the rules of the New York Stock Exchange, if a broker has not received instructions from beneficial owners or persons entitled to vote and the proposal to be voted upon may “affect substantially” a shareholder’s rights or privileges, the broker may not vote the shares as to that proposal even if it has discretionary voting power.  As a result, these shares also will be treated as broker non-votes for purposes of proposals that may “affect substantially” a shareholder’s rights or privileges (but will not be treated as broker non-votes for other proposals, including adjournment of the Special Meeting).

Abstentions and broker non-votes will be treated as shares voted against a proposal.  Treating broker non-votes as votes against a proposal can have the effect of causing shareholders who choose not to participate in the proxy vote to prevail over shareholders who cast votes or provide voting instructions to their brokers or nominees. In order to prevent this result, the Bridgeway Fund may request that selected brokers or nominees refrain from returning proxies on behalf of shares for which voting instructions have not been received from beneficial owners or persons entitled to vote.  The Bridgeway Fund also may request that selected brokers or nominees return proxies on behalf of shares for which voting instructions have not been received if doing so is necessary to obtain a quorum.  Abstentions and broker non-votes will not be voted “FOR” or “AGAINST” any adjournment.

F.
SOLICITATION OF PROXIES
 
The Bridgeway Fund expects that the solicitation of proxies will be primarily by mail and telephone. The solicitation also may include facsimile, Internet or oral communications by certain employees of Bridgeway, who will not be paid for these services.  Bridgeway has retained Broadridge Financial Solutions, Inc. to aid in the solicitation of proxies, at an anticipated cost of approximately $10,300, exclusive of printing costs.  Bridgeway and the Manager will bear the costs of the Special Meeting, including legal costs, the costs of retaining Broadridge Financial Solutions, Inc., and other expenses incurred in connection with the solicitation of proxies.
 
III.OTHER INFORMATION
 
A.
OTHER BUSINESS
 
The Board knows of no other business to be brought before the Special Meeting.  If any other matters come before the Special Meeting, the Board intends that proxies that do not contain specific restrictions to the contrary will be voted on those matters in accordance with the judgment of the persons named in the enclosed proxy card.

 
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B.
NEXT MEETING OF SHAREHOLDERS
 
The Bridgeway Fund does not hold regular meetings of shareholders.  Shareholders wishing to submit proposals for inclusion in a proxy statement for a subsequent meeting of shareholders should send their written proposals to the Secretary of Bridgeway Funds, Inc., 20 Greenway Plaza, Suite 450, Houston, Texas 77046.  Proposals must be received by the Secretary of the Company prior to the 90th day before the date of the Special Meeting.

C.
LEGAL MATTERS
 
Certain legal matters concerning the issuance of shares of the AB Fund in connection with the Reorganization and the tax consequences of the Reorganization will be passed upon by K&L Gates LLP.

D.
INFORMATION FILED WITH THE SEC
 
The Company and the AB Trust are subject to the information requirements of the Securities Exchange Act of 1934 and the 1940 Act and in accordance therewith, file reports and other information, including proxy materials and charter documents, with the SEC.  Reports, proxy statements, registration statements and other information filed by the Company may be inspected without charge and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, DC 20549, and at the following regional offices of the SEC: Northeast Regional Office, 3 World Financial Center, Suite 400, New York, New York 10281; Southeast Regional Office, 801 Brickell Avenue, Suite 1800, Miami, Florida 33131; Midwest Regional Office, 175 West Jackson Boulevard, Suite 900, Chicago, Illinois 60604; Central Regional Office, 1801 California Street, Suite 1500, Denver, Colorado 80202; and Pacific Regional Office, 5670 Wilshire Boulevard, Suite 1100, Los Angeles, California 90036. Copies of such materials may also be obtained from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, DC 20549 at prescribed rates.


By Order of the Board of Directors of Bridgeway Funds, Inc.
 
 
/s/ Michael D. Mulcahy
Michael D. Mulcahy
President

December 16, 2011

 
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APPENDIX A
 
FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
 
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION (“Agreement”) is made as of ________ __, 2012, among AMERICAN BEACON FUNDS, a Massachusetts business trust, with its principal place of business at 4151 Amon Carter Boulevard, Fort Worth, Texas  76155 (“Trust”), on behalf of American Beacon Bridgeway Large Cap Value Fund, a segregated portfolio of assets (“series”) thereof (“New Fund”), BRIDGEWAY FUNDS, INC., a Maryland corporation, with its principal place of business at 20 Greenway Plaza, Suite 450, Houston, Texas  77046 (“Corporation”), on behalf of its Bridgeway Large-Cap Value Fund series (“Old Fund”), and, solely for purposes of paragraph 6, AMERICAN BEACON ADVISORS, INC., Trust’s investment manager (“AmBeacon Manager”), and BRIDGEWAY CAPITAL MANAGEMENT, INC., Old Fund’s investment adviser and New Fund’s investment sub-adviser (“Bridgeway Adviser”).  (Each of Trust and Corporation is sometimes referred to herein as an “Investment Company,” and each of New Fund and Old Fund is sometimes referred to herein as a “Fund.”)  Notwithstanding anything to the contrary contained herein, (1) the agreements, covenants, representations, warranties, actions, and obligations of and by each Fund, and of and by each Investment Company, as applicable, on its behalf, shall be the agreements, covenants, representations, warranties, actions, and obligations of that Fund only, (2) all rights and benefits created hereunder in favor of a Fund shall inure to and be enforceable by the Investment Company of which that Fund is a series on that Fund’s behalf, and (3) in no event shall any other series of an Investment Company or the assets thereof be held liable with respect to the breach or other default by a Fund or Investment Company of its agreements, covenants, representations, warranties, actions, and obligations set forth herein.
 
Each Investment Company wishes to effect a reorganization described in section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (“Code”) (all “section” references are to the Code, unless otherwise noted), and intends this Agreement to be, and adopts it as, a “plan of reorganization” within the meaning of the regulations under the Code (“Regulations”).  The reorganization will involve Old Fund’s changing its identity, form, and place of organization -- by converting from a series of Corporation to a series of Trust -- by (1) transferring all its assets to New Fund (which is being established solely for the purpose of acquiring those assets and continuing Old Fund’s business) in exchange solely for voting shares of beneficial interest in New Fund and New Fund’s assumption of all of Old Fund’s liabilities, (2) distributing those shares pro rata to Old Fund’s shareholders in exchange for their shares of common stock therein and in complete liquidation thereof, and (3) terminating Old Fund, all on the terms and conditions set forth herein (all the foregoing transactions being referred to herein collectively as the “Reorganization”).
 
Each Investment Company’s board of directors/trustees (each, a “Board”), in each case including a majority of its members who are not “interested persons” (as that term is defined in the Investment Company Act of 1940, as amended (“1940 Act”)) (“Non-Interested Persons”) of either Investment Company, (1) has duly adopted and approved this Agreement and the transactions contemplated hereby, (2) has duly authorized performance thereof on its Fund’s behalf by all necessary Board action, and (3) has determined that participation in the Reorganization is in the best interests of the Fund that is a series thereof and, in the case of Old Fund, that the interests of the existing shareholders thereof will not be diluted as a result of the Reorganization.
 
Old Fund currently offers a single class of shares of common stock, par value of $.001 each (“Old Fund Shares”).  New Fund will have multiple classes of shares of beneficial interest, including a class designated Institutional Class shares (“New Fund Shares”); New Fund’s other classes of shares
 

 
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(designated Investor Class shares, A Class shares, Y Class shares, and Class C shares) will not be involved in the Reorganization and thus are not included in the term “New Fund Shares.”  The Old Fund Shares have characteristics substantially similar to the New Fund Shares.
 
1.           PLAN OF REORGANIZATION AND TERMINATION
 
1.1.           Subject to the requisite approval of Old Fund’s shareholders and the terms and conditions set forth herein, Old Fund shall assign, sell, convey, transfer, and deliver all of its assets described in paragraph 1.2 (“Assets”) to New Fund.  In exchange therefor, New Fund shall:
 
 
(a)
issue and deliver to Old Fund the number of full and fractional (all references herein to “fractional” shares meaning fractions rounded to the third decimal place) New Fund Shares equal to the number of full and fractional Old Fund Shares then outstanding, and
 
 
(b)
assume all of Old Fund’s liabilities described in paragraph 1.3 (“Liabilities”).
 
Those transactions shall take place at the Closing (as defined in paragraph 2.1).
 
1.2           The Assets shall consist of all assets and property of every kind and nature -- including all cash, cash equivalents, securities, commodities, futures interests, receivables (including interest and dividends receivable), claims and rights of action, rights to register shares under applicable securities laws, and books and records -- Old Fund owns at the Effective Time (as defined in paragraph 2.1) and any deferred and prepaid expenses shown as assets on Old Fund’s books at that time; and Old Fund has no unamortized or unpaid organizational fees or expenses that have not previously been disclosed in writing to Trust.
 
1.3           The Liabilities shall consist of all of Old Fund’s liabilities, debts, obligations, and duties existing at the Effective Time, whether known or unknown, contingent, accrued, or otherwise, excluding Reorganization Expenses (as defined in paragraph 3.3(f)) borne by Bridgeway Adviser and AmBeacon Manager pursuant to paragraph 6.  Notwithstanding the foregoing, Old Fund will endeavor to discharge all its known liabilities, debts, obligations, and duties before the Effective Time.
 
1.4           At or before the Closing, New Fund shall redeem the Initial Share (as defined in paragraph 5.5) for the amount at which it is issued pursuant to that paragraph.  At the Effective Time (or as soon thereafter as is reasonably practicable), Old Fund shall distribute all the New Fund Shares it receives pursuant to paragraph 1.1(a) to its shareholders of record determined at the Effective Time (each, a “Shareholder”), in proportion to their Old Fund Shares then held of record and in constructive exchange therefor, and shall completely liquidate.  That distribution shall be accomplished by Trust’s transfer agent’s opening accounts on New Fund’s shareholder records in the Shareholders’ names and transferring those New Fund Shares thereto.  Pursuant to that transfer, each Shareholder’s account shall be credited with the number of full and fractional New Fund Shares equal to the number of full and fractional Old Fund Shares that Shareholder holds at the Effective Time.  The aggregate net asset value (“NAV”) of New Fund Shares to be so credited to each Shareholder’s account shall equal the aggregate NAV of the Old Fund Shares that Shareholder holds at the Effective Time.  All issued and outstanding Old Fund Shares, including any represented by certificates, shall simultaneously be canceled on Old Fund’s shareholder records.  Trust shall not issue certificates representing the New Fund Shares issued in connection with the Reorganization.
 
1.5           Any transfer taxes payable on the issuance and transfer of New Fund Shares in a name other than that of the registered holder on Old Fund’s shareholder records of the Old Fund Shares actually or constructively exchanged therefor shall be paid by the transferee thereof, as a condition of that issuance and transfer.
 

 
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1.6           Any reporting responsibility of Old Fund to a public authority, including the responsibility for filing regulatory reports, tax returns, and other documents with the Securities and Exchange Commission (“Commission”), any state securities commission, any federal, state, and local tax authorities, and any other relevant regulatory authority, is and shall remain its responsibility up to and including the date on which it is terminated.
 
1.7           After the Effective Time, Old Fund shall not conduct any business except in connection with its termination.  As soon as reasonably practicable after distribution of the New Fund Shares pursuant to paragraph 1.4, but in all events within six months after the Effective Time, (a) Old Fund shall be terminated as a series of Corporation and (b) Corporation shall make all filings and take all other actions in connection therewith necessary and proper to effect that termination.
 
2.           CLOSING AND EFFECTIVE TIME
 
2.1           Unless the Investment Companies agree otherwise, all acts necessary to consummate the Reorganization (“Closing”) shall be deemed to take place simultaneously as of immediately after the close of business (4:00 p.m., Eastern Time) on February 3, 2012 (“Effective Time”).  The Closing shall be held at Trust’s offices or at such other place as to which the Investment Companies agree.
 
2.2           Corporation shall cause the custodian of Old Fund’s assets (“Old Custodian”) (a) to make Old Fund’s portfolio securities available to Trust (or to its custodian (“New Custodian”), if Trust so directs), for examination, no later than five business days preceding the Effective Time and (b) to transfer and deliver the Assets at the Effective Time to the New Custodian for New Fund’s account, as follows:  (1) duly endorsed in proper form for transfer in such condition as to constitute good delivery thereof in accordance with the custom of brokers, (2) by book entry, in accordance with the Old Custodian’s customary practices and any securities depository (as defined in Rule 17f-4 under the 1940 Act) in which Old Fund’s assets are deposited, in the case of Old Fund’s portfolio securities and instruments deposited with those depositories, and (3) by wire transfer of federal funds in the case of cash.  Corporation shall also direct the Old Custodian to deliver at the Closing an authorized officer’s certificate (a) stating that pursuant to proper instructions provided to the Old Custodian by Corporation, the Old Custodian has delivered all of Old Fund’s portfolio securities, cash, and other Assets to the New Custodian for New Fund’s account and (b) attaching a schedule setting forth information (including adjusted basis and holding period, by lot) concerning the Assets.  The New Custodian shall certify to Trust that such information, as reflected on New Fund’s books immediately after the Effective Time, does or will conform to that information as so certified by the Old Custodian.
 
2.3           Corporation shall deliver, or shall direct its transfer agent to deliver, to Trust at the Closing an authorized officer’s certificate listing the Shareholders’ names and addresses together with the number of full and fractional outstanding Old Fund Shares each such Shareholder owns, at the Effective Time, certified by Corporation’s Secretary or Assistant Secretary or by its transfer agent, as applicable.  Trust shall direct its transfer agent to deliver to Corporation at or as soon as reasonably practicable after the Closing an authorized officer’s certificate as to the opening of accounts on New Fund’s shareholder records in the names of the listed Shareholders and a confirmation, or other evidence satisfactory to Corporation, that the New Fund Shares to be credited to Old Fund at the Effective Time have been credited to Old Fund’s account on those records.
 
2.4           Corporation shall deliver to Trust and AmBeacon Manager, within five days before the Closing, an authorized officer’s certificate listing each security, by name of issuer and number of shares, that is being carried on Old Fund’s books at an estimated fair market value provided by an authorized pricing vendor for Old Fund.
 
2.5           At the Closing, each Investment Company shall deliver to the other (a) bills of sale, checks, assignments, share certificates, receipts, and/or other documents the other Investment Company or its counsel reasonably requests and (b) a certificate executed in its name by its President or a Vice President
 

 
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in form and substance satisfactory to the recipient, and dated the Effective Time, to the effect that the representations and warranties it made in this Agreement are true and correct at the Effective Time except as they may be affected by the transactions contemplated hereby.
 
3.           REPRESENTATIONS AND WARRANTIES
 
3.1           Corporation, on Old Fund’s behalf, represents and warrants to Trust, on New Fund’s behalf, as follows:
 
(a)           Corporation (1) is a corporation that is duly created, validly existing, and in good standing under the laws of the State of Maryland, and its Articles of Incorporation, dated September 28, 1993, as amended to date (“Articles”), are on file with the Maryland State Department of Assessments and Taxation, (2) is duly registered under the 1940 Act as an open-end management investment company, and (3) has the power to own all its properties and assets and to carry on its business as described in its current registration statement on Form N-1A;
 
(b)           Old Fund is a duly established and designated series of Corporation;
 
(c)           The execution, delivery, and performance of this Agreement have been duly authorized at the date hereof by all necessary action on the part of Corporation’s Board; and this Agreement constitutes a valid and legally binding obligation of Corporation, with respect to Old Fund, enforceable in accordance with its terms, subject to the effect of bankruptcy, insolvency, fraudulent transfer, reorganization, receivership, moratorium, and other laws affecting the rights and remedies of creditors generally and general principles of equity;
 
(d)           At the Effective Time, Corporation will have good and marketable title to the Assets for Old Fund’s benefit and full right, power, and authority to sell, assign, transfer, and deliver the Assets hereunder free of any liens or other encumbrances (except securities that are subject to “securities loans,” as referred to in section 851(b)(2), or that are restricted to resale by their terms); and on delivery and payment for the Assets, Trust, on New Fund’s behalf, will acquire good and marketable title thereto, subject to no restrictions on the full transfer thereof, including restrictions that might arise under the Securities Act of 1933, as amended (“1933 Act”);
 
(e)           Corporation, with respect to Old Fund,  is not currently engaged in, and its execution, delivery, and performance of this Agreement and consummation of the Reorganization will not result in, (1) a conflict with or material violation of any provision of Maryland law, the Articles or Corporation’s By-Laws, or any agreement, indenture, instrument, contract, lease, or other undertaking (each, an “Undertaking”) to which Corporation, on Old Fund’s behalf, is a party or by which it is bound or (2) the acceleration of any obligation, or the imposition of any penalty, under any Undertaking, judgment, or decree to which Corporation, on Old Fund’s behalf, is a party or by which it is bound;
 
(f)           At or before the Effective Time, either (1) all material contracts and other commitments of Old Fund (other than this Agreement and certain investment contracts, including options, futures, forward contracts, and swap agreements) will terminate, or (2) provision for discharge and/or New Fund’s assumption of any liabilities of Old Fund thereunder will be made, without either Fund’s incurring any penalty with respect thereto and without diminishing or releasing any rights Corporation may have had with respect to actions taken or omitted or to be taken by any other party thereto before the Closing;
 
(g)           No litigation, administrative proceeding, action, or investigation of or before any court, governmental body, or arbitrator is presently pending or, to Corporation’s knowledge, threatened against Corporation, with respect to Old Fund or any of its properties or assets attributable or allocable to Old Fund, that, if adversely determined, would materially and adversely affect Old Fund’s financial condition or the conduct of its business; and Corporation, on Old Fund’s behalf,
 

 
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knows of no facts that might form the basis for the institution of any such litigation, proceeding, action, or investigation and is not a party to or subject to the provisions of any order, decree, judgment, or award of any court, governmental body, or arbitrator that materially and adversely affects Old Fund’s business or Corporation’s ability to consummate the transactions contemplated hereby;
 
(h)           Old Fund’s Statement of Assets and Liabilities, Schedule of Investments, Statement of Operations, and Statement of Changes in Net Assets (each, a “Statement”) at and for the fiscal year (in the case of the last Statement, for the two fiscal years) ended June 30, 2011, have been audited by BBD, LLP, an independent registered public accounting firm, and are in accordance with generally accepted accounting principles consistently applied in the United States (“GAAP”); and those Statements (copies of which Corporation has furnished to Trust), present fairly, in all material respects, Old Fund’s financial condition at that date in accordance with GAAP and the results of its operations and changes in its net assets for the periods then ended, and there are no known contingent liabilities of Old Fund required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP at that date that are not disclosed therein;
 
(i)           Since June 30, 2011, there has not been any material adverse change in Old Fund’s financial condition, assets, liabilities, or business, other than changes occurring in the ordinary course of business, or any incurrence by Old Fund of indebtedness maturing more than one year from the date that indebtedness was incurred; for purposes of this subparagraph, a decline in NAV per Old Fund Share due to declines in market values of securities Old Fund holds, the discharge of Old Fund liabilities, or the redemption of Old Fund Shares by its shareholders shall not constitute a material adverse change;
 
(j)           All federal and other tax returns, dividend reporting forms, and other tax-related reports (collectively, “Returns”) of Old Fund required by law to have been filed by the Effective Time (including any properly and timely filed extensions of time to file) shall have been filed and are or will be correct in all material respects, and all federal and other taxes shown as due or required to be shown as due on those Returns shall have been paid or provision shall have been made for the payment thereof; to the best of Corporation’s knowledge, no such Return is currently under audit and no assessment has been asserted with respect to those Returns; and Old Fund is in compliance in all material respects with all applicable Regulations pertaining to the reporting of dividends and other distributions with respect to, and redemptions of, its shares and to withholding in respect thereof and is not liable for any material penalties that could be imposed thereunder;
 
(k)           Old Fund is a “fund” (as defined in section 851(g)(2), eligible for treatment under section 851(g)(1)); for each taxable year of its operation (including its current taxable year through the Effective Time), Old Fund has met (and for its current taxable year, through the Effective Time, will meet) the requirements of Part I of Subchapter M of Chapter 1 of Subtitle A of the Code (“Subchapter M”) for qualification as a “regulated investment company” (as defined in section 851(a)(1)) (“RIC”) and has been (and for its current taxable year, through the Effective Time, will be) eligible to and has computed its federal income tax under section 852; Old Fund has not at any time since its inception been liable for, and is not now liable for, any material income or excise tax pursuant to sections 852 or 4982; and Old Fund has no earnings and profits accumulated in any taxable year in which the provisions of Subchapter M did not apply to it;
 
(l)           All issued and outstanding Old Fund Shares are, and at the Effective Time will be, duly and validly issued and outstanding, fully paid, and non-assessable by Corporation and have been offered and sold in every state and the District of Columbia in compliance in all material respects with applicable registration requirements of the 1933 Act and state securities laws; all issued and
 

 
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outstanding Old Fund Shares will, at the Effective Time, be held by the persons and in the amounts set forth on Old Fund’s shareholder records, as provided in paragraph 2.3; and Old Fund does not have outstanding any options, warrants, or other rights to subscribe for or purchase any Old Fund Shares, nor are there outstanding any securities convertible into any Old Fund Shares;
 
(m)           Old Fund incurred the Liabilities, which are associated with the Assets, in the ordinary course of its business;
 
(n)           Old Fund is not under the jurisdiction of a court in a “title 11 or similar case” (as defined in section 368(a)(3)(A));
 
(o)           Not more than 25% of the value of Old Fund’s total assets (excluding cash, cash items, and Government securities) is invested in the stock and securities of any one issuer, and not more than 50% of the value of those assets is invested in the stock and securities of five or fewer issuers;
 
(p)           Old Fund’s current prospectus and statement of additional information (1) conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission thereunder and (2) at the date on which they were issued did not contain, and as supplemented by any supplement thereto dated prior to or at the Effective Time do not contain, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;
 
(q)           The information to be furnished by Corporation for use in no-action letters, applications for orders, registration statements, proxy materials, and other documents filed or to be filed with any federal, state, or local regulatory authority (including the Financial Industry Regulatory Authority, Inc. (“FINRA”)) that may be necessary in connection with the transactions contemplated hereby shall be accurate and complete in all material respects and shall comply in all material respects with federal securities laws and other laws and regulations; and the information Corporation provided for inclusion in the Registration Statement (as defined in paragraph 3.3(a)) will, on its effective date, at the Effective Time, and at the time of the Shareholders Meeting (as defined in paragraph 4.1), not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;
 
(r)           Old Fund’s investment operations from inception to the date hereof have been in compliance in all material respects with the investment policies and investment restrictions set forth in its prospectus, except as previously disclosed in writing to Trust; and
 
(s)           The New Fund Shares to be delivered hereunder are not being acquired for the purpose of making any distribution thereof, other than in accordance with the terms hereof.
 
3.2           Trust, on New Fund’s behalf, represents and warrants to Corporation, on Old Fund’s behalf, as follows:
 
(a)           Trust (1) is a trust operating under a written instrument or declaration of trust, the beneficial interest in which is divided into transferable shares, that is duly created, validly existing, and in good standing under the laws of the Commonwealth of Massachusetts (“Massachusetts”), and its Amended and Restated Declaration of Trust, as amended by Written Instrument dated March 23, 2005 (“Declaration”) is on file with the Secretary of Massachusetts, (2) is duly registered under the 1940 Act as an open-end management investment company, (3) has the power to own all its properties and assets and to carry on its business as described in its current registration statement on Form N-1A, and (4) before January 1, 1997, “claimed” classification as an association taxable as a corporation and has never elected otherwise;
 

 
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(b)           At the Effective Time, New Fund will be a duly established and designated series of Trust; New Fund has not commenced operations and will not do so until after the Closing; and, immediately before the Closing, New Fund will be a shell series of Trust, without assets (except the amount paid for the Initial Share if it has not already been redeemed by that time) or liabilities, created for the purpose of acquiring the Assets, assuming the Liabilities, and continuing Old Fund’s business;
 
(c)           The execution, delivery, and performance of this Agreement have been duly authorized at the date hereof by all necessary action on the part of Trust’s Board; and this Agreement constitutes a valid and legally binding obligation of Trust, with respect to New Fund, enforceable in accordance with its terms, subject to the effect of bankruptcy, insolvency, fraudulent transfer, reorganization, receivership, moratorium, and other laws affecting the rights and remedies of creditors generally and general principles of equity;
 
(d)           Before the Closing, there will be no (1) issued and outstanding New Fund Shares, (2) options, warrants, or other rights to subscribe for or purchase any New Fund Shares, (3) securities convertible into any New Fund Shares, or (4) any other securities issued by New Fund, except the Initial Share;
 
(e)           No consideration other than New Fund Shares (and New Fund’s assumption of the Liabilities) will be issued in exchange for the Assets in the Reorganization;
 
(f)           Trust, with respect to New Fund, is not currently engaged in, and its execution, delivery, and performance of this Agreement and consummation of the Reorganization will not result in, (1) a conflict with or material violation of any provision of Massachusetts law, the Declaration or Trust’s By Laws, or any Undertaking to which Trust, on New Fund’s behalf, is a party or by which it is bound or (2) the acceleration of any obligation, or the imposition of any penalty, under any Undertaking, judgment, or decree to which Trust, on New Fund’s behalf, is a party or by which it is bound;
 
(g)           No litigation, administrative proceeding, action, or investigation of or before any court, governmental body, or arbitrator is presently pending or, to Trust’s knowledge, threatened against Trust, with respect to New Fund or any of its properties or assets attributable or allocable to New Fund, that, if adversely determined, would materially and adversely affect New Fund’s financial condition or the conduct of its business; and Trust, on New Fund’s behalf, knows of no facts that might form the basis for the institution of any such litigation, proceeding, action, or investigation and is not a party to or subject to the provisions of any order, decree, judgment, or award of any court, governmental body, or arbitrator that materially and adversely affects New Fund’s business or Trust’s ability to consummate the transactions contemplated hereby;
 
(h)           New Fund is not (and will not be) classified as a partnership, and instead is (and will be) classified as an association that is taxable as a corporation, for federal tax purposes and either has elected (or will timely elect) the latter classification by filing Form 8832 with the Internal Revenue Service or is (and will be) a “publicly traded partnership” (as defined in section 7704(b)) that is treated as a corporation; New Fund has not filed any income tax return and will file its first federal income tax return after the completion of its first taxable year after the Effective Time as a RIC on Form 1120-RIC; New Fund will be a “fund” (as defined in section 851(g)(2), eligible for treatment under section 851(g)(1)) and has not taken and will not take any steps inconsistent with its qualification as such or its qualification and eligibility for treatment as a RIC under Subchapter M; assuming that Old Fund will meet the requirements of Subchapter M for qualification as a RIC for its taxable year in which the Reorganization occurs, New Fund will meet those requirements, and will be eligible to and will compute its federal income tax under section 852, for its taxable year in which the Reorganization occurs; and New Fund intends to
 

 
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continue to meet all those requirements, and to be eligible to and to so compute its federal income tax, for its next taxable year;
 
(i)           The New Fund Shares to be issued and delivered to Old Fund, for the Shareholders’ accounts, pursuant to the terms hereof, (1) will at the Effective Time have been duly authorized and duly registered under the federal securities laws, and appropriate notices respecting them will have been duly filed under applicable state securities laws, and (2) when so issued and delivered, will be duly and validly issued and outstanding New Fund Shares and will be fully paid and non-assessable by Trust;
 
(j)           There is no plan or intention for New Fund to be dissolved or merged into another business or statutory trust or a corporation or any “fund” thereof (as defined in section 851(g)(2)) following the Reorganization;
 
(k)           Assuming the truthfulness and correctness of Corporation’s representation and warranty in paragraph 3.1(o), immediately after the Reorganization (1) not more than 25% of the value of New Fund’s total assets (excluding cash, cash items, and Government securities) will be invested in the stock and securities of any one issuer and (2) not more than 50% of the value of those assets will be invested in the stock and securities of five or fewer issuers;
 
(l)           Immediately after the Effective Time, New Fund will not be under the jurisdiction of a court in a “title 11 or similar case” (as defined in section 368(a)(3)(A));
 
(m)           The information to be furnished by Trust for use in no-action letters, applications for orders, registration statements, proxy materials, and other documents filed or to be filed with any federal, state, or local regulatory authority (including FINRA) that may be necessary in connection with the transactions contemplated hereby shall be accurate and complete in all material respects and shall comply in all material respects with federal securities laws and other laws and regulations; and the Registration Statement (other than written information provided by Corporation for inclusion therein) will, on its effective date, at the Effective Time, and at the time of the Shareholders Meeting, not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and
 
(n)           The Declaration permits Trust to vary its shareholders’ investment; Trust does not have a fixed pool of assets; and each series thereof (including New Fund after it commences operations) is (or will be) a managed portfolio of securities, and AmBeacon Manager and each investment sub-adviser thereof have (and Bridgeway Adviser, as New Fund’s investment sub-adviser, will have) the authority to buy and sell securities for it.
 
3.3           Each Investment Company, on its Fund’s behalf, represents and warrants to the other Investment Company, on its Fund’s behalf, as follows:
 
(a)              No governmental consents, approvals, authorizations, or filings are required under the 1933 Act, the Securities Exchange Act of 1934, as amended, the 1940 Act, or state securities laws, and no consents, approvals, authorizations, or orders of any court are required, for its execution or performance of this Agreement on its Fund’s behalf, except for (1) Trust’s filing with the Commission of a registration statement on Form N-14 relating to the New Fund Shares issuable hereunder, and any supplement or amendment thereto, including therein a prospectus and proxy statement (“Registration Statement”), and (2) consents, approvals, authorizations, and filings that have been made or received or may be required after the Effective Time;
 
(b)              The fair market value of the New Fund Shares each Shareholder receives will be approximately equal to the fair market value of its Old Fund Shares it actually or constructively surrenders in exchange therefor;
 

 
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(c)              The Shareholders will pay their own expenses (such as fees of personal investment or tax advisers for advice regarding the Reorganization), if any, incurred in connection with the Reorganization;
 
(d)              The fair market value of the Assets will equal or exceed the Liabilities to be assumed by New Fund and those to which the Assets are subject;
 
(e)              None of the compensation received by any Shareholder who or that is an employee of or service provider to Old Fund will be separate consideration for, or allocable to, any of the Old Fund Shares that Shareholder holds; none of the New Fund Shares any such Shareholder receives will be separate consideration for, or allocable to, any employment agreement, investment advisory agreement, or other service agreement; and the compensation paid to any such Shareholder will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm’s-length for similar services;
 
(f)              No expenses incurred by Old Fund or on its behalf in connection with the Reorganization will be paid or assumed by New Fund, AmBeacon Manager, Bridgeway Adviser, or any other third party unless those expenses are solely and directly related to the Reorganization (determined in accordance with the guidelines set forth in Rev. Rul. 73-54, 1973-1 C.B. 187) (“Reorganization Expenses”), and no cash or property other than New Fund Shares will be transferred to Old Fund or any of its shareholders with the intention that it be used to pay any expenses (even Reorganization Expenses) thereof; and
 
(g)              Immediately following consummation of the Reorganization, (1) the Shareholders will own all the New Fund Shares and will own those shares solely by reason of their ownership of the Old Fund Shares immediately before the Reorganization and (2) New Fund will hold the same assets -- except for assets used to pay the Funds’ expenses incurred in connection with the Reorganization -- and be subject to the same liabilities that Old Fund held or was subject to immediately before the Reorganization, plus any liabilities for those expenses; and those excepted assets, together with the amount of all redemptions (other than redemptions Old Fund will make as a series of an open-end investment company pursuant to section 22(e) of the 1940 Act) and distributions (other than regular, normal dividends) Old Fund makes immediately preceding the Reorganization, will, in the aggregate, constitute less than 1% of its net assets.
 
4.           COVENANTS
 
4.1           Corporation covenants to call a meeting of Old Fund’s shareholders to consider and act on this Agreement and to take all other action necessary to obtain approval of the transactions contemplated hereby (“Shareholders Meeting”).
 
4.2           Corporation covenants that it will assist Trust in obtaining information Trust reasonably requests concerning the beneficial ownership of Old Fund Shares.
 
4.3           Corporation covenants that it will turn over its books and records pertaining to Old Fund (including all books and records required to be maintained under the 1940 Act and the rules and regulations thereunder) to Trust at the Closing.  Notwithstanding the foregoing, Corporation may, in its sole discretion, keep a copy of all such books and records pertaining to Old Fund.
 
4.4           Each Investment Company covenants to cooperate with the other in preparing the Registration Statement in compliance with applicable federal and state securities laws.
 
4.5           Each Investment Company covenants that it will, from time to time, as and when requested by the other, execute and deliver or cause to be executed and delivered all assignments and other instruments, and will take or cause to be taken any further action(s), the other Investment Company
 

 
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deems necessary or desirable in order to vest in, and confirm to, (a) Trust, on New Fund’s behalf, title to and possession of all the Assets, and (b) Corporation, on Old Fund’s behalf, title to and possession of the New Fund Shares to be delivered hereunder, and otherwise to carry out the intent and purpose hereof.
4.6           Trust covenants to use all reasonable efforts to obtain the approvals and authorizations required by the 1933 Act, the 1940 Act, and applicable state securities laws it deems appropriate to commence and continue New Fund’s operations after the Effective Time.
 
4.7           Subject to this Agreement, each Investment Company covenants to take or cause to be taken all actions, and to do or cause to be done all things, reasonably necessary, proper, or advisable to consummate and effectuate the transactions contemplated hereby.
 
5.           CONDITIONS PRECEDENT
 
Each Investment Company’s obligations hereunder shall be subject to (a) performance by the other Investment Company of all its obligations to be performed hereunder at or before the Closing, (b) all representations and warranties of the other Investment Company contained herein being true and correct in all material respects at the date hereof and, except as they may be affected by the transactions contemplated hereby, at the Effective Time, with the same force and effect as if made at that time, and (c) the following further conditions that, at or before that time:
 
5.1           This Agreement and the transactions contemplated hereby shall have been duly adopted and approved by both Boards and by Old Fund’s shareholders at the Shareholders Meeting;
 
5.2           All necessary filings shall have been made with the Commission and state securities authorities, and no order or directive shall have been received that any other or further action is required to permit the Investment Companies to carry out the transactions contemplated hereby.  The Registration Statement shall have become effective under the 1933 Act, no stop orders suspending the effectiveness thereof shall have been issued, and, to each Investment Company’s best knowledge, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened, or contemplated under the 1933 Act or the 1940 Act.  The Commission shall not have issued an unfavorable report with respect to the Reorganization under section 25(b) of the 1940 Act nor instituted any proceedings seeking to enjoin consummation of the transactions contemplated hereby under section 25(c) of the 1940 Act.  All consents, orders, and permits of federal, state, and local regulatory authorities (including the Commission and state securities authorities) either Investment Company deems necessary to permit consummation, in all material respects, of the transactions contemplated hereby shall have been obtained, except where failure to obtain same would not involve a risk of a material adverse effect on either Fund’s assets or properties;
 
5.3           At the Effective Time, no action, suit, or other proceeding shall be pending (or, to either Investment Company’s best knowledge, threatened to be commenced) before any court, governmental agency, or arbitrator in which it is sought to enjoin the performance of, restrain, prohibit, affect the enforceability of, or obtain damages or other relief in connection with, the transactions contemplated hereby;
 
5.4           The Investment Companies shall have received an opinion of K&L Gates LLP (“Counsel”) as to the federal income tax consequences mentioned below (“Tax Opinion”).  In rendering the Tax Opinion, Counsel may rely as to factual matters, exclusively and without independent verification, on the representations and warranties made in this Agreement, which Counsel may treat as representations and warranties made to it (that, notwithstanding paragraph 7, shall survive the Closing), and in separate letters, if Counsel requests, addressed to it and any certificates delivered pursuant to paragraph 2.5(b).  The Tax Opinion shall be substantially to the effect that -- based on the facts and assumptions stated therein and conditioned on those representations and warranties’ being true and complete at the Effective
 

 
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Time and consummation of the Reorganization in accordance with this Agreement (without the waiver or modification of any terms or conditions hereof and without taking into account any amendment hereof that Counsel has not approved) -- for federal income tax purposes:
 
(a)           New Fund’s acquisition of the Assets in exchange solely for New Fund Shares and its assumption of the Liabilities, followed by Old Fund’s distribution of those shares pro rata to the Shareholders actually or constructively in exchange for their Old Fund Shares, will qualify as a “reorganization” (as defined in section 368(a)(1)(F)), and each Fund will be “a party to a reorganization” (within the meaning of section 368(b));
 
(b)           Old Fund will recognize no gain or loss on the transfer of the Assets to New Fund in exchange solely for New Fund Shares and New Fund’s assumption of the Liabilities or on the subsequent distribution of those shares to the Shareholders in exchange for their Old Fund Shares;
 
(c)           New Fund will recognize no gain or loss on its receipt of the Assets in exchange solely for New Fund Shares and its assumption of the Liabilities;
 
(d)           New Fund’s basis in each Asset will be the same as Old Fund’s basis therein immediately before the Reorganization, and New Fund’s holding period for each Asset will include Old Fund’s holding period therefor (except where New Fund’s investment activities have the effect of reducing or eliminating an Asset’s holding period);
 
(e)           A Shareholder will recognize no gain or loss on the exchange of all its Old Fund Shares solely for New Fund Shares pursuant to the Reorganization;
 
(f)           A Shareholder’s aggregate basis in the New Fund Shares it receives in the Reorganization will be the same as the aggregate basis in its Old Fund Shares it actually or constructively surrenders in exchange for those New Fund Shares, and its holding period for those New Fund Shares will include, in each instance, its holding period for those Old Fund Shares, provided the Shareholder holds them as capital assets at the Effective Time; and
 
(g)           For purposes of section 381, New Fund will be treated just as Old Fund would have been treated if there had been no Reorganization.  Accordingly, the Reorganization will not result in the termination of Old Fund’s taxable year, Old Fund’s tax attributes enumerated in section 381(c) will be taken into account by New Fund as if there had been no Reorganization, and the part of Old Fund’s taxable year before the Reorganization will be included in New Fund’s taxable year after the Reorganization.
 
Notwithstanding subparagraphs (b) and (d), the Tax Opinion may state that no opinion is expressed as to the effect of the Reorganization on the Funds or any Shareholder with respect to any Asset as to which any unrealized gain or loss is required to be recognized for federal income tax purposes at the end of a taxable year (or on the termination or transfer thereof) under a mark-to-market system of accounting;
 
5.5           Before the Closing, Trust’s Board shall have authorized the issuance of, and Trust shall have issued, one New Fund Share (“Initial Share”) to AmBeacon Manager or an affiliate thereof, in consideration of the payment of $10.00 (or other amount that Board determines), to vote on the investment management and sub-advisory contracts, distribution and service plan, and other agreements and plans referred to in paragraph 5.6 and to take whatever action it may be required to take as New Fund’s sole shareholder;
 
5.6           Trust, on New Fund’s behalf, shall have entered into, or adopted, as appropriate, an investment management contract, a sub-advisory contract, a distribution and service plan pursuant to Rule 12b-1 under the 1940 Act, and other agreements and plans necessary for New Fund’s operation as a series of an open-end management investment company.  Each such contract, plan, and agreement shall have been approved by Trust’s Board and, to the extent required by law (as interpreted by Commission staff
 

 
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positions), by its trustees who are Non-Interested Persons thereof and by AmBeacon Manager or its affiliate as New Fund’s sole shareholder; and
 
5.7           At any time before the Closing, either Investment Company may waive any of the foregoing conditions (except those set forth in paragraphs 5.1 and 5.4) if, in the judgment of its Board, that waiver will not have a material adverse effect on its Fund’s shareholders’ interests.
 
6.           EXPENSES
 
Subject to complying with the representation and warranty contained in paragraph 3.3(f), AmBeacon Manager shall bear the first $50,000 of the total Reorganization Expenses and each of Bridgeway Adviser and AmBeacon Manager shall bear 50% of the remaining Reorganization Expenses.  The Reorganization Expenses include (1) costs associated with obtaining any necessary order of exemption from the 1940 Act, preparing and filing Old Fund’s prospectus supplements and the Registration Statement, and printing and distributing New Fund’s prospectus and Old Fund’s proxy materials, (2) legal and accounting fees, (3) transfer agent and custodian conversion costs, (4) transfer taxes for foreign securities, (5) proxy solicitation costs, and (6) expenses of holding the Shareholders Meeting (including any adjournments thereof) but exclude brokerage, Bridgeway Adviser’s and AmBeacon Manager’s travel expenses, and similar expenses in connection with the Reorganization.  Notwithstanding the foregoing, expenses shall be paid by the Fund directly incurring them if and to the extent that the payment thereof by another person would result in that Fund’s disqualification as a RIC or would prevent the Reorganization from qualifying as a tax-free reorganization.
 
7.           ENTIRE AGREEMENT; NO SURVIVAL
 
Neither Investment Company has made any representation, warranty, or covenant not set forth herein, and this Agreement constitutes the entire agreement between the Investment Companies.  The representations, warranties, and covenants contained herein or in any document delivered pursuant hereto or in connection herewith shall not survive the Closing.
 
8.           TERMINATION
 
This Agreement may be terminated at any time at or before the Closing:
 
8.1           By either Investment Company (a) in the event of the other Investment Company’s material breach of any representation, warranty, or covenant contained herein to be performed at or before the Closing, (b) if a condition to its obligations has not been met and it reasonably appears that that condition will not or cannot be met, (c) if a governmental body issues an order, decree, or ruling having the effect of permanently enjoining, restraining, or otherwise prohibiting consummation of the Reorganization, or (d) if the Closing has not occurred on or before August 31, 2012, or such other date as to which the Investment Companies agree; or
 
8.2           By the Investment Companies’ mutual agreement.
 
In the event of termination under paragraphs 8.1(c) or (d) or 8.2, neither Investment Company (nor its directors/trustees, officers, or shareholders) shall have any liability to the other Investment Company.
 
9.           AMENDMENTS
 
The Investment Companies may amend, modify, or supplement this Agreement at any time in any manner they mutually agree on in writing, notwithstanding Old Fund’s shareholders’ approval thereof; provided that, following that approval no such amendment, modification, or supplement shall have a material adverse effect on the Shareholders’ interests.
 
10.           SEVERABILITY
 
Any term or provision hereof that is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of that invalidity or unenforceability without rendering invalid or
 

 
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unenforceable the remaining terms and provisions hereof or affecting the validity or enforceability of any of the terms and provisions hereof in any other jurisdiction.
 
11.           MISCELLANEOUS
 
11.1           This Agreement shall be governed by and construed in accordance with the internal laws of Massachusetts, without giving effect to principles of conflicts of laws; provided that, in the case of any conflict between those laws and the federal securities laws, the latter shall govern.
 
11.2           Nothing expressed or implied herein is intended or shall be construed to confer on or give any person, firm, trust, or corporation other than Trust, on New Fund’s behalf, or Corporation, on Old Fund’s behalf, and their respective successors and assigns any rights or remedies under or by reason of this Agreement.
 
11.3           Notice is hereby given that this instrument is executed and delivered on behalf of Trust’s trustees solely in their capacities as trustees, and not individually, and that Trust’s obligations under this instrument are not binding on or enforceable against any of its trustees, officers, shareholders, or series other than New Fund but are only binding on and enforceable against its property attributable to and held for the benefit of New Fund (“New Fund’s Property”) and not its property attributable to and held for the benefit of any other series thereof.  Corporation, in asserting any rights or claims under this Agreement on its or Old Fund’s behalf, shall look only to New Fund’s Property in settlement of those rights or claims and not to the property of any other series of Trust or to those trustees, officers, or shareholders.
 
11.4           This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been executed by each Investment Company and delivered to the other Investment Company.  The headings contained herein are for reference purposes only and shall not affect in any way the meaning or interpretation hereof.
 
 
IN WITNESS WHEREOF, each party has caused this Agreement to be executed and delivered by its duly authorized officer as of the day and year first written above.
 
[Signatures on following page]
 

 

 
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AMERICAN BEACON FUNDS, on behalf of its series,
American Beacon Bridgeway Large Cap Value Fund
 
By:   _______________________________                                                             
 
Gene L. Needles, Jr.
 
President
 
 
BRIDGEWAY FUNDS, INC., on behalf of its series,
Bridgeway Large-Cap Value Fund
 
By:   _______________________________                                                             
 
Michael D. Mulcahy
 
President
 
 
Solely for purposes of paragraph 6,
BRIDGEWAY CAPITAL MANAGEMENT, INC.
 
By:     ______________________________                                                           
 
John N. R. Montgomery
 
Chairman
 
 
AMERICAN BEACON ADVISORS, INC.
 
By:     ______________________________                                                           
 
Gene L. Needles, Jr.
 
President and Chief Executive Officer
 

 
 


 
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APPENDIX B
 
OWNERSHIP OF SHARES OF THE BRIDGEWAY FUND
 
As of the Record Date, the Bridgeway Fund’s shareholders of record and/or beneficial owners (to the Company’s knowledge) who owned 5% or more of each class of the Bridgeway Fund’s shares are set forth below:

 
 
 
 
 
Name and Address
Class
No. of Shares
Owned
% of Shares
Ameritrade Inc.
For the Exclusive Benefit of Our
Customers
P.O. Box 2226
Omaha, NE 68103-2226
 
Class N
122,726
6.13%
Charles Schwab Co Inc.
Attn Mutual Fund Ops
101 Montgomery Street
San Francisco, CA 94104-4175
 
Class N
323,812
16.18%
National Financial Services LLC
FBO Our Customers
200 Liberty Street
One World Financial Center
Attn Mutual Funds Dept 5th Floor
New York, NY 10281
 
Class N
353,441
17.67%
 

As of the Record Date, no shareholders may be deemed to “control” the Bridgeway Fund.  “Control” for this purpose is the ownership of more than 25% of the Bridgeway Fund’s voting securities.

As of the Record Date, the Officers and Directors of the Company, as a group, owned of record and beneficially less than 1.00% of the outstanding voting securities of the Bridgeway Fund.
 

 


 
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APPENDIX C
 
VALUATION, PURCHASE, REDEMPTION AND TAX INFORMATION FOR THE AB FUND
 
Valuation of AB Fund Shares
 
The price of the AB Fund’s shares is based on its net asset value (“NAV”) per share. The AB Fund’s NAV is computed by adding total assets, subtracting all of the AB Fund’s liabilities, and dividing the result by the total number of shares outstanding.  Equity securities are valued based on market value.  Debt securities (other than short-term securities) usually are valued on the basis of prices provided by a pricing service.  In some cases, the price of debt securities is determined using quotes obtained from brokers.
 
Securities may be valued at fair value, as determined in good faith and pursuant to procedures approved by the Board of Trustees, under certain limited circumstances.  For example, fair value pricing will be used when market quotations are not readily available or reliable, as determined by the Manager, such as when (i) trading for a security is restricted or stopped; (ii) a security’s trading market is closed (other than customary closings); or (iii) a security has been de-listed from a national exchange.  A security with limited market liquidity may require fair value pricing if the Manager determines that the available price does not reflect the security’s true market value.  In addition, if a significant event that the Manager determines to affect the value of one or more securities held by the AB Fund occurs after the close of a related exchange but before the determination of the AB Fund’s NAV, fair value pricing may be used on the affected security or securities.  The AB Fund may fair value securities as a result of significant events occurring after the close of the foreign markets in which the AB Fund invests.
 
Attempts to determine the fair value of securities introduce an element of subjectivity to the pricing of securities.  As a result, the price of a security determined through fair valuation techniques may differ from the price quoted or published by other sources and may not accurately reflect the market value of the security when trading resumes.  If a reliable market quotation becomes available for a security formerly valued through fair valuation techniques, the Manager compares the new market quotation to the fair value price to evaluate the effectiveness of the AB Fund’s fair valuation procedures.  If any significant discrepancies are found, the Manager may adjust the AB Fund’s fair valuation procedures.
 
The NAV of each class of the AB Fund’s shares is determined based on a pro rata allocation of the AB Fund’s investment income, expenses and total capital gains and losses.  The AB Fund’s NAV per share is determined as of the close of the New York Stock Exchange (“Exchange”), generally 4:00 p.m. Eastern Time, on each day on which it is open for business.
 
Policy on Prohibition of Foreign Shareholders
 
The AB Fund requires that all shareholders be U.S. persons with a valid U.S. taxpayer identification number to open an account with the AB Fund.
 
Portfolio Holdings
 
A description of the AB Funds’ policies and procedures regarding the disclosure of portfolio holdings is available in the Statement of Additional Information to this Proxy Statement, which is incorporated by reference into this Proxy Statement.
 

 
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Redemptions In Kind
 
Although the AB Fund intends to redeem shares in cash, each reserves the right to pay the redemption price in whole or in part by a distribution of securities or other assets. However, shareholders always will be entitled to redeem shares for cash up to the lesser of $250,000 or 1% of the AB Fund’s net asset value during any 90-day period. Redemption in kind is not as liquid as a cash redemption. In addition, to the extent the AB Fund redeems its shares in this manner; the shareholder assumes the risk of a subsequent change in the market value of those securities, the cost of liquidating the securities and the possibility of a lack of a liquid market for those securities.
 
Frequent Trading and Market Timing
 
Frequent trading by AB Fund shareholders poses risks to other shareholders in the AB Fund, including (i) the dilution of the AB Fund’s NAV, (ii) an increase in the AB Fund’s expenses, and (iii) interference with the portfolio manager’s ability to execute efficient investment strategies.  Frequent, short-term trading of AB Fund shares in an attempt to profit from day-to-day fluctuations in the AB Fund’s NAV is known as market timing.
 
The AB Fund’s Board of Trustees has adopted policies and procedures intended to discourage frequent trading and market timing.  Shareholders may transact one “round trip” in the AB Fund in any rolling 90-day period.  A “round trip” is defined as two transactions, each in an opposite direction. A round trip may involve (i) a purchase or exchange into the AB Fund followed by a redemption or exchange out of the same AB Fund or (ii) a redemption or exchange out of the AB Fund followed by a purchase or exchange into the same AB Fund.  If the Manager detects that a shareholder has exceeded one round trip in the AB Fund in any rolling 90-day period, the Manager, without prior notice to the shareholder, will prohibit the shareholder from making further purchases of the AB Fund.  In general, the AB Fund reserves the right to reject any purchase order, terminate the exchange privilege, or liquidate the account of any shareholder that the Manager determines has engaged in frequent trading or market timing, regardless of whether the shareholder’s activity violates any policy stated in this prospectus.
 
The round-trip limit does not apply to the following transaction types:
 
shares acquired through the reinvestment of dividends and distributions;
 
systematic purchases and redemptions;
 
shares redeemed to return excess IRA contributions; or
 
certain transactions made within a retirement or employee benefit plan, such as payroll contributions, minimum required distributions, loans, and hardship withdrawals, or other transactions that are initiated by a party other than the plan participant.
 
Financial intermediaries that offer AB Fund shares, such as broker-dealers, third party administrators of retirement plans, and trust companies, will be asked to enforce the AB Fund’s policies to discourage frequent trading and market timing by investors.  However, certain intermediaries that offer AB Fund shares have informed the AB Fund that they are currently unable to enforce the AB Fund’s policies on an automated basis.  In those instances, the Manager will monitor trading activity of the intermediary in an attempt to detect patterns of activity that indicate frequent trading or market timing by underlying investors.  In some cases, intermediaries that offer AB Fund shares have their own policies to deter frequent trading and market timing that differ from the AB Fund’s policies.  The AB Fund may defer to an intermediary’s policies.  For more information, please contact the financial intermediary through which you invest in the AB Fund.
 
The Manager monitors trading activity in the AB Fund to attempt to identify shareholders engaged in frequent trading or market timing.  The Manager may exclude transactions below a certain
 

 
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dollar amount from monitoring and may change that dollar amount from time to time.  The ability of the Manager to detect frequent trading and market timing activity by investors who own shares through an intermediary is dependent upon the intermediary’s provision of information necessary to identify transactions by the underlying investors.  The AB Fund has entered agreements with the intermediaries that service the AB Fund’s investors, pursuant to which the intermediaries agree to provide information on investor transactions to the AB Fund and to act on the AB Fund’s instructions to restrict transactions by investors who the Manager has identified as having violated the AB Fund’s policies and procedures to deter frequent trading and market timing.
 
Wrap programs offered by certain intermediaries may be designated “Qualified Wrap Programs” by the AB Fund based on specific criteria established by the AB Fund and a certification by the intermediary that the criteria have been met.  A Qualified Wrap Program is: (i) a wrap program whose sponsoring intermediary certifies that it has investment discretion over $50 million or more in client assets invested in mutual funds at the time of the certification, (ii) a wrap program whose sponsoring intermediary certifies that it directs transactions in accounts participating in the wrap program(s) in concert with changes in a model portfolio; (iii) managed by an intermediary that agrees to provide the Manager a description of the wrap program(s) that the intermediary seeks to qualify; and (iv) managed by an intermediary that agrees to provide the Manager sufficient information to identify individual accounts in the intermediary’s wrap program(s).  For purposes of applying the round-trip limit, transactions initiated by clients invested in a Qualified Wrap Program will not be matched to transactions initiated by the intermediary sponsoring the Qualified Wrap Program.  For example, a client’s purchase of the AB Fund followed within 90 days by the intermediary’s redemption of the same AB Fund would not be considered a round trip.  However, transactions initiated by a Qualified Wrap Program client are subject to the round-trip limit and will be matched to determine if the client has exceeded the round-trip limit.  In addition, the Manager will monitor transactions initiated by Qualified Wrap Program intermediaries to determine whether any intermediary has engaged in frequent trading or market timing.  If the Manager determines that an intermediary has engaged in activity that is harmful to the AB Fund, the Manager will revoke the intermediary’s Qualified Wrap Program status. Upon termination of status as a Qualified Wrap Program, all account transactions will be matched for purposes of testing compliance with the AB Fund’s frequent trading and market timing policies, including any applicable redemption fees.
 
The AB Fund reserves the right to modify the frequent trading and market timing policies and procedures and grant or eliminate waivers to such policies and procedures at any time without advance notice to shareholders. There can be no assurance that the AB Fund’s policies and procedures to deter frequent trading and market timing will have the intended effect nor that the Manager will be able to detect frequent trading and market timing.
 
Purchase and Redemption of AB Fund Shares
 
Eligibility
 
The Institutional Class shares offered in this prospectus are available to all investors who meet the minimum initial investment.  American Beacon Funds do not accept accounts registered to foreign individuals or entities including foreign correspondence accounts.
 
Our investors include:
 
Ø
agents or fiduciaries acting on behalf of their clients (such as employee benefit plans, personal trusts and other accounts for which a trust company or financial advisor acts as agent or fiduciary);
 
Ø
endowment funds and charitable foundations;

 
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Ø
employee welfare plans that are tax-exempt under Section 501(c)(9) of the Internal Revenue Code of 1986, as amended (“Code”);
 
Ø
qualified pension and profit sharing plans;
 
Ø
cash and deferred arrangements under Section 401(k) of the Code;
 
Ø
corporations; and
 
Ø
other investors who make an initial investment of at least the minimum investment amounts.

Subject to your eligibility, you may invest in the AB Fund directly through us or through intermediary organizations, such as broker-dealers, insurance companies, plan sponsors, third party administrators and retirement accounts.
 
If you invest directly with the AB Fund, the fees and policies with respect to the AB Fund’s shares that are outlined in this prospectus are set by the AB Fund.
 
If you invest through a financial intermediary, most of the information you will need for managing your investment will come from your financial intermediary.  This includes information on how to buy, sell and exchange shares of the AB Fund. If you establish an account through a financial intermediary, the investment minimums described in this section may not apply.  Investors investing in the AB Fund through a financial intermediary should consult with their financial intermediary to ensure they obtain any proper “breakpoint” discount and regarding the differences between available share classes.   Your broker-dealer or financial intermediary also may charge fees that are in addition to those described in this prospectus. Please contact your intermediary for information regarding investment minimums, how to purchase and redeem shares and applicable fees.
 
Minimum Initial Investment
 
Institutional Class – $250,000
 
The Manager may allow a reasonable period of time after opening an account for an Institutional Class investor to meet the initial investment requirement. In addition, for investors such as trust companies and financial advisors who make investments for a group of clients, the minimum initial investment can be met through an aggregated purchase order for more than one client.
 
Opening an Account
 
You may open an account through your broker-dealer or other financial intermediary. Please contact your financial intermediary for more information on how to open an account. Shares you purchase through your broker-dealer will normally be held in your account with that firm.
 
You may also open an account directly through us. A completed, signed application is required. You may download an account application from the AB Fund’s web site at www.americanbeaconfunds.com under “Open An Account”. You also may obtain an application form by calling:
 
1-800-967-9009
 
Complete the application, sign it and send it
 
 
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Regular Mail to:
American Beacon Funds
P.O. Box 219643
Kansas City, MO 64121-9643
(or Institutional Class shareholders may)
Fax to:
(816) 374-7408
 
 
For Overnight Delivery
American Beacon Funds
c/o BFDS
330 West 9th Street
Kansas City, MO 64105
(800) 658-5811
 
 

 
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. When you open an account with the AB Fund or your financial institution, you will be asked for information that will allow the AB Fund or your financial institution to identify you. Non-public corporations and other entities may be required to provide articles of incorporation, trust or partnership agreements, tax ID numbers, Social Security numbers for persons authorized to provide instructions on the account or other documentation. The AB Fund and your financial institution are required by law to reject your new account application if the required identifying information is not provided.
 
Purchase Policies
 
Shares of the AB Fund are offered and purchase orders are typically accepted until 4:00 p.m. Eastern Time or the close of the New York Stock Exchange (“NYSE”) (whichever comes first) on each day on which the NYSE is open for business. If a purchase order is received by the AB Fund in good order prior to the AB Fund’s deadline, the purchase price will be the net asset value (“NAV”) per share next determined on that day, plus any applicable sales charges. If a purchase order is received in good order after the applicable deadline, the purchase price will be the NAV per share of the following day that the AB Fund is open for business plus any applicable sales charge.
 
The AB Fund has authorized certain third party financial intermediaries, such as broker-dealers, insurance companies, third party administrators and trust companies, to receive purchase and redemption orders on behalf of the AB Fund and to designate other intermediaries to receive purchase and redemption orders on behalf of the AB Fund. The AB Fund is deemed to have received such orders when they are received by the financial intermediaries or their designees. Thus, an order to purchase or sell AB Fund shares will be priced at the AB Fund’s next determined NAV after receipt by the financial intermediary or its designee. You should contact your broker-dealer or other financial intermediary to find out by what time your purchase order must be received so that it can be processed the same day. It is the responsibility of your broker-dealer or financial intermediary to transmit orders that will be received by the AB Fund in proper form and in a timely manner.
 

 
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The AB Fund has the right to reject any purchase order or cease offering shares at any time. Checks to purchase shares are accepted subject to collection at full face value in U.S. funds and must be drawn in U.S. dollars on a U.S. bank. The AB Fund will not accept “starter” checks, credit card checks, money orders, cashier’s checks, official checks, or third party checks.
 
Please refer to the section titled “Frequent Trading and Market Timing” for information on the AB Fund’s policies regarding frequent purchases, redemptions, and exchanges.
 
Redemption Policies
 
If you purchased shares of the AB Fund through your financial intermediary, please contact your broker-dealer or other financial intermediary to sell shares of the AB Fund.
 
If you purchased your shares directly from the AB Fund, your shares may be redeemed by telephone by calling 1-800-658-5811, via the AB Fund’s website, or by mail on any day that the AB Fund is open for business.
 
The redemption price will be the NAV next determined after a redemption request is received in good order, minus any applicable CDSC and/or redemption fees. In order to receive the redemption price calculated on a particular business day, redemption requests must be received in good order by 4:00 p.m. Eastern Time or by the close of the NYSE (whichever comes first). You should contact your broker-dealer or other financial intermediary to find out by what time your order must be received so that it can be processed the same day.
 
Wire proceeds from redemption requests received in good order by 4:00 p.m. Eastern Time or by the close of the Exchange (whichever comes first) generally are transmitted to shareholders on the next day the AB Fund is open for business.  In any event, proceeds from a redemption request will typically be transmitted to a shareholder by no later than seven days after the receipt of a redemption request in good order.  Delivery of proceeds from shares purchased by check or pre-authorized automatic investment may be delayed until the funds have cleared, which may take up to ten days.
 
The AB Fund reserves the right to suspend redemptions or postpone the date of payment for more than seven days (i) when the Exchange is closed (other than for customary weekend and holiday closings); (ii) when trading on the Exchange is restricted; (iii) when the SEC determines that an emergency exists so that disposal of the AB Fund’s investments or determination of its NAV is not reasonably practicable; or (iv) by order of the SEC for protection of the AB Fund’s shareholders.
 
Although the AB Fund intends to redeem shares in cash, the AB Fund reserves the right to pay the redemption price in whole or in part by a distribution of securities or other assets held by the AB Fund.  To the extent that the AB Fund redeems its shares in this manner, the shareholder assumes the risk of a subsequent change in the market value of those securities, the cost of liquidating the securities and the possibility of a lack of a liquid market for those securities.
 
Please refer to the section titled “Frequent Trading and Market Timing” for information on the AB Fund’s policies regarding frequent purchases, redemptions, and exchanges.
 
Exchange Policies
 
If you purchased shares of the AB Fund through your financial intermediary, please contact your broker-dealer or other financial intermediary to determine if you may take advantage of the exchange policies described in this section and for its policies to effect an exchange.
 
If you purchased shares of the AB Fund directly through us, your shares may be exchanged by calling 1-800-658-5811 to speak to a representative, through our website, www.americanbeaconfunds.com.
 

 
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Shares of any class of the AB Fund may be exchanged for shares of the same class of another American Beacon Fund under certain limited circumstances.  Shares of any class of the AB Fund may be exchanged for shares of another class of the same AB Fund under certain limited circumstances.  Since an exchange involves a concurrent purchase and redemption, please review the sections titled “Purchase Policies” and “Redemption Policies” for additional limitations that apply to purchases and redemptions.
 
If shares were purchased by check, to exchange out of one AB Fund and into another, a shareholder must have owned shares of the redeeming AB Fund for at least ten days.
 
The eligibility and minimum investment requirement must be met for the class into which the shareholder is exchanging.  AB Fund shares may be acquired through exchange only in states in which they can be legally sold.  The AB Fund reserves the right to charge a fee and to modify or terminate the exchange privilege at any time.  The AB Fund reserves the right to refuse exchange purchases if, in the judgment of the AB Fund, the transaction would adversely affect the AB Fund and its shareholders.  For Federal income tax purposes, exchanges of one share class for a different share class of the same fund should not result in the realization by the investor of a capital gain or loss.  There can be no assurance of any particular tax treatment, however, and you are urged and advised to consult with your own tax advisor before entering into a share class exchange.  Please refer to the section titled “Frequent Trading and Market Timing” for information on the AB Fund’s policies regarding frequent purchases, redemptions, and exchanges.
 
Payments to Financial Intermediaries
 
The AB Fund and its affiliates (at their own expense) may pay compensation to financial intermediaries for shareholder-related services and, if applicable, distribution-related services, including administrative, sub-transfer agency, recordkeeping and shareholder communication services. For example, compensation may be paid to make AB Fund shares available to sales representatives and/or customers of a fund supermarket platform or similar program sponsor or for services provided in connection with such fund supermarket platforms and programs.
 
The amount of compensation paid to different financial intermediaries may differ. The compensation paid to a financial intermediary may be based on a variety of factors, including average assets under management in accounts distributed and/or serviced by the financial intermediary, gross sales by the financial intermediary and/or the number of accounts serviced by the financial intermediary that invest in the AB Fund. To the extent that the AB Fund pays (a portion) of such compensation, it is designed to compensate the financial intermediary for providing services that would otherwise be provided by the AB Fund or its transfer agent. To the extent the AB Fund affiliate pays such compensation, it would likely include amounts from that affiliate’s own resources and constitute what is sometimes referred to as “revenue sharing.”
 
Compensation received by a financial intermediary from the Manager or another AB Fund affiliate may include payments for marketing and/or training expenses incurred by the financial intermediary, including expenses incurred by the financial intermediary in educating (itself and) its salespersons with respect to AB Fund shares. For example, such compensation may include reimbursements for expenses incurred in attending educational seminars regarding the AB Fund, including travel and lodging expenses. It may also cover costs incurred by financial intermediaries in connection with their efforts to sell AB Fund shares, including costs incurred compensating (registered) sales representatives and preparing, printing and distributing sales literature.
 
Any compensation received by a financial intermediary, whether from the AB Fund or its affiliate(s), and the prospect of receiving it may provide the financial intermediary with an incentive to recommend the
 

 
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shares of the AB Fund, or a certain class of shares of the AB Fund, over other potential investments. Similarly, the compensation may cause financial intermediaries to elevate the prominence of the AB Fund within its organization by, for example, placing it on a list of preferred funds.
 
How to Purchase Shares
 
Through your Broker – Dealer or Other Financial Intermediary
 
Contact your broker-dealer or other financial intermediary to purchase shares of the AB Fund. Your broker-dealer or financial intermediary can help you open a new account, review your financial needs and formulate long-term investment goals and objectives. Your broker-dealer or financial intermediary will transmit your request to the AB Fund and may charge you a fee for this service. Dealers or other financial intermediaries purchasing shares for their customers in omnibus accounts are responsible for determining the suitability of a particular share class for an investor.
 
By Check
 
The minimum initial and subsequent investment requirements for investments by check are:
 
 
 
 
 
Share Class
Minimum Initial
Investment Amount
    Minimum Subsequent
    Investment Amount
 
Institutional Class
$250,000
    $50

Make the check payable to American Beacon Funds.
 
Include the shareholder’s account number, AB Fund name and AB Fund number on the check.
 
Mail the check to:
 
American Beacon Funds
 
P.O. Box 219643
 
Kansas City, MO 64121-9643
   
 
For Overnight Delivery:
 
American Beacon Funds
 
c/o BFDS
 
330 West 9th Street
 
Kansas City, MO 6410
   
By Wire
 
The minimum initial and subsequent investment requirements for investments by wire are:
 
 
Share Class
Minimum Initial
Investment Amount
    Minimum Subsequent
    Investment Amount
Institutional Class
$250,000
    None
 
If your account has been established, call 1-800-658-5811 to purchase shares by wire.
 
Send a bank wire to State Street Bank and Trust Co. with these instructions:

 
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  ABA# 0110-0002-8; AC-9905-342-3,
  Attn: American Beacon Funds
  the AB Fund name and AB Fund number, and
  shareholder account number and registration.

By Exchange
 
The minimum requirements to establish an account by making an exchange and to make subsequent exchanges are as follows:
 
 

Share Class
Minimum Amount to
Establish a New Account
    Minimum Subsequent
    Exchange Amount
Institutional Class
$250,000
    $50
 

 
To exchange shares, send a written request to the address above, or call 1-800-658-5811 and speak to a representative.
 
You also may exchange shares by visiting www.americanbeaconfunds.com via “My Account.”
 
If you purchased shares through a financial intermediary, please contact your broker-dealer or other financial intermediary to exchange your shares.
 
Via “My Account” on www.americanbeaconfunds.com
 
You may purchase shares of all classes via “My Account” on www.americanbeaconfunds.com.
 
Funds will be transferred automatically from your bank account via Automated Clearing House (“ACH”) if valid bank instructions were included on your application.
 
If not, please call 1-800-658-5811 for assistance with establishing bank instructions.
 
A $50 minimum applies.
 
How to Redeem Shares
 
Through your Broker – Dealer or other Financial Intermediary
 
Contact your broker-dealer or other financial intermediary to sell shares of the AB Fund. Your broker-dealer or other financial intermediary is responsible for transmitting your sale request to the transfer agent in proper form and in a timely manner. Your financial intermediary may charge you a fee for selling your shares.
 
By Telephone
 
Call 1-800-658-5811 to request a redemption.
 

 

 
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Minimum redemption amounts and applicable class limitations, and policies as to the disposition of the proceeds of telephone redemptions are as follows:
 
Share Class
Minimum Redemption
Limitations
Disposition of
Redemption Proceeds
Institutional Classes
 
None
None
Transmitted to commercial bank designated on the account application form.

 
By Mail
 
 
Write a letter of instruction including:
 
 
  the AB Fund name and AB Fund number,
  shareholder account number,
  shares or dollar amount to be redeemed, and
  authorized signature(s) of all persons required to sign for the account.
 
Mail to:
American Beacon Funds
P.O. Box 219643
Kansas City, MO 64121-9643

For Overnight Delivery
American Beacon Funds
c/o BFDS
330 West 9th Street
Kansas City, MO 64105
 
Proceeds will be mailed to the account address of record or transmitted to the commercial bank designated on the account application form.
 
Minimum redemption amounts are as follows:
 
Share Class
Minimum Redemption
Institutional Class
None

 
Supporting documents may be required for redemptions by estates, trusts, guardianships, custodians, corporations, and welfare, pension and profit sharing plans.  Call 1-800-658-5811 for instructions.
 
To protect the AB Fund and your account from fraud, a STAMP 2000 Medallion signature guarantee is required for redemption orders:

 
with a request to send the proceeds to an address or commercial bank account other than the address or commercial bank account designated on the account application, or
         
 
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for an account whose address has changed within the last 30 days if proceeds are sent by check.
 
The AB Fund only accepts STAMP 2000 Medallion signature guarantees, which may be obtained at most banks, broker-dealers and credit unions. A notary public can not provide a signature guarantee. Call 1-800-658-5811 for instructions and further assistance.
 
By Exchange
 
Send a written request to the address above.
 
Call 1-800-658-5811 to speak to a representative to exchange shares.
 
Visit www.americanbeaconfunds.com and select “My Account.”
 
The minimum requirements to redeem shares by making an exchange is $50.
 
If you purchased shares through a financial intermediary, please contact your broker-dealer or other financial intermediary to exchange your shares.
 
Via “My Account” on www.americanbeaconfunds.com
 
If you have established bank instructions for your account, you may request a redemption via ACH or wire by selecting “My Account” on www.americanbeaconfunds.com.
 
If bank instructions were not included on the account application form, please call 1-800-658-5811 to establish bank instructions.
 
Minimum wire, ACH and check redemption amounts and policies as to the disposition of the proceeds of redemptions via “My Account” on www.americanbeaconfunds.com are as follows:
 
Share Class
Minimum
Wire Amount
Minimum ACH or Check Amount
Disposition of
Redemption Proceeds
Institutional Class
None
Not Available
Transmitted to commercial bank designated on the account application form.

 
General Policies
 
If a shareholder’s Institutional Class account balance falls below the following minimum level, the shareholder may be asked to increase the balance.
 
Share Class
Account Balance
Institutional Class
$75,000

 
 
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If the account balance remains below the minimum account balance after 45 days, the AB Fund reserves the right to close the account and send the proceeds to the shareholder.  IRA accounts will be charged an annual maintenance fee of $15.00 by the Custodian for maintaining either a Traditional IRA or a Roth IRA.  The AB Fund reserves the authority to modify minimum account balances in its discretion.
 
A Signature Validation Program (“SVP”) stamp may be required in order to change an account’s registration or banking instructions. You may obtain a SVP stamp at banks, broker-dealers and credit unions, but not from a notary public. The SVP stamp is analogous to the STAMP 2000 Medallion guarantee in that it is provided at similar institutions. However, it is used only for non-financial transactions.
 
The following policies apply to instructions you may provide to the AB Fund by telephone:
 
The AB Fund, its officers, trustees, employees, or agents are not responsible for the authenticity of instructions provided by telephone, nor for any loss, liability, cost or expense incurred for acting on them.
 
The AB Fund employs procedures reasonably designed to confirm that instructions communicated by telephone are genuine.
 
Due to the volume of calls or other unusual circumstances, telephone redemptions may be difficult to implement during certain time periods.
 
The AB Fund reserves the right to:
 
liquidate a shareholder’s account at the current day’s NAV and remit proceeds via check if the AB Fund or a financial institution are unable to verify the shareholder’s identity within three business days of account opening,
 
seek reimbursement from the shareholder for any related loss incurred by the AB Fund if payment for the purchase of AB Fund shares by check does not clear the shareholder’s bank, and
 
reject a purchase order and seek reimbursement from the shareholder for any related loss incurred by the AB Fund if funds are not received by the applicable wire deadline.
 
Unclaimed accounts may be subject to State escheatment laws, where the holdings in an account may be transferred to the appropriate State if no activity occurs in the account within the time period specified by State law. The AB Fund and the Transfer Agent will not be liable to shareholders or their representatives for good faith compliance with those escheatment laws.
 
Distributions and Taxes
 
The AB Fund distributes most or all of their net earnings in the form of dividends from net investment income and distributions of realized net capital gains and gains from foreign currency transactions. The AB Fund does not have a fixed dividend rate and do not guarantee they will pay any dividends or capital gains distributions in any particular period.  Dividends paid by the AB Fund with respect to each class of shares are calculated in the same manner and at the same time, but dividends on different classes of shares may be different as a result of the service and/or distribution fees applicable to certain classes of shares.  Unless the account application instructs otherwise, distributions will be reinvested in additional AB Fund shares. Distributions are paid as follows:
 

 
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AB Fund
 
Dividends
Paid
Other
Distributions
Paid
Bridgeway Large
Cap Value Fund
Annually
Annually

 
Options for Receiving Dividends and Distributions
 
When you open your AB Fund account, you can specify on your application how you want to receive distributions of dividends and capital gains. To change that option, you must notify the Transfer Agent. Unless the account application instructs otherwise, distributions will be reinvested in additional AB Fund shares. There are four payment options available:
 
Reinvest All Distributions in the AB Fund. You can elect to reinvest all dividends and capital gains distributions in additional shares of the AB Fund.
 
Reinvest Only Dividends or Capital Gains. You can elect to reinvest some types of distributions in the AB Fund while receiving the other types of distributions by check or having them sent to your bank account by ACH. Different treatment is available for distributions of dividends and long-term capital gains.
 
Receive All Distributions in Cash. You can elect to receive all dividends and capital gains distributions by check or have them sent to your bank by ACH.
 
Reinvest Your Distributions in another American Beacon Fund. You can reinvest all of your dividends and capital gains distributions in another American Beacon Fund that is available for exchanges. You must have an existing account in the same share class in the selected fund.
 
 
Usually, any dividends and distributions of net realized gains are taxable events.  However, the portion of the AB Fund’s dividends derived from its investments in certain direct U.S. Government obligations is generally exempt from state and local income taxes.  The following table outlines the typical tax liabilities for transactions in taxable accounts:
 
Type of Transaction
 
Tax Status
Dividends from net investment income*
 
Ordinary income**
Distributions of excess net short-term capital gain
over net long-term capital loss*
 
 
Ordinary income
Distributions of gains from certain foreign
currency transactions*
 
 
Ordinary income
Distributions of excess net long-term capital gain
over net short-term capital loss*
 
 
Long-term capital gains
Redemptions or exchanges
of shares owned for
more than one year
 
Long-term capital gains or losses
Redemptions or exchanges
of shares owned
for one year or less
 
Net gains are taxed at the same rate as ordinary income; net losses are subject to special rules
 
 
 
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_________________
 
*   Whether reinvested or taken in cash.
 
**  Except for dividends that are attributable to qualified dividend income.
 
To the extent distributions of the excess of net long-term capital gain over net short-term capital loss are attributable to net capital gain that the AB Fund recognizes on sales or exchanges of capital assets through its last taxable year beginning before January 1, 2013, they are subject to a 15% maximum federal income tax rate for individual shareholders.
 
A portion of the dividends paid by the AB Fund may be eligible for the 15% maximum federal income tax rate applicable to dividends that individuals receive through the year 2012.
 
The eligible portion for the AB Fund may not exceed its qualified dividend income (“QDI”).  QDI is the aggregate of dividends the AB Fund receives from most domestic corporations and certain foreign corporations.  If the AB Fund’s QDI is at least 95% of its gross income (as specially computed) and the AB Fund satisfies certain holding period and other restrictions with respect to the shares on which the dividends are paid (and the shareholder meets similar restrictions with respect to its AB Fund shares), the entire dividend will qualify for the 15% maximum federal income tax rate.  A portion of the dividends paid by the AB Fund may also be eligible for the dividends-received deduction allowed to corporations, subject to similar holding period, debt-financing and other restrictions, but the eligible portion will not exceed the aggregate dividends the AB Fund receives from domestic corporations.  However, dividends that a corporate shareholder receives and deducts pursuant to the dividends-received deduction may be subject indirectly to the federal alternative minimum tax.
 
Shareholders may realize a taxable gain or loss when redeeming or exchanging shares.  That gain or loss generally is treated as a short-term or long-term capital gain or loss, depending on how long the redeemed or exchanged shares were held.  Any capital gain an individual shareholder recognizes through the year 2012 on a redemption or exchange of AB Fund shares that have been held for more than one year will qualify for the 15% maximum federal income tax rate mentioned above.
 
Dividends and distributions of net realized gains from the AB Fund and gains recognized from the redemptions or exchanges of AB Fund shares will be subject to a 3.8% U.S. Federal Medicare contribution tax on “net investment income,” beginning in 2013, for individuals with incomes exceeding $200,000 (or $250,000 if married and filing jointly).
 
This is only a summary of some of the important income tax considerations that may affect AB Fund shareholders. Shareholders should consult their tax advisors regarding specific questions as to the effect of federal, state and local income taxes on an investment in the AB Fund.  Each year, shareholders will receive tax information from the AB Fund to assist them in preparing their tax returns.
 
Master-Feeder Structure
 
Under a master-feeder structure, a “feeder” fund invests all of its investable assets in a “master” fund with the same investment objective. The “master” fund purchases securities for investment. The master-feeder structure works as follows:
 
 
 Investor      
 
↓     purchases shares of
 
Feeder Fund      
 
↓     which invests in
 
 
 
C-14

 
 
 
Master Fund      
 
↓     which buys
 
Investment Securities      
 
Each Master-Feeder Fund can withdraw its investment in its corresponding portfolio at any time if the Board of Trustees determines that it is in the best interest of the Fund and its shareholders to do so. A change in a portfolio’s fundamental objective, policies and restrictions, which is not approved by the shareholders of its corresponding Fund, could require that Fund to redeem its interest in the portfolio. Any such redemption could result in a distribution in kind of portfolio securities (as opposed to a cash distribution) by the portfolio. Should such a distribution occur, that Fund could incur brokerage fees or other transaction costs in converting such securities to cash. In addition, a distribution in kind could result in a less diversified portfolio of investments for that Fund and could affect adversely the liquidity of the Fund. If a Master-Feeder Fund withdraws its investment in its corresponding portfolio, the Fund’s assets will be invested directly in investment securities or in another master fund, according to the investment policies and restrictions described in this Prospectus.
 

 

 

 
C-15

 

APPENDIX D

FINANCIAL HIGHLIGHTS OF THE AB FUND

The AB Fund will adopt the financial statements of the Bridgeway Fund.  The financial highlights table is intended to help you understand the Bridgeway Fund’s financial performance for the past five (5) years.  The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in the Bridgeway Fund (assuming reinvestment of all dividends and other distributions).

This information below has been audited by BBD, LLP, whose report, along with the Bridgeway Fund’s financial statements, is included in the Bridgeway Fund’s annual report, which is available upon request.
 
 
Large-Cap Value Fund
                                       
   
For the Year Ended June 30,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
Per Share Data
                                       
Net asset value, beginning of year
   
$11.44
  
   
$9.74
  
   
$13.63
  
   
$17.07
  
   
$14.41
  
                                         
Income from investment operations:
                                       
Net investment income^
   
0.20
  
   
0.19
  
   
0.23
  
   
0.22
  
   
0.17
  
Net realized and unrealized gain (loss)
   
3.21
  
   
1.73
  
   
(3.89
   
(2.94
   
2.64
  
                                         
Total from investment operations
   
3.41
  
   
1.92
  
   
(3.66
   
(2.72
   
2.81
  
                                         
Less distributions to shareholders from:
                                       
Net realized gain
   
  
   
  
   
  
   
(0.51
   
  
Net investment income
   
(0.23
   
(0.22
   
(0.23
   
(0.21
   
(0.15
                                         
Total distributions
   
(0.23
   
(0.22
   
(0.23
   
(0.72
   
(0.15
                                         
Net asset value, end of year
   
$14.62
  
   
$11.44
  
   
$9.74
  
   
$13.63
  
   
$17.07
  
                                         
                                         
           
Total Return
   
30.02%
‡ 
   
19.65%
‡ 
   
(26.88%
)
  ‡   
(16.46%
  ‡  
19.57%
  
Ratios & Supplemental Data
                                       
Net assets, end of year (‘000’s)
   
$29,647
  
   
$25,534
  
   
$27,996
  
   
$54,144
  
   
$86,095
  
Ratios to average net assets:
                                       
Expenses before waivers
and reimbursements
   
1.17%
  
   
1.11%
  
   
0.98%
  
   
0.80%
  
   
0.79%
  
Expenses after waivers
and reimbursements
   
0.84%
  
   
0.84%
  
   
0.84%
  
   
0.79%
  
   
0.79%
  
Net investment income after waivers and reimbursements
   
1.50%
  
   
1.58%
  
   
2.20%
  
   
1.38%
  
   
1.08%
  
Portfolio turnover rate
   
43%
  
   
49%
  
   
65%
  
   
28%
  
   
34%
  
 
^ Per share amounts calculated based on the average daily shares outstanding during the period.
‡ Total return would have been lower had various fees not been waived during the period.

 

 

D-1
 
 
 

 
 
AMERICAN BEACON FUNDS
 
American Beacon Bridgeway Large Cap Value Fund
 
 
STATEMENT OF ADDITIONAL INFORMATION
 
 
December 16, 2011
 
 
 
 
 
Acquisition of the Assets and Stated Liabilities of:
  
By and in Exchange for Shares of:
Bridgeway Large-Cap Value Fund
  
American Beacon Bridgeway Large Cap Value Fund
   
20 Greenway Plaza, Suite 450
 
Houston, Texas  77046
 
(800) 661-3550
  
4151 Amon Carter Boulevard, MD 2450
 
Fort Worth, Texas  76155
 
(800) 658-5811
     
 
 
 
This Statement of Additional Information, which is not a prospectus, supplements, and should be read in conjunction with, the Proxy Statement and Prospectus dated December 16, 2011, relating specifically to the proposed transfer of all of the assets of the Bridgeway Large-Cap Value Fund (the “Bridgeway Fund”) to, and the assumption of the stated liabilities of the Bridgeway Fund by, the American Beacon Bridgeway Large Cap Value Fund (the “Fund”) in exchange for shares of the Fund having an aggregate value equal to the aggregate net asset value of the Bridgeway Fund.  To obtain a copy of the Proxy Statement and Prospectus, please write to the Fund at the address set forth above or call (800) 658-5811. The transfer is to occur pursuant to an Agreement and Plan of Reorganization and Termination. Unless otherwise indicated, capitalized terms used herein and not otherwise defined have the same meanings as are given to them in the Proxy Statement and Prospectus.
 
GENERAL INFORMATION
 
 
A Special Meeting of Shareholders of the Bridgeway Fund to consider the Reorganization will be held at 11:00 a.m. Central time on Wednesday, February 1, 2012.  For further information about the Reorganization, see the Proxy Statement and Prospectus.
 
 
INCORPORATION OF DOCUMENTS BY REFERENCE INTO THE STATEMENT OF ADDITIONAL INFORMATION
 
 
This Statement of Additional Information related to the Proxy Statement and Prospectus dated December 16, 2011, incorporates by reference the following documents, each of which was filed electronically with the Securities and Exchange Commission and is incorporated by reference herein:
 
 
 
The Prospectus and Statement of Additional Information for Class N Shares of the Bridgeway Large-Cap Value Fund, dated October 31, 2011 (Filed on October 27, 2011; Accession No. 0001193125-11-283854 )
 
 
 
 

 

 
 
The financial statements of the Bridgeway Large-Cap Value Fund as included in the Bridgeway Fund’s Annual Report filed for the year ended June 30, 2011 (Filed on August 31, 2011; Accession No. 0001193125-11-237467)
 
 
Because the Fund has not yet commenced operations as of the date of this Statement of Additional Information, no annual or semi-annual report is available at this time.
 
 
Pro Forma Financial Statements
 
Pro forma financial statements are not presented as the Bridgeway Fund is being combined with the Fund, a newly created series of American Beacon Funds, which does not have material assets or liabilities.
 

 

 

 

 
 

 

TABLE OF CONTENTS
 
Organization and History of the Fund                                                                                                                                       
1
Additional Information About Investment Strategies and Risks
1
Non-Principal Investments Strategies and Risks                                                                                                                                         
14
Investment Restrictions                                                                                                                                         
15
Temporary Defensive and Interim Investments                                                                                                                                         
16
Portfolio Turnover                                                                                                                                         
17
Disclosure of Portfolio Holdings                                                                                                                                         
17
Trustees and Officers of the Trust                                                                                                                                         
19
Code of Ethics                                                                                                                                         
25
Proxy Voting Policies                                                                                                                                         
25
Control Persons and 5% Shareholders                                                                                                                                         
25
Investment Advisory Agreement                                                                                                                                         
26
Management, Administrative and Distribution Services                                                                                                                                         
26
Other Service Providers                                                                                                                                         
27
Portfolio Managers                                                                                                                                         
28
Portfolio Securities Transactions                                                                                                                                         
31
Redemptions in Kind                                                                                                                                         
31
Tax Information                                                                                                                                         
32
Description of the Trust                                                                                                                                         
35
Financial Statements                                                                                                                                         
36
   
Appendix A: Proxy Voting Policy and Procedures for the Trust                                                                                                                                         
A-1
Appendix B: Ratings Definitions                                                                                                                                         
B-1
 

 

 
 

 

ORGANIZATION AND HISTORY OF THE FUND
 
The Fund is a separate investment portfolio of the American Beacon Funds (the “Trust”), an open-end management investment company organized as a Massachusetts business trust on January 16, 1987.  The Fund constitutes a separate investment portfolio with a distinct investment objective and distinct purpose and strategy.  This SAI relates to the Institutional Class shares of the Fund.

ADDITIONAL INFORMATION ABOUT INVESTMENT STRATEGIES AND RISKS
 
The investment objective and principal investment strategies and risks of the Fund are described in the Prospectus. This section contains additional information about the Fund’s investment policies and risks and types of securities the Fund may purchase.  The composition of the Fund’s portfolio and the strategies that the Fund uses in selecting portfolio securities may vary over time. The Fund is not required to use all of the investment strategies described below in pursuing its investment objectives. It may use some of the investment strategies only at some times or it may not use them at all.

Asset-Backed Securities – Asset-backed securities are securities issued by trusts and special purpose entities that are backed by pools of assets, such as automobile and credit-card receivables and home equity loans, which pass through the payments on the underlying obligations to the security holders (less servicing fees paid to the originator or fees for any credit enhancement). Typically, loans or accounts receivable paper are transferred from the originator to a specially created trust, which repackages the trust’s interests as securities with a minimum denomination and a specific term. The securities are then privately placed or publicly offered. Examples include certificates for automobile receivables and so-called plastic bonds, backed by credit card receivables. The Fund is permitted to invest in asset-backed securities, subject to the Fund’s rating and quality requirements.

The value of an asset-backed security is affected by, among other things, changes in the market’s perception of the asset backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans and the financial institution providing any credit enhancement. Payments of principal and interest passed through to holders of asset-backed securities are frequently supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or by having a priority to certain of the borrower’s other assets. The degree of credit enhancement varies, and generally applies to only a portion of the asset-backed security’s par value. Value is also affected if any credit enhancement has been exhausted.

Borrowing Risks – The Fund may borrow money in an amount up to one-third of its total assets (including the amount borrowed) from banks and other financial institutions.  The Fund may also borrow for temporary purposes. Borrowing may exaggerate changes in the Fund’s NAV and in its total return. Interest expense and other fees associated with borrowing may reduce the Fund’s return.

Cash Equivalents – Cash equivalents include time deposits, certificates of deposit, bearer deposit notes, bankers’ acceptances, government obligations, commercial paper, short-term corporate debt securities and repurchase agreements.

Bankers’ acceptances are short-term credit instruments designed to enable businesses to obtain funds to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then “accepted” by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an earning asset or it may be sold in the secondary market at the going rate of discount for a specific maturity. Although maturities for acceptances can be as long as 270 days, most acceptances have maturities of six months or less.

Certificates of deposit (“CDs”) are issued against funds deposited in an eligible bank (including its domestic and foreign branches, subsidiaries and agencies), are for a definite period of time, earn a specified rate of return and are normally negotiable.  U.S. dollar denominated CDs issued by banks abroad are known as Eurodollar CDs.  CDs issued by foreign branches of U.S. banks are known as Yankee dollar CDs.

Time deposits are non-negotiable deposits maintained at a banking institution for a specified period of time at a specified interest rate.


 
 

 

Commercial Paper – The Fund may invest in commercial paper and other short-term notes.  Commercial paper refers to promissory notes representing an unsecured debt of a corporation or finance company with a fixed maturity of no more than 270 days. A variable amount master demand note (which is a type of commercial paper) represents a direct borrowing arrangement involving periodically fluctuating rates of interest under a letter agreement between a commercial paper issuer and an institutional lender pursuant to which the lender may determine to invest varying amounts.

Common Stock – Common stock generally takes the form of shares in a corporation which represent an ownership interest. It ranks bellow preferred stock and debt securities in claims for dividends and for assets of the company in a liquidation or bankruptcy. The value of a company’s common stock may fall as a result of factors directly relating to that company, such as decisions made by its management or decreased demand the company’s products or services. A stock’s value may also decline because of factors affecting not just the company, but also companies in the same industry or sector. The price of a company’s stock may also be affected by changes in financial markets that are relatively unrelated to the company, such as changes in interest rates, currency exchange rates or industry regulation. Companies that pay dividends on their common stock generally only do so after they invest in their own business and make required payments to bondholders and on other debt and preferred stock. Therefore, the value of a company’s common stock will usually be more volatile than its bonds, other debt and preferred stock. Common stock may be exchange-traded or over-the-counter. Over the counter stock may be less liquid than exchange-traded stock.

Convertible Securities – Convertible securities include corporate bonds, notes, preferred stock or other securities that may be converted into or exchanged for a prescribed amount of common stock of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or dividends paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. While no securities investment is without some risk, investments in convertible securities generally entail less risk than the issuer’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 fixed income security. The market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. While convertible securities generally offer lower interest or dividend yields than non-convertible debt securities of similar quality, they do enable the investor to benefit from increases in the market price of the underlying common stock. Holders of convertible securities have a claim on the assets of the issuer prior to the common stockholders, but may be subordinated to holders of similar non-convertible securities of the same issuer. Because of the conversion feature, the Manager may consider some convertible securities to be equity equivalents.

Cover and Asset Segregation – The Fund may make investments or employ trading practices that obligate the Fund, on a fixed or contingent basis, to deliver an asset or make a cash payment to another party in the future. The Fund will comply with guidance from the U.S. Securities and Exchange Commission (the “SEC”) and other applicable regulatory bodies with respect to coverage of certain investments and trading practices. This guidance requires segregation (which may include earmarking) by the Fund of cash or liquid securities with its custodian or a designated sub-custodian to the extent the Fund’s obligations with respect to these strategies are not otherwise “covered” through ownership of the underlying security or financial instrument or by offsetting portfolio positions.

For example, if the Fund enters into a currency forward contract to sell foreign currency on a future date, the Fund may cover its obligation to deliver the foreign currency by segregating cash or liquid securities having a value at least equal to the value of the deliverable currency. Alternatively, the Fund could cover its obligation by entering into an offsetting transaction to acquire an amount of foreign currency at least equal to the deliverable amount at a price at or below the sale price received by the Fund under the currency forward contract.

The Fund’s approach to asset coverage may vary among different types of swaps. With respect to most swap agreements (but excluding, for example, credit default swaps), the Fund calculates the obligations of the parties to the agreement on a “net basis” (i.e., the two payment streams are netted out with the Fund receiving or paying, as the case may be, only the net amount of the two payments). Consequently, the Fund’s current obligations (or rights) under these swap agreements will generally 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”). The Fund’s current obligation, if any, under a swap agreement will generally be covered by segregating cash or liquid securities having an aggregate value at least equal the amount, if any, that the Fund would owe, based on current market values, of all swaps with the same counterparty were terminated. To the extent that the obligations of the parties under these swaps are not calculated on a net basis, the amount segregated will be the full amount of the Fund’s obligations, if any.

 
2

 
 
With respect to credit default swaps, typically, if the Fund enters into a credit default swap as the buyer of credit protection, then it will earmark or otherwise segregate an amount of cash or liquid securities at least equal to any accrued payment or delivery obligations under the swap. Alternatively, if the Fund enters into a credit default swap as the seller of credit protection, then the Fund will earmark or otherwise segregate an amount of cash or liquid securities at least equal to the full notional amount of the swap. Alternatively, the Fund could cover its obligation by other means consistent with applicable regulatory policies.

Inasmuch as the Fund covers its obligations under these transactions as described above, the Manager and the Fund believe such obligations do not constitute senior securities. Earmarking or otherwise segregating a large percentage of the Fund’s assets could impede the Sub-Advisor’s ability to manage the Fund’s portfolio.

Depositary Receipts  American Depositary Receipts (ADRs) – ADRs are depositary receipts for foreign issuers in registered form traded in U.S. securities markets. Depositary receipts may not be denominated in the same currency as the securities into which they may be converted. Investing in depositary receipts entails substantially the same risks as direct investment in foreign securities. There is generally less publicly available information about foreign companies and there may be less governmental regulation and supervision of foreign stock exchanges, brokers and listed companies. In addition, such companies may use different accounting and financial standards (and certain currencies may become unavailable for transfer from a foreign currency), resulting in the Fund’s possible inability to convert immediately into U.S. currency proceeds realized upon the sale of portfolio securities of the affected foreign companies. In addition, the Fund may invest in unsponsored depositary receipts, the issuers of which are not obligated to disclose material information about the underlying securities to investors in the United States. Ownership of unsponsored depositary receipts may not entitle the Fund to the same benefits and rights as ownership of a sponsored depositary receipt or the underlying security. Please see “Foreign Securities” below for a description of the risks associated with investments in foreign securities.

Fixed-Income Securities – The Fund may hold debt, including corporate debt, and other fixed-income securities. Typically, the values of fixed-income securities change inversely with prevailing interest rates. Therefore, a fundamental risk of fixed-income securities is interest rate risk, which is the risk that their value will generally decline as prevailing interest rates rise, which may cause the Fund’s net asset value to likewise decrease, and vice versa. How specific fixed-income securities may react to changes in interest rates will depend on the specific characteristics of each security. For example, while securities with longer maturities tend to produce higher yields, they also tend to be more sensitive to changes in prevailing interest rates and are therefore more volatile than shorter-term securities and are subject to greater market fluctuations as a result of changes in interest rates. Fixed-income securities are also subject to credit risk, which is the risk that the credit strength of an issuer of a fixed-income security will weaken and/or that the issuer will be unable to make timely principal and interest payments and that the security may go into default. In addition, there is prepayment risk, which is the risk that during periods of falling interest rates, certain fixed-income securities with higher interest rates, such as mortgage- and asset-backed securities, may be prepaid by their issuers thereby reducing the amount of interest payments. This may result in the Fund having to reinvest its proceeds in lower yielding securities. Securities underlying mortgage- and asset-backed securities, which may include subprime mortgages, also may be subject to a higher degree of credit risk, valuation risk, and liquidity risk.

Foreign Securities – The Fund may invest in U.S. dollar-denominated foreign securities. For purposes of the Fund’s investments, “foreign securities” means those securities issued by companies: (i) that are domiciled in a country other than the U.S.; and (ii) that derive 50% or more of their total revenue from activities outside of the U.S. The term “foreign securities” would also include American Depository Receipts (“ADRs”) issued by companies that meet the preceding criteria. Although the Fund may invest in foreign securities, the Fund normally invests only minimally in foreign securities. Foreign securities carry incremental risk associated with: (1) currency fluctuations; (2) restrictions on, and costs associated with, the exchange of currencies; (3) difficulty in obtaining or enforcing a court judgment abroad; (4) reduced levels of publicly available information concerning issuers; (5) restrictions on foreign investment in other jurisdictions; (6) reduced levels of governmental regulation of foreign securities markets; (7) difficulties in transaction settlements and the effect of this delay on shareholder equity; (8) foreign withholding taxes; (9) political, economic, and similar risks, including expropriation and nationalization; (10) different accounting, auditing, and financial standards; (11) price volatility; and (12) reduced liquidity in foreign markets where the securities also trade. While some of these risks are reduced by investing only in ADRs and foreign securities listed on American exchanges even these foreign securities may carry substantial incremental risk.

 
3

 

Futures Contracts – Futures contracts obligate a purchaser to take delivery of a specific amount of an obligation underlying the futures contract at a specified time in the future for a specified price. Likewise, the seller incurs an obligation to deliver the specified amount of the underlying obligation against receipt of the specified price. Futures are traded on both U.S. and foreign commodities exchanges. Futures contracts will be traded for the same purposes as entering into forward contracts. The purchase of futures can serve as a long hedge, and the sale of futures can serve as a short hedge.

No price is paid upon entering into a futures contract. Instead, at the inception of a futures contract the Fund is required to deposit “initial deposit” consisting of cash or U.S. Government Securities in an amount generally equal to 10% or less of the contract value. Margin must also be deposited when writing a call or put option on a futures contract, in accordance with applicable exchange rules. Unlike margin in securities transactions, initial margin on futures contracts does not represent a borrowing, but rather is in the nature of a performance bond or good-faith deposit that is returned to the Fund at the termination of the transaction if all contractual obligations have been satisfied. Under certain circumstances, such as periods of high volatility, the Fund may be required by a futures exchange to increase the level of its initial margin payment, and initial margin requirements might be increased generally in the future by regulatory action.

Subsequent “variation margin” payments are made to and from the futures broker daily as the value of the futures position varies, a process known as “marking-to-market.” Variation margin does not involve borrowing, but rather represents a daily settlement of the Fund’s obligations to or from a futures broker. When the Fund purchases or sells a futures contract, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements. If the Fund has insufficient cash to meet daily variation margin requirements, it might need to sell securities at a time when such sales are disadvantageous.

Purchasers and sellers of futures contracts can enter into offsetting closing transactions, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Positions in futures contracts may be closed only on a futures exchange or board of trade that provides a secondary market. The Fund intends to enter into futures contracts only on exchanges or boards of trade where there appears to be a liquid secondary market. However, there can be no assurance that such a market will exist for a particular contract at a particular time. In such event, it may not be possible to close a futures contract.
 
Although futures contracts by their terms call for the actual delivery or acquisition of securities or currency, in most cases the contractual obligation is fulfilled before the date of the contract without having to make or take delivery of the securities or currency. The offsetting of a contractual obligation is accomplished by buying (or selling, as appropriate) on a commodities exchange an identical futures contract calling for delivery in the same month. Such a transaction, which is effected through a member of an exchange, cancels the obligation to make or take delivery of the securities or currency. Since all transactions in the futures market are made, offset or fulfilled through a clearinghouse associated with the exchange on which the contracts are traded, the Fund will incur brokerage fees when it purchases or sells futures contracts.
 
Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit. Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.

If the Fund were unable to liquidate a futures contract due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. The Fund would continue to be subject to market risk with respect to the position. In addition, the Fund would continue to be required to make daily variation margin payments and might be required to maintain the position being hedged by the futures contract or option thereon or to maintain cash or securities in a segregated account.
 
To the extent that the Fund enters into futures contracts, in each case other than for bona fide hedging purposes (as defined by the Commodities Futures Trading Commission (“CFTC”)), the aggregate initial margin will not exceed 5% of the liquidation value of the Fund’s portfolio, after taking into account unrealized profits and unrealized losses on any contracts that the Fund has entered into.
 
The ordinary spreads between prices in the cash and futures market, due to differences in the nature of those markets, are subject to distortions. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin deposit requirements, investors may close futures contracts through offsetting transactions that could distort the normal relationship

 
4

 

between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the margin deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of securities price or currency exchange rate trends by the Sub-Advisor may still not result in a successful transaction.
 
In addition, futures contracts entail risks. Although the Sub-Advisor may believe that use of such contracts will benefit the Fund, if that Sub-Advisor’s investment judgment about the general direction of, for example, an index is incorrect, the Fund’s overall performance would be worse than if it had not entered into any such contract. In addition, there are differences between the securities and futures markets that could result in an imperfect correlation between the markets, causing a given transaction not to achieve its objectives.
 
Illiquid and Restricted Securities – Generally, an illiquid asset is an asset that cannot be sold or disposed of in the ordinary course of business within seven days at approximately the price at which it has been valued.

Section 4(2) securities are restricted as to disposition under the federal securities laws, and generally are sold to institutional investors, such as the Fund, that agree they are purchasing the securities for investment and not with an intention to distribute to the public. Any resale by the purchaser must be pursuant to an exempt transaction and may be accomplished in accordance with Rule 144A.  Section 4(2) securities normally are resold to other institutional investors through or with the assistance of the issuer or dealers that make a market in the Section 4(2) securities, thus providing liquidity.
 
The Board and the Sub-Advisor will carefully monitor the Fund’s investments in Section 4(2) securities offered and sold under Rule 144A, focusing on such important factors, among others, as valuation, liquidity, and availability of information. Investments in Section 4(2) securities could have the effect of reducing the Fund’s liquidity to the extent that qualified institutional buyers no longer wish to purchase these restricted securities.

Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the 1933 Act, securities that are otherwise not readily marketable, and repurchase agreements having a remaining maturity of longer than seven calendar days. Securities that have not been registered under the 1933 Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. These securities may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. A large institutional market exists for certain securities that are not registered under the 1933 Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer’s ability to honor a demand for repayment. However, the fact that there are contractual or legal restrictions on resale of such investments to the general public or to certain institutions may not be indicative of their liquidity.
 
In recognition of the increased size and liquidity of the institutional market for unregistered securities and the importance of institutional investors in the formation of capital, the SEC has adopted Rule 144A under the 1933 Act. Rule 144A is designed to facilitate efficient trading among institutional investors by permitting the sale of certain unregistered securities to qualified institutional buyers. To the extent privately placed securities held by the Fund qualify under Rule 144A and an institutional market develops for those securities, that Fund likely will be able to dispose of the securities without registering them under the 1933 Act. To the extent that institutional buyers become, for a time, uninterested in purchasing these securities, investing in Rule 144A securities could increase the level of the Fund’s illiquidity. The Manager or the Sub-Advisor, as applicable, acting under guidelines established by the Board, may determine that certain securities qualified for trading under Rule 144A are liquid. Regulation S under the 1933 Act permits the sale abroad of securities that are not registered for sale in the United States.
 
Limitations on resale may have an adverse effect on the marketability of portfolio securities, and the Fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven calendar days. In addition, the Fund may get only limited information about an issuer, so it may be less able to predict a loss. The Fund also might have to register such restricted securities in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities.

 
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Index Futures Contracts and Options on Index Futures Contracts – The Fund may invest in index futures contracts, options on index futures contracts and options on securities indices. The Fund may invest in index futures contracts for investment purposes, including for short term cash management purposes.
 
Index Futures Contracts – U.S. futures contracts traded on exchanges that have been designated “contracts markets” by the CFTC and must be executed through a futures commission merchant, or brokerage firm, which is a member of the relevant contract market. Futures contracts trade on a number of exchange markets.
 
At the same time a futures contract on an index is purchased or sold, the Fund must allocate cash or securities as a deposit payment (“initial deposit”). It is expected that the initial deposit would be approximately 2% to 5% of a contract’s face value. Daily thereafter, the futures contract is valued and the payment of “variation margin” may be required.
 
Options on Index Futures Contracts – The purchase of a call option on an index futures contract is similar in some respects to the purchase of a call option on such an index.
 
The writing of a call option on a futures contract with respect to an index constitutes a partial hedge against declining prices of the underlying securities that are deliverable upon exercise of the futures contract. If the futures price at expiration of the option is below the exercise price, the Fund will retain the full amount of the option premium, which provides a partial hedge against any decline that may have occurred in the Fund’s holdings. The writing of a put option on an index futures contract constitutes a partial hedge against increasing prices of the underlying securities that are deliverable upon exercise of the futures contract. If the futures price at expiration of the option is higher than the exercise price, the Fund will retain the full amount of the option premium, which provides a partial hedge against any increase in the price of securities that the Fund intends to purchase. If a put or call option the Fund has written is exercised, the Fund will incur a loss that will be reduced by the amount of the premium it receives. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its futures positions, the Fund’s losses or gains from existing options on futures may to some extent be reduced or increased by changes in the value of portfolio securities.
 
The purchase of a put option on a futures contract with respect to an index is similar in some respects to the purchase of protective put options on the Index. For example, the Fund may purchase a put option on an index futures contract to hedge against the risk of lowering securities values.
 
The amount of risk the Fund assumes when it purchases an option on a futures contract with respect to an index is the premium paid for the option plus related transaction costs. In addition to the correlation risks discussed above, the purchase of such an option also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased.

Futures Contracts on Stock Indices – The Fund may enter into contracts providing for the making and acceptance of a cash settlement based upon changes in the value of an index of securities (“Index Futures Contracts”). This investment technique is used only to hedge against anticipated future change in general market prices which otherwise might either adversely affect the value of securities held by the Fund or adversely affect the prices of securities which are intended to be purchased at a later date for the Fund.
 
In general, each transaction in Index Futures Contracts involves the establishment of a position that will move in a direction opposite to that of the investment being hedged. If these hedging transactions are successful, the futures positions taken for the Fund will rise in value by an amount that approximately offsets the decline in value of the portion of the Fund’s investments that are being hedged. Should general market prices move in an unexpected manner, the full anticipated benefits of Index Futures Contracts may not be achieved or a loss may be realized.
 
Transactions in Index Futures Contracts involve certain risks. These risks could include a lack of correlation between the Futures Contract and the equity market, a potential lack of liquidity in the secondary market and incorrect assessments of market trends, which may result in worse overall performance than if a Futures Contract had not been entered into.
 
Brokerage costs will be incurred and “margin” will be required to be posted and maintained as a good-faith deposit against performance of obligations under Futures Contracts written into by the Fund.

 
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Options on Securities Indices – The Fund may write (sell) covered call and put options to a limited extent on an index (“covered options”) in an attempt to increase income. Such options give the holder the right to receive a cash settlement during the term of the option based upon the difference between the exercise price and the value of the index. The Fund may forgo the benefits of appreciation on the index or may pay more than the market price for the index pursuant to call and put options written by the Fund.
 
By writing a covered call option, the Fund forgoes, in exchange for the premium less the commission (“net premium”), the opportunity to profit during the option period from an increase in the market value of an index above the exercise price. By writing a put option, the Fund, in exchange for the net premium received, accept the risk of a decline in the market value of the index below the exercise price.
 
The Fund may terminate its obligation as the writer of a call or put option by purchasing an option with the same exercise price and expiration date as the option previously written.
 
When the Fund writes an option, an amount equal to the net premium received by the Fund is included in the liability section of the Fund’s Statement of Assets and Liabilities as a deferred credit. The amount of the deferred credit will be subsequently marked to market to reflect the current market value of the option written. The current market value of a traded option is the last sale price or, in the absence of a sale, the mean between the closing bid and asked price. If an option expires unexercised on its stipulated expiration date or if the Fund enters into a closing purchase transaction, the Fund will realize a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was sold), and the deferred credit related to such option will be eliminated.
 
The Fund has adopted certain other non-fundamental policies concerning index option transactions that are discussed above.
 
The hours of trading for options on an index may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying securities markets that cannot be reflected in the option markets. It is impossible to predict the volume of trading that may exist in such options, and there can be no assurance that viable exchange markets will develop or continue.
 
Because options on securities indices require settlement in cash or the Sub-Advisor may be forced to liquidate portfolio securities to meet settlement obligations.
 
Options on Stock Indices – The Fund may purchase and write put and call options on stock indices listed on stock exchanges. A stock index fluctuates with changes in the market values of the stocks included in the index. Options on stock indices generally are similar to options on stock except that the delivery requirements are different. Instead of giving the right to take or make delivery of stock at a specified price, an option on a stock index gives the holder the right to receive a cash “exercise settlement amount” equal to (a) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a call) or is less than (in the case of a put) the closing value of the underlying index on the date of exercise, multiplied by (b) a fixed “index multiplier.” The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset its position in stock index options prior to expiration by entering into a closing transaction on an exchange or the option may expire unexercised.
 
Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether the Fund will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indices, in an industry or market segment, rather than movements in the price of a particular stock.

Initial Public Offerings – The Fund can invest in initial public offerings (“IPOs”). By definition, securities issued in IPOs have not traded publicly until the time of their offerings. Special risks associated with IPOs may include, among others, the fact that there may only be a limited number of shares available for trading. The market for those securities may be unseasoned. The issuer may have a limited operating history. These factors may contribute to price volatility. The limited number of shares available for trading in some IPOs may also make it more difficult for the Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. In addition, some companies initially offering their shares publicly are involved in relatively new industries or lines of business, which may not be widely understood by investors. Some of the companies involved in new industries may be regarded as developmental state companies, without revenues or operating

 
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income, or the near-term prospects of them. Many IPOs are by small- or micro-cap companies that are undercapitalized.

Interests in Publicly Traded Limited Partnerships – The Fund may invest in interests in publicly traded limited partnerships (limited partnership interests or units) which represent equity interests in the assets and earnings of the partnership’s trade or business. Unlike common stock in a corporation, limited partnership interests have limited or no voting rights. However, many of the risks of investing in common stocks are still applicable to investments in limited partnership interests. In addition, limited partnership interests are subject to risks not present in common stock. For example, interest income generated from limited partnerships deemed not to be ‘publicly traded’ will not be considered ‘qualifying income’ under the Internal Revenue Code of 1986, as amended (“Internal Revenue Code”) and may trigger adverse tax consequences. Also, since publicly traded limited partnerships are a less common form of organizational structure than corporations, the limited partnership units may be less liquid than publicly traded common stock. Also, because of the difference in organizational structure, the fair value of limited partnership units in the Fund’s portfolio may be based either upon the current market price of such units, or if there is no current market price, upon the pro rata value of the underlying assets of the partnership. Limited partnership units also have the risk that the limited partnership might, under certain circumstances, be treated as a general partnership giving rise to broader liability exposure to the limited partners for activities of the partnership.  Further, the general partners of a limited partnership may be able to significantly change the business or asset structure of a limited partnership without the limited partners having any ability to disapprove any such changes. In certain limited partnerships, limited partners may also be required to return distributions previously made in the event that excess distributions have been made by the partnership, or in the event that the general partners, or their affiliates, are entitled to indemnification.

Interfund Lending – Pursuant to an order issued by the SEC, the American Beacon Funds may participate in a credit facility whereby each American Beacon Fund, under certain conditions, is permitted to lend money directly to and borrow directly from other American Beacon Funds for temporary purposes. The credit facility can provide a borrowing fund with significant savings at times when the cash position of a fund is insufficient to meet temporary cash requirements. This situation could arise when shareholder redemptions exceed anticipated volumes and certain funds have insufficient cash on hand to satisfy such redemptions. When the funds liquidate portfolio securities to meet redemption requests, they often do not receive payment in settlement for up to three days (or longer for certain foreign transactions). However, redemption requests normally are satisfied immediately. The credit facility provides a source of immediate, short-term liquidity pending settlement of the sale of portfolio securities.
 
The credit facility will reduce the Fund’s potential borrowing costs and enhance the ability of the lending Funds to earn higher rates of interest on their short-term lending. Although the credit facility will reduce the Fund’s need to borrow from banks, the Fund remains free to establish lines of credit or other borrowing arrangements with banks.

Issuer Risk – The value of a security may decline for a number of reasons which 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.

Limited Liability Companies – The Fund may purchase securities of entities such as limited partnerships, limited liability companies, business trusts and companies organized outside the United States. These securities are comparable to common or preferred stock.

Loan Transactions – Loan transactions involve the lending of securities to a broker-dealer or institutional investor for its use in connection with short sales, arbitrages or other security transactions. The purpose of a qualified loan transaction is to afford a lender the opportunity to continue to earn income on the securities loaned and at the same time earn fee income or income on the collateral held by it.

Securities loans will be made in accordance with the following conditions: (1) the Fund must receive at least 100% collateral in the form of cash or cash equivalents, securities of the U.S. Government and its agencies and instrumentalities, and approved bank letters of credit; (2) the borrower must increase the collateral whenever the market value of the loaned securities (determined on a daily basis) rises above the level of collateral; (3) the Fund must be able to terminate the loan after notice, at any time; (4) the Fund must receive reasonable interest on the loan or a flat fee from the borrower, as well as amounts equivalent to any dividends, interest or other distributions on the securities loaned, and any increase in market value of the loaned securities; (5) the Fund may pay only reasonable custodian fees in connection with the loan; and (6) voting rights on the securities loaned may pass to the borrower, provided, however, that if a material event affecting the investment occurs, the

 
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Board must be able to terminate the loan and vote proxies or enter into an alternative arrangement with the borrower to enable the Board as appropriate, to vote proxies.

While there may be delays in recovery of loaned securities or even a loss of rights in collateral supplied should the borrower fail financially, loans will be made only to firms deemed by the Board of Trustees to be of good financial standing and will not be made unless the consideration to be earned from such loans would justify the risk. If the borrower of the securities fails financially, there is a risk of delay in recovery of the securities loaned or loss of rights in the collateral. Such loan transactions are referred to in this Statement of Additional Information as “qualified” loan transactions.

The cash collateral so acquired through qualified loan transactions may be invested only in those categories of high quality liquid securities previously authorized by the Board.

Market Events – Turbulence in the financial sector has resulted, and may continue to result, in an unusually high degree of volatility in the financial markets. Both domestic and foreign equity markets have been experiencing increased volatility and turmoil, with issuers that have exposure to the real estate, mortgage and credit markets particularly affected, and it is uncertain whether or for how long these conditions could continue. The U.S. Government has taken a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced extreme volatility, and in some cases a lack of liquidity.

Reduced liquidity in equity, credit and fixed-income markets may adversely affect many issuers worldwide. This reduced liquidity may result in less money being available to purchase raw materials, goods and services from emerging markets, which may, in turn, bring down the prices of these economic staples. It may also result in small or emerging market issuers having more difficulty obtaining financing, which may, in turn, cause a decline in their stock prices. These events and possible continued market turbulence may have an adverse effect on the Fund.

Master Demand Notes – Master demand notes are direct arrangements of obligations, between a lender and a corporate borrower, that permit the investment of fluctuating amounts of money at varying rates of interest. They permit daily changes in the amounts borrowed. The lender has the right to increase or decrease the amount it lends under the note at any time, up to the full amount provided by the note agreement. The borrower may prepay up to the full amount of the note without penalty. These notes may or may not be backed by bank letters of credit.

These notes are direct lending arrangements between the lender and borrower and there is no secondary market for them. The principal plus accrued interest is redeemable at any time, however. This right to redeem the notes depends on the ability of the borrower to make the specified payment on demand. The sub-advisors will consider the earning power, cash flow and other liquidity ratios of an issuer, and its ability to pay principal and interest on demand, including a situation in which all holders of such notes make demand simultaneously. Investments in master demand notes are subject to the limitation on investments in illiquid securities.

Mortgage-Backed Securities – Mortgage-backed securities consist of both collateralized mortgage obligations and mortgage pass-through certificates.
 
Collateralized Mortgage Obligations (“CMOs”) – CMOs and interests in real estate mortgage investment conduits (“REMICs”) are debt securities collateralized by mortgages or mortgage pass-through securities. CMOs divide the cash flow generated from the underlying mortgages or mortgage pass-through securities into different groups referred to as “tranches,” which are then retired sequentially over time in order of priority. The principal governmental issuers of such securities are the Federal National Mortgage Association (“FNMA”), a government sponsored corporation owned entirely by private stockholders, and the Federal Home Loan Mortgage Corporation (“FHLMC”), a corporate instrumentality of the United States created pursuant to an act of Congress that is owned entirely by the Federal Home Loan Banks. The issuers of CMOs are structured as trusts or corporations established for the purpose of issuing such CMOs and often have no assets other than those underlying the securities and any credit support provided. A REMIC is a mortgage securities vehicle that holds residential or commercial mortgages and issues securities representing interests in those mortgages. A REMIC may be formed as a corporation, partnership, or segregated pool of assets. A REMIC itself is generally exempt from federal income tax, but the income from its mortgages is taxable to its investors. For investment purposes, interests in REMIC securities are virtually indistinguishable from CMOs.

 
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Mortgage Pass-Through Securities – Mortgage pass-through securities are securities representing interests in “pools” of mortgages in which payments of both interest and principal on the securities are generally made monthly, in effect “passing through” monthly payments made by the individual borrowers on the residential mortgage loans that underlie the securities (net of fees paid to the issuer or guarantor of the securities). They are issued by governmental, government-related and private organizations which are backed by pools of mortgage loans.
 
Payment of principal and interest on some mortgage pass-through securities (but not the market value of the securities themselves) may be guaranteed by the full faith and credit of the U.S. government, as in the case of securities guaranteed by the Government National Mortgage Association (“GNMA”), or guaranteed by agencies or instrumentalities of the U.S. government, as in the case of securities guaranteed by the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”), which are supported only by the discretionary authority of the U.S. government to purchase the agency’s obligations.
 
Mortgage pass-through securities created by nongovernmental issuers (such as commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers) may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit, which may be issued by governmental entities, private insurers or the mortgage poolers.
 
There are a number of important differences among the agencies, instrumentalities and government-sponsored enterprises of the U.S. government that issue mortgage-related securities and among the securities that they issue. Such agencies and securities include:
 
(1) GNMA Mortgage Pass-Through Certificates (“Ginnie Maes”) – GNMA is a wholly owned U.S. Government corporation within the Department of Housing and Urban Development. Ginnie Maes represent an undivided interest in a pool of mortgages that are insured by the Federal Housing Administration or the Farmers Home Administration or guaranteed by the Veterans Administration. Ginnie Maes entitle the holder to receive all payments (including prepayments) of principal and interest owed by the individual mortgagors, net of fees paid to GNMA and to the issuer which assembles the mortgage pool and passes through the monthly mortgage payments to the certificate holders (typically, a mortgage banking firm), regardless of whether the individual mortgagor actually makes the payment. Because payments are made to certificate holders regardless of whether payments are actually received on the underlying mortgages, Ginnie Maes are of the “modified pass-through” mortgage certificate type. The GNMA is authorized to guarantee the timely payment of principal and interest on the Ginnie Maes. The GNMA guarantee is backed by the full faith and credit of the United States, and the GNMA has unlimited authority to borrow funds from the U.S. Treasury to make payments under the guarantee. The market for Ginnie Maes is highly liquid because of the size of the market and the active participation in the secondary market of security dealers and a variety of investors.
 
(2) Mortgage-Related Securities Issued by Private Organizations – Pools created by non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government guarantees of payments in such pools. However, timely payment of interest and principal of these pools is often partially supported by various enhancements such as over-collateralization and senior/subordination structures and by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by government entities, private insurers or the mortgage poolers. Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable.
 
(3) FHLMC Mortgage Participation Certificates (“Freddie Macs”) – Freddie Macs represent interests in groups of specified first lien residential conventional mortgages underwritten and owned by the FHLMC. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. In cases where the FHLMC has not guaranteed timely payment of principal, the FHLMC may remit the amount due because of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable. Freddie Macs are not guaranteed by the United States or by any of the Federal Home Loan Banks and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Please see “Additional Information Regarding Freddie Mac and Fannie Mae” below for further information.
 
(4) FNMA Guaranteed Mortgage Pass-Through Certificates (“Fannie Maes”) – Fannie Maes represent an undivided interest in a pool of conventional mortgage loans secured by first mortgages or deeds of trust, on one
 

 
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family or two to four family, residential properties. The FNMA is obligated to distribute scheduled monthly installments of principal and interest on the mortgages in the pool, whether or not received, plus full principal of any foreclosed or otherwise liquidated mortgages. The obligation of the FNMA under its guarantee is solely its obligation and is not backed by, nor entitled to, the full faith and credit of the United States. Please see “Additional Information Regarding Freddie Mac and Fannie Mae” below for further information.

The U.S. Treasury has historically had the authority to purchase obligations of Fannie Mae and Freddie Mac. However, in 2008, due to capitalization concerns, Congress provided the U.S. Treasury with additional authority to lend emergency funds to Fannie Mae and Freddie Mac and to purchase their stock. In September 2008, those capital concerns lead the U.S. Treasury and the Federal Housing Finance Agency (“FHFA”) to announce that Fannie Mae and Freddie Mac had been placed in conservatorship.

Since that time, the Fannie Mae and Freddie Mac have received significant capital support through U.S. Treasury preferred stock purchases, as well as Treasury and Federal Reserve purchases of their mortgage backed securities (“MBS”). The FHFA and the U.S. Treasury (through its agreement to purchase Freddie Mac and Fannie Mae preferred stock) have imposed strict limits on the size of their mortgage portfolios. While the MBS purchase programs ended in 2010, the U.S. Treasury announced in December 2009 that it would continue its support for the entities’ capital as necessary to prevent a negative net worth through at least 2012. While the U.S. Treasury is committed to offset negative equity at Freddie Mac and Fannie Mae through its preferred stock purchases through 2012, no assurance can be given that any Federal Reserve, U.S. Treasury, or FHFA initiatives will ensure that Freddie Mac and Fannie Mae will remain successful in meeting their obligations with respect to the debt and mortgage-backed securities they issue beyond that date.

In addition, the problems faced by Fannie Mae and Freddie Mac resulting in their being placed into federal conservatorship and receiving significant U.S. Government support have sparked serious debate among federal policy makers regarding the continued role of the U.S. Government in providing liquidity for mortgage loans. The Obama Administration produced a report to Congress on February 11, 2011 outlining a proposal to wind down Fannie Mae and Freddie Mac by increasing their guarantee fees, reducing their conforming loan limits (the maximum amount of each loan they are authorized to purchase), and continuing progressive limits on the size of their investment portfolio. Serious discussions among policymakers continue, however, as to whether Freddie Mac and Fannie Mae should be nationalized, privatized, restructured, or eliminated altogether. Fannie Mae and Freddie Mac also are the subject of several continuing legal actions and investigations over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may continue to have an adverse effect on the guaranteeing entities. Importantly, the future of Freddie Mac and Fannie Mae is in serious question as the U.S. Government considers multiple options.

Commercial Mortgage-Backed Securities include securities that reflect an interest in, and are secured by, mortgage loans on commercial real property. Many of the risks of investing in commercial mortgage-backed securities reflect the risks of investing in the real estate securing the underlying mortgage loans. These risks reflect the effects of local and other economic conditions on real estate markets, the ability of tenants to make loan payments, and the ability of a property to attract and retain tenants. Commercial mortgage-backed securities may be less liquid and exhibit greater price volatility than other types of mortgage- or asset-backed securities.

Other Mortgage-Related Securities. Other mortgage-related securities include securities other than those described above that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property, including mortgage dollar rolls, CMO residuals or stripped mortgage-backed securities (“SMBS”). Other mortgage-related securities may be equity or debt securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts and special purpose entities of the foregoing.

CMO Residuals. CMO residuals are mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing. The cash flow generated by the mortgage assets underlying a series of CMOs is applied first to make required payments of principal and interest on the CMOs and second to pay the related administrative expenses and any management fee of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO residual represents income and/or a return of capital. The amount of residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMO, prevailing interest rates, the amount of administrative expenses

 
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and the pre-payment experience on the mortgage assets. In particular, the yield to maturity on CMO residuals is extremely sensitive to pre-payments on the related underlying mortgage assets, in the same manner as an interest-only (“IO”) class of stripped mortgage-backed securities. See “Other Mortgage-Related Securities—Stripped Mortgage-Backed Securities.” In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon which interest rate adjustments are based. As described below with respect to stripped mortgage-backed securities, in certain circumstances the Fund may fail to recoup fully its initial investment in a CMO residual.

CMO residuals are generally purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. Transactions in CMO residuals are generally completed only after careful review of the characteristics of the securities in question. In addition, CMO residuals may, or pursuant to an exemption therefrom, may not have been registered under the Securities Act of 1933, as amended (the “1933 Act”). CMO residuals, whether or not registered under the 1933 Act, may be subject to certain restrictions on transferability, and may be deemed “illiquid” and subject to the Fund’s limitations on investment in illiquid securities.

Stripped Mortgage-Backed Securities. SMBS are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. Government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing.

SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the “IO” class), while the other class will receive all of the principal (the principal-only or “PO” class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including pre-payments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on the Fund’s yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated pre-payments of principal, the Fund may fail to recoup some or all of its initial investment in these securities even if the security is in one of the highest rating categories.
 
Other Investment Company Securities – The Fund at times may invest in shares of other investment companies, including open-end funds, closed-end funds, business development companies, exchange-traded funds (“ETFs), exchange-traded notes (“ETNs”), unit investment trusts, and other investment companies of the Trust. The Fund may invest in investment company securities advised by the Manager or the Sub-Advisor. Investments in the securities of other investment companies may involve duplication of advisory fees and certain other expenses. By investing in another investment company, the Fund becomes a shareholder of that investment company. As a result, Fund shareholders indirectly will bear the Fund’s proportionate share of the fees and expenses paid by shareholders of the other investment company, in addition to the fees and expenses Fund shareholders directly bear in connection with the Fund’s own operations. These other fees and expenses are reflected as Acquired Fund Fees and Expenses and are included in the Fees and Expenses Table for the Fund in its prospectus, if applicable. Investment in other investment companies may involve the payment of substantial premiums above the value of such issuer’s portfolio securities.
 
The Fund can invest free cash balances in registered open-end investment companies regulated as money market funds under the Investment Company Act of 1940, to provide liquidity or for defensive purposes. The Fund would invest in money market funds rather than purchasing individual short-term investments. The Fund may choose to invest in money market mutual funds advised by the Manager or the Sub-Advisor. The Fund may purchase shares of exchange-traded funds. ETFs trade like a common stock and usually represent a fixed portfolio of securities designed to track the performance and dividend yield of a particular domestic or foreign market index. Typically, the Fund would purchase ETF shares for the same reason it would purchase (and as an alternative to purchasing) futures contracts: to obtain exposure to all or a portion of the stock or bond market. ETF shares enjoy several advantages over futures. Depending on the market, the holding period, and other factors, ETF shares can be less costly and more tax-efficient than futures. In addition, ETF shares can be purchased for smaller sums, offer exposure to market sectors and styles for which there is no suitable or liquid futures contract, and do not involve leverage. As a shareholder of an ETF, the Fund would be subject to its ratable share of ETFs expenses, including its advisory and administration expenses. An investment in an ETF generally presents the same primary risks as an investment in a conventional fund (i.e., one that is not exchange traded) that has the same investment objective, strategies, and policies. The price of an ETF can fluctuate within

 
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a wide range, and the Fund could lose money investing in an ETF if the prices of the securities owned by the ETF go down. In addition, ETFs are subject to the following risks that do not apply to conventional funds: (1) the market price of the ETF’s shares may trade at a discount to their net asset value; (2) an active trading market for an ETF’s shares may not develop or be maintained; or (3) trading of an ETF’s shares may be halted if the listing exchange’s officials deem such action appropriate, the shares are de-listed from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally. Most ETFs are investment companies. Therefore, the Fund’s purchases of ETF shares generally are subject to the limitations on, and the risks of, the Fund’s investments in other investment companies, which are described below.

The Fund may also invest in exchange traded notes, which are structured debt securities.  Whereas ETFs’ liabilities are secured by their portfolio securities, ETNs’ liabilities are unsecured general obligations of the issuer. Most ETFs and ETNs are designed to track a particular market segment or index. ETFs and ETNs have expenses associated with their operation, typically including, with respect to ETFs, advisory fees.

Preferred Stock – A preferred stock blends the characteristics of a bond and common stock. It can offer the higher yield of a bond and has priority over common stock in equity ownership, but does not have the seniority of a bond and its participation in the issuer’s growth may be limited. Preferred stock has preference over common stock in the receipt of dividends and in any residual assets after payment to creditors should the issuer be dissolved. Although the dividend is set at a fixed or variable rate, in some circumstances it can be changed or omitted by the issuer. Preferred stocks are subject to the risks associated with other types of equity securities, as well as additional risks, such as credit risk, interest rate risk, potentially greater volatility and risks related to deferral, non-cumulative dividends, subordination, liquidity, limited voting rights, and special redemption rights.

Real Estate Related Investments – The Fund may gain exposure to the real estate sector by investing in real estate-linked derivatives, real estate investment trusts (“REITs”), and common, preferred and convertibles securities of issuers in real estate-related industries. Adverse economic, business or political developments affecting real estate could have a major effect on the value of the Fund’s investments. Investing in securities issued by real estate and real estate-related companies may subject the Fund to risks associated with the direct ownership of real estate. Changes in interest rates, debt leverage ratios, debt maturity schedules, and the availability of credit to real estate companies may also affect the value of the Fund’s investment in real estate securities. Real estate securities are dependent upon specialized management skills at the operating company level, have limited diversification and are, therefore, subject to risks inherent in operating and financing a limited number of properties. Real estate securities are also subject to heavy cash flow dependency and defaults by borrowers. The real estate industry tends to be cyclical. Such cycles may adversely affect the value of the Fund’s portfolio. The Fund will indirectly bear a proportionate share of a REIT’s ongoing operating fees and expense. In addition, U.S.-qualified REITs are subject to the possibility of failing to a) qualify for tax-free pass-through of income under the Internal Revenue Code (“IRC”) and b) maintain exemption eligibility from the investment company registration requirements.

Repurchase Agreements – A repurchase agreement is a fixed income security in the form of an agreement between the Fund as purchaser and an approved counterparty as seller. The agreement is backed by collateral in the form of securities and/or cash transferred by the seller to the buyer to be held by an eligible third-party custodian. Under the agreement the Fund acquires securities from the seller and the seller simultaneously commits to repurchase the securities at an agreed upon price and date, normally within a week. The price for the seller to repurchase the securities is greater than the Fund’s purchase price, reflecting an agreed upon “interest rate” that is effective for the period of time the purchaser’s money is invested in the security. During the term of the repurchase agreement, the Fund monitors on a daily basis the market value of the collateral subject to the agreement and, if the market value of the securities falls below the seller’s repurchase amount provided under the repurchase agreement, the seller is required to transfer additional securities or cash collateral equal to the amount by which the market value of the securities falls below the repurchase amount. Because a repurchase agreement permits the Fund to invest temporarily available cash on a fully-collateralized basis, repurchase agreements permit the Fund to earn income while retaining “overnight” flexibility in pursuit of longer-term investments. Repurchase agreements may exhibit the economic characteristics of loans by the Fund.
 
The obligation of the seller under the repurchase agreement is not guaranteed, and there is a risk that the seller may fail to repurchase the underlying securities, whether because of the seller’s bankruptcy or otherwise. In such event the Fund would attempt to exercise its rights with respect to the underlying collateral, including possible sale of the securities. The Fund may incur various expenses in the connection with the exercise of its rights and may be subject to various delays and risks of loss, including (a) possible declines in the value of the underlying collateral, (b) possible reduction in levels of income and (c) lack of access to the

 
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securities (if they are held through a third-party custodian) and possible inability to enforce the Portfolio’s rights. The Fund’s Board of Trustees has established procedures pursuant to which the Sub-Advisor monitors the creditworthiness of the counterparties with which the Fund enters into repurchase agreement transactions.

The Fund may enter into repurchase agreements with member banks of the Federal Reserve System or registered broker-dealers who, in the opinion of the Sub-Advisor, present a minimal risk of default during the term of the agreement. The underlying securities which serve as collateral for repurchase agreements may include equity and fixed income securities such as U.S. government and agency securities, municipal obligations, asset-backed securities, mortgage-backed securities, common and preferred stock, American Depository Receipts, exchange-traded funds, corporate obligations and convertible securities.

Rights and Warrants – Rights are short-term warrants issued in conjunction with new stock or bond issues. Warrants are options to purchase an issuer’s securities at a stated price during a stated term. If the market price of the underlying common stock does not exceed the warrant’s exercise price during the life of the warrant, the warrant will expire worthless. Warrants usually have no voting rights, pay no dividends and have no rights with respect to the assets of the corporation issuing them. The percentage increase or decrease in the value of a warrant may be greater than the percentage increase or decrease in the value of the underlying common stock. Warrants may be purchased with values that vary depending on the change in value of one or more specified indexes (“index warrants”). Index warrants are generally issued by banks or other financial institutions and give the holder the right, at any time during the term of the warrant, to receive upon exercise of the warrant a cash payment from the issuer based on the value of the underlying index at the time of the exercise. The market for warrants or rights may be very limited and it may be difficult to sell them promptly at an acceptable price. There is no specific limit on the percentage of assets the Fund may invest in rights and warrants.
 
U.S. Government Agency Securities – U.S. Government agency securities are issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Some obligations issued by U.S. Government agencies and instrumentalities are supported by the full faith and credit of the U.S. Treasury; others by the right of the issuer to borrow from the U.S. Treasury; others by discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others only by the credit of the agency or instrumentality. U.S. Government securities bear fixed, floating or variable rates of interest. While the U.S. Government currently provides financial support to certain U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law. U.S. Government securities include U.S. Treasury bills, notes and bonds, Federal Home Loan Bank obligations, Federal Intermediate Credit Bank obligations, U.S. Government agency obligations and repurchase agreements secured thereby. U.S. Government agency securities are subject to credit risk and interest rate risk.
 
U.S. Treasury Obligations – U.S. Treasury obligations include bills (initial maturities of one year or less), notes (initial maturities between two and ten years), and bonds (initial maturities over ten years) issued by the U.S. Treasury, Separately Traded Registered Interest and Principal component parts of such obligations known as STRIPS and inflation-indexed securities. The prices of these securities (like all debt securities) change between issuance and maturity in response to fluctuating market interest rates. U.S. Treasury obligations are subject to credit risk and interest rate risk.


NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS
 
In addition to the investment strategies and risks described in the Prospectus, the Fund may:
 
1.           Engage in dollar rolls or purchase or sell securities on a when-issued or forward commitment basis. The purchase or sale of when-issued securities enables an investor to hedge against anticipated changes in interest rates and prices by locking in an attractive price or yield. The price of when-issued securities is fixed at the time the commitment to purchase or sell is made, but delivery and payment for the when-issued securities takes place at a later date, normally one to two months after the date of purchase. During the period between purchase and settlement, no payment is made by the purchaser to the issuer and no interest accrues to the purchaser. Such transactions therefore involve a risk of loss if the value of the security to be purchased declines prior to the settlement date or if the value of the security to be sold increases prior to the settlement date. A sale of a when-issued security also involves the risk that the other party will be unable to settle the transaction. Dollar rolls are a type of forward commitment transaction. Purchases and sales of securities on a forward commitment basis involve a commitment to purchase or sell securities with payment and delivery to take place at some future date,
 

 
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normally one to two months after the date of the transaction. As with when-issued securities, these transactions involve certain risks, but they also enable an investor to hedge against anticipated changes in interest rates and prices. Forward commitment transactions are executed for existing obligations, whereas in a when-issued transaction, the obligations have not yet been issued. When purchasing securities on a when-issued or forward commitment basis, a segregated account of liquid assets at least equal to the value of purchase commitments for such securities will be maintained until the settlement date.
 
2.           Invest in other investment companies (including affiliated investment companies) to the extent permitted by the Investment Company Act of 1940, as amended (“1940 Act”), or exemptive relief granted by the SEC.
 
3.           Loan securities to broker-dealers or other institutional investors. Securities loans will not be made if, as a result, the aggregate amount of all outstanding securities loans by the Fund exceeds 33 1/3% of its total assets (including the market value of collateral received). For purposes of complying with the Fund’s investment policies and restrictions, collateral received in connection with securities loans is deemed an asset of the Fund to the extent required by law.

4.           Enter into repurchase agreements. A repurchase agreement is an agreement under which securities are acquired by the Fund from a securities dealer or bank subject to resale at an agreed upon price on a later date. The acquiring Fund bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Fund is delayed or prevented from exercising its rights to dispose of the collateral securities. However, the Manager or the Sub-Advisor, as applicable, attempts to minimize this risk by entering into repurchase agreements only with financial institutions that are deemed to be of good financial standing.

5.           Purchase securities in private placement offerings made in reliance on the “private placement” exemption from registration afforded by Section 4(2) of the Securities Act of 1933 (“1933 Act”), and resold to qualified institutional buyers under Rule 144A under the 1933 Act (“Section 4(2) securities”). The Fund will not invest more than 15% of its respective net assets in Section 4(2) securities and illiquid securities unless the Manager or the Sub-Advisor, as applicable, determines, by continuous reference to the appropriate trading markets and pursuant to guidelines approved by the Trust’s Board of Trustees (“Board”) that any Section 4(2) securities held by such Fund in excess of this level are at all times liquid.


INVESTMENT RESTRICTIONS
 
Fundamental Policies. The Fund has the following fundamental investment policy that enables it to invest in another investment company or series thereof that has substantially similar investment objectives and policies:
 
Notwithstanding any other limitation, the Fund may invest all of its investable assets in an open-end management investment company with substantially the same investment objectives, policies and limitations as the Fund. For this purpose, “all of the Fund’s investable assets” means that the only investment securities that will be held by the Fund will be the Fund’s interest in the investment company.

Fundamental Investment Restrictions. The following discusses the investment policies of the Fund and the Board.

In addition to the investment objectives noted in the Prospectus, the following restrictions have been adopted by the Fund and may be changed with respect to the Fund only by the majority vote of the Fund’s outstanding interests. “Majority of the outstanding voting securities” under the 1940 Act and as used herein means, with respect to the Fund, the lesser of (a) 67% of the shares of the Fund present at the meeting if the holders of more than 50% of the shares are present and represented at the shareholders’ meeting or (b) more than 50% of the shares of the Fund.
 
The Fund may not:
 
1.           Purchase or sell real estate or real estate limited partnership interests, provided, however, that the Fund may invest in securities secured by real estate or interests therein or issued by companies
 
 
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which invest in real estate or interests therein when consistent with the other policies and limitations described in the Prospectus.
 
2.           Invest in physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Fund from purchasing or selling foreign currency, options, futures contracts, options on futures contracts, forward contracts, swaps, caps, floors, collars, securities on a forward-commitment or delayed-delivery basis, and other similar financial instruments).
 
3.           Engage in the business of underwriting securities issued by others, except to the extent that, in connection with the disposition of securities, the Fund may be deemed an underwriter under federal securities law.
 
4.           Lend any security or make any other loan except (i) as otherwise permitted under the 1940 Act, (ii) pursuant to a rule, order or interpretation issued by the SEC or its staff, (iii) through the purchase of a portion of an issue of debt securities in accordance with the Fund’s investment objective, policies and limitations, or (iv) by engaging in repurchase agreements.
 
5.           Issue any senior security except as otherwise permitted (i) under the 1940 Act or (ii) pursuant to a rule, order or interpretation issued by the SEC or its staff.
 
6.           Borrow money, except as otherwise permitted under the 1940 Act or pursuant to a rule, order or interpretation issued by the SEC or its staff, including (i) as a temporary measure, (ii) by entering into reverse repurchase agreem