Registration Statement by an Open-End Management Investment Company — Form N-1A
Filing Table of Contents
Document/Exhibit Description Pages Size
1: N-1A Registration Statement by an Open-End Management 121 551K
Investment Company
4: CORRESP ¶ Comment-Response or Other Letter to the SEC 1 2K
2: EX-99.AI Miscellaneous Exhibit 1 6K
3: EX-99.AII Miscellaneous Exhibit 23 99K
‘N-1A’ — Registration Statement by an Open-End Management Investment Company
Document Table of Contents
AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 2014
File No. 033-
File No. 811-23004
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 /X/
POST-EFFECTIVE AMENDMENT NO. / /
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. / /
WINTON SERIES TRUST
(Exact Name of Registrant as Specified in Charter)
ONE FREEDOM VALLEY DRIVE
OAKS, PENNSYLVANIA 19456
(Address of Principal Executive Offices, Zip Code)
(800) 342-5734
(Registrant's Telephone Number, including Area Code)
MICHAEL BEATTIE
C/O SEI CORPORATION
ONE FREEDOM VALLEY DRIVE
OAKS, PENNSYLVANIA 19456
(Name and Address of Agent for Service)
Copies to:
SEAN GRABER, ESQUIRE DIANNE M. DESCOTEAUX, ESQUIRE
MORGAN, LEWIS & BOCKIUS LLP C/O SEI CORPORATION
1701 MARKET STREET ONE FREEDOM VALLEY DRIVE
PHILADELPHIA, PENNSYLVANIA 19103 OAKS, PENNSYLVANIA 19456
Approximate Date of Proposed Public Offering: AS SOON AS PRACTICABLE AFTER THIS
REGISTRATION STATEMENT BECOMES EFFECTIVE.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
SUBJECT TO COMPLETION
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE U.S.
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED
PRELIMINARY PROSPECTUS DATED OCTOBER 10, 2014
WINTON GLOBAL EQUITY PORTFOLIO
PROSPECTUS
[DATE]
WINTON SERIES TRUST
INSTITUTIONAL CLASS SHARES: [TICKER SYMBOL]
INVESTMENT ADVISER:
WINTON CAPITAL US LLC
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN
EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE
FUND, PLEASE SEE:
PAGE
WINTON GLOBAL EQUITY PORTFOLIO
INVESTMENT OBJECTIVE ................................................... XX
FUND FEES AND EXPENSES ................................................. XX
PRINCIPAL INVESTMENT STRATEGIES ........................................ XX
PRINCIPAL RISKS ........................................................ XX
PERFORMANCE INFORMATION ................................................ XX
INVESTMENT ADVISER ..................................................... XX
PORTFOLIO MANAGERS ..................................................... XX
PURCHASE AND SALE OF FUND SHARES ....................................... XX
TAX INFORMATION ........................................................ XX
PAYMENTS TO BROKER-DEALERS AND OTHER
FINANCIAL INTERMEDIARIES ........................................... XX
MORE INFORMATION ABOUT THE FUND'S INVESTMENT OBJECTIVE
AND PRINCIPAL INVESTMENT STRATEGIES .................................... XX
MORE INFORMATION ABOUT RISK ............................................... XX
INFORMATION ABOUT PORTFOLIO HOLDINGS ...................................... XX
INVESTMENT ADVISER AND PORTFOLIO MANAGERS ................................. XX
RELATED PERFORMANCE DATA OF THE PORTFOLIO MANAGERS ........................ XX
PURCHASING AND SELLING FUND SHARES ........................................ XX
PAYMENTS TO FINANCIAL INTERMEDIARIES ...................................... XX
OTHER POLICIES ............................................................ XX
DIVIDENDS AND DISTRIBUTIONS ............................................... XX
TAXES ..................................................................... XX
FINANCIAL HIGHLIGHTS ...................................................... XX
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ....................... Back Cover
i
WINTON GLOBAL EQUITY PORTFOLIO
INVESTMENT OBJECTIVE
The Winton Global Equity Portfolio (the "Fund") seeks to achieve long-term
investment growth.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE
OF THE VALUE OF YOUR INVESTMENT)
[Enlarge/Download Table]
--------------------------------------------------------------------------------------
INSTITUTIONAL CLASS SHARES
--------------------------------------------------------------------------------------
Management Fees [0.55]%
--------------------------------------------------------------------------------------
Distribution (12b-1) Fees None
--------------------------------------------------------------------------------------
Other Expenses(1) [1.73]%
--------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses [2.28]%
--------------------------------------------------------------------------------------
Less Fee Reductions and/or Expense Reimbursements [(1.48)]%
======================================================================================
Total Annual Fund Operating Expenses after Fee
Reductions and/or Expense Reimbursements(2) [0.80]%
--------------------------------------------------------------------------------------
(1) Other Fund Expenses are based on estimated amounts for the current fiscal
year.
(2) Winton Capital US LLC (the "Adviser") has contractually agreed to reduce
fees and reimburse expenses to the extent necessary to keep Total Annual
Fund Operating Expenses after Fee Reductions and/or Expense Reimbursements
(excluding class-specific expenses (such as Rule 12b-1 fees), interest,
taxes, brokerage commissions, Acquired Fund Fees and Expenses, and
non-routine expenses) from exceeding 0.80% of the Fund's average daily net
assets until February 29, 2016 (the "Expense Limitation"). The Adviser may
recover all or a portion of its fee reductions or expense reimbursements
within a three-year period from the year in which it reduced its fee or
reimbursed expenses if the Fund's Total Annual Fund Operating Expenses are
below the Expense Limitation. This agreement may be terminated: (i) by the
Board of Trustees of Winton Series Trust (the "Trust") for any reason at
any time, or (ii) by the Adviser, upon ninety (90) days' prior written
notice to the Trust, effective as of the close of business on February 29,
2016.
1
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses (including capped expenses for the period
described in the fee table) remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS
INSTITUTIONAL CLASS SHARES $[82] $[544]
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when Fund
shares are held in a taxable account. These costs, which are not reflected in
Total Annual Fund Operating Expenses or in the Example, affect the Fund's
performance.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its investment objective by investing globally in
equity securities, including common stocks, depositary receipts and
exchange-traded funds in accordance with the Adviser's Program (defined below).
The common stocks and depositary receipts are primarily selected from the large
and mid-cap securities of developed market countries, deemed by the Adviser to
have sufficient liquidity. The Fund invests in securities providing exposure to
a number of different countries and, under normal market conditions, invests at
least 40% of its net assets outside the United States (or, if conditions are not
deemed favorable by the Adviser, invests at least 30% of its net assets outside
the United States). The Fund may invest in the securities of companies located
in emerging market countries although these are not expected to represent more
than 10% of the net assets of the Fund. A small portion of the Fund's assets may
be held in cash or cash equivalents. However, under normal market conditions,
the Fund will invest at least 95% of its net assets (including any borrowings
for investment purposes) in equity securities.
The Fund's primary benchmark is the MSCI World Net Total Return Index (USD)
("MSCI World"), which is a market capitalization weighted index that represents
about 1,600 large and mid-cap securities from about twenty developed market
countries.
The Adviser uses an automated computer-based investment system that is developed
by its research team in accordance with a quantitative investment process based
on the statistical analysis of past data. The investment system is implemented
with particular investment constraints to create different investment programs.
The program used by the Fund is the Adviser's fully invested long-only equity
program (the "Program"). The Program constructs a portfolio by forecasting the
returns of each security in the universe using a variety of data-based signals
(for instance using price or company account data) and selecting those
calculated as likely to have above-average returns. In order to determine
position weights in the target portfolio, the Adviser uses its proprietary risk
weighting methodology that seeks to weight each security in accordance with its
forecast level of risk. As a result, the securities in the portfolio are more
equally weighted than those in market capitalization weighted indices like the
MSCI World. The Adviser believes that this provides a good means of diversifying
the portfolio. The Adviser takes into consideration transaction costs in its
forecasting models to seek to trade in a cost efficient manner that encourages
limited turnover and prioritizes trades with the greatest expected overall
benefit to the portfolio.
The investment system (from which the Program is derived) is modified over time
as the Adviser monitors its operation and undertakes further research. Changes
to the investment system occur as a result of, amongst other things, the
discovery of new relationships, changes in market liquidity, the availability of
new data or the reinterpretation of existing data.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her
investment could lose money. A Fund share is not a bank deposit and it is not
insured or guaranteed by the FDIC or any government agency. The principal risk
factors affecting shareholders' investments in the Fund are set out below.
EQUITIES RISK -- Equities represent ownership interests in a company or
corporation. Investments in equity securities in general are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the
value of equities in which the Fund invests will cause the value of the
Fund's assets to fluctuate.
CURRENCY RISK -- As a result of the Fund's investments in securities denominated
in, and/or receiving revenues in, non-U.S. currencies, the Fund will be subject
to currency risk. Currency risk is the risk that non-U.S. currencies will
decline in value relative to the U.S. dollar, which would adversely affect the
U.S. dollar value of an investment in the Fund. Currency exchange rates may
fluctuate in response to, among other things, changes in interest rates,
intervention (or failure to intervene) by U.S. or non-U.S. governments, central
banks or supranational entities, or by the imposition of currency controls or
other political developments in the United States or abroad.
PORTFOLIO TURNOVER RISK -- The Fund may buy and sell securities frequently. This
may result in higher transaction costs and additional capital gains tax
liabilities.
2
EXCHANGE-TRADED FUNDS (ETFS) RISK -- The risks of owning shares of an ETF
generally reflect the risks of owning the underlying securities in which the
ETF invests, although lack of liquidity in an ETF could result in its value
being more volatile than the underlying portfolio securities. When the Fund
invests in an ETF, in addition to directly bearing the expenses associated with
its own operations, it will bear a pro rata portion of the ETF's expenses.
DEPOSITARY RECEIPTS -- Depositary receipts are certificates evidencing
ownership of shares of a non-U.S. issuer that are issued by depositary banks
and generally trade on an established market. Depositary receipts are subject
to many of the risks associated with investing directly in non-U.S. securities,
including, among other things, political, social and economic developments
abroad, currency movements and different legal, regulatory and tax
environments.
NON-U.S. INVESTMENT/EMERGING MARKETS RISK -- The Fund invests in securities
issued by non-U.S. companies. Non-U.S. securities may be subject to additional
risks due to, among other things, political, social and economic developments
abroad, currency movements and different legal, regulatory and tax
environments. These additional risks may be heightened with respect to emerging
market countries since political turmoil and rapid changes in economic
conditions are more likely to occur in these countries.
MEDIUM CAPITALIZATION COMPANY RISK - The risk that medium capitalization
companies in which the Fund invests may be more vulnerable to adverse business
or economic events than larger, more established companies. In particular,
medium capitalization companies may have limited product lines, markets and
financial resources and may depend upon a relatively small management group.
Therefore, medium capitalization stocks may be more volatile than those of
larger companies. Medium capitalization stocks may be traded over-the-counter or
listed on an exchange.
LIMITATIONS ON MATHEMATICAL MODELS RISK -- The Fund utilizes the Adviser's
investment approach, which is based on research into past data and the
application of that research to the development of mathematical models that
attempt to forecast returns, risk, correlation and transaction costs. Many of
these models are trend-following models that attempt to identify and exploit
market trends. Mathematical models may be incomplete and/or flawed and there is
an inherent risk that any forecasts derived from them may be inaccurate,
particularly if the research or models are based on, or incorporate, inaccurate
assumptions or data. Assumptions or data may be inaccurate from the outset or
may become inaccurate as a result of many factors such as, changes in market
structure, increased government intervention in markets or growth in assets
managed in accordance with similar investment strategies. In particular, such
factors may make the trend-following models of the Adviser less effective
because they may lessen the prospect of identified trends occurring or
continuing in the future. As a result of the foregoing, the investment system
may not generate profitable trading signals and the Fund may suffer losses.
PROCESS EXCEPTIONS RISK -- The Fund utilizes the Adviser's investment approach,
which is based on mathematical models that are implemented as an automated
computer-based investment system. Issues with the design, development,
implementation, maintenance or operation of the investment system; any
component of the investment system; or any processes and procedures related to
the investment system may cause losses to the Fund and such losses may be
substantial.
3
VOLATILITY RISK -- The markets in which the Fund invests are subject to high
levels of volatility. Price movements are influenced by a variety of factors,
including: changing supply and demand relationships; trade, fiscal, monetary
and exchange control programs and policies of governments; political and
economic events and policies; changes in interest rates and rates of inflation;
currency devaluations and re-evaluations; and market sentiment. Such volatility
could result in significant losses to the Fund.
PERFORMANCE INFORMATION
The Fund has not commenced operations, and therefore has no performance
history. Once the Fund has completed a full calendar year of operations, a bar
chart and table will be included that will provide some indication of the risks
of investing in the Fund by showing the variability of the Fund's returns and
comparing the Fund's performance to a broad measure of market performance.
The Fund's past performance (before and after taxes) does not necessarily
indicate how the Fund will perform in the future. Current performance
information is available on the Fund's website at [INSERT] or by calling the
Fund at [(___)-(___)-(____)].
INVESTMENT ADVISER
Winton Capital US LLC
PORTFOLIO MANAGERS
David Winton Harding, Chief Executive Officer and Chairman of the Adviser's
parent company, Winton Capital Group Limited, has advised the Fund since its
inception in [2014].
Matthew David Beddall, Chief Investment Officer of the Adviser's parent company,
Winton Capital Group Limited, has advised the Fund since its inception in
[2014].
PURCHASE AND SALE OF FUND SHARES
To purchase Institutional Class shares of the Fund for the first time, you must
invest at least $1,000,000. The Fund may accept investments of smaller amounts
in its sole discretion. [There is no minimum subsequent investment amount for
Institutional Class shares.]
If you own your shares directly, you may redeem your shares on any day that the
New York Stock Exchange is open for business by contacting the Fund directly by
mail at: [INSERT] or by Express Mail to [INSERT] or telephone at
[(___)-(___)-(____)].
If you own your shares through an account with a broker or other financial
intermediary, contact that broker or intermediary to redeem your shares. Your
broker or financial intermediary may charge a fee for its services in addition
to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or
capital gains, unless you are investing through a tax-deferred arrangement, such
as a 401(k) plan or individual retirement account, in which case your
distribution will be taxed when withdrawn from the tax-deferred account.
4
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), the Fund and its related companies may pay the
intermediary for the sale of Fund shares and related services. These payments
may create a conflict of interest by influencing the broker-dealer or other
intermediary and your salesperson to recommend the Fund over another
investment. Ask your salesperson or visit your financial intermediary's web
site for more information.
5
MORE INFORMATION ABOUT THE FUND'S INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT
STRATEGIES
INVESTMENT OBJECTIVE
The Fund seeks to achieve long-term investment growth. The Fund's investment
objective may not be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
The investments and strategies described in this prospectus are those that the
Fund uses under normal conditions. During unusual economic or market
conditions, or for temporary defensive or liquidity purposes, the Fund may
invest up to 100% of its assets in cash, money market instruments or other cash
equivalents that would not ordinarily be consistent with its investment
objective. If the Fund invests in this manner, it may not achieve its
investment objective. The Fund will do so only if the Adviser believes that the
risk of loss outweighs the opportunity to pursue its investment objective.
This prospectus describes the Fund's principal investment strategies and risks,
and the Fund will normally invest in the types of securities and other
instruments described in this prospectus. In addition to the securities and
other instruments and strategies described in this prospectus, the Fund also
may invest in other securities and instruments, use other strategies and engage
in other investment practices. These investments and strategies are described
in the Fund's Statement of Additional Information ("SAI") (for information on
how to obtain a copy of the SAI see the back cover of this prospectus).
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund
will achieve its investment objective. You could lose money on your investment
in the Fund, just as you could with other investments.
The value of your investment in the Fund is based on the value of the
securities and other instruments the Fund holds. Generally, these prices
change daily due to economic and other events that affect particular companies
and other issuers. These price movements, sometimes called volatility, may be
greater or lesser depending on the types of securities the Fund owns and the
markets in which it trades. The effect on the Fund of a change in the value of
a single security will depend on how widely the Fund diversifies its holdings.
The following descriptions provide additional information about some of the
risks of investing in the Fund:
EQUITY MARKET RISK -- As the Fund invests significantly in equity securities,
it is subject to the risk that stock prices will fall over short or extended
periods of time. Historically, the equity markets have moved in cycles, and the
value of the Fund's securities may fluctuate drastically from day to day.
Individual companies may report poor results or be negatively affected by
6
industry and/or economic trends and developments. The prices of securities
issued by such companies may suffer a decline in response. These factors
contribute to price volatility.
CURRENCY RISK -- Currency exchange rates may fluctuate in response to factors
extrinsic to that country's economy, which makes the forecasting of currency
market movements extremely difficult. Currency rates in non-U.S. countries may
fluctuate significantly over short periods of time for a number of reasons,
including changes in interest rates, intervention (or failure to intervene) by
U.S. or non-U.S. governments, central banks or supranational entities such as
the International Monetary Fund, or by the imposition of currency controls or
other political developments in the United States or abroad. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds
in settlement of obligations and could also cause hedges it has entered into to
be rendered useless, resulting in full currency exposure as well as incurring
transaction costs.
EXCHANGE-TRADED FUNDS RISK -- ETFs are investment companies whose shares are
bought and sold on a securities exchange. The risks of owning interests of an
ETF generally reflect the same risks as owning the underlying securities or
other instruments in which the ETF invests, although lack of liquidity in an
ETF could result in its value being more volatile than the underlying portfolio
of securities. The shares of certain ETFs may trade at a premium or discount to
their intrinsic value (i.e., the market value may differ from the net asset
value of an ETF's shares). For example, supply and demand for shares of an ETF
or market disruptions may cause the market price of the ETF to deviate from the
value of the ETF's investments, which may be emphasized in less liquid markets.
ETFs, like mutual funds, have expenses associated with their operation,
including advisory fees. When the Fund invests in an ETF, in addition to
directly bearing expenses associated with its own operations, it will bear a
pro rata portion of the ETF's expenses. Such ETF expenses may make owning
shares of the ETF more costly than owning the underlying securities directly.
DEPOSITARY RECEIPTS RISK -- American Depositary Receipts (ADRs) are
dollar-denominated depositary receipts typically issued by a U.S. financial
institution that evidence an ownership interest in a security or pool of
securities issued by a non-U.S. issuer. ADRs are listed and traded in the
United States. Global Depositary Receipts (GDRs) are similar to ADRs but
represent shares of non-U.S.-based corporations generally issued by
international banks in one or more markets around the world. ADRs and GDRs are
subject to the risks associated with investing directly in non-U.S. securities,
which are described below. In addition, investments in ADRs and GDRs may be
less liquid than the underlying shares in their primary trading markets and
GDRs, many of which represent shares issued by companies in emerging markets,
may be more volatile. Depositary receipts may be sponsored or unsponsored.
Holders of unsponsored depositary receipts generally bear all the costs
associated with establishing unsponsored depositary receipts. In addition, the
issuers of the securities underlying unsponsored depositary receipts are not
obligated to disclose material information in the United States, and,
therefore, there may be less information available regarding such issuers, and
there may not be a correlation between such information and the market value of
the depositary receipts.
NON-U.S. INVESTMENT/EMERGING MARKETS RISK -- Investing in issuers located in
non-U.S. countries poses distinct risks since political and economic events
unique to a country or region will affect those markets and their issuers. These
events will not necessarily affect the U.S. economy or similar issuers located
in the United States. Non-U.S. issuers may not be registered with the SEC and
are generally not subject to the regulatory controls imposed on U.S. issuers
and, as a consequence, there is generally less publically available information
about non-U.S. securities than is available about domestic securities. Income
from non-U.S. securities owned by the Fund may be reduced by a withholding tax
at the source, which tax would reduce income received from the securities
comprising the portfolio.
7
Emerging market countries are those countries that are: (i) characterized as
developing or emerging by any of the World Bank, the United Nations, the
International Finance Corporation, or the European Bank for Reconstruction and
Development; (ii) included in an emerging markets index by a recognized index
provider; or (iii) countries with similar developing or emerging
characteristics as countries classified as emerging market countries pursuant
to sub-paragraph (i) and (ii) above, in each case determined at the time of
purchase. Emerging market countries may be more likely to experience political
turmoil or rapid changes in market or economic conditions than more developed
countries. Emerging market countries often have less uniformity in accounting
and reporting requirements and unreliable securities valuation. It is sometimes
difficult to obtain and enforce court judgments in such countries and there is
often a greater potential for nationalization and/or expropriation of assets by
the government of an emerging market country. In addition, the financial
stability of issuers (including governments) in emerging market countries may
be more precarious than in other countries. As a result, there will tend to be
an increased risk of price volatility associated with the Funds' investments in
emerging market countries, which may be magnified by currency fluctuations
relative to the U.S. dollar.
PROCESS EXCEPTIONS RISK -- The Fund utilizes the Adviser's investment approach,
which is based on mathematical models that are implemented as an automated
computer-based investment system. Issues with the design, development,
implementation, maintenance or operation of the investment system; any
component of the investment system; or any processes and procedures related to
the investment system (collectively, "Process Exceptions") may cause losses to
the Fund and such losses may be substantial. Process Exceptions may include,
but are not limited to:
o PROGRAMMING ERRORS -- The Adviser may make programming errors in
translating its mathematical models into computer code. In addition,
as a mathematical model can be expressed in computer code in multiple
ways, the choice of code ultimately used may not result in the best
representation of the model.
o FAILURE OF TECHNOLOGY -- The Adviser's investment system is reliant
on proprietary and third party technology. Such technology may be
adversely affected by many issues, some of which may be outside of the
Adviser's control, including issues associated with network
infrastructure, software updates, bugs, viruses and unauthorized
access.
o INCORPORATION OF DATA -- The Adviser may incorporate inaccurate data,
or make errors in incorporating data, into the investment system.
Process Exceptions may be difficult to detect, may go undetected for long
periods or may never be detected. The impact of such Process Exceptions may be
compounded over time and may result in, among other things, the execution of
unanticipated trades, the failure to execute anticipated trades, the failure to
properly allocate trades, the failure to properly gather and organize available
data and/or the failure to take certain hedging or risk mitigating actions.
Although the Adviser evaluates the materiality of any Process Exceptions that
it detects, the Adviser may conclude that some are not material and may choose
not to address them. Such judgments may prove not to be correct.
8
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the
circumstances under which the Fund discloses its portfolio holdings is available
in the SAI. [INSERT] calendar days after each [INSERT PERIOD] end, a
[complete/top ten list] of the Fund's portfolio holdings as of the end of such
[INSERT PERIOD] may be made available at [INSERT]. The Adviser may exclude any
portion of the portfolio holdings from publication when deemed in the best
interest of the Fund. Beginning on the day after any portfolio holdings
information is posted on the Fund's website, such information will be delivered
directly to any person that requests it, through electronic or other means. The
portfolio holdings information placed on the Fund's website generally will
remain there until replaced by new postings as described above.
INVESTMENT ADVISER AND PORTFOLIO MANAGERS
Winton Capital US LLC, located at 375 Park Avenue, New York, New York 10152,
serves as investment adviser to the Fund. The Adviser makes investment
decisions for the Fund and continuously reviews, supervises and administers the
Fund's investment program. The Board of Trustees of the Trust (the "Board")
supervises the Adviser and establishes policies that the Adviser must follow in
its management activities.
The Adviser is a wholly-owned subsidiary of Winton Capital Group Limited, an
English limited liability company. Winton Capital Group Limited and its
affiliated companies (together, "Winton") operate as an investment management
business that employs a professional research team to perform scientific
analysis on historic data related to financial markets in an attempt to identify
profitable investment opportunities for its clients. Winton provides investment
management services to, among other investors, pension funds, pooled investment
vehicles, fund of funds, sovereign wealth funds and other government entities,
corporations, family offices and high net worth individuals either directly or
indirectly through the management of pooled investment vehicles. As of September
30, 2014, Winton had approximately $25.2 billion in assets under management.
For its services to the Fund, the Adviser is entitled to a fee, which is
calculated daily and paid monthly, at an annual rate of [0.55]% based on the
average daily net assets of the Fund. The Adviser has contractually agreed to
reduce fees and reimburse expenses to the extent necessary to keep the Fund's
net expenses (excluding class specific expenses (such as Rule 12b-1 fees),
interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses and
non-routine expenses) from exceeding [0.80]% of the Fund's average daily net
assets until February 29, 2016 (the "Expense Limitation"). The Adviser may
recover all or a portion of its fee reductions or expense reimbursements within
a three-year period from the year in which it reduced its fee or reimbursed
expenses if the Fund's Total Annual Fund Operating Expenses are below the
Expense Limitation. This agreement may be terminated: (i) by the Board of
Trustees of Winton Series Trust (the "Trust") for any reason at any time, or
(ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust,
effective as of the close of business on February 29, 2016.
A discussion regarding the basis for the Board's approval of the Fund's
investment advisory agreement will be available in the Fund's first Annual or
Semi-Annual Report to Shareholders.
PORTFOLIO MANAGERS
David Winton Harding, Chief Executive Officer and Chairman of the Adviser's
parent company, Winton Capital Group Limited, has managed the Fund since its
inception in [2014]. Mr. Harding founded Winton in 1997. Prior to that, Mr.
Harding founded Adam Harding and Lueck, a commodity trading adviser, in 1987.
Mr. Harding holds a degree in Natural Sciences specializing in Theoretical
Physics from Cambridge University.
9
Matthew David Beddall, Chief Investment Officer of the Adviser's parent company,
Winton Capital Group Limited, has managed the Fund since its inception in
[2014]. Mr. Beddall joined Winton in 2001 as a researcher and was appointed
Chief Investment Officer in 2008. Mr. Beddall holds a degree in Mathematics and
Computer Science from Southampton University and an MSc in Applied Statistics
from Birkbeck College, University of London.
RELATED PERFORMANCE DATA OF THE PORTFOLIO MANAGERS
The Fund's portfolio managers also hold the same positions with Winton Capital
Management Limited, an affiliated company of the Adviser, and in such capacity
serve as the portfolio managers of three other accounts that are managed
pursuant to investment objectives, policies and strategies that are
substantially similar to those of the Fund (the "Comparable Accounts").
The following table shows the historical performance of the Comparable Accounts.
The manner in which the performance was calculated for the Comparable Accounts
differs from that of registered mutual funds such as the Fund. If the
performance was calculated in accordance with SEC standardized performance
methodology, the performance results may have been different. The performance
should not be viewed as an indication of how the portfolio managers will perform
in the future. THE DATA DOES NOT REPRESENT THE PERFORMANCE OF THE FUND.
The Comparable Accounts are not subject to the same type of expenses to which
the Fund is subject, and the performance information of the Comparable Accounts
has not been adjusted to reflect the expenses of the Fund. [The management fees
of the Comparable Accounts were generally lower than that of the Fund, however
certain Comparable Accounts incurred performance fees. The average actual total
operating expenses of the Comparable Accounts were lower/higher than the Fund's
estimated total operating expenses [(exclusive of waivers)]. If the performance
of the Comparable Accounts was calculated using the Fund's estimated expenses
for its first fiscal year, the performance would have been lower/higher.]
The Comparable Accounts are not subject to the diversification requirements,
specific tax restrictions, and investment limitations imposed by the federal
securities and tax laws. Consequently, the performance results for the
Comparable Accounts could have been adversely affected if the Comparable
Accounts were subject to the same fees and expenses or federal securities and
tax laws as the Fund.
"Total Return (Net of Fees)" returns presented were calculated on a total return
basis and include all dividends, interest and realized and unrealized gains and
losses. Except as otherwise noted, all returns reflect the payment of actual
management fees, actual performance fees (if applicable), brokerage commissions,
and execution costs paid by the Comparable Accounts, without taking into account
federal or state income taxes.
THE INVESTMENT RESULTS FOR THE COMPARABLE ACCOUNTS ARE NOT INTENDED TO PREDICT
OR SUGGEST THE FUTURE RETURNS OF THE FUND. THE PERFORMANCE DATA SHOWN BELOW
SHOULD NOT BE CONSIDERED A SUBSTITUTE FOR THE FUND'S OWN PERFORMANCE
INFORMATION.
ANNUAL RETURNS FOR THE COMPARABLE ACCOUNTS
(JANUARY 12, 2010 THROUGH DECEMBER 31, 2013)
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------
YEAR TOTAL RETURN TOTAL RETURN MSCI WORLD NET TOTAL
(NET OF FEES) (GROSS OF FEES) RETURN INDEX (REFLECTS NO
DEDUCTIONS FOR FEES, EXPENSES
OR TAXES)
------------------------------------------------------------------------------------------------
2013 30.10% 30.81% 26.68%
------------------------------------------------------------------------------------------------
2012 14.00% 14.17% 15.83%
------------------------------------------------------------------------------------------------
2011 -5.06% -4.87% -5.54%
------------------------------------------------------------------------------------------------
2010 6.16% 6.16% 11.76%
------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(AS OF DECEMBER 31, 2103)
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------
TIME PERIOD NET OF FEES GROSS OF FEES MSCI WORLD NET TOTAL
RETURN INDEX (REFLECTS NO
DEDUCTIONS FOR FEES, EXPENSES
OR TAXES)
------------------------------------------------------------------------------------------------
1 Year 30.10% 30.81% 26.68%
------------------------------------------------------------------------------------------------
Since Inception 11.30% 11.57% 12.18%
(1/12/2010)
------------------------------------------------------------------------------------------------
10
PURCHASING AND SELLING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem")
shares of the Fund.
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund through its transfer agent, complete
and send in the application. If you need an application or have questions,
please call [(___)-(___)-(____)].
All investments must be made by check, Automated Clearing House ("ACH"), or
wire. All checks must be made payable in U.S. dollars and drawn on U.S.
financial institutions. The Fund does not accept purchases made by third-party
checks, credit cards, credit card checks, cash, traveler's checks, money orders
or cashier's checks.
You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution, you will have to follow its
procedures, which may be different from the procedures for investing directly.
Your broker or institution may charge a fee for its services, in addition to
the fees charged by the Fund. You will also generally have to address your
correspondence or questions regarding the Fund to your institution.
The Fund reserves the right to reject any specific purchase order for any
reason. The Fund is not intended for short-term trading by shareholders in
response to short-term market fluctuations. For more information about the
Fund's policy on short-term trading, see "Excessive Trading Policies and
Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S.
persons may be permitted to invest in the Fund subject to the satisfaction of
enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account
application to the address below. You can add to an existing account by sending
the Fund a check and, if possible, the "Invest by Mail" stub that accompanies
your statement. Be sure your check identifies clearly your name, your account
number, the Fund name and the share class.
REGULAR MAIL ADDRESS
[INSERT]
EXPRESS MAIL ADDRESS
[INSERT]
The Fund does not consider the U.S. Postal Service or other independent
delivery services to be its agents. Therefore, deposit in the mail or with such
services of purchase orders does not constitute receipt by the Fund's transfer
agent. The share price used to fill the purchase order is the next price
calculated by the Fund after the Fund's transfer agent receives the order in
proper form at the P.O. Box provided for regular mail delivery or the office
address provided for express mail delivery.
11
BY WIRE
To open an account by wire, call [(___)-(___)-(____)] for details. To add to an
existing account by wire, wire your money using the wiring instructions set out
below (be sure to include the Fund name and your account number).
WIRING INSTRUCTIONS
[INSERT]
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the
Fund with liquid securities and other assets that are eligible for purchase by
the Fund (consistent with the Fund's investment policies and restrictions) and
that have a value that is readily ascertainable in accordance with the Fund's
valuation policies. These transactions will be effected only if the Adviser
deems the security to be an appropriate investment for the Fund. Assets
purchased by the Fund in such a transaction will be valued in accordance with
procedures adopted by the Fund. The Fund reserves the right to amend or
terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange ("NYSE") is
open for business (a "Business Day"). Shares cannot be purchased by Federal
Reserve wire on days when either the NYSE or the Federal Reserve is closed.
The Fund's price per share will be the net asset value per share ("NAV") next
determined after the Fund receives your purchase order in proper form. "Proper
form" means that the Fund was provided a complete and signed account
application, including the investor's social security number, tax
identification number, and other identification required by law or regulation,
as well as sufficient purchase proceeds.
The Fund calculates its NAV once each Business Day as of the close of normal
trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current
Business Day's NAV, the Fund must receive your order in proper form before 4:00
p.m., Eastern Time, that day. If the NYSE closes early -- such as on days in
advance of certain generally observed holidays -- the Fund reserves the right
to calculate NAV as of the earlier closing time. The Fund will not accept
orders that request a particular day or price for the transaction or any other
special conditions.
Shares will not be priced on days that the NYSE is closed for trading,
including nationally observed holidays.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Fund
through its transfer agent, you may also buy or sell shares of the Fund through
accounts with financial intermediaries such as brokers and other institutions
that are authorized to place trades in Fund shares for their customers. When
you purchase or sell Fund shares through a financial intermediary (rather than
directly from the Fund), you may have to transmit your purchase and sale
requests to the financial intermediary at an earlier time for your transaction
to become effective that day. This allows the financial intermediary time to
process your requests and transmit them to the Fund prior to the
12
time the Fund calculates its NAV that day. Your financial intermediary is
responsible for transmitting all purchase and redemption requests, investment
information, documentation and money to the Fund on time. If your financial
intermediary fails to do so, it may be responsible for any resulting fees or
losses. Unless your financial intermediary is an authorized institution
(defined below), orders transmitted by the financial intermediary and received
by the Fund after the time NAV is calculated for a particular day will receive
the following day's NAV.
Certain financial intermediaries, including certain broker-dealers and
shareholder organizations, are authorized to act as agent on behalf of the Fund
with respect to the receipt of purchase and redemption orders for Fund shares
("authorized institutions"). Authorized institutions are also authorized to
designate other intermediaries to receive purchase and redemption orders on the
Fund's behalf. The Fund will be deemed to have received a purchase or
redemption order when an authorized institution or, if applicable, an
authorized institution's designee, receives the order. Orders will be priced at
the Fund's net asset value next computed after they are received by an
authorized institution or an authorized institution's designee. To determine
whether your financial intermediary is an authorized institution or an
authorized institution's designee such that it may act as agent on behalf of
the Fund with respect to purchase and redemption orders for Fund shares, you
should contact them directly.
If you deal directly with a financial intermediary, you will have to follow
their procedures for transacting with the Fund. Your financial intermediary may
charge a fee for your purchase and/or redemption transactions. For more
information about how to purchase or sell Fund shares through a financial
intermediary, you should contact your authorized institution directly.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets
of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at
market price. If market prices are not readily available or the Fund reasonably
believes that they are unreliable, such as in the case of a security value that
has been materially affected by events occurring after the relevant market
closes, the Fund is required to price those securities at fair value as
determined in good faith using methods approved by the Trust's Board of
Trustees. Pursuant to the policies adopted by and under the ultimate
supervision of the Board of Trustees, these methods are implemented through the
Fund's Fair Value Pricing Committee, members of which are appointed by the
Board of Trustees. The Fund's determination of a security's fair value price
often involves the consideration of a number of subjective factors, and is
therefore subject to the unavoidable risk that the value that the Fund assigns
to a security may be higher or lower than the security's value would be if a
reliable market quotation for the security was readily available.
There may be limited circumstances in which the Fund would price securities at
fair value for stocks of U.S. companies that are traded on U.S. exchanges --
for example, if the exchange on which a portfolio security is principally
traded closed early or if trading in a particular security was halted during
the day and did not resume prior to the time the Fund calculated its NAV.
With respect to non-U.S. securities held by the Fund, the Fund may take factors
influencing specific markets or issuers into consideration in determining the
fair value of a non-U.S. security. International securities markets may be open
on days when the U.S. markets are closed. In such cases, the value of any
international securities owned by the Fund may be significantly affected on
days when investors cannot buy or sell shares. In addition, due to the
difference in times between the close of the international markets and the time
as of which the Fund prices its shares,
13
the value the Fund assigns to securities may not be the same as the quoted or
published prices of those securities on their primary markets or exchanges. In
determining fair value prices, the Fund may consider the performance of
securities on their primary exchanges, non-U.S. currency
appreciation/depreciation, securities market movements in the United States, or
other relevant information related to the securities.
Securities, options, futures contracts and other assets (including swap
agreements) for which market quotations are not readily available will be
valued at their fair value as determined in good faith by or under the
direction of the Board of Trustees.
FUND CODES
The Fund's reference information, which is listed below, will be helpful to you
when you contact the Fund to purchase Institutional Class shares, check daily
NAV, or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE
Winton Global Equity Portfolio [INSERT] [INSERT] [INSERT]
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day
by contacting the Fund directly by mail or telephone at [(___)-(___)-(____)].
If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares. Your broker or
institution may charge a fee for its services in addition to the fees charged
by the Fund.
If you would like to have your redemption proceeds, including proceeds
generated as a result of closing your account, sent to a third party or an
address other than your own, please notify the Fund in writing.
Certain redemption requests will require a signature guarantee by an eligible
guarantor institution. Eligible guarantors include commercial banks, savings
and loans, savings banks, trust companies, credit unions, member firms of a
national stock exchange, or any other member or participant of an approved
signature guarantor program. For example, signature guarantees may be required
if your address of record has changed in the last 30 days, you want the
proceeds sent to a bank other than the bank of record on your account, or if
you ask that the proceeds be sent to a different person or address. Please note
that a notary public is not an acceptable provider of a signature guarantee and
that we must be provided with the original guarantee. Signature guarantees are
for the protection of our shareholders. Before it grants a redemption request,
the Fund may require a shareholder to furnish additional legal documents to
ensure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require
additional documentation along with a signature guaranteed letter of
instruction. The Fund participates in the Paperless Legal Program (the "PLP"),
which eliminates the need for accompanying paper documentation on legal
securities transfers. Requests received with a Medallion Signature Guarantee
will be reviewed for the proper criteria to meet the guidelines of the PLP and
may not require additional documentation. Please contact Shareholder Services
at [(___)-(___)-(____)] for more information.
14
The sale price of each share will be the next NAV determined after the Fund (or
an authorized broker) receives your request.
BY MAIL
To redeem shares by mail, please send a letter to the Fund signed by all
registered parties on the account specifying:
o The Fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered shareholders must sign the letter in the exact name(s) and must
designate any special capacity in which they are registered.
REGULAR MAIL ADDRESS
[INSERT]
EXPRESS MAIL ADDRESS
[INSERT]
The Fund does not consider the U.S. Postal Service or other independent
delivery services to be its agents. Therefore, deposit in the mail or with such
services of sale orders does not constitute receipt by the Fund's transfer
agent. The share price used to fill the sale order is the next price calculated
by the Fund after the Fund's transfer agent receives the order in proper form
at the P.O. Box provided for regular mail delivery or the office address
provided for express mail delivery.
BY TELEPHONE
To redeem shares by telephone, you must first establish the telephone
redemption privilege (and, if desired, the wire and ACH redemption privileges)
by completing the appropriate sections of the account application. Call
[(___)-(___)-(____)] to redeem your shares. Based on your instructions, the
Fund will mail your proceeds to you, or send them to your bank via wire or
ACH.
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after the
Fund receives your request. Your proceeds can be wired to your bank account
(but may be subject to a $10 fee), sent to you by check or sent via ACH to your
bank account once you have established banking instructions with the Fund. IF
YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH,
REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE
ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE
OF PURCHASE).
15
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under
unusual conditions that make the payment of cash unwise and for the protection
of the Fund's remaining shareholders, the Fund might pay all or part of your
redemption proceeds in securities with a market value equal to the redemption
price (redemption in kind). The Fund may also redeem in kind to discourage
short term trading of shares. It is highly unlikely that your shares would ever
be redeemed in kind, but if they were, you would have to pay transaction costs
to sell the securities distributed to you, as well as taxes on any capital
gains from the sale as with any redemption. In addition, you would continue to
be subject to the risks of any market fluctuation in the value of the
securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $[____] because of redemptions, you may be
required to sell your shares. The Fund will provide you at least 30 days'
written notice to give you time to add to your account and avoid the
involuntary redemption of your shares. The Fund reserves the right to waive the
minimum account value requirement in their sole discretion.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading
on the NYSE is restricted or halted, or otherwise as permitted by the SEC. More
information about this is in the SAI.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient,
but not without risk. Although the Fund has certain safeguards and procedures
to confirm the identity of callers and the authenticity of instructions, the
Fund is not responsible for any losses or costs incurred by following telephone
instructions it reasonably believes to be genuine. If you or your financial
institution transact with the Fund over the telephone, you will generally bear
the risk of any loss.
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may
make payments to certain affiliated or unaffiliated financial intermediaries to
compensate them for the costs associated with distribution, marketing,
administration and shareholder servicing support for the Fund. These payments
are sometimes characterized as "revenue sharing" payments and are made out of
the Adviser's and/or its affiliates' own legitimate profits or other resources,
and are not paid by the Fund. A financial intermediary may provide these
services with respect to Fund shares sold or held through programs such as
retirement plans, qualified tuition programs, fund supermarkets, fee-based
advisory or wrap fee programs, bank trust programs, and insurance (e.g.,
individual or group annuity) programs. In addition, financial intermediaries
may receive payments for making shares of the Fund available to their customers
or registered representatives, including providing the Fund with "shelf space,"
placing it on a preferred or recommended fund list, or promoting the Fund in
certain sales programs that are sponsored by financial intermediaries. To the
extent permitted by SEC and Financial Industry Regulatory Authority rules and
other applicable laws and regulations, the Adviser and/or its affiliates may
pay or allow other promotional incentives or payments to financial
intermediaries. For more information please see "Payments to Financial
Intermediaries" in the Fund's SAI.
16
The level of payments to individual financial intermediaries varies in any
given year and may be negotiated on the basis of sales of Fund shares, the
amount of Fund assets serviced by the financial intermediary or the quality of
the financial intermediary's relationship with the Adviser and/or its
affiliates. These payments may be more or less than the payments received by
the financial intermediaries from other mutual funds and may influence a
financial intermediary to favor the sales of certain funds or share classes
over others. In certain instances, the payments could be significant and may
cause a conflict of interest for your financial intermediary. Any such payments
will not change the net asset value or price of the Fund's shares. Please
contact your financial intermediary for information about any payments it may
receive in connection with the sale of Fund shares or the provision of services
to Fund shareholders, as well as information about any fees and/or commissions
it charges.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages
shareholders from engaging in "market timing" or other types of excessive
short-term trading. This frequent trading into and out of the Fund may present
risks to the Fund's long-term shareholders and could adversely affect
shareholder returns. The risks posed by frequent trading include interfering
with the efficient implementation of the Fund's investment strategies,
triggering the recognition of taxable gains and losses on the sale of Fund
investments, requiring the Fund to maintain higher cash balances to meet
redemption requests and experiencing increased transaction costs.
In addition, because the Fund may invest in non-U.S. securities traded
primarily on markets that close prior to the time the Fund determines its NAV,
the risks posed by frequent trading may have a greater potential to dilute the
value of Fund shares held by long-term shareholders than funds investing
exclusively in U.S. securities. In instances where a significant event that
affects the value of one or more non-U.S. securities held by the Fund takes
place after the close of the primary non-U.S. market, but before the time that
the Fund determines its NAV, certain investors may seek to take advantage of
the fact that there will be a delay in the adjustment of the market price for a
security caused by this event until the non-U.S. market reopens (sometimes
referred to as "price" or "time zone" arbitrage). Shareholders who attempt this
type of arbitrage may dilute the value of the Fund's shares if the prices of
the Fund's non-U.S. securities do not reflect their fair value. Although the
Fund has procedures designed to determine the fair value of non-U.S. securities
for purposes of calculating its NAV when such an event has occurred, fair value
pricing, because it involves judgments which are inherently subjective, may not
always eliminate the risk of price arbitrage.
The Fund's service providers will take steps reasonably designed to detect and
deter frequent trading by shareholders pursuant to the Fund's policies and
procedures described in this prospectus and approved by the Fund's Board of
Trustees. For purposes of applying these policies, the Fund's service providers
may consider the trading history of accounts under common ownership or control.
The Fund's policies and procedures include:
o Shareholders are restricted from making more than [INSERT] ([INSERT])
"round trips," into or out of the Fund within any [INSERT]-day period.
If a shareholder exceeds this amount, the Fund and/or its service
providers may, at their discretion, reject any additional purchase
orders. The Fund defines a "round trip" as a purchase into the Fund by
a shareholder, followed by a subsequent redemption out of the Fund, of
an amount the Adviser reasonably believes would be harmful or
disruptive to the Fund.
17
o The Fund reserves the right to reject any purchase request by any
investor or group of investors for any reason without prior notice,
including, in particular, if the Fund or the Adviser reasonably
believes that the trading activity would be harmful or disruptive to
the Fund.
The Fund and/or its service providers seek to apply these policies to the best
of their abilities uniformly and in a manner they believe is consistent with
the interests of the Fund's long-term shareholders. The Fund does not knowingly
accommodate frequent purchases and redemptions by Fund shareholders. Although
these policies are designed to deter frequent trading, none of these measures
alone nor all of them taken together eliminate the possibility that frequent
trading in the Fund will occur. Systematic purchases and redemptions are exempt
from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often
establish omnibus accounts in the Fund for their customers through which
transactions are placed. The Fund has entered into "information sharing
agreements" with these financial intermediaries, which permit the Fund to
obtain, upon request, information about the trading activity of the
intermediary's customers that invest in the Fund. If the Fund or its service
providers identify omnibus account level trading patterns that have the
potential to be detrimental to the Fund, the Fund or its service provider may,
in their sole discretion, request from the financial intermediary information
concerning the trading activity of its customers. Based upon a review of that
information, if the Fund or its service providers determine that the trading
activity of any customer may be detrimental to the Fund, they may, in their
sole discretion, request the financial intermediary to restrict or limit
further trading in the Fund by that customer. If the Fund is not satisfied that
the intermediary has taken appropriate action, the Fund may terminate the
intermediary's ability to transact in Fund shares. When information regarding
transactions in the Fund's shares is requested by the Fund and such information
is in the possession of a person that is itself a financial intermediary to a
financial intermediary (an "indirect intermediary"), any financial intermediary
with whom the Fund has an information sharing agreement is obligated to obtain
transaction information from the indirect intermediary or, if directed by the
Fund, to restrict or prohibit the indirect intermediary from purchasing shares
of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with
financial intermediaries to identify excessive short-term trading in omnibus
accounts that may be detrimental to the Fund. However, there can be no
assurance that the monitoring of omnibus account level trading will enable the
Fund to identify or prevent all such trading by a financial intermediary's
customers. Please contact your financial intermediary for more information.
CUSTOMER IDENTIFICATION AND VERIFICATION
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.
What this means to you: When you open an account, the Fund will ask your name,
address, date of birth, and other information that will allow the Fund to
identify you. This information is subject to verification to ensure the
identity of all persons opening a mutual fund account.
18
The Fund is required by law to reject your new account application if the
required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its
legal obligation. Documents provided in connection with your application will
be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be
performed by either contacting you or, if applicable, your broker or financial
intermediary. If this information cannot be obtained within a reasonable
timeframe established in the sole discretion of the Fund, your application will
be rejected.
Subject to the Fund's right to reject purchases as described in this
prospectus, upon receipt of your application in proper form (or upon receipt of
all identifying information required on the application), your investment will
be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV
next-determined and remit proceeds to you via check if it is unable to verify
your identity. Attempts to verify your identity will be performed within a
reasonable timeframe established in the sole discretion of the Fund. Further,
the Fund reserves the right to hold your proceeds until your original check
clears the bank, which may take up to 15 days from the date of purchase. In
such an instance, you may be subject to a gain or loss on Fund shares and will
be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall
obligation to deter money laundering under federal law. The Fund has adopted
an anti-money laundering compliance program designed to prevent the Fund from
being used for money laundering or the financing of illegal activities and has
appointed an anti-money laundering officer to monitor the Fund's compliance
with the program. In this regard, the Fund reserves the right to: (i) refuse,
cancel or rescind any purchase order; (ii) freeze any account and/or suspend
account services; or (iii) involuntarily close your account in cases of
threatening conduct or suspected fraudulent or illegal activity. These actions
will be taken when, in the sole discretion of Fund management, they are deemed
to be in the best interest of the Fund or in cases when the Fund is requested
or compelled to do so by governmental or law enforcement authority. If your
account is closed at the request of governmental or law enforcement authority,
you may not receive proceeds of the redemption if the Fund is required to
withhold such proceeds.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income at least [INSERT] and makes
distributions of its net realized capital gains, if any, annually. If you own
Fund shares on the Fund's record date, you will be entitled to receive the
distribution.
You will receive dividends and distributions in the form of additional Fund
shares unless you elect to receive payment in cash. To elect cash payment, you
must notify the Fund in writing prior to the date of the distribution. Your
election will be effective for dividends and distributions paid after the Fund
receives your written notice. To cancel your election, simply send the Fund
written notice.
19
TAXES
YOU SHOULD ALWAYS CONSULT YOUR TAX ADVISOR FOR SPECIFIC GUIDANCE REGARDING THE
FEDERAL, STATE AND LOCAL TAX EFFECTS OF YOUR INVESTMENT IN THE FUND. The
following is a summary of the federal income tax consequences of investing in
the Fund. This summary does not apply to shares held in an individual
retirement account or other tax-qualified plan, which are not subject to
current tax. Transactions relating to shares held in such accounts may,
however, be taxable at some time in the future.
The Fund intends to satisfy tax requirements applicable to regulated investment
companies each year, including a qualifying income requirement, so that the
Fund will not be liable for U.S. federal income tax on the income and capital
gains that it timely distributes to shareholders each year. There is a risk,
however, that certain of the investments of the Fund may from time to time
generate income that does not constitute qualifying income to the Fund. The
Fund intends to monitor the income from such investments in order to be able to
satisfy such qualifying income requirement. However, if the Fund's
non-qualifying income should exceed 10% of the Fund's gross income for a
taxable year, in the absence of relief from the Internal Revenue Service
("IRS"), the Fund would become liable for a corporate level federal income tax
on its taxable income and gains, regardless of whether such income and gains
are distributed to shareholders.
The Fund intends to distribute substantially all of its net investment income
and net realized capital gains, if any. The dividends and distributions you
receive, whether in cash or reinvested in additional shares of the Fund may be
subject to federal, state, and local taxation, depending upon your tax
situation. Income distributions, including distributions of net short-term
capital gains but excluding distributions of qualified dividend income, are
generally taxable at ordinary income tax rates. Long-term capital gains
distributions and distributions that are designated by the Fund as qualified
dividend income are generally taxable at the rates applicable to long-term
capital gains and set at a maximum tax rate for individuals at 20% (lower rates
apply to individuals in lower tax brackets). Once a year the Fund will send you
a statement showing the types and total amount of distributions you received
during the previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In this
case, you would be taxed on the entire amount of the distribution received,
even though, as an economic matter, the distribution simply constitutes a
return of your investment. This is known as "buying a dividend" and should be
avoided by taxable investors.
Each sale of shares of the Fund may be a taxable event. A sale may result in a
capital gain or loss to you. The gain or loss generally will be treated as
short term if you held the shares 12 months or less, long term if you held the
shares for longer. For tax purposes, an exchange of your Fund shares for shares
of a different fund is the same as a sale.
Effective January 1, 2013, U.S. individuals with income exceeding $200,000
($250,000 if married and filing jointly) are subject to a 3.8% Medicare
contribution tax on their "net investment income," including interest,
dividends, and capital gains (including capital gains realized on the sale or
exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the IRS and furnish to
Fund shareholders cost basis information for purchases of Fund shares. In
addition to reporting the gross proceeds
20
from the sale of Fund shares, the Fund is also required to report the cost
basis information for such shares and indicate whether these shares had a
short-term or long-term holding period. For each sale of Fund shares, the Fund
will permit shareholders to elect from among several IRS-accepted cost basis
methods, including the average basis method. In the absence of an election, the
Fund will use the average basis method as the default cost basis method. The
cost basis method elected by the Fund shareholder (or the cost basis method
applied by default) for each sale of Fund shares may not be changed after the
settlement date of each such sale of Fund shares. Fund shareholders should
consult their tax advisors to determine the best IRS-accepted cost basis method
for their tax situation and to obtain more information about how cost basis
reporting applies to them.
To the extent the Fund invests in non-U.S. securities, it may be subject to
non-U.S. withholding taxes with respect to dividends or interest the Fund
received from sources in non-U.S. countries. If more than 50% of the total
assets of the Fund consists of non-U.S. securities, the Fund will be eligible
to elect to treat some of those taxes as a distribution to shareholders, which
would allow shareholders to offset some of their U.S. federal income tax.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
Because the Fund has not commenced operations as of the date of this
prospectus, financial highlights are not available.
21
WINTON SERIES TRUST
WINTON GLOBAL EQUITY PORTFOLIO
INVESTMENT ADVISER
Winton Capital US LLC
375 Park Avenue
New York, New York 10152
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
More information about the Fund is available, without charge, through the
following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated [DATE], includes
detailed information about Winton Series Trust and the Fund. The SAI is on file
with the SEC and is incorporated by reference into this prospectus. This means
that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and
contain information from the Fund's portfolio managers about investment
strategies, and recent market conditions and trends and their impact on Fund
performance. The reports also contain detailed financial information about the
Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: [(___)-(___)-(____)]
BY MAIL: [INSERT]
BY INTERNET: [INSERT]
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports
for the Fund, as well as other information about Winton Series Trust, from the
EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-551-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: U.S. Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-1520. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
publicinfo@sec.gov.
The Trust's Investment Company Act registration number is 811-23004.
[INVENTORY CODE]
SUBJECT TO COMPLETION
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE U.S.
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED
PRELIMINARY PROSPECTUS DATED OCTOBER 10, 2014
WINTON GLOBAL EQUITY PORTFOLIO
PROSPECTUS
[DATE]
WINTON SERIES TRUST
INVESTOR CLASS SHARES: [TICKER SYMBOL]
INVESTMENT ADVISER:
WINTON CAPITAL US LLC
THE U.S. SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ABOUT THIS PROSPECTUS
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN
EASILY REVIEW THIS IMPORTANT INFORMATION. FOR DETAILED INFORMATION ABOUT THE
FUND, PLEASE SEE:
PAGE
WINTON GLOBAL EQUITY PORTFOLIO
INVESTMENT OBJECTIVE .................................................... XX
FUND FEES AND EXPENSES .................................................. XX
PRINCIPAL INVESTMENT STRATEGIES ......................................... XX
PRINCIPAL RISKS ......................................................... XX
PERFORMANCE INFORMATION ................................................. XX
INVESTMENT ADVISER ...................................................... XX
PORTFOLIO MANAGERS ...................................................... XX
PURCHASE AND SALE OF FUND SHARES ........................................ XX
TAX INFORMATION ......................................................... XX
PAYMENTS TO BROKER-DEALERS AND OTHER
FINANCIAL INTERMEDIARIES ............................................ XX
MORE INFORMATION ABOUT THE FUND'S INVESTMENT OBJECTIVE
AND PRINCIPAL INVESTMENT STRATEGIES ..................................... XX
MORE INFORMATION ABOUT RISK ................................................ XX
INFORMATION ABOUT PORTFOLIO HOLDINGS ....................................... XX
INVESTMENT ADVISER AND PORTFOLIO MANAGERS .................................. XX
RELATED PERFORMANCE DATA OF THE PORTFOLIO MANAGERS ......................... XX
PURCHASING AND SELLING FUND SHARES ......................................... XX
DISTRIBUTION OF FUND SHARES ................................................ XX
[SHAREHOLDER SERVICING ARRANGEMENTS] ....................................... XX
PAYMENTS TO FINANCIAL INTERMEDIARIES ....................................... XX
OTHER POLICIES ............................................................. XX
DIVIDENDS AND DISTRIBUTIONS ................................................ XX
TAXES ...................................................................... XX
FINANCIAL HIGHLIGHTS ....................................................... XX
HOW TO OBTAIN MORE INFORMATION ABOUT THE FUND ...................... Back Cover
i
WINTON GLOBAL EQUITY PORTFOLIO
INVESTMENT OBJECTIVE
The Winton Global Equity Portfolio (the "Fund") seeks to achieve long-term
investment growth.
FUND FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE
OF THE VALUE OF YOUR INVESTMENT)
[Download Table]
------------------------------------------------------------------------------------
INVESTOR CLASS SHARES
------------------------------------------------------------------------------------
Management Fees [0.55]%
------------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25%
------------------------------------------------------------------------------------
Other Expenses
------------------------------------------------------------------------------------
Shareholder Services Fee [0.15]%
------------------------------------------------------------------------------------
Other Fund Expenses [1.73]%
------------------------------------------------------------------------------------
Total Other Expenses [1.88]%
------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses [2.68]%
------------------------------------------------------------------------------------
Less Fee Reductions and/or Expense Reimbursements [(1.48)]%
------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses after Fee
Reductions and/or Expense Reimbursements(2) [1.20]%
------------------------------------------------------------------------------------
(1) Other Operating Expenses are based on estimated amounts for the current
fiscal year.
(2) Winton Capital US LLC (the "Adviser") has contractually agreed to reduce
fees and reimburse expenses to the extent necessary to keep Total Annual
Fund Operating Expenses after Fee Reductions and/or Expense Reimbursements
(excluding class specific expenses (such as Rule 12b-1 fees), interest,
taxes, brokerage commissions, Acquired Fund Fees and Expenses and
non-routine expenses) from exceeding [1.20]% of the Fund's average daily
net assets until February 29, 2016 (the "Expense Limitation"). The Adviser
may recover all or a portion of its fee reductions or expense
reimbursements within a three-year period from the year in which it reduced
its fee or reimbursed expenses if the Fund's Total Annual Fund Operating
Expenses are below the Expense Limitation. This agreement may be
terminated: (i) by the Board of Trustees of Winton Series Trust (the
"Trust") for any reason at any time, or (ii) by the Adviser, upon ninety
(90) days' prior written notice to the Trust, effective as of the close of
business on February 29, 2016.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses (including capped expenses for the period
described in the fee table) remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS
INVESTOR CLASS SHARES [$122] [$666]
PORTFOLIO TURNOVER
The Fund pays transaction costs, such as commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate
may indicate higher transaction costs and may result in higher taxes when Fund
shares are held in a taxable account. These costs, which are not reflected in
Total Annual Fund Operating Expenses or in the Example, affect the Fund's
performance.
PRINCIPAL INVESTMENT STRATEGIES
The Fund seeks to achieve its investment objective by investing globally in
equity securities, including common stocks, depositary receipts and
exchange-traded funds in accordance with the Adviser's Program (defined below).
The common stocks and depositary receipts are primarily selected from the large
and mid-cap securities of developed market countries, deemed by the Adviser to
have sufficient liquidity. The Fund invests in securities providing exposure to
a number of different countries and, under normal market conditions, invests at
least 40% of its net assets outside the United States (or, if conditions are not
deemed favorable by the Adviser, invests at least 30% of its net assets outside
the United States). The Fund may invest in the securities of companies located
in emerging market countries although these are not expected to represent more
than 10% of the net assets of the Fund. A small portion of the Fund's assets may
be held in cash or cash equivalents. However, under normal market conditions,
the Fund will invest at least 95% of its net assets (including any borrowings
for investment purposes) in equity securities.
The Fund's primary benchmark is the MSCI World Net Total Return Index (USD)
("MSCI World"), which is a market capitalization weighted index that represents
about 1,600 large and mid-cap securities from about twenty developed market
countries.
The Adviser uses an automated computer-based investment system that is developed
by its research team in accordance with a quantitative investment process based
on the statistical analysis of past data. The investment system is implemented
with particular investment constraints to create different investment programs.
The program used by the Fund is the Adviser's fully invested long-only equity
program (the "Program"). The Program constructs a portfolio by forecasting the
returns of each security in the universe using a variety of data-based signals
(for instance using price or company account data) and selecting those
calculated as likely to have above-average returns. In order to determine
position weights in the target portfolio, the Adviser uses its proprietary risk
weighting methodology that seeks to weight each security in accordance with its
forecast level of risk. As a result, the securities in the portfolio are more
equally weighted than those in market capitalization weighted indices like the
MSCI World. The Adviser believes that this provides a good means of diversifying
the portfolio. The Adviser takes into consideration transaction costs in its
forecasting models to seek to trade in a cost efficient manner that encourages
limited turnover and prioritizes trades with the greatest expected overall
benefit to the portfolio.
The investment system (from which the Program is derived) is modified over time
as the Adviser monitors its operation and undertakes further research. Changes
to the investment system occur as a result of, amongst other things, the
discovery of new relationships, changes in market liquidity, the availability of
new data or the reinterpretation of existing data.
PRINCIPAL RISKS
As with all mutual funds, a shareholder is subject to the risk that his or her
investment could lose money. A Fund share is not a bank deposit and it is not
insured or guaranteed by the FDIC or any government agency. The principal risk
factors affecting shareholders' investments in the Fund are set out below.
EQUITIES RISK -- Equities represent ownership interests in a company or
corporation. Investments in equity securities in general are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the
value of equities in which the Fund invests will cause the value of the
Fund's assets to fluctuate.
CURRENCY RISK -- As a result of the Fund's investments in securities denominated
in, and/or receiving revenues in, non-U.S. currencies, the Fund will be subject
to currency risk. Currency risk is the risk that non-U.S. currencies will
decline in value relative to the U.S. dollar, which would adversely affect the
U.S. dollar value of an investment in the Fund. Currency exchange rates may
fluctuate in response to, among other things, changes in interest rates,
intervention (or failure to intervene) by U.S. or non-U.S. governments, central
banks or supranational entities, or by the imposition of currency controls or
other political developments in the United States or abroad.
PORTFOLIO TURNOVER RISK -- The Fund may buy and sell securities frequently. This
may result in higher transaction costs and additional capital gains tax
liabilities.
2
EXCHANGE-TRADED FUNDS (ETFS) RISK -- The risks of owning shares of an ETF
generally reflect the risks of owning the underlying securities in which the
ETF invests, although lack of liquidity in an ETF could result in its value
being more volatile than the underlying portfolio securities. When the Fund
invests in an ETF, in addition to directly bearing the expenses associated with
its own operations, it will bear a pro rata portion of the ETF's expenses.
DEPOSITARY RECEIPTS -- Depositary receipts are certificates evidencing
ownership of shares of a non-U.S. issuer that are issued by depositary banks
and generally trade on an established market. Depositary receipts are subject
to many of the risks associated with investing directly in non-U.S. securities,
including, among other things, political, social and economic developments
abroad, currency movements and different legal, regulatory and tax
environments.
NON-U.S. INVESTMENT/EMERGING MARKETS RISK -- The Fund invests in securities
issued by non-U.S. companies. Non-U.S. securities may be subject to additional
risks due to, among other things, political, social and economic developments
abroad, currency movements and different legal, regulatory and tax
environments. These additional risks may be heightened with respect to emerging
market countries since political turmoil and rapid changes in economic
conditions are more likely to occur in these countries.
MEDIUM CAPITALIZATION COMPANY RISK - The risk that medium capitalization
companies in which the Fund invests may be more vulnerable to adverse business
or economic events than larger, more established companies. In particular,
medium capitalization companies may have limited product lines, markets and
financial resources and may depend upon a relatively small management group.
Therefore, medium capitalization stocks may be more volatile than those of
larger companies. Medium capitalization stocks may be traded over-the-counter or
listed on an exchange.
LIMITATIONS ON MATHEMATICAL MODELS RISK -- The Fund utilizes the Adviser's
investment approach, which is based on research into past data and the
application of that research to the development of mathematical models that
attempt to forecast returns, risk, correlation and transaction costs. Many of
these models are trend-following models that attempt to identify and exploit
market trends. Mathematical models may be incomplete and/or flawed and there is
an inherent risk that any forecasts derived from them may be inaccurate,
particularly if the research or models are based on, or incorporate, inaccurate
assumptions or data. Assumptions or data may be inaccurate from the outset or
may become inaccurate as a result of many factors such as, changes in market
structure, increased government intervention in markets or growth in assets
managed in accordance with similar investment strategies. In particular, such
factors may make the trend-following models of the Adviser less effective
because they may lessen the prospect of identified trends occurring or
continuing in the future. As a result of the foregoing, the investment system
may not generate profitable trading signals and the Fund may suffer losses.
PROCESS EXCEPTIONS RISK -- The Fund utilizes the Adviser's investment approach,
which is based on mathematical models that are implemented as an automated
computer-based investment system. Issues with the design, development,
implementation, maintenance or operation of the investment system; any
component of the investment system; or any processes and procedures related to
the investment system may cause losses to the Fund and such losses may be
substantial.
3
VOLATILITY RISK -- The markets in which the Fund invests are subject to high
levels of volatility. Price movements are influenced by a variety of factors,
including: changing supply and demand relationships; trade, fiscal, monetary
and exchange control programs and policies of governments; political and
economic events and policies; changes in interest rates and rates of inflation;
currency devaluations and re-evaluations; and market sentiment. Such volatility
could result in significant losses to the Fund.
PERFORMANCE INFORMATION
The Fund has not commenced operations, and therefore has no performance
history. Once the Fund has completed a full calendar year of operations, a bar
chart and table will be included that will provide some indication of the risks
of investing in the Fund by showing the variability of the Fund's returns and
comparing the Fund's performance to a broad measure of market performance.
The Fund's past performance (before and after taxes) does not necessarily
indicate how the Fund will perform in the future. Current performance
information is available on the Fund's website at [INSERT] or by calling the
Fund at [(___)-(___)-(____)].
INVESTMENT ADVISER
Winton Capital US LLC
PORTFOLIO MANAGERS
David Winton Harding, Chief Executive Officer and Chairman of the Adviser's
parent company, Winton Capital Group Limited, has advised the Fund since its
inception in [2014].
Matthew David Beddall, Chief Investment Officer of the Adviser's parent company,
Winton Capital Group Limited, has advised the Fund since its inception in
[2014].
PURCHASE AND SALE OF FUND SHARES
To purchase Investor Class shares of the Fund for the first time, you must
invest at least $2,500. Thereafter your investments must be at least $[INSERT].
The Fund may accept investments of smaller amounts in its sole discretion.
If you own your shares directly, you may redeem your shares on any day that the
New York Stock Exchange is open for business by contacting the Fund directly
by mail at: [INSERT] or by Express Mail to [INSERT] or telephone at
[(___)-(___)-(____)].
If you own your shares through an account with a broker or other financial
intermediary, contact that broker or intermediary to redeem your shares. Your
broker or financial intermediary may charge a fee for its services in addition
to the fees charged by the Fund.
TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or
capital gains, unless you are investing through a tax-deferred arrangement, such
as a 401(k) plan or individual retirement account, in which case your
distribution will be taxed when withdrawn from the tax-deferred account.
4
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), the Fund and its related companies may pay the
intermediary for the sale of Fund shares and related services. These payments
may create a conflict of interest by influencing the broker-dealer or other
intermediary and your salesperson to recommend the Fund over another
investment. Ask your salesperson or visit your financial intermediary's web
site for more information.
MORE INFORMATION ABOUT THE FUND'S INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT
STRATEGIES
INVESTMENT OBJECTIVE
The Fund seeks to achieve long-term investment growth. The Fund's investment
objective may not be changed without shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
The investments and strategies described in this prospectus are those that the
Fund uses under normal conditions. During unusual economic or market
conditions, or for temporary defensive or liquidity purposes, the Fund may
invest up to 100% of its assets in cash, money market instruments or other cash
equivalents that would not ordinarily be consistent with its investment
objective. If the Fund invests in this manner, it may not achieve its
investment objective. The Fund will do so only if the Adviser believes that the
risk of loss outweighs the opportunity to pursue its investment objective.
This prospectus describes the Fund's principal investment strategies and risks,
and the Fund will normally invest in the types of securities and other
instruments described in this prospectus. In addition to the securities and
other instruments and strategies described in this prospectus, the Fund also
may invest in other securities and instruments, use other strategies and engage
in other investment practices. These investments and strategies are described
in the Fund's Statement of Additional Information ("SAI") (for information on
how to obtain a copy of the SAI see the back cover of this prospectus).
MORE INFORMATION ABOUT RISK
Investing in the Fund involves risk and there is no guarantee that the Fund
will achieve its investment objective. You could lose money on your investment
in the Fund, just as you could with other investments.
The value of your investment in the Fund is based on the value of the
securities and other instruments the Fund holds. Generally, these prices
change daily due to economic and other
5
events that affect particular companies and other issuers. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities the Fund owns and the markets in which it trades. The
effect on the Fund of a change in the value of a single security will depend on
how widely the Fund diversifies its holdings.
The following descriptions provide additional information about some of the
risks of investing in the Fund:
EQUITY MARKET RISK -- As the Fund invests significantly in equity securities,
it is subject to the risk that stock prices will fall over short or extended
periods of time. Historically, the equity markets have moved in cycles, and the
value of the Fund's securities may fluctuate drastically from day to day.
Individual companies may report poor results or be negatively affected by
industry and/or economic trends and developments. The prices of securities
issued by such companies may suffer a decline in response. These factors
contribute to price volatility.
CURRENCY RISK -- Currency exchange rates may fluctuate in response to factors
extrinsic to that country's economy, which makes the forecasting of currency
market movements extremely difficult. Currency rates in non-U.S. countries may
fluctuate significantly over short periods of time for a number of reasons,
including changes in interest rates, intervention (or failure to intervene) by
U.S. or non-U.S. governments, central banks or supranational entities such as
the International Monetary Fund, or by the imposition of currency controls or
other political developments in the United States or abroad. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds
in settlement of obligations and could also cause hedges it has entered into to
be rendered useless, resulting in full currency exposure as well as incurring
transaction costs.
EXCHANGE-TRADED FUNDS RISK -- ETFs are investment companies whose shares are
bought and sold on a securities exchange. The risks of owning interests of an
ETF generally reflect the same risks as owning the underlying securities or
other instruments in which the ETF invests, although lack of liquidity in an
ETF could result in its value being more volatile than the underlying portfolio
of securities. The shares of certain ETFs may trade at a premium or discount to
their intrinsic value (i.e., the market value may differ from the net asset
value of an ETF's shares). For example, supply and demand for shares of an ETF
or market disruptions may cause the market price of the ETF to deviate from the
value of the ETF's investments, which may be emphasized in less liquid markets.
ETFs, like mutual funds, have expenses associated with their operation,
including advisory fees. When the Fund invests in an ETF, in addition to
directly bearing expenses associated with its own operations, it will bear a
pro rata portion of the ETF's expenses. Such ETF expenses may make owning
shares of the ETF more costly than owning the underlying securities directly.
DEPOSITARY RECEIPTS RISK -- American Depositary Receipts (ADRs) are
dollar-denominated depositary receipts typically issued by a U.S. financial
institution that evidence an ownership interest in a security or pool of
securities issued by a non-U.S. issuer. ADRs are listed and traded in the
United States. Global Depositary Receipts (GDRs) are similar to ADRs but
represent shares of non-U.S.-based corporations generally issued by
international banks in one or more markets around the world. ADRs and GDRs are
subject to the risks associated with investing directly in non-U.S. securities,
which are described below. In addition, investments in ADRs and GDRs may be
less liquid than the underlying shares in their primary trading markets and
GDRs, many of which represent shares issued by companies in emerging markets,
may be more volatile. Depositary receipts may be sponsored or unsponsored.
Holders of unsponsored depositary receipts generally bear all the costs
associated with establishing unsponsored depositary receipts.
6
In addition, the issuers of the securities underlying unsponsored depositary
receipts are not obligated to disclose material information in the United
States, and, therefore, there may be less information available regarding such
issuers, and there may not be a correlation between such information and the
market value of the depositary receipts.
NON-U.S. INVESTMENT/EMERGING MARKETS RISK -- Investing in issuers located in
non-U.S. countries poses distinct risks since political and economic events
unique to a country or region will affect those markets and their issuers.
These events will not necessarily affect the U.S. economy or similar issuers
located in the United States. Non-U.S. issuers may not be registered with the
SEC and are generally not subject to the regulatory controls imposed on U.S.
issuers and, as a consequence, there is generally less publically available
information about non-U.S. securities than is available about domestic
securities. Income from non-U.S. securities owned by the Fund may be reduced by
a withholding tax at the source, which tax would reduce income received from
the securities comprising the portfolio.
Emerging market countries are those countries that are: (i) characterized as
developing or emerging by any of the World Bank, the United Nations, the
International Finance Corporation, or the European Bank for Reconstruction and
Development; (ii) included in an emerging markets index by a recognized index
provider; or (iii) countries with similar developing or emerging
characteristics as countries classified as emerging market countries pursuant
to sub-paragraph (i) and (ii) above, in each case determined at the time of
purchase. Emerging market countries may be more likely to experience political
turmoil or rapid changes in market or economic conditions than more developed
countries. Emerging market countries often have less uniformity in accounting
and reporting requirements and unreliable securities valuation. It is sometimes
difficult to obtain and enforce court judgments in such countries and there is
often a greater potential for nationalization and/or expropriation of assets by
the government of an emerging market country. In addition, the financial
stability of issuers (including governments) in emerging market countries may
be more precarious than in other countries. As a result, there will tend to be
an increased risk of price volatility associated with the Funds' investments in
emerging market countries, which may be magnified by currency fluctuations
relative to the U.S. dollar.
PROCESS EXCEPTIONS RISK -- The Fund utilizes the Adviser's investment approach,
which is based on mathematical models that are implemented as an automated
computer-based investment system. Issues with the design, development,
implementation, maintenance or operation of the investment system; any
component of the investment system; or any processes and procedures related to
the investment system (collectively, "Process Exceptions") may cause losses to
the Fund and such losses may be substantial. Process Exceptions may include,
but are not limited to:
o PROGRAMMING ERRORS -- The Adviser may make programming errors in
translating its mathematical models into computer code. In addition,
as a mathematical model can be expressed in computer code in multiple
ways, the choice of code ultimately used may not result in the best
representation of the model.
o FAILURE OF TECHNOLOGY -- The Adviser's investment system is reliant
on proprietary and third party technology. Such technology may be
adversely affected by many issues, some of which may be outside of the
Adviser's control, including issues associated with network
infrastructure, software updates, bugs, viruses and unauthorized
access.
o INCORPORATION OF DATA -- The Adviser may incorporate inaccurate data,
or make errors in incorporating data, into the investment system.
7
Process Exceptions may be difficult to detect, may go undetected for long
periods or may never be detected. The impact of such Process Exceptions may be
compounded over time and may result in, among other things, the execution of
unanticipated trades, the failure to execute anticipated trades, the failure to
properly allocate trades, the failure to properly gather and organize available
data and/or the failure to take certain hedging or risk mitigating actions.
Although the Adviser evaluates the materiality of any Process Exceptions that
it detects, the Adviser may conclude that some are not material and may choose
not to address them. Such judgments may prove not to be correct.
INFORMATION ABOUT PORTFOLIO HOLDINGS
A description of the Fund's policy and procedures with respect to the
circumstances under which the Fund discloses its portfolio holdings is
available in the SAI. [[INSERT] calendar days after each [INSERT PERIOD] end, a
[complete/top ten list] of the Fund's portfolio holdings as of the end of such
[INSERT PERIOD] may be made available at [INSERT]. The Adviser may exclude any
portion of the portfolio holdings from publication when deemed in the best
interest of the Fund. Beginning on the day after any portfolio holdings
information is posted on the Fund's website, such information will be delivered
directly to any person that requests it, through electronic or other means. The
portfolio holdings information placed on the Fund's website generally will
remain there until replaced by new postings as described above.
INVESTMENT ADVISER AND PORTFOLIO MANAGERS
Winton Capital US LLC, located at 375 Park Avenue, New York, New York 10152,
serves as investment adviser to the Fund. The Adviser makes investment
decisions for the Fund and continuously reviews, supervises and administers the
Fund's investment program. The Board of Trustees of the Trust (the "Board")
supervises the Adviser and establishes policies that the Adviser must follow in
its management activities.
The Adviser is a wholly-owned subsidiary of Winton Capital Group Limited, an
English limited liability company. Winton Capital Group Limited and its
affiliated companies (together, "Winton") operate as an investment management
business that employs a professional research team to perform scientific
analysis on historic data related to financial markets in an attempt to identify
profitable investment opportunities for its clients. Winton provides investment
management services to, among other investors, pension funds, pooled investment
vehicles, fund of funds, sovereign wealth funds and other government entities,
corporations, family offices and high net worth individuals either directly or
indirectly through the management of pooled investment vehicles. As of [____],
2014, Winton had approximately $[___] in assets under management.
For its services to the Fund, the Adviser is entitled to a fee, which is
calculated daily and paid monthly, at an annual rate of [0.55]% based on the
average daily net assets of the Fund. The Adviser has contractually agreed to
reduce fees and reimburse expenses to the extent necessary to keep the Fund's
net expenses (excluding class specific expenses (such as Rule 12b-1 fees),
interest, taxes, brokerage commissions, Acquired Fund Fees and Expenses and
non-routine expenses) from exceeding [1.20]% of the Fund's average daily net
assets until February 29, 2016 (the "Expense Limitation"). The Adviser may
recover all or a portion of its fee reductions or expense reimbursements within
a three-year period from the year in which it reduced its fee or reimbursed
expenses if the Fund's Total Annual Fund Operating Expenses are below the
Expense
8
Limitation. This agreement may be terminated: (i) by the Board of Trustees of
Winton Series Trust (the "Trust") for any reason at any time, or (ii) by the
Adviser, upon ninety (90) days' prior written notice to the Trust, effective as
of the close of business on February 29, 2016.
A discussion regarding the basis for the Board's approval of the Fund's
investment advisory agreement will be available in the Fund's first Annual or
Semi-Annual Report to Shareholders.
PORTFOLIO MANAGERS
David Winton Harding, Chief Executive Officer and Chairman of the Adviser's
parent company, Winton Capital Group Limited, has managed the Fund since its
inception in [2014]. Mr. Harding founded Winton in 1997. Prior to that, Mr.
Harding founded Adam Harding and Lueck, a commodity trading adviser, in 1987.
Mr. Harding holds a degree in Natural Sciences specializing in Theoretical
Physics from Cambridge University.
Matthew David Beddall, Chief Investment Officer of the Adviser's parent company,
Winton Capital Group Limited, has managed the Fund since its inception in
[2014]. Mr. Beddall joined Winton in 2001 as a researcher and was appointed
Chief Investment Officer in 2008. Mr. Beddall holds a degree in Mathematics and
Computer Science from Southampton University and an MSc in Applied Statistics
from Birkbeck College, University of London.
RELATED PERFORMANCE DATA OF THE PORTFOLIO MANAGERS
The Fund's portfolio managers also hold the same positions with Winton Capital
Management Limited, an affiliated company of the Adviser, and in such capacity
serve as the portfolio managers of three other accounts that are managed
pursuant to investment objectives, policies and strategies that are
substantially similar to those of the Fund (the "Comparable Accounts").
The following table shows the historical performance of the Comparable Accounts.
The manner in which the performance was calculated for the Comparable Accounts
differs from that of registered mutual funds such as the Fund. If the
performance was calculated in accordance with SEC standardized performance
methodology, the performance results may have been different. The performance
should not be viewed as an indication of how the portfolio managers will perform
in the future. THE DATA DOES NOT REPRESENT THE PERFORMANCE OF THE FUND.
The Comparable Accounts are not subject to the same type of expenses to which
the Fund is subject, and the performance information of the Comparable Accounts
has not been adjusted to reflect the expenses of the Fund. [The management fees
of the Comparable Accounts were generally lower than that of the Fund, however
certain Comparable Accounts incurred performance fees. The average actual total
operating expenses of the Comparable Accounts were lower/higher than the Fund's
estimated total operating expenses [(exclusive of waivers)]. If the performance
of the Comparable Accounts was calculated using the Fund's estimated expenses
for its first fiscal year, the performance would have been lower/higher.]
The Comparable Accounts are not subject to the diversification requirements,
specific tax restrictions, and investment limitations imposed by the federal
securities and tax laws. Consequently, the performance results for the
Comparable Accounts could have been adversely affected if the Comparable
Accounts were subject to the same fees and expenses or federal securities and
tax laws as the Fund.
"Total Return (Net of Fees)" returns presented were calculated on a total return
basis and include all dividends, interest and realized and unrealized gains and
losses. Except as otherwise noted, all returns reflect the payment of actual
management fees, actual performance fees (if applicable), brokerage commissions,
and execution costs paid by the Comparable Accounts, without taking into account
federal or state income taxes.
THE INVESTMENT RESULTS FOR THE COMPARABLE ACCOUNTS ARE NOT INTENDED TO PREDICT
OR SUGGEST THE FUTURE RETURNS OF THE FUND. THE PERFORMANCE DATA SHOWN BELOW
SHOULD NOT BE CONSIDERED A SUBSTITUTE FOR THE FUND'S OWN PERFORMANCE
INFORMATION.
ANNUAL RETURNS FOR THE COMPARABLE ACCOUNTS
(JANUARY 12, 2010 THROUGH DECEMBER 31, 2013)
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------
YEAR TOTAL RETURN TOTAL RETURN MSCI WORLD NET TOTAL
(NET OF FEES) (GROSS OF FEES) RETURN INDEX (REFLECTS NO
DEDUCTIONS FOR FEES, EXPENSES
OR TAXES)
------------------------------------------------------------------------------------------------
2013 30.10% 30.81% 26.68%
------------------------------------------------------------------------------------------------
2012 14.00% 14.17% 15.83%
------------------------------------------------------------------------------------------------
2011 -5.06% -4.87% -5.54%
------------------------------------------------------------------------------------------------
2010 6.16% 6.16% 11.76%
------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(AS OF DECEMBER 31, 2103)
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------
TIME PERIOD NET OF FEES GROSS OF FEES MSCI WORLD NET TOTAL
RETURN INDEX (REFLECTS NO
DEDUCTIONS FOR FEES, EXPENSES
OR TAXES)
------------------------------------------------------------------------------------------------
1 Year 30.10% 30.81% 26.68%
------------------------------------------------------------------------------------------------
Since Inception 11.30% 11.57% 12.18%
(1/12/2010)
------------------------------------------------------------------------------------------------
9
PURCHASING AND SELLING FUND SHARES
This section tells you how to purchase and sell (sometimes called "redeem")
shares of the Fund.
HOW TO PURCHASE FUND SHARES
To purchase shares directly from the Fund through its transfer agent, complete
and send in the application. If you need an application or have questions,
please call [(___)-(___)-(____)].
All investments must be made by check, Automated Clearing House ("ACH"), or
wire. All checks must be made payable in U.S. dollars and drawn on U.S.
financial institutions. The Fund does not accept purchases made by third-party
checks, credit cards, credit card checks, cash, traveler's checks, money orders
or cashier's checks.
You may also buy shares through accounts with brokers and other institutions
that are authorized to place trades in Fund shares for their customers. If you
invest through an authorized institution, you will have to follow its
procedures, which may be different from the procedures for investing directly.
Your broker or institution may charge a fee for its services, in addition to
the fees charged by the Fund. You will also generally have to address your
correspondence or questions regarding the Fund to your institution.
The Fund reserves the right to reject any specific purchase order for any
reason. The Fund is not intended for short-term trading by shareholders in
response to short-term market fluctuations. For more information about the
Fund's policy on short-term trading, see "Excessive Trading Policies and
Procedures."
The Fund does not generally accept investments by non-U.S. persons. Non-U.S.
persons may be permitted to invest in the Fund subject to the satisfaction of
enhanced due diligence. Please contact the Fund for more information.
BY MAIL
You can open an account with the Fund by sending a check and your account
application to the address below. You can add to an existing account by sending
the Fund a check and, if possible, the "Invest by Mail" stub that accompanies
your statement. Be sure your check identifies clearly your name, your account
number, the Fund name and the share class.
REGULAR MAIL ADDRESS
[INSERT]
10
EXPRESS MAIL ADDRESS
[INSERT]
The Fund does not consider the U.S. Postal Service or other independent
delivery services to be its agents. Therefore, deposit in the mail or with such
services of purchase orders does not constitute receipt by the Fund's transfer
agent. The share price used to fill the purchase order is the next price
calculated by the Fund after the Fund's transfer agent receives the order in
proper form at the P.O. Box provided for regular mail delivery or the office
address provided for express mail delivery.
BY WIRE
To open an account by wire, call [(___)-(___)-(____)] for details. To add to an
existing account by wire, wire your money using the wiring instructions set out
below (be sure to include the Fund name and your account number).
WIRING INSTRUCTIONS
[INSERT]
[BY SYSTEMATIC INVESTMENT PLAN (VIA AUTOMATED CLEARING HOUSE OR ACH)
You may not open an account via ACH. However, once you have established an
account, you can set up a systematic investment plan by mailing a completed
application to the Fund. These purchases can be made monthly, quarterly,
semi-annually or annually in amounts of at least $[____]. To cancel or change a
plan, write to the Fund at: [INSERT] (Express Mail Address: [INSERT]). Please
allow up to 15 days to create the plan and 3 days to cancel or change it.]
PURCHASES IN-KIND
Subject to the approval of the Fund, an investor may purchase shares of the
Fund with liquid securities and other assets that are eligible for purchase by
the Fund (consistent with the Fund's investment policies and restrictions) and
that have a value that is readily ascertainable in accordance with the Fund's
valuation policies. These transactions will be effected only if the Adviser
deems the security to be an appropriate investment for the Fund. Assets
purchased by the Fund in such a transaction will be valued in accordance with
procedures adopted by the Fund. The Fund reserves the right to amend or
terminate this practice at any time.
GENERAL INFORMATION
You may purchase shares on any day that the New York Stock Exchange ("NYSE") is
open for business (a "Business Day"). Shares cannot be purchased by Federal
Reserve wire on days when either the NYSE or the Federal Reserve is closed.
The Fund's price per share will be the net asset value per share ("NAV") next
determined after the Fund receives your purchase order in proper form. "Proper
form" means that the Fund was provided a complete and signed account
application, including the investor's social security number, tax
identification number, and other identification required by law or regulation,
as well as sufficient purchase proceeds.
11
The Fund calculates its NAV once each Business Day as of the close of normal
trading on the NYSE (normally, 4:00 p.m., Eastern Time). To receive the current
Business Day's NAV, the Fund must receive your order in proper form before 4:00
p.m., Eastern Time, that day. If the NYSE closes early -- such as on days in
advance of certain generally observed holidays -- the Fund reserves the right
to calculate NAV as of the earlier closing time. The Fund will not accept
orders that request a particular day or price for the transaction or any other
special conditions.
Shares will not be priced on days that the NYSE is closed for trading,
including nationally observed holidays.
BUYING OR SELLING SHARES THROUGH A FINANCIAL INTERMEDIARY
In addition to being able to buy and sell Fund shares directly from the Fund
through its transfer agent, you may also buy or sell shares of the Fund through
accounts with financial intermediaries such as brokers and other institutions
that are authorized to place trades in Fund shares for their customers. When
you purchase or sell Fund shares through a financial intermediary (rather than
directly from the Fund), you may have to transmit your purchase and sale
requests to the financial intermediary at an earlier time for your transaction
to become effective that day. This allows the financial intermediary time to
process your requests and transmit them to the Fund prior to the time the Fund
calculates its NAV that day. Your financial intermediary is responsible for
transmitting all purchase and redemption requests, investment information,
documentation and money to the Fund on time. If your financial intermediary
fails to do so, it may be responsible for any resulting fees or losses. Unless
your financial intermediary is an authorized institution (defined below),
orders transmitted by the financial intermediary and received by the Fund after
the time NAV is calculated for a particular day will receive the following
day's NAV.
Certain financial intermediaries, including certain broker-dealers and
shareholder organizations, are authorized to act as agent on behalf of the Fund
with respect to the receipt of purchase and redemption orders for Fund shares
("authorized institutions"). Authorized institutions are also authorized to
designate other intermediaries to receive purchase and redemption orders on the
Fund's behalf. The Fund will be deemed to have received a purchase or
redemption order when an authorized institution or, if applicable, an
authorized institution's designee, receives the order. Orders will be priced at
the Fund's net asset value next computed after they are received by an
authorized institution or an authorized institution's designee. To determine
whether your financial intermediary is an authorized institution or an
authorized institution's designee such that it may act as agent on behalf of
the Fund with respect to purchase and redemption orders for Fund shares, you
should contact them directly.
If you deal directly with a financial intermediary, you will have to follow
their procedures for transacting with the Fund. Your financial intermediary may
charge a fee for your purchase and/or redemption transactions. For more
information about how to purchase or sell Fund shares through a financial
intermediary, you should contact your authorized institution directly.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets
of the Fund.
In calculating NAV, the Fund generally values its investment portfolio at
market price. If market prices are not readily available or the Fund reasonably
believes that they are unreliable, such as in the case of a security value that
has been materially affected by events occurring after the relevant
12
market closes, the Fund is required to price those securities at fair value as
determined in good faith using methods approved by the Trust's Board of
Trustees. Pursuant to the policies adopted by and under the ultimate
supervision of the Board of Trustees, these methods are implemented through the
Fund's Fair Value Pricing Committee, members of which are appointed by the
Board of Trustees. The Fund's determination of a security's fair value price
often involves the consideration of a number of subjective factors, and is
therefore subject to the unavoidable risk that the value that the Fund assigns
to a security may be higher or lower than the security's value would be if a
reliable market quotation for the security was readily available.
There may be limited circumstances in which the Fund would price securities at
fair value for stocks of U.S. companies that are traded on U.S. exchanges --
for example, if the exchange on which a portfolio security is principally
traded closed early or if trading in a particular security was halted during
the day and did not resume prior to the time the Fund calculated its NAV.
With respect to non-U.S. securities held by the Fund, the Fund may take factors
influencing specific markets or issuers into consideration in determining the
fair value of a non-U.S. security. International securities markets may be open
on days when the U.S. markets are closed. In such cases, the value of any
international securities owned by the Fund may be significantly affected on
days when investors cannot buy or sell shares. In addition, due to the
difference in times between the close of the international markets and the time
as of which the Fund prices its shares, the value the Fund assigns to
securities may not be the same as the quoted or published prices of those
securities on their primary markets or exchanges. In determining fair value
prices, the Fund may consider the performance of securities on their primary
exchanges, non-U.S. currency appreciation/depreciation, securities market
movements in the United States, or other relevant information related to the
securities.
Securities, options, futures contracts and other assets (including swap
agreements) for which market quotations are not readily available will be
valued at their fair value as determined in good faith by or under the
direction of the Board of Trustees.
FUND CODES
The Fund's reference information, which is listed below, will be helpful to you
when you contact the Fund to purchase Investor Class shares, check daily NAV,
or obtain additional information.
FUND NAME TICKER SYMBOL CUSIP FUND CODE
Winton Global Equity Portfolio [INSERT] [INSERT] [INSERT]
HOW TO SELL YOUR FUND SHARES
If you own your shares directly, you may sell your shares on any Business Day
by contacting the Fund directly by mail or telephone at [(___)-(___)-(____)].
If you own your shares through an account with a broker or other institution,
contact that broker or institution to sell your shares. Your broker or
institution may charge a fee for its services in addition to the fees charged
by the Fund.
If you would like to have your redemption proceeds, including proceeds
generated as a result of closing your account, sent to a third party or an
address other than your own, please notify the Fund in writing.
13
Certain redemption requests will require a signature guarantee by an eligible
guarantor institution. Eligible guarantors include commercial banks, savings
and loans, savings banks, trust companies, credit unions, member firms of a
national stock exchange, or any other member or participant of an approved
signature guarantor program. For example, signature guarantees may be required
if your address of record has changed in the last 30 days, you want the
proceeds sent to a bank other than the bank of record on your account, or if
you ask that the proceeds be sent to a different person or address. Please note
that a notary public is not an acceptable provider of a signature guarantee and
that we must be provided with the original guarantee. Signature guarantees are
for the protection of our shareholders. Before it grants a redemption request,
the Fund may require a shareholder to furnish additional legal documents to
ensure proper authorization.
Accounts held by a corporation, trust, fiduciary or partnership, may require
additional documentation along with a signature guaranteed letter of
instruction. The Fund participates in the Paperless Legal Program (the "PLP"),
which eliminates the need for accompanying paper documentation on legal
securities transfers. Requests received with a Medallion Signature Guarantee
will be reviewed for the proper criteria to meet the guidelines of the PLP and
may not require additional documentation. Please contact Shareholder Services
at [(___)-(___)-(____)] for more information.
The sale price of each share will be the next NAV determined after the Fund (or
an authorized broker) receives your request.
BY MAIL
To redeem shares by mail, please send a letter to the Fund signed by all
registered parties on the account specifying:
o The Fund name;
o The account number;
o The dollar amount or number of shares you wish to redeem;
o The account name(s); and
o The address to which redemption (sale) proceeds should be sent.
All registered shareholders must sign the letter in the exact name(s) and must
designate any special capacity in which they are registered.
REGULAR MAIL ADDRESS
[INSERT]
EXPRESS MAIL ADDRESS
[INSERT]
The Fund does not consider the U.S. Postal Service or other independent
delivery services to be its agents. Therefore, deposit in the mail or with such
services of sale orders does not constitute receipt by the Fund's transfer
agent. The share price used to fill the sale order is the next price calculated
by the Fund after the Fund's transfer agent receives the order in proper form
at the P.O. Box provided for regular mail delivery or the office address
provided for express mail delivery.
14
BY TELEPHONE
To redeem shares by telephone, you must first establish the telephone
redemption privilege (and, if desired, the wire and ACH redemption privileges)
by completing the appropriate sections of the account application. Call
[(___)-(___)-(____)] to redeem your shares. Based on your instructions, the
Fund will mail your proceeds to you, or send them to your bank via wire or
ACH.
[BY SYSTEMATIC WITHDRAWAL PLAN (VIA ACH)
If your account balance is at least $[____], you may transfer as little as
$[____] per month from your account to another financial institution. To
participate in this service you must complete the appropriate sections of the
account application and mail it to the Fund.]
RECEIVING YOUR MONEY
Normally, the Fund will send your sale proceeds within seven days after the
Fund receives your request. Your proceeds can be wired to your bank account
(but may be subject to a $10 fee), sent to you by check or sent via ACH to your
bank account once you have established banking instructions with the Fund. IF
YOU ARE SELLING SHARES THAT WERE RECENTLY PURCHASED BY CHECK OR THROUGH ACH,
REDEMPTION PROCEEDS MAY NOT BE AVAILABLE UNTIL YOUR CHECK HAS CLEARED OR THE
ACH TRANSACTION HAS BEEN COMPLETED (WHICH MAY TAKE UP TO 15 DAYS FROM YOUR DATE
OF PURCHASE).
REDEMPTIONS IN-KIND
The Fund generally pays sale (redemption) proceeds in cash. However, under
unusual conditions that make the payment of cash unwise and for the protection
of the Fund's remaining shareholders, the Fund might pay all or part of your
redemption proceeds in securities with a market value equal to the redemption
price (redemption in kind). The Fund may also redeem in kind to discourage
short term trading of shares. It is highly unlikely that your shares would ever
be redeemed in kind, but if they were, you would have to pay transaction costs
to sell the securities distributed to you, as well as taxes on any capital
gains from the sale as with any redemption. In addition, you would continue to
be subject to the risks of any market fluctuation in the value of the
securities you receive in kind until they are sold.
INVOLUNTARY REDEMPTIONS OF YOUR SHARES
If your account balance drops below $[____] because of redemptions, you may be
required to sell your shares. The Fund will provide you at least 30 days'
written notice to give you time to add to your account and avoid the
involuntary redemption of your shares. The Fund reserves the right to waive the
minimum account value requirement in their sole discretion.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares during times when trading
on the NYSE is restricted or halted, or otherwise as permitted by the SEC. More
information about this is in the SAI.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient,
but not without risk. Although the Fund has certain safeguards and procedures
to confirm the identity of callers
15
and the authenticity of instructions, the Fund is not responsible for any
losses or costs incurred by following telephone instructions it reasonably
believes to be genuine. If you or your financial institution transact with the
Fund over the telephone, you will generally bear the risk of any loss.
DISTRIBUTION OF FUND SHARES
The Fund has adopted a distribution plan under Rule 12b-1 of the 1940 Act, as
amended, for Investor Class shares that allows the Fund to pay distribution and
service fees for the sale and distribution of its shares, and for services
provided to shareholders. Because these fees are paid out of the Fund's assets
on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges. The
maximum annual distribution fee for Investor Class shares of the Fund is 0.25%.
[SHAREHOLDER SERVICING ARRANGEMENTS
The Fund may compensate financial intermediaries for providing a variety of
services to shareholders. Financial intermediaries include affiliated or
unaffiliated brokers, dealers, banks (including bank trust departments), trust
companies, registered investment advisers, financial planners, retirement plan
administrators, insurance companies, and any other institution having a
service, administration, or any similar arrangement with the Fund, its service
providers or their respective affiliates. This section and the following
section briefly describe how financial intermediaries may be paid for providing
these services.
The Fund generally pays financial intermediaries a fee that is based on the
assets of the Fund that are attributable to investments by customers of the
financial intermediary. The services for which financial intermediaries are
compensated may include record-keeping, transaction processing for
shareholders' accounts and other shareholder services. In addition to these
payments, your financial intermediary may charge you account fees, transaction
fees for buying or redeeming shares of the Fund, or other fees for servicing
your account. Your financial intermediary should provide a schedule of its fees
and services to you upon request.
The Fund has adopted a shareholder servicing plan that provides that the Fund
may pay financial intermediaries for shareholder services in an annual amount
not to exceed [0.15]% based on the average daily net assets of the Fund's
Investor Class shares. The Fund does not pay these service fees on shares
purchased directly. In addition to payments made directly to financial
intermediaries by the Fund, the Adviser or its affiliates may, at their own
expense, pay financial intermediaries for these and other services to the
Fund's shareholders, as described in the section below.]
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may
make payments to certain affiliated or unaffiliated financial intermediaries to
compensate them for the costs associated with distribution, marketing,
administration and shareholder servicing support for the Fund. These payments
are sometimes characterized as "revenue sharing" payments and are made out of
the Adviser's and/or its affiliates' own legitimate profits or other resources,
and are not paid by the Fund. A financial intermediary may provide these
services with respect to Fund shares sold or held through programs such as
retirement plans, qualified tuition programs, fund supermarkets, fee-based
advisory or wrap fee programs, bank trust programs, and insurance (e.g.,
16
individual or group annuity) programs. In addition, financial intermediaries
may receive payments for making shares of the Fund available to their customers
or registered representatives, including providing the Fund with "shelf space,"
placing it on a preferred or recommended fund list, or promoting the Fund in
certain sales programs that are sponsored by financial intermediaries. To the
extent permitted by SEC and Financial Industry Regulatory Authority rules and
other applicable laws and regulations, the Adviser and/or its affiliates may
pay or allow other promotional incentives or payments to financial
intermediaries. For more information please see "Payments to Financial
Intermediaries" in the Fund's SAI.
The level of payments to individual financial intermediaries varies in any
given year and may be negotiated on the basis of sales of Fund shares, the
amount of Fund assets serviced by the financial intermediary or the quality of
the financial intermediary's relationship with the Adviser and/or its
affiliates. These payments may be more or less than the payments received by
the financial intermediaries from other mutual funds and may influence a
financial intermediary to favor the sales of certain funds or share classes
over others. In certain instances, the payments could be significant and may
cause a conflict of interest for your financial intermediary. Any such payments
will not change the net asset value or price of the Fund's shares. Please
contact your financial intermediary for information about any payments it may
receive in connection with the sale of Fund shares or the provision of services
to Fund shareholders, as well as information about any fees and/or commissions
it charges.
OTHER POLICIES
EXCESSIVE TRADING POLICIES AND PROCEDURES
The Fund is intended for long-term investment purposes only and discourages
shareholders from engaging in "market timing" or other types of excessive
short-term trading. This frequent trading into and out of the Fund may present
risks to the Fund's long-term shareholders and could adversely affect
shareholder returns. The risks posed by frequent trading include interfering
with the efficient implementation of the Fund's investment strategies,
triggering the recognition of taxable gains and losses on the sale of Fund
investments, requiring the Fund to maintain higher cash balances to meet
redemption requests and experiencing increased transaction costs.
In addition, because the Fund may invest in non-U.S. securities traded
primarily on markets that close prior to the time the Fund determines its NAV,
the risks posed by frequent trading may have a greater potential to dilute the
value of Fund shares held by long-term shareholders than funds investing
exclusively in U.S. securities. In instances where a significant event that
affects the value of one or more non-U.S. securities held by the Fund takes
place after the close of the primary non-U.S. market, but before the time that
the Fund determines its NAV, certain investors may seek to take advantage of
the fact that there will be a delay in the adjustment of the market price for a
security caused by this event until the non-U.S. market reopens (sometimes
referred to as "price" or "time zone" arbitrage). Shareholders who attempt this
type of arbitrage may dilute the value of the Fund's shares if the prices of
the Fund's non-U.S. securities do not reflect their fair value. Although the
Fund has procedures designed to determine the fair value of non-U.S. securities
for purposes of calculating its NAV when such an event has occurred, fair value
pricing, because it involves judgments which are inherently subjective, may not
always eliminate the risk of price arbitrage.
The Fund's service providers will take steps reasonably designed to detect and
deter frequent trading by shareholders pursuant to the Fund's policies and
procedures described in this
17
prospectus and approved by the Fund's Board of Trustees. For purposes of
applying these policies, the Fund's service providers may consider the trading
history of accounts under common ownership or control. The Fund's policies and
procedures include:
o Shareholders are restricted from making more than [INSERT] ([INSERT])
"round trips," into or out of the Fund within any [INSERT]-day period.
If a shareholder exceeds this amount, the Fund and/or its service
providers may, at their discretion, reject any additional purchase
orders. The Fund defines a "round trip" as a purchase into the Fund by
a shareholder, followed by a subsequent redemption out of the Fund, of
an amount the Adviser reasonably believes would be harmful or
disruptive to the Fund.
o The Fund reserves the right to reject any purchase request by any
investor or group of investors for any reason without prior notice,
including, in particular, if the Fund or the Adviser reasonably
believes that the trading activity would be harmful or disruptive to
the Fund.
The Fund and/or its service providers seek to apply these policies to the best
of their abilities uniformly and in a manner they believe is consistent with
the interests of the Fund's long-term shareholders. The Fund does not knowingly
accommodate frequent purchases and redemptions by Fund shareholders. Although
these policies are designed to deter frequent trading, none of these measures
alone nor all of them taken together eliminate the possibility that frequent
trading in the Fund will occur. Systematic purchases and redemptions are exempt
from these policies.
Financial intermediaries (such as investment advisers and broker-dealers) often
establish omnibus accounts in the Fund for their customers through which
transactions are placed. The Fund has entered into "information sharing
agreements" with these financial intermediaries, which permit the Fund to
obtain, upon request, information about the trading activity of the
intermediary's customers that invest in the Fund. If the Fund or its service
providers identify omnibus account level trading patterns that have the
potential to be detrimental to the Fund, the Fund or its service provider may,
in their sole discretion, request from the financial intermediary information
concerning the trading activity of its customers. Based upon a review of that
information, if the Fund or its service providers determine that the trading
activity of any customer may be detrimental to the Fund, they may, in their
sole discretion, request the financial intermediary to restrict or limit
further trading in the Fund by that customer. If the Fund is not satisfied that
the intermediary has taken appropriate action, the Fund may terminate the
intermediary's ability to transact in Fund shares. When information regarding
transactions in the Fund's shares is requested by the Fund and such information
is in the possession of a person that is itself a financial intermediary to a
financial intermediary (an "indirect intermediary"), any financial intermediary
with whom the Fund has an information sharing agreement is obligated to obtain
transaction information from the indirect intermediary or, if directed by the
Fund, to restrict or prohibit the indirect intermediary from purchasing shares
of the Fund on behalf of other persons.
The Fund and its service providers will use reasonable efforts to work with
financial intermediaries to identify excessive short-term trading in omnibus
accounts that may be detrimental to the Fund. However, there can be no
assurance that the monitoring of omnibus account level trading will enable the
Fund to identify or prevent all such trading by a financial intermediary's
customers. Please contact your financial intermediary for more information.
18
CUSTOMER IDENTIFICATION AND VERIFICATION
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.
What this means to you: When you open an account, the Fund will ask your name,
address, date of birth, and other information that will allow the Fund to
identify you. This information is subject to verification to ensure the
identity of all persons opening a mutual fund account.
The Fund is required by law to reject your new account application if the
required identifying information is not provided.
In certain instances, the Fund is required to collect documents to fulfill its
legal obligation. Documents provided in connection with your application will
be used solely to establish and verify a customer's identity.
Attempts to collect the missing information required on the application will be
performed by either contacting you or, if applicable, your broker or financial
intermediary. If this information cannot be obtained within a reasonable
timeframe established in the sole discretion of the Fund, your application will
be rejected.
Subject to the Fund's right to reject purchases as described in this
prospectus, upon receipt of your application in proper form (or upon receipt of
all identifying information required on the application), your investment will
be accepted and your order will be processed at the NAV next-determined.
The Fund reserves the right to close or liquidate your account at the NAV
next-determined and remit proceeds to you via check if it is unable to verify
your identity. Attempts to verify your identity will be performed within a
reasonable timeframe established in the sole discretion of the Fund. Further,
the Fund reserves the right to hold your proceeds until your original check
clears the bank, which may take up to 15 days from the date of purchase. In
such an instance, you may be subject to a gain or loss on Fund shares and will
be subject to corresponding tax implications.
ANTI-MONEY LAUNDERING PROGRAM
Customer identification and verification is part of the Fund's overall
obligation to deter money laundering under federal law. The Fund has adopted
an anti-money laundering compliance program designed to prevent the Fund from
being used for money laundering or the financing of illegal activities and has
appointed an anti-money laundering officer to monitor the Fund's compliance
with the program. In this regard, the Fund reserves the right to: (i) refuse,
cancel or rescind any purchase order; (ii) freeze any account and/or suspend
account services; or (iii) involuntarily close your account in cases of
threatening conduct or suspected fraudulent or illegal activity. These actions
will be taken when, in the sole discretion of Fund management, they are deemed
to be in the best interest of the Fund or in cases when the Fund is requested
or compelled to do so by governmental or law enforcement authority. If your
account is closed at the request of governmental or law enforcement authority,
you may not receive proceeds of the redemption if the Fund is required to
withhold such proceeds.
19
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its net investment income at least [INSERT] and makes
distributions of its net realized capital gains, if any, annually. If you own
Fund shares on the Fund's record date, you will be entitled to receive the
distribution.
You will receive dividends and distributions in the form of additional Fund
shares unless you elect to receive payment in cash. To elect cash payment, you
must notify the Fund in writing prior to the date of the distribution. Your
election will be effective for dividends and distributions paid after the Fund
receives your written notice. To cancel your election, simply send the Fund
written notice.
TAXES
YOU SHOULD ALWAYS CONSULT YOUR TAX ADVISOR FOR SPECIFIC GUIDANCE REGARDING THE
FEDERAL, STATE AND LOCAL TAX EFFECTS OF YOUR INVESTMENT IN THE FUND. The
following is a summary of the federal income tax consequences of investing in
the Fund. This summary does not apply to shares held in an individual
retirement account or other tax-qualified plan, which are not subject to
current tax. Transactions relating to shares held in such accounts may,
however, be taxable at some time in the future.
The Fund intends to satisfy tax requirements applicable to regulated investment
companies each year, including a qualifying income requirement, so that the
Fund will not be liable for U.S. federal income tax on the income and capital
gains that it timely distributes to shareholders each year. There is a risk,
however, that certain of the investments of the Fund may from time to time
generate income that does not constitute qualifying income to the Fund. The
Fund intends to monitor the income from such investments in order to be able to
satisfy such qualifying income requirement. However, if the Fund's
non-qualifying income should exceed 10% of the Fund's gross income for a
taxable year, in the absence of relief from the Internal Revenue Service
("IRS"), the Fund would become liable for a corporate level federal income tax
on its taxable income and gains, regardless of whether such income and gains
are distributed to shareholders.
The Fund intends to distribute substantially all of its net investment income
and net realized capital gains, if any. The dividends and distributions you
receive, whether in cash or reinvested in additional shares of the Fund may be
subject to federal, state, and local taxation, depending upon your tax
situation. Income distributions, including distributions of net short-term
capital gains but excluding distributions of qualified dividend income, are
generally taxable at ordinary income tax rates. Long-term capital gains
distributions and distributions that are designated by the Fund as qualified
dividend income are generally taxable at the rates applicable to long-term
capital gains and set at a maximum tax rate for individuals at 20% (lower rates
apply to individuals in lower tax brackets). Once a year the Fund will send you
a statement showing the types and total amount of distributions you received
during the previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In this
case, you would be taxed on the entire amount of the distribution received,
even though, as an economic matter, the distribution simply constitutes a
return of your investment. This is known as "buying a dividend" and should be
avoided by taxable investors.
20
Each sale of shares of the Fund may be a taxable event. A sale may result in a
capital gain or loss to you. The gain or loss generally will be treated as
short term if you held the shares 12 months or less, long term if you held the
shares for longer. For tax purposes, an exchange of your Fund shares for shares
of a different fund is the same as a sale.
Effective January 1, 2013, U.S. individuals with income exceeding $200,000
($250,000 if married and filing jointly) are subject to a 3.8% Medicare
contribution tax on their "net investment income," including interest,
dividends, and capital gains (including capital gains realized on the sale or
exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the IRS and furnish to
Fund shareholders cost basis information for purchases of Fund shares. In
addition to reporting the gross proceeds from the sale of Fund shares, the Fund
is also required to report the cost basis information for such shares and
indicate whether these shares had a short-term or long-term holding period. For
each sale of Fund shares, the Fund will permit shareholders to elect from among
several IRS-accepted cost basis methods, including the average basis method. In
the absence of an election, the Fund will use the average basis method as the
default cost basis method. The cost basis method elected by the Fund
shareholder (or the cost basis method applied by default) for each sale of Fund
shares may not be changed after the settlement date of each such sale of Fund
shares. Fund shareholders should consult their tax advisors to determine the
best IRS-accepted cost basis method for their tax situation and to obtain more
information about how cost basis reporting applies to them.
To the extent the Fund invests in non-U.S. securities, it may be subject to
non-U.S. withholding taxes with respect to dividends or interest the Fund
received from sources in non-U.S. countries. If more than 50% of the total
assets of the Fund consists of non-U.S. securities, the Fund will be eligible
to elect to treat some of those taxes as a distribution to shareholders, which
would allow shareholders to offset some of their U.S. federal income tax.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
FINANCIAL HIGHLIGHTS
Because the Fund has not commenced operations as of the date of this
prospectus, financial highlights are not available.
21
WINTON SERIES TRUST
WINTON GLOBAL EQUITY PORTFOLIO
INVESTMENT ADVISER
Winton Capital US LLC
375 Park Avenue
New York, New York 10152
DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
More information about the Fund is available, without charge, through the
following:
STATEMENT OF ADDITIONAL INFORMATION ("SAI"): The SAI, dated [DATE], includes
detailed information about Winton Series Trust and the Fund. The SAI is on file
with the SEC and is incorporated by reference into this prospectus. This means
that the SAI, for legal purposes, is a part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS: These reports list the Fund's holdings and
contain information from the Fund's portfolio managers about investment
strategies, and recent market conditions and trends and their impact on Fund
performance. The reports also contain detailed financial information about the
Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR MORE INFORMATION:
BY TELEPHONE: [(___)-(___)-(____)]
BY MAIL: [INSERT]
BY INTERNET: [INSERT]
FROM THE SEC: You can also obtain the SAI or the Annual and Semi-Annual Reports
for the Fund, as well as other information about Winton Series Trust, from the
EDGAR Database on the SEC's website at: http://www.sec.gov. You may review and
copy documents at the SEC Public Reference Room in Washington, DC (for
information on the operation of the Public Reference Room, call 202-551-8090).
You may request documents by mail from the SEC, upon payment of a duplicating
fee, by writing to: U.S. Securities and Exchange Commission, Public Reference
Section, Washington, DC 20549-1520. You may also obtain this information, upon
payment of a duplicating fee, by e-mailing the SEC at the following address:
publicinfo@sec.gov.
The Trust's Investment Company Act registration number is 811-23004.
[INVENTORY CODE]
SUBJECT TO COMPLETION
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 10, 2014
STATEMENT OF ADDITIONAL INFORMATION
WINTON GLOBAL EQUITY PORTFOLIO
(INSTITUTIONAL SHARES: [____])
(INVESTOR SHARES: [____])
A SERIES OF WINTON SERIES TRUST
[DATE]
INVESTMENT ADVISER:
WINTON CAPITAL US LLC
This Statement of Additional Information ("SAI") is not a prospectus. This SAI
is intended to provide additional information regarding the activities and
operations of Winton Series Trust (the "Trust") and the Winton Global Equity
Portfolio (the "Fund"). This SAI is incorporated by reference and should be
read in conjunction with the Fund's prospectuses dated [____]. Capitalized
terms not defined herein are defined in the prospectuses. Shareholders may
obtain copies of the Fund's prospectuses or Annual Report (when available) free
of charge by writing to the Fund at [____] or by calling the Fund at ([___]
[___]-[____]).
TABLE OF CONTENTS
THE TRUST ................................................................ S-1
DESCRIPTION OF PERMITTED INVESTMENTS ..................................... S-1
INVESTMENT LIMITATIONS ................................................... S-26
THE ADVISER .............................................................. S-28
THE PORTFOLIO MANAGERS ................................................... S-29
THE ADMINISTRATOR ........................................................ S-31
THE DISTRIBUTOR .......................................................... S-31
[SHAREHOLDER SERVICES] ................................................... S-32
PAYMENTS TO FINANCIAL INTERMEDIARIES ..................................... S-32
THE TRANSFER AGENT ....................................................... S-33
THE CUSTODIAN ............................................................ S-33
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ............................ S-33
LEGAL COUNSEL ............................................................ S-33
TRUSTEES AND OFFICERS OF THE TRUST ....................................... S-33
PURCHASING AND REDEEMING SHARES .......................................... S-40
DETERMINATION OF NET ASSET VALUE ......................................... S-41
TAXES .................................................................... S-42
FUND TRANSACTIONS ........................................................ S-49
PORTFOLIO HOLDINGS ....................................................... S-50
DESCRIPTION OF SHARES .................................................... S-51
LIMITATION OF TRUSTEES' LIABILITY ........................................ S-52
PROXY VOTING ............................................................. S-52
CODES OF ETHICS .......................................................... S-52
5% AND 25% SHAREHOLDERS .................................................. S-52
FINANCIAL STATEMENTS ..................................................... S-52
APPENDIX A -- DESCRIPTION OF RATINGS ..................................... A-1
APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES ....................... B-1
[Date] [Inventory Code]
i
THE TRUST
GENERAL. The Fund is a series of the Trust. The Trust is an open-end investment
management company established under Delaware law as a Delaware statutory trust
under an Agreement and Declaration of Trust dated October 6, 2014 (the
"Declaration of Trust"). The Declaration of Trust permits the Trust to offer
separate series of shares of beneficial interest ("shares"). The Trust reserves
the right to create and issue shares of additional series. Each series is a
separate mutual fund, and each share of each series represents an equal
proportionate interest in that series. All consideration received by the Trust
for shares of any series and all assets of such series belong solely to that
series and would be subject to liabilities related thereto. Each series of the
Trust pays its: (i) operating expenses, including fees of its service
providers, expenses of preparing prospectuses, proxy solicitation material and
reports to shareholders, costs of custodial services and registering its shares
under federal and state securities laws, pricing and insurance expenses,
brokerage costs, interest charges, taxes and organization expenses, and (ii)
pro rata share of the series' other expenses, including audit and legal
expenses. Expenses attributable to a specific series shall be payable solely
out of the assets of that series. Expenses not attributable to a specific
series are allocated across all of the series on the basis of relative net
assets.
DESCRIPTION OF MULTIPLE CLASSES OF SHARES. The Trust is authorized to offer
shares of the Fund in Institutional Class shares and Investor Class shares. The
different classes provide for variations in distribution and shareholder
servicing fees and minimum investment requirements. Minimum investment
requirements and investor eligibility are described in the prospectuses. The
Trust reserves the right to create and issue additional classes of shares. [For
more information on shareholder servicing expenses, see the section titled
"Shareholder Services" in this SAI.]
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each
share held on the record date of the meeting. Each series of the Trust will
vote separately on matters relating solely to it. As a Delaware statutory
trust, the Trust is not required, and does not intend, to hold annual meetings
of shareholders. Approval of shareholders will be sought, however, for certain
changes in the operation of the Trust and for the election of Trustees under
certain circumstances. Under the Declaration of Trust, the Trustees have the
power to liquidate the Fund without shareholder approval. While the Trustees
have no present intention of exercising this power, they may do so if the Fund
fails to reach a viable size within a reasonable amount of time or for such
other reasons as may be determined by the Board of Trustees of the Trust (the
"Board").
In addition, a Trustee may be removed by the remaining Trustees or by
shareholders at a special meeting called upon written request of shareholders
owning at least [10%] of the outstanding shares of the Trust. In the event that
such a meeting is requested, the Trust will provide appropriate assistance and
information to the shareholders requesting the meeting.
Any series of the Trust may reorganize or merge with one or more other series
of the Trust or of another investment company. Any such reorganization or
merger shall be pursuant to the terms and conditions specified in an agreement
and plan of reorganization authorized and approved by the Trustees and entered
into by the relevant series in connection therewith. In addition, such
reorganization or merger may be authorized by vote of a majority of the
Trustees then in office and, to the extent permitted by applicable law and the
Declaration of Trust, without the approval of shareholders of any series.
DESCRIPTION OF PERMITTED INVESTMENTS
The Fund's investment objective and principal investment strategies are
described in the prospectuses. The Fund is classified as a "diversified"
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"). The following information supplements, and should be read in
conjunction with, the prospectuses. The following are descriptions of the
permitted investments and investment practices of the Fund and the associated
risk factors. The Fund may invest in any of the following instruments or engage
in any of the following investment practices unless such investment or activity
is inconsistent with or is not permitted by the Fund's stated investment
policies, including those stated below.
S-1
AMERICAN DEPOSITARY RECEIPTS ("ADRS"). ADRs, as well as other "hybrid" forms of
ADRs, including European Depositary Receipts ("EDRs") and Global Depositary
Receipts ("GDRs"), are certificates evidencing ownership of shares of a foreign
issuer. Depositary receipts are securities that evidence ownership interests in
a security or a pool of securities that have been deposited with a "depository"
and may be sponsored or unsponsored. These certificates are issued by depository
banks and generally trade on an established market in the United States or
elsewhere. The underlying shares are held in trust by a custodian bank or
similar financial institution in the issuer's home country. The depository bank
may not have physical custody of the underlying securities at all times and may
charge fees for various services, including forwarding dividends and interest
and corporate actions. ADRs are alternatives to directly purchasing the
underlying foreign securities in their national markets and currencies. However,
ADRs continue to be subject to many of the risks associated with investing
directly in foreign securities.
For ADRs, the depository is typically a U.S. financial institution and the
underlying securities are issued by a foreign issuer. For other depositary
receipts, the depository may be a foreign or a U.S. entity, and the underlying
securities may have a foreign or a U.S. issuer. Depositary receipts will not
necessarily be denominated in the same currency as their underlying securities.
Generally, ADRs are issued in registered form, denominated in U.S. dollars, and
designed for use in the U.S. securities markets. Other depositary receipts,
such as GDRs and EDRs, may be issued in bearer form and denominated in other
currencies, and are generally designed for use in securities markets outside
the U.S. While the two types of depositary receipt facilities (unsponsored or
sponsored) are similar, there are differences regarding a holder's rights and
obligations and the practices of market participants. A depository may
establish an unsponsored facility without participation by (or acquiescence of)
the underlying issuer; typically, however, the depository requests a letter of
non-objection from the underlying issuer prior to establishing the facility.
Holders of unsponsored depositary receipts generally bear all the costs of the
facility. The depository usually charges fees upon deposit and withdrawal of
the underlying securities, the conversion of dividends into U.S. dollars or
other currency, the disposition of non-cash distributions, and the performance
of other services. The depository of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
underlying issuer or to pass through voting rights to depositary receipt
holders with respect to the underlying securities.
Sponsored depositary receipt facilities are created in generally the same
manner as unsponsored facilities, except that sponsored depositary receipts are
established jointly by a depository and the underlying issuer through a deposit
agreement. The deposit agreement sets out the rights and responsibilities of
the underlying issuer, the depository, and the depositary receipt holders.
With sponsored facilities, the underlying issuer typically bears some of the
costs of the depositary receipts (such as dividend payment fees of the
depository), although most sponsored depositary receipts agree to distribute
notices of shareholders meetings, voting instructions, and other shareholder
communications and information to the depositary receipt holders at the
underlying issuer's request. The depositary of an unsponsored facility
frequency is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through, to the
holders of the receipts, voting rights with respect to the deposited
securities.
For purposes of the Fund's investment policies, investments in depositary
receipts will be deemed to be investments in the underlying securities. Thus, a
depositary receipt representing ownership of common stock will be treated as
common stock. Depositary receipts do not eliminate all of the risks associated
with directly investing in the securities of foreign issuers.
Investments in the securities of foreign issuers may subject the Fund to
investment risks that differ in some respects from those related to investments
in securities of U.S. issuers. Such risks include future adverse political and
economic developments, possible imposition of withholding taxes on income,
possible seizure, nationalization or expropriation of foreign deposits,
possible establishment of exchange controls or taxation at the source or
greater fluctuation in value due to changes in exchange rates. Foreign issuers
of securities often engage in business practices different from those of
domestic issuers of similar securities, and there may be less information
publicly available about foreign issuers. In addition, foreign issuers are,
generally speaking, subject to less government supervision and regulation and
different accounting treatment than are those in the United States.
EQUITY SECURITIES. Equity securities represent ownership interests in a company
or partnership and consist of common stocks, preferred stocks, warrants and
rights to acquire common stock, securities convertible into common stock, and
investments in master limited partnerships. Investments in equity securities in
general are subject to market risks that may
S-2
cause their prices to fluctuate over time. Fluctuations in the value of equity
securities in which the Fund invests will cause the net asset value of the Fund
to fluctuate. The Fund purchases equity securities traded on global securities
exchanges or the over-the-counter market. Equity securities are described in
more detail below:
o COMMON STOCK. Common stock represents an equity or ownership interest in
an issuer. In the event an issuer is liquidated or declares bankruptcy, the
claims of owners of bonds and preferred stock take precedence over the
claims of those who own common stock.
o PREFERRED STOCK. Preferred stock represents an equity or ownership
interest in an issuer that pays dividends at a specified rate and that has
precedence over common stock in the payment of dividends. In the event an
issuer is liquidated or declares bankruptcy, the claims of owners of bonds
take precedence over the claims of those who own preferred and common
stock.
o ALTERNATIVE ENTITY SECURITIES. Alternative entity securities are the
securities of entities that are formed as limited partnerships, limited
liability companies, business trusts or other non-corporate entities that
are similar to common or preferred stock of corporations.
o EXCHANGE-TRADED FUNDS ("ETFS"). An ETF is a fund whose shares are bought
and sold on a securities exchange as if it were a single security. An ETF
holds a portfolio of securities that is either actively managed by its
investment adviser or is passively managed and designed to track a
particular market segment or index. The Fund could purchase an ETF to
temporarily gain exposure to a portion of the U.S. or foreign markets while
awaiting an opportunity to purchase securities directly. Similarly, the
Fund may establish a short position in an ETF to gain inverse exposure to a
portion of the U.S. or foreign markets. The risks of owning an ETF
generally reflect the risks of owning the underlying securities the ETF
holds, although lack of liquidity in an ETF could result in it being more
volatile than the underlying portfolio of securities and ETFs have
management fees that increase their costs versus the costs of owning the
underlying securities directly. See also "Investment Company Shares" below.
o WARRANTS. Warrants are instruments that entitle the holder to buy an
equity security at a specific price for a specific period of time. Changes
in the value of a warrant do not necessarily correspond to changes in the
value of its underlying security. The price of a warrant may be more
volatile than the price of its underlying security, and a warrant may offer
greater potential for capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect
to the underlying security and do not represent any rights in the assets of
the issuing company. A warrant ceases to have value if it is not exercised
prior to its expiration date. These factors can make warrants more
speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures,
notes, preferred stocks or other securities that may be converted or
exchanged (by the holder or by the issuer) into shares of the underlying
common stock (or cash or securities of equivalent value) at a stated
exchange ratio. A convertible security may also be called for redemption or
conversion by the issuer after a particular date and under certain
circumstances (including a specified price) established upon issue. If a
convertible security held by the Fund is called for redemption or
conversion, the Fund could be required to tender it for redemption, convert
it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than
common stocks. Convertible securities generally provide yields higher than
the underlying common stocks, but generally lower than comparable
non-convertible securities. Because of this higher yield, convertible
securities generally sell at a price above their "conversion value," which
is the current market value of the stock to be received upon conversion.
The difference between this conversion value and the price of convertible
securities will vary over time depending on changes in the value of the
underlying common stocks and interest rates. When the underlying common
stocks decline in value, convertible securities will tend not to decline to
the same extent because of the interest or dividend payments and the
repayment of principal at maturity for certain types of convertible
securities. However, securities that are convertible other than at the
option of the holder generally do not limit the potential for loss to the
same extent as securities convertible at the option of the holder. When the
underlying common stocks rise in value, the value of convertible securities
may also be expected to increase. At the same time, however, the difference
between the market value of
S-3
convertible securities and their conversion value will narrow, which means
that the value of convertible securities will generally not increase to the
same extent as the value of the underlying common stocks. Because
convertible securities may also be interest-rate sensitive, their value may
increase as interest rates fall and decrease as interest rates rise.
Convertible securities are also subject to credit risk, and are often
lower-quality securities.
GENERAL RISKS OF INVESTING IN STOCKS - While investing in stocks allows
investors to participate in the benefits of owning a company, such investors
must accept the risks of ownership. Unlike bondholders, who have preference to
a company's earnings and cash flow, preferred stockholders, followed by common
stockholders in order of priority, are entitled only to the residual amount
after a company meets its other obligations. For this reason, the value of a
company's stock will usually react more strongly to actual or perceived changes
in the company's financial condition or prospects than its debt obligations.
Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices. The value of a company's stock may fall because of:
o Factors that directly relate to that company, such as decisions made by
its management or lower demand for the company's products or services;
o Factors affecting an entire industry, such as increases in production
costs; and
o Changes in general financial market conditions that are relatively
unrelated to the company or its industry, such as changes in interest
rates, currency exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
ADDITIONAL RISKS RELATING TO THE ADVISER'S INVESTMENT SYSTEM -
Trading Outside the Investment System Risk - Most of the Fund's investments are
made strictly in accordance with the output of the Adviser's investment system.
However, the Adviser may, on occasion (such as the occurrence of exceptional
events that fall outside the parameters of the research on which the system is
based), make investment decisions based on factors other than those that are
programmed into the investment system (for example, fundamental factors or the
Adviser's judgment) and take action to override the output of the system to seek
to protect the interests of the Fund. For example, if there is a market crash or
if trading on a market or exchange is suspended, the Adviser may attempt to
reduce risk by liquidating or hedging positions in certain markets. However, the
investment system's signals may ultimately prove to be accurate and the
Adviser's action may not prevent losses to the Fund and may in fact cause or
exacerbate losses.
REAL ESTATE INVESTMENT TRUSTS ("REITS"). A REIT is a corporation or business
trust (that would otherwise be taxed as a corporation) which meets the
definitional requirements of the Internal Revenue Code of 1986, as amended (the
"Code"). The Code permits a qualifying REIT to deduct from taxable income the
dividends paid, thereby effectively eliminating corporate level federal income
tax and making the REIT a pass-through vehicle for federal income tax purposes.
To meet the definitional requirements of the Code, a REIT must, among other
things: invest substantially all of its assets in interests in real estate
(including mortgages and other REITs), cash and government securities; derive
most of its income from rents from real property or interest on loans secured
by mortgages on real property; and distribute annually 90% or more of its
otherwise taxable income to shareholders. Although the REIT structure
originated in the U.S., a number of countries around the world have adopted, or
are considering adopting, similar REIT and REIT-like structures.
REITs are sometimes informally characterized as Equity REITs and Mortgage
REITs. An Equity REIT invests primarily in the fee ownership or leasehold
ownership of land and buildings; a Mortgage REIT invests primarily in mortgages
on real property, which may secure construction, development or long-term
loans.
REITs in which the Fund invests may be affected by changes in underlying real
estate values, which may have an exaggerated effect to the extent that REITs in
which the Fund invests may concentrate investments in particular geographic
regions or property types. Additionally, rising interest rates may cause
investors in REITs to demand a higher annual yield from future distributions,
which may in turn decrease market prices for equity securities issued by REITs.
Rising interest rates also generally increase the costs of obtaining financing,
which could cause the value of the Fund's investments to decline. During
periods of declining interest rates, certain Mortgage REITs may hold mortgages
that the mortgagors elect to prepay, which prepayment may diminish the yield on
securities issued by such Mortgage REITs. In addition, Mortgage REITs may be
affected by the ability of borrowers to repay when due the debt extended by the
REIT and Equity REITs may be affected by the ability of tenants to pay rent.
Certain REITs have relatively small market capitalization, which may tend to
increase the volatility of the market price of securities issued by such REITs.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. By
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investing in REITs indirectly through the Fund, a shareholder will bear not
only his proportionate share of the expenses of the Fund, but also, indirectly,
similar expenses of the REITs. REITs depend generally on their ability to
generate cash flow to make distributions to shareholders.
In addition to these risks, Equity REITs may be affected by changes in the
value of the underlying property owned by the trusts, while Mortgage REITs may
be affected by the quality of any credit extended. Further, Equity and Mortgage
REITs are dependent upon management skills and generally may not be
diversified. Equity and Mortgage REITs are also subject to heavy cash flow
dependency defaults by borrowers and self-liquidation. In addition, Equity and
Mortgage REITs could possibly fail to qualify for tax free pass-through of
income under the Code or to maintain their exemptions from registration under
the 1940 Act. The above factors may also adversely affect a borrower's or a
lessee's ability to meet its obligations to the REIT. In the event of default
by a borrower or lessee, the REIT may experience delays in enforcing its rights
as a mortgagee or lessor and may incur substantial costs associated with
protecting its investments.
MICRO, SMALL AND MEDIUM CAPITALIZATION ISSUERS. Investing in equity securities
of micro, small and medium capitalization companies often involves greater risk
than is customarily associated with investments in larger capitalization
companies. This increased risk may be due to the greater business risks of
smaller size, limited markets and financial resources, narrow product lines and
frequent lack of depth of management. The securities of micro and smaller
companies are often traded in the over-the-counter market and even if listed on
a national securities exchange may not be traded in volumes typical for that
exchange. Consequently, the securities of micro and smaller companies are less
likely to be liquid, may have limited market stability, and may be subject to
more abrupt or erratic market movements than securities of larger, more
established growth companies or the market averages in general.
INITIAL PUBLIC OFFERINGS ("IPOS") - The Fund may invest a portion of its assets
in securities of companies offering shares in IPOs. IPOs may have a magnified
performance impact on a fund with a small asset base. The Fund may hold IPO
shares for a very short period of time, which may increase the turnover of the
Fund's portfolio and may lead to increased expenses for the Fund, such as
commissions and transaction costs. By selling IPO shares, the Fund may realize
taxable gains it will subsequently distribute to shareholders. In addition, the
market for IPO shares can be speculative and/or inactive for extended periods
of time. The limited number of shares available for trading in some IPOs may
make it more difficult for the Fund to buy or sell significant amounts of
shares without an unfavorable impact on prevailing prices. Holders of IPO
shares can be affected by substantial dilution in the value of their shares, by
sales of additional shares and by concentration of control in existing
management and principal shareholders.
The Fund's investment in IPO shares may include the securities of unseasoned
companies (companies with less than three years of continuous operations),
which presents risks considerably greater than common stocks of more
established companies. These companies may have limited operating histories and
their prospects for profitability may be uncertain. These companies may be
involved in new and evolving businesses and may be vulnerable to competition
and changes in technology, markets and economic conditions. They may be more
dependent on key managers and third parties and may have limited product
lines.
MASTER LIMITED PARTNERSHIPS ("MLPS") -- MLPs are limited partnerships or
limited liability companies, whose partnership units or limited liability
interests are listed and traded on a U.S. securities exchange, and are treated
as publicly traded partnerships for federal income tax purposes. To qualify to
be treated as a partnership for tax purposes, an MLP must receive at least 90%
of its income from qualifying sources as set forth in Section 7704(d) of the
Internal Revenue Code of 1986, as amended (the "Code"). These qualifying
sources include activities such as the exploration, development, mining,
production, processing, refining, transportation, storage and marketing of
mineral or natural resources. MLPs that are formed as limited partnerships
generally have two classes of owners, the general partner and limited partners,
while MLPs that are formed as limited liability companies generally have two
analogous classes of owners, the managing member and the members. For purposes
of this section, references to general partners also apply to managing members
and references to limited partners also apply to members.
The general partner is typically owned by a major energy company, an investment
fund, the direct management of the MLP or is an entity owned by one or more of
such parties. The general partner may be structured as a private or publicly
traded corporation or other entity. The general partner typically controls the
operations and management of the MLP
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through an equity interest of as much as 2% in the MLP plus, in many cases,
ownership of common units and subordinated units. A holder of general partner
interests can be liable under certain circumstances for amounts greater than
the amount of the holder's investment in the general partner interest. General
partner interests are not publicly traded and generally cannot be converted
into common units. The general partner interest can be redeemed by the MLP if
the MLP unitholders choose to remove the general partner, typically with a
supermajority vote by limited partner unitholders.
Limited partners own the remainder of the MLP through ownership of common units
and have a limited role in the MLP's operations and management. Common units
are listed and traded on U.S. securities exchanges, with their value
fluctuating predominantly based on prevailing market conditions and the success
of the MLP. Unlike owners of common stock of a corporation, owners of common
units have limited voting rights and have no ability annually to elect
directors. In the event of liquidation, common units have preference over
subordinated units, but not over debt or preferred units, to the remaining
assets of the MLP.
MLPs are typically structured such that common units and general partner
interests have first priority to receive quarterly cash distributions up to an
established minimum amount ("minimum quarterly distributions" or "MQD"). Common
and general partner interests also accrue arrearages in distributions to the
extent the MQD is not paid. Once common and general partner interests have been
paid, subordinated units receive distributions of up to the MQD; however,
subordinated units do not accrue arrearages. Distributable cash in excess of
the MQD paid to both common and subordinated units is distributed to both
common and subordinated units generally on a pro rata basis. The general
partner is also eligible to receive incentive distributions if the general
partner operates the business in a manner which results in distributions paid
per common unit surpassing specified target levels. As the general partner
increases cash distributions to the limited partners, the general partner
receives an increasingly higher percentage of the incremental cash
distributions. A common arrangement provides that the general partner can reach
a tier where it receives 50% of every incremental dollar paid to common and
subordinated unit holders. These incentive distributions encourage the general
partner to streamline costs, increase capital expenditures and acquire assets
in order to increase the partnership's cash flow and raise the quarterly cash
distribution in order to reach higher tiers. Such results benefit all security
holders of the MLP.
FOREIGN SECURITIES. Foreign securities include equity securities of foreign
entities, obligations of foreign branches of U.S. banks and of foreign banks,
including, without limitation, European Certificates of Deposit, European Time
Deposits, European Bankers' Acceptances, Canadian Time Deposits, Europaper and
Yankee Certificates of Deposit, and investments in Canadian Commercial Paper
and foreign securities. These instruments have investment risks that differ in
some respects from those related to investments in obligations of U.S. domestic
issuers. Such risks include future adverse political and economic developments,
the possible imposition of withholding taxes on interest or other income,
possible seizure, nationalization, or expropriation of foreign deposits, the
possible establishment of exchange controls or taxation at the source, greater
fluctuations in value due to changes in exchange rates, or the adoption of
other foreign governmental restrictions which might adversely affect the
payment of principal and interest on such obligations. Such investments may
also entail higher custodial fees and sales commissions than domestic
investments. Foreign issuers of securities or obligations are often subject to
accounting treatment and engage in business practices different from those
respecting domestic issuers of similar securities or obligations. Foreign
branches of U.S. banks and foreign banks may be subject to less stringent
reserve requirements than those applicable to domestic branches of U.S. banks.
EMERGING MARKETS -- An "emerging country" is generally a country that the
International Bank for Reconstruction and Development (World Bank) and the
International Finance Corporation would consider to be an emerging or
developing country. Typically, emerging markets are in countries that are in
the process of industrialization, with lower gross national products (GNP) than
more developed countries. There are currently over 130 countries that the
international financial community generally considers to be emerging or
developing countries, approximately 40 of which currently have stock markets.
These countries generally include every nation in the world except the United
States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe.
INVESTMENT FUNDS -- Some emerging countries currently prohibit direct foreign
investment in the securities of their companies. Certain emerging countries,
however, permit indirect foreign investment in the securities of companies
listed and traded on their stock exchanges through investment funds that they
have specifically authorized. Investments in these investment funds are subject
to the provisions of the 1940 Act. If the Fund invests in such investment
funds, shareholders
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will bear not only their proportionate share of the expenses (including
operating expenses and the fees of the Adviser), but also will bear indirectly
bear similar expenses of the underlying investment funds. In addition, these
investment funds may trade at a premium over their net asset value.
RISKS OF FOREIGN SECURITIES:
Foreign securities, foreign currencies, and securities issued by U.S. entities
with substantial foreign operations may involve significant risks in addition
to the risks inherent in U.S. investments.
POLITICAL AND ECONOMIC FACTORS -- Local political, economic, regulatory, or
social instability, military action or unrest, or adverse diplomatic
developments may affect the value of foreign investments. Listed below are some
of the more important political and economic factors that could negatively
affect an investment in foreign securities:
o The economies of foreign countries may differ from the economy of the
United States in such areas as growth of gross national product, rate
of inflation, capital reinvestment, resource self-sufficiency, budget
deficits and national debt;
o Foreign governments sometimes participate to a significant degree,
through ownership interests or regulation, in their respective
economies. Actions by these governments could significantly influence
the market prices of securities and payment of dividends;
o The economies of many foreign countries are dependent on
international trade and their trading partners and they could be
severely affected if their trading partners were to enact protective
trade barriers and economic conditions;
o The internal policies of a particular foreign country may be less
stable than in the United States. Other countries face significant
external political risks, such as possible claims of sovereignty by
other countries or tense and sometimes hostile border clashes; and
o A foreign government may act adversely to the interests of U.S.
investors, including expropriation or nationalization of assets,
confiscatory taxation and other restrictions on U.S. investment. A
country may restrict or control foreign investments in its securities
markets. These restrictions could limit the Fund's ability to invest
in a particular country or make it very expensive for the Fund to
invest in that country. Some countries require prior governmental
approval or limit the types or amount of securities or companies in
which a foreigner can invest. Other countries may restrict the ability
of foreign investors to repatriate their investment income and capital
gains.
INFORMATION AND SUPERVISION -- There is generally less publicly available
information about foreign companies than companies based in the United States.
For example, there are often no reports and ratings published about foreign
companies comparable to the ones written about U.S. companies. Foreign
companies are typically not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. The lack of comparable information makes
investment decisions concerning foreign companies more difficult and less
reliable than domestic companies.
STOCK EXCHANGE AND MARKET RISK -- The Fund's investment managers anticipate
that in most cases an exchange or over-the-counter ("OTC") market located
outside of the United States will be the best available market for foreign
securities. Foreign stock markets, while growing in volume and sophistication,
are generally not as developed as the markets in the United States. Foreign
stock markets tend to differ from those in the United States in a number of
ways.
Foreign stock markets:
o are generally more volatile than, and not as developed or efficient
as, those in the United States;
o have substantially less volume;
o trade securities that tend to be less liquid and experience rapid and
erratic price movements;
o have generally higher commissions and are subject to set minimum
rates, as opposed to negotiated rates;
o employ trading, settlement and custodial practices less developed
than those in U.S. markets; and
o may have different settlement practices, which may cause delays and
increase the potential for failed settlements.
Foreign markets may offer less protection to shareholders than U.S. markets
because:
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o foreign accounting, auditing, and financial reporting requirements
may render a foreign corporate balance sheet more difficult to
understand and interpret than one subject to U.S. law and standards;
o adequate public information on foreign issuers may not be available,
and it may be difficult to secure dividends and information regarding
corporate actions on a timely basis;
o in general, there is less overall governmental supervision and
regulation of securities exchanges, brokers, and listed companies than
in the United States;
o OTC markets tend to be less regulated than stock exchange markets
and, in certain countries, may be totally unregulated;
o economic or political concerns may influence regulatory enforcement
and may make it difficult for shareholders to enforce their legal
rights; and
o restrictions on transferring securities within the United States or
to U.S. persons may make a particular security less liquid than
foreign securities of the same class that are not subject to such
restrictions.
FOREIGN CURRENCY RISK -- While the Fund denominates its net asset value in U.S.
dollars, the securities of foreign companies are frequently denominated in
foreign currencies. Thus, a change in the value of a foreign currency against
the U.S. dollar will result in a corresponding change in value of securities
denominated in that currency. Some of the factors that may impair the
investments denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.S. dollars
and vice versa;
o Complex political and economic factors may significantly affect the
values of various currencies, including U.S. dollars, and their
exchange rates;
o Government intervention may increase risks involved in purchasing or
selling foreign currency options, forward contracts and futures
contracts, since exchange rates may not be free to fluctuate in
response to other market forces;
o There may be no systematic reporting of last sale information for
foreign currencies or regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis;
o Available quotation information is generally representative of very
large round-lot transactions in the inter-bank market and thus may not
reflect exchange rates for smaller odd-lot transactions (less than $1
million) where rates may be less favorable; and
o The inter-bank market in foreign currencies is a global,
around-the-clock market. To the extent that a market is closed while
the markets for the underlying currencies remain open, certain markets
may not always reflect significant price and rate movements.
TAXES -- Certain foreign governments levy withholding taxes on dividend and
interest income. Although in some countries it is possible for the Fund to
recover a portion of these taxes, the portion that cannot be recovered will
reduce the income the Fund receives from its investments.
EMERGING MARKETS -- Investing in emerging markets may magnify the risks of
foreign investing. Security prices in emerging markets can be significantly
more volatile than those in more developed markets, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses, restrictions on
foreign ownership and prohibitions on the repatriation of assets;
o Offer less protection of property rights than more developed countries;
and
o Have economies that are based on only a few industries, may be highly
vulnerable to changes in local or global trade conditions, and may suffer
from extreme and volatile debt burdens or inflation rates.
Local securities markets may trade a small number of securities and may be
unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of holdings difficult or impossible at times.
MONEY MARKET SECURITIES. Money market securities include short-term U.S.
government securities; custodial receipts evidencing separately traded interest
and principal components of securities issued by the U.S. Treasury; commercial
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paper rated in the highest short-term rating category by a nationally
recognized statistical ratings organization ("NRSRO"), such as Standard &
Poor's Rating Services ("S&P") or Moody's Investor Services, Inc. ("Moody's"),
or determined by the Adviser to be of comparable quality at the time of
purchase; short-term bank obligations (certificates of deposit, time deposits
and bankers' acceptances) of U.S. commercial banks with assets of at least $1
billion as of the end of their most recent fiscal year; and repurchase
agreements involving such securities. Each of these money market securities
are described below. For a description of ratings, see "Appendix A --
Description of Ratings" to this SAI.
U.S. GOVERNMENT SECURITIES - The Funds may invest in U.S. government
securities. Securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities include U.S. Treasury securities, which are
backed by the full faith and credit of the U.S. Treasury and which differ only
in their interest rates, maturities, and times of issuance. U.S. Treasury bills
have initial maturities of one-year or less; U.S. Treasury notes have initial
maturities of one to ten years; and U.S. Treasury bonds generally have initial
maturities of greater than ten years. U.S. Treasury notes and bonds typically
pay coupon interest semi-annually and repay the principal at maturity. Certain
U.S. government securities are issued or guaranteed by agencies or
instrumentalities of the U.S. government including, but not limited to,
obligations of U.S. government agencies or instrumentalities such as the
Federal National Mortgage Association ("Fannie Mae"), the Government National
Mortgage Association ("Ginnie Mae"), the Small Business Administration, the
Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for
Cooperatives (including the Central Bank for Cooperatives), the Federal Land
Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority,
the Export-Import Bank of the United States, the Commodity Credit Corporation,
the Federal Financing Bank, the Student Loan Marketing Association, the
National Credit Union Administration and the Federal Agricultural Mortgage
Corporation ("Farmer Mac").
Some obligations issued or guaranteed by U.S. government agencies and
instrumentalities, including, for example, Ginnie Mae pass-through
certificates, are supported by the full faith and credit of the U.S. Treasury.
Other obligations issued by or guaranteed by federal agencies, such as those
securities issued by Fannie Mae, are supported by the discretionary authority
of the U.S. government to purchase certain obligations of the federal agency.
Additionally, some obligations are issued by or guaranteed by federal agencies,
such as those of the Federal Home Loan Banks, which are supported by the right
of the issuer to borrow from the U.S. Treasury. While the U.S. government
provides financial support to such U.S. government-sponsored federal agencies,
no assurance can be given that the U.S. government will always do so, since the
U.S. government is not so obligated by law. Guarantees of principal by U.S.
government agencies or instrumentalities may be a guarantee of payment at the
maturity of the obligation so that in the event of a default prior to maturity
there might not be a market and thus no means of realizing on the obligation
prior to maturity. Guarantees as to the timely payment of principal and
interest do not extend to the value or yield of these securities nor to the
value of the Funds' shares.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie
Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the
two federal instrumentalities in conservatorship. Under the takeover, the U.S.
Treasury agreed to acquire $1 billion of senior preferred stock of each
instrumentality and obtained warrants for the purchase of common stock of each
instrumentality (the "Senior Preferred Stock Purchase Agreement" or
"Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to
$200 billion per instrumentality as needed, including the contribution of cash
capital to the instrumentalities in the event their liabilities exceed their
assets. This was intended to ensure that the instrumentalities maintain a
positive net worth and meet their financial obligations, preventing mandatory
triggering of receivership. On December 24, 2009, the U.S. Treasury announced
that it was amending the Agreement to allow the $200 billion cap on the U.S.
Treasury's funding commitment to increase as necessary to accommodate any
cumulative reduction in net worth through the end of 2012. The unlimited
support the U.S. Treasury extended to the two companies expired at the
beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and
Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the
Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay
a 10% annual dividend. Instead, the companies will transfer to the U.S.
Treasury on a quarterly basis all profits earned during a quarter that exceed a
capital reserve amount of $3 billion. It is believed that the new amendment
puts Fannie Mae and Freddie Mac in a better position to service their debt
because the companies no longer have to borrow from the U.S. Treasury to make
fixed dividend payments. As part of the new terms,
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Fannie Mae and Freddie Mac also will be required to reduce their investment
portfolios at an annual rate of 15 percent instead of the previous 10 percent,
which puts each of them on track to cut their portfolios to a targeted $250
billion in 2018.
Fannie Mae and Freddie Mac are the subject of several continuing class action
lawsuits and investigations by federal regulators over certain accounting,
disclosure or corporate governance matters, which (along with any resulting
financial restatements) may adversely affect the guaranteeing entities.
Importantly, the future of the entities is in serious question as the U.S.
Government reportedly is considering multiple options, ranging from
nationalization, privatization, consolidation, or abolishment of the entities.
o U.S. TREASURY OBLIGATIONS - U.S. Treasury obligations consist of direct
obligations of the U.S. Treasury, including Treasury bills, notes and
bonds, and separately traded interest and principal component parts of such
obligations, including those transferable through the Federal book-entry
system known as Separate Trading of Registered Interest and Principal of
Securities ("STRIPS"). The STRIPS program lets investors hold and trade the
individual interest and principal components of eligible Treasury notes and
bonds as separate securities. Under the STRIPS program, the principal and
interest components are separately issued by the U.S. Treasury at the
request of depository financial institutions, which then trade the
component parts separately.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured
short-term promissory notes issued by corporations and other entities.
Maturities on these issues vary from a few to 270 days.
INVESTMENT GRADE FIXED INCOME SECURITIES. Fixed income securities are
considered investment grade if they are rated in one of the four highest rating
categories by an NRSRO, or, if not rated, are determined to be of comparable
quality by the Adviser. See "Appendix A -Description of Ratings" for a
description of the bond rating categories of several NRSROs. Ratings of each
NRSRO represent its opinion of the safety of principal and interest payments
(and not the market risk) of bonds and other fixed income securities it
undertakes to rate at the time of issuance. Ratings are not absolute standards
of quality and may not reflect changes in an issuer's creditworthiness. Fixed
income securities rated BBB- or Baa3 lack outstanding investment
characteristics, and have speculative characteristics as well. Securities rated
Baa3 by Moody's or BBB- by S&P or higher are considered by those rating
agencies to be "investment grade" securities, although Moody's considers
securities rated in the Baa category to have speculative characteristics. While
issuers of bonds rated BBB by S&P are considered to have adequate capacity to
meet their financial commitments, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and principal for debt in this category than debt in higher rated categories.
In the event a security owned by the Fund is downgraded below investment grade,
the Adviser will review the situation and take appropriate action with regard
to the security, including the actions discussed below.
DEBT SECURITIES. Corporations and governments use debt securities to borrow
money from investors. Most debt securities promise a variable or fixed rate of
return and repayment of the amount borrowed at maturity. Some debt securities,
such as zero-coupon bonds, do not pay current interest and are purchased at a
discount from their face value.
TYPES OF DEBT SECURITIES:
o CORPORATE BONDS - Corporations issue bonds and notes to raise money
for working capital or for capital expenditures such as plant
construction, equipment purchases and expansion. In return for the
money loaned to the corporation by investors, the corporation promises
to pay investors interest, and repay the principal amount of the bond
or note.
o MORTGAGE-BACKED SECURITIES - Mortgage-backed securities are interests
in pools of mortgage loans that various governmental,
government-related and private organizations assemble as securities
for sale to investors. Unlike most debt securities, which pay interest
periodically and repay principal at maturity or on specified call
dates, mortgage-backed securities make monthly payments that consist
of both interest and principal payments. In effect, these payments are
a "pass-through" of the monthly payments made by the individual
borrowers on their mortgage loans, net of any fees paid to the issuer
or guarantor of such securities. Since homeowners usually have
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the option of paying either part or all of the loan balance before
maturity, the effective maturity of a mortgage-backed security is
often shorter than is stated.
Governmental entities, private insurers and mortgage poolers may
insure or guarantee the timely payment of interest and principal of
these pools through various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance and
letters of credit. The Adviser will consider such insurance and
guarantees and the creditworthiness of the issuers thereof in
determining whether a mortgage-related security meets its investment
quality standards. It is possible that the private insurers or
guarantors will not meet their obligations under the insurance
policies or guarantee arrangements.
Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be
readily marketable.
COMMERCIAL BANKS, SAVINGS AND LOAN INSTITUTIONS, PRIVATE MORTGAGE INSURANCE
COMPANIES, MORTGAGE BANKERS AND OTHER SECONDARY MARKET ISSUERS. Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers also create pass-through
pools of conventional mortgage loans. In addition to guaranteeing the
mortgage-related security, such issuers may service and/or have originated the
underlying mortgage loans. Pools created by these issuers generally offer a
higher rate of interest than pools created by Ginnie Mae, Fannie Mae and
Freddie Mac because they are not guaranteed by a government agency.
RISKS OF MORTGAGE-BACKED SECURITIES - Yield characteristics of mortgage-backed
securities differ from those of traditional debt securities in a variety of
ways. The most significant differences of mortgage-backed securities are: 1)
payments of interest and principal are more frequent (usually monthly) and 2)
falling interest rates generally cause individual borrowers to pay off their
mortgage earlier than expected, which results in prepayments of principal on
the securities, thus forcing the Fund to reinvest the money at a lower interest
rate. In addition to risks associated with changes in interest rates described
in "Factors Affecting the Value of Debt Securities," a variety of economic,
geographic, social and other factors, such as the sale of the underlying
property, refinancing or foreclosure, can cause investors to repay the loans
underlying a mortgage-backed security sooner than expected. When prepayment
occurs, the Fund may have to reinvest its principal at a rate of interest that
is lower than the rate on existing mortgage-backed securities.
OTHER ASSET-BACKED SECURITIES - These securities are interests in pools of a
broad range of assets other than mortgages, such as automobile loans, computer
leases and credit card receivables. Like mortgage-backed securities, these
securities are pass-through. In general, the collateral supporting these
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments with interest rate fluctuations, but may
still be subject to prepayment risk.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets, which raises the
possibility that recoveries on repossessed collateral may not be available to
support payments on these securities. For example, credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which allow debtors to
reduce their balances by offsetting certain amounts owed on the credit cards.
Most issuers of asset-backed securities backed by automobile receivables permit
the servicers of such receivables to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related asset-backed securities. Due to the quantity of
vehicles involved and requirements under state laws, asset-backed securities
backed by automobile receivables may not have a proper security interest in all
of the obligations backing such receivables.
To lessen the effect of failures by obligors on underlying assets to make
payments, the entity administering the pool of assets may agree to ensure the
receipt of payments on the underlying pool occurs in a timely fashion
("liquidity protection"). In addition, asset-backed securities may obtain
insurance, such as guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, for some or all of the assets in the pool
("credit support"). Delinquency or loss more than that anticipated or failure
of the credit support could adversely affect the return on an investment in
such a security.
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The Fund may also invest in residual interests in asset-backed securities,
which consist of the excess cash flow remaining after making required payments
on the securities and paying related administrative expenses. The amount of
residual cash flow resulting from a particular issue of asset-backed securities
depends in part on the characteristics of the underlying assets, the coupon
rates on the securities, prevailing interest rates, the amount of
administrative expenses and the actual prepayment experience on the underlying
assets.
SENIOR LOANS AND BANK LOANS. Senior loans and bank loans typically are arranged
through private negotiations between a borrower and several financial
institutions or a group of lenders which are represented by one or more lenders
acting as agent. The agent is often a commercial bank that originates the loan
and invites other parties to join the lending syndicate. The agent will be
primarily responsible for negotiating the loan agreement and will have
responsibility for the documentation and ongoing administration of the loan on
behalf of the lenders after completion of the loan transaction. The Fund can
invest in a senior loan or bank loan either as a direct lender or through an
assignment or participation.
When the Fund acts as a direct lender, it will have a direct contractual
relationship with the borrower and may participate in structuring the loan, may
enforce compliance by the borrower with the terms of the loan agreement and may
have voting, consent and set-off rights under the loan agreement.
Loan assignments are investments in all or a portion of certain senior loans or
bank loans purchased from the lenders or from other third parties. The
purchaser of an assignment typically will acquire direct rights against the
borrower under the loan. While the purchaser of an assignment typically
succeeds to all the rights and obligations of the assigning lender under the
loan agreement, because assignments are arranged through private negotiations
between potential assignees and assignors, or other third parties whose
interests are being assigned, the rights and obligations acquired by the Fund
may differ from and be more limited than those held by the assigning lender.
A holder of a loan participation typically has only a contractual right with
the seller of the participation and not with the borrower or any other entities
interpositioned between the seller of the participation and the borrower. As
such, the purchaser of a loan participation assumes the credit risk of the
seller of the participation, and any intermediary entities between the seller
and the borrower, in addition to the credit risk of the borrower. When the Fund
holds a loan participation, it will have the right to receive payments of
principal, interest and fees to which it may be entitled only from the seller
of the participation and only upon receipt of the seller of such payments from
the borrower or from any intermediary parties between the seller and the
borrower. Additionally, the Fund will generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement, will have no
voting, consent or set-off rights under the loan agreement and may not directly
benefit from the collateral supporting the loan although lenders that sell
participations generally are required to distribute liquidation proceeds
received by them pro rata among the holders of such participations. In the
event of the bankruptcy or insolvency of the borrower, a loan participation may
be subject to certain defenses that can be asserted by the borrower as a result
of improper conduct by the seller or intermediary. If the borrower fails to pay
principal and interest when due, the Fund may be subject to greater delays,
expenses and risks that those that would have been involved if the Fund had
purchased a direct obligation of such borrower.
Direct loans, assignments and loan participations may be considered liquid, as
determined by the Adviser based on criteria approved by the Board.
The Adviser may from time to time have the opportunity to receive material,
non-public information ("Confidential Information") about the issuers of bank
loans and related investments being considered for acquisition by the Fund or
held in the Fund's portfolio. For example, a bank issuer of privately placed
bank loans considered by the Fund may offer to provide the Adviser with
financial information and related documentation regarding the bank issuer that
is not publicly available. Pursuant to applicable policies and procedures, the
Adviser may (but is not required to) seek to avoid receipt of Confidential
Information from the issuer so as to avoid possible restrictions on its ability
to purchase and sell investments on behalf of the Fund and other clients to
which such Confidential Information relates (e.g., other securities issued by
the bank used in the example above). In such circumstances, the Fund (and other
clients of the Adviser) may be disadvantaged in comparison to other investors,
including with respect to the price the Fund pays or receives when it buys or
sells an investment. Further, the Adviser's and the Fund's abilities to assess
the desirability of proposed consents, waivers or amendments with respect to
certain investments may be compromised if they are not privy to available
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Confidential Information. The Adviser may also determine to receive such
Confidential Information in certain circumstances under its applicable policies
and procedures. If the Adviser intentionally or unintentionally comes into
possession of Confidential Information, it may be unable, potentially for a
substantial period of time, to purchase or sell investments to which such
Confidential Information relates.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. A repurchase agreement is an agreement under which the
Fund acquires a fixed income security (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, and simultaneously agrees
to resell such security to the seller at an agreed upon price and date
(normally, the next business day). Because the security purchased constitutes
collateral for the repurchase obligation, a repurchase agreement may be
considered a loan that is collateralized by the security purchased. The
acquisition of a repurchase agreement may be deemed to be an acquisition of the
underlying securities as long as the obligation of the seller to repurchase the
securities is collateralized fully. The Fund follows certain procedures
designed to minimize the risks inherent in such agreements. These procedures
include effecting repurchase transactions only with creditworthy financial
institutions whose condition will be continually monitored by the Adviser. The
repurchase agreements entered into by the Fund will provide that the underlying
collateral at all times shall have a value at least equal to 102% of the resale
price stated in the agreement and consist only of securities permissible under
Section 101(47)(A)(i) of the Bankruptcy Code (the Adviser monitors compliance
with this requirement). Under all repurchase agreements entered into by the
Fund, the custodian or its agent must take possession of the underlying
collateral. In the event of a default or bankruptcy by a selling financial
institution, the Fund will seek to liquidate such collateral. However, the
exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price,
the Fund could suffer a loss. The Fund may enter into "tri-party" repurchase
agreements. In "tri-party" repurchase agreements, an unaffiliated third party
custodian maintains accounts to hold collateral for the Fund and its
counterparties and, therefore, the Fund may be subject to the credit risk of
those custodians. It is the current policy of the Fund not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund, amounts
to more than 15% of the Fund's total assets. The investments of the Fund in
repurchase agreements, at times, may be substantial when, in the view of the
Adviser, liquidity or other considerations so warrant.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are transactions
in which the Fund sells portfolio securities to financial institutions, such as
banks and broker-dealers, and agrees to repurchase them at a mutually
agreed-upon date and price that is higher than the original sale price. Reverse
repurchase agreements are similar to a fully collateralized borrowing by the
Fund. At the time the Fund enters into a reverse repurchase agreement, it will
earmark on the books of the Fund or place in a segregated account cash or
liquid securities having a value equal to the repurchase price (including
accrued interest) and will subsequently monitor the account to ensure that such
equivalent value is maintained.
Reverse repurchase agreements involve risks. Reverse repurchase agreements are
a form of leverage, and the use of reverse repurchase agreements by the Fund
may increase the Fund's volatility. Reverse repurchase agreements are also
subject to the risk that the other party to the reverse repurchase agreement
will be unable or unwilling to complete the transaction as scheduled, which may
result in losses to the Fund. Reverse repurchase agreements also involve the
risk that the market value of the securities sold by the Fund may decline below
the price at which it is obligated to repurchase the securities. In addition,
when the Fund invests the proceeds it receives in a reverse repurchase
transaction, there is a risk that those investments may decline in value. In
this circumstance, the Fund could be required to sell other investments in
order to meet its obligations to repurchase the securities.
SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in shares of
other investment companies, to the extent permitted by applicable law and
subject to certain restrictions. These investment companies typically incur
fees that are separate from those fees incurred directly by the Fund. The
Fund's purchase of such investment company securities results in the layering
of expenses, such that shareholders would indirectly bear a proportionate share
of the operating expenses of such investment companies, including advisory
fees, in addition to paying the Fund's expenses. Unless an exception is
available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i)
acquiring more than 3% of the voting
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shares of any one investment company, (ii) investing more than 5% of its total
assets in any one investment company, and (iii) investing more than 10% of its
total assets in all investment companies combined, including its ETF
investments.
For hedging or other purposes, the Fund may invest in investment companies that
seek to track the composition and/or performance of specific indexes or
portions of specific indexes. Certain of these investment companies, known as
exchange-traded funds, are traded on a securities exchange. (See "Exchange
Traded Funds" above). The market prices of index-based investments will
fluctuate in accordance with changes in the underlying portfolio securities of
the investment company and also due to supply and demand of the investment
company's shares on the exchange upon which the shares are traded. Index-based
investments may not replicate or otherwise match the composition or performance
of their specified index due to transaction costs, among other things.
Pursuant to orders issued by the Securities and Exchange Commission (the "SEC")
to each of certain iShares, Market Vectors, Vanguard, ProShares, PowerShares,
Guggenheim (formerly, Claymore), Direxion, Wisdom Tree, Rydex, First Trust and
SPDR exchange-traded funds (collectively, the "ETFs") and procedures approved
by the Board, the Fund may invest in the ETFs in excess of the 3% limit
described above, provided that the Fund otherwise complies with the conditions
of the SEC order, as it may be amended, and any other applicable investment
limitations. Neither the ETFs nor their investment advisers make any
representations regarding the advisability of investing in the ETFs.
DERIVATIVES
Derivatives are financial instruments whose value is based on an underlying
asset (such as a stock or a bond), an underlying economic factor (such as an
interest rate) or a market benchmark. Unless otherwise stated in the Fund's
Prospectuses, the Fund may use derivatives for a number of purposes including
managing risk, gaining exposure to various markets in a cost efficient manner,
reducing transaction costs, remaining fully invested and speculating. The Fund
may also invest in derivatives to protect it from broad fluctuations in market
prices, interest rates or foreign currency exchange rates (a practice known as
"hedging"). When hedging is successful, the Fund will have offset any
depreciation in the value of its portfolio securities by the appreciation in
the value of the derivative position. Although techniques other than the sale
and purchase of derivatives could be used to control the exposure of the Fund
to market fluctuations, the use of derivatives may be a more effective means of
hedging this exposure. In the future, the Fund may use instruments and
techniques that are not presently contemplated, but which may be subsequently
developed, to the extent such use is consistent with the Fund's investment
objectives and is legally permissible.
There can be no assurance that a derivative strategy, if employed, will be
successful. Because many derivatives have a leverage or borrowing component,
adverse changes in the value or level of the underlying asset, reference rate
or index can result in a loss substantially greater than the amount invested in
the derivative itself. Certain derivatives have the potential for unlimited
loss, regardless of the size of the initial investment. Accordingly, certain
derivative transactions may be considered to constitute borrowing transactions
for purposes of the 1940 Act. Such a derivative transaction will not be
considered to constitute the issuance of a "senior security" by the Fund, and
therefore such transaction will not be subject to the 300% asset coverage
requirement otherwise applicable to borrowings by the Fund, if the Fund covers
the transaction or segregates sufficient liquid assets (or such assets are
"earmarked" on the Fund's books) in accordance with the requirements and
interpretations of the SEC and its staff. The Fund may enter into agreements
with broker-dealers that require the broker-dealers to accept physical
settlement for certain types of derivatives instruments. If this occurs, the
Fund would treat such derivative instruments as being cash settled for purposes
of determining the Fund's coverage requirements.
As a result of recent amendments to rules under the Commodity Exchange Act
("CEA") by the Commodity Futures Trading Commission ("CFTC"), a Fund must
either operate within certain guidelines and restrictions with respect to the
Fund's use of futures, options on such futures, commodity options and certain
swaps, or the Adviser will be subject to registration with the CFTC as a
"commodity pool operator" ("CPO").
Consistent with the CFTC's new regulations, the Trust, on behalf of the Fund,
has filed a notice of exclusion from the definition of the term CPO under the
CEA pursuant to CFTC Rule 4.5 and, therefore, the Fund is not subject to
registration or regulation as a CPO under the CEA. As a result, the Fund will
be limited in its ability to use futures,
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options on such futures, commodity options and certain swaps. Complying with
the limitations may restrict the Adviser's ability to implement the Fund's
investment strategies and may adversely affect the Fund's performance.
TYPES OF DERIVATIVES:
FUTURES. A futures contract is an agreement between two parties whereby one
party agrees to sell and the other party agrees to buy a specified amount of a
financial instrument at an agreed upon price and time. The financial instrument
underlying the contract may be a stock, stock index, bond, bond index, interest
rate, foreign exchange rate or other similar instrument. Agreeing to buy the
underlying financial instrument is called buying a futures contract or taking a
long position in the contract. Likewise, agreeing to sell the underlying
financial instrument is called selling a futures contract or taking a short
position in the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade (known as "contract markets") approved for such trading and
regulated by the CFTC. These contract markets standardize the terms, including
the maturity date and underlying financial instrument, of all futures
contracts.
Unlike other securities, the parties to a futures contract do not have to pay
for or deliver the underlying financial instrument until some future date (the
delivery date). Contract markets require both the purchaser and seller to
deposit "initial margin" with a futures broker, known as a futures commission
merchant or custodian bank, when they enter into the contract. Initial margin
deposits are typically equal to a percentage of the contract's value. Initial
margin is similar to a performance bond or good faith deposit on a contract and
is returned to the depositing party upon termination of the futures contract if
all contractual obligations have been satisfied. After they open a futures
contract, the parties to the transaction must compare the purchase price of the
contract to its daily market value. If the value of the futures contract
changes in such a way that a party's position declines, that party must make
additional "variation margin" payments so that the margin payment is adequate.
On the other hand, the value of the contract may change in such a way that
there is excess margin on deposit, possibly entitling the party that has a gain
to receive all or a portion of this amount. This process is known as "marking
to the market." Variation margin does not represent a borrowing or loan by a
party but is instead a settlement between the party and the futures broker of
the amount one party would owe the other if the futures contract terminated. In
computing daily net asset value, each party marks to market its open futures
positions.
Although the terms of a futures contract call for the actual delivery of and
payment for the underlying security, in many cases the parties may close the
contract early by taking an opposite position in an identical contract. If the
sale price upon closing out the contract is less than the original purchase
price, the party closing out the contract will realize a loss. If the sale
price upon closing out the contract is more than the original purchase price,
the party closing out the contract will realize a gain. Conversely, if the
purchase price upon closing out the contract is more than the original sale
price, the party closing out the contract will realize a loss. If the purchase
price upon closing out the contract is less than the original sale price, the
party closing out the contract will realize a gain.
The Fund may incur commission expenses when it opens or closes a futures
position.
OPTIONS. An option is a contract between two parties for the purchase and sale
of a financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the right
to sell the security). Options have various types of underlying instruments,
including specific securities, indices of securities prices, foreign
currencies, interest rates and futures contracts. Options may be traded on an
exchange (exchange-traded options) or may be customized agreements between the
parties (over-the-counter or "OTC" options). Like futures, a financial
intermediary, known as a clearing corporation, financially backs
exchange-traded options. However, OTC options have no such intermediary and
are subject to the risk that the counterparty will not fulfill its obligations
under the contract. The principal factors affecting the market value of an
option include supply and demand, interest rates, the current market value of
the underlying instrument relative to the exercise price of the option, the
volatility of the underlying instrument, and the time remaining until the
option expires.
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o PURCHASING PUT AND CALL OPTIONS
When the Fund purchases a put option, it buys the right to sell the instrument
underlying the option at a fixed strike price. In return for this right, the
Fund pays the current market price for the option (known as the "option
premium"). The Fund may purchase put options to offset or hedge against a
decline in the market value of its securities ("protective puts") or to benefit
from a decline in the price of securities that it does not own. The Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to cover
the premium and transaction costs. However, if the price of the underlying
instrument does not fall enough to offset the cost of purchasing the option, a
put buyer would lose the premium and related transaction costs.
Call options are similar to put options, except that the Fund obtains the right
to purchase, rather than sell, the underlying instrument at the option's strike
price. The Fund would normally purchase call options in anticipation of an
increase in the market value of securities it owns or wants to buy. The Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying instrument exceeded the exercise price plus the premium paid and
related transaction costs. Otherwise, the Fund would realize either no gain or
a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
o Allowing it to expire and losing its entire premium;
o Exercising the option and either selling (in the case of a put
option) or buying (in the case of a call option) the underlying
instrument at the strike price; or
o Closing it out in the secondary market at its current price.
o SELLING (WRITING) PUT AND CALL OPTIONS
When the Fund writes a call option it assumes an obligation to sell specified
securities to the holder of the option at a fixed strike price if the option is
exercised at any time before the expiration date. Similarly, when the Fund
writes a put option it assumes an obligation to purchase specified securities
from the option holder at a fixed strike price if the option is exercised at
any time before the expiration date. The Fund may terminate its position in an
exchange-traded put option before exercise by buying an option identical to the
one it has written. Similarly, it may cancel an OTC option by entering into an
offsetting transaction with the counterparty to the option.
The Fund could try to hedge against an increase in the value of securities it
would like to acquire by writing a put option on those securities. If security
prices rise, the Fund would expect the put option to expire and the premium it
received to offset the increase in the security's value. If security prices
remain the same over time, the Fund would hope to profit by closing out the put
option at a lower price. If security prices fall, the Fund may lose an amount
of money equal to the difference between the value of the security and the
premium it received. Writing covered put options, as described below, may
deprive the Fund of the opportunity to profit from a decrease in the market
price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing put
options, except that call writers expect to profit if prices remain the same or
fall. The Fund could try to hedge against a decline in the value of securities
it already owns by writing a call option. If the price of that security falls
as expected, the Fund would expect the option to expire and the premium it
received to offset the decline of the security's value. However, the Fund must
be prepared to deliver the underlying instrument in return for the strike
price, which may deprive it of the opportunity to profit from an increase in
the market price of the securities it holds.
The Funds are permitted to write only "covered" options. At the time of selling
a call option, the Fund may cover the option by owning, among other things:
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o The underlying security (or securities convertible into the
underlying security without additional consideration), index, interest
rate, foreign currency or futures contract;
o A call option on the same security or index with the same or lesser
exercise price;
o A call option on the same security or index with a greater exercise
price, provided that the Fund also segregates cash or liquid
securities in an amount equal to the difference between the exercise
prices;
o Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures
contract; or
o In the case of an index, the portfolio of securities that corresponds
to the index.
At the time of selling a put option, the Fund may cover the option by, among
other things:
o Entering into a short position in the underlying security;
o Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price;
o Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the
difference between the exercise prices; or
o Maintaining the entire exercise price in liquid securities.
o OPTIONS ON SECURITIES INDICES
Options on securities indices are similar to options on securities, except that
the exercise of securities index options requires cash settlement payments and
does not involve the actual purchase or sale of securities. In addition,
securities index options are designed to reflect price fluctuations in a group
of securities or segment of the securities market rather than price
fluctuations in a single security.
o OPTIONS ON CREDIT DEFAULT SWAPS
An option on a credit default swap ("CDS") option gives the holder the right to
enter into a CDS at a specified future date and under specified terms in
exchange for a purchase price or premium. The writer of the option bears the
risk of any unfavorable move in the value of the CDS relative to the market
value on the exercise date, while the purchaser may allow the option to expire
unexercised.
o OPTIONS ON FUTURES
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract (in
the case of a put option) at a fixed time and price. Upon exercise of the
option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option (in the case of a
call option) or a corresponding long position (in the case of a put option). If
the option is exercised, the parties will be subject to the futures contracts.
In addition, the writer of an option on a futures contract is subject to
initial and variation margin requirements on the option position. Options on
futures contracts are traded on the same contract market as the underlying
futures contract.
The buyer or seller of an option on a futures contract may terminate the option
early by purchasing or selling an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or sold.
The difference between the premiums paid and received represents the trader's
profit or loss on the transaction.
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The Fund may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Fund may buy a put option on a futures
contract for the same reasons it would sell a futures contract. It also may
purchase such a put option in order to hedge a long position in the underlying
futures contract. The Fund may buy a call option on a futures contract for the
same purpose as the actual purchase of a futures contract, such as in
anticipation of favorable market conditions.
The Fund may write a call option on a futures contract to hedge against a
decline in the prices of the instrument underlying the futures contracts. If
the price of the futures contract at expiration were below the exercise price,
the Fund would retain the option premium, which would offset, in part, any
decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of
the futures contracts, except that, if the market price declines, the Fund
would pay more than the market price for the underlying instrument. The premium
received on the sale of the put option, less any transaction costs, would
reduce the net cost to the Fund.
o OPTIONS ON FOREIGN CURRENCIES
A put option on a foreign currency gives the purchaser of the option the right
to sell a foreign currency at the exercise price until the option expires. A
call option on a foreign currency gives the purchaser of the option the right to
purchase the currency at the exercise price until the option expires. The Fund
may purchase or write put and call options on foreign currencies for the purpose
of hedging against changes in future currency exchange rates.
The Fund may use foreign currency options under the same circumstances that it
could use forward foreign currency exchange contracts. For example, a decline
in the U.S. dollar value of a foreign currency in which the Fund's securities
are denominated would reduce the U.S. dollar value of the securities, even if
their value in the foreign currency remained constant. In order to hedge
against such a risk, the Fund may purchase a put option on the foreign
currency. If the value of the currency then declined, the Fund could sell the
currency for a fixed amount in U.S. dollars and thereby offset, at least
partially, the negative effect on its securities that otherwise would have
resulted. Conversely, if the Fund anticipates a rise in the U.S. dollar value
of a currency in which securities to be acquired are denominated, the Fund may
purchase call options on the currency in order to offset, at least partially,
the effects of negative movements in exchange rates. If currency exchange rates
do not move in the direction or to the extent anticipated, the Fund could
sustain losses on transactions in foreign currency options.
o COMBINED POSITIONS
The Fund may purchase and write options in combination with each other, or in
combination with futures or forward contracts or swap agreements, to adjust the
risk and return characteristics of the overall position. For example, the Fund
could construct a combined position whose risk and return characteristics are
similar to selling a futures contract by purchasing a put option and writing a
call option on the same underlying instrument. Alternatively, the Fund could
write a call option at one strike price and buy a call option at a lower price
to reduce the risk of the written call option in the event of a substantial
price increase. Because combined options positions involve multiple trades,
they result in higher transaction costs and may be more difficult to open and
close out.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
contract involves an obligation to purchase or sell a specific amount of
currency at a future date or date range at a specific price. In the case of a
cancelable forward contract, the holder has the unilateral right to cancel the
contract at maturity by paying a specified fee. Forward foreign currency
exchange contracts differ from foreign currency futures contracts in certain
respects. Unlike futures contracts, forward contracts:
o Do not have standard maturity dates or amounts (i.e., the parties to
the contract may fix the maturity date and the amount);
o Are typically traded directly between currency traders (usually large
commercial banks) and their customers in the inter-bank markets, as
opposed to on exchanges regulated by the CFTC (note, however, that
under new definitions adopted by the CFTC and SEC, many
non-deliverable foreign currency forwards will be considered swaps for
certain purposes, including determination of whether such instruments
must be traded on exchanges and centrally cleared);
S-18
o Do not require an initial margin deposit; and
o May be closed by entering into a closing transaction with the
currency trader who is a party to the original forward contract, as
opposed to with a commodities exchange.
o FOREIGN CURRENCY HEDGING STRATEGIES
A "settlement hedge" or "transaction hedge" is designed to protect the Fund
against an adverse change in foreign currency values between the date a security
is purchased or sold and the date on which payment is made or received. Entering
into a forward contract for the purchase or sale of the amount of foreign
currency involved in an underlying security transaction for a fixed amount of
U.S. dollars "locks in" the U.S. dollar price of the security. The Fund may also
use forward contracts to purchase or sell a foreign currency when it anticipates
purchasing or selling securities denominated in foreign currency, even if it has
not yet selected the specific investments.
The Fund may use forward contracts to hedge against a decline in the value of
existing investments denominated in foreign currency. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. The Fund could also hedge the position by selling
another currency expected to perform similarly to the currency in which the
Fund's investment is denominated. This type of hedge, sometimes referred to as
a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally would not hedge currency exposure as effectively as a direct
hedge into U.S. dollars. Proxy hedges may result in losses if the currency used
to hedge does not perform similarly to the currency in which the hedged
securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange that one can achieve at some
future point in time. Additionally, these techniques tend to minimize the risk
of loss due to a decline in the value of the hedged currency and to limit any
potential gain that might result from the increase in value of such currency.
The Fund may enter into forward contracts to shift its investment exposure from
one currency into another. Such transactions may call for the delivery of one
foreign currency in exchange for another foreign currency, including currencies
in which its securities are not then denominated. This may include shifting
exposure from U.S. dollars to a foreign currency, or from one foreign currency
to another foreign currency. This type of strategy, sometimes known as a
"cross-hedge," will tend to reduce or eliminate exposure to the currency that
is sold, and increase exposure to the currency that is purchased. Cross-hedges
may protect against losses resulting from a decline in the hedged currency but
will cause the Fund to assume the risk of fluctuations in the value of the
currency it purchases. Cross-hedging transactions also involve the risk of
imperfect correlation between changes in the values of the currencies
involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the Fund may have to purchase additional foreign currency on the
spot (cash) market if the market value of a security it is hedging is less than
the amount of foreign currency it is obligated to deliver. Conversely, the Fund
may have to sell on the spot market some of the foreign currency it received
upon the sale of a security if the market value of such security exceeds the
amount of foreign currency it is obligated to deliver.
EQUITY-LINKED SECURITIES. The Fund may invest in privately issued securities
whose investment results are designed to correspond generally to the
performance of a specified stock index or "basket" of securities, or sometimes
a single stock (referred to as "equity-linked securities"). These securities
are used for many of the same purposes as derivative instruments and share many
of the same risks. Equity-linked securities may be considered illiquid and thus
subject to the Fund's restrictions on investments in illiquid securities.
S-19
SWAP AGREEMENTS. A swap agreement is a financial instrument that typically
involves the exchange of cash flows between two parties on specified dates
(settlement dates), where the cash flows are based on agreed-upon prices,
rates, indices, etc. The nominal amount on which the cash flows are calculated
is called the notional amount. Swap agreements are individually negotiated and
structured to include exposure to a variety of different types of investments
or market factors, such as interest rates, foreign currency rates, mortgage
securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the Fund and its share price. The performance of swap agreements
may be affected by a change in the specific interest rate, currency, or other
factors that determine the amounts of payments due to and from the Fund. If a
swap agreement calls for payments by the Fund, the Fund must be prepared to
make such payments when due. In addition, if the counterparty's
creditworthiness declined, the value of a swap agreement would be likely to
decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon
by the parties. The agreement can be terminated before the maturity date under
certain circumstances, such as default by one of the parties or insolvency,
among others, and can be transferred by a party only with the prior written
consent of the other party. The Fund may be able to eliminate its exposure
under a swap agreement either by assignment or by other disposition, or by
entering into an offsetting swap agreement with the same party or a similarly
creditworthy party. If the counterparty is unable to meet its obligations under
the contract, declares bankruptcy, defaults or becomes insolvent, a Fund may
not be able to recover the money it expected to receive under the swap
agreement. The Fund will not enter into any swap agreement unless the Fund
believes that the counterparty to the transaction is creditworthy.
A swap agreement can be a form of leverage, which can magnify the Fund's gains
or losses. In order to reduce the risk associated with leveraging, the Fund may
cover its current obligations under swap agreements according to guidelines
established by the SEC. If the Fund enters into a swap agreement on a net
basis, it will segregate assets with a daily value at least equal to the
excess, if any, of the Fund's accrued obligations under the swap agreement over
the accrued amount the Fund is entitled to receive under the agreement. If the
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the swap agreement.
o EQUITY SWAPS
In a typical equity swap, one party agrees to pay another party the return on a
stock, stock index or basket of stocks in return for a specified interest rate.
By entering into an equity index swap, for example, the index receiver can
gain exposure to stocks making up the index of securities without actually
purchasing those stocks. Equity index swaps involve not only the risk
associated with investment in the securities represented in the index, but also
the risk that the performance of such securities, including dividends, will not
exceed the return on the interest rate that the Fund will be committed to pay.
o TOTAL RETURN SWAPS
Total return swaps are contracts in which one party agrees to make payments of
the total return from a reference instrument--which may be a single asset, a
pool of assets or an index of assets--during a specified period, in return for
payments equal to a fixed or floating rate of interest or the total return from
another underlying reference instrument. The total return includes appreciation
or depreciation on the underlying asset, plus any interest or dividend
payments. Payments under the swap are based upon an agreed upon principal
amount but, since the principal amount is not exchanged, it represents neither
an asset nor a liability to either counterparty, and is referred to as
notional. Total return swaps are marked to market daily using different
sources, including quotations from counterparties, pricing services, brokers or
market makers. The unrealized appreciation or depreciation related to the
change in the valuation of the notional amount of the swap is combined with the
amount due to the Fund at termination or settlement. The primary risks
associated with total return swaps are credit risks (if the counterparty fails
to meet its obligations) and market risk (if there is no liquid market for the
swap or unfavorable changes occur to the underlying reference instrument).
S-20
o INTEREST RATE SWAPS
Interest rate swaps are financial instruments that involve the exchange of one
type of interest rate for another type of interest rate cash flow on specified
dates in the future. Some of the different types of interest rate swaps are
"fixed-for-floating rate swaps," "termed basis swaps" and "index amortizing
swaps." Fixed-for floating rate swaps involve the exchange of fixed interest
rate cash flows for floating rate cash flows. Termed basis swaps entail cash
flows to both parties based on floating interest rates, where the interest rate
indices are different. Index amortizing swaps are typically fixed-for-floating
rate swaps where the notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, the Fund could lose money by
investing in an interest rate swap if interest rates change adversely. For
example, if the Fund enters into a swap where it agrees to exchange a floating
rate of interest for a fixed rate of interest, the Fund may have to pay more
money than it receives. Similarly, if the Fund enters into a swap where it
agrees to exchange a fixed rate of interest for a floating rate of interest,
the Fund may receive less money than it has agreed to pay.
o CURRENCY SWAPS
A currency swap is an agreement between two parties in which one party agrees to
make interest rate payments in one currency and the other promises to make
interest rate payments in another currency. The Fund may enter into a currency
swap when it has one currency and desires a different currency. Typically, the
interest rates that determine the currency swap payments are fixed, although
occasionally one or both parties may pay a floating rate of interest. Unlike an
interest rate swap, however, the principal amounts are exchanged at the
beginning of the agreement and returned at the end of the agreement. Changes in
foreign exchange rates and changes in interest rates, as described above, may
negatively affect currency swaps.
o INFLATION SWAPS
Inflation swaps are fixed-maturity, over-the-counter derivatives where one
party pays a fixed rate in exchange for payments tied to an inflation index,
such as the Consumer Price Index. The fixed rate, which is set by the parties
at the initiation of the swap, is often referred to as the "breakeven
inflation" rate and generally represents the current difference between
treasury yields and Treasury Inflation Protected Securities yields of similar
maturities at the initiation of the swap agreement. Inflation swaps are
typically designated as "zero coupon," where all cash flows are exchanged at
maturity. The value of an inflation swap is expected to fluctuate in response
to changes in the relationship between nominal interest rates and the rate of
inflation. An inflation swap can lose value if the realized rate of inflation
over the life of the swap is less than the fixed market implied inflation rate
(the breakeven inflation rate) the investor agreed to pay at the initiation of
the swap.
o CREDIT DEFAULT SWAPS
A credit default swap is an agreement between a "buyer" and a "seller" for
credit protection. The credit default swap agreement may have as reference
obligations one or more securities that are not then held by the Fund. The
protection buyer is generally obligated to pay the protection seller an upfront
payment and/or a periodic stream of payments over the term of the agreement
until a credit event on a reference obligation has occurred. If no default
occurs, the seller would keep the stream of payments and would have no payment
obligations. If a credit event occurs, the seller generally must pay the buyer
the full notional amount (the "par value") of the swap.
o CAPS, COLLARS AND FLOORS
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level. The seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap
and selling a floor.
S-21
CONTRACTS FOR DIFFERENCES. The Adviser may enter into contracts for
differences ("CFDs") on individual equity securities. CFDs are privately
negotiated contracts between two parties, buyer and seller, stipulating that
the seller will pay to or receive from the buyer the difference between the
nominal value of the underlying instrument at the opening of the contract and
that instrument's value at the end of the contract. As is the case with owning
any financial instrument, there is the risk of loss associated with buying a
CFD. There may be liquidity risk if the underlying instrument is illiquid
because the liquidity of a CFD is based on the liquidity of the underlying
instrument. A further risk is that adverse movements in the underlying
security will require the buyer to post additional margin. CFDs also carry
counterparty risk, I.E., the risk that the counterparty to the CFD transaction
may be unable or unwilling to make payments or to otherwise honour its
financial obligations under the terms of the contract. If the counterparty were
to do so, the value of the contract may be reduced. To the extent that there is
an imperfect correlation between the return on the Fund's obligation to its
counterparty under the CFDs and the return on related assets in its portfolio,
the CFD transaction may increase the Fund's financial risk.
RISKS OF DERIVATIVES:
While transactions in derivatives may reduce certain risks, these transactions
themselves entail certain other risks. For example, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance of the Fund than if it had not entered into any
derivatives transactions. Derivatives may magnify the Fund's gains or losses,
causing it to make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the
Fund holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could expose
the Fund to greater risks.
Use of derivatives involves transaction costs, which may be significant, and
may also increase the amount of taxable income to shareholders.
CORRELATION OF PRICES. The Fund's ability to hedge its securities through
derivatives depends on the degree to which price movements in the underlying
index or instrument correlate with price movements in the relevant securities.
In the case of poor correlation, the price of the securities the Fund is
hedging may not move in the same amount, or even in the same direction as the
hedging instrument. The Adviser will try to minimize this risk by investing
only in those contracts whose behavior it expects to correlate with the
portfolio securities it is trying to hedge. However, if the Fund's prediction
of interest and currency rates, market value, volatility or other economic
factors is incorrect, the Fund may lose money, or may not make as much money as
it expected.
Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence:
o current and anticipated short-term interest rates, changes in volatility
of the underlying instrument, and the time remaining until expiration of
the contract;
o a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or discontinued trading of an instrument;
and
o differences between the derivatives, such as different margin
requirements, different liquidity of such markets and the participation of
speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based on a
broad market index. Since narrower indices are made up of a smaller number of
securities, they are more susceptible to rapid and extreme price fluctuations
because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of the
investments of the Fund. A currency hedge, for example, should protect a
yen-denominated
S-22
security from a decline in the yen, but will not protect the Fund against a
price decline resulting from deterioration in the issuer's creditworthiness.
Because the value of the Fund's foreign-denominated investments changes in
response to many factors other than exchange rates, it may not be possible to
match the amount of currency options and futures to the value of the Fund's
investments precisely over time.
LACK OF LIQUIDITY. Before a futures contract or option is exercised or expires,
the Fund can terminate it only by entering into a closing purchase or sale
transaction. Moreover, the Fund may close out a futures contract only on the
exchange the contract was initially traded. Although the Fund intends to
purchase options and futures only where there appears to be an active market,
there is no guarantee that such a liquid market will exist. If there is no
secondary market for the contract, or the market is illiquid, the Fund may not
be able to close out its position. In an illiquid market, the Fund may:
o have to sell securities to meet its daily margin requirements at a time
when it is disadvantageous to do so;
o have to purchase or sell the instrument underlying the contract;
o not be able to hedge its investments; and/or
o not be able to realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and
price) under a variety of market conditions. For example:
o an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives, which
sometimes occurs because of increased market volatility;
o unusual or unforeseen circumstances may interrupt normal operations of an
exchange;
o the facilities of the exchange may not be adequate to handle current
trading volume;
o equipment failures, government intervention, insolvency of a brokerage
firm or clearing house or other occurrences may disrupt normal trading
activity; or
o investors may lose interest in a particular derivative or category of
derivatives.
MANAGEMENT RISK. Successful use of derivatives by the Fund is subject to the
ability of its Adviser to forecast stock market and interest rate trends. If
the Adviser incorrectly predicts stock market and interest rate trends, the
Fund may lose money by investing in derivatives. For example, if the Fund were
to write a call option based on the Adviser's expectation that the price of the
underlying security would fall, but the price were to rise instead, the Fund
could be required to sell the security upon exercise at a price below the
current market price. Similarly, if the Fund were to write a put option based
on the Adviser's expectation that the price of the underlying security would
rise, but the price were to fall instead, the Fund could be required to
purchase the security upon exercise at a price higher than the current market
price.
PRICING RISK. At times, market conditions might make it hard to value some
investments. For example, if the Fund has valued its securities too high,
shareholders may end up paying too much for Fund shares when they buy into the
Fund. If the Fund underestimates its price, shareholders may not receive the
full market value for their Fund shares when they sell.
MARGIN. Because of the low margin deposits required upon the opening of a
derivative position, such transactions involve an extremely high degree of
leverage. Consequently, a relatively small price movement in a derivative may
result in an immediate and substantial loss (as well as gain) to the Fund and
it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to sell
securities at a time when it is disadvantageous to do so to meet its minimum
daily margin requirement. The Fund may lose its margin deposits if a
broker-dealer with whom it has an open futures contract or related option
becomes insolvent or declares bankruptcy.
S-23
VOLATILITY AND LEVERAGE. The Fund's use of derivatives may have a leveraging
effect. Leverage generally magnifies the effect of any increase or decrease in
value of an underlying asset and results in increased volatility, which means
the Fund will have the potential for greater gains, as well as the potential
for greater losses, than if the Fund does not use derivative instruments that
have a leveraging effect. The prices of derivatives are volatile (i.e., they
may change rapidly, substantially and unpredictably) and are influenced by a
variety of factors, including:
o actual and anticipated changes in interest rates;
o fiscal and monetary policies; and
o national and international political events.
Most exchanges limit the amount by which the price of a derivative can change
during a single trading day. Daily trading limits establish the maximum amount
that the price of a derivative may vary from the settlement price of that
derivative at the end of trading on the previous day. Once the price of a
derivative reaches this value, the Fund may not trade that derivative at a
price beyond that limit. The daily limit governs only price movements during a
given day and does not limit potential gains or losses. Derivative prices have
occasionally moved to the daily limit for several consecutive trading days,
preventing prompt liquidation of the derivative.
GOVERNMENT REGULATION. The regulation of derivatives markets in the U.S. is a
rapidly changing area of law and is subject to modification by government and
judicial action. In particular, the Dodd-Frank Wall Street Reform and Consumer
Protection Act, signed into law in 2010, grants significant new authority to
the SEC and the CFTC to impose comprehensive regulations on the OTC and cleared
derivatives markets. These regulations include, but are not limited to,
mandatory clearing of certain derivatives and requirements relating to
disclosure, margin and trade reporting. The new law and regulations may
negatively impact the Fund by increasing transaction and/or regulatory
compliance costs, limiting the availability of certain derivatives or otherwise
adversely affecting the value or performance of the derivatives the Fund
trades. Other potentially adverse regulatory obligations can develop suddenly
and without notice.
ILLIQUID SECURITIES. Illiquid securities are securities that cannot be sold or
disposed of in the ordinary course of business (i.e. within seven days) at
approximately the prices at which they are valued. Because of their illiquid
nature, illiquid securities must be priced at fair value as determined in good
faith pursuant to procedures approved by the Trust's Board. Despite such good
faith efforts to determine fair value prices, the Fund's illiquid securities
are subject to the risk that the security's fair value price may differ from
the actual price which the Fund may ultimately realize upon its sale or
disposition. Difficulty in selling illiquid securities may result in a loss or
may be costly to the Fund. Under the supervision of the Trust's Board, the
Adviser determines the liquidity of the Fund's investments. In determining the
liquidity of the Fund's investments, the Adviser may consider various factors,
including (1) the frequency and volume of trades and quotations, (2) the number
of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, and (4) the nature of the security and the
market in which it trades (including any demand, put or tender features, the
mechanics and other requirements for transfer, any letters of credit or other
credit enhancement features, any ratings, the number of holders, the method of
soliciting offers, the time required to dispose of the security, and the
ability to assign or offset the rights and obligations of the security). The
Fund will not hold more than 15% of its net assets in illiquid securities.
SECURITIES LENDING. The Fund may lend portfolio securities to brokers, dealers
and other financial organizations that meet capital and other credit
requirements or other criteria established by the Fund's Board of Trustees.
These loans, if and when made, may not exceed 33 1/3% of the total asset value
of the Fund (including the loan collateral). The Fund will not lend portfolio
securities to the Adviser or its affiliates unless permissible under the 1940
Act and the rules and promulgations thereunder. Loans of portfolio securities
will be fully collateralized by cash, letters of credit or U.S. government
securities, and the collateral will be maintained in an amount equal to at least
100% of the current market value of the loaned securities by marking to market
daily. Any gain or loss in the market price of the securities loaned that might
occur during the term of the loan would be for the account of the Fund.
S-24
The Fund may pay a part of the interest earned from the investment of
collateral, or other fee, to an unaffiliated third party for acting as the
Fund's securities lending agent, but will bear all of any losses from the
investment of collateral.
By lending their securities, the Fund may increase their income by receiving
payments from the borrower that reflect the amount of any interest or any
dividends payable on the loaned securities as well as by either investing cash
collateral received from the borrower in short-term instruments or obtaining a
fee from the borrower when U.S. government securities or letters of credit are
used as collateral. Investing cash collateral subjects the Fund to market risk.
The Fund remains obligated to return all collateral to the borrower under the
terms of its securities lending arrangements, even if the value of investments
made with the collateral decline. Accordingly, if the value of a security in
which the cash collateral has been invested declines, the loss would be borne
by the Fund, and the Fund may be required to liquidate other investments in
order to return collateral to the borrower at the end of the loan. The Fund
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type discussed in the preceding paragraph from the borrower;
(ii) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (iii) the Fund must be
able to terminate the loan on demand; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable fees in connection with the loan (which fees may include fees
payable to the lending agent, the borrower, the Fund's administrator and the
custodian); and (vi) voting rights on the loaned securities may pass to the
borrower, provided, however, that if a material event adversely affecting the
investment occurs, the Fund must terminate the loan and regain the right to
vote the securities. In such instances, the Adviser will vote the securities in
accordance with its proxy voting policies and procedures. The Board has adopted
procedures reasonably designed to ensure that the foregoing criteria will be
met. Loan agreements involve certain risks in the event of default or
insolvency of the borrower, including possible delays or restrictions upon the
Fund's ability to recover the loaned securities or dispose of the collateral
for the loan, which could give rise to loss because of adverse market action,
expenses and/or delays in connection with the disposition of the underlying
securities.
RESTRICTED SECURITIES. The Fund may purchase restricted securities. Restricted
securities are securities that may not be sold freely to the public absent
registration under the Securities Act of 1933, as amended (the "1933 Act") or
an exemption from registration. This generally includes securities that are
unregistered that can be sold to qualified institutional buyers in accordance
with Rule 144A under the 1933 Act or securities that are exempt from
registration under the 1933 Act, such as commercial paper. Institutional
markets for restricted securities have developed as a result of the
promulgation of Rule 144A under the 1933 Act, which provides a "safe harbor"
from 1933 Act registration requirements for qualifying sales to institutional
investors. When Rule 144A restricted securities present an attractive
investment opportunity and meet other selection criteria, the Fund may make
such investments whether or not such securities are "illiquid" depending on the
market that exists for the particular security. The Board has delegated the
responsibility for determining the liquidity of Rule 144A restricted securities
that the Fund may invest in to the Adviser.
SHORT SALES. The Fund may engage in short sales that are either "uncovered" or
"against the box." A short sale is "against the box" if at all times during
which the short position is open, the Fund owns at least an equal amount of the
securities or securities convertible into, or exchangeable without further
consideration for, securities of the same issue as the securities that are sold
short. A short sale against the box is a taxable transaction to the Fund with
respect to the securities that are sold short. The Fund will not sell a
security short if, as a result of such short sale, the aggregate market value
of all securities sold short exceeds 10% of the Fund's total assets. This
limitation does not apply to short sales against the box.
Uncovered short sales are transactions under which the Fund sells a security it
does not own. To complete such a transaction, the Fund must borrow the
security to make delivery to the buyer. The Fund then is obligated to replace
the security borrowed by purchasing the security at the market price at the
time of the replacement. The price at such time may be more or less than the
price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to pay the lender amounts equal to any dividends
or interest that accrue during the period of the loan. To borrow the security,
the Fund also may be required to pay a premium, which would increase the cost
of the security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the short
position is closed out.
S-25
Until the Fund closes its short position or replaces the borrowed security, the
Fund may: (a) segregate cash or liquid securities at such a level that the
amount segregated plus the amount deposited with the broker as collateral will
equal the current value of the security sold short; or (b) otherwise cover the
Fund's short position.
WHEN-ISSUED, DELAYED--DELIVERY AND FORWARD TRANSACTIONS
A when-issued security is one whose terms are available and for which a market
exists, but which have not been issued. In a forward delivery transaction, the
Fund contracts to purchase securities for a fixed price at a future date beyond
customary settlement time. "Delayed-delivery" refers to securities transactions
on the secondary market where settlement occurs in the future. In each of these
transactions, the parties fix the payment obligation and the interest rate that
they will receive on the securities at the time the parties enter the
commitment; however, they do not pay money or deliver securities until a later
date. Typically, no income accrues on securities the Fund has committed to
purchase before the securities are delivered, although the Fund may earn income
on securities it has in a segregated account to cover its position. The Fund
will only enter into these types of transactions with the intention of actually
acquiring the securities, but may sell them before the settlement date.
The Fund may use when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at the
time of purchase. When the Fund engages in when-issued, delayed-delivery or
forward delivery transactions, it relies on the other party to consummate the
sale. If the other party fails to complete the sale, the Fund may miss the
opportunity to obtain the security at a favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the Fund assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes place
also may be higher than those obtained in the transaction itself. Because the
Fund does not pay for the security until the delivery date, these risks are in
addition to the risks associated with its other investments.
The Fund will segregate cash or liquid securities equal in value to commitments
for the when-issued, delayed delivery or forward delivery transactions. The
Fund will segregate additional liquid assets daily so that the value of such
assets is equal to the amount of the commitments.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The following investment limitations are fundamental, which means that the Fund
cannot change them without approval by the vote of a majority of the
outstanding shares of the Fund. The phrase "majority of the outstanding shares"
means the vote of (i) 67% or more of the Fund's shares present at a meeting, if
more than 50% of the outstanding shares of the Fund are present or represented
by proxy, or (ii) more than 50% of the Fund's outstanding shares, whichever is
less.
1. The Fund may purchase securities of an issuer, except if such purchase
would cause the Fund to fail to satisfy the diversification requirement for
a diversified management company under the 1940 Act, the rules or
regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended or interpreted from time to time.
2. The Fund may not concentrate investments in a particular industry or group
of industries, as concentration is defined under the 1940 Act, the rules
and regulations thereunder or any exemption therefrom, as such statute,
rules or regulations may be amended or interpreted from time to time,
except that the Fund may invest without limitation in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
repurchase agreements involving such securities or tax-exempt obligations
of state or municipal governments and their political subdivisions.
3. The Fund may borrow money or issue senior securities (as defined under the
1940 Act), except as prohibited under the 1940 Act, the rules and
regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended or interpreted from time to time.
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4. The Fund may make loans, except as prohibited under the 1940 Act, the
rules and regulations thereunder or any exemption therefrom, as such
statute, rules or regulations may be amended or interpreted from time to
time.
5. The Fund may purchase or sell commodities or real estate, except as
prohibited under the 1940 Act, the rules and regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended
or interpreted from time to time.
6. The Fund may underwrite securities issued by other persons, except as
prohibited under the 1940 Act, the rules and regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended
or interpreted from time to time.
NON-FUNDAMENTAL POLICIES
In addition to the Fund's investment objective, the following investment
limitations of the Fund are non-fundamental and may be changed by the Board
without shareholder approval.
1. The Fund may not purchase securities of any issuer (except securities of
other investment companies, securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities and repurchase agreements
involving such securities) if, as a result, more than 5% of the total
assets of the Fund would be invested in the securities of such issuer; or
(ii) acquire more than 10% of the outstanding voting securities of any one
issuer. This restriction applies to 75% of the Fund's total assets.
2. The Fund may not borrow money from a bank in an amount exceeding 33 1/3%
of the value of its total assets (including the amount borrowed, but
excluding temporary borrowings not in excess of 5% of its total assets),
provided that, for purposes of this limitation, investment strategies that
either obligate the Fund to purchase securities or require the Fund to
segregate assets are not considered to be borrowing.
3. The Fund may not make loans if, as a result, more than 33 1/3% of its
total assets (including the loan collateral) would be lent to other
parties, except that the Fund may: (i) purchase or hold debt instruments in
accordance with its investment objective and policies; (ii) enter into
repurchase agreements; and (iii) engage in securities lending as described
in the SAI.
4. The Fund may not invest in unmarketable interests in real estate limited
partnerships or invest directly in real estate. For the avoidance of doubt,
the foregoing policy does not prevent the Fund from, among other things;
purchasing marketable securities of companies that deal in real estate or
interests therein (including REITs).
5. The Fund may purchase or sell financial and physical commodities,
commodity contracts based on (or relating to) physical commodities or
financial commodities and securities and derivative instruments whose
values are derived from (in whole or in part) physical commodities or
financial commodities.
6. The Fund may not purchase an investment if, as a result, more than 15% of
the value of the Fund's net assets would be invested in illiquid
securities.
7. The Fund may not change its investment strategy to invest at least 80% of
its net assets, plus any borrowings for investment purposes, in equity
securities without 60 days' prior written notice to shareholders.
Except with respect to Fund policies concerning borrowing and illiquid
securities, if a percentage restriction is adhered to at the time of an
investment, a later increase or decrease in percentage resulting from changes
in values or assets will not constitute a violation of such restriction. With
respect to the limitation on illiquid securities, in the event that a
subsequent change in net assets or other circumstances causes the Fund to
exceed its limitation, the Fund will take steps to bring the
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aggregate amount of illiquid instruments back within the limitations as soon as
reasonably practicable. With respect to the limitation on borrowing, in the
event that a subsequent change in net assets or other circumstances causes the
Fund to exceed its limitation, the Fund will take steps to bring the aggregate
amount of borrowing back within the limitations within three days thereafter
(not including Sundays and holidays).
The following descriptions of certain provisions of the 1940 Act may assist
investors in understanding the above policies and restrictions:
DIVERSIFICATION. Under the 1940 Act, a diversified investment management
company, as to 75% of its total assets, may not purchase securities of any
issuer (other than securities issued or guaranteed by the U.S. Government, its
agents or instrumentalities or securities of other investment companies) if, as
a result, more than 5% of its total assets would be invested in the securities
of such issuer, or more than 10% of the issuer's outstanding voting securities
would be held by the fund.
CONCENTRATION. The SEC has defined concentration as investing 25% or more of an
investment company's net assets in an industry or group of industries, with
certain exceptions. For purposes of the Fund's concentration policy, each Fund
may classify and re-classify companies in a particular industry and define and
re-define industries in any reasonable manner.
BORROWING. The 1940 Act presently allows a fund to borrow from any bank
(including pledging, mortgaging or hypothecating assets) in an amount up to 33
1/3% of its total assets (not including the amount borrowed) and to borrow for
temporary purposes in an amount not exceeding 5% of the value of its total
assets.
SENIOR SECURITIES. Senior securities may include any obligation or instrument
issued by a fund evidencing indebtedness. The 1940 Act generally prohibits
funds from issuing senior securities, although it does not treat certain
transactions as senior securities, such as certain borrowings, short sales,
reverse repurchase agreements, firm commitment agreements and standby
commitments, with appropriate earmarking or segregation of assets to cover such
obligation.
LENDING. Under the 1940 Act, a fund may only make loans if expressly permitted
by its investment policies.
UNDERWRITING. Under the 1940 Act, underwriting securities involves a fund
purchasing securities directly from an issuer for the purpose of selling
(distributing) them or participating in any such activity either directly or
indirectly. Under the 1940 Act, a diversified fund may not make any commitment
as underwriter, if immediately thereafter the amount of its outstanding
underwriting commitments, plus the value of its investments in securities of
issuers (other than investment companies) of which it owns more than 10% of the
outstanding voting securities, exceeds 25% of the value of its total assets.
REAL ESTATE. The 1940 Act does not directly restrict an investment company's
ability to invest in real estate, but does require that every investment
company have a fundamental investment policy governing such investments.
COMMODITIES. The 1940 Act does not directly restrict an investment company's
ability to invest in commodities, but does require that every investment
company have a fundamental investment policy governing such investments.
THE ADVISER
GENERAL. Winton Capital US LLC (the "Adviser"), a Delaware limited liability
company located at 375 Park Avenue, New York, New York 10152, is a professional
investment management firm registered with the SEC under the Investment Advisers
Act of 1940, as amended. The Adviser is a wholly-owned subsidiary of Winton
Capital Group Limited, an English limited liability company located at Grove
House, 27 Hammersmith Grove, London W6 0NE, United Kingdom. As of September 30,
2014, the Adviser and its affiliated companies had approximately $25.2 billion
in assets under management.
ADVISORY AGREEMENT WITH THE TRUST. The Trust and the Adviser have entered into
an investment advisory agreement (the "Advisory Agreement") with respect to the
Fund. [Under the Advisory Agreement, the Adviser serves as the
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investment adviser and makes investment decisions for the Fund and continuously
reviews, supervises and administers the investment program of the Fund, subject
to the supervision of, and policies established by, the Trustees of the Trust.
After the initial two-year term, the continuance of the Advisory Agreement must
be specifically approved at least annually: (i) by the vote of the Trustees or
by a vote of the majority of the shareholders of the Fund and (ii) by the vote
of a majority of the Trustees who are not parties to the Advisory Agreement or
"interested persons" or of any party thereto, cast in person at a meeting
called for the purpose of voting on such approval. The Advisory Agreement will
terminate automatically in the event of its assignment, and is terminable at
any time without penalty by the Trustees of the Trust or, with respect to the
Fund, by a majority of the outstanding shares of the Fund, on not less than 30
days' nor more than 60 days' written notice to the Adviser, or by the Adviser
on 90 days' written notice to the Trust. As used in the Advisory Agreement, the
terms "majority of the outstanding voting securities," "interested persons" and
"assignment" have the same meaning as such terms in the 1940 Act.
ADVISORY FEES PAID TO THE ADVISER. For its services under the Advisory
Agreement, the Adviser is entitled to a fee, which is calculated daily and paid
monthly, at the following annual rate based on the average daily net assets of
the Fund:
--------------------------------------------------------------------------------
FUND ADVISORY FEE RATE
--------------------------------------------------------------------------------
Winton Global Equity Portfolio [0.55%]
--------------------------------------------------------------------------------
The Adviser has contractually agreed to reduce its fees and/or reimburse
expenses to the extent necessary to keep total annual Fund operating expenses
(excluding class specific expenses (such as Rule 12b-1 fees), interest, taxes,
brokerage commissions, Acquired Fund Fees and Expenses and non-routine expenses
(collectively, "excluded expenses")) from exceeding certain levels as set forth
below until February 29, 2016. This agreement may be terminated: (i) by the
Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90)
days' prior written notice to the Trust, effective as of the close of business
on February 29, 2016.
--------------------------------------------------------------------------------
CONTRACTUAL CONTRACTUAL
EXPENSE EXPENSE
LIMITATION LIMITATION
(INSTITUTIONAL (INVESTOR
FUND SHARES) SHARES)
--------------------------------------------------------------------------------
Winton Global Equity Portfolio [0.80%] [1.20%]
--------------------------------------------------------------------------------
If at any point total annual Fund operating expenses (not including excluded
expenses) are below the levels as set forth above, the Adviser may receive from
the Fund the difference between the total annual Fund operating expenses (not
including excluded expenses) and the levels set forth above to recover all or a
portion of its prior fee reductions or expense reimbursements made during the
preceding three-year period during which this agreement was in place.
THE PORTFOLIO MANAGERS
This section includes information about the Fund's portfolio managers,
including information about other accounts they manage, the dollar range of
Fund shares they own and how they are compensated.
COMPENSATION. Compensation for the portfolio managers is a combination of a
fixed salary and a quarterly bonus (a portion of which may be deferred). The
bonuses paid to a portfolio manager may be tied, in part, to the performance of
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the Fund or any other fund(s) advised by Winton. In addition, a portion of the
salary and bonus paid to the portfolio manager may be based on a variety of
factors, including the financial performance of Winton and execution of the
portfolio manager's responsibilities. Compensation is assessed in accordance a
remuneration policy (designed to support key business strategies without
creating incentives for undue risk-taking) and is subject to approval by a
remuneration committee chaired by an independent non-executive director of
Winton.
FUND SHARES OWNED BY PORTFOLIO MANAGERS. The Fund is required to show the
dollar amount range of each portfolio manager's "beneficial ownership" of
shares of the Fund as of the end of the most recently completed fiscal year.
Dollar amount ranges disclosed are established by the SEC. "Beneficial
ownership" is determined in accordance with Rule 16a-1(a)(2) under the
Securities Exchange Act of 1934 (the "1934 Act"). Because the Fund has not
commenced operations, as of the date of this SAI, none of the portfolio
managers beneficially own shares of the Fund.
OTHER ACCOUNTS. In addition to the Fund, the portfolio managers are
responsible for the day-to-day management of certain other accounts, as listed
below. The information below is provided as of August 30, 2014.
[Enlarge/Download Table]
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REGISTERED OTHER POOLED
INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
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NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
NAME ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS) ACCOUNTS (IN MILLIONS)
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David Winton
Harding [XX] [$XX] [XX] [$XX] [XX] [$XX]
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Matthew David
Beddall [XX] [$XX] [XX] [$XX] [XX] [$XX]
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CONFLICTS OF INTERESTS. A potential conflict of interest may arise as a result
of Winton's provision of advisory services to Other Accounts. Other Accounts
may pay higher management fees than the Fund or may pay performance fees (which
the Fund does not) and this could create an incentive for Winton to favor such
funds in the allocation of investment opportunities.
Winton has implemented procedures that are designed to ensure that investment
opportunities are allocated in a manner that: (i) treats all of its clients
fairly and equitably; (ii) prevents conflict regarding allocation of investment
opportunities among its clients; and (iii) complies with applicable regulatory
requirements. For example, Winton uses an allocation algorithm designed to
allocate all filled orders ratably based on a defined allocation procedure.
Notwithstanding the foregoing, an aggregated order may be allocated on a
different basis under certain circumstances depending on factors which include,
but are not limited to, available cash, liquidity requirements, risk parameters
and legal and/or regulatory requirements.
Winton and its portfolio managers may hold investments in Other Accounts. This
may create an incentive for Winton and its portfolio managers to take
investment actions based on those investment interests which might diverge, in
some cases, from the interests of other clients or to favor or disfavor certain
funds over other funds. Any potential conflict that arises from these
circumstances is mitigated by several factors, including: (i) the requirement
that any material changes to Winton's investment system must be tested and
reviewed and approved by Winton's investment management meeting; (ii) the fact
that Winton's investment system is designed to achieve long-term capital
appreciation as opposed to short-term profits; and (iii) the fact that most of
Winton's investments are made in accordance with the signals produced by its
investment system.
Certain broker-dealers that Winton may use to execute Fund transactions are
also clients of Winton and/or may refer clients to Winton, which creates
potential conflicts of interest. These conflicts are addressed by the fact that
Winton adheres to a policy that prohibits Winton from considering any factor
other than best execution for its clients when Winton executes client
transactions.
S-30
THE ADMINISTRATOR
GENERAL. SEI Investments Global Funds Services (the "Administrator"), a
Delaware statutory trust, has its principal business offices at One Freedom
Valley Drive, Oaks, Pennsylvania 19456. SEI Investments Management Corporation
("SIMC"), a wholly owned subsidiary of SEI Investments Company ("SEI
Investments"), is the owner of all beneficial interest in the Administrator.
SEI Investments and its subsidiaries and affiliates, including the
Administrator, are leading providers of funds evaluation services, trust
accounting systems, and brokerage and information services to financial
institutions, institutional investors, and money managers. The Administrator
and its affiliates also serve as administrator or sub-administrator to other
mutual funds.
ADMINISTRATION AGREEMENT WITH THE TRUST. The Trust and the Administrator have
entered into an administration agreement (the "Administration Agreement").
Under the Administration Agreement, the Administrator provides the Trust with
administrative services, including regulatory reporting and all necessary
office space, equipment, personnel and facilities.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. For its services under the
Administration Agreement, the Administrator is entitled to a fee, which is
detailed below in the following schedule:
[INSERT FEE SCHEDULE]
Due to account minimums, the annual administration fee the Fund pays will
exceed the above percentages at low asset levels.
THE DISTRIBUTOR
GENERAL. The Trust and SEI Investments Distribution Co. (the "Distributor"), a
wholly owned subsidiary of SEI Investments, and an affiliate of the
Administrator, are parties to a distribution agreement ("Distribution
Agreement"), whereby the Distributor acts as principal underwriter for the
Trust's shares. The principal business address of the Distributor is One
Freedom Valley Drive, Oaks, Pennsylvania 19456.
The continuance of the Distribution Agreement must be specifically approved at
least annually (i) by the vote of the Trustees or by a vote of the majority of
the shareholders of the Fund and (ii) by the vote of a majority of the Trustees
who are not "interested persons" of the Trust and have no direct or indirect
financial interest in the operations of the Distribution Agreement or any
related agreement, cast in person at a meeting called for the purpose of voting
on such approval. The Distribution Agreement will terminate automatically in
the event of its assignment (as such term is defined in the 1940 Act), and is
terminable at any time without penalty by the Board or, with respect to the
Fund, by a majority of the outstanding shares of the Fund, upon not more than
60 days' written notice by either party.
DISTRIBUTION PLAN. The Distribution Plan (the "Plan") provides that Investor
Shares of the Fund pay the Distributor an annual fee of up to 0.25% of the
average daily net assets of the Investor Shares. Under the Plan, the
Distributor may make payments pursuant to written agreements to financial
institutions and intermediaries such as banks, savings and loan associations
and insurance companies including, without limit, investment counselors,
broker-dealers and the Distributor's affiliates and subsidiaries (collectively,
"Agents") as compensation for services and reimbursement of expenses incurred
in connection with distribution assistance. The Plan is characterized as a
compensation plan since the distribution fee will be paid to the Distributor
without regard to the distribution expenses incurred by the Distributor or the
amount of payments made to other financial institutions and intermediaries. The
Trust intends to operate the Plan in accordance with its terms and with the
Financial Industry Regulatory Authority ("FINRA") rules concerning sales
charges.
S-31
The Trust has adopted the Plan in accordance with the provisions of Rule 12b-1
under the 1940 Act, which regulates circumstances under which an investment
company may directly or indirectly bear expenses relating to the distribution
of its shares. Continuance of the Plan must be approved annually by a majority
of the Trustees of the Trust and by a majority of the Trustees who are not
interested persons (as defined in the 1940 Act) of the Trust and have no direct
or indirect financial interest in the Plan or any agreements related to the
Plan ("Qualified Trustees"). The Plan requires that quarterly written reports
of amounts spent under the Plan and the purposes of such expenditures be
furnished to and reviewed by the Trustees. The Plan may not be amended to
increase materially the amount that may be spent thereunder without approval by
a majority of the outstanding shares of the Fund. All material amendments of
the Plan will require approval by a majority of the Trustees of the Trust and
of the Qualified Trustees.
[SHAREHOLDER SERVICES
SHAREHOLDER SERVICING PLAN. The Fund has adopted a shareholder servicing plan
(the "Service Plan") under which a shareholder servicing fee of up to [0.15]%
of the average daily net assets of Investor Shares of the Fund will be paid to
other service providers. Under the Service Plan, other service providers may
perform, or may compensate other service providers for performing, certain
shareholder and administrative services as discussed below.
DESCRIPTION OF SHAREHOLDER SERVICES. Shareholder services may include: (i)
maintaining accounts relating to clients that invest in shares; (ii) arranging
for bank wires; (iii) responding to client inquiries relating to the services
performed by the services provider; (iv) responding to inquiries from clients
concerning their investment in shares; (v) assisting clients in changing
dividend options, account designations and addresses; (vi) providing
information periodically to clients showing their position in shares; (vii)
forwarding shareholder communications from the Fund such as proxies,
shareholder reports, annual reports, and dividend distribution and tax notices
to clients; and (viii) processing dividend payments from the Fund on behalf of
clients.]
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, in their discretion, may make payments from
their own resources and not from Fund assets to affiliated or unaffiliated
brokers, dealers, banks (including bank trust departments), trust companies,
registered investment advisers, financial planners, retirement plan
administrators, insurance companies, and any other institution having a
service, administration, or any similar arrangement with the Fund, its service
providers or their respective affiliates, as incentives to help market and
promote the Fund and/or in recognition of their distribution, marketing,
administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell
Fund shares or provide services to the Fund, the Distributor or shareholders of
the Fund through the financial intermediary's retail distribution channel
and/or fund supermarkets. Payments may also be made through the financial
intermediary's retirement, qualified tuition, fee-based advisory, wrap fee bank
trust, or insurance (e.g., individual or group annuity) programs. These
payments may include, but are not limited to, placing the Fund in a financial
intermediary's retail distribution channel or on a preferred or recommended
fund list; providing business or shareholder financial planning assistance;
educating financial intermediary personnel about the Fund; providing access to
sales and management representatives of the financial intermediary; promoting
sales of Fund shares; providing marketing and educational support; maintaining
share balances and/or for sub-accounting, administrative or shareholder
transaction processing services. A financial intermediary may perform the
services itself or may arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own
resources to financial intermediaries for costs associated with the purchase of
products or services used in connection with sales and marketing, participation
in and/or presentation at conferences or seminars, sales or training programs,
client and investor entertainment and other sponsored events. The costs and
expenses associated with these efforts may include travel, lodging, sponsorship
at educational seminars and conferences, entertainment and meals to the extent
permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors,
including the level of sales, the amount of Fund assets attributable to
investments in the Fund by a financial intermediary's customers, a flat fee or
other measures as
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determined from time to time by the Adviser and/or its affiliates. A
significant purpose of these payments is to increase the sales of Fund shares,
which in turn may benefit the Adviser through increased fees as Fund assets
grow.
THE TRANSFER AGENT
[____] (the "Transfer Agent") serves as the Fund's transfer agent.
THE CUSTODIAN
[____] (the "Custodian") serves as the custodian of the Fund. The Custodian
holds cash, securities and other assets of the Fund as required by the 1940
Act.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[____] serves as the independent registered public accounting firm for the
Fund.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, PA 19103-2921,
serves as legal counsel to the Trust.
TRUSTEES AND OFFICERS OF THE TRUST
BOARD RESPONSIBILITIES. The management and affairs of the Trust and its series,
including the Fund described in this SAI, are overseen by the Trustees. The
Board has approved contracts, as described above, under which certain companies
provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the
management of risk, is performed by third party service providers, such as the
Adviser, the Distributor and the Administrator. The Trustees are responsible
for overseeing the Trust's service providers and, thus, have oversight
responsibility with respect to risk management performed by those service
providers. Risk management seeks to identify and address risks, i.e., events or
circumstances that could have material adverse effects on the business,
operations, shareholder services, investment performance or reputation of the
funds. The funds and their service providers employ a variety of processes,
procedures and controls to identify various possible events or circumstances,
to lessen the probability of their occurrence and/or to mitigate the effects of
such events or circumstances if they do occur. Each service provider is
responsible for one or more discrete aspects of the Trust's business (e.g., the
Adviser is responsible for the day-to-day management of the Fund's portfolio
investments) and, consequently, for managing the risks associated with that
business. The Board has emphasized to the funds' service providers the
importance of maintaining vigorous risk management.
The Trustees' role in risk oversight begins before the inception of a fund, at
which time certain of the fund's service providers present the Board with
information concerning the investment objectives, strategies and risks of the
fund as well as proposed investment limitations for the fund. Additionally, the
fund's adviser provides the Board with an overview of, among other things, its
investment philosophy, brokerage practices and compliance infrastructure.
Thereafter, the Board continues its oversight function as various personnel,
including the Trust's Chief Compliance Officer, as well as personnel of the
adviser and other service providers, such as the fund's independent
accountants, make periodic reports to the Audit Committee or to the Board with
respect to various aspects of risk management. The Board and the Audit
Committee oversee efforts by management and service providers to manage risks
to which the funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the
services provided to the funds by the adviser and receives information about
those services at its regular meetings. In addition, on an annual basis, in
connection with its consideration of whether to renew the advisory agreement
with the adviser, the Board meets with the adviser to review such services.
Among other things, the Board regularly considers the adviser's adherence to
the funds' investment restrictions and compliance with various fund policies
and procedures and with applicable securities regulations. The Board also
reviews information about the funds' investments, including, for example,
portfolio holdings schedules and
S-33
reports on the adviser's use of derivatives in managing the funds, if any, as
well as reports on the funds' investments in ETFs, if any.
The Trust's Chief Compliance Officer reports regularly to the Board to review
and discuss compliance issues and fund and adviser risk assessments. At least
annually, the Trust's Chief Compliance Officer provides the Board with a report
reviewing the adequacy and effectiveness of the Trust's policies and procedures
and those of its service providers, including the adviser. The report addresses
the operation of the policies and procedures of the Trust and each service
provider since the date of the last report; any material changes to the
policies and procedures since the date of the last report; any recommendations
for material changes to the policies and procedures; and any material
compliance matters since the date of the last report.
The Board receives reports from the funds' service providers regarding
operational risks and risks related to the valuation and liquidity of portfolio
securities. The Trust's Fair Value Pricing Committee makes regular reports to
the Board concerning investments for which market quotations are not readily
available. Annually, the independent registered public accounting firm reviews
with the Audit Committee its audit of the funds' financial statements, focusing
on major areas of risk encountered by the funds and noting any significant
deficiencies or material weaknesses in the funds' internal controls.
Additionally, in connection with its oversight function, the Board oversees
fund management's implementation of disclosure controls and procedures, which
are designed to ensure that information required to be disclosed by the Trust
in its periodic reports with the SEC are recorded, processed, summarized, and
reported within the required time periods. The Board also oversees the Trust's
internal controls over financial reporting, which comprise policies and
procedures designed to provide reasonable assurance regarding the reliability
of the Trust's financial reporting and the preparation of the Trust's financial
statements.
From their review of these reports and discussions with the adviser, the Chief
Compliance Officer, the independent registered public accounting firm and other
service providers, the Board and the Audit Committee learn in detail about the
material risks of the funds, thereby facilitating a dialogue about how
management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the funds can be
identified and/or quantified, that it may not be practical or cost-effective to
eliminate or mitigate certain risks, that it may be necessary to bear certain
risks (such as investment-related risks) to achieve the funds' goals, and that
the processes, procedures and controls employed to address certain risks may be
limited in their effectiveness. Moreover, reports received by the Trustees as
to risk management matters are typically summaries of the relevant information.
Most of the funds' investment management and business affairs are carried out
by or through the funds' advisers and other service providers, each of which
has an independent interest in risk management but whose policies and the
methods by which one or more risk management functions are carried out may
differ from the funds' and each other's in the setting of priorities, the
resources available or the effectiveness of relevant controls. As a result of
the foregoing and other factors, the Board's ability to monitor and manage
risk, as a practical matter, is subject to limitations.
MEMBERS OF THE BOARD. There are five members of the Board of Trustees, four of
whom are not interested persons of the Trust, as that term is defined in the
1940 Act ("independent Trustees"). Mr. Doran, an interested person of the
Trust, serves as Chairman of the Board. Mr. Hunt, an independent Trustee,
serves as the lead independent Trustee. The Trust has determined its leadership
structure is appropriate given the specific characteristics and circumstances
of the Trust. The Trust made this determination in consideration of, among
other things, the fact that the independent Trustees constitute more than
three-quarters of the Board, the fact that the chairperson of each Committee of
the Board is an independent Trustee, the amount of assets under management in
the Trust, and the number of funds (and classes of shares) overseen by the
Board. The Board also believes that its leadership structure facilitates the
orderly and efficient flow of information to the independent Trustees from fund
management.
The Board of Trustees has two standing committees: the Audit Committee and
Governance Committee. The Audit Committee and Governance Committee are chaired
by an independent Trustee and composed of all of the independent Trustees. In
addition, the Board of Trustees has a lead independent Trustee.
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In his role as lead independent Trustee, Mr. Hunt, among other things: (i)
presides over Board meetings in the absence of the Chairman of the Board; (ii)
presides over executive sessions of the independent Trustees; (iii) along with
the Chairman of the Board, oversees the development of agendas for Board
meetings; (iv) facilitates communication between the independent Trustees and
management, and among the independent Trustees; (v) serves as a key point
person for dealings between the independent Trustees and management; and (vi)
has such other responsibilities as the Board or independent Trustees determine
from time to time.
Set forth below are the names, years of birth, position with the Trust, and the
principal occupations and other directorships held during at least the last
five years of each of the persons currently serving as a Trustee of the Trust.
There is no stated term of office for the Trustees of the Trust. Unless
otherwise noted, the business address of each Trustee is SEI Investments
Company, One Freedom Valley Drive, Oaks, Pennsylvania 19456.
[Enlarge/Download Table]
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PRINCIPAL
OCCUPATIONS NUMBER OF PORTFOLIOS IN
NAME AND YEAR POSITION WITH IN THE PAST FUND COMPLEX OVERSEEN OTHER DIRECTORSHIPS HELD
OF BIRTH TRUST 5 YEARS BY TRUSTEE IN THE PAST 5 YEARS
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INTERESTED TRUSTEE
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William M. Doran Chairman of the Self-Employed 1 Current Directorships:
(Born: 1940) Board of Consultant since Trustee of The Advisors'
Trustees(1) 2003. Partner at Inner Circle Fund, The
(since 2014) Morgan, Lewis & Advisors' Inner Circle Fund
Bockius LLP II, The Advisors' Inner
(law firm) from Circle Fund III, Bishop
1976 to 2003. Street Funds, SEI Daily
Counsel to the Income Trust, SEI
Trust, SEI Institutional International
Investments, Trust, SEI Institutional
SIMC, the Investments Trust, SEI
Administrator Institutional Managed Trust,
and the SEI Liquid Asset Trust, SEI
Distributor. Asset Allocation Trust, SEI
Tax Exempt Trust, Adviser
Managed Trust, New
Covenant Funds, SEI
Insurance Products Trust,
The KP Funds, and
O'Connor EQUUS (closed-
end investment company).
Director of SEI Investments
(Europe), Limited, SEI
Investments--Global Funds
Services, Limited, SEI
Investments Global, Limited,
SEI Investments (Asia),
Limited, SEI Global
Nominee Ltd. and SEI
Investments -- Unit Trust
Management (UK) Limited.
Director of the Distributor
since 2003.
Former Directorships:
Director of SEI Alpha
Strategy Portfolios, LP to
2013.
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S-35
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PRINCIPAL
OCCUPATIONS NUMBER OF PORTFOLIOS IN
NAME AND YEAR POSITION WITH IN THE PAST FUND COMPLEX OVERSEEN OTHER DIRECTORSHIPS HELD
OF BIRTH TRUST 5 YEARS BY TRUSTEE IN THE PAST 5 YEARS
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INDEPENDENT TRUSTEES
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Jon C. Hunt Trustee Retired since 1 Current Directorships:
(Born: 1951) (since 2014) 2013. Consultant Trustee of City National
to Management, Rochdale Funds, The
Convergent Advisors' Inner Circle Fund
Capital III, and O'Connor EQUUS
Management, (closed-end investment
LLC ("CCM") company). Member of
from 2012 to Independent Committee of
2013. Managing Nuveen Commodities Asset
Director and Management.
Chief Operating
Officer, CCM
from 1998 to
2012.
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Terrence O. Jones Trustee Retired. 1 Current Directorships:
(Born: 1963) (since 2014) Trustee of Genworth Life
Insurance Company of New
York, Highland Funds, The
Advisors' Inner Circle Fund
III, and O'Connor EQUUS
(closed-end investment
company).
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Thomas P. Lemke Trustee Retired since 1 Current Directorships:
(Born: 1954) (since 2014) 2013. Executive Trustee of The Munder
Vice President Funds, AXA Premier VIP
and General Trust, The Advisors' Inner
Counsel, Legg Circle Fund III, and
Mason, Inc. from O'Connor EQUUS (closed-
2005 to 2013. end investment company).
Former Directorships:
Director of ICI Mutual
Insurance Company to 2013.
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Randall S. Yanker Trustee Co-Founder and 1 Current Directorships:
(Born: 1960) (since 2014) Senior Partner, Trustee of The Advisors'
Alternative Asset Inner Circle Fund III and
Managers, L.P. O'Connor EQUUS (closed-
since 2004. end investment company).
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S-36
(1) Mr. Doran may be deemed to be an "interested" person of the Trust as that
term is defined in the 1940 Act by virtue of his affiliation with the
Distributor and/or its affiliates.
INDIVIDUAL TRUSTEE QUALIFICATIONS
---------------------------------
The Trust has concluded that each of the Trustees should serve on the Board
because of their ability to review and understand information about the Fund
provided to them by management, to identify and request other information they
may deem relevant to the performance of their duties, to question management
and other service providers regarding material factors bearing on the
management and administration of the Fund, and to exercise their business
judgment in a manner that serves the best interests of the Fund's shareholders.
The Trust has concluded that each of the Trustees should serve as a Trustee
based on their own experience, qualifications, attributes and skills as
described below.
The Trust has concluded that Mr. Doran should serve as Trustee because of the
experience he gained serving as a Partner in the Investment Management and
Securities Industry Practice of a large law firm, his experience in and
knowledge of the financial services industry, and the experience he has gained
serving on other mutual fund boards.
The Trust has concluded that Mr. Hunt should serve as Trustee because of the
experience he gained in a variety of leadership roles with different investment
management institutions, his experience in and knowledge of the financial
services industry, and the experience he has gained as a board member of
open-end, closed-end and private funds investing in a broad range of asset
classes, including alternative asset classes.
The Trust has concluded that Mr. Jones should serve as Trustee because of the
experience he gained in a variety of leadership roles with different investment
management institutions and in the alternative asset management industry, his
experience in and knowledge of the financial services industry, and the
experience he has gained serving on other mutual fund boards.
The Trust has concluded that Mr. Lemke should serve as Trustee because of the
extensive experience he gained in the financial services industry, including
experience in various senior management positions with financial services firms
and multiple years of service with a regulatory agency, his background in
controls, including legal, compliance and risk management, and his service as
general counsel for several financial services firms.
The Trust has concluded that Mr. Yanker should serve as Trustee because of the
experience he gained in a variety of leadership roles with the alternative
asset management divisions of various financial services firms, his experience
in and knowledge of the financial services industry, and the experience he has
gained advising institutions on alternative asset management.
In its periodic assessment of the effectiveness of the Board, the Board
considers the complementary individual skills and experience of the individual
Trustees primarily in the broader context of the Board's overall composition so
that the Board, as a body, possesses the appropriate (and appropriately
diverse) skills and experience to oversee the business of the funds.
BOARD COMMITTEES. The Board has established the following standing committees:
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is
composed of each of the independent Trustees of the Trust. The Audit
Committee operates under a written charter approved by the Board. The
principal responsibilities of the Audit Committee include: (i)
recommending which firm to engage as each fund's independent
registered public accounting firm and whether to terminate this
relationship; (ii) reviewing the independent registered public
accounting firm's compensation, the proposed scope and terms of its
engagement,
S-37
and the firm's independence; (iii) pre-approving audit and non-audit
services provided by each fund's independent registered public
accounting firm to the Trust and certain other affiliated entities;
(iv) serving as a channel of communication between the independent
registered public accounting firm and the Trustees; (v) reviewing the
results of each external audit, including any qualifications in the
independent registered public accounting firm's opinion, any related
management letter, management's responses to recommendations made by
the independent registered public accounting firm in connection with
the audit, reports submitted to the Committee by the internal auditing
department of the Trust's Administrator that are material to the Trust
as a whole, if any, and management's responses to any such reports;
(vi) reviewing each fund's audited financial statements and
considering any significant disputes between the Trust's management
and the independent registered public accounting firm that arose in
connection with the preparation of those financial statements; (vii)
considering, in consultation with the independent registered public
accounting firm and the Trust's senior internal accounting executive,
if any, the independent registered public accounting firms' reports on
the adequacy of the Trust's internal financial controls; (viii)
reviewing, in consultation with each fund's independent registered
public accounting firm, major changes regarding auditing and
accounting principles and practices to be followed when preparing each
fund's financial statements; and (ix) other audit related matters. Mr.
Hunt, Mr. Jones, Mr. Lemke and Mr. Yanker currently serve as members
of the Audit Committee. Mr. Jones serves as the Chairman of the Audit
Committee. The Audit Committee meets periodically, as necessary.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee
that is composed of each of the independent Trustees of the Trust. The
Governance Committee operates under a written charter approved by the
Board. The principal responsibilities of the Governance Committee
include: (i) considering and reviewing Board governance and
compensation issues; (ii) conducting a self-assessment of the Board's
operations; (iii) selecting and nominating all persons to serve as
independent Trustees and evaluating the qualifications of "interested"
Trustee candidates; and (iv) reviewing shareholder recommendations for
nominations to fill vacancies on the Board if such recommendations are
submitted in writing and addressed to the Committee at the Trust's
office. Mr. Hunt, Mr. Jones, Mr. Lemke and Mr. Yanker currently serve
as members of the Governance Committee. Mr. Lemke serves as the
Chairman of the Governance Committee. The Governance Committee meets
periodically, as necessary.
FAIR VALUE PRICING COMMITTEE. The Board has also established a standing Fair
Value Pricing Committee that is composed of various representatives of the
Trust's service providers, as appointed by the Board. The Fair Value Pricing
Committee operates under procedures approved by the Board. The principal
responsibility of the Fair Value Pricing Committee is to determine the fair
value of securities for which current market quotations are not readily
available. The Fair Value Pricing Committee's determinations are reviewed by
the Board.
FUND SHARES OWNED BY BOARD MEMBERS. As of the date of this SAI, the Fund has
not commenced operations, and therefore no Trustee owns shares of the Fund. The
Trust is the only investment company in the Fund complex.
BOARD COMPENSATION. The following table sets forth information covering the
anticipated total compensation payable by the Trust during its initial fiscal
year ending [INSERT] to the persons who serve as Trustees of the Trust:
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AGGREGATE COMPENSATION ESTIMATED TOTAL COMPENSATION
NAME FROM THE TRUST FROM THE TRUST
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INTERESTED TRUSTEES
--------------------------------------------------------------------------------------------
William M. Doran $0 $0 for service on one (1) board
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INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------------------
Jon C. Hunt [$XX] [$XX] for service on one (1) board
--------------------------------------------------------------------------------------------
Terrence O. Jones [$XX] [$XX] for service on one (1) board
--------------------------------------------------------------------------------------------
Thomas P. Lemke [$XX] [$XX] for service on one (1) board
--------------------------------------------------------------------------------------------
Randall S. Yanker [$XX] [$XX] for service on one (1) board
--------------------------------------------------------------------------------------------
S-38
TRUST OFFICERS. Set forth below are the names, year of birth, position with the
Trust, and the principal occupations for the last five years of each of the
persons currently serving as executive officers of the Trust. There is no
stated term of office for the officers of the Trust. Unless otherwise noted,
the business address of each officer is SEI Investments Company, One Freedom
Valley Drive, Oaks, Pennsylvania 19456. The Chief Compliance Officer is the
only officer who receives compensation from the Trust for his services.
Certain officers of the Trust also serve as officers of one or more mutual
funds for which SEI Investments Company or its affiliates act as investment
manager, administrator or distributor.
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NAME AND YEAR
OF BIRTH POSITION WITH TRUST PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
-----------------------------------------------------------------------------------------------------------------
[Michael Beattie] President Director of Client Service, SEI Investments Company,
(Born: 1965) (since 2014) since 2004.
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[Robert Nesher] Vice Chairman SEI employee 1974 to present; currently performs
(Born: 1946) (since 2014) various services on behalf of SEI Investments for
which Mr. Nesher is compensated. President and
Director of SEI Structured Credit Fund, LP. President
and Chief Executive Officer of SEI Alpha Strategy
Portfolios, LP, June 2007 to September 2013.
President and Director of SEI Opportunity Fund, L.P.
to 2010.
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[Rami Abdel- Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting since
Rahman] Financial Officer June 2014. Fund Accounting Director, BNY Mellon,
(Born: 1974) (since 2014) from 2006 to 2014. Fund Accounting Manager,
JPMorgan Chase, from 1998 to 2006.
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[Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010. Associate at
Descoteaux] (since 2014) Morgan, Lewis & Bockius LLP from 2006 to 2010.
(Born: 1977)
-----------------------------------------------------------------------------------------------------------------
[Russell Emery] Chief Compliance Officer Chief Compliance Officer of SEI Structured Credit
(Born: 1962) (since 2014) Fund, LP since June 2007. Chief Compliance Officer
of SEI Alpha Strategy Portfolios, LP from June 2007
to September 2013. Chief Compliance Officer of The
Advisors' Inner Circle Fund, The Advisors' Inner
Circle Fund II, The Advisors' Inner Circle Fund III,
Bishop Street Funds, SEI Institutional Managed Trust,
SEI Asset Allocation Trust, SEI Institutional
International Trust, SEI Institutional Investments
-----------------------------------------------------------------------------------------------------------------
S-39
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NAME AND YEAR
OF BIRTH POSITION WITH TRUST PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
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Trust, SEI Daily Income Trust, SEI Liquid Asset
Trust, SEI Tax Exempt Trust, Adviser Managed Trust,
New Covenant Funds, SEI Insurance Products Trust,
The KP Funds, and O'Connor EQUUS (closed-end
investment company). Chief Compliance Officer of
SEI Opportunity Fund, L.P. until 2010. Director of
Investment Product Management and Development,
SEI Investments, since February 2003; Senior
Investment Analyst -- Equity Team, SEI Investments,
from March 2000 to February 2003.
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[Lisa Whittaker] Vice President and Assistant Attorney, SEI Investments Company (2012-present).
(Born: 1978) Secretary Associate Counsel and Compliance Officer, The
(since 2014) Glenmede Trust Company, N.A. (2011-2012).
Associate, Drinker Biddle & Reath LLP (2006-2011).
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[John Y. Kim] Vice President and Assistant Attorney, SEI Investments Company (2014-present).
(Born: 1981) Secretary Associate, Stradley Ronon Stevens & Young, LLP
(since 2014) (2009-2014).
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[Edward Anti-Money Laundering Compliance Compliance Manager of SEI Investments Company,
McCusker] Officer and Privacy Officer May 2011 -- April 2013. Project Manager and AML
(Born: 1983) (since 2014) Operations Lead of SEI Private Trust Company,
September 2010 -- May 2011. Private Banking Client
Service Professional of SEI Private Banking and Trust,
September 2008 -- September 2010.
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PURCHASING AND REDEEMING SHARES
Purchases and redemptions may be made through the Transfer Agent on any day the
New York Stock Exchange ("NYSE") is open for business. Shares of the Fund are
offered and redeemed on a continuous basis. Currently, the Trust is closed for
business when the following holidays are observed: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust
retains the right, however, to alter this policy to provide for redemptions in
whole or in part by a distribution in-kind of securities held by the Fund in
lieu of cash. Shareholders may incur brokerage charges on the sale of any such
securities so received in payment of redemptions.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the NYSE is restricted, or during the existence of an emergency (as determined
by the SEC by rule or regulation) as a result of which disposal or valuation of
the Fund's securities is not reasonably practicable, or for such other periods
as the SEC has by order permitted. The Trust also reserves the right to suspend
sales of shares of the Fund for any period during which the NYSE, the Adviser,
the Administrator, the Transfer Agent and/or the Custodian are not open for
business.
S-40
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. The Fund adheres to Section 2(a)(41), and Rule 2a-4 thereunder,
of the 1940 Act with respect to the valuation of portfolio securities. In
general, securities for which market quotations are readily available are
valued at current market value, and all other securities are valued at fair
value as determined in good faith by the Board. In complying with the 1940
Act, the Trust relies on guidance provided by the SEC and by the SEC staff in
various interpretive letters and other guidance.
EQUITY SECURITIES. Securities listed on a securities exchange, market or
automated quotation system for which quotations are readily available (except
for securities traded on NASDAQ), including securities traded over the counter,
are valued at the last quoted sale price on the primary exchange or market
(foreign or domestic) on which they are traded on the valuation date (or at
approximately 4:00 p.m. Eastern Time if a security's primary exchange is
normally open at that time), or, if there is no such reported sale on the
valuation date, at the most recent quoted bid price. For securities traded on
NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not
available or determined to not represent the fair value of the security as of
the Fund's pricing time, the security will be valued at fair value as
determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market
securities and other debt securities are priced based upon valuations provided
by recognized independent, third-party pricing agents. Such values generally
reflect the last reported sales price if the security is actively traded. The
third-party pricing agents may also value debt securities by employing
methodologies that utilize actual market transactions, broker-supplied
valuations, or other methodologies designed to identify the market value for
such securities. Such methodologies generally consider such factors as security
prices, yields, maturities, call features, ratings and developments relating to
specific securities in arriving at valuations. Money market securities and
other debt securities with remaining maturities of sixty days or less may be
valued at their amortized cost, which approximates market value. If such prices
are not available or determined to not represent the fair value of the security
as of the Fund's pricing time, the security will be valued at fair value as
determined in good faith using methods approved by the Board.
FOREIGN SECURITIES. The prices for foreign securities are reported in local
currency and converted to U.S. dollars using currency exchange rates. Exchange
rates are provided daily by recognized independent pricing agents.
DERIVATIVES AND OTHER COMPLEX SECURITIES. Exchange traded options on securities
and indices purchased by the Fund generally are valued at their last trade
price or, if there is no last trade price, the last bid price. Exchange traded
options on securities and indices written by the Fund generally are valued at
their last trade price or, if there is no last trade price, the last asked
price. In the case of options traded in the over-the-counter market, if the OTC
option is also an exchange traded option, the Fund will follow the rules
regarding the valuation of exchange traded options. If the OTC option is not
also an exchange traded option, the Fund will value the option at fair value in
accordance with procedures adopted by the Board.
Futures and swaps cleared through a central clearing house ("centrally cleared
swaps") are valued at the settlement price established each day by the board of
exchange on which they are traded. The daily settlement prices for financial
futures are provided by an independent source. On days when there is excessive
volume or market volatility, or the future or centrally cleared swap does not
end trading by the time the Fund calculates NAV, the settlement price may not
be available at the time at which the Fund calculates its NAV. On such days,
the best available price (which is typically the last sales price) may be used
to value the Fund's futures or centrally cleared swaps position.
Foreign currency forward contracts are valued at the current day's interpolated
foreign exchange rate, as calculated using the current day's spot rate, and the
thirty, sixty, ninety and one-hundred eighty day forward rates provided by an
independent source.
If available, non-centrally cleared swaps, collateralized debt obligations,
collateralized loan obligations and bank loans are priced based on valuations
provided by an independent third party pricing agent. If a price is not
available from an independent third party pricing agent, the security will be
valued at fair value as determined in good faith using methods approved by the
Board.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS AND INDEPENDENT BROKERS.
Pursuant to contracts with the Administrator, prices for most securities held
by the Fund are provided daily by third-party independent pricing agents
S-41
that are approved by the Board. The valuations provided by third-party
independent pricing agents are reviewed daily by the Administrator.
If a security price cannot be obtained from an independent, third-party pricing
agent, the Administrator shall seek to obtain a bid price from at least one
independent broker.
FAIR VALUE PROCEDURES. Securities for which market prices are not "readily
available" or which cannot be valued using the methodologies described above
are valued in accordance with Fair Value Procedures established by the Board
and implemented through the Fair Value Pricing Committee. The members of the
Fair Valuation Committee report, as necessary, to the Board regarding portfolio
valuation determinations. The Board, from time to time, will review these
methods of valuation and will recommend changes which may be necessary to
assure that the investments of the Fund are valued at fair value.
Some of the more common reasons that may necessitate a security being valued
using Fair Value Procedures include: the security's trading has been halted or
suspended; the security has been de-listed from a national exchange; the
security's primary trading market is temporarily closed at a time when under
normal conditions it would be open; the security has not been traded for an
extended period of time; the security's primary pricing source is not able or
willing to provide a price; trading of the security is subject to local
government-imposed restrictions; or a significant event with respect to a
security has occurred after the close of the market or exchange on which the
security principally trades and before the time the Fund calculates NAV. When a
security is valued in accordance with the Fair Value Procedures, the Fair Value
Pricing Committee will determine the value after taking into consideration
relevant information reasonably available to the Fair Value Pricing Committee.
TAXES
The following is only a summary of certain additional federal income tax
considerations generally affecting the Fund and its shareholders that is
intended to supplement the discussion contained in the Fund's prospectuses. No
attempt is made to present a detailed explanation of the tax treatment of the
Fund or its shareholders, and the discussion here and in the Fund's
prospectuses is not intended as a substitute for careful tax planning.
Shareholders are urged to consult their tax advisors with specific reference to
their own tax situations, including their state, local, and foreign tax
liabilities.
The following general discussion of certain federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the
date of this SAI. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated
herein.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY ("RIC"). The Fund intends to
qualify and elects to be treated as a RIC. By following such a policy, the Fund
expects to eliminate or reduce to a nominal amount the federal taxes to which
it may be subject. If the Fund qualifies as a RIC, it will generally not be
subject to federal income taxes on the net investment income and net realized
capital gains that it timely distributes to its shareholders. The Board
reserves the right not to maintain the qualification of the Fund as a RIC if it
determines such course of action to be beneficial to shareholders.
In order to qualify as a RIC under the Code, the Fund must distribute annually
to its shareholders at least 90% of its net investment income (which, includes
dividends, taxable interest, and the excess of net short-term capital gains
over net long-term capital losses, less operating expenses) and at least 90% of
its net tax exempt interest income, for each tax year, if any (the
"Distribution Requirement") and also must meet certain additional requirements.
Among these requirements are the following: (i) at least 90% of the Fund's
gross income each taxable year must be derived from dividends, interest,
payments with respect to certain securities loans, and gains from the sale or
other disposition of stock, securities, or foreign currencies, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies, and net income derived from an interest in a qualified publicly
traded partnership (the "Qualifying Income Test"); and (ii) at the close of
each quarter of the Fund's taxable year: (A) at least 50% of the value of its
total assets must be represented by cash and cash items, U.S. government
S-42
securities, securities of other RICs and other securities, with such other
securities limited, in respect to any one issuer, to an amount not greater than
5% of the value of the Fund's total assets and that does not represent more
than 10% of the outstanding voting securities of such issuer, including the
equity securities of a qualified publicly traded partnership, and (B) not more
than 25% of the value of its total assets is invested in the securities (other
than U.S. government securities or securities of other RICs) of any one issuer
or the securities (other than the securities of another RIC) of two or more
issuers that the Fund controls and which are engaged in the same or similar
trades or businesses or related trades or businesses, or the securities of one
or more qualified publicly traded partnerships (the "Asset Test"). Although the
Fund intends to distribute substantially all of its net investment income and
may distribute their capital gains for any taxable year, the Fund will be
subject to federal income taxation to the extent any such income or gains are
not distributed.
In general, for purposes of the Qualifying Income Test described in (i) above,
income derived from a partnership will be treated as qualifying income only to
the extent such income is attributable to items of income of the partnership
that would be qualifying income if realized directly by the Fund. However, 100%
of the net income derived from an interest in a "qualified publicly traded
partnership" (generally, a partnership (i) interests in which are traded on an
established securities market or are readily tradable on a secondary market or
the substantial equivalent thereof, (ii) that derives at least 90% of its
income from the passive income sources specified in Code section 7704(d), and
(iii) that derives less than 90% of its income from the qualifying income
described in (i) of the prior paragraph) will be treated as qualifying income.
In addition, although in general the passive loss rules of the Code do not
apply to RICs, such rules do apply to a RIC with respect to items attributable
to an interest in a qualified publicly traded partnership. The Fund may invest
in certain MLPs which may be treated as "qualified publicly traded
partnerships." As described above, income from "qualified publicly traded
partnerships" is qualifying income for purposes of the Qualifying Income Test,
but the Fund's investment in one or more of such "qualified publicly traded
partnerships" is limited under the Asset Test to no more than 25% of the value
of the Fund's assets. The Fund will monitor its investment in such "qualified
publicly traded partnerships" in order to ensure compliance with the Qualifying
Income Test.
The U.S. Treasury Department has authority to issue regulations that would
exclude foreign currency gains from the Qualifying Income Test described above
if such gains are not directly related to the Fund's business of investing in
stock or securities (or options and futures with respect to stock or
securities). Accordingly, regulations may be issued in the future that could
treat some or all of the Fund's non-U.S. currency gains as non-qualifying
income, thereby potentially jeopardizing the Fund's status as a RIC for all
years to which the regulations are applicable.
The Fund is currently permitted to purchase or sell financial and physical
commodities, commodity contracts based on (or relating to) physical commodities
or financial commodities and securities and derivative instruments whose values
are derived (in whole or in part) from physical commodities or financial
commodities. These commodity-based investments will likely generate
non-qualifying income for the Fund under the Qualifying Income Test. The Fund
intends to carefully monitor the income from such investments in order to
satisfy the Qualifying Income Test by maintaining the Fund's non-qualifying
income below 10% of the Fund's gross income for a taxable year.
If the Fund fails to satisfy the Qualifying Income or Asset Tests in any
taxable year, the Fund may be eligible for relief provisions if the failures
are due to reasonable cause and not willful neglect and if a penalty tax is
paid with respect to each failure to satisfy the applicable requirements.
Additionally, relief is provided for certain DE MINIMIS failures of the
diversification requirements where the Fund corrects the failure within a
specified period. If the Fund fails to maintain qualification as a RIC for a
tax year, and the relief provisions are not available, the Fund will be subject
to federal income tax at regular corporate rates without any deduction for
distributions to shareholders. In such case, its shareholders would be taxed as
if they received ordinary dividends, although corporate shareholders could be
eligible for the dividends received deduction (subject to certain limitations)
and individuals may be able to benefit from the lower tax rates available to
qualified dividend income. In addition, the Fund could be required to recognize
unrealized gains, pay substantial taxes and interest, and make substantial
distributions before requalifying as a RIC. The Board reserves the right not to
maintain the qualification of the Fund as a RIC if it determines such course of
action to be beneficial to shareholders.
The Fund may elect to treat part or all of any "qualified late year loss" as if
it had been incurred in the succeeding taxable year in determining the Fund's
taxable income, net capital gain, net short-term capital gain, and earnings and
profits. The effect of this election is to treat any such "qualified late year
loss" as if it had been incurred in the succeeding taxable year
S-43
in characterizing Fund distributions for any calendar. A "qualified late year
loss" generally includes net capital loss, net long-term capital loss, or net
short-term capital loss incurred after October 31 of the current taxable year
(commonly referred to as "post-October losses") and certain other late-year
losses.
The treatment of capital loss carryovers for the Fund is similar to the rules
that apply to capital loss carryovers of individuals, which provide that such
losses are carried over indefinitely. If the Fund has a "net capital loss"
(that is, capital losses in excess of capital gains), the excess of the Fund's
net short-term capital losses over its net long-term capital gains is treated
as a short-term capital loss arising on the first day of the Fund's next
taxable year, and the excess (if any) of the Fund's net long-term capital
losses over its net short-term capital gains is treated as a long-term capital
loss arising on the first day of the Fund's next taxable year. The carryover of
capital losses may be limited under the general loss limitation rules if the
Fund experiences an ownership change as defined in the Code.
FEDERAL EXCISE TAX. Notwithstanding the Distribution Requirement described
above, which generally requires the Fund to distribute at least 90% of its
annual investment company taxable income and the excess of its exempt interest
income (but does not require any minimum distribution of net capital gain), the
Fund will be subject to a nondeductible 4% federal excise tax to the extent it
fails to distribute, by the end of the calendar year at least 98% of its
ordinary income and 98.2% of its capital gain net income (the excess of short-
and long-term capital gains over short- and long-term capital losses) for the
one-year period ending on October 31 of such year (including any retained
amount from the prior calendar year on which the Fund paid no federal income
tax). The Fund intends to make sufficient distributions to avoid liability for
federal excise tax, but can make no assurances that such tax will be completely
eliminated. The Fund may in certain circumstances be required to liquidate Fund
investments in order to make sufficient distributions to avoid federal excise
tax liability at a time when the investment adviser might not otherwise have
chosen to do so, and liquidation of investments in such circumstances may
affect the ability of the Fund to satisfy the requirement for qualification as
a RIC.
DISTRIBUTIONS TO SHAREHOLDERS. The Fund receives income generally in the form
of dividends and interest on investments. This income, plus net short-term
capital gains, if any, less expenses incurred in the operation of the Fund,
constitutes the Fund's net investment income from which dividends may be paid
to you. Any distributions by the Fund from such income will be taxable to you
as ordinary income or at the lower capital gains rates that apply to
individuals receiving qualified dividend income, whether you take them in cash
or in additional shares.
Distributions by the Fund will be eligible for the reduced maximum tax rate to
individuals of 20% (lower rates apply to individuals in lower tax brackets) to
the extent that the Fund receives qualified dividend income on the securities
it holds and the Fund designates the distributions as qualified dividend
income. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (e.g., foreign
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock
of which is readily tradable on an established securities market in the United
States). A dividend will not be treated as qualified dividend income to the
extent that: (i) the shareholder has not held the shares on which the dividend
was paid for more than 60 days during the 121-day period that begins on the
date that is 60 days before the date on which the shares become "ex-dividend"
(which is the day on which declared distributions (dividends or capital gains)
are deducted from the Fund's assets before it calculates the net asset value)
with respect to such dividend, (ii) the Fund has not satisfied similar holding
period requirements with respect to the securities it holds that paid the
dividends distributed to the shareholder), (iii) the shareholder is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to substantially similar or related property, or (iv) the
shareholder elects to treat such dividend as investment income under section
163(d)(4)(B) of the Code. Distributions that the Fund receives from an ETF or
underlying fund taxable as a RIC or a REIT will be treated as qualified
dividend income only to the extent so designated by such ETF, underlying fund
or REIT.
Distributions by the Fund of its net short-term capital gains will be taxable
as ordinary income. Capital gain distributions consisting of the Fund's net
capital gains will be taxable as long-term capital gains for individual
shareholders at a maximum rate of 20% regardless of how long you have held your
shares in the Fund. The Fund will report annually to its shareholders the
federal tax status of all distributions made by the Fund.
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In the case of corporate shareholders, the Fund's distributions (other than
capital gain distributions) generally qualify for the dividend-received
deduction to the extent such distributions are so designated and do not exceed
the gross amount of qualifying dividends received by the Fund for the year.
Generally, and subject to certain limitations (including certain holding period
limitations), a dividend will be treated as a qualifying dividend if it has
been received from a domestic corporation. All such qualifying dividends
(including the deducted portion) must be included in your alternative minimum
taxable income calculation.
To the extent that the Fund makes a distribution of income received by the Fund
in lieu of dividends (a "substitute payment") with respect to securities on
loan pursuant to a securities lending transaction, such income will not
constitute qualified dividend income to individual shareholders and will not be
eligible for the dividends received deduction for corporate shareholders.
If the Fund's distributions exceed its taxable income and capital gains
realized during a taxable year, all or a portion of the distributions made in
the same taxable year may be recharacterized as a return of capital to
shareholders. A return of capital distribution will generally not be taxable,
but will reduce each shareholder's cost basis in the Fund and result in a
higher reported capital gain or lower reported capital loss when those shares
on which the distribution was received are sold.
A dividend or distribution received shortly after the purchase of shares
reduces the net asset value of the shares by the amount of the dividend or
distribution and, although in effect a return of capital, will be taxable to
the shareholder. If the net asset value of shares were reduced below the
shareholder's cost by dividends or distributions representing gains realized on
sales of securities, such dividends or distributions would be a return of
investment though taxable to the shareholder in the same manner as other
dividends or distributions.
The Fund will inform you of the amount of your ordinary income dividends,
qualified dividend income and capital gain distributions, if any, and will
advise you of their tax status for federal income tax purposes shortly after
the close of each calendar year. If you have not held your shares for a full
year, the Fund may designate and distribute to you, as ordinary income,
qualified dividend income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the Fund.
Dividends declared to shareholders of record in October, November or December
and actually paid in January of the following year will be treated as having
been received by shareholders on December 31 of the calendar year in which
declared. Under this rule, therefore, a shareholder may be taxed in one year on
dividends or distributions actually received in January of the following year.
SALES, EXCHANGES OR REDEMPTIONS. Any gain or loss recognized on a sale,
exchange, or redemption of shares of the Fund by a shareholder who is not a
dealer in securities will generally, for individual shareholders, be treated as
a long-term capital gain or loss if the shares have been held for more than
twelve months and otherwise will be treated as a short-term capital gain or
loss. However, if shares on which a shareholder has received a net capital
gain distribution are subsequently sold, exchanged, or redeemed and such shares
have been held for six months or less, any loss recognized will be treated as a
long-term capital loss to the extent of the net capital gain distribution. In
addition, the loss realized on a sale or other disposition of shares will be
disallowed to the extent a shareholder repurchases (or enters into a contract
to or option to repurchase) shares within a period of 61 days (beginning 30
days before and ending 30 days after the disposition of the shares). This loss
disallowance rule will apply to shares received through the reinvestment of
dividends during the 61-day period.
Effective January 1, 2013, U.S. individuals with income exceeding $200,000
($250,000 if married and filing jointly) are subject to a 3.8% Medicare
contribution tax on their "net investment income," including interest,
dividends, and capital gains (including any capital gains realized on the sale
or exchange of shares of the Fund).
The Fund (or its administrative agent) must report to the Internal Revenue
Service ("IRS") and furnish to Fund shareholders the cost basis information for
purchases of Fund shares. In addition to the requirement to report the gross
proceeds from the sale of Fund shares, the Fund is also required to report the
cost basis information for such shares and
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indicate whether these shares had a short-term or long-term holding period. For
each sale of Fund shares, the Fund will permit Fund shareholders to elect from
among several IRS-accepted cost basis methods, including the average basis
method. In the absence of an election, the Fund will use the average basis
method as its default cost basis method. The cost basis method elected by the
Fund shareholder (or the cost basis method applied by default) for each sale of
Fund shares may not be changed after the settlement date of each such sale of
Fund shares. Fund shareholders should consult with their tax advisors to
determine the best IRS-accepted cost basis method for their tax situation and
to obtain more information about how cost basis reporting applies to them.
TAX TREATMENT OF COMPLEX SECURITIES. The Fund may invest in complex securities
and these investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the Fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to the Fund and/or defer the Fund's ability to recognize losses, and, in
limited cases, subject the Fund to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the amount,
timing or character of the income distributed to you by the Fund.
The Fund is required for federal income tax purposes to mark-to-market and
recognize as income for each taxable year its net unrealized gains and losses
on certain futures contracts as of the end of the year as well as those
actually realized during the year. Gain or loss from futures and options
contracts on broad-based indexes required to be marked to market will be 60%
long-term and 40% short-term capital gain or loss. Application of this rule may
alter the timing and character of distributions to shareholders. The Fund may
be required to defer the recognition of losses on futures contracts, options
contracts and swaps to the extent of any unrecognized gains on offsetting
positions held by the Fund. These provisions may also require the Fund to
mark-to-market certain types of positions in its portfolio (i.e., treat them as
if they were closed out), which may cause the Fund to recognize income without
receiving cash with which to make distributions in amounts necessary to satisfy
the Distribution Requirement and for avoiding the excise tax discussed above.
Accordingly, in order to avoid certain income and excise taxes, the Fund may be
required to liquidate its investments at a time when the investment adviser
might not otherwise have chosen to do so.
With respect to investments in STRIPS, Treasury Receipts, and other zero coupon
securities which are sold at original issue discount and thus do not make
periodic cash interest payments, the Fund will be required to include as part of
its current income the imputed interest on such obligations even though the Fund
has not received any interest payments on such obligations during that period.
Because the Fund distributes all of its net investment income to its
shareholders, the Fund may have to sell Fund securities to distribute such
imputed income which may occur at a time when the Adviser would not have chosen
to sell such securities and which may result in taxable gain or loss.
Any market discount recognized on a bond is taxable as ordinary income. A
market discount bond is a bond acquired in the secondary market at a price
below redemption value or adjusted issue price if issued with original issue
discount. Absent an election by the Fund to include the market discount in
income as it accrues, gain on the Fund's disposition of such an obligation will
be treated as ordinary income rather than capital gain to the extent of the
accrued market discount.
As described above in the section describing the qualification requirements for
a RIC, the Fund may invest in certain MLPs which may be treated as "qualified
publicly traded partnerships." Income from qualified publicly traded
partnerships is qualifying income for purposes of the Qualifying Income Test,
but the Fund's investment in one or more of such qualified publicly traded
partnerships is limited under the Asset Test to no more than 25% of the value
of the Fund's assets. The Fund will monitor its investment in such qualified
publicly traded partnerships in order to ensure compliance with the Qualifying
Income and Asset Tests. MLPs and other partnerships that the Fund may invest in
will deliver Form K-1s to the Fund to report its share of income, gains,
losses, deductions and credits of the MLP or other partnership. These Form K-1s
may be delayed and may not be received until after the time that the Fund
issues its tax reporting statements. As a result, the Fund may at times find it
necessary to reclassify the amount and character of its distributions to you
after it issues you your tax reporting statement.
The Fund may invest in REITs. Investments in REIT equity securities may require
the Fund to accrue and distribute income not yet received. To generate
sufficient cash to make the requisite distributions, the Fund may be required
to sell securities in its portfolio (including when it is not advantageous to
do so) that it otherwise would have continued to hold.
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The Fund's investments in REIT equity securities may at other times result in
the Fund's receipt of cash in excess of the REIT's earnings; if the Fund
distributes these amounts, these distributions could constitute a return of
capital to the Fund's shareholders for federal income tax purposes. Dividends
paid by a REIT, other than capital gain distributions, will be taxable as
ordinary income up to the amount of the REIT's current and accumulated earnings
and profits. Capital gain dividends paid by a REIT to the Fund will be treated
as long-term capital gains by the Fund and, in turn, may be distributed by the
Fund to its shareholders as a capital gain distribution. Dividends received by
the Fund from a REIT generally will not constitute qualified dividend income.
If a REIT is operated in a manner such that it fails to qualify as a REIT, an
investment in the REIT would become subject to double taxation, meaning the
taxable income of the REIT would be subject to federal income tax at regular
corporate rates without any deduction for dividends paid to shareholders and
the dividends would be taxable to shareholders as ordinary income (or possibly
as qualified dividend income) to the extent of the REIT's current and
accumulated earnings and profits.
CERTAIN FOREIGN CURRENCY TAX ISSUES. The Fund's transactions in foreign
currencies and forward foreign currency contracts will generally be subject to
special provisions of the Code that, among other things, may affect the
character of gains and losses realized by the Fund (i.e., may affect whether
gains or losses are ordinary or capital), accelerate recognition of income to
the Fund and defer losses. These rules could therefore affect the character,
amount and timing of distributions to shareholders. These provisions also may
require the Fund to mark-to-market certain types of positions in its portfolio
(i.e., treat them as if they were closed out) which may cause the Fund to
recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the Distribution Requirements and for avoiding the
excise tax described above. The Fund intends to monitor its transactions,
intends to make the appropriate tax elections, and intends to make the
appropriate entries in its books and records when it acquires any foreign
currency or forward foreign currency contract in order to mitigate the effect
of these rules so as to prevent disqualification of the Fund as a RIC and
minimize the imposition of income and excise taxes.
If the Fund owns shares in certain foreign investment entities, referred to as
"passive foreign investment companies" or "PFICs," the Fund will generally be
subject to one of the following special tax regimes: (i) the Fund may be liable
for U.S. federal income tax, and an additional interest charge, on a portion of
any "excess distribution" from such foreign entity or any gain from the
disposition of such shares, even if the entire distribution or gain is paid out
by the Fund as a dividend to its shareholders; (ii) if the Fund were able and
elected to treat a PFIC as a "qualified electing fund" or "QEF," the Fund would
be required each year to include in income, and distribute to shareholders in
accordance with the distribution requirements set forth above, the Fund's pro
rata share of the ordinary earnings and net capital gains of the PFIC, whether
or not such earnings or gains are distributed to the Fund, whether or not such
earnings or gains are distributed to the Fund; or (iii) the Fund may be
entitled to mark-to-market annually shares of the PFIC, and in such event would
be required to distribute to shareholders any such mark-to-market gains in
accordance with the distribution requirements set forth above. The Fund may
have to distribute to its shareholders certain "phantom" income and gain the
Fund accrues with respect to its investment in a PFIC in order to satisfy the
Distribution Requirement and to avoid imposition of the 4% excise tax described
above. The Fund will make the appropriate tax elections, if possible, and take
any additional steps that are necessary to mitigate the effect of these rules.
FOREIGN TAXES. Dividends and interest received by the Fund may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield on the Fund's stock or securities. Tax
conventions between certain countries and the United States may reduce or
eliminate these taxes. Foreign countries generally do not impose taxes on
capital gains with respect to investments by foreign investors.
If more than 50% of the value of the Fund's total assets at the close of its
taxable year consists of stocks or securities of foreign corporations, the Fund
will be eligible to and intends to file an election with the IRS that may
enable shareholders, in effect, to receive either the benefit of a foreign tax
credit, or a deduction from such taxes, with respect to any foreign and U.S.
possessions income taxes paid by the Fund, subject to certain limitations.
Pursuant to the election, the Fund will treat those taxes as dividends paid to
its shareholders. Each such shareholder will be required to include a
proportionate share of those taxes in gross income as income received from a
foreign source and must treat the amount so included as if the shareholder had
paid the foreign tax directly. The shareholder may then either deduct the taxes
deemed paid by him or her in computing his or her taxable income or,
alternatively, use the foregoing information in calculating any foreign tax
credit they may be entitled to use against the shareholders' federal income
tax. If the Fund makes the election, the Fund
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will report annually to its shareholders the respective amounts per share of
the Fund's income from sources within, and taxes paid to, foreign countries and
U.S. possessions.
Foreign tax credits, if any, received by the Fund as a result of an investment
in another RIC (including an ETF which is taxable as a RIC) will not be passed
through to you unless the Fund qualifies as a "qualified fund-of-funds" under
the Code. If the Fund is a "qualified fund-of-funds" it will be eligible to
file an election with the IRS that will enable the Fund to pass along these
foreign tax credits to its shareholders. The Fund will be treated as a
"qualified fund-of-funds" under the Code if at least 50% of the value of the
Fund's total assets (at the close of each quarter of the Fund's taxable year)
is represented by interests in other RICs. Foreign tax credits, if any,
received by the Fund as a result of an investment in an ETF which is taxable as
a RIC will generally not be passed through to you.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Fund generally serves to block UBTI from being
realized by its tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of Real Estate Mortgage Investment Conduits ("REMICs"), (ii) the Fund
invests in a REIT that is a taxable mortgage pool ("TMP") or that has a
subsidiary that is a TMP or that invests in the residual interest of a REMIC,
or (iii) shares in the Fund constitute debt-financed property in the hands of
the tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are strongly
encouraged to consult their tax advisors regarding these issues.
BACKUP WITHHOLDING. The Fund will be required in certain cases to withhold at a
28% withholding rate and remit to the U.S. Treasury the amount withheld on
amounts payable to any shareholder who: (i) has provided the Fund either an
incorrect tax identification number or no number at all; (ii) is subject to
backup withholding by the IRS for failure to properly report payments of
interest or dividends; (iii) has failed to certify to the Fund that such
shareholder is not subject to backup withholding; or (iv) has failed to certify
to the Fund that the shareholder is a U.S. person (including a resident
alien).
NON-U.S. INVESTORS. Any non-U.S. investors in the Fund may be subject to U.S.
withholding and estate tax and are encouraged to consult their tax advisors
prior to investing in the Fund.
A U.S. withholding tax at a 30% rate will be imposed on dividends beginning
after June 30, 2014 (and proceeds of sales in respect of Fund shares received
by Fund shareholders beginning after December 31, 2016) for shareholders who
own their shares through foreign accounts or foreign intermediaries if certain
disclosure requirements related to U.S. accounts or ownership are not
satisfied. The Fund will not pay any additional amounts in respect to any
amounts withheld.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally,
if a shareholder recognizes a loss of $2 million or more for an individual
shareholder or $10 million or more for a corporate shareholder, the shareholder
must file with the IRS a disclosure statement on Form 8886. Direct shareholders
of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a RIC such as the Fund
are not excepted. Future guidance may extend the current exception from this
reporting requirement to shareholders of most or all RICs. The fact that a loss
is reportable under these regulations does not affect the legal determination
of whether the taxpayer's treatment of the loss is proper. Shareholders should
consult their tax advisors to determine the applicability of these regulations
in light of their individual circumstances.
STATE TAXES. Depending upon state and local law, distributions by the Fund to
its shareholders and the ownership of such shares may be subject to state and
local taxes. Rules of state and local taxation of dividend and capital gains
distributions from RICs often differ from rules for federal income taxation
described above. It is expected that the Fund will not be liable for any
corporate excise, income or franchise tax in Massachusetts if it qualifies as a
RIC for federal income tax purposes.
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Many states grant tax-free status to dividends paid to you from interest earned
on direct obligations of the U.S. government, subject in some states to minimum
investment requirements that must be met by the Fund. Investment in Ginnie Mae
or Fannie Mae securities, banker's acceptances, commercial paper, and
repurchase agreements collateralized by U.S. government securities do not
generally qualify for such tax-free treatment. The rules on exclusion of this
income are different for corporate shareholders. Shareholders are urged to
consult their tax advisors regarding state and local taxes applicable to an
investment in the Fund.
The Fund's shares held in a tax-qualified retirement account will generally not
be subject to federal taxation on income and capital gains distribution from
the Fund until a shareholder begins receiving payments from its retirement
account. Because each shareholder's tax situation is different, shareholders
should consult their tax advisor about the tax implications of an investment in
the Fund.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and OTC, are
bought and sold through brokerage transactions for which commissions are
payable. Purchases from underwriters will include the underwriting commission
or concession, and purchases from dealers serving as market makers will include
a dealer's mark-up or reflect a dealer's mark-down. Money market securities and
other debt securities are usually bought and sold directly from the issuer or
an underwriter or market maker for the securities. Generally, the Fund will not
pay brokerage commissions for such purchases. When a debt security is bought
from an underwriter, the purchase price will usually include an underwriting
commission or concession. The purchase price for securities bought from dealers
serving as market makers will similarly include the dealer's mark up or reflect
a dealer's mark down. When the Fund executes transactions in the OTC market,
they will generally deal with primary market makers unless prices that are more
favorable are otherwise obtainable.
In addition, the Adviser may place a combined order for two or more accounts it
manages, including the Fund, engaged in the purchase or sale of the same
security if, in its judgment, joint execution is in the best interest of each
participant and will result in best price and execution. Transactions
involving commingled orders are allocated in a manner deemed equitable to each
account or fund. Although it is recognized that, in some cases, the joint
execution of orders could adversely affect the price or volume of the security
that a particular account or the Fund may obtain, it is the opinion of the
Adviser that the advantages of combined orders outweigh the possible
disadvantages of separate transactions.
BROKERAGE SELECTION. The Trust does not expect to use one particular broker or
dealer, and when one or more brokers is believed capable of providing the best
combination of price and execution, the Adviser may select a broker based upon
brokerage or research services provided to the Adviser. The Adviser may pay a
higher commission than otherwise obtainable from other brokers in return for
such services only if a good faith determination is made that the commission is
reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances,
to cause the Fund to pay a broker or dealer a commission for effecting a
transaction in excess of the amount of commission another broker or dealer
would have charged for effecting the transaction in recognition of the value of
brokerage and research services provided by the broker or dealer. In addition
to agency transactions, the Adviser may receive brokerage and research services
in connection with certain riskless principal transactions, in accordance with
applicable SEC guidance. Brokerage and research services include: (1)
furnishing advice as to the value of securities, the advisability of investing
in, purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; (2) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (3) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody). In the case of research services, the
Adviser believes that access to independent investment research is beneficial
to their investment decision-making processes and, therefore, to the Fund.
To the extent research services may be a factor in selecting brokers, such
services may be in written form or through direct contact with individuals and
may include information as to particular companies and securities as well as
market, economic, or institutional areas and information which assists in the
valuation and pricing of investments. Examples of research-oriented services
for which the Adviser might utilize Fund commissions include research reports
and other
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information on the economy, industries, sectors, groups of securities,
individual companies, statistical information, political developments,
technical market action, pricing and appraisal services, credit analysis, risk
measurement analysis, performance and other analysis. The Adviser may use
research services furnished by brokers in servicing all client accounts and not
all services may necessarily be used by the Adviser in connection with the Fund
or any other specific client account that paid commissions to the broker
providing such services. Information so received by the Adviser will be in
addition to and not in lieu of the services required to be performed by the
Fund's Adviser under the Advisory Agreement. Any advisory or other fees paid to
the Adviser are not reduced as a result of the receipt of research services.
In some cases the Adviser may receive a service from a broker that has both a
"research" and a "non-research" use. When this occurs, the Adviser makes a good
faith allocation, under all the circumstances, between the research and
non-research uses of the service. The percentage of the service that is used
for research purposes may be paid for with client commissions, while the
Adviser will use its own funds to pay for the percentage of the service that is
used for non-research purposes. In making this good faith allocation, the
Adviser faces a potential conflict of interest, but the Adviser believes that
its allocation procedures are reasonably designed to ensure that it
appropriately allocates the anticipated use of such services to their research
and non-research uses.
From time to time, the Fund may purchase new issues of securities for clients
in a fixed price offering. In these situations, the seller may be a member of
the selling group that will, in addition to selling securities, provide the
adviser with research services. The Financial Industry Regulatory Authority
("FINRA") has adopted rules expressly permitting these types of arrangements
under certain circumstances. Generally, the seller will provide research
"credits" in these situations at a rate that is higher than that which is
available for typical secondary market transactions. These arrangements may not
fall within the safe harbor of Section 28(e).
BROKERAGE WITH FUND AFFILIATES. The Fund may execute brokerage or other agency
transactions through registered broker-dealer affiliates of either the Fund,
the Adviser or the Distributor for a commission in conformity with the 1940
Act, the 1934 Act and rules promulgated by the SEC. These rules require that
commissions paid to the affiliate by the Fund for exchange transactions not
exceed "usual and customary" brokerage commissions. The rules define "usual and
customary" commissions to include amounts which are "reasonable and fair
compared to the commission, fee or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time." The Trustees, including those who are not
"interested persons" of the Fund, have adopted procedures for evaluating the
reasonableness of commissions paid to affiliates and review these procedures
periodically.
SECURITIES OF "REGULAR BROKER-DEALERS." The Fund is required to identify any
securities of its "regular brokers and dealers" (as such term is defined in the
1940 Act) that the Fund held during its most recent fiscal year. Because the
Fund has not commenced operations, as of the date of this SAI, the Fund does
not hold any securities of "regular brokers and dealers."
PORTFOLIO TURNOVER RATE. Portfolio turnover rate is defined under SEC rules as
the greater of the value of the securities purchased or securities sold,
excluding all securities whose maturities at the time of acquisition were one
year or less, divided by the average monthly value of such securities owned
during the year. Based on this definition, instruments with remaining
maturities of less than one year are excluded from the calculation of the
portfolio turnover rate. Instruments excluded from the calculation of portfolio
turnover generally would include the futures contracts in which the Fund may
invest since such contracts generally have remaining maturities of less than
one year. The Fund may at times hold investments in other short-term
instruments, such as repurchase agreements, which are excluded for purposes of
computing portfolio turnover.
PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and
circumstances regarding the disclosure of Fund portfolio holdings information
to shareholders and third parties. These policies and procedures are designed
to ensure that disclosure of information regarding the Fund's portfolio
securities is in the best interests of Fund shareholders, and include
procedures to address conflicts between the interests of the Fund's
shareholders, on the one hand, and those of
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the Adviser, principal underwriter or any affiliated person of the Fund,
Adviser or principal underwriter, on the other. Pursuant to such procedures,
the Board has authorized the Adviser's Chief Compliance Officer (the
"Authorized Person") to authorize the release of the Fund's portfolio holdings,
as necessary, in conformity with the foregoing principles. The Authorized
Person reports at least quarterly to the Board regarding the implementation of
such policies and procedures.
Pursuant to applicable law, the Fund is required to disclose its complete
portfolio holdings quarterly, within 60 days of the end of each fiscal quarter
(currently, each [__________, __________, __________ and __________]). The Fund
discloses a complete schedule of investments in each Semi-Annual Report and
Annual Report to Fund shareholders following the second and fourth fiscal
quarters and in quarterly holdings reports filed with the SEC on Form N-Q
following the first and third fiscal quarters. Semi-Annual and Annual Reports
are distributed to Fund shareholders. Quarterly holdings reports filed with the
SEC on Form N-Q are not distributed to Fund shareholders, but are available,
free of charge, on the EDGAR database on the SEC's website at WWW.SEC.GOV.
In addition to the quarterly portfolio holdings disclosure required by
applicable law, within [____] days of the end of each [____], the Fund will
post its [____] holdings on the internet at HTTP://WWW.[____].COM. The Adviser
may exclude any portion of the portfolio holdings from publication when deemed
in the best interest of the Fund. Beginning on the day after any portfolio
holdings information is posted on the Fund's website, such information will be
delivered directly to any person that requests it, through electronic or other
means. The portfolio holdings information placed on the Fund's website
generally will remain there until replaced by new postings as described above.
The Fund's policies and procedures provide that the Authorized Person may
authorize disclosure of portfolio holdings information to third parties at
differing times and/or with different lag times than the information posted to
the internet; provided that the recipient is, either by contractual agreement
or otherwise by law, (i) required to maintain the confidentiality of the
information and (ii) prohibited from using the information to facilitate or
assist in any securities transactions or investment program. The Fund will
review a third party's request for portfolio holdings information to determine
whether the third party has legitimate business objectives in requesting such
information.
The Trust's policies and procedures prohibit any compensation or other
consideration from being paid to or received by any party in connection with
the disclosure of portfolio holdings information, including the Fund, Adviser
and their affiliates or any recipient of the Fund's portfolio holdings
information.
In addition, the Fund's service providers, such as the Custodian, Administrator
and Transfer Agent, may receive portfolio holdings information as frequently as
daily in connection with their services to the Fund. In addition to any
contractual provisions relating to confidentiality of information that may be
included in the service providers' contracts with the Trust, these arrangements
impose obligations on the Fund's service providers that would prohibit them
from disclosing or trading on the Fund's non-public information. Financial
printers and pricing information vendors may receive portfolio holdings
information, as necessary, in connection with their services to the Fund. The
Administrator may disclose portfolio holdings information to rating agencies
and similar parties as part of its services to the Fund if such disclosure is
made in the best interests of shareholders, as determined by the Trust's
president and chief compliance officer. Portfolio holdings information may be
disclosed no more frequently than monthly to such parties. Monthly disclosures
will not be made sooner than three (3) days after the date of the information.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
funds and shares of each fund, each of which represents an equal proportionate
interest in that fund with each other share. Shares are entitled upon
liquidation to a pro rata share in the net assets of the fund. Shareholders
have no preemptive rights. The Declaration of Trust provides that the Trustees
of the Trust may create additional series or class of shares. All consideration
received by the Trust for shares of any additional funds and all assets in
which such consideration is invested would belong to that fund and would be
subject to the liabilities related thereto. Share certificates representing
shares will not be issued. The Fund's shares, when issued, are fully paid and
non-assessable.
S-51
LIMITATION OF TRUSTEES' LIABILITY
[TO BE INSERTED]
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for
securities held by the Fund to the Adviser. The Adviser will vote such proxies
in accordance with its proxy policies and procedures, which are included in
Appendix B to this SAI.
The Trust is required to disclose annually the Fund's complete proxy voting
record during the most recent 12-month period ended June 30 on Form N-PX. This
voting record is available: (i) without charge, upon request, by calling [(___)
(___)-(____)] and (ii) on the SEC's website at http://www.sec.gov.
CODES OF ETHICS
The Board, on behalf of the Trust, has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act. In addition, the Adviser, the Administrator and
the Distributor have adopted Codes of Ethics pursuant to Rule 17j-1. These
Codes of Ethics apply to the personal investing activities of trustees,
officers and certain employees ("Access Persons"). Rule 17j-1 and the Codes of
Ethics are designed to prevent unlawful practices in connection with the
purchase or sale of securities by Access Persons. Under each Code of Ethics,
Access Persons are permitted to engage in personal securities transactions,
including in securities that may be purchased or held by the Fund, but are
required to report their personal securities transactions for monitoring
purposes. In addition, certain Access Persons are required to obtain approval
before investing in IPOs or private placements or are prohibited from making
such investments. Copies of these Codes of Ethics are on file with the SEC, and
are available to the public.
5% AND 25% SHAREHOLDERS
Because the Fund has not commenced operations, as of the date of this SAI, the
Fund does not have any beneficial owners to report.
FINANCIAL STATEMENTS
[ ] [To be included by amendment.]
S-52
APPENDIX A -- DESCRIPTION OF RATINGS
A-1
DESCRIPTION OF RATINGS
DESCRIPTION OF RATINGS
The following descriptions of securities ratings have been published by Moody's
Investors Services, Inc. ("Moody's"), Standard & Poor's ("S&P"), and Fitch
Ratings ("Fitch"), respectively.
DESCRIPTION OF MOODY'S GLOBAL RATINGS
Ratings assigned on Moody's global long-term and short-term rating scales are
forward-looking opinions of the relative credit risks of financial obligations
issued by non-financial corporates, financial institutions, structured finance
vehicles, project finance vehicles, and public sector entities. Long-term
ratings are assigned to issuers or obligations with an original maturity of one
year or more and reflect both on the likelihood of a default on contractually
promised payments and the expected financial loss suffered in the event of
default. Short-term ratings are assigned to obligations with an original
maturity of thirteen months or less and reflect the likelihood of a default on
contractually promised payments.
DESCRIPTION OF MOODY'S GLOBAL LONG-TERM RATINGS
Aaa Obligations rated Aaa are judged to be of the highest quality, subject to
the lowest level of credit risk.
Aa Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
A Obligations rated A are considered upper-medium grade and are subject to low
credit risk.
Baa Obligations rated Baa are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative characteristics.
Ba Obligations rated Ba are judged to be speculative and are subject to
substantial credit risk.
B Obligations rated B are considered speculative and are subject to high credit
risk.
Caa Obligations rated Caa are judged to be speculative of poor standing and are
subject to very high credit risk.
Ca Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
C Obligations rated C are the lowest rated and are typically in default, with
little prospect for recovery of principal or interest.
NOTE: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
HYBRID INDICATOR (hyb)
The hybrid indicator (hyb) is appended to all ratings of hybrid securities
issued by banks, insurers, finance companies, and securities firms. By their
terms, hybrid securities allow for the omission of scheduled dividends,
interest, or principal payments, which can potentially result in impairment if
such an omission occurs. Hybrid securities may also be subject to contractually
allowable write-downs of principal that
A-2
could result in impairment. Together with the hybrid indicator, the long-term
obligation rating assigned to a hybrid security is an expression of the
relative credit risk associated with that security.
DESCRIPTION OF MOODY'S GLOBAL SHORT-TERM RATINGS
P-1 Issuers (or supporting institutions) rated Prime-1 have a superior ability
to repay short-term debt obligations.
P-2 Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
P-3 Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability to repay short-term obligations.
NP Issuers (or supporting institutions) rated Not Prime do not fall within any
of the Prime rating categories.
DESCRIPTION OF MOODY'S U.S. MUNICIPAL SHORT-TERM OBLIGATION RATINGS
The Municipal Investment Grade ("MIG") scale is used to rate U.S. municipal
bond anticipation notes of up to three years maturity. Municipal notes rated on
the MIG scale may be secured by either pledged revenues or proceeds of a
take-out financing received prior to note maturity. MIG ratings expire at the
maturity of the obligation, and the issuer's long-term rating is only one
consideration in assigning the MIG rating. MIG ratings are divided into three
levels--MIG 1 through MIG 3--while speculative grade short-term obligations are
designated SG.
Moody's U.S. municipal short-term obligation ratings are as follows:
MIG 1 This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
MIG 2 This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group.
MIG 3 This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
SG This designation denotes speculative-grade credit quality. Debt instruments
in this category may lack sufficient margins of protection.
DESCRIPTION OF MOODY'S DEMAND OBLIGATION RATINGS
In the case of variable rate demand obligations ("VRDOs"), a two-component
rating is assigned: a long or short-term debt rating and a demand obligation
rating. The first element represents Moody's evaluation of risk associated with
scheduled principal and interest payments. The second element represents
Moody's evaluation of risk associated with the ability to receive purchase
price upon demand ("demand feature"). The second element uses a rating from a
variation of the MIG scale called the Variable Municipal Investment Grade
("VMIG") scale.
Moody's demand obligation ratings are as follows:
A-3
VMIG 1 This designation denotes superior credit quality. Excellent protection
is afforded by the superior short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
VMIG 2 This designation denotes strong credit quality. Good protection is
afforded by the strong short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of purchase
price upon demand.
VMIG 3 This designation denotes acceptable credit quality. Adequate protection
is afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
SG This designation denotes speculative-grade credit quality. Demand features
rated in this category may be supported by a liquidity provider that does not
have an investment grade short-term rating or may lack the structural and/or
legal protections necessary to ensure the timely payment of purchase price upon
demand.
DESCRIPTION OF S&P'S ISSUE CREDIT RATINGS
An S&P's issue credit rating is a forward-looking opinion about the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium-term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated. The opinion reflects S&P's
view of the obligor's capacity and willingness to meet its financial
commitments as they come due, and may assess terms, such as collateral security
and subordination, which could affect ultimate payment in the event of
default.
Issue credit ratings can be either long-term or short-term. Short-term ratings
are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days--including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. Medium-term notes are
assigned long-term ratings.
Issue credit ratings are based, in varying degrees, on S&P's analysis of the
following considerations:
o Likelihood of payment--capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
o Nature of and provisions of the obligation; and the promise S&P imputes;
o Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
Issue ratings are an assessment of default risk, but may incorporate an
assessment of relative seniority or ultimate recovery in the event of default.
Junior obligations are typically rated lower than senior obligations, to
reflect the lower priority in bankruptcy. (Such differentiation may apply when
an entity has both senior and subordinated obligations, secured and unsecured
obligations, or operating company and holding company obligations.)
A-4
DESCRIPTION OF S&P'S LONG-TERM ISSUE CREDIT RATINGS*
AAA An obligation rated 'AAA' has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated 'AA' differs from the highest-rated obligations only to
a small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong
A An obligation rated 'A' is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB; B; CCC; CC; AND C Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are
regarded as having significant speculative characteristics. 'BB' indicates the
least degree of speculation and 'C' the highest. While such obligations will
likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated 'CC' is currently highly vulnerable to nonpayment. The
'CC' rating is used when a default has not yet occurred, but S&P expects default
to be a virtual certainty, regardless of the anticipated time to default.
C An obligation rated 'C' is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority or lower ultimate
recovery compared to obligations that are rated higher.
D An obligation rated 'D' is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the 'D' rating category is used when payments
on an obligation are not made on the date due, unless S&P believes that such
payments will be made within five business days in the absence of a stated
grace period or within the earlier of the stated grace period or 30 calendar
days. The 'D' rating also will be used upon the filing of a bankruptcy petition
or the taking of similar action and where default on an obligation is a virtual
certainty, for example due to automatic stay provisions. An obligation's rating
is lowered to 'D' if it is subject to a distressed exchange offer.
A-5
NR This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
obligation as a matter of policy.
*The ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within the major rating
categories.
DESCRIPTION OF S&P'S SHORT-TERM ISSUE CREDIT RATINGS
A-1 A short-term obligation rated 'A-1' is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B A short-term obligation rated 'B' is regarded as vulnerable and has
significant speculative characteristics. The obligor currently has the capacity
to meet its financial commitments; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitments.
C A short-term obligation rated 'C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
D A short-term obligation rated 'D' is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the 'D' rating category is used
when payments on an obligation are not made on the date due, unless S&P
believes that such payments will be made within any stated grace period.
However, any stated grace period longer than five business days will be treated
as five business days. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action and where default on an
obligation is a virtual certainty, for example due to automatic stay
provisions. An obligation's rating is lowered to 'D' if it is subject to a
distressed exchange offer.
DESCRIPTION OF S&P'S MUNICIPAL SHORT-TERM NOTE RATINGS
An S&P's U.S. municipal note rating reflects S&P's opinion about the liquidity
factors and market access risks unique to the notes. Notes due in three years
or less will likely receive a note rating. Notes with an original maturity of
more than three years will most likely receive a long-term debt rating. In
determining which type of rating, if any, to assign, S&P's analysis will review
the following considerations:
o Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note; and
o Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
S&P's municipal short-term note ratings are as follows:
A-6
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
DESCRIPTION OF FITCH'S CREDIT RATINGS
Fitch's credit ratings provide an opinion on the relative ability of an entity
to meet financial commitments, such as interest, preferred dividends, repayment
of principal, insurance claims or counterparty obligations. Credit ratings are
used by investors as indications of the likelihood of receiving the money owed
to them in accordance with the terms on which they invested.
The terms "investment grade" and "speculative grade" have established
themselves over time as shorthand to describe the categories 'AAA' to 'BBB'
(investment grade) and 'BB' to 'D' (speculative grade). The terms "investment
grade" and "speculative grade" are market conventions, and do not imply any
recommendation or endorsement of a specific security for investment purposes.
"Investment grade" categories indicate relatively low to moderate credit risk,
while ratings in the "speculative" categories either signal a higher level of
credit risk or that a default has already occurred.
Fitch's credit ratings do not directly address any risk other than credit risk.
In particular, ratings do not deal with the risk of a market value loss on a
rated security due to changes in interest rates, liquidity and other market
considerations. However, in terms of payment obligation on the rated liability,
market risk may be considered to the extent that it influences the ABILITY of
an issuer to pay upon a commitment. Ratings nonetheless do not reflect market
risk to the extent that they influence the size or other conditionality of the
OBLIGATION to pay upon a commitment (for example, in the case of index-linked
bonds).
In the default components of ratings assigned to individual obligations or
instruments, the agency typically rates to the likelihood of non-payment or
default in accordance with the terms of that instrument's documentation. In
limited cases, Fitch may include additional considerations (i.e. rate to a
higher or lower standard than that implied in the obligation's documentation).
In such cases, the agency will make clear the assumptions underlying the
agency's opinion in the accompanying rating commentary.
DESCRIPTION OF FITCH'S LONG-TERM CORPORATE FINANCE OBLIGATIONS RATINGS
AAA Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in cases of exceptionally strong capacity
for payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote expectations of very low
credit risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. 'A' ratings denote expectations of low credit risk. The
capacity for payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to adverse business or economic
conditions than is the case for higher ratings.
A-7
BBB Good credit quality. 'BBB' ratings indicate that expectations of credit
risk are currently low. The capacity for payment of financial commitments is
considered adequate but adverse business or economic conditions are more likely
to impair this capacity.
BB Speculative. 'BB' ratings indicate an elevated vulnerability to credit risk,
particularly in the event of adverse changes in business or economic conditions
over time; however, business or financial alternatives may be available to
allow financial commitments to be met.
B Highly speculative. 'B' ratings indicate that material credit risk is
present.
CCC Substantial credit risk. 'CCC' ratings indicate that substantial credit
risk is present.
CC Very high levels of credit risk. 'CC' ratings indicate very high levels of
credit risk.
C Exceptionally high levels of credit risk. 'C' ratings indicate exceptionally
high levels of credit risk.
NR This designation is used to denote securities not rated by Fitch where Fitch
has rated some, but not all, securities comprising an issuance capital
structure.
WD This designation indicates that the rating has been withdrawn and the issue
or issuer is no longer rated by Fitch.
Note: The modifiers "+" or "-" may be appended to a rating to denote relative
status within major rating categories. Such suffixes are not added to the 'AAA'
obligation rating category, or to corporate finance obligation ratings in the
categories below 'CCC'.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
A short-term issuer or obligation rating is based in all cases on the
short-term vulnerability to default of the rated entity or security stream and
relates to the capacity to meet financial obligations in accordance with the
documentation governing the relevant obligation. Short-Term Ratings are
assigned to obligations whose initial maturity is viewed as "short term" based
on market convention. Typically, this means up to 13 months for corporate,
sovereign, and structured obligations, and up to 36 months for obligations in
U.S. public finance markets.
Fitch's short-term ratings are as follows:
F1 Highest short-term credit quality. Indicates the strongest intrinsic
capacity for timely payment of financial commitments; may have an added "+" to
denote any exceptionally strong credit feature.
F2 Good short-term credit quality. Good intrinsic capacity for timely payment
of financial commitments.
F3 Fair short-term credit quality. The intrinsic capacity for timely payment of
financial commitments is adequate.
B Speculative short-term credit quality. Minimal capacity for timely payment of
financial commitments, plus heightened vulnerability to near term adverse
changes in financial and economic conditions.
C High short-term default risk. Default is a real possibility.
RD Restricted default. Indicates an entity that has defaulted on one or more of
its financial commitments, although it continues to meet other financial
obligations. Applicable to entity ratings only.
D Default. Indicates a broad-based default event for an entity, or the default
of a short-term obligation.
A-8
NR This designation is used to denote securities not rated by Fitch where Fitch
has rated some, but not all, securities comprising an issuance capital
structure.
WD This designation indicates that the rating has been withdrawn and the issue
or issuer is no longer rated by Fitch.
A-9
APPENDIX B --PROXY VOTING POLICIES AND PROCEDURES
[Adviser's Proxy Voting Policies and Procedures to be added]
B-1
PART C: OTHER INFORMATION
ITEM 28. EXHIBITS
-------- --------
(a)(i) Certificate of Trust of Winton Series Trust (the "Registrant") is filed
herewith.
(a)(ii) Registrant's Agreement and Declaration of Trust, dated October 6,
2014, is filed herewith.
(b) Registrant's By-Laws to be filed by amendment.
(c) See Article III and Article V of the Registrant's Agreement and
Declaration of Trust, which is filed herewith.
(d) Investment Advisory Agreement between the Registrant and Winton Capital
US LLC (the "Adviser") to be filed by amendment.
(e) Distribution Agreement between the Registrant and SEI Investments
Distribution Co. ("SIDCo.") to be filed by amendment.
(f) Not Applicable.
(g) Custodian Agreement between the Registrant and [Custodian] to be filed
by amendment.
(h)(1) Administration Agreement between the Registrant and SEI Investments
Global Funds Services ("SIGFS") to be filed by amendment.
(h)(2) Transfer Agency Agreement between the Registrant and [Transfer Agent]
to be filed by amendment.
(i) Opinion and Consent of Morgan, Lewis & Bockius LLP to be filed by
amendment.
(j) Consent of [Independent Registered Public Accounting Firm] to be filed
by amendment.
(k) Not applicable.
(l) Initial Capital Agreement to be filed by amendment.
(m) Plan of Distribution Pursuant to Rule 12b-1 to be filed by amendment.
(n) Registrant's Rule 18f-3 Multiple Class Plan to be filed by amendment.
(o) Not applicable.
(p)(1) Code of Ethics for the Registrant to be filed by amendment.
(p)(2) Code of Ethics for Winton to be filed by amendment.
(p)(3) Code of Ethics for SIDCo. to be filed by amendment.
(p)(4) Code of Ethics for SIGFS to be filed by amendment.
C-1
ITEM 29. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND:
Not applicable.
ITEM 30. INDEMNIFICATION:
Please see Article VII of the Registrant's Agreement and Declaration of Trust,
which is filed herewith and is incorporated herein by reference.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "1933 Act") may be permitted to trustees, directors,
officers and controlling persons of the Registrant by the Registrant pursuant
to the Declaration of Trust or otherwise, the Registrant is aware that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and, therefore, is unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by trustees,
directors, officers or controlling persons of the Registrant in connection with
the successful defense of any act, suite or proceeding) is asserted by such
trustees, directors, officers or controlling persons in connection with the
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issues.
ITEM 31. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER:
The following lists any other business, profession, vocation or employment of a
substantial nature in which the Adviser, and each director, officer or partner
of the Adviser, is or has been engaged within the last two fiscal years for his
or her own account or in the capacity of director, officer, employee, partner,
or trustee. Unless noted below, none of the Adviser, and/or director, officer
or partner of the Adviser, is or has been engaged within the last two fiscal
years in any other business, profession, vocation or employment of a
substantial nature for his or her own account or in the capacity of director,
officer, employee, partner or trustee.
WINTON CAPITAL US LLC
The Adviser's principal address is 375 Park Avenue, New York, New York 10152.
The Adviser is an investment adviser registered under the Investment Advisers
Act of 1940, as amended. The information listed below is for the fiscal years
ended October 31, 2012 and 2013.
C-2
[TO BE INSERTED]
ITEM 32. PRINCIPAL UNDERWRITERS
(a) Furnish the name of each investment company (other than the Registrant)
for which each principal underwriter currently distributing the securities
of the Registrant also acts as a principal underwriter, distributor or
investment adviser.
The Registrant's distributor, SEI Investments Distribution Co. (the
"Distributor"), acts as distributor for:
--------------------------------------------------------------------------------
SEI Daily Income Trust July 15, 1982
--------------------------------------------------------------------------------
SEI Liquid Asset Trust November 29, 1982
--------------------------------------------------------------------------------
SEI Tax Exempt Trust December 3, 1982
--------------------------------------------------------------------------------
SEI Institutional Managed Trust January 22, 1987
--------------------------------------------------------------------------------
SEI Institutional International Trust August 30, 1988
--------------------------------------------------------------------------------
The Advisors' Inner Circle Fund November 14, 1991
--------------------------------------------------------------------------------
The Advisors' Inner Circle Fund II January 28, 1993
--------------------------------------------------------------------------------
Bishop Street Funds January 27, 1995
--------------------------------------------------------------------------------
SEI Asset Allocation Trust April 1, 1996
--------------------------------------------------------------------------------
SEI Institutional Investments Trust June 14, 1996
--------------------------------------------------------------------------------
City National Rochdale Funds (f/k/a CNI Charter Funds) April 1, 1999
--------------------------------------------------------------------------------
Causeway Capital Management Trust September 20, 2001
--------------------------------------------------------------------------------
ProShares Trust November 14, 2005
--------------------------------------------------------------------------------
Community Capital Trust (f/k/a Community Reinvestment January 8, 2007
Act Qualified Investment Fund)
--------------------------------------------------------------------------------
TD Asset Management USA Funds July 25, 2007
--------------------------------------------------------------------------------
SEI Structured Credit Fund, LP July 31, 2007
--------------------------------------------------------------------------------
Wilshire Mutual Funds, Inc. July 12, 2008
--------------------------------------------------------------------------------
Wilshire Variable Insurance Trust July 12, 2008
--------------------------------------------------------------------------------
Global X Funds October 24, 2008
--------------------------------------------------------------------------------
ProShares Trust II November 17, 2008
--------------------------------------------------------------------------------
Exchange Traded Concepts Trust (f/k/a FaithShares Trust) August 7, 2009
--------------------------------------------------------------------------------
Schwab Strategic Trust October 12, 2009
--------------------------------------------------------------------------------
RiverPark Funds September 8, 2010
--------------------------------------------------------------------------------
Adviser Managed Trust December 10, 2010
--------------------------------------------------------------------------------
Huntington Strategy Shares July 26, 2011
--------------------------------------------------------------------------------
New Covenant Funds March 23, 2012
--------------------------------------------------------------------------------
Cambria ETF Trust August 30, 2012
--------------------------------------------------------------------------------
Highland Funds I (f/k/a Pyxis Funds I) September 25, 2012
--------------------------------------------------------------------------------
KraneShares Trust December 18, 2012
--------------------------------------------------------------------------------
LocalShares Investment Trust May 6, 2013
--------------------------------------------------------------------------------
SEI Insurance Products Trust September 10, 2013
--------------------------------------------------------------------------------
The KP Funds September 19, 2013
--------------------------------------------------------------------------------
The Advisors' Inner Circle Fund III February 12, 2014
--------------------------------------------------------------------------------
J.P. Morgan Exchange-Traded Fund Trust April 1, 2014
--------------------------------------------------------------------------------
O'Connor EQUUS May 15, 2014
--------------------------------------------------------------------------------
The Distributor provides numerous financial services to investment managers,
pension plan sponsors, and bank trust departments. These services include
portfolio evaluation, performance measurement and consulting services ("Funds
Evaluation") and automated execution, clearing and settlement of securities
transactions ("MarketLink").
(b) Furnish the Information required by the following table with respect to
each director, officer or partner of each principal underwriter named in the
answer to Item 20 of Part B. Unless otherwise noted, the business address of
each director or officer is One Freedom Valley Drive, Oaks, PA 19456.
C-3
--------------------------------------------------------------------------------
POSITION AND OFFICE WITH POSITION AND OFFICES
NAME UNDERWRITER WITH REGISTRANT
--------------------------------------------------------------------------------
William M. Doran Director Trustee
--------------------------------------------------------------------------------
Edward D. Loughlin Director --
--------------------------------------------------------------------------------
Wayne M. Withrow Director --
--------------------------------------------------------------------------------
Kevin P. Barr President & Chief Executive --
Officer
--------------------------------------------------------------------------------
Maxine J. Chou Chief Financial Officer, Chief --
Operations Officer, & Treasurer
--------------------------------------------------------------------------------
Karen E. LaTourette Chief Compliance Officer, Anti- --
Money Laundering Officer &
Assistant Secretary
--------------------------------------------------------------------------------
John C. Munch General Counsel & Secretary --
--------------------------------------------------------------------------------
Mark J. Held Senior Vice President --
--------------------------------------------------------------------------------
Lori L. White Vice President & Assistant --
Secretary
--------------------------------------------------------------------------------
John P. Coary Vice President & Assistant --
Secretary
--------------------------------------------------------------------------------
John J. Cronin Vice President --
--------------------------------------------------------------------------------
Judith A. Hirx Vice President --
--------------------------------------------------------------------------------
Robert M. Silvestri Vice President --
--------------------------------------------------------------------------------
(c) Not applicable.
C-4
ITEM 33. LOCATION OF ACCOUNTS AND RECORDS:
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder will be maintained at the offices of:
THE REGISTRANT
One Freedom Valley Drive
Oaks, Pennsylvania 19456
THE REGISTRANT'S INVESTMENT ADVISER
Winton Capital US LLC
375 Park Avenue
New York, New York 10152
THE REGISTRANT'S CUSTODIAN
[To be updated]
THE REGISTRANT'S ADMINISTRATOR
SEI Investments Global Funds Services
One Freedom Valley Drive
Oaks, Pennsylvania 19456
THE REGISTRANT'S DISTRIBUTOR
SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
ITEM 34. MANAGEMENT SERVICES:
None.
ITEM 35. UNDERTAKINGS:
Not applicable.
C-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Oaks, Commonwealth of
Pennsylvania on the 10th day of October, 2014.
WINTON SERIES TRUST
By: /S/ MICHAEL BEATTIE
-----------------------------
Michael Beattie
President
Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed below by the following persons in the capacities and on the
date(s) indicated.
SIGNATURE TITLE DATE
/S/ MICHAEL BEATTIE Trustee October 10, 2014
---------------------
Michael Beattie
/S/ MICHAEL BEATTIE President October 10, 2014
---------------------
Michael Beattie
/S/ RAMI ABDEL-RAHMAN Treasurer, Controller and October 10, 2014
--------------------- Chief Financial Officer
Rami Abdel-Rahman
C-6
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- ------------
28(a)(i) Registrant's Certificate of Trust
28(a)(ii) Registrant's Agreement and Declaration of Trust
C-7
Dates Referenced Herein and Documents Incorporated by Reference
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