Amendment to Certified Annual Shareholder Report of a Management Investment Company — Form N-CSR Filing Table of Contents
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We are pleased to celebrate a successful year for Davidson Funds, and would like to take this opportunity to express our continued appreciation for your trust and confidence. It was an eventful year for our Multi-Cap Equity Fund; in August 2013, we marked the five-year anniversary of the launch of the Fund, and in October 2013, we launched Class I shares of the Fund, providing another avenue for investment to better accommodate our institutional clients. The Small/Mid Equity Fund, which is entering its third year, continued to gain traction and gather assets. As of June 30,
2014, Davidson Funds had over $90 million in total net assets; we look forward to continued growth of both assets and investors in our product offerings.
The Davidson Multi-Cap Equity Fund is actively managed and unconstrained by market capitalization and style classifications. As fundamental investors, we are cognizant of cyclical and secular dynamics, and focus on profitable companies with attractive return on capital, cash flow and growth prospects. Of key importance are management teams with sound, achievable strategies. We take active industry positions, with relative position sizes commensurate with risk. Our holdings are diversified by economic sector and adjusted based on where we view the greatest market opportunities.
The Davidson Small/Mid Equity Fund is also actively managed and seeks to invest in high-quality companies with attractive margins, conservative balance sheets and opportunity for growth in the under-researched small/mid cap segment of the market. Using proprietary modeling and a strict valuation discipline, we favor companies generating cash flow and funding growth internally. We look to capitalize on “time horizon arbitrage,” forecasting growth opportunity and operating leverage beyond current Wall Street estimates and not currently recognized by the market.
PERFORMANCE OVERVIEW
Davidson Multi-Cap Equity Fund
The Russell 3000® Index, the benchmark for the Davidson Multi-Cap Equity Fund, finished the twelve month period ended June 30, 2014 up 25.22%. The Class A shares of the Fund generated a total return of 18.80% on a fully-loaded basis and 25.06% on a no-load* basis during the twelve month period ended June 30, 2014. The Class C shares generated a total return of 23.13% on a fully-loaded basis and a total return of 24.13% on a no-load* basis over the same time period. The Class I shares generated a total return of 12.15% since inception (10/30/13).
Acquisition activity was a primary driver of performance in the Fund over the past year. Shares of Information Technology holding MICROS Systems, Inc. rose following the announcement that the company will be acquired by Oracle Corporation; the transaction is expected to close in the second half of 2014. Telecommunication Services holding tw telecom inc. announced that the company will be merged into Level 3 Communications, Inc., which is anticipated to be completed during the fourth quarter of 2014. Stock selection in the Financials sector also contributed to relative performance versus our benchmark; First Republic Bancorp Inc. was a stand-out performer. The company’s loan originations
are at all-time highs, and continued strength in loan pipelines could bode well for the future. The
Health Care sector was our main detractor from performance, as this sector performed particularly well within the Russell 3000® Index. Within this sector, Laboratory Corporation of America Holdings and Waters Corporation lagged. Laboratory Corporation has been negatively impacted by reimbursement and billing collection issues exacerbated by the increased use of high-deductible and coinsurance plans, while Waters Corporation experienced order delays in China and the impact of capital budget delays by large domestic pharmaceutical firms.
One of the key advantages of the Multi-Cap Equity Fund’s investment approach is flexibility, enabling portfolio managers to focus on the merits of a potential investment without the bias of continually questioning whether a company fits a specific size and/or investment style. We believe great investment opportunities are not isolated to any one segment of the market, and our sole focus as portfolio managers is on making good long-term investment decisions. As markets dynamically change over time, it’s inevitable that certain segments of the market shift from being attractive to unattractive. Investing within an isolated style box can force a portfolio manager to invest within a particular segment even though he or she may not find current opportunities particularly attractive. As Fund managers, we have the flexibility to tactically shift the portfolio to areas of the market where greater opportunity currently exists, whereas style-box
managers are forced to compromise for investments within their restricted opportunity set defined by their style box.
We believe our Davidson Multi-Cap Equity strategy demonstrates the advantages of flexibility and broad market coverage that can add value to a client’s portfolio throughout the market cycle. Combined with our truly active, concentrated approach and disciplined portfolio construction process, our strategy seeks to strike a balance of managing risk and while providing an opportunity for return.
Davidson Small/Mid Equity Fund
The Russell 2500® Index, the benchmark for the Davidson Small/Mid Equity Fund, finished the twelve month period ended June 30, 2014 up 25.58%. The Class A shares of the Fund generated a total return of 13.76% on a fully-loaded basis and 19.73% on a no-load* basis during the twelve month period ended June 30, 2014. The Class C shares generated a total return of 17.87% on a fully-loaded basis and a total return of 18.87% on a no-load* basis over the same time period.
The Information Technology sector was the main contributor to performance in the Fund this year, with a number of holdings making a positive impact. Shares of RF Micro Devices, Inc. have appreciated due to sales acceleration and gross margin expansion. The aforementioned acquisition of MICROS Systems, Inc. by Oracle Corporation also benefitted the Small/Mid Equity Fund. Lastly, Brightcove Inc., a provider of cloud-based solutions for publishing and distributing digital media, made a notable contribution; given the sharp increase in stock price following their favorable third quarter 2013 earnings release, we exited our position in the stock. Energy sector holding Whiting Petroleum Corporation also contributed positively to performance; the company has executed well, consistently reporting strong quarterly results and boasting a robust drilling inventory. Recently,
the company has benefited from a favorable commodity price backdrop. The Industrials sector was the primary detractor from the Fund’s performance this year; within this sector, both InnerWorkings, Inc. and Dice Holdings, Inc. lagged. Innerworkings’ Production Graphics segment has been challenged, while Dice Holdings’ digital media business has dampened results recently. Despite these companies’ near-term challenges, we remain optimistic about their long-term growth profiles. Consumer Discretionary holdings ReachLocal, Inc., Blue Nile, Inc. and Select Comfort Corporation have also faced challenges over the past year. ReachLocal’s sales model transition has progressed slower than anticipated; Blue Nile and Select Comfort have been negatively impacted by a soft retail environment.
2
This year, we have witnessed a fairly sizeable divergence in performance of small capitalization (“small cap”) stocks and large capitalization (“large cap”) stocks; this divergence comes on the heels of five years of fairly strong performance from the small cap segment of the market. Historically, there are many periods when large caps have outperformed small caps and vice versa. Generally speaking, large caps have performed better when there is a premium placed on liquidity, as small caps are much less liquid. Conversely, small caps have done better when investors are seeking higher returns and growth opportunity, and may not be as focused on liquidity. In the very long term, small caps have outperformed large caps due to their faster growth, which tended to shine through over longer holding periods. The downside to this approach: there are periods when the illiquid nature of small caps will result in outsized underperformance
a dynamic investor must be willing to endure to have an opportunity for the longer term outperformance small caps could potentially deliver.
In managing the Davidson Small/Mid Equity Fund, we attempt to marry the long-term benefits of exposure to small caps with a disciplined approach to risk management. We believe there is much more to risk management than volatility and liquidity considerations. We believe security selection is one of our best weapons to mitigate risk. We focus on companies that generate considerable cash flow, maintain solid competitive positions, and carry very high quality balance sheets. We believe that our companies are businesses that can thrive in a growing economy and survive in a weak environment – a very important distinction in our risk management process. Focusing on high quality, “middle inning” companies, which are conservatively capitalized and have underappreciated operating leverage, is in our view the “sweet-spot” in the risk/reward tradeoff.
MARKET PERSPECTIVE
The U.S. equities market marked new highs during the last year, showing resilience in the face of spotty growth domestically and in Europe, as well as geopolitical turmoil in areas such as Ukraine and the Middle East. Recent economic data show the economy has regained a growth trajectory, driven by improving home sales, strong automobile sales and a pickup in manufacturing activity. We believe the U.S. economy has the potential to continue this positive momentum. Broadly speaking, we do not see excesses in the general economy which typically precede economic downturns. To the contrary, we believe areas such as employment, housing, and finance all have significant room to improve and drive further economic improvement.
However, some headwinds to growth remain. For example, the Financials sector has been constrained by factors such as low interest rates, decreases in trading activity, legal battles, and a tougher regulatory environment. In addition, higher oil and gasoline prices, if sustained, may weigh on economic activity and consumer spending. Selectivity and active portfolio positioning is warranted and necessary, in our view, as stock valuations are no longer depressed and in some cases, may already reflect improvement. We maintain our commitment to a bottom-up, fundamental approach to portfolio management, seeking companies whose solid management teams, sound capital allocation strategies and attractive business models position them well for future growth.
IN CLOSING
It has been a positive year, both for Davidson Funds and the broader U.S. equities market. We remain ever mindful that it is not the market that makes Davidson Funds strong, but the continued support of our investors. While market conditions, consumer sentiment, and other external factors may vary, our process and approach to managing Davidson Funds will not.
3
We thank you again for the continued trust you have placed in us, and we look forward to continuing to earn that trust over the coming year. Please feel free to contact us with any questions or comments you may have.
Sincerely,
Andrew I. Davidson
President
Davidson Investment Advisors, Inc.
Must be preceded or accompanied by a prospectus.
Past performance does not guarantee future results. Investment performance reflects fee waivers and in the absence of these waivers returns would be lower.
Mutual fund investing involves risk. Principal loss is possible. Small- and medium capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies. Growth stocks typically are more volatile than value stocks; however, value stocks have a lower expected growth rate in earnings and sales. Investments in foreign securities involve political, economic and currency risks, greater volatility and differences in accounting methods. These risks are greater for emerging markets. Investments in exchange-traded funds (“ETFs”), are subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETFs shares may trade at a discount to its net asset value (“NAV”), an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a fund’s ability
to sell its shares. The Funds will bear their share of the fees and expenses of the underlying funds. Shareholders will pay higher expenses than would be the case if making direct investments in the underlying funds. The Funds may also use options and future contracts, which have the risks of unlimited losses of the underlying holdings due to unanticipated market movements and failure to correctly predict the direction of securities prices, interest rates and currency exchange rates. The investment in options is not suitable for all investors.
The Russell 2500® Index measures the performance of the small to mid-cap segment of the U.S. equity universe. It is not possible to invest directly in an index.
The Russell 3000® Index measures the performance of the largest 3,000 U.S. companies representing approximately
98% of the investable U.S. equity market. It is not possible to invest directly in an index.
Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security. Please refer to the Schedule of Investments for a complete listing of fund holdings. Current and future portfolio holdings are subject to risk.
Free cash flow, a measure of financial performance, is calculated by subtracting capital expenditures from operating cash flow. Free cash flow represents residual cash generated by a company after expenditures to maintain or expand its asset base.
4
The opinions expressed in this letter are those of the fund manager, are subject to change, are not guaranteed, and should not be considered investment advice.
Diversification does not assure a profit or protect against a loss in a declining market.
* The no-load basis refers to the performance with front-end and back-end sales loads waived. The fully-loaded returns reflect a 5% sales load for the A shares and a 1% deferred sales load for the C shares.
Davidson Investment Advisors, Inc is the adviser to the Davidson Funds, which are distributed by Quasar Distributors, LLC.
5
Davidson Multi-Cap Equity Fund
Comparison of the change in value of a hypothetical $10,000 investment in the
Davidson Multi-Cap Equity Fund - Class A vs. the Russell 3000® Index
Average Annual Total Return:
Since Inception
1 Year
5 Years
8/11/2008
7/1/2009
10/30/2013
Class A (with sales load)
18.80%
17.36%
8.92%
-
-
Class A (without sales load)
25.06%
18.57%
9.87%
-
-
Class C (with deferred sales load)
23.13%
-
-
17.52%
-
Class C (without deferred sales load)
24.13%
-
-
17.52%
-
Class I
-
-
-
-
12.15%*
Russell 3000® Index
25.22%
19.33%
9.86%
19.20%
12.56%*
Total Annual Fund Operating Expenses: 1.42% (Class A); 2.16% (Class C); 1.16% (Class I)
* Not Annualized.
Performance data quoted on this page represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling (877) 332-0529.
Returns reflect reinvestment of dividends and capital gains distributions. Fee waivers are in effect. In the absence of fee waivers, returns would be reduced. Class A shares may be subject to a 5.00% sales load. Class A shares do not have a contingent deferred sales charge ("CDSC") except that a charge of 1% applies to certain redemptions made within seven calendar days, or to redemptions made within twelve months following purchases of $1 million or more without an initial sales charge. Class C shares may be subject to a CDSC of 1.00% on redemptions held for twelve months or less after purchase. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions, or redemption of Fund shares. Indices do not incur expenses and are not available for investment.
The Russell 3000® Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. You cannot invest directly in an index.
Risks: Foreign securities typically involve greater volatility and political, economic and currency risks and differences in accounting methods than domestic securities. Small- and medium capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies.
6
Davidson Small/Mid Equity Fund
Comparison of the change in value of a hypothetical $10,000 investment in the
Davidson Small/Mid Equity Fund - Class A vs. the Russell 2500® Index
Average Annual Total Return:
1 Year
Since Inception
6/29/2012
Class A (with sales load)
13.76%
10.74%
Class A (without sales load)
19.73%
13.62%
Class C (with deferred sales load)
17.87%
12.75%
Class C (without deferred sales load)
18.87%
12.75%
Russell 2500® Index
25.58%
25.56%
Total Annual Fund Operating Expenses : 8.73% (Class A); 9.29% (Class C)
Performance data quoted on this page represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling (877) 332-0529.
Returns reflect reinvestment of dividends and capital gains distributions. Fee waivers are in effect. In the absence of fee waivers, returns would be reduced. Class A shares may be subject to a 5.00% sales load. Class A shares do not have a contingent deferred sales charge ("CDSC") except that a charge of 1% applies to certain redemptions made within seven calendar days, or to redemptions made within twelve months following purchases of $1 million or more without an initial sales charge. Class C shares may be subject to a CDSC of 1.00% on redemptions held for twelve months or less after purchase. The performance data and graph do not reflect the deduction of taxes that a shareholder would pay on dividends, capital gains distributions, or redemption of Fund shares. Indices do not incur expenses and are not available for investment.
The Russell 2500® Index measures the performance of the small to mid-cap segment of the U.S. equity universe. You cannot invest directly in an index.
Risks: Foreign securities typically involve greater volatility and political, economic and currency risks and differences in accounting methods than domestic securities. Small- and medium capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies.
Shareholders in mutual funds generally incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, reinvested dividends, or other distributions; redemption fees; and exchange fees; and (2) ongoing costs, including management fees; distribution and/or service fees; and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested in Class A, Class C, and Class I of each Fund at the beginning of the period and held for the entire period (1/1/14 – 6/30/14).
Actual Expenses
For each class of the Davidson Multi-Cap Equity Fund and Davidson Small/Mid Equity Fund, two lines are presented in the tables below. The first line of the tables below provides information about actual account values and actual expenses, with actual net expenses being limited to 1.15%, 1.90%, and 0.90% per the operating expenses limitation agreement for the Davidson Multi-Cap Equity Fund Class A, Class C, and Class I, respectively, and 1.40% and 2.15% for the Davidson Small/Mid Equity Class A and Class C, respectively. The Example below includes, but is not limited to, management fees, fund accounting, custody and transfer agent fees. However, the Example below does not include portfolio trading commissions and related expenses. In addition, you will be assessed fees for outgoing wire transfers, returned checks, and stop payment orders at prevailing rates charged by U.S. Bancorp Fund Services, LLC, the Funds’ transfer
agent. You may use the information in the first line of the tables, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period’’ to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the tables below provides information about hypothetical account values and hypothetical expenses based on the Funds’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Funds’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the tables are meant to highlight your ongoing costs only and will not help you determine the relative total costs of owning different funds, as they may charge transactional costs, such as sales charges (loads), redemption fees, or exchange fees. Therefore,
the second line of the tables is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Davidson Multi-Cap Equity Fund - Class A
Beginning
Account Value
1/1/14
Ending
Account Value
6/30/14
Expenses Paid
During Period*
1/1/14 – 6/30/14
Actual
$
1,000.00
$
1,063.00
$
5.88
Hypothetical (5% return
before expenses)
$
1,000.00
$
1,019.09
$
5.76
*Expenses are equal to the Fund’s annualized expense ratio of 1.15% multiplied by the average account value over the period, multiplied by 181 (days in most recent fiscal half-year)/365 days to reflect the one-half year expense.
8
Davidson Funds
Expense Example at June 30, 2014 (Unaudited) - Continued
Davidson Multi-Cap Equity Fund - Class C
Beginning
Account Value
1/1/14
Ending
Account Value
6/30/14
Expenses Paid
During Period*
1/1/14 – 6/30/14
Actual
$
1,000.00
$
1,058.90
$
9.70
Hypothetical (5% return
before expenses)
$
1,000.00
$
1,015.37
$
9.49
* Expenses are equal to the Fund’s annualized expense ratio of 1.90%, multiplied by the average account value over the period, multiplied by 181 (days in most recent fiscal half-year)/365 days to reflect the one-half year expense.
Davidson Multi-Cap Equity Fund - Class I
Beginning
Account Value
1/1/14
Ending
Account Value
6/30/14
Expenses Paid
During Period*
1/1/14 – 6/30/14
Actual
$
1,000.00
$
1,064.10
$
4.61
Hypothetical (5% return
before expenses)
$
1,000.00
$
1,020.33
$
4.51
* Expenses are equal to the Fund’s annualized expense ratio of 0.90%, multiplied by the average account value over the period, multiplied by 181 (days in most recent fiscal half-year)/365 days to reflect the one-half year expense.
Davidson Small/Mid Equity Fund - Class A
Beginning
Account Value
1/1/14
Ending
Account Value
6/30/14
Expenses Paid
During Period*
1/1/14 – 6/30/14
Actual
$
1,000.00
$
1,030.30
$
7.05
Hypothetical (5% return
before expenses)
$
1,000.00
$
1,017.85
$
7.00
* Expenses are equal to the Fund’s annualized expense ratio of 1.40% multiplied by the average account value over the period, multiplied by 181 (days in most recent fiscal half-year)/365 days to reflect the one-half year expense.
Davidson Small/Mid Equity Fund - Class C
Beginning
Account Value
1/1/14
Ending
Account Value
6/30/14
Expenses Paid
During Period*
1/1/14 – 6/30/14
Actual
$
1,000.00
$
1,026.70
$
10.80
Hypothetical (5% return
before expenses)
$
1,000.00
$
1,014.13
$
10.74
* Expenses are equal to the Fund’s annualized expense ratio of 2.15%, multiplied by the average account value over the period, multiplied by 181 (days in most recent fiscal half-year)/365 days to reflect the one-half year expense.
9
Davidson Funds
Sector Allocation of Portfolio Assets at June 30, 2014 (Unaudited)
Davidson Multi-Cap Equity Fund
Davidson Small/Mid Equity Fund
Percentages represent market value as a percentage of total investments.
The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and Standard & Poor Financial Services LLC (“S&P”). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bancorp Fund Services, LLC.
Technology, Hardware, and Storage and Peripherals - 3.53%
32,886
Apple, Inc.
3,056,096
TOTAL COMMON STOCKS (Cost $58,248,236)
85,210,445
SHORT-TERM INVESTMENTS - 1.42%
1,222,853
Fidelity Institutional Government Portfolio - Class I, 0.01% (c)
1,222,853
TOTAL SHORT-TERM INVESTMENTS (Cost $1,222,853)
1,222,853
Total Investments in Securities (Cost $59,471,089) - 99.92%
86,433,298
Other Assets in Excess of Liabilities - 0.08%
73,155
NET ASSETS - 100.00%
$
86,506,453
(a)
Non-income producing security.
(b)
U.S. traded security of a foreign issuer.
(c)
Rate shown is the 7-day annualized yield as of June 30, 2014.
The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and Standard & Poor Financial Services LLC (“S&P”). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bancorp Fund Services, LLC.
The accompanying notes are an integral part of these financial statements.
Semiconductors and Semiconductor Equipment - 2.82%
795
NVE Corp. (a)
44,194
8,940
RF Micro Devices, Inc. (a)
85,735
129,929
Software - 10.96%
5,150
Fortinet, Inc. (a)
129,419
2,220
MICROS Systems, Inc. (a)
150,738
10,000
RealPage, Inc. (a)
224,800
504,957
Specialty Retail - 4.06%
9,050
Select Comfort Corp. (a)
186,973
Technology Hardware, and Storage and Peripherals - 0.54%
11,790
USA Technologies, Inc. (a)
24,877
TOTAL COMMON STOCKS (Cost $3,831,624)
4,470,513
SHORT-TERM INVESTMENTS - 4.32%
199,289
Fidelity Institutional Government Portfolio - Class I, 0.01% (c)
199,289
TOTAL SHORT-TERM INVESTMENTS (Cost $199,289)
199,289
Total Investments in Securities (Cost $4,030,913) - 101.35%
4,669,802
Liabilities in Excess of Other Assets - (1.35)%
(62,236
)
NET ASSETS - 100.00%
$
4,607,566
(a)
Non-income producing security.
(b)
U.S. traded security of a foreign issuer.
(c)
Rate shown is the 7-day annualized yield as of June 30, 2014.
The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and Standard & Poor Financial Services LLC (“S&P”). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bancorp Fund Services, LLC.
The accompanying notes are an integral part of these financial statements.
17
Davidson Funds
STATEMENTS OF ASSETS AND LIABILITIES at June 30, 2014
Davidson Multi-Cap Equity Fund
Davidson Small/Mid Equity Fund
ASSETS
Investments in securities, at value (identified cost $59,471,089
and $4,030,133, respectively)
$
86,433,298
$
4,669,802
Receivables
Dividends and interest
67,602
2,459
Fund shares sold
144,900
6,768
Due from Advisor (Note 4)
-
12,100
Prepaid expenses
36,328
10,404
Total assets
86,681,728
4,701,533
LIABILITIES
Payables
Investment securities purchased
-
46,263
Fund shares redeemed
4,507
-
12b-1 fees
74,692
5,353
Advisory Fees
26,233
-
Audit fees
19,500
19,500
Administration fees
18,370
5,824
Transfer agent fees and expenses
11,698
5,598
Fund accounting fees
10,503
6,091
Shareholder reporting
3,983
405
Custody fees
2,108
1,585
Chief Compliance Officer fee
1,500
1,500
Legal Fees
1,370
1,371
Trustee fees
278
280
Miscellaneous
263
197
Total liabilities
175,275
93,967
NET ASSETS
$
86,506,453
$
4,607,566
CALCULATION OF NET ASSET VALUE PER SHARE
Class A
Net assets applicable to shares outstanding
$
48,498,206
$
3,076,542
Shares issued and outstanding [unlimited number of shares
(par value $0.01) authorized]
2,144,659
164,262
Net asset value and redemption price per share
$
22.61
$
18.73
Maximum offering price per share (Net asset value per
share divided by 95.00%)
$
23.80
$
19.72
The accompanying notes are an integral part of these financial statements.
18
Davidson Funds
STATEMENTS OF ASSETS AND LIABILITIES - Continued
Davidson Multi-Cap Equity Fund
Davidson Small/Mid Equity Fund
Class C
Net assets applicable to shares outstanding
$
19,825,022
$
1,531,024
Shares issued and outstanding [unlimited number of shares
(par value $0.01) authorized]
896,476
83,043
Net asset value and offering price per share (Note 1)
$
22.11
$
18.44
Class I
Net assets applicable to shares outstanding
$
18,183,225
$
-
Shares issued and outstanding [unlimited number of shares
(par value $0.01) authorized]
804,781
-
Net asset value, redemption and offering price per share
$
22.59
$
-
COMPONENTS OF NET ASSETS
Paid-in capital
$
57,745,956
$
3,859,731
Undistributed net investment income
516,702
-
Accumulated net realized gain on investments
1,281,586
108,946
Net unrealized appreciation on investments
26,962,209
638,889
Net assets
$
86,506,453
$
4,607,566
The accompanying notes are an integral part of these financial statements.
19
Davidson Funds
STATEMENTS OF OPERATIONS For the Year Ended June 30, 2014
Davidson Multi-Cap Equity Fund
Davidson Small/Mid Equity Fund
INVESTMENT INCOME
Dividends (Net of foreign tax withheld of $0 and $293, respectively)
$
1,668,038
$
27,592
Interest
121
17
Total investment income
1,668,159
27,609
Expenses
Advisory fees (Note 4)
483,745
27,832
Distribution fees - Class C (Note 5)
171,145
12,510
Distribution fees - Class A (Note 5)
119,290
6,150
Administration fees (Note 4)
101,976
38,153
Transfer agent fees and expenses (Note 4)
72,277
33,616
Fund accounting fees (Note 4)
59,221
36,237
Registration fees
40,769
21,130
Audit fees
20,000
20,000
Reports to shareholders
13,155
651
Custody fees (Note 4)
12,868
7,424
Legal fees
9,518
9,382
Chief Compliance Officer fee (Note 4)
9,000
9,000
Other expenses
8,074
1,118
Trustee fees
7,249
5,015
Insurance expense
3,669
2,503
Total expenses
1,131,956
230,721
Less: advisory fee waiver and expense reimbursement (Note 4)
(171,720
)
(169,385
)
Net expenses
960,236
61,336
Net investment income/(loss)
707,923
(33,727
)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments
$
2,135,208
234,531
Net change in unrealized appreciation on investments
13,487,470
435,121
Net realized and unrealized gain on investments
15,622,678
669,652
Net Increase in Net Assets Resulting from Operations
$
16,330,601
$
635,925
The accompanying notes are an integral part of these financial statements.
The Davidson Multi-Cap Equity Fund and the Davidson Small/Mid Equity Fund (each a “Fund” and collectively, the “Funds”) are each a diversified series of Advisors Series Trust (the “Trust”), which is registered under the Investment Company Act of 1940 as an open-end management investment company. The Funds’ investment objective is to seek long-term capital appreciation. The Funds currently offer Class A shares and Class C shares. Class A shares are subject to a maximum sales load of 5.00%, which decreases depending on the amount invested. U.S. Bancorp Fund Services, LLC, the Funds’ transfer agent, will assess Class C redemptions a 1.00% Contingent Deferred Sales Charge on shares held for twelve months or less, unless the dealer of record waived its commission. The Davidson Multi-Cap Equity Fund Class A shares and Class C shares commenced operations on August
11, 2008 and October 30, 2013 respectively. The Davidson Small/Mid Equity Fund Class A shares and Class C shares commenced operations on June 29, 2012.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently followed by the Funds. These policies are in conformity with accounting principles generally accepted in the United States of America.
A.
Security Valuation: All investments in securities are recorded at their estimated fair value, as described in note 3.
B.
Federal Income Taxes: It is the Funds’ policy to comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income or excise tax provision is required.
The Funds recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has analyzed the Funds’ tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for the Davidson Multi-Cap Equity Fund and Davidson Small/Mid Equity Fund open tax years 2011-2013 and 2012-2013, respectively, or expected to be taken in the Funds’ 2014 tax returns. The Funds identify their major tax jurisdictions as U.S. Federal and the state of Wisconsin; however the Funds are not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months.
C.
Securities Transactions, Income and Distributions: Securities transactions are accounted for on the trade date. Realized gains and losses on securities sold are determined on a first-in, first-out basis. Interest income is recorded on an accrual basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Withholding taxes on foreign dividends have been provided for in accordance with the Funds’ understanding of the applicable country’s tax rules and rates.
Investment income, expenses (other than those specific to the class of shares), and realized and unrealized gains and losses on investments are allocated to the separate classes of the Funds based upon their relative net assets on the date income is earned or expensed and realized and unrealized gains and losses are incurred.
30
Davidson Funds
NOTES TO FINANCIAL STATEMENTS at June 30, 2014 - continued
Each Fund is charged for those expenses that are directly attributable to the fund, such as investment advisory, custody and transfer agent fees. Expenses that are not attributable to a Fund are typically allocated among the Funds in proportion to their respective net assets.
The Funds distribute substantially all net investment income, if any, and net realized capital gains, if any, annually. The amount of dividends and distributions to shareholders from net investment income and net realized capital gains is determined in accordance with Federal income tax regulations, which differs from accounting principles generally accepted in the United States of America. To the extent these book/tax differences are permanent, such amounts are reclassified within the capital accounts based on their Federal tax treatment.
D.
Reclassification of Capital Accounts: Accounting principles generally accepted in the United States of America require that certain components of net assets relating to permanent differences be reclassified between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share.
For the year end June 30, 2014, the Davidson Small/Mid Equity Fund made the following permanent tax adjustments on the statement of assets and liabilities:
Undistributed
Accumulated Net
Net Investment
Realized
Income/(Loss)
Gain/(Loss)
$
33,727
$
(33,727
)
E.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets during the reporting period. Actual results could differ from those estimates.
F.
Redemption Fees: The Funds charge a 1.00% redemption fee to shareholders who redeem shares held for 7 days or less. Such fees are retained by the Funds and accounted for as an addition to paid-in capital. During the year ended June 30, 2014, the Davidson Multi-Cap Equity Fund and the Davidson Small/Mid Equity Fund Class C shares retained $23 and $19, respectively, in redemption fees.
G.
Events Subsequent to the Fiscal Year End: In preparing the financial statements as of June 30, 2014, management considered the impact of subsequent events for potential recognition or disclosure in the financial statements.
NOTE 3 – SECURITIES VALUATION
The Funds have adopted authoritative fair value accounting standards which establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value, a discussion in changes in valuation techniques and related inputs during the period and expanded disclosure of valuation levels for majority security types. These inputs are summarized in the three broad levels listed below:
●
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Funds have the ability to access.
31
Davidson Funds
NOTES TO FINANCIAL STATEMENTS at June 30, 2014 - continued
●
Level 2 - Observable inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
●
Level 3 - Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Funds’ own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available.
Following is a description of the valuation techniques applied to the Funds’ major categories of assets and liabilities measured at fair value on a recurring basis.
Equity Securities: The Funds’ investments are carried at fair value. Equity securities including common stocks and exchange-traded funds, that are primarily traded on a national securities exchange shall be valued at the last sale price on the exchange on which they are primarily traded on the day of valuation or, if there has been no sale on such day, at the mean between the bid and asked prices. Securities primarily traded in the NASDAQ Global Market System for which market quotations are readily available shall be valued using the NASDAQ Official Closing Price (“NOCP”). If the NOCP is not available, such securities shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices. Over-the-counter securities which are not traded in the NASDAQ Global Market System shall be valued at the
most recent sales price. Investments in open-end mutual funds are valued at their net asset value per share. To the extent, these securities are actively traded and valuation adjustments are not applied, they are categorized in level 1 of the fair value hierarchy.
Short-Term Securities: Short-term securities having a maturity of 60 days or less are valued at amortized cost, which approximates market value. To the extent the inputs are observable and timely, these securities would be classified in level 2 of the fair value hierarchy.
The Board of Trustees (“Board”) has delegated day-to-day valuation issues to a Valuation Committee of the Trust which is comprised of representatives from U.S. Bancorp Fund Services, LLC, the Funds’ administrator. The function of the Valuation Committee is to value securities where current and reliable market quotations are not readily available or the closing price does not represent fair value by following procedures approved by the Board. These procedures consider many factors, including the type of security, size of holding, trading volume and news events. All actions taken by the Valuation Committee are subsequently reviewed and ratified by the Board.
Depending on the relative significance of the valuation inputs, fair valued securities may be classified in either level 2 or level 3 of the fair value hierarchy.
Summary of inputs continued to page 33
32
Davidson Funds
NOTES TO FINANCIAL STATEMENTS at June 30, 2014 - continued
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of the inputs used to value the Funds’ securities as of June 30, 2014:
Davidson Multi-Cap Equity Fund
Level 1
Level 2
Level 3
Total
Common Stocks
Consumer Discretionary
$
10,024,182
$
-
$
-
$
10,024,182
Consumer Staples
7,624,407
-
-
7,624,407
Energy
9,128,584
-
-
9,128,584
Financials
14,883,005
-
-
14,883,005
Health Care
9,035,270
-
-
9,035,270
Industrials
10,961,664
-
-
10,961,664
Information Technology
17,190,525
-
-
17,190,525
Materials
3,213,224
-
-
3,213,224
Telecommunication Services
1,876,834
-
-
1,876,834
Utilities
1,272,750
-
-
1,272,750
Total Common Stocks
85,210,445
-
-
85,210,445
Short-Term Investments
1,222,853
-
-
1,222,853
Total Investments in Securities
$
86,433,298
$
-
$
-
$
86,433,298
Davidson Small/Mid Equity Fund
Level 1
Level 2
Level 3
Total
Common Stocks
Consumer Discretionary
$
787,614
$
-
$
-
$
787,614
Consumer Staples
125,847
125,847
Energy
296,272
-
-
296,272
Financials
1,016,802
-
-
1,016,802
Health Care
447,758
-
-
447,758
Industrials
549,860
-
-
549,860
Information Technology
1,090,619
-
-
1,090,619
Materials
155,741
-
-
155,741
Total Common Stocks
4,470,513
-
-
4,470,513
Short-Term Investments
199,289
-
-
199,289
Total Investments in Securities
$
4,669,802
$
-
$
-
$
4,669,802
Refer to the Funds’ Schedule of Investments for a detailed break-out of securities by industry classification. Transfers between levels are recognized at June 30, 2014, the end of the reporting period. The Funds recognized no transfers to/from Level 1 or Level 2. There were no Level 3 securities held in the Funds during the year ended June 30, 2014.
33
Davidson Funds
NOTES TO FINANCIAL STATEMENTS at June 30, 2014 - continued
NOTE 4 - INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
For the year ended June 30, 2014, Davidson Investment Advisors, Inc. (the “Advisor”) provided the Funds with investment management services under an Investment Advisory Agreement. The Advisor furnished all investment advice, office space, facilities, and provides most of the personnel needed by the Funds. As compensation for its services, the Advisor is entitled to a monthly fee at the annual rate of 0.65% and 0.75%, respectively, based upon the average daily net assets of the Davidson Multi-cap Equity Fund and the Davidson Small/Mid Equity Fund. For the year ended June 30, 2014, the Davidson Multi-Cap Equity Fund and the Davidson Small/Mid Equity Fund incurred $483,745 and $27,832, respectively, in advisory fees.
The Funds are responsible for their own operating expenses. The Advisor has agreed to reduce fees payable to it by the Funds and to pay Fund operating expenses to the extent necessary to limit the Davidson Multi-Cap Equity Fund’s Class A, Class C, and Class I net annual operating expenses to 1.15%, 1.90%, and 0.90%, respectively, of average daily net assets. The Advisor has agreed to reduce fees payable to it by the Funds and to pay Fund operating expenses to the extent necessary to limit the Davidson Small/Mid Equity Class A shares and Class C shares net annual operating expenses to 1.40% and 2.15%, respectively, of average daily net assets. Any such reduction made by the Advisor in its fees or payment of expenses which are the Funds’ obligation are subject to reimbursement by the Funds to the Advisor, if so requested by the Advisor, in subsequent fiscal years if the aggregate amount actually paid by the
Funds toward the operating expenses for such fiscal year (taking into account the reimbursement) does not exceed the applicable limitation on Funds expenses. The Advisor is permitted to be reimbursed only for fee reductions and expense payments made in the previous three fiscal years. Any such reimbursement is also contingent upon Board of Trustees review and approval at the time the reimbursement is made. Such reimbursement may not be paid prior to the Funds’ payment of current ordinary operating expenses. For the year ended June 30, 2014, the Advisor reduced its fees and absorbed Funds expenses in the amount of $171,720 and $169,385 for the Davidson Multi-Cap Equity Fund and for the Davidson Small/Mid Equity Fund, respectively. Cumulative expenses subject to recapture pursuant to the aforementioned conditions expire as follows:
Davidson Multi-Cap
Davidson Small/Mid
Equity Fund
Equity Fund
Year
Amount
Year
Amount
2015
$
145,966
2016
$
162,745
2016
141,618
2017
169,385
2017
171,720
$
332,130
$
459,304
U.S. Bancorp Fund Services, LLC (the “Administrator”) acts as the Funds’ Administrator under an Administration Agreement. The Administrator prepares various federal and state regulatory filings, reports and returns for the Funds; prepares reports and materials to be supplied to the Trustees; monitors the activities of the Funds’ custodian, transfer agent and accountants; coordinates the preparation and payment of the Funds’ expenses and reviews the Funds’ expense accruals. U.S. Bancorp Fund Services, LLC also serves as the fund accountant and transfer agent to the Funds. U.S. Bank N.A., an affiliate of U.S. Bancorp Fund Services, serves as the Funds’ custodian.
34
Davidson Funds
NOTES TO FINANCIAL STATEMENTS at June 30, 2014 - continued
For the year ended June 30, 2014, the Davidson Multi-Cap Equity Fund and the Davidson Small/Mid Equity Fund incurred the following expenses for administration, transfer agency, fund accounting, custody and chief compliance officer fees:
Davidson Multi-Cap
Davidson Small/Mid
Equity Fund
Equity Fund
Administration
$
101,976
$
38,153
Transfer Agency (a)
62,448
33,199
Fund Accounting
59,221
36,237
Custody
12,868
7,424
Chief Compliance Officer
9,000
9,000
(a) Does not include out-of-pocket expenses
At June 30, 2014, the Funds had payables due to USBFS for administration, transfer agency, fund accounting, to U.S. Bank, N.A. for custody fees, and Chief Compliance Officer fees in the following amounts:
Davidson Multi-Cap
Davidson Small/Mid
Equity Fund
Equity Fund
Administration
$
18,370
$
5,824
Transfer Agency (a)
10,107
5,520
Fund Accounting
10,503
6,091
Custody
2,108
1,585
Chief Compliance Officer
1,500
1,500
(a) Does not include out-of-pocket expenses
Quasar Distributors, LLC (the “Distributor”) acts as the Funds’ principal underwriter in a continuous public offering of each Funds’ shares. The Distributor is an affiliate of the Administrator. The Distributor has advised the Funds that it has received $147,677 and $17,818, respectively, in front-end sales charges resulting from sales of Class A shares of the Davidson Multi-Cap Equity Fund and Davidson Small/Mid Equity Fund. For the year ended June 30, 2014, the Distributor paid Davidson Multi-Cap Equity Fund and Davidson Small/Mid Equity Fund front- end sales charges of $145,880 and $17,643, respectively, to D.A. Davidson & Co. (“DAD”), the Advisor’s affiliated broker dealer. The Distributor pays a broker dealer a 1.00% up-front sales commission, which includes an advance of the first year's service and distribution fees on the Funds’ Class C shares.
The Distributor retains the service and distribution fees in the first year to reimburse itself for paying your financial intermediary a 1.00% up-front sales commission and retains the service and distribution fees on accounts with no authorized dealer of record. For the year ended June 30, 2014, the Distributor paid DAD $31,972 and $5,273, respectively, in up-front sales commissions on Class C shares for the Davidson Multi-Cap Equity Fund and Davidson Small/Mid Equity Fund.
Certain officers of the Funds are employees of the Administrator.
35
Davidson Funds
NOTES TO FINANCIAL STATEMENTS at June 30, 2014 - continued
NOTE 5 – DISTRIBUTION AGREEMENT AND PLAN
The Funds have adopted a Distribution Plan pursuant to Rule 12b-1 (the “Plan”). The Plan permits the Funds to pay the Distributor for distribution and related expenses at an annual rate of up to 0.25% and 1.00%, respectively, of each Fund’s Class A and Class C shares average daily net assets. The expenses covered by the Plan may include the cost of preparing and distributing prospectuses and other sales material, advertising and public relations expenses, payments to financial intermediaries and compensation of personnel involved in selling shares of the Funds Payments made pursuant to the Plan will represent compensation for distribution and service activities, not reimbursements for specific expenses incurred. For the year ended June 30, 2014, the Davidson Multi-Cap Equity Fund Class A shares and Class C shares paid the Distributor $119,290 and
$171,145, respectively, and the Davidson Small/Mid Equity Fund Class A shares and Class C shares paid the Distributor $6,150 and $12,510, respectively.
NOTE 6 – PURCHASES AND SALES OF SECURITIES
For the year ended June 30, 2014, the cost of purchases and the proceeds from sales of securities, excluding short-term securities for the Davidson Multi-Cap Equity Fund, were $16,376,067 and $8,505,804, respectively.
For the year ended June 30, 2014, the cost of purchases and the proceeds from sales of securities, excluding short-term securities for the Davidson Small/Mid Equity Fund, were $2,330,502 and $1,321,576, respectively.
NOTE 7 – INCOME TAXES
Net investment income/(loss) and net realized gains/(losses) can differ for financial statement and tax purposes due to differing treatments of wash sale losses deferred and REIT adjustments.
The tax character of distributions paid during the years ended June 30, 2014 and June 30, 2013 was as follows:
Ordinary income distributions may include dividends paid from short-term capital gains.
36
Davidson Funds
NOTES TO FINANCIAL STATEMENTS at June 30, 2014 - continued
As of June 30, 2014, the components of accumulated earnings/(losses) on a tax basis were as follows:
Davidson
Multi-Cap
Davidson
Small/Mid
Equity Fund
Equity Fund
Cost of investments (a)
$
59,503,337
$
4,046,565
Gross tax unrealized appreciation
27,618,119
787,432
Gross tax unrealized depreciation
(688,158
)
(164,195
)
Net tax unrealized appreciation
26,929,961
623,237
Undistributed ordinary income
714,256
49,827
Undistributed long-term capital gain
1,116,280
74,771
Total distributable earnings
1,830,536
124,598
Other accumulated gains/(losses)
-
-
Total accumulated earnings/(losses)
$
28,760,497
$
747,835
(a)
The difference between book-basis and tax-basis unrealized appreciation is attributable primarily to the tax deferral of losses on wash sales and REIT adjustments.
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees
Advisors Series Trust and
Shareholders of
The Davidson Funds
We have audited the accompanying statements of assets and liabilities of the Davidson Multi-Cap Equity Fund and the Davidson Small/Mid Equity Fund, each a series of Advisors Series Trust (the “Trust”), including the schedules of investments, as of June 30, 2014, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and with respect to the Davidson Multi- Cap Equity Fund the financial highlights for each of the five years in the period then ended and with respect to the Davidson Small/Mid Equity Fund the financial highlights for each of the two years in the period then ended and the period June 29, 2012 (commencement of operations) through June 30, 2012. These financial
statements and financial highlights are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Trust is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of June 30, 2014, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Davidson Multi-Cap Equity Fund and the Davidson Small/Mid Equity Fund as of June 30, 2014, and the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and their financial highlights for the periods indicated above, in conformity with accounting principles generally accepted in the United States of America.
For the year ended June 30, 2014, the Davidson Multi-Cap Equity Fund and the Davidson Small/Mid Equity Fund designated $968,350 and $52,980, respectively, as ordinary income and the Davidson Multi-Cap Equity Fund and the Davidson Small/Mid Equity Fund $2,512,446 and $31,322, respectively, as long-term capital gains for purposes of the dividends paid deduction.
For the year ended June 30, 2014, certain dividends paid by the Funds may be subject to a maximum tax rate of 15%, as provided by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from net investment income designated as qualified dividend income for the Davidson Multi-Cap Equity Fund and the Davidson Small/Mid Equity Fund was 100.00% and 28.08%, respectively.
For corporate shareholders in the Davidson Multi-Cap Equity Fund and the Davidson Small/Mid Equity Fund, the percent of ordinary income distributions qualifying for the corporate dividends received deduction for the year ended June 30, 2014 was 100.00% and 25.35%, respectively.
The percentage of taxable ordinary income distributions that are designated as interest related income under Internal Revenue Section 871(k)(2)(C) for the Davidson Multi-Cap Equity Fund and the Davidson Small/Mid Equity Fund was 58.90% and 100.00%, respectively.
How to Obtain a Copy of the Funds’ Proxy Voting Policies
A description of the policies and procedures that the Funds use to determine how to vote proxies relating to portfolio securities is available without charge upon request by calling 1-877-332-0529 or on the U.S. Securities and Exchange Commission’s website at http://www.sec.gov.
How to Obtain a Copy of the Funds’ Proxy Voting Records for the 12-Month Period Ended June 30, 2014
Information regarding how the Funds voted proxies relating to portfolio securities during the most recent 12- month period ended June 30 is available without charge, upon request, by calling 1-877-332-0529. Furthermore, you can obtain the Funds’ proxy voting records on the SEC’s website at http://www.sec.gov.
Quarterly Filings on Form N-Q
The Funds file their complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Form N-Q is available on the SEC’s website at http://www.sec.gov. The Funds’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington,
DC and information on the operation of the Public Reference
Room may be obtained by calling 1-202-551-8090. Information included in the Funds’ Form N-Q is also available by calling 1-877-332-0529.
Householding
In an effort to decrease costs, the Funds intend to reduce the number of duplicate prospectuses, annual and semi-annual reports, proxy statements and other similar documents you receive by sending only one copy of each to those addresses shared by two or more accounts and to shareholders the Transfer Agent reasonably believes are from the same family or household. Once implemented, if you would like to discontinue householding for your accounts, please call toll-free at 1-877-332-0529 to request individual copies of these documents. Once the Transfer Agent receives notice to stop householding, the Transfer Agent will begin sending individual copies thirty days after receiving your request. This policy does not apply to account statements.
39
Davidson Funds
INFORMATION ABOUT TRUSTEES AND OFFICERS (Unaudited)
This chart provides information about the Trustees and Officers who over-see the Funds. Officers elected by the Trustees manage the day-to-day operations of the Funds and execute policies formulated by the Trustees.
Director , Alpha Gamma Delta Housing Corporation (collegiate housing management) (2012 to present); Trustee and Chair (2000 to 2012), New Covenant Mutual Funds (1999 to 2012); Director and Board Member, Alpha Gamma Delta Foundation (philanthropic organization) (2005 to 2011).
4
Trustee, Advisors Series Trust
(for series not affiliated with the Funds); Independent Trustee from 1999 to 2012,
Retired; former Financial Consultant and former Executive Vice President and Chief Operating Officer of ICI Mutual Insurance Company (until January 1997).
4
Trustee, Advisors Series Trust
(for series not affiliated with the Funds); Trustee, The Forward Funds (34 portfolios).
Vice President, Chief Compliance Officer and AML Officer
Indefinite term since September 2009.
Senior Vice President, U.S. Bancorp Fund Services, LLC (February 2008 to present); General Counsel/Controller, Steinhafels, Inc. (September 1995 to February 2008).
Senior Vice President and Counsel, U.S. Bancorp Fund Services, LLC
(May 2006 to present).
(1)
The Trustees of the Trust who are not “interested persons” of the Trust as defined under the 1940 Act (“Independent Trustees”).
(2)
As of June 30, 2014, the Trust is comprised of 44 active portfolios managed by unaffiliated investment advisors. The term “Fund Complex” applies only to the Funds. The Funds do not hold themselves out as related to any other series within the Trust for investment purposes, nor does it share the same investment adviser with any other series.
(3)
"Other Directorships Held" includes only directorships of companies required to register or file reports with the SEC under the Securities Exchange Act of 1934, as amended (that is, "public companies") or other investment companies registered under the 1940 act.
(4)
Mr. Redwine is an “interested person” of the Trust as defined by the 1940 Act. Mr. Redwine is an interested Trustee of the Trust by virtue of the fact that he is an interested person of Quasar Distributors, LLC who acts as principal underwriter to the series of the Trust.
The Statement of Additional Information includes additional information about the Funds' Trustees and Officers and is available, without charge, upon request by calling (877) 332-0529.
42
PRIVACY NOTICE
The Funds collect non-public information about you from the following sources:
●
Information we receive about you on applications or other forms;
●
Information you give us orally; and/or
●
Information about your transactions with us or others.
We do not disclose any non-public personal information about our customers or former customers without the customer’s authorization, except as permitted by law or in response to inquiries from governmental authorities. We may share information with affiliated and unaffiliated third parties with whom we have contracts for servicing the Funds. We will provide unaffiliated third parties with only the information necessary to carry out their assigned responsibilities. We maintain physical, electronic and procedural safeguards to guard your non-public personal information and require third parties to treat your personal information with the same high degree of confidentiality.
In the event that you hold shares of the Funds through a financial intermediary, including, but not limited to, a broker-dealer, bank, or trust company, the privacy policy of your financial intermediary would govern how your non-public personal information would be shared by those entities with unaffiliated third parties.
This report is intended for the shareholders of the Funds and may not be used as sales literature unless preceded or accompanied by a current prospectus. To obtain a free prospectus please call 877-332-0529.
Item 2. Code of Ethics.
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer and principal financial officer. The registrant has not made any amendments to its code of ethics during the period covered by this report. The registrant has not granted any waivers from any provisions of the code of ethics during the period covered by this report.
The registrant’s Board of Trustees has determined that there is at least one audit committee financial expert serving on its audit committee. Ms. Gail S. Duree is the “audit committee financial expert” and is considered to be “independent” as each term is defined in Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
The registrant has engaged its principal accountant to perform audit services, audit-related services, tax services and other services during the past two fiscal years. “Audit services” refer to performing an audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. “Audit-related services” refer to the assurance and related services by the principal accountant that are reasonably related to the performance of the audit. “Tax services” refer to professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. There were no “other services” provided by
the principal accountant. The following table details the aggregate fees billed or expected to be billed for each of the last two fiscal years for audit fees, audit-related fees, tax fees and other fees by the principal accountant.
FYE 6/30/2014
FYE 6/30/2013
Audit Fees
$35,300
$32,800
Audit-Related Fees
N/A
N/A
Tax Fees
$6,400
$6,200
All Other Fees
N/A
N/A
The audit committee has adopted pre-approval policies and procedures that require the audit committee to pre-approve all audit and non-audit services of the registrant, including services provided to any entity affiliated with the registrant.
The percentage of fees billed by Tait, Weller, & Baker LLP applicable to non-audit services pursuant to waiver of pre-approval requirement were as follows:
FYE 6/30/2014
FYE 6/30/2013
Audit-Related Fees
0%
0%
Tax Fees
0%
0%
All Other Fees
0%
0%
All of the principal accountant’s hours spent on auditing the registrant’s financial statements were attributed to work performed by full-time permanent employees of the principal accountant.
The following table indicates the non-audit fees billed or expected to be billed by the registrant’s accountant for services to the registrant and to the registrant’s investment adviser (and any other controlling entity, etc.—not sub-adviser) for the last two years. The audit committee of the Board of Trustees has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser is compatible with maintaining the principal accountant's independence and has concluded that the provision of such non-audit services by the accountant
has not compromised the accountant’s independence.
Non-Audit Related Fees
FYE 6/30/2014
FYE 6/30/2013
Registrant
N/A
N/A
Registrant’s Investment Adviser
N/A
N/A
Item 5. Audit Committee of Listed Registrants.
Not applicable to registrants who are not listed issuers (as defined in Rule 10A-3 under the Securities Exchange Act of 1934).
Item 6. Investments.
(a) Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form.
(b) Not Applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable to open-end investment companies.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable to open-end investment companies.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable to open-end investment companies.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Trustees.
Item 11. Controls and Procedures.
(a)
The Registrant’s President/Principal Executive Officer and Treasurer/Principal Financial Officer have reviewed the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as of a date within 90 days of the filing of this report, as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on their review, such officers have concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this report is appropriately recorded, processed, summarized and reported and made known to them by others within the
Registrant and by the Registrant’s service provider.
(b)
There were no changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the fourth fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting.
Item 12. Exhibits.
(a)
(1) Any code of ethics or amendment thereto, that is subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy Item 2 requirements through filing an exhibit. Filed herewith.
(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable to open-end investment companies.
(b)
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
