As filed with the Securities and Exchange Commission on
June 26, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
FORUM FUNDS
Three Canal Plaza, Suite 600
Jessica A. Chase, Principal Executive Officer
Three Canal Plaza, Suite 600
Date of fiscal year end: April 30
ITEM 1. REPORT TO STOCKHOLDERS.
MONONGAHELA ALL CAP VALUE FUND
Annual Report
MONONGAHELA ALL CAP VALUE FUND
A MESSAGE TO OUR SHAREHOLDERS (Unaudited)
Dear Shareholder,
We are pleased to offer the annual report for the Monongahela All Cap Value Fund (the
“Fund”) for the time period from
May 1, 2017 to
April 30, 2018. For the year ending
April 30, 2018, the Fund was up 9.36% while the S&P 500 Index was up 13.27% and the Russell 2000 Value Index was up 6.53%. Since our mid-year report on
October 31, 2017 the Fund was up 2.04% while the S&P 500 Index was up 3.82% and the Russell 2000 Value Index was up 0.94%.
Marty Whitman
Marty Whitman died in April of this year at the age of ninety three. Marty was a renowned deep value investor, passionate about the merit of exhaustive research in individual companies. Marty was a blunt man who took issue with Eugene Fama’s Efficient Market Hypothesis (EMH.) In an oversimplification, EMH suggests that markets operate efficiently and stock prices instantly reflect all available information. The EMH theory is partially responsible for the tremendous growth in all forms of passive investing. While our language is not as salty as Mr. Whitman’s, we are equally passionate about the risk associated with index investing and ETF’s.
Robert Shiller, a Yale University Economics professor and Nobel Prize winning economist warned of the potential risk of passive investing. He noted late in 2017 that:
The problem is that if you are talking about passive indexing, that is something that is really free-riding on other people’s work ... The strength of this country was built on people who watched individual companies. They had opinions about them. All of this talk of indexes, it’s a little bit diluting of our intellect. It becomes more of a game … It’s a chaotic system.
Shiller went on to compare passive investing “to seeing a green light at an intersection and crossing the street without looking both ways.” We saw some of that chaos enter the market in February of 2018. On February 5th, the markets were struggling with fears of inflation and potentially higher interest rates. At 3 PM, the Dow Jones Industrial Average (“Dow”) was down approximately 800 points, within minutes plunging to a loss of 1597 points. At the day’s end, the market recovered a bit, closing down 1175 points. Three days later, on February 8th, the Dow fell another 1000 points and entered correction territory.
We believe the significant outflow of ETF funds and indexing, combined with liquidity issues, exaggerated the market’s movements in early February. There is no individual security price discovery in passive investing; money flows blindly into an index-tracking fund. Good and bad companies alike benefit from capital inflows to an index and conversely suffer when money flows out. The movement can be dramatic in the short term as we witnessed on February 5th and February 8th.
While passive investing has benefits (low cost index tracking and theoretical diversification), one needs to be mindful of associated risk. Since 2009, fund inflows have been positive and have contributed to the highly correlated rise in various indexes. When markets flatten or decline, individual security analysis will become critical as the market eventually differentiates individual issues and markets become less correlated. We believe that as passive strategies become more popular, their risk will continue to rise.
Portfolio Changes
We believe that monolithic trading of passive investing has left some sectors out in the cold. The Consumer Staples Select Sector SPDR (which tracks a market-cap weighted index of consumer staples stocks selected from the S&P 500) was down 11% in the first four months of calendar year 2018. Stocks in the Consumer Staples Select Sector have been heavily sold and are now trading at steep discounts to intrinsic value. We have added B&G Foods Inc. and Walgreen Boots Alliance, Inc. Both are very well managed with above average dividend yields. In addition to the new positions, we have increased our exposure to General Mills, Inc.
In the Health Care sector, we’ve sold Baxter International Inc., Johnson & Johnson and Halyard Health Inc. after they exceeded our fair value targets. We have increased our position in Eli Lilly & Co., Gilead Sciences Inc. and added Celgene Corp., a biopharmaceutical company. Celgene Corp. is currently out of favor, but our growth and earnings research suggests that we are buying future cash flow at a significant discount.
MONONGAHELA ALL CAP VALUE FUND
A MESSAGE TO OUR SHAREHOLDERS (Unaudited)
The Industrial sector continues to benefit from robust growth and we have expanded our exposure with the addition of
Mueller Water Products, Inc. and
Pitney Bowes, Inc. Pitney Bowes’ management has been repositioning
the company to participate in digital commerce growth while continuing to increase efficiencies in the core postage and metering business. While there is risk in the transition, we believe the market has overreacted to that risk. A dividend cut is possible, as the stock is currently yielding 8%.
In the Technology sector, we were excited to repurchase Badger Meter, Inc. after a negative reaction to quarterly earnings. Our two largest technology positions, II-VI Inc. and Seagate Technology PLC are exceeding our growth targets and remain core positions. We have also added International Business Machines Corp. Their research and development efforts over the last ten years in artificial intelligence and cloud computing should lead to renewed higher margin growth. In the meantime, the stock’s dividend yield exceeds 4%.
Marty Whitman would have understood today’s volatility and taken advantage of it. He noted “The kind of investing I do doesn’t really depend on how the public stock market does. If I’m right, these very undervalued companies will be taken over, liquidated or refinanced, and that’s where you make your money.” We are very comfortable collecting dividends while we wait for value to be recognized.
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Mark Rodgers
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Michael C. Rodgers
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Co-Manager
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Co-Manager
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IMPORTANT RISKS AND DISCLOSURES:
Mutual fund investing involves risk, including possible loss of principal. Turbulence in the financial markets and reduced liquidity in equity, credit and fixed-income markets may negatively affect issuers worldwide, which could have an adverse effect on mutual fund investments. A value investing strategy involves the risk that undervalued securities may not appreciate as anticipated or will remain undervalued for long periods of time. Securities of micro-, small- and mid- capitalization companies may be more volatile and less liquid than those of large-cap companies due to limited resources or product lines and greater sensitivity to adverse economic conditions.
The views in this report were those of the Fund managers as of
April 30, 2018, and may not reflect their views on the date this report is first published or any time thereafter. These views are intended to assist shareholders in understanding their investment in the Fund and do not constitute investment advice. This letter may contain discussions about certain investments both held and not held in the portfolio. All current and future holdings are subject to risk and to change.
MONONGAHELA ALL CAP VALUE FUND
PERFORMANCE CHART AND ANALYSIS (Unaudited)
The following chart reflects the change in the value of a hypothetical $10,000 investment, including reinvested dividends and distributions, in the Monongahela All Cap Value Fund (the “Fund”) compared with the performance of the benchmarks, the S&P 500 Index (the “S&P 500”) and the Russell 2000® Value Index (the “Russell 2000 Value”), since inception. The S&P 500 is a broad-based measurement of the U.S. stock market based on the performance of 500 widely held large capitalization common stocks. The Russell 2000 Value measures the 2,000 smallest of the 3,000 largest U.S. Companies (based on total market capitalization) that have lower price-to-book ratios and lower forecasted growth values. The total return of the indices includes the reinvestment of dividends and income. The total return of the Fund includes operating expenses that reduce returns, while the total return of the indices do not include
expenses. The Fund is professionally managed, while the indices are unmanaged and are not available for investment.
Comparison of Change in Value of a $10,000 Investment
Monongahela All Cap Value Fund vs. S&P 500 Index vs. Russell 2000 Value Index
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Six Month
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One Year
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Since Inception 07/01/13
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Monongahela All Cap Value Fund
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2.04%
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9.36%
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10.54%
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S&P 500 Index
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3.82%
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13.27%
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13.09%
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Russell 2000® Value Index
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0.94%
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6.53%
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9.92%
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Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than original cost. As stated in the Fund’s prospectus, the annual operating expense ratio (gross) is 4.29%. However, the Fund’s adviser has contractually agreed to waive its fee and/or reimburse Fund expenses to limit Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement (excluding all taxes, interest, portfolio transaction expenses, dividend and interest expenses on short sales, acquired fund fees and expenses, proxy expenses and extraordinary expenses) to 0.85%, through
September 1, 2018 (the
“Expense Cap”). The adviser may be reimbursed by the Fund for fees waived and
expenses reimbursed by the adviser pursuant to the Expense Cap if such payment is made within three years of the fee waiver or expense reimbursement, and does not cause the Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement to exceed the lesser of (i) the then-current Expense Cap, or (ii) the Expense Cap in place at the time the fees/expenses were waived/reimbursed. During the period, certain fees were waived and/or expenses reimbursed; otherwise, returns would have been lower. Shares redeemed or exchanged within 60 days of purchase will be charged a 1.00% redemption fee. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Returns greater than one year are annualized. For the most recent month-end performance, please call (
855) 392-9331.
MONONGAHELA ALL CAP VALUE FUND
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization
The Monongahela All Cap Value Fund (the
“Fund”) is a diversified portfolio of Forum Funds (the
“Trust”). The Trust is a Delaware statutory trust that is registered as an open-end, management investment company under the Investment Company Act of 1940, as amended (the
“Act”). Under its Trust Instrument, the Trust is authorized to issue an unlimited number of the Fund’s shares of beneficial interest without par value. The Fund commenced operations on
July 1, 2013. The Fund seeks total return through long-term capital appreciation and income.
Note 2. Summary of Significant Accounting Policies
The Fund is an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, “Financial Services-Investment Companies”. These financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of increases and decreases in net assets from operations during the fiscal year. Actual amounts could differ from those estimates. The following summarizes the significant accounting policies of the Fund:
Security Valuation – Securities are valued at market prices using the last quoted trade or official closing price from the principal exchange where the security is traded, as provided by independent pricing services on each Fund business day. In the absence of a last trade, securities are valued at the mean of the last bid and ask price provided by the pricing service. Short-term investments that mature in sixty days or less may be valued at amortized cost.
The Fund values its investments at fair value pursuant to procedures adopted by the Trust’s Board of Trustees (the “Board”) if (1) market quotations are not readily available or (2) the Adviser, as defined in Note 3, believes that the values available are unreliable. The Trust’s Valuation Committee, as defined in the Fund’s registration statement, performs certain functions as they relate to the administration and oversight of the Fund’s valuation procedures. Under these procedures, the Valuation Committee convenes on a regular and ad hoc basis to review such investments and considers a number of factors, including valuation methodologies and significant unobservable inputs, when arriving at fair value.
The Valuation Committee may work with the Adviser to provide valuation inputs. In determining fair valuations, inputs may include market-based analytics that may consider related or comparable assets or liabilities, recent transactions, market multiples, book values and other relevant investment information. Adviser inputs may include an income-based approach in which the anticipated future cash flows of the investment are discounted in determining fair value. Discounts may also be applied based on the nature or duration of any restrictions on the disposition of the investments. The Valuation Committee performs regular reviews of valuation methodologies, key inputs and assumptions, disposition analysis and market activity.
Fair valuation is based on subjective factors and, as a result, the fair value price of an investment may differ from the security’s market price and may not be the price at which the asset may be sold. Fair valuation could result in a different Net Asset Value (“NAV”) than a NAV determined by using market quotes.
GAAP has a three-tier fair value hierarchy. The basis of the tiers is dependent upon the various “inputs” used to determine the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below:
Level 1 - Quoted prices in active markets for identical assets and liabilities.
Level 2 - Prices determined using significant other observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). Short-term securities with maturities of sixty days or less are valued at amortized cost, which approximates market value, and are categorized as Level 2 in the hierarchy. Municipal securities, long-term U.S. government obligations and corporate debt securities are valued in accordance with the evaluated price supplied by the pricing service and generally categorized as Level 2 in the hierarchy. Other securities that are categorized as Level 2 in the hierarchy include, but are not limited to, warrants that do not trade on an exchange, securities valued at the mean between the last reported bid and ask quotation and international equity securities valued by an independent third party
MONONGAHELA ALL CAP VALUE FUND
NOTES TO FINANCIAL STATEMENTS
with adjustments for changes in value between the time of the securities respective local market closes and the close of the U.S. market.
Level 3 - Significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments).
The aggregate value by input level, as of
April 30, 2018, for the Fund’s investments is included in the Fund’s Schedule of Investments.
Security Transactions, Investment Income and Realized Gain and Loss – Investment transactions are accounted for on the trade date. Dividend income is recorded on the ex-dividend date. Foreign dividend income is recorded on the ex-dividend date or as soon as possible after determining the existence of a dividend declaration after exercising reasonable due diligence. Income and capital gains on some foreign securities may be subject to foreign withholding taxes, which are accrued as applicable. Interest income is recorded on an accrual basis. Premium is amortized and discount is accreted using the effective interest method. Identified cost of investments sold is used to determine the gain and loss for both financial statement and federal income tax purposes.
Distributions to Shareholders – The Fund declares any dividends from net investment income and pays them annually. Any net capital gains and net foreign currency gains realized by the Fund are distributed at least annually. Distributions to shareholders are recorded on the ex-dividend date. Distributions are based on amounts calculated in accordance with applicable federal income tax regulations, which may differ from GAAP. These differences are due primarily to differing treatments of income and gain on various investment securities held by the Fund, timing differences and differing characterizations of distributions made by the Fund.
Federal Taxes – The Fund intends to continue to qualify each year as a regulated investment company under Subchapter M of Chapter 1, Subtitle A, of the Internal Revenue Code of 1986, as amended (
“Code”), and to distribute all of its taxable income to shareholders. In addition, by distributing in each calendar year substantially all of its net investment income and capital gains, if any, the Fund will not be subject to a federal excise tax. Therefore, no federal income or excise tax provision is required. The Fund files a U.S. federal income and excise tax return as required. The Fund’s federal income tax returns are subject to examination by the Internal Revenue Service for a period of three fiscal years after they are filed. As of
April 30, 2018, there are no uncertain tax positions that would require financial statement recognition, de-recognition or disclosure.
Income and Expense Allocation – The Trust accounts separately for the assets, liabilities and operations of each of its investment portfolios. Expenses that are directly attributable to more than one investment portfolio are allocated among the respective investment portfolios in an equitable manner.
Redemption Fees – A shareholder who redeems or exchanges shares within 60 days of purchase will incur a redemption fee of 1.00% of the current NAV of shares redeemed or exchanged, subject to certain limitations. The fee is charged for the benefit of the remaining shareholders and will be paid to the Fund to help offset transaction costs. The fee is accounted for as an addition to paid-in capital. The Fund reserves the right to modify the terms of or terminate the fee at any time. There are limited exceptions to the imposition of the redemption fee. Redemption fees incurred for the Fund, if any, are reflected on the Statements of Changes in Net Assets.
Commitments and Contingencies – In the normal course of business, the Fund enters into
contracts that provide general indemnifications by the Fund to the counterparty to the
contract. The Fund’s maximum exposure under these arrangements is dependent on future claims that may be made against the Fund and, therefore, cannot be estimated; however, based on experience, the risk of loss from such claims is considered remote. The Fund has determined that none of these arrangements requires disclosure on the Fund’s balance sheet.
Note 3. Fees and Expenses
Investment Adviser – Rodgers Brothers, Inc. d/b/a Monongahela Capital Management (the “Adviser”) is the investment adviser to the Fund. Pursuant to an investment advisory agreement, the Adviser receives an advisory fee, payable monthly, from the Fund at an annual rate of 0.75% of the Fund’s average daily net assets.
MONONGAHELA ALL CAP VALUE FUND
NOTES TO FINANCIAL STATEMENTS
Distribution – Foreside Fund Services, LLC serves as the Fund’s distributor (the “Distributor”). The Fund does not have a distribution (12b-1) plan; accordingly, the Distributor does not receive compensation from the Fund for its distribution services. The Adviser compensates the Distributor directly for its services. The Distributor is not affiliated with the Adviser or Atlantic Fund Administration, LLC (d/b/a Atlantic Fund Services) (“Atlantic”) or their affiliates.
Other Service Providers – Atlantic provides fund accounting, fund administration, compliance and transfer agency services to the Fund. The fees related to these services are included in Fund services fees within the Statement of Operations. Atlantic also provides certain shareholder report production and EDGAR conversion and filing services. Pursuant to an Atlantic services agreement, the Fund pays Atlantic customary fees for its services. Atlantic provides a Principal Executive Officer, a Principal Financial Officer, a Chief Compliance Officer and an Anti-Money Laundering Officer to the Fund, as well as certain additional compliance support functions.
Trustees and Officers – Through
December 31, 2017, the Trust paid each independent Trustee an annual retainer fee of $50,000 for service to the Trust ($66,000 for the Chairman), and the Audit Committee Chairman and Vice Chairman received an additional $6,000 annually. Effective
January 1, 2018, each independent Trustee’s annual retainer is $31,000 ($41,000 for the Chairman), and the Audit Committee Chairman receives an additional $2,000 annually. The Trustees and Chairman may receive additional fees for special Board meetings. Each Trustee is also reimbursed for all reasonable out-of-pocket expenses incurred in connection with his duties as a Trustee, including travel and related expenses incurred in attending Board meetings. The amount of Trustees’ fees attributable to the Fund is disclosed in the Statement of Operations. Certain
officers of the Trust are also officers or employees of the above named service providers, and during their terms of office received no compensation from the Fund.
Note 4. Expense Reimbursements and Fees Waived
The Adviser has contractually agreed to waive its fee and/or reimburse Fund expenses to limit Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement (excluding all taxes, interest, portfolio transaction expenses, dividend and interest expenses on short sales, acquired fund fees and expenses, proxy expenses and extraordinary expenses) to 0.85%, through
September 1, 2018 (
“Expense Cap”). Other Fund service providers have voluntarily agreed to waive a portion of their fees. The voluntary waivers may be changed or eliminated at any time. The Expense Cap may only be raised or eliminated with the consent of the Board of Trustees. For the year ended
April 30, 2018, fees waived and expenses reimbursed were as follows:
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Investment Adviser Fees Waived
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Investment Adviser Expenses Reimbursed
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Other Waivers
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Total Fees Waived and Expenses Reimbursed
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$
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68,148
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$
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75,238
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$
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85,000
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$
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228,386
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The adviser may be reimbursed by the Fund for fees waived and expenses reimbursed by the adviser pursuant to the Expense Cap if such payment is made within three years of the fee waiver or expense reimbursement, and does not cause the Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement to exceed the lesser of (i) the then-current Expense Cap, or (ii) the Expense Cap in place at the time the fees/expenses were waived/reimbursed. As of
April 30, 2018, $427,715 is subject to recapture by the Adviser. Other waivers are not eligible for recoupment.
Note 5. Security Transactions
The cost of purchases and proceeds from sales of investment securities (including maturities), other than short-term investments, during the year ended
April 30, 2018 were $7,402,360 and $4,868,508 respectively.
Note 6. Federal Income Tax
As of
April 30, 2018, cost for federal income tax purposes is $9,318,774 and net unrealized appreciation consists of:
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Gross Unrealized Appreciation
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$
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1,238,519
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Gross Unrealized Depreciation
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(418,530
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)
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Net Unrealized Appreciation
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$
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819,989
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MONONGAHELA ALL CAP VALUE FUND
NOTES TO FINANCIAL STATEMENTS
Distributions paid during the fiscal year ended as noted were characterized for tax purposes as follows:
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2018 |
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2017 |
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Ordinary Income
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$
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234,333
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$
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99,718
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Long-Term Capital Gain
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677,359
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46,094
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$
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911,692
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$
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145,812
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As of
April 30, 2018, distributable earnings on a tax basis were as follows:
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Undistributed Ordinary Income
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$
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135,992
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Undistributed Long-Term Gain
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392,680
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Unrealized Appreciation
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819,989
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Total
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$
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1,348,661
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The difference between components of distributable earnings on a tax basis and the amounts reflected in the Statement of Assets and Liabilities are primarily due to wash sales.
Note 7. Subsequent Events
Subsequent events occurring after the date of this report through the date these financial statements were issued have been evaluated for potential impact, and the Fund has had no such events.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Forum Funds
and the Shareholders of Monongahela All Cap Value Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of Monongahela All Cap Value Fund, a series of shares of beneficial interest in Forum Funds (the
“Fund”), including the schedule of investments, as of
April 30, 2018, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the four-year period then ended and for the period
July 1, 2013 (commencement of operations) through
April 30, 2014, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial
statements present fairly, in all
material respects, the financial position of the Fund as of
April 30, 2018, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and its financial highlights for each of the years in the four-year period then ended and for the period
July 1, 2013 through
April 30, 2014, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities law and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of
April 30, 2018 by correspondence with the custodian. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
BBD, LLP
We have served as the auditor of one or more of the Funds in the Forum Funds since 2009.
Philadelphia, Pennsylvania
MONONGAHELA ALL CAP VALUE FUND
ADDITIONAL INFORMATION (Unaudited)
Investment Advisory Agreement Approval
At the
March 27, 2018 Board meeting, the Board, including the Independent Trustees, considered the approval of the continuance of the investment advisory agreement between the Adviser and the Trust pertaining to the Fund (the
“Advisory Agreement”). In preparation for its deliberations, the Board requested and reviewed written responses from the Adviser to a due diligence questionnaire circulated on the Board's behalf concerning the services provided by the Adviser. The Board also discussed the materials with Fund counsel and, as necessary, with the Trust's administrator, Atlantic Fund Services. During its deliberations, the Board received an oral presentation from the Adviser, and was advised by Trustee counsel.
At the meeting, the Board reviewed, among other matters: (1) the nature, extent and quality of the services provided to the Fund by the Adviser, including information on the investment performance of the Fund and the Adviser; (2) the costs of the services provided and profitability to the Adviser of its relationship with the Fund; (3) the advisory fee and total expense ratio of the Fund compared to a relevant peer group of funds; (4) the extent to which economies of scale may be realized as the Fund grows and whether the advisory fee enables the Fund's investors to share in the benefits of economies of scale; and (5) other benefits received by the Adviser from its relationship with the Fund. In addition, the Board recognized that the evaluation process with respect to the Adviser was an ongoing one and, in this regard, the Board considered information provided by the Adviser at regularly scheduled meetings during the past year.
Nature, Extent and Quality of Services
Based on written materials received, a presentation from senior representatives of the Adviser and a discussion with the Adviser about the Adviser’s personnel, operations and financial condition, the Board considered the quality of services provided by the Adviser under the Advisory Agreement. In this regard, the Board considered information regarding the experience, qualifications and professional background of the portfolio managers at the Adviser with principal responsibility for the Fund, as well as the investment philosophy and decision-making process of the Adviser and the capability and integrity of the Adviser’s senior management and staff.
The Board considered also the adequacy of the Adviser’s resources. The Board noted the Adviser’s representations that the firm is in stable financial condition, that the firm is able to meet its expense reimbursement obligations to the Fund, and that the Adviser has the operational capability and the necessary staffing and experience to continue providing high-quality investment advisory services to the Fund. Based on the presentation and the materials provided by the Adviser in connection with the Board’s consideration of the renewal of the Advisory Agreement, the Board concluded that, overall, it was satisfied with the nature, extent and quality of services to be provided to the Fund under the Advisory Agreement.
Performance
In connection with a presentation by the Adviser regarding its approach to managing the Fund, the Board reviewed the performance of the Fund compared to its benchmark. The Board observed that the Fund underperformed the S&P 500 Index, the Fund’s primary benchmark index, for the one-year period ended
December 31, 2017, and outperformed the primary benchmark index for the three-year period ended
December 31, 2017. The Board also observed that the Fund outperformed the Russell 2000 Value Index, the Fund’s secondary benchmark index, for the one- and three-year periods ended
December 31, 2017. The Board noted the Adviser’s representation that the Fund’s underperformance relative to its benchmark during the one-year period could be attributed, in part, to the Fund’s conservative, value-biased investment strategy,
and the underperformance of value investments relative to growth investments over that period.
The Board also considered the Fund’s performance relative to an independent peer group of funds identified by Broadridge Financial Solutions, Inc. (
“Broadridge”) as having characteristics similar to those of the Fund. The Board observed that, based on the information provided by Broadridge, the Fund outperformed the median of its Broadridge peer group for the one- and three-year periods ended
December 31, 2017. The Board noted the Adviser’s representation that the Fund’s outperformance relative to the Broadridge peers could be attributed, in part, to the Fund’s overweight positions in certain sectors that performed well compared to the market as a whole. Based on the Adviser’s investment style and the foregoing performance information, among other factors, the Board determined that the Fund and its shareholders could benefit from the Adviser’s continued management of the Fund.
MONONGAHELA ALL CAP VALUE FUND
ADDITIONAL INFORMATION (Unaudited)
Compensation
The Board evaluated the Adviser’s compensation for providing advisory services to the Fund and analyzed comparative information on actual advisory fee rates and actual total expenses of the Fund’s Broadridge peer group. The Board noted that the Adviser’s actual advisory fee rate and actual total expenses were each lower than the median of the Broadridge peers. The Board further noted that the Adviser was currently waiving its entire advisory fee in an effort to keep the Fund’s expenses at competitive levels such that the Fund’s actual advisory fee rate and actual total expenses were each among the lowest in the Broadridge peer group. Based on the foregoing, the Board concluded that the Adviser’s advisory fee rate charged to the Fund was reasonable.
Cost of Services and Profitability
The Board considered information provided by the Adviser regarding the costs of services and its profitability with respect to the Fund. In this regard, the Board considered the Adviser’s resources devoted to the Fund, as well as the Adviser’s discussion of the costs and profitability. The Board noted that the Adviser was currently waiving its entire advisory fee in an effort to keep Fund expenses at a desired level and had committed to extending its contractual expense cap agreement through at least the duration of the advisory agreement. Based on these and other applicable considerations, the Board concluded that the Adviser’s profitability attributable to management of the Fund was reasonable.
Economies of Scale
The Board considered whether the Fund would benefit from any economies of scale. In this respect, the Board noted both the Adviser’s representation that the Fund could potentially benefit from economies of scale as assets grow, but that at the current low asset levels, consideration of breakpoints was not appropriate. Based on the foregoing information, the Board concluded that economies of scale were not a material factor in approving the continuation of the Advisory Agreement.
Other Benefits
The Board noted the Adviser’s representation that, aside from the compliment that the Fund provides to the Adviser’s other advisory offerings, the Adviser does not benefit in a material way from its relationship with the Fund. Based on the foregoing representation, the Board concluded that other benefits received by the Adviser from its relationship with the Fund were not a material factor in approving the continuation of the Advisory Agreement.
Conclusion
The Board did not identify any single factor as being of paramount importance, and different Trustees may have given different weight to different factors. The Board reviewed a memorandum from Fund counsel discussing the legal standards applicable to its consideration of the Advisory Agreement. Based on its review, including consideration of each of the factors referenced above, the Board determined, in the exercise of its reasonable business judgment, that the contractual fee under the advisory arrangement was fair and reasonable in light of the services performed or to be performed, expenses incurred or to be incurred and such other matters as the Board considered relevant.
information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
