As filed with the Securities and Exchange Commission on June 11, 2018
1933 Act File No. [ ]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
oPre-Effective Amendment No. o Post-Effective Amendment No.
(Check appropriate box or boxes)
Touchstone Funds Group Trust
(Exact Name of Registrant as Specified in Charter)
1-800-543-0407
(Area Code and Telephone Number)
303 Broadway, Suite 1100, Cincinnati, Ohio 45202
(Address of Principal Executive Offices: Number, Street, City, State, Zip Code)
Jill T. McGruder
303 Broadway, Suite 1100
Cincinnati, Ohio 45202
(Name and Address of Agent for Service)
Copies to:
Deborah Bielicke Eades, Esq.
Vedder Price P.C.
222 North LaSalle Street
Chicago, Illinois 60601
(312) 609-7661
Renee M. Hardt, Esq.
Vedder Price P.C.
222 North LaSalle Street
Chicago, Illinois 60601
(312) 609-7616
Approximate Date of Proposed Public Offering: As soon as practicable after this Registration Statement becomes effective under the Securities Act of 1933, as amended.
Title of Securities Being Registered: Class A, Class C, Class Y and Institutional Class shares of beneficial interest, par value $0.01 per share, of Touchstone Small Cap Value Fund, a series of the Registrant, are being registered. No filing fee is due because Registrant is relying on Section 24(f) of the Investment Company Act of 1940, as amended.
It is proposed that this filing will become effective on July 11, 2018, pursuant to Rule 488 under the Securities Act of 1933.
_____________________________________________________________________________________________________
TOUCHSTONE SMALL CAP VALUE OPPORTUNITIES FUND
a series of
TOUCHSTONE STRATEGIC TRUST
303 Broadway, Suite 1100
Cincinnati, Ohio 45202
(800) 543-0407
July [l], 2018
Dear Shareholder:
We have important information concerning your investment in the Touchstone Small Cap Value Opportunities Fund (the “Small Cap Value Opportunities Fund”), a series of Touchstone Strategic Trust (the “Target Trust”). As a shareholder of the Small Cap Value Opportunities Fund, we wish to inform you that the Board of Trustees of the Target Trust has approved the reorganization, subject to shareholder approval, of the Small Cap Value Opportunities Fund into the Touchstone Small Cap Value Fund (the “Small Cap Value Fund,” and together with the Small Cap Value Opportunities Fund, the “Funds”), a series of Touchstone Funds Group Trust (the “Reorganization”). The investment advisor to both Funds is Touchstone Advisors, Inc. ("Touchstone Advisors"). The Funds have the same investment goals and substantially similar principal investment strategies. The Small Cap Value Opportunities Fund is currently sub-advised by Thompson, Siegel & Walmsley LLC (“TS&W”), while the Small Cap Value Fund is sub-advised by LMCG Investments, LLC ("LMCG").
The Reorganization is intended to eliminate the offering of multiple funds with the same investment goal and substantially similar principal investment strategies, and has the potential to provide efficiencies and economies of scale for the combined Fund.
Pursuant to an Agreement and Plan of Reorganization, the Small Cap Value Opportunities Fund will transfer all of its assets and liabilities to the Small Cap Value Fund. In the Reorganization, you will receive shares of the Small Cap Value Fund that will have a total value equal to the total value of your shares in the Small Cap Value Opportunities Fund. The Small Cap Value Opportunities Fund will then cease operations and terminate. The Reorganization is expected to be completed on or about September 21, 2018.
The Board of Trustees of the Target Trust recommends that you vote FOR the Reorganization proposal.
We have enclosed a Proxy Statement/Prospectus that describes the Reorganization proposal in greater detail, as well as important information about the Small Cap Value Fund. The enclosed Proxy Statement/Prospectus also contains information about the appointment of LMCG as sub-advisor to the Small Cap Value Opportunities Fund, effective as of July 30, 2018. Please contact Shareholder Services at (800) 543-0407 with any questions.
Sincerely, | |
Jill T. McGruder | |
President | |
Touchstone Strategic Trust | |
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QUESTIONS & ANSWERS
We recommend that you read the enclosed Proxy Statement/Prospectus. In addition to the detailed information in the Proxy Statement/Prospectus, the following questions and answers provide an overview of key features of the Reorganization.
Q. Why are we sending you the Proxy Statement/Prospectus?
A. On May 17, 2018, the Board of Trustees of the Target Trust (the "Board") approved the Reorganization of the Small Cap Value Opportunities Fund into the Small Cap Value Fund, subject to the approval of the Small Cap Value Opportunities Fund's shareholders. As a shareholder of the Small Cap Value Opportunities Fund, you are receiving the enclosed Proxy Statement/Prospectus in connection with a special shareholder meeting of the Target Trust with respect to the Small Cap Value Opportunities Fund. At the special meeting, shareholders of the Small Cap Value Opportunities Fund will be asked to vote on the approval of an Agreement and Plan of Reorganization providing for the reorganization of the Small Cap Value Opportunities Fund into the Small Cap Value Fund.
Q. Why has the Board recommended the Reorganization proposal?
A. The Board approved the Reorganization in order to eliminate the offering of multiple funds with the same investment goal and substantially similar principal investment strategies. The Reorganization has the potential to provide efficiencies and economies of scale for the combined Fund.
Q. What will happen to my existing shares?
A. Immediately after the Reorganization, you will own shares of the Small Cap Value Fund that are equal in total value to the shares of the Small Cap Value Opportunities Fund that you hold as of the close of business on the date of the Reorganization (although the number of shares and the net asset value per share may be different).
Q. How do the fees and expenses of the Funds compare?
A. The current advisory fee rate of the Small Cap Value Fund is lower than the advisory fee rate of the Small Cap Value Opportunities Fund at the lowest asset level and higher than the advisory fee rate of the Small Cap Value Opportunities Fund at the highest asset level. However, effective September 21, 2018, the advisory fee rate of the Small Cap Value Fund will be lowered contractually and, as a result, the advisory fee rate of the Small Cap Value Fund will be the same or lower than the advisory fee rate of the Small Cap Value Opportunities Fund at all asset levels.
In addition, each Fund has entered into an expense limitation agreement with Touchstone Advisors. Touchstone Advisors has contractually agreed to waive a portion of its fees and to reimburse certain Fund expenses in order to limit annual fund operating expenses for each Fund. The expense limitation for each share class of the Small Cap Value Fund is lower than the expense limitation for the corresponding share class of the Small Cap Value Opportunities Fund. Before giving effect to contractual fee waivers and expense reimbursements pursuant to the expense limitation agreement, the annual fund operating expenses of each class of shares of the Small Cap Value Fund (other than Class A shares) are higher than the annual fund operating expenses of the corresponding class of shares of the Small Cap Value Opportunities Fund based upon the annual fund operating expenses for the twelve months ended December 31, 2017 for the Small Cap Value Opportunities Fund and March 31, 2018 for the Small Cap Value Fund. The pro forma annual fund operating expenses before contractual fee waivers and expense reimbursements for each class of shares of the combined Fund are lower than the expenses of the corresponding class of shares of the Small Cap Value Opportunities Fund. The expense limitation agreement for the Small Cap Value Opportunities Fund is effective through October 29, 2018. The expense limitation agreement for the Small Cap Value Fund is effective through August 1, 2019.
For Classes A and C shares, the Funds have the same 12b-1 fees and sales charges. Class Y and Institutional Class shares of each Fund are not subject to any 12b-1 fees or sales charges.
The section titled “Summary-Reorganization-How do the Funds’ fees and expenses compare?” of the Proxy Statement/Prospectus compares the fees and expenses of the Funds in detail and the section titled “The Funds’ Management-Expense Limitation Agreement” provides additional information regarding the expense limitation agreements.
Q. How do the Funds’ investment goals and principal investment strategies compare?
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A. The Funds have the same investment goal and substantially similar principal investment strategies. The investment goal of the Funds is to seek long-term capital growth. Each Fund invests, under normal circumstances, at least 80% of its assets in common stocks of small capitalization companies. The section of the Proxy Statement/Prospectus titled “Summary—Reorganization—How do the Funds’ investment goals and principal investment strategies compare?” describes the investment goal and principal investment strategies of each Fund.
Q. Who will manage the Small Cap Value Fund after the Reorganization?
A. Touchstone Advisors serves as the investment advisor to both Funds. LMCG Investments LLC ("LMCG") is the sub-advisor to the Small Cap Value Fund and will continue to serve as sub-advisor following the completion of the Reorganization. Thompson, Siegel & Walmsley LLC (“TS&W”) is currently the sub-advisor to the Small Cap Value Opportunities Fund; however, effective July 30, 2018, LMCG will also be the sub-advisor to the Small Cap Value Opportunities Fund. For more information please see the sections of the Proxy Statement/Prospectus titled “Summary—Reorganization—Who will be the Advisor, Sub-Advisor, and Portfolio Manager of my Fund after the Reorganization?,” “The Funds’ Management—Investment Advisor” and “The Funds’ Management—Sub-Advisors and Portfolio Managers.”
Q. What are the primary federal income tax consequences of the Reorganization?
A. You are not expected to recognize any gain or loss for federal income tax purposes on the exchange of your shares of the Small Cap Value Opportunities Fund for shares of the Small Cap Value Fund in the Reorganization. Prior to the closing of the Reorganization, however, the Small Cap Value Opportunities Fund expects to distribute all of its net investment income and net capital gains, if any. Such a distribution may be taxable to shareholders of the Small Cap Value Opportunities Fund for federal income tax purposes. The section titled “Information About the Reorganization-Material Federal Income Tax Consequences” of the Proxy Statement/Prospectus provides additional information regarding the federal income tax consequences of the Reorganization.
In connection with the appointment of LMCG as the sub-advisor to the Small Cap Value Opportunities Fund, which is separate from the Reorganization and does not require shareholder approval, it is expected that the Small Cap Value Opportunities Fund will reposition a portion of its portfolio. If such transaction had occurred as of March 31, 2018, the Small Cap Value Opportunities Fund would have sold approximately 90.7% (or $77.3 million) of its investment portfolio. This repositioning will occur whether or not the Reorganization is consummated. The Small Cap Value Opportunities Fund may realize gains as a result of such repositioning, which may increase the net investment income and net capital gains to be distributed by the Small Cap Value Opportunities Fund as a taxable dividend to its shareholders prior to the Reorganization. Taking into account the repositioning of the Small Cap Value Opportunities Fund, the Small Cap Value Fund is not expected to sell a material portion (less than 5% of net assets) of the Small Cap Value Opportunities Fund’s assets received in the Reorganization. For more information, please see the sections of the Proxy Statement/Prospectus titled “Summary-Reorganization-What will be the primary federal income tax consequences of the Reorganization?,” “Summary-Reorganization-Will there be any repositioning costs?” and “Information About the Reorganization-Material Federal Income Tax Consequences.”
Q. Will I have to pay any sales load, commission, or other similar fee in connection with the Reorganization?
A. No, you will not pay any sales load, commission, or other similar fee in connection with the shares of the Small Cap Value Fund you will receive in the Reorganization, and any contingent deferred sales charge (“CDSC”) holding period on your shares of the Small Cap Value Opportunities Fund will carry over to the shares of the Small Cap Value Fund that you receive in the Reorganization. However, following the Reorganization, additional purchases, exchanges and redemptions of shares of the Small Cap Value Fund will be subject to any sales loads, commissions, and other similar fees.
Q. Who will pay the costs of the Reorganization?
A. Touchstone Advisors will pay the costs of the Reorganization (which do not include brokerage transaction costs associated with portfolio repositioning) whether or not the Reorganization is completed.
Q. What if I redeem my shares before the Reorganization takes place?
A. If you choose to redeem your shares before the Reorganization takes place, then the redemption will be treated as a normal sale of shares and, generally, will be a taxable transaction and may be subject to any applicable CDSC.
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Q. What will happen if shareholders of the Small Cap Value Opportunities Fund do not approve the Reorganization or the transaction is not completed?
A. If the shareholders of the Small Cap Value Opportunities Fund do not approve the Reorganization or other closing conditions are not satisfied or waived, the Reorganization will not be completed and the Board will consider other possible courses of action for the Small Cap Value Opportunities Fund, including continuing to operate the Fund as a stand-alone fund or merging the Fund into another Touchstone fund.
Q. When will the Reorganization occur?
A. The Reorganization is expected to be completed on or about September 21, 2018.
Q. Who should I contact for more information?
A. You can contact Shareholder Services at (800) 543-0407 for more information.
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TOUCHSTONE SMALL CAP VALUE OPPORTUNITIES FUND
a series of
TOUCHSTONE STRATEGIC TRUST
303 Broadway, Suite 1100
Cincinnati, Ohio 45202
(800) 543-0407
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 22, 2018
To the Shareholders:
Notice is hereby given that a special meeting of shareholders of Touchstone Small Cap Value Opportunities Fund (the “Small Cap Value Opportunities Fund”), a series of Touchstone Strategic Trust (the “Target Trust”), will be held at the offices of the Target Trust, 303 Broadway, Suite 1100, Cincinnati, Ohio, 45202 on August 22, 2018 at 11:00am, Eastern time, and any adjournment or postponement thereof (the “Special Meeting”). At the Special Meeting, shareholders of the Small Cap Value Opportunities Fund will be asked to consider the following proposal:
To approve an Agreement and Plan of Reorganization (the “Plan”) between the Small Cap Value Opportunities Fund, a series of the Target Trust, and the Touchstone Small Cap Value Fund (the “Small Cap Value Fund”), a series of Touchstone Funds Group Trust, providing for (i) the transfer of all of the assets of the Small Cap Value Opportunities Fund to the Small Cap Value Fund in exchange solely for Class A, Class C, Class Y and Institutional Class shares of the Small Cap Value Fund and the assumption by the Small Cap Value Fund of all of the liabilities of the Small Cap Value Opportunities Fund; and (ii) the pro rata distribution by class of the Small Cap Value Fund's shares to the Small Cap Value Opportunities Fund’s shareholders in complete liquidation and termination of the Small Cap Value Opportunities Fund (the “Reorganization”).
The Board of Trustees of the Target Trust has fixed the close of business on June 30, 2018 as the record date for determination of shareholders entitled to notice of and to vote at the Special Meeting.
Please complete, sign, date and return your proxy card in the postage paid return envelope or otherwise vote promptly regardless of the number of shares owned.
Shareholders who do not expect to attend the Special Meeting are requested to complete, sign, date and return the enclosed proxy card in the enclosed envelope, which needs no postage if mailed in the United States. Shareholders may also vote by telephone or via the Internet. Instructions for the proper execution of the proxy card are set forth immediately following this notice or, with respect to telephone or internet voting, on the proxy card. It is important that you vote promptly.
Jill T. McGruder | |
President | |
Touchstone Strategic Trust | |
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INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of assistance to you and avoid the time and expense to the Target Trust in validating your vote if you fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party signing should conform exactly to the name shown in the registration on the proxy card.
3. All Other Accounts: The capacity of the individual signing the proxy card should be indicated unless it is reflected in the form of registration. For example:
Registration | Valid Signature | |
Corporate Accounts | ||
(1) ABC Corp. | ABC Corp. | |
(2) ABC Corp | John Doe, Treasurer | |
(3) ABC Corp. c/o John Doe, Treasurer | John Doe | |
(4) ABC Corp. Profit Sharing Plan | John Doe, Trustee | |
Trust Accounts | ||
(1) ABC Trust | Jane B. Doe, Trustee | |
(2) Jane B. Doe, Trustee u/t/d 12/28/78 | Jane B. Doe | |
Custodial or Estate Accounts | ||
(1) John B. Smith, Cust. f/b/o John B. Smith, Jr. UGMA | John B. Smith | |
(2) Estate of John B. Smith | John B. Smith, Jr., Executor | |
Every shareholder’s vote is important!
Please complete, sign, date and return your proxy card today!
Your proxy vote is important!
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The information contained in this Proxy Statement/Prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Proxy Statement/Prospectus is not an offer to sell these securities, and it is not a solicitation of an offer to buy these securities, in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION,
DATED JUNE 11, 2018
PROXY STATEMENT/PROSPECTUS
JULY [ ], 2018
TOUCHSTONE SMALL CAP VALUE OPPORTUNITIES FUND
a series of
TOUCHSTONE STRATEGIC TRUST
303 Broadway, Suite 1100
Cincinnati, Ohio 45202
(800) 543-0407
TOUCHSTONE SMALL CAP VALUE FUND
a series of
TOUCHSTONE FUNDS GROUP TRUST
303 Broadway, Suite 1100
Cincinnati, Ohio 45202
(800) 543-0407
This Proxy Statement/Prospectus is being furnished to shareholders of the Touchstone Small Cap Value Opportunities Fund (the “Small Cap Value Opportunities Fund”), a series of Touchstone Strategic Trust (the “Target Trust”). The Board of Trustees of the Target Trust has called a special meeting of shareholders of the Small Cap Value Opportunities Fund to be held at the offices of the Target Trust, 303 Broadway, Suite 1100, Cincinnati, Ohio 42502, on August 22, 2018 at 11:00am, Eastern time, and any adjournment or postponement thereof (the “Special Meeting”). This Proxy Statement/Prospectus and the enclosed proxy are first being sent to shareholders of the Small Cap Value Opportunities Fund on or about July [ ], 2018.
Shareholders of record of the Small Cap Value Opportunities Fund as of the close of business on June 30, 2018 (the “Record Date”) are entitled to vote at the Special Meeting and any adjournments or postponements thereof. At the Special Meeting, shareholders of the Small Cap Value Opportunities Fund will be asked to consider a proposal to approve an Agreement and Plan of Reorganization (the “Plan”) between the Small Cap Value Opportunities Fund, a series of the Target Trust, and the Touchstone Small Cap Value Fund (the “Small Cap Value Fund”), a series of Touchstone Funds Group Trust (the "Acquiring Trust"), providing for (i) the transfer of all of the assets of the Small Cap Value Opportunities Fund to the Small Cap Value Fund in exchange solely for Class A, Class C, Class Y, and Institutional Class shares of the Small Cap Value Fund and the assumption by the Small Cap Value Fund of all of the liabilities of the Small Cap Value Opportunities Fund; and (ii) the pro rata distribution by class of the Small Cap Value Fund's shares to the Small Value Opportunities Fund's shareholders in complete liquidation and termination of the Small Cap Value Opportunities Fund (the “Reorganization”).
The Board of Trustees of each of the Target Trust and the Acquiring Trust (each a “Trust,” and together the “Trusts”) is comprised of the same individual board members. The Board of Trustees of the Target Trust (the “Board”) has approved the proposed Reorganization. In the Reorganization, you will receive shares of the Small Cap Value Fund in an amount equal in value to the shares of the Small Cap Value Opportunities Fund that you hold as of the close of business on the date of the Reorganization (although the number of shares and the net asset value per share may be different). As a shareholder of the Small Cap Value Opportunities Fund, you are being asked to vote to approve the Plan pursuant to which these transactions will be accomplished. The Reorganization is expected to be completed on or about September 21, 2018.
The Board has approved the proposed Reorganization and recommends that shareholders of the Small Cap Value Opportunities Fund vote in favor of the proposal to approve the Plan.
Each of the Small Cap Value Opportunities Fund and the Small Cap Value Fund is a series of a registered open-end investment company (mutual fund). The Small Cap Value Opportunities Fund and the Small Cap Value Fund are sometimes referred to in this Proxy Statement/Prospectus individually as a “Fund” and collectively as the “Funds.”
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This Proxy Statement/Prospectus, which you should read carefully and retain for future reference, presents the information that you should know about the Funds and the Reorganization for purposes of voting on the proposal. This document also serves as a prospectus for the offering and issuance of shares of the Small Cap Value Fund to be issued in the Reorganization. A Statement of Additional Information (“SAI”) dated July [l], 2018 relating to this Proxy Statement/Prospectus and the Reorganization has been filed with the U.S. Securities and Exchange Commission (the “SEC”) and is incorporated by reference into this Proxy Statement/Prospectus (meaning it is legally a part of this Proxy Statement/Prospectus).
Additional information concerning the Funds is contained in the documents described below, all of which have been filed with the SEC.
Information About the Small Cap Value Opportunities Fund and the Small Cap Value Fund: | How to Obtain this Information: | |
Prospectuses 1. Prospectus relating to the Touchstone Small Cap Value Opportunities Fund dated October 30, 2017, as supplemented through the date of this Proxy Statement/Prospectus (File Nos. 002-80859 and 811-03651). 2. Prospectus relating to the Touchstone Small Cap Value Fund dated January 30, 2018, as supplemented through the date of this Proxy Statement/Prospectus (File Nos. 033-70958 and 811-08104). Statements of Additional Information 1. SAI relating to the Touchstone Small Cap Value Opportunities Fund dated October 30, 2017, as supplemented through the date of this Proxy Statement/Prospectus (File Nos. 002-80859 and 811-03651). 2. SAI relating to the Touchstone Small Cap Value Fund dated January 30, 2018, as supplemented through the date of this Proxy Statement/Prospectus (File Nos. 033-70958 and 811-08104). Annual Reports 1. Annual Report relating to the Touchstone Small Cap Value Opportunities Fund for the fiscal year ended June 30, 2017 (File No. 811-03651). 2. Annual Report relating to the Touchstone Small Cap Value Fund for the fiscal year ended September 30, 2017 (File No. 811-08104). Semi-Annual Reports 1. Semi-Annual Report relating to the Touchstone Small Cap Value Opportunities Fund for the six months ended December 31, 2017 (File No. 811-03651). 2. Semi-Annual Report relating to the Touchstone Small Cap Value Fund for the six months ended March 31, 2018 (File No. 811-08104). | Copies are available upon request and without charge if you: · Write to Touchstone Strategic Trust, P.O. Box 9878, Providence, RI 02940; or · Call (800) 543-0407 toll-free; or · Download a copy from touchstoneinvestments.com/literature-center/fund-literature.htm. | |
You can also obtain copies of any of the above-referenced documents without charge on the EDGAR database on the SEC’s Internet site at http://www.sec.gov. Copies are available for a fee by electronic request at the following e-mail address: publicinfo@sec.gov, or from the Public Reference Section, Securities and Exchange Commission, Washington, D.C. 20549-1520.
This Proxy Statement/Prospectus sets forth the information shareholders of the Small Cap Value Opportunities Fund should know before voting on the Reorganization (in effect, investing in shares of the Small Cap Value Fund) and constitutes an offering of shares of beneficial interest, $0.01 par value per share, of the Small Cap Value Fund. Please read this Proxy Statement/Prospectus carefully and retain it for future reference.
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In addition, this document serves as an Information Statement with respect to the appointment of LMCG Investments LLC ("LMCG") as the sub-advisor to the Small Cap Value Opportunities Fund, effective as of July 30, 2018.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT DETERMINED THAT THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE, NOR HAS IT APPROVED OR DISAPPROVED THESE SECURITIES. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A CRIMINAL OFFENSE.
An investment in the Small Cap Value Fund:
· is not a deposit of, or guaranteed by, any bank
· is not insured by the FDIC, the Federal Reserve Board or any other government agency
· is not endorsed by any bank or government agency
· involves investment risk, including possible loss of your original investment
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TABLE OF CONTENTS
Page
SUMMARY OF INFORMATION REGARDING THE REORGANIZATION | 12 |
Background | 12 |
Reorganization | 12 |
COMPARISON OF INVESTMENT GOALS, PRINCIPAL INVESTMENT STRATEGIES AND RISKS | 20 |
Investment Goals and Principal Investment Strategies | 20 |
Principal Risks | 22 |
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION | 22 |
Reasons for the Reorganization | 22 |
Agreement and Plan of Reorganization | 23 |
Description of the Securities to be Issued | 24 |
Material Federal Income Tax Consequences | 24 |
Pro Forma Capitalization | 26 |
THE FUNDS’ MANAGEMENT | 27 |
Investment Advisor | 27 |
Sub-Advisors and Portfolio Managers | 28 |
Advisory and Sub-Advisory Agreement Approval | 29 |
Expense Limitation Agreement | 29 |
Other Service Providers | 30 |
CHOOSING A CLASS OF SHARES | 30 |
Class A Shares | 30 |
Class C Shares | 31 |
Class Y Shares | 31 |
Institutional Class Shares | 31 |
Buying and Selling Fund Shares | 31 |
Exchange Privileges of the Funds | 32 |
Distribution Policy | 33 |
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS | 33 |
INFORMATION ON SHAREHOLDERS’ RIGHTS | 34 |
VOTING INFORMATION CONCERNING THE SPECIAL MEETING | 38 |
LEGAL MATTERS | 39 |
ADDITIONAL INFORMATION | 39 |
OTHER BUSINESS | 40 |
FINANCIAL HIGHLIGHTS | 41 |
OTHER INFORMATION REGARDING APPOINTMENT OF LMCG AS SUB-ADVISOR TO THE SMALL CAP VALUE OPPORTUNITIES FUND | 49 |
Background | 49 |
Board Considerations | 49 |
Information About the Sub-Advisor | 50 |
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Table of Contents (Continued)
Description of the Sub-Advisory Agreement | 50 |
EXHIBIT A: | FORM OF AGREEMENT AND PLAN OF REORGANIZATION 52 |
EXHIBIT B: | FUNDAMENTAL INVESTMENT LIMITATIONS 65 |
EXHIBIT C: | CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES 68 |
EXHIBIT D: | FORM OF SUB-ADVISORY AGREEMENT 69 |
EXHIBIT E: | PRIOR PERFORMANCE FOR SIMILAR ACCOUNTS MANAGED BY LMCG FOR THE TOUCHSTONE SMALL CAP VALUE FUND 78 |
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SUMMARY OF INFORMATION REGARDING THE REORGANIZATION
This section summarizes the primary features of the Reorganization. It may not contain all of the information that is important to you. To understand the Reorganization, you should read this entire Proxy Statement/Prospectus and the exhibits. This summary is qualified in its entirety by reference to the additional information contained elsewhere in this Proxy Statement/Prospectus, the SAI, and the Plan, a form of which is attached to this Proxy Statement/Prospectus as Exhibit A.
Background
Thompson, Siegel & Walmsley LLC (“TS&W”) is currently the sub-advisor to the Small Cap Value Opportunities Fund. At a meeting on May 17, 2018, the Board approved the appointment of LMCG Investments, LLC ("LMCG") to serve as sub-advisor to the Small Cap Value Opportunities Fund effective as of July 30, 2018. The sub-advisory agreement with TS&W will terminate on July 29, 2018.
Reorganization
What are the reasons for the Reorganization?
The Small Cap Value Opportunities Fund and the Small Cap Value Fund are currently managed by different sub-advisors, but have the same investment goals and substantially similar principal investment strategies. At the time of the Reorganization, the Funds will be managed by the same sub-advisor. The Reorganization is designed to eliminate the offering of multiple funds with the same investment goal and substantially similar principal investment strategies, and has the potential to provide efficiencies and economies of scale for the combined Fund.
At the May 17, 2018 meeting, the Board of Trustees of each Trust, including those trustees who are not “interested persons,” as such term is defined in the Investment Company Act of 1940, as amended (the “1940 Act”) (the “Independent Trustees”), determined that the Reorganization was in the best interests of its respective Fund and that the interests of existing shareholders of its Fund will not be diluted as a result of the Reorganization. The Board approved the Reorganization and recommended that shareholders of the Small Cap Value Opportunities Fund approve the Reorganization at the Special Meeting. For more information, please see the section titled “Information About the Reorganization-Reasons for the Reorganization.”
What are the key features of the Reorganization?
The Plan sets forth the key features of the Reorganization. The Plan provides for the following:
• | the transfer of all of the assets of the Small Cap Value Opportunities Fund to the Small Cap Value Fund in exchange solely for Class A, Class C, Class Y and Institutional Class shares of the Small Cap Value Fund and the assumption by the Small Cap Value Fund of all of the liabilities of the Small Cap Value Opportunities Fund; |
• | the pro rata distribution by class of the Small Cap Value Fund's shares to the Small Cap Value Opportunities Fund shareholders in complete liquidation and termination of the Small Cap Value Opportunities Fund; and |
• | the receipt of an opinion of counsel that the Reorganization qualifies as a tax-free reorganization for federal income tax purposes. |
The Reorganization is expected to be completed on or about September 21, 2018.
After the Reorganization, what shares of the Small Cap Value Fund will I own?
Each Fund is a series of a registered open-end management investment company (i.e., a mutual fund). In the Reorganization, you will receive the same class of shares in the Small Cap Value Fund as you currently own in the Small Cap Value Opportunities Fund. The Small Cap Value Fund shares you receive will have the same total value as your shares of the Small Cap Value Opportunities Fund, in each case measured as of the close of business on the date of the Reorganization.
How do the Funds’ investment goals and principal investment strategies compare?
The Funds have the same investment goals and substantially similar principal investment strategies, as outlined below. The Funds also have similar fundamental investment limitations, which are set forth in Exhibit B.
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The investment goal of each Fund is to seek long-term capital growth. Each Fund invests, under normal market conditions, at least 80% of its assets in common stocks of small capitalization companies. For purposes of each Fund, small capitalization companies are those companies with market capitalizations at the time of investment similar to the market capitalizations of companies in the Russell 2000® Value Index (between approximately $7 million and $8.5 billion as of March 31, 2018). The size of the companies in the Russell 2000® Value Index will change with market conditions. This is a non-fundamental investment policy that a Fund can change upon at least 60-days' prior notice to its shareholders. Each Fund is classified as a diversified fund.
Small Cap Value Opportunities Fund. For purposes of the Small Cap Value Opportunities Fund, equity securities include common and preferred stocks. The Fund may invest up to 15% of its assets in foreign equity securities, including American Depositary Receipts ("ADRs") or other depositary receipts.
TS&W seeks to invest in companies it believes present a value or potential worth that is not recognized by prevailing market prices or that have experienced some fundamental changes and are intrinsically undervalued by the investment community. TS&W’s analysts also explore numerous factors that might affect the outlook for a company. They evaluate publicly available information, including, but not limited to, sell-side research, company filings, and trade periodicals. The analysts may speak with company management to hear their perspectives and outlook on the pertinent business issues. TS&W's investment process may result in exposure to one or a group of related sectors. TS&W generally considers selling a security when the catalyst for the investment is no longer valid, when TS&W believes that another stock will have a higher expected return, or for portfolio risk management. The Fund generally engages in active and frequent trading of portfolio securities as part of its principal investment strategy.
Beginning on July 30, 2018, LMCG will serve as the Fund's sub-advisor.
Small Cap Value Fund. The Fund's sub-advisor, LMCG, employs a fundamental investment process which seeks to identify companies which it believes are selling at a discount to their intrinsic value. LMCG generally limits the Fund’s weight in a sector to 10% over or under the sector’s weight in the Russell 2000® Value Index. The Fund will hold approximately 80 to 115 securities. LMCG will generally sell a security when it no longer passes the valuation screens, reaches a price target, or its prospects for appreciation have diminished.
How do the Funds’ fees and expenses compare?
Comparative Fee Tables. The following tables allow you to compare the various fees and expenses that you may pay for buying and holding shares of each Fund. Pro forma expenses project anticipated expenses of the Small Cap Value Fund following the Reorganization. Actual expenses may be greater or less than those shown. The shareholder transaction expenses presented below show the maximum sales charge (load) on purchases of Fund shares as a percentage of offering price. The Small Cap Value Opportunities Fund shareholders will not pay any front-end sales charge on any shares of the Small Cap Value Fund received as part of the Reorganization. However, the holding period related to any contingent deferred sales charge (“CDSC”) applicable to shares of the Small Cap Value Opportunities Fund will carry over to shares of the Small Cap Value Fund received as part of the Reorganization. For information regarding sales charge discounts and waivers for which you may qualify with respect to future purchases of Class A shares of the Small Cap Value Fund, please see the section titled “Choosing a Class of Shares-Class A Shares”. Expense ratios for the Small Cap Value Opportunities Fund reflect annual fund operating expenses for the twelve months ended December 31, 2017. Expense ratios for the Small Cap Value Fund reflect annual fund operating expenses for the twelve months ended March 31, 2018. Pro forma numbers are estimated as if the Reorganization had been completed as of the beginning of the 12-month period ended March 31, 2018 and do not include the estimated costs of the Reorganization (which do not include brokerage transaction costs associated with portfolio repositioning), which will be borne by Touchstone Advisors and not the Funds, whether or not the Reorganization is completed.
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Small Cap Value Opportunities Fund Class A | Small Cap Value Fund Class A | Small Cap Value Fund after Reorganization (pro forma) Class A | ||||||||
Shareholder Fees (fees paid directly from your investment) | ||||||||||
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price) | 5.75 | % | 5.75 | % | 5.75 | % | ||||
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or the amount redeemed, whichever is less) | None | None | None | |||||||
Wire Redemption Fee | Up to $15 | Up to $15 | Up to $15 | |||||||
Annual Fund Operating Expenses (expenses that you pay each year as a % of the value of your investment) | ||||||||||
Management Fees | 0.95 | % | 0.90 | % | 0.85 | % | (1) | |||
Distribution and/or Shareholder Service (12b-1) Fees | 0.25 | % | 0.25 | % | 0.25 | % | ||||
Other Expenses | 1.10 | % | 0.77 | % | 0.60 | % | (2) | |||
Acquired Fund Fees and Expenses (AFFE) | 0.00 | % | 0.13 | % | 0.00 | % | (3) | |||
Total Annual Fund Operating Expenses | 2.30 | % | 2.05 | % | 1.70 | % | ||||
Fee Waiver and/or Expense Reimbursement(4) | (0.87 | )% | (0.54 | )% | (0.32 | )% | ||||
Total Annual Fund Operating Expenses After Fee Waiver or Expense Reimbursement(4) | 1.43 | % | 1.51 | % | 1.38 | % | ||||
Small Cap Value Opportunities Fund Class C | Small Cap Value Fund Class C | Small Cap Value Fund after Reorganization (pro forma) Class C | ||||||||
Shareholder Fees (fees paid directly from your investment) | ||||||||||
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or the amount redeemed, whichever is less) | 1.00 | % | 1.00 | % | 1.00 | % | ||||
Wire Redemption Fee | Up to $15 | Up to $15 | Up to $15 | |||||||
Annual Fund Operating Expenses (expenses that you pay each year as a % of the value of your investment) | ||||||||||
Management Fees | 0.95 | % | 0.90 | % | 0.85 | % | (1) | |||
Distribution and/or Shareholder Service (12b-1) Fees | 1.00 | % | 1.00 | % | 1.00 | % | ||||
Other Expenses | 1.92 | % | 1.90 | % | 1.37 | % | (2) | |||
Acquired Fund Fees and Expenses (AFFE) | 0.00 | % | 0.13 | % | 0.00 | % | (3) | |||
Total Annual Fund Operating Expenses | 3.87 | % | 3.93 | % | 3.22 | % | ||||
Fee Waiver and/or Expense Reimbursement(4) | (1.69 | )% | (1.67 | )% | (1.09 | )% | ||||
Total Annual Fund Operating Expenses After Fee Waiver or Expense Reimbursement(4) | 2.18 | % | 2.26 | % | 2.13 | % | ||||
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Small Cap Value Opportunities Fund Class Y | Small Cap Value Fund Class Y | Small Cap Value Fund after Reorganization (pro forma) Class Y | ||||||||
Shareholder Fees (fees paid directly from your investment) | ||||||||||
Wire Redemption Fee | Up to $15 | Up to $15 | Up to $15 | |||||||
Annual Fund Operating Expenses (expenses that you pay each year as a % of the value of your investment) | ||||||||||
Management Fees | 0.95 | % | 0.90 | % | 0.85 | % | (1) | |||
Other Expenses | 0.35 | % | 1.10 | % | 0.37 | % | (2) | |||
Acquired Fund Fees and Expenses (AFFE) | 0.00 | % | 0.13 | % | 0.00 | % | (3) | |||
Total Annual Fund Operating Expenses | 1.30 | % | 2.13 | % | 1.22 | % | ||||
Fee Waiver and/or Expense Reimbursement(4) | (0.12 | )% | (0.87 | )% | (0.09 | )% | ||||
Total Annual Fund Operating Expenses After Fee Waiver or Expense Reimbursement(4) | 1.18 | % | 1.26 | % | 1.13 | % | ||||
Small Cap Value Opportunities Fund Institutional Class | Small Cap Value Fund Institutional Class | Small Cap Value Fund after Reorganization (pro forma) Institutional Class | ||||||||
Shareholder Fees (fees paid directly from your investment) | ||||||||||
Wire Redemption Fee | Up to $15 | Up to $15 | Up to $15 | |||||||
Annual Fund Operating Expenses (expenses that you pay each year as a % of the value of your investment) | ||||||||||
Management Fees | 0.95 | % | 0.90 | % | 0.85 | % | (1) | |||
Other Expenses | 0.56 | % | 0.57 | % | 0.40 | % | (2) | |||
Acquired Fund Fees and Expenses (AFFE) | 0.00 | % | 0.13 | % | 0.00 | % | (3) | |||
Total Annual Fund Operating Expenses | 1.51 | % | 1.60 | % | 1.25 | % | ||||
Fee Waiver and/or Expense Reimbursement(4) | (0.41 | )% | (0.49 | )% | (0.27 | )% | ||||
Total Annual Fund Operating Expenses After Fee Waiver or Expense Reimbursement(4) | 1.10 | % | 1.11 | % | 0.98 | % | ||||
(1) Management Fees have been restated to reflect contractual changes to the Fund’s Investment Advisory Agreement effective September 21, 2018.
(2) Other Expenses are estimated based on fees and expenses of the Small Cap Value Opportunities Fund and Small Cap Value Fund.
(3) Acquired Fund Fees and Expenses are estimated based on fees and expenses of the Small Cap Value Opportunities Fund and Small Cap Value Fund. The Small Cap Value Fund had AFFE of 0.13% for the twelve months ended March 31, 2018. The pro forma Acquired Fund Fees and Expenses of the Small Cap Value Fund reflects the holdings of the Fund as of the date of the Proxy Statement/Prospectus and are based on a restatement of the Fund's AFFE that reflects the Fund's current investment strategy and present intent to not invest in underlying companies.
(4) Touchstone Advisors and each Trust have entered into a contractual expense limitation agreement whereby Touchstone Advisors will waive a portion of its fees or reimburse certain Fund expenses (excluding dividend and interest expenses relating to short sales; interest; taxes; brokerage commissions and other transaction costs; portfolio transaction and investment related expenses, including expenses associated with the Fund's liquidity providers; other expenditures which are capitalized in accordance with U.S. generally accepted accounting principles; the cost of “Acquired Fund Fees and Expenses,” if any; and other extraordinary expenses not incurred in the ordinary course of business) in order to limit annual Fund operating expenses to 1.43%, 2.18%, 1.18% and 1.10% of average daily net assets for Classes A, C, Y and Institutional Class shares, respectively, of the Small Cap Value Opportunities Fund and to 1.38%, 2.13%, 1.13% and 0.98% of average daily net assets for Classes A, C, Y and Institutional Class shares, respectively, of the Small Cap Value Fund. Fee waivers and expense reimbursements are calculated and applied monthly, based on each Fund’s average net assets during such month. The expense limitation agreement for the Small Cap Value Opportunities Fund is effective through October 29, 2018 and is not expected to be renewed. The expense limitation agreement for the Small Cap Value Fund is effective through August 1, 2019. Each agreement can be terminated by a vote of the Board of Trustees if it deems the termination to be beneficial to the Fund. The terms of the
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contractual expense limitation agreements provide that Touchstone Advisors is entitled to recoup, subject to approval by the Fund's Board of Trustees, such amounts waived or reimbursed by a Fund for a period of up to three years from the date on which Touchstone Advisors reduced its compensation or assumed expenses for the Fund. The Fund will make repayments to Touchstone Advisors only if such repayment does not cause the Fund's annual fund operating expenses (after the repayment is taken into account) to exceed both (1) the expense cap in place when such amounts were waived or reimbursed and (2) the Fund’s current expense limitation. See the discussion titled “The Funds’ Management—Expense Limitation Agreement” in this Proxy Statement/Prospectus for more information.
Expense Example. The example is intended to help you compare the cost of investing in each Fund and the Small Cap Value Fund (pro forma), assuming the Reorganization takes place. The example assumes that you invest $10,000 for the time periods indicated and redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year, that the operating expenses remain as shown above and that the contractual expense limitation agreement for the Small Cap Value Fund after the Reorganization (pro forma) is in place for the first year. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
Assuming Redemption | Assuming No Redemption | |||||||||||||||||||||||||||||||
Classes | 1 Year | 3 Years | 5 Years | 10 Years | 1 Year | 3 Years | 5 Years | 10 Years | ||||||||||||||||||||||||
Class A | ||||||||||||||||||||||||||||||||
Small Cap Value Opportunities Fund | $ | 795 | $ | 1,252 | $ | 1,734 | $ | 3,059 | $ | 795 | $ | 1,252 | $ | 1,734 | $ | 3,059 | ||||||||||||||||
Small Cap Value Fund | $ | 720 | $ | 1,132 | $ | 1,568 | $ | 2,777 | $ | 720 | $ | 1,132 | $ | 1,568 | $ | 2,777 | ||||||||||||||||
Small Cap Value Fund after Reorganization (pro forma) | $ | 707 | $ | 1,051 | $ | 1,417 | $ | 2,443 | $ | 707 | $ | 1,051 | $ | 1,417 | $ | 2,443 | ||||||||||||||||
Class C | ||||||||||||||||||||||||||||||||
Small Cap Value Opportunities Fund | $ | 489 | $ | 1,181 | $ | 1,990 | $ | 4,096 | $ | 389 | $ | 1,181 | $ | 1,990 | $ | 4,096 | ||||||||||||||||
Small Cap Value Fund | $ | 329 | $ | 1,045 | $ | 1,879 | $ | 4,043 | $ | 229 | $ | 1,045 | $ | 1,879 | $ | 4,043 | ||||||||||||||||
Small Cap Value Fund after Reorganization (Pro Forma Combined) | $ | 316 | $ | 890 | $ | 1,589 | $ | 3,447 | $ | 216 | $ | 890 | $ | 1,589 | $ | 3,447 | ||||||||||||||||
Class Y | ||||||||||||||||||||||||||||||||
Small Cap Value Opportunities Fund | $ | 132 | $ | 412 | $ | 713 | $ | 1,568 | $ | 132 | $ | 412 | $ | 713 | $ | 1,568 | ||||||||||||||||
Small Cap Value Fund | $ | 128 | $ | 583 | $ | 1,064 | $ | 2,393 | $ | 128 | $ | 583 | $ | 1,064 | $ | 2,393 | ||||||||||||||||
Small Cap Value Fund after Reorganization (Pro Forma Combined) | $ | 115 | $ | 378 | $ | 662 | $ | 1,469 | $ | 115 | $ | 378 | $ | 662 | $ | 1,469 | ||||||||||||||||
Institutional Class | ||||||||||||||||||||||||||||||||
Small Cap Value Opportunities Fund | $ | 154 | $ | 477 | $ | 824 | $ | 1,802 | $ | 154 | $ | 477 | $ | 824 | $ | 1,802 | ||||||||||||||||
Small Cap Value Fund | $ | 113 | $ | 457 | $ | 825 | $ | 1,859 | $ | 113 | $ | 457 | $ | 825 | $ | 1,859 | ||||||||||||||||
Small Cap Value Fund after Reorganization (Pro Forma Combined) | $ | 100 | $ | 370 | $ | 660 | $ | 1,488 | $ | 100 | $ | 370 | $ | 660 | $ | 1,488 | ||||||||||||||||
Portfolio Turnover. Each Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Total Annual Fund Operating Expenses or in the Expense Example, affect the Funds’ performance. As of its most recent fiscal year end, the portfolio turnover rate for the Small Cap Value Opportunities Fund was 59% of the average value of its portfolio. As of its most recent fiscal year end, the portfolio turnover rate for the Small Cap Value Fund was 63% of the average value of its portfolio.
How do the Funds’ performance records compare?
The bar charts and performance tables below illustrate some indication of the risks of investing in the Funds by showing changes in the Fund performance from year to year as compared to the Russell 2000® Value Index (the benchmark for each
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Fund). The bar charts do not reflect any sales charges, which would reduce your return. The performance tables do reflect any applicable sales charges. The Funds’ past performance (before and after taxes) does not indicate how the Funds will perform in the future. Updated performance is available at no cost by visiting TouchstoneInvestments.com or by calling (800) 543-0407.
Touchstone Small Cap Value Opportunities Fund—Class A Shares Total Return as of December 31
Best Quarter: Third Quarter 2009 17.60% | Worst Quarter: Fourth Quarter 2008 (24.42)% | |
The Small Cap Value Opportunities Fund’s calendar year-to-date total return for Class A shares as of March 31, 2018 was (1.47)%.
Average Annual Total Returns
For the periods ended December 31, 2017
Small Cap Value Opportunities Fund | ||||||||||
1 Year | 5 Years | 10 Years | ||||||||
Class A | ||||||||||
Return Before Taxes | (3.17 | )% | 9.19 | % | 5.08 | % | ||||
Return After Taxes on Distributions | (3.17 | )% | 6.58 | % | 3.30 | % | ||||
Return After Taxes on Distributions and Sale of Fund Shares | (1.79 | )% | 6.42 | % | 3.59 | % | ||||
Class C | ||||||||||
Return Before Taxes | 0.97 | % | 9.67 | % | 5.05 | % | ||||
Class Y | ||||||||||
Return Before Taxes | 2.94 | % | 10.77 | % | 5.98 | % | ||||
Institutional Class | ||||||||||
Return Before Taxes | 3.06 | % | 10.89 | % | 5.79 | % | ||||
Russell 2000® Value Index (reflects no deductions for fees, expenses or taxes) | 7.84 | % | 13.01 | % | 8.17 | % | ||||
Performance of the Small Cap Value Opportunities Fund reflects the performance of TS&W, which has served as the Fund’s sub-advisor since it commenced operations in July 2003. On or about July 30, 2018, the Fund will be sub-advised by LMCG.
The inception dates of Class A shares, Class C shares, Class Y shares, and Institutional Class shares were July 31, 2003, April 12, 2012, July 25, 2003 and December 9, 2008, respectively. Class C and Institutional Class shares’ performance was calculated
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using the historical performance of Class Y shares for the periods prior to April 12, 2012 and December 9, 2008, respectively. Performance for these periods has been restated to reflect the impact of the fees and expenses applicable to Class C and Institutional Class shares.
Before the Small Cap Value Opportunities Fund commenced operations, all of the assets and liabilities of the Old Mutual TS&W Small Cap Value Fund (the “TS&W Predecessor Fund”) were transferred to the Small Cap Value Opportunities Fund in a tax-free reorganization on April 16, 2012. As a result of that reorganization, the Small Cap Value Opportunities Fund assumed the performance and accounting history of the TS&W Predecessor Fund prior to the date of the reorganization. For more information on the prior history of the Small Cap Value Opportunities Fund, please see the section titled “The Trust” in the Fund’s SAI.
Touchstone Small Cap Value Fund—Class A Shares Total Return as of December 31
Best Quarter: Third Quarter 2009 17.14% | Worst Quarter: Fourth Quarter 2008 (24.10)% | |
The Small Cap Value Fund’s calendar year-to-date total return for Class A shares as of March 31, 2018 was (4.11)%.
Average Annual Total Returns
For the periods ended December 31, 2017
Small Cap Value Fund | ||||||||||
1 Year | 5 Years | 10 Years | ||||||||
Class A | ||||||||||
Return Before Taxes | 1.06 | % | 8.47 | % | 5.34 | % | ||||
Return After Taxes on Distributions | 1.05 | % | 7.82 | % | 4.96 | % | ||||
Return After Taxes on Distributions and Sale of Fund Shares | 0.61 | % | 6.57 | % | 4.22 | % | ||||
Class C | ||||||||||
Return Before Taxes | 5.36 | % | 8.95 | % | 5.18 | % | ||||
Class Y | ||||||||||
Return Before Taxes | 7.49 | % | 10.04 | % | 6.17 | % | ||||
Institutional Class | ||||||||||
Return Before Taxes | 7.63 | % | 10.19 | % | 6.26 | % | ||||
Russell 2000® Value Index (reflects no deductions for fees, expenses or taxes) | 7.84 | % | 13.01 | % | 8.17 | % | ||||
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On July 1, 2016, the Fund changed its investment sub-advisor to LMCG. Consequently, prior period performance may have been different if the Fund had not been managed by the prior sub-advisor using that sub-advisor’s small cap value strategy. In addition, the Fund's performance after the change in sub-advisor may be different as a result. For a discussion of the “Prior Performance for Similar Accounts Managed by LMCG for the Touchstone Small Cap Value Fund,” see Exhibit E to this Proxy Statement/Prospectus.
The inception date of each of Class A shares, Class C shares, Class Y shares, and Institutional Class shares was March 1, 2011, and the performance for each Class was calculated using the historical performance of Class Z shares for the periods prior to March 1, 2011. Performance for these periods has been restated to reflect the impact of the fees and expenses applicable to Class A, Class C, Class Y and Institutional Class shares.
With respect to both Funds, after-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Your actual after-tax returns may differ from those shown and depend on your tax situation. The after-tax returns do not apply to shares held in an individual retirement account ("IRA"), 401(k), or other tax-advantaged account. The after-tax returns shown in the table are for Class A shares only. The after-tax returns for other classes of shares offered by the Funds will differ from the Class A shares' after-tax returns.
Will I be able to purchase, redeem, and exchange shares the same way?
Yes, after the Reorganization you will be able to purchase, redeem, and exchange shares of the Small Cap Value Fund the same way that you purchase, redeem, and exchange shares of the Small Cap Value Opportunities Fund. For more information, see the sections titled “Choosing a Class of Shares—Buying and Selling Fund Shares” and “Choosing a Class of Shares—Exchange Privileges of the Funds.”
Will I be able to receive distributions the same way?
Like the Small Cap Value Opportunities Fund, the Small Cap Value Fund intends to distribute to its shareholders substantially all of its net investment income and capital gains. The Small Cap Value Opportunities Fund declares and pays any net investment income dividends annually. The Small Cap Value Fund declares and pays any net investment income dividends quarterly. Each Fund makes distributions of capital gains, if any, at least annually.
After the Reorganization, any income and capital gains will be reinvested in the class of shares of the Small Cap Value Fund you receive in the Reorganization or, if you have so elected, distributed in cash. Each Fund intends to make distributions that may be taxed as ordinary income or capital gains except when shares are held through a tax-advantaged account, such as a 401(k) plan or an IRA. Withdrawals from a tax-advantaged account, however, may be taxable. For more information, see the section titled “Choosing a Class of Shares-Distribution Policy.”
Who will be the Advisor, Sub-Advisor, and Portfolio Manager of my Fund after the Reorganization?
For each Fund, Touchstone Advisors serves as the investment advisor.
LMCG serves as sub-advisor to the Small Cap Value Fund, with R. Todd Vingers serving as portfolio manager. Mr. Vingers joined LMCG in 2002. He is the Managing Director of Value Equities at LMCG and is responsible for the management of the Fund. Previously, Mr. Vingers served as portfolio manager at American Century Investments. After the Reorganization, Touchstone Advisors will continue to serve as investment advisor to the Small Cap Value Fund, with LMCG and Mr. Vingers continuing in their capacity as sub-advisor and portfolio manager, respectively.
For additional information regarding Touchstone Advisors, the sub-advisors, and the portfolio manager, please see the section titled “The Funds’ Management—Investment Advisor” and “The Funds’ Management—Sub-Advisors and Portfolio Managers.”
What will be the primary federal income tax consequences of the Reorganization?
The Reorganization is expected to qualify as a tax-free reorganization for federal income tax purposes. If the Reorganization so qualifies, then generally no gain or loss will be recognized for federal income tax purposes by the Funds or their respective shareholders as a direct result of the Reorganization. As a condition to the closing of the Reorganization, the Funds will each receive an opinion from the law firm of Vedder Price P.C. that the Reorganization qualifies as a tax-free reorganization within the meaning of Section 368(a) of the United States Internal Revenue Code of 1986, as amended (the “Code”). The opinion,
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however, is not binding on the Internal Revenue Service (the “IRS”) or any court and thus does not preclude the IRS or a court from taking a contrary position. See “Information About the Reorganization—Material Federal Income Tax Consequences” for more information on the material federal income tax consequences of the Reorganization.
Will there be any repositioning costs?
It is expected that, in connection with the transition from TS&W, which currently serves as the sub-advisor to the Small Cap Value Opportunities Fund, to LMCG, which will be appointed as sub-advisor to the Small Cap Value Opportunities Fund effective July 30, 2018, the Small Cap Value Opportunities Fund will reposition a portion of its portfolio. If the transaction occurred as of March 31, 2018, the Small Cap Value Opportunities Fund would have sold approximately 90.7% (or $77.3 million) of its investment portfolio. The appointment of LMCG as sub-advisor is separate from the Reorganization and does not require shareholder approval, and the repositioning will occur whether or not the Reorganization is consummated. Taking into account the repositioning of the Small Cap Value Opportunities Fund, the Small Cap Value Fund is not expected to sell a material portion (less than 5% of net assets) of the Small Cap Value Opportunities Fund’s assets received in the Reorganization.
It is estimated that portfolio repositioning in connection with the appointment of LMCG as the sub-advisor would have resulted in brokerage commissions or other transaction costs of approximately $147,866 for the Small Cap Value Opportunities Fund, based on average commission rates charged by transition managers, if such sales occurred on March 31, 2018, and realized gains of approximately $10.4 million, or approximately $2.26 per share, if the securities had been sold on March 31, 2018. The gains realized by the Small Cap Value Opportunities Fund as a result of this repositioning may increase the net investment income and net capital gains to be distributed by the Small Cap Value Opportunities Fund as a taxable dividend to its shareholders prior to the Reorganization. The amount of a Fund’s distribution may be reduced by the Fund’s capital loss carryforward balances, which are subject to limitations.
COMPARISON OF INVESTMENT GOALS, PRINCIPAL INVESTMENT STRATEGIES AND RISKS
The Funds have the same investment goals and substantially similar principal investment strategies and risk factors, which are presented in the table below. Effective July 30, 2018, LMCG will be the sub-advisor to the Small Cap Value Opportunities Fund pursuant to a sub-advisory agreement with Touchstone Advisors and will use its investment process to manage the Fund's assets pursuant to the Fund's investment strategy.
Investment Goals and Principal Investment Strategies
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Small Cap Value Opportunities Fund | Small Cap Value Fund | |
Investment Goal | The Fund seeks to provide investors with long-term capital growth. | The Fund seeks long-term capital growth. |
Principal Investment Strategy | The Fund normally invests at least 80% of its assets in equity securities of small-cap companies. This is a non-fundamental investment policy that can be changed by the Fund upon 60 days’ prior notice to shareholders. For purposes of this Fund, small-cap companies are those companies with market capitalizations at the time of investment similar to the market capitalizations of companies in the Russell 2000® Value Index (between approximately $7 million and $8.5 billion as of March 31, 2018). The size of the companies in the Russell 2000® Value Index will change with market conditions. Equity securities include common and preferred stocks. The Fund may invest up to 15% of its assets in foreign equity securities, including American Depositary Receipts ("ADRs") or other depositary receipts. | The Fund invests, under normal market conditions, at least 80% of its assets in common stocks of companies with small market capitalizations. This is a non-fundamental investment policy that can be changed by the Fund upon 60 days’ prior notice to shareholders. For purposes of the Fund, a small capitalization company has a market capitalization at the time of purchase within the range represented in the Russell 2000® Value Index (between approximately $7 million and $8.5 billion as of March 31, 2018) at the time of purchase. The market capitalization range of the Russell 2000® Value Index will change with market conditions. The Fund will hold approximately 80 to 115 securities. |
TS&W, the Fund’s sub-advisor, primarily invests in common stocks. TS&W seeks to invest in companies it believes present a value or potential worth that is not recognized by prevailing market prices or that have experienced some fundamental changes and are intrinsically undervalued by the investment community. TS&W’s small-cap value process uses a combination of quantitative and qualitative methods with a front-end Four-Factor Screen. Factors one and two of the screen attempt to assess a company’s discount to private market value relative to other small-cap stocks. The third factor considers the relative earnings prospects of the company. The fourth factor involves looking at the company’s recent price action. TS&W's investment process may result in exposure to one or a group of related sectors. TS&W’s analysts also explore numerous factors that might affect the outlook for a company. They evaluate publicly available information, including, but not limited to, sell-side research, company filings, and trade periodicals. The analysts may speak with company management to hear their perspectives and outlook on the pertinent business issues. TS&W's investment process may result in exposure to one or a group of related sectors. | The Fund's sub-advisor, LMCG, employs a fundamental investment process which seeks to identify companies which it believes are selling at a discount to their intrinsic value. In the first step of the process, LMCG uses a series of five valuation screens to define the investable universe. In evaluating and selecting potential investments for the Fund, LMCG completes in-depth research and analysis on the securities in the investable universe in an effort to identify leading companies selling at attractive valuations. The research and analysis include an examination of financial statements and assessments of the management team, the company’s competitive strategy and its current market position. LMCG generally limits the Fund’s weight in a sector to 10% over or under the sector’s weight in the Russell 2000 ® Value Index. | |
TS&W generally considers selling a security when the catalyst for the investment is no longer valid, when TS&W believes that another stock will have a higher expected return, or for portfolio risk management. The Fund generally engages in active and frequent trading of portfolio securities as part of its principal investment strategy. | LMCG will generally sell a security when it no longer passes the valuation screens, reaches a price target, or its prospects for appreciation have diminished. | |
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Principal Risks
Each Fund’s share price will fluctuate. You could lose money on your investment in each Fund, and each Fund could return less than other investments. As with any mutual fund, there is no guarantee that either Fund will achieve its investment goal. The principal risks of investing in the Funds are similar, as their investment goals are the same and their principal investment strategies are substantially similar. The principal risks of the Funds are set forth below, and such risks apply to both Funds unless otherwise noted.
Equity Securities Risk: The Fund is subject to the risk that stock prices will fall over short or extended periods of time. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by these companies may decline in response to such developments, which could result in a decline in the value of the Fund’s shares.
• | Preferred Stock Risk (Small Cap Value Opportunities Fund only): In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence over the claims of those who own preferred and common stock. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of preferred stocks to decline. |
• | Small-Cap Risk: Stocks of smaller companies may be subject to more abrupt or erratic market movements than stocks of larger, more established companies. Small companies may have limited product lines or financial resources, and may be dependent upon a small or inexperienced management group. |
Foreign Securities Risk (Small Cap Value Opportunities Fund only): Investing in foreign securities poses additional risks since political and economic events unique in a country or region will affect those markets and their issuers, while such events may not necessarily affect the U.S. economy or issuers located in the United States. In addition, investments in foreign securities are generally denominated in foreign currency. As a result, changes in the value of those currencies compared to the U.S. dollar may affect (positively or negatively) the value of the Fund's investments. Foreign markets may be less liquid and more volatile than U.S. markets and offer less protection to investors.
• | Depositary Receipts Risk: Foreign receipts, which include ADRs, Global Depositary Receipts, and European Depositary Receipts, are securities that evidence ownership interests in a security or a pool of securities issued by a foreign issuer. The risks of depositary receipts include many risks associated with investing directly in foreign securities. |
Management Risk: In managing the Fund’s portfolio, Touchstone Advisors engages one or more sub-advisors to make investment decisions for a portion of or the entire portfolio. There is a risk that Touchstone Advisors may be unable to identify and retain sub-advisors who achieve superior investment returns relative to other similar sub-advisors.
Portfolio Turnover Risk (Small Cap Value Opportunities Fund only): Frequent and active trading may result in greater expenses to the Fund, which may lower the Fund's performance and may result in the realization of substantial capital gains, including net short-term capital gains. As a result, high portfolio turnover may reduce the Fund's returns.
Sector Focus Risk (Small Cap Value Opportunities Fund only): The Fund may invest a high percentage of its assets in specific sectors of the market in order to achieve a potentially greater investment return. As a result, the Fund may be more susceptible to economic, political, and regulatory developments in a particular sector of the market, positive or negative, than a fund that does not invest a high percentage of its assets in specific sectors.
Value Investing Risk: Value investing presents the risk that the Fund’s security holdings may never reach their full market value because the market fails to recognize what the portfolio managers consider the true business value or because the portfolio managers have misjudged those values.
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION
Reasons for the Reorganization
The Reorganization is intended to eliminate the offering of multiple funds with the same investment goal and substantially similar principal investment strategies. The Reorganization has the potential to provide efficiencies and economies of scale for the combined Fund. At a meeting held on May 17, 2018, the Board of Trustees of each Trust, including the Independent Trustees, determined that the Reorganization was in the best interests of its respective Fund and that the interests of existing
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shareholders of the Fund will not be diluted as a result of the Reorganization. The Board approved the Reorganization and recommended that shareholders of the Small Cap Value Opportunities Fund approve the Reorganization at the Special Meeting.
In evaluating the Reorganization, the Board of Trustees of each Trust requested and reviewed, with the assistance of independent legal counsel, materials furnished by Touchstone Advisors, the investment advisor to the Funds. These materials included information regarding the operations and financial conditions of the Funds and the principal terms and conditions of the Reorganization, including that the Reorganization is expected to qualify as a tax-free reorganization for federal income tax purposes. The Board of Trustees of each Trust considered the following factors, among others:
• | the investment goals, principal investment strategies, sub-advisors and portfolio managers of the Funds; |
• | the historical investment performance record of the Funds; |
• | the advice and recommendation of Touchstone Advisors, including its opinion that the Reorganization would be in the best interests of the Funds and that the combined Fund would have a greater opportunity to achieve economies of scale than either Fund operating individually; |
• | the investment advisory fee and other fees paid by the Funds, the expense ratios of the Funds and the contractual limitations on the Funds’ expenses; |
• | the anticipated benefits to the Funds, including operating efficiencies, that may be achieved from the Reorganization; |
• | that the expenses of the Reorganization would not be borne by the Funds’ shareholders; |
• | the terms and conditions of the Reorganization, including the Small Cap Value Fund’s assumption of all of the liabilities of the Small Cap Value Opportunities Fund; |
• | the Reorganization is intended to be a tax-free reorganization for federal income tax purposes; and |
• | alternatives available to shareholders of the Small Cap Value Opportunities Fund, including the ability to redeem their shares. |
During their assessment, the Board of Trustees of each Trust met with independent legal counsel regarding the legal issues involved. After consideration of the factors noted above, together with other factors and information considered to be relevant, and recognizing that there can be no assurance that any potential operating efficiencies or other benefits will in fact be realized, the Board of Trustees of each Trust concluded that the Reorganization would be in the best interests of each Fund and the interests of existing shareholders of the Funds would not be diluted as a result of the Reorganization.
Agreement and Plan of Reorganization
The following summary is qualified in its entirety by reference to the Plan, a form of which is set forth in Exhibit A. The Plan provides that all of the assets of the Small Cap Value Opportunities Fund will be transferred to the Small Cap Value Fund solely in exchange for shares of the Small Cap Value Fund and the assumption by the Small Cap Value Fund of all the liabilities of the Small Cap Value Opportunities Fund on or about September 21, 2018 or such other date as may be agreed upon by the parties (the “Closing Date”). The class or classes of the Small Cap Value Fund shares that you will receive in connection with the Reorganization will be the same as the class or classes of the Small Cap Value Opportunities Fund shares that you own immediately prior to the closing of the Reorganization.
Prior to the close of business on the Closing Date, the Small Cap Value Opportunities Fund will endeavor to discharge all of its known liabilities and obligations. In addition, prior to the close of business on the Closing Date, for tax reasons, the Small Cap Value Opportunities Fund will distribute to its shareholders all of the Small Cap Value Opportunities Fund’s investment company taxable income for all taxable periods ending on or before the Closing Date, all of the Small Cap Value Opportunities Fund’s net tax-exempt income for all taxable periods ending on or before the Closing Date, and all of its net capital gains realized in all taxable periods ending on or before the Closing Date (after reduction for any available capital loss carryforwards and excluding any net capital gain on which the Small Cap Value Opportunities Fund paid federal income tax).
BNY Mellon Investment Servicing (US) Inc., the sub-administrator for the Funds, will compute the value of the Small Cap Value Opportunities Fund’s portfolio of securities. The method of valuation employed will be consistent with the valuation
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procedures described in the Target Trust’s declaration of trust and the Small Cap Value Opportunities Fund’s prospectus and statement of additional information or such other valuation procedures as shall be mutually agreed upon by the Funds.
As soon after the closing as practicable, the Small Cap Value Opportunities Fund will distribute pro rata by class to its shareholders of record as of the closing the full and fractional shares of the Small Cap Value Fund received by the Small Cap Value Opportunities Fund. The liquidation and distribution will be accomplished by the establishment of accounts in the names of the Small Cap Value Opportunities Fund’s shareholders on the Small Cap Value Fund’s share records of its transfer agent. Each account will receive the respective pro rata number of full and fractional shares of the appropriate class of the Small Cap Value Fund due a Small Cap Value Opportunities Fund shareholder. All issued and outstanding shares of the Small Cap Value Opportunities Fund will be cancelled. After these distributions and the winding up of its affairs, the Small Cap Value Opportunities Fund will be terminated.
The Reorganization is subject to the satisfaction or waiver of the conditions set forth in the Plan. The Plan may be terminated (a) by the mutual agreement of the Small Cap Value Opportunities Fund and the Small Cap Value Fund; or (b) at or prior to the closing by either party (1) because of a breach by the other of any representation, warranty, or agreement contained in the Plan to be performed at or prior to the closing, if not cured within 30 days, or (2) because a condition in the Plan expressed to be precedent to the obligations of the terminating party has not been met and it reasonably appears that it will not or cannot be met.
Whether or not the Reorganization is consummated, Touchstone Advisors will pay the expenses incurred by the Funds in connection with the Reorganization.
Description of the Securities to be Issued
Shareholders of the Small Cap Value Opportunities Fund as of the closing will receive full and fractional shares of the Small Cap Value Fund in accordance with the terms of the Plan. The shares of the Small Cap Value Fund to be issued in connection with the Reorganization will be duly and validly issued and outstanding, fully paid and non-assessable by the Small Cap Value Fund. Shares of the Small Cap Value Fund to be issued in the Reorganization will have no preemptive or conversion rights and no share certificates will be issued.
Material Federal Income Tax Consequences
The following discussion summarizes the material U.S. federal income tax consequences of the Reorganization that are applicable to you as a Small Cap Value Opportunities Fund shareholder. It is based on the Code, applicable U.S. Treasury regulations, judicial authority, and administrative rulings and practice, all as of the date of this Proxy Statement/Prospectus and all of which are subject to change, including changes with retroactive effect. The discussion below does not address any state, local, or foreign tax consequences of the Reorganization. Your tax treatment may vary depending upon your particular situation. You also may be subject to special rules not discussed below if you are a certain kind of Small Cap Value Opportunities Fund shareholder, including, but not limited to: an insurance company; a tax-exempt organization; a financial institution or broker-dealer; a person who is neither a citizen nor resident of the United States or an entity that is not organized under the laws of the United States or a political subdivision thereof; a holder of Small Cap Value Opportunities Fund shares as part of a hedge, straddle, or conversion transaction; a person who does not hold Small Cap Value Opportunities Fund shares as a capital asset at the time of the Reorganization; or an entity taxable as a partnership for U.S. federal income tax purposes.
The Reorganization is intended to qualify for federal income tax purposes as a tax-free reorganization under Section 368(a) of the Code. As a condition to the closing of the Reorganization, the Small Cap Value Opportunities Fund and the Small Cap Value Fund will receive an opinion from the law firm of Vedder Price P.C. substantially to the effect that, on the basis of the existing provisions of the Code, U.S. Treasury regulations issued thereunder, current administrative rules, pronouncements and court decisions, and certain representations, qualifications, and assumptions with respect to the Reorganization, for federal income tax purposes:
(i) The transfer by the Small Cap Value Opportunities Fund of all its assets to the Small Cap Value Fund solely in exchange for Small Cap Value Fund shares and the assumption by the Small Cap Value Fund of all the liabilities of the Small Cap Value Opportunities Fund, immediately followed by the pro rata, by class, distribution of all the Small Cap Value Fund shares so received by the Small Cap Value Opportunities Fund to the Small Cap Value Opportunities Fund’s shareholders of record in complete liquidation of the Small Cap Value Opportunities Fund and the termination of the Small Cap Value Opportunities Fund as soon as practicable thereafter, will constitute a “reorganization” within the meaning of Section 368(a)(1) of the Code, and the Small Cap Value Fund and the Small Cap Value Opportunities Fund will each be “a party to a reorganization,” within the meaning of Section 368(b) of the Code, with respect to the Reorganization.
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(ii) No gain or loss will be recognized by the Small Cap Value Fund upon the receipt of all the assets of the Small Cap Value Opportunities Fund solely in exchange for Small Cap Value Fund shares and the assumption by the Small Cap Value Fund of all the liabilities of the Small Cap Value Opportunities Fund.
(iii) No gain or loss will be recognized by the Small Cap Value Opportunities Fund upon the transfer of all its assets to the Small Cap Value Fund solely in exchange for Small Cap Value Fund shares and the assumption by the Small Cap Value Fund of all the liabilities of the Small Cap Value Opportunities Fund or upon the distribution (whether actual or constructive) of the Small Cap Value Fund shares so received to the Small Cap Value Opportunities Fund’s shareholders solely in exchange for such shareholders’ shares of the Small Cap Value Opportunities Fund in complete liquidation of the Small Cap Value Opportunities Fund.
(iv) No gain or loss will be recognized by the Small Cap Value Opportunities Fund’s shareholders upon the exchange, pursuant to the Reorganization, of all their shares of the Small Cap Value Opportunities Fund solely for Small Cap Value Fund shares.
(v) The aggregate basis of the Small Cap Value Fund shares received by each Small Cap Value Opportunities Fund shareholder pursuant to the Reorganization will be the same as the aggregate basis of the Small Cap Value Opportunities Fund shares exchanged therefor by such shareholder.
(vi) The holding period of the Small Cap Value Fund shares received by each Small Cap Value Opportunities Fund shareholder in the Reorganization will include the period during which the shares of the Small Cap Value Opportunities Fund exchanged therefor were held by such shareholder, provided such Small Cap Value Opportunities Fund shares were held as capital assets at the effective time of the Reorganization.
(vii) The basis of the assets of the Small Cap Value Opportunities Fund received by the Small Cap Value Fund will be the same as the basis of such assets in the hands of the Small Cap Value Opportunities Fund immediately before the effective time of the Reorganization.
(viii) The holding period of the assets of the Small Cap Value Opportunities Fund received by the Small Cap Value Fund will include the period during which such assets were held by the Small Cap Value Opportunities Fund.
No opinion will be expressed as to (1) the effect of the Reorganization on the Small Cap Value Opportunities Fund, the Small Cap Value Fund or any Small Cap Value Opportunities Fund shareholder with respect to any asset (including without limitation any stock held in a passive foreign investment company as defined in Section 1297(a) of the Code) as to which any unrealized gain or loss is required to be recognized under federal income tax principles (i) at the end of a taxable year or on the termination thereof, or (ii) upon the transfer of such asset regardless of whether such transfer would otherwise be a non-taxable transaction under the Code or (2) any other federal tax issues (except those set forth above) and all state, local or foreign tax issues of any kind.
No private ruling will be sought from the IRS with respect to the federal income tax consequences of the Reorganization. Opinions of counsel are not binding upon the IRS or the courts, are not guarantees of the tax results, and do not preclude the IRS from adopting or taking a contrary position, which may be sustained by a court. If the Reorganization is consummated but the IRS or the courts determine that the Reorganization does not qualify as a tax-free reorganization under the Code and, thus, is taxable, the Small Cap Value Opportunities Fund would recognize gain or loss on the transfer of its assets to the Small Cap Value Fund and each shareholder of the Small Cap Value Opportunities Fund would recognize a taxable gain or loss equal to the difference between its tax basis in its Small Cap Value Opportunities Fund shares and the fair market value of the shares of the Small Cap Value Fund it receives.
Prior to the Reorganization, the Small Cap Value Opportunities Fund will declare and pay a distribution to its shareholders, which together with all previous distributions, will have the effect of distributing to its shareholders all of the Small Cap Value Opportunities Fund’s investment company taxable income (computed without regard to the deduction for dividends paid), net tax exempt income and realized net capital gain, if any, for all periods through the Closing Date. Such distributions will be taxable to shareholders for federal income tax purposes and may include net capital gain from the sale of portfolio assets as discussed below. Even if reinvested in additional shares of the Small Cap Value Opportunities Fund, which would be exchanged for shares of the Small Cap Value Fund in the Reorganization, such distributions will be taxable for federal income tax purposes.
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If portfolio assets of the Small Cap Value Opportunities Fund are sold prior to the Reorganization, the tax impact of such sales will depend on the holding periods of such assets and the difference between the price at which such portfolio assets are sold and the Small Cap Value Opportunities Fund’s basis in such assets. Any capital gains recognized in these sales on a net basis (after taking into account any available capital loss carryforwards) will be distributed to the Small Cap Value Opportunities Fund’s shareholders as capital gains (to the extent of net long-term capital gain over any net short-term capital loss) or ordinary dividends (to the extent of net short-term capital gain over any net long-term capital loss) during or with respect to the year of sale, and such distributions will be taxable to shareholders.
The Reorganization will cause the tax year of the Small Cap Value Opportunities Fund to close. After the Reorganization, the Small Cap Value Fund’s ability to use the Small Cap Value Opportunities Fund’s or the Small Cap Value Fund’s realized and unrealized pre-Reorganization capital losses, if any, may be limited under certain federal income tax rules applicable to reorganizations of this type. Therefore, in certain circumstances, shareholders may pay federal income tax sooner, or may pay more federal income taxes, than they would have had the Reorganization not occurred. The effect of these potential limitations will depend on a number of factors, including the amount of the losses, the amount of gains to be offset, the exact timing of the Reorganization and the amount of unrealized capital gains in the Funds at the time of the Reorganization.
As of June 30, 2017, for U.S. federal income tax purposes, the Small Cap Value Opportunities Fund had capital loss carryforwards of $3,480,339 that are not subject to expiration. As of December 31, 2017, for U.S. federal income tax purposes, the Small Cap Value Opportunities Fund had net unrealized gains of $14,576,155. These figures will change significantly by the date of the Reorganization as a result of the portfolio repositioning related to the sub-advisor transition, as discussed below, and do not reflect the impact of the Reorganization, including, in particular, the application of the loss limitation rules discussed herein.
In addition, shareholders of the Small Cap Value Opportunities Fund will receive a proportionate share of any taxable income and gains realized by the Small Cap Value Fund and not distributed to its shareholders prior to the Reorganization when such income and gains are eventually distributed by the Small Cap Value Fund. Furthermore, any gain the Small Cap Value Fund realizes after the Reorganization, including any built-in gain in the portfolio investments of the Small Cap Value Opportunities Fund or the Small Cap Value Fund that was unrealized at the time of the Reorganization, may result in taxable distributions to shareholders holding shares of the Small Cap Value Fund (including former shareholders of the Small Cap Value Opportunities Fund who hold shares of the Small Cap Value Fund following the Reorganization). As a result, shareholders of the Small Cap Value Opportunities Fund may receive a greater amount of taxable distributions than they would have had the Reorganization not occurred.
It is expected that, in connection with the sub-advisor transition from TS&W to LMCG, the Small Cap Value Opportunities Fund will sell approximately 90.7% (or $77.3 million) of its investment portfolio. The portfolio repositioning may result in a dividend and/or capital gain distribution to the Small Cap Value Opportunities Fund’s shareholders. The amount of the distribution may be reduced by the Fund’s capital loss carryforward balance, which is subject to limitations. This portfolio repositioning will occur whether or not the Reorganization is consummated.
Tracking Your Basis and Holding Period; State and Local Taxes. After the Reorganization, you will continue to be responsible for tracking the adjusted tax basis and holding period of your shares for federal income tax purposes. However, mutual funds must report cost basis information to you and the IRS when a shareholder sells or exchanges shares acquired on or after January 1, 2012 that are not in a retirement account (“covered shares”). Cost basis reporting by a mutual fund is not required if the shares were acquired in a reorganization and the basis of the acquired shares is determined from the basis of shares that were not covered shares.
This discussion does not address any state or local tax issues and is limited to material federal income tax issues. You are urged and advised to consult your own tax advisors as to the federal, state, local, foreign, and other tax consequences of the Reorganization in light of your individual circumstances, including the applicability and effect of possible changes in any applicable tax laws.
Pro Forma Capitalization
The following table sets forth the net assets, number of shares outstanding, and net asset value (“NAV”) per share, assuming the Reorganization occurred as of March 31, 2018. This information is generally referred to as the “capitalization” of a Fund. The term “pro forma capitalization” means the expected capitalization of the Small Cap Value Fund as of March 31, 2018 after giving effect to the Reorganization and assuming the Reorganization occurred as of March 31, 2018. These numbers may differ as of the closing date of the Reorganization.
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Small Cap Value Opportunities Fund | Small Cap Value Fund | Pro Forma Adjustments(1)(2) | Pro Forma Small Cap Value Fund after Reorganization | ||||||||||||
Net Assets (all classes)(1) | $ | 85,271,301 | $ | 95,599,697 | -- | $ | 180,870,998 | ||||||||
Class A | |||||||||||||||
Net assets | $ | 2,279,669 | $ | 74,483,172 | $ | 76,762,841 | |||||||||
Shares outstanding | 130,388 | 2,901,957 | (41,569 | ) | (2) | 2,990,776 | |||||||||
Net asset value per share | $ | 17.48 | $ | 25.67 | $ | 25.67 | |||||||||
Class C | |||||||||||||||
Net assets | $ | 542,043 | $ | 1,058,782 | $ | 1,600,825 | |||||||||
Shares outstanding | 32,291 | 42,152 | (10,711 | ) | (2) | 63,732 | |||||||||
Net asset value per share | $ | 16.79 | $ | 25.12 | $ | 25.12 | |||||||||
Class Y | |||||||||||||||
Net assets | $ | 75,325,734 | $ | 2,722,847 | $ | 78,048,581 | |||||||||
Shares outstanding | 4,040,057 | 105,909 | (1,110,156 | ) | (2) | 3,035,810 | |||||||||
Net asset value per share | $ | 18.64 | $ | 25.71 | $ | 25.71 | |||||||||
Institutional Class | |||||||||||||||
Net assets | $ | 7,123,855 | $ | 17,334,896 | $ | 24,458,751 | |||||||||
Shares outstanding | 376,314 | 675,040 | (98,903 | ) | (2) | 952,451 | |||||||||
Net asset value per share | $ | 18.93 | $ | 25.68 | $ | 25.68 | |||||||||
(1) Touchstone Advisors, and not the Funds, will bear 100% of the Reorganization expenses (which do not include brokerage transaction costs associated with portfolio repositioning), which are estimated to be approximately $95,000, whether or not the Reorganization is completed. As a result there are no pro forma adjustments to net assets.
(2) Pro forma shares outstanding have been adjusted for the accumulated change in the number of shares of the Small Cap Value Opportunities Fund’s shareholder accounts based on the relative value of each Fund's net asset value per share as of March 31, 2018.
THE FUNDS’ MANAGEMENT
The Funds have the same investment advisor.
Investment Advisor
Touchstone Advisors, Inc.
303 Broadway, Suite 1100, Cincinnati, Ohio 45202
Touchstone Advisors has been a SEC-registered investment advisor since 1994. As of March 31, 2018, it had approximately $19.2 billion in assets under management.
Touchstone Advisors is responsible for selecting each Fund’s sub-advisor(s), subject to approval by the Fund's Board of Trustees. Touchstone Advisors selects a sub-advisor that has shown good investment performance in its areas of expertise. Touchstone Advisors considers various factors in evaluating a sub-advisor, including:
· level of knowledge and skill;
· performance as compared to its peers or benchmark;
· consistency of performance over 5 years or more;
· level of compliance with investment rules and strategies;
· employees;
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· facilities and financial strength; and
· quality of service.
Touchstone Advisors will also continually monitor each sub-advisor’s performance through various analyses and through in-person, telephone, and written consultations with a sub-advisor. Touchstone Advisors discusses its expectations for performance with each sub-advisor and provides evaluations and recommendations to the Board of Trustees, including whether or not a sub-advisor’s contract should be renewed, modified, or terminated.
The SEC has granted an exemptive order that permits each Trust or Touchstone Advisors, under certain conditions, to select or change unaffiliated sub-advisors, enter into new sub-advisory agreements or amend existing sub-advisory agreements without first obtaining shareholder approval. A Fund must still obtain shareholder approval of any sub-advisory agreement with a sub-advisor affiliated with the Trust of which it is a series or Touchstone Advisors other than by reason of serving as a sub-advisor to one or more Funds. Shareholders of a Fund will be notified of any material changes in the Fund’s sub-advisory arrangements. After the Reorganization, Touchstone Advisors and each Trust will continue to rely on this exemptive order.
Two or more sub-advisors may manage a Fund, with each managing a portion of the Fund’s assets. If a Fund has more than one sub-advisor, Touchstone Advisors allocates how much of a Fund’s assets are managed by each sub-advisor. Touchstone Advisors may change these allocations from time to time, often based upon the results of its evaluations of the sub-advisors.
Touchstone Advisors is also responsible for running all of the operations of the Funds, except those that are subcontracted to a sub-advisor, custodian, transfer agent, sub-administrative agent, or other parties. For its services, Touchstone Advisors is entitled to receive an investment advisory fee from each Fund at an annualized rate based on the average daily net assets of the Fund as set forth below.
• | The Small Cap Value Opportunities Fund pays an advisory fee at an annual rate of 0.95% on the first $300 million of the average daily net assets of the Fund, 0.90% on the next $200 million of average daily net assets, and 0.85% on average daily net assets over $500 million. |
• | The Small Cap Value Fund currently pays an advisory fee at an annual rate of 0.90% of the average daily net assets of the Fund. Effective September 21, 2018, the advisory fee rate of the Small Cap Value Fund will contractually be lowered to 0.85% of the average daily net assets of the Fund. |
The annual fee rate below is the fee paid to Touchstone Advisors by each Fund for the Fund’s most recent fiscal year end and is net of any advisory fee waivers and/or expense reimbursements, which are discussed in more detail below. Touchstone Advisors, and not the Funds, pays sub-advisory fees to each sub-advisor from its advisory fee.
• | Small Cap Value Opportunities Fund: 0.87% |
• | Small Cap Value Fund: 0.72% |
Sub-Advisors and Portfolio Managers
Small Cap Value Opportunities Fund
Thompson, Siegel & Walmsley LLC, 6641 West Broad Street, Suite 600, Richmond, Virginia 23230
TS&W is the current sub-advisor to the Small Cap Value Opportunities Fund and is expected to serve as sub-advisor through July 29, 2018. The sub-advisor makes investment decisions for the Fund and also ensures compliance with the Fund's investment policies and guidelines. Founded in 1969, TS&W serves institutional investors, middle market investors, and
individuals in managing equity, fixed income and international investments. As of March 31, 2018, TS&W had approximately $24.4 billion in assets under management.
Frank H. Reichel III, CFA serves as President of TS&W, a position he has held since January 2015, and Co-Portfolio Manager on the TS&W Small Cap Value Strategy, a position he has held since August 2000.
Roger W. Porter serves as Co-Portfolio Manager on the TS&W Small Cap Value strategy, a position he has held since January 2015, and Research Analyst for the TS&W SMID Cap Value strategy, a position he has held since 2008.
Effective July 30, 2018, LMCG will serve as sub-advisor to the Small Cap Value Opportunities Fund.
Small Cap Value Fund
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LMCG Investments, LLC, 200 Clarendon Street, 28th Floor, Boston, Massachusetts, 02116
LMCG serves as the sub-advisor to the Small Cap Value Fund. As the sub-advisor, LMCG makes investment decisions for the Fund and also ensures compliance with the Fund’s investment policies and guidelines. As of March 31, 2018, 2018, LMCG managed approximately $8 billion in assets. LMCG is a board-managed limited liability company owned by its employees, Lee P. Munder, and Royal Bank of Canada (“RBC”). LMCG operates independently of RBC, a publicly held Canadian bank that on November 2, 2015 acquired City National Corporation, LMCG’s former majority owner.
R. Todd Vingers is portfolio manager of the Small Cap Value Fund and joined LMCG in 2002. Mr. Vingers is the Managing Director of Value Equities at LMCG and is responsible for the management of the Fund. Previously, he served as portfolio manager at American Century Investments.
Advisory and Sub-Advisory Agreement Approval
A discussion of the basis for the Board’s approval of the advisory agreement between the Target Trust, on behalf of the Small Cap Value Opportunities Fund, and Touchstone Advisors, and the basis for the Board’s approval of the sub-advisory agreement between Touchstone Advisors and TS&W, with respect to the Small Cap Value Opportunities Fund, is included in the Fund’s December 31, 2017 Semi-Annual Report. A discussion of the basis for the Board’s approval of the sub-advisory agreement between Touchstone Advisors and LMCG, with respect to the Small Cap Value Opportunities Fund, is included herein in the section titled "Other Information Regarding Appointment of LMCG as Sub-Advisor to the Small Cap Value Opportunities Fund" and will be included in the Small Cap Value Opportunities Fund's June 30, 2018 Annual Report.
A discussion of the basis for the Board’s approval of the advisory agreement between the Trust, on behalf of the Small Cap Value Fund, and Touchstone Advisors, and the basis for the Board’s approval of the sub-advisory agreement between Touchstone Advisors and LMCG, with respect to the Small Cap Value Fund, is included in the Fund’s March 31, 2018 Semi-Annual Report.
Expense Limitation Agreement
Touchstone Advisors has contractually agreed to waive fees and reimburse expenses to the extent necessary to ensure that each Fund's total annual operating expenses (excluding dividend and interest expenses relating to short sales, interest, taxes, brokerage commissions and other transaction costs; portfolio transaction and investment related expenses, including expenses associated with the Fund's liquidity provider; other expenditures which are capitalized in accordance with U.S. generally accepted accounting principles, the cost of “Acquired Fund Fees and Expenses,” if any, and other extraordinary expenses not incurred in the ordinary course of business (collectively, “Excluded Expenses”)) do not exceed the contractual expense limits set forth below. The Funds bear the costs of Excluded Expenses. The contractual expense limits set forth below have been adjusted for each class of each Fund to include the effect of Rule 12b-1 fees, shareholder servicing fees, and other anticipated class specific expenses, if applicable. Fee waivers and expense reimbursements are calculated and applied monthly, based on each Fund’s average net assets during such month. The terms of Touchstone Advisors’ expense limitation agreement provide that Touchstone Advisors is entitled to recoup, subject to approval by a Fund's Board of Trustees, such amounts waived or reimbursed for a period of up to three years from the date on which Touchstone Advisors reduced its compensation or reimbursed expenses for the Fund. The Fund will make repayments to Touchstone Advisors only to the extent that such repayment does not cause the Fund’s total annual operating expenses, less Excluded Expenses, to exceed both (1) the expense cap in place when such amounts were waived or reimbursed and (2) the Fund’s current expense limitation. Fees waived and expenses reimbursed by Touchstone Advisors with respect to the Small Cap Value Opportunities Fund prior to the closing of the Reorganization may not be recouped by Touchstone Advisors following the closing of the Reorganization.
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Fund | Expense Limit | Effective Through | |||
Small Cap Value Opportunities Fund | |||||
Class A | 1.43 | % | October 29, 2018 | ||
Class C | 2.18 | % | October 29, 2018 | ||
Class Y | 1.18 | % | October 29, 2018 | ||
Institutional Class | 1.10 | % | October 29, 2018 | ||
Small Cap Value Fund | |||||
Class A | 1.38 | % | August 1, 2019 | ||
Class C | 2.13 | % | August 1, 2019 | ||
Class Y | 1.13 | % | August 1, 2019 | ||
Institutional Class | 0.98 | % | August 1, 2019 | ||
Other Service Providers
The Funds currently have the same service providers. Upon completion of the Reorganization, the Small Cap Value Fund will continue to engage its existing service providers, as set forth in the chart below.
Service Providers | |||
Principal Underwriter | Touchstone Securities, Inc. | ||
Administrator | Touchstone Advisors, Inc. | ||
Sub-Administrator | The Bank of New York Mellon | ||
Transfer Agent | BNY Mellon Investment Servicing (US) Inc. | ||
Custodian | Brown Brothers Harriman & Co. | ||
Independent Registered Public Accounting Firm | Ernst & Young LLP | ||
CHOOSING A CLASS OF SHARES
Share Class Offerings. The Small Cap Value Fund is offering the following classes of shares pursuant to this Proxy Statement/Prospectus and the SAI: Class A, Class C, Class Y and Institutional Class. Each class of shares has different sales charges and distribution fees. You will not pay any sales load, commission, or other similar fee in connection with the shares you will receive in the Reorganization. However, additional purchases, exchanges and redemptions of shares of a Fund will be subject to any sales loads, commissions, and other similar fees applicable to the Fund. For additional information regarding sales charges, sales charge reductions and waivers, and distribution fees applicable to Fund shares not offered in this Proxy Statement/Prospectus and the SAI, see the sections titled “Choosing a Class of Shares” and “Investing with Touchstone” in the Fund’s prospectus.
Class A Shares
The offering price of Class A shares of each Fund is equal to its net asset value (“NAV”) plus a front-end sales charge that you pay when you buy your shares. The front-end sales charge is generally deducted from the amount of your investment. Class A shares are subject to a Rule 12b-1 distribution fee of up to 0.25% of the Fund’s average daily net assets allocable to Class A shares.
Class A Sales Charge. The following table shows the amount of front-end sales charge you will pay on purchases of Class A shares for the Funds. The amount of front-end sales charge is shown as a percentage of (1) offering price and (2) the net amount invested after the charge has been subtracted. Note that the front-end sales charge gets lower as your investment amount gets larger.
You will not pay any front-end sales charge in connection with the shares you will receive in the Reorganization.
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Amount of Your Investment | Sales Charge as % of Offering Price | Sales Charge as % of Net Amount Invested | Dealer Reallowance as Percentage of Offering Price | ||||||
Under $50,000 | 5.75 | % | 6.10 | % | 5.00 | % | |||
$50,000 but less than $100,000 | 4.50 | % | 4.71 | % | 3.75 | % | |||
$100,000 but less than $250,000 | 3.50 | % | 3.63 | % | 2.75 | % | |||
$250,000 but less than $500,000 | 2.95 | % | 3.04 | % | 2.25 | % | |||
$500,000 but less than $1 million | 2.25 | % | 2.30 | % | 1.75 | % | |||
$1 million or more | — | % | — | % | None | ||||
Waiver of Class A Sales Charge. Purchases in the amount of $1 million or more of Class A shares are not subject to a front-end sales charge and are sold at NAV. For these purchases, Touchstone Securities, Inc. (“Touchstone Securities”) may pay your financial intermediary a distribution-related commission associated with such sale of up to 1.00%. In the event that Touchstone Securities paid such a commission to your financial intermediary, a CDSC of up to 1.00% may be charged on redemptions made within one year of your purchase. With respect to Class A shares, the percentage of the CDSC is based on the commission that was paid to your financial intermediary. Any CDSC applicable to your shares of the Small Cap Value Opportunities Fund will not be incurred as a result of your shares being exchanged for shares of the Small Cap Value Fund pursuant to the Reorganization, and the holding period applicable to your Small Cap Value Opportunities Fund shares will carry over to the shares of the Small Cap Value Fund that you receive in the Reorganization.
Class C Shares
Class C shares are sold at NAV, without an initial sales charge so that the full amount of your purchase payment may be immediately invested in the Funds. Class C shares are subject to a CDSC of 1.00% on redemptions of Class C shares made within one year of their purchase. The CDSC will be a percentage of the dollar amount of shares redeemed and will be assessed on an amount equal to the lesser of (1) the NAV at the time of purchase of the Class C shares being redeemed, or (2) the NAV of such Class C shares being redeemed. A CDSC will not be imposed upon redemptions of Class C shares held for at least one year. Any CDSC applicable to your shares of the Small Cap Value Opportunities Fund will not be incurred as a result of your shares being exchanged for shares of the Small Cap Value Fund pursuant to the Reorganization, and the holding period applicable to your Small Cap Value Opportunities Fund shares will carry over to the shares of the Small Cap Value Fund that you receive in the Reorganization.
Class C shares are subject to an annual Rule 12b-1 fee of up to 1.00% of a Fund’s average daily net assets allocable to Class C shares. Touchstone Securities intends to pay a commission of 1.00% of the purchase amount to your broker at the time you purchase Class C shares.
Class Y Shares
Class Y shares of the Funds are sold at NAV without an initial sales charge so that the full amount of your purchase payment may be immediately invested in the Funds. Class Y shares are not subject to a Rule 12b-1 fee or CDSC. In addition, Class Y shares may be purchased through certain mutual fund programs sponsored by qualified intermediaries, such as broker-dealers and investment advisors. In each case, the intermediary has entered into an agreement with Touchstone Securities to include the
Funds in their program where the intermediary provides investors participating in their program with additional services, including advisory, asset allocation, recordkeeping or other services. You should ask your financial institution if it offers and you are eligible to participate in such a mutual fund program and whether participation in the program is consistent with your
investment goals. The intermediaries sponsoring or participating in these mutual fund programs may also offer their clients other classes of shares of the funds and investors may receive different levels of services or pay different fees depending upon the class of shares included in the program. Investors should carefully consider any separate transaction fee or other fees charged by these programs in connection with investing in each available share class before selecting a share class.
Institutional Class Shares
Institutional Class shares are sold at NAV, without an initial sales charge so that the full amount of your purchase
payment may be immediately invested in the Funds. Institutional Class shares are not subject to a Rule 12b-1 fee or CDSC, but are subject to higher initial investment requirements than other classes of shares of a Fund. Institutional Class shares are offered through certain broker-dealers or financial institutions that have distribution agreements with Touchstone Securities.
Buying and Selling Fund Shares
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Each Fund has the same minimum investment requirements, which are set forth in the chart below.
Classes A, C, and Y | ||||||||
Minimum Investment Requirements | Initial Investment | Additional Investment | ||||||
Regular Account | $ | 2,500 | $ | 50 | ||||
Retirement Account or Custodial Account under the Uniform Gifts/Transfers to Minors Act | $ | 1,000 | $ | 50 | ||||
Investments through the Automatic Investment Plan | $ | 100 | $ | 50 | ||||
Institutional Class | ||||||||
Minimum Investment Requirements | Initial Investment | Additional Investment | ||||||
Regular Account | $ | 500,000 | $ | 50 | ||||
You may buy and sell shares in the Fund on a day when the New York Stock Exchange is open for trading. Existing Class A and C and Institutional Class shareholders may purchase shares directly through Touchstone Funds via the transfer agent, BNY Mellon or through their financial intermediary. Class Y shares are available only through financial intermediaries who have appropriate selling agreements in place with Touchstone Securities. Shares may be purchased or sold by writing to Touchstone Securities at P.O. Box 9878, Providence, Rhode Island 02940, calling 1.800.543.0407, or visiting the Touchstone Funds’ website: TouchstoneInvestments.com. You may only sell shares over the telephone or via the Internet if the value of the shares sold is less than or equal to $100,000. Shares held in qualified retirement plans cannot be sold via the Internet. If your shares are held by a processing organization or financial intermediary you will need to follow its purchase and redemption procedures.
Touchstone Securities will forward the proceeds of your sale to you (or to your financial intermediary) within 7 days (normally
within 3 business days) after receipt of a proper redemption request. Under normal conditions, each Fund typically expects to meet redemption requests through the use of the Fund's holdings of cash or cash equivalents, lines of credit, an interfund loan (as discussed in the Fund’s SAI) or by selling other Fund assets. Under unusual circumstances, such as a market emergency, when its Board of Trustees deems it appropriate, a Fund may make payment for shares redeemed by tendering portfolio securities of the Fund taken at current value in order to meet the redemption request. Shareholders may incur transaction and brokerage costs when they sell these portfolio securities. Until such time as the shareholder sells the securities they receive in-kind, the securities are subject to market risk. Redemptions in kind are taxable for federal income tax purposes in the same manner as redemptions for cash. The Funds may also use redemption in-kind for certain Fund shares held by ReFlow. For more information about buying and selling shares, see the section “Investing with Touchstone” in each Fund’s Prospectus or call (800) 543-0407.
Exchange Privileges of the Funds
Each Fund has the same exchange privileges. The Funds are subject to the exchange privileges listed below.
Class A shares may be exchanged into Class A shares of any other Touchstone Fund at NAV, although Touchstone Funds that are closed to new investors may not accept exchanges.
Class C shares may be exchanged into Class C shares of any other fund managed by Touchstone Advisors (a "Touchstone Fund"), although Touchstone Funds that are closed to new investors may not accept exchanges.
Class Y shares of the Funds are exchangeable for Class Y shares of any other Touchstone Fund as long as investment minimums and proper selling agreement requirements are met. Class Y shares may be available through financial intermediaries that have appropriate selling agreements with Touchstone Securities, or through “processing organizations” (e.g., mutual fund supermarkets) that purchase shares for their customers. Touchstone Funds that are closed to new investors may not accept exchanges.
Institutional Class shares of the Funds are exchangeable for Institutional Class shares of any other Touchstone Fund as long as investment minimums and proper selling agreement requirements are met, although Touchstone Funds that are closed to new investors may not accept exchanges.
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Class A, C, and Y shareholders who are eligible to invest in Institutional Class shares are eligible to exchange their Class A shares, Class C shares, and Class Y shares for Institutional Class shares of the same Fund, if offered in their state, and to the extent that such an exchange can be accommodated by their financial intermediary.
You do not have to pay any exchange fee for your exchange, but if you exchange from a fund with a lower load schedule to a fund with a higher load schedule you may be charged the load differential.
Shares otherwise subject to a CDSC will not be charged a CDSC in an exchange. However, when you redeem the shares acquired through the exchange, the shares you redeem may be subject to a CDSC, depending on when you originally purchased the exchanged shares. For purposes of computing the CDSC, the length of time you have owned your shares will be measured from the date of original purchase and will not be affected by any exchange.
You should carefully review the disclosure provided in the prospectus relating to the exchanged-for shares before making an exchange of your Fund shares. Touchstone Funds that are closed to new investors may not accept exchanges.
You may realize a taxable gain if you exchange shares of a Fund for shares of another fund.
Distribution Policy
Each Fund intends to distribute to its shareholders substantially all of its net income and net capital gains. Dividends, if any, are declared and paid annually by the Small Cap Value Opportunities Fund and quarterly by the Small Cap Value Fund. Each Fund makes distributions of net capital gains, if any, at least annually. If you own shares on a Fund’s distribution record date, you will be titled to receive the distribution.
After the Reorganization, shareholders of the Small Cap Value Opportunities Fund who currently have their dividends or distributions reinvested will have dividends or distributions received from the Small Cap Value Fund reinvested in the same class of shares of the Small Cap Value Fund as they owned in the Small Cap Value Opportunities Fund. Shareholders of the Small Cap Value Opportunities Fund who have elected to receive dividends or distributions in cash will receive dividends or distributions from the Small Cap Value Fund in cash after the Reorganization, although they may, after the Reorganization, elect to have both dividends and distributions reinvested in additional shares of the Small Cap Value Fund.
The Funds have each qualified and intend to remain qualified (for the Small Cap Value Opportunities Fund, through the Closing Date) to be treated as a regulated investment company under the Code. To remain qualified as a regulated investment company, a Fund must, among other things, distribute at least 90% of its net taxable and tax-exempt income and diversify its holdings as required by the Code. While so qualified, so long as a Fund distributes all of its investment company taxable income (determined without regard to the deduction for dividends paid) and net tax-exempt income and any realized net capital gains to its shareholders of record, it is expected that the Fund will not be required to pay any federal income taxes.
DISTRIBUTION AND SHAREHOLDER SERVICING ARRANGEMENTS
Rule 12b-1 Distribution Plans. Each Fund has adopted distribution plans, with respect to its Class A and Class C shares, under Rule 12b-1 of the 1940 Act. The plans allow each Fund to pay distribution and other fees for the sale and distribution of its shares and for services provided to shareholders. Under the Class A plan, the Funds pay an annual fee of up to 0.25% of average daily net assets that are attributable to Class A shares. Under the Class C plan, the Funds pay an annual fee of up to 1.00% of average daily net assets that are attributable to Class C shares (of which up to 0.75% is a distribution fee and up to 0.25% is a shareholder servicing fee). Because these fees are paid out of a Fund’s assets on an ongoing basis, they will increase the cost of your investment and over time may cost you more than paying other types of sales charges. Class Y shares and Institutional Class shares are not subject to a fee pursuant to a Rule 12b-1 plan. For more information on these plans, please see the section titled “Distribution and Shareholder Servicing Arrangements - Rule 12b-1 Distribution Plans” in Exhibit A to the SAI.
Additional Compensation to Financial Intermediaries. Touchstone Securities, the Trusts' principal underwriter, at its own expense (from a designated percentage of its income) currently provides additional compensation to certain dealers. Touchstone Securities pursues a focused distribution strategy with a limited number of dealers who have sold shares of the Funds or other Touchstone Funds. Touchstone Securities reviews and makes changes to the focused distribution strategy on a periodic basis. These payments are generally based on a pro rata share of a dealer’s sales. Touchstone Securities may also provide compensation in connection with conferences, sales, or training programs for employees, seminars for the public, advertising, and other dealer-sponsored programs.
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Touchstone Advisors, at its own expense, may also provide additional compensation to certain affiliated and unaffiliated dealers, financial intermediaries or service providers for certain services including distribution, administrative, sub-accounting, sub-transfer agency or shareholder servicing activities. These additional cash payments to a financial intermediary are payments over and above sales commissions or reallowances, distribution fees or servicing fees (including networking, administration, and sub-transfer agency fees). These additional cash payments also may be made as an expense reimbursement in cases where the financial intermediary bears certain costs in connection with providing shareholder services to
Fund shareholders. Touchstone Advisors may also reimburse Touchstone Securities for making these payments.
Touchstone Advisors and its affiliates may also pay cash compensation in the form of finders’ fees or referral fees that vary depending on the dollar amount of shares sold. The amount and value of additional cash payments vary for each financial intermediary. The additional cash payment arrangement between a particular financial intermediary and Touchstone Advisors or its affiliates may provide for increased rates of compensation as the dollar value of each Fund’s shares or particular class of shares sold or invested through such financial intermediary increases. The availability of these additional cash payments, the varying fee structure within a particular additional cash payment arrangement and the basis for and manner in which a financial intermediary compensates its sales representatives may create a financial incentive for a particular financial intermediary and its sales representatives to recommend a Fund’s shares over the shares of other mutual funds based, at least in part, on the level of compensation paid. You should consult with your financial intermediary and review carefully any disclosure by the financial firm as to compensation received by your financial intermediary. Although each Fund may use financial firms that sell the Fund’s shares to effect portfolio transactions for the Fund, the Fund and Touchstone Advisors will not consider the sale of the Fund’s shares as a factor when choosing financial firms to effect those transactions.
INFORMATION ON SHAREHOLDERS’ RIGHTS
The following is a summary of certain important provisions of the governing instruments and governing laws applicable to each Trust, but is not a complete description. Further information about a Trust’s governance structure is contained in the applicable Fund’s SAI and the Trust’s governing documents, which are on file with the SEC.
Organization and Governing Law. The Funds are open-end, management investment companies. The Small Cap Value Opportunities Fund is a series of Touchstone Strategic Trust, a Massachusetts business trust. The Small Cap Value Fund is a series of Touchstone Funds Group Trust, a Delaware statutory trust. A Fund organized as a series of a Massachusetts business trust is governed by the trust’s declaration of trust and by-laws or similar instruments. The power and authority to manage the Fund and its affairs reside with the trustees, and shareholder rights are generally limited to those provided to the shareholders in the declaration of trust or similar instrument, rather than by statute. A Fund organized as a series of a Delaware statutory trust is governed by Delaware law and the trust’s declaration of trust and by-laws or similar instruments. The Funds are also governed by applicable federal law. Each Fund and its business and affairs are managed under the supervision of its Board of Trustees (for purposes of the table below, each a “Board”).
Touchstone Strategic Trust | Touchstone Funds Group Trust | |
Form of Organization: | Massachusetts business trust | Delaware statutory trust |
Preemptive Rights: | None | None |
Conversion Rights: | Subject to compliance with the requirements of the 1940 Act, the trustees shall have the authority to provide that holders of shares of any series shall have the right to convert said shares into shares of one or more other series of shares in accordance with such requirements and procedures as may be established by the Board. | The different series shall be established and designated, and the variations in relative rights and preferences as between the different series shall be fixed and determined, by the Board. |
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Shareholder Meetings: | The Fund is not required to hold annual shareholder meetings under its declaration of trust and bylaws. | The Fund is not required to hold annual shareholder meetings under its declaration of trust and bylaws. |
Right to Call Shareholder Meetings: | A meeting of the shareholders of the Trust may be called at any time by the Board or by application of shareholders holding at least 25% of the shares of the Trust or one or more series then outstanding. A special meeting of shareholders shall be called for the purpose of voting on the removal of any trustee upon the written request of the holders of 10% of the shares then outstanding. | Meetings of the shareholders may be called by the trustees for the purpose of electing trustees and for such other purposes as may be prescribed by law, by the declaration of trust or by the by-laws. A meeting of the shareholders may be called at any time by the Board or by the Chair of the Board or by the President. |
Notice of Meetings: | Written notice of any meeting of shareholders shall be given or caused to be given by the Trustees by mailing such notice at least seven days before such meeting, postage prepaid, stating the time, place and purpose of the meeting, to each shareholder at the shareholder’s address as it appears on the records of the Trust. | Written notice of any meeting of shareholders shall be given or caused to be given by the Trustees by mailing such notice at least seven days, but not more than 75 days, before such meeting, postage prepaid, stating the time and place of the meeting, to each shareholder at the shareholder’s address as it appears on the records of the Trust. |
Record Date for Meetings: | The trustees may fix a date not more than 60 days prior to the date of any meeting of shareholders. | The Board may fix in advance a record date at least seven days, but not more than 90 days, before the date of any such meeting. |
Quorum for Meetings and Adjournments: | A majority of the shares entitled to vote shall be a quorum for the transaction of business at a shareholders’ meeting, but any lesser number shall be sufficient for adjournments. | Except when a larger quorum is required by applicable law, by the by-laws or by the declaration of trust, 40% of the shares entitled to vote shall constitute a quorum at a shareholders’ meeting. |
Shareholder Votes Required for Approval of Matters at Meetings: | A majority of the shares voted, at a meeting of which a quorum is present, shall decide any questions, except when a different vote is required or permitted by any provision of the 1940 Act or other applicable law or by the declaration of trust or the by-laws. | When a quorum is present at any meeting, a majority of the shares voted shall decide any questions, except when a larger vote is required by any provision of the declaration of trust or the by-laws or by applicable law. |
Vote Required for Election of Trustees: | A plurality of the shares voted, at a meeting at which a quorum is present, shall elect a trustee, except when a different vote is required or permitted by any provision of the 1940 Act or other applicable law or by the declaration of trust or the by-laws. | When a quorum is present at any meeting, a plurality of the shares voted shall elect a Trustee, except when a larger vote is required by any provision of the declaration of trust or the by-laws or by applicable law. |
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Votes Required for Approval of Reorganization: | The declaration of trust provides for the reorganization of the Trust or any series of the Trust by the transfer of the assets of the Trust or such series to another trust or fund, by vote of the trustees of the Trust without the approval of shareholders, unless such approval is required under the 1940 Act. | The trustees may cause the Trust, its series, or its shares to be merged into, consolidated with, converted into, or exchanged with beneficial interests in another trust or company, as authorized by the vote of a majority of the outstanding shares so affected. Notwithstanding the above, any Series created on or after August 14, 1998 may (1) consolidate or merge with one or more other trusts, partnerships, associations or corporations, including any series or class thereof, or (2) transfer a substantial portion of its assets to one or more other trusts, partnerships, associations or corporations, including any series or class thereof, without the approval of shareholders of such series if the transaction is authorized by vote of a majority of the trustees. |
Votes Required for Liquidation of a Fund: | The liquidation of a Fund may be authorized by vote of a majority of the Trustees then in office subject to the approval of a majority of the outstanding voting shares of the Fund, as defined in the 1940 Act; provided however, that for a Fund created on or after November 17, 2011, the liquidation may be authorized by vote of a majority of the trustees without shareholder approval. | The Board may liquidate the Fund by written notice to the shareholders of the Fund. |
Removal of Trustees: | Any trustee may be removed with or without cause by two-thirds of the trustees or by a vote of two-thirds of the outstanding shares of the Trust. | Any trustee may be removed by a vote of two-thirds of the outstanding shares of the Trust. |
Personal Liability of Trustees, Officers and Shareholders: | A Trustee shall be liable for his own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee, and for nothing else, and shall not be liable for errors of judgment or mistakes of fact or law. Subject to the foregoing, the Trustees shall not be responsible or liable in any event for any neglect or wrongdoing of any officer, agent, employee, consultant, adviser, administrator, distributor or principal underwriter, custodian or transfer, dividend disbursing, shareholder servicing or accounting agent of the Trust, nor shall any trustee be responsible for the act or omission of any other trustee. All persons extending credit to, contracting with or having any claim against the Trust shall look only to the assets of the Trust for payment under such credit, contract or claim; and neither the shareholders nor the trustees, nor any of the Trust’s officers, employees or agents, whether past, present or future, shall be personally liable therefor. | The Trustees shall not be responsible or liable in any event for any neglect or wrongdoing of any officer, agent, employee, investment advisor or principal underwriter of the Trust, nor shall any trustee be responsible for the act or omission of any other trustee. All persons who have extended credit which has been allocated to a particular series, or who have a claim or contract which has been allocated to any particular series, shall look, and shall be required by contract to look exclusively, to the assets of that particular series for payment of such credit, claim, or contract. |
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Indemnification of Trustees: | The declaration of trust generally provides for the indemnification of the Trust’s trustees and officers against all liabilities and expenses incurred by any trustee or officer in connection with any proceeding in which such person is made a party or otherwise or is threatened to be made a party by reason of being or having held such position with the Trust, except with respect to any matter arising from his or her own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person. (1) | The Trust out of its assets shall indemnify and hold harmless each and every trustee from and against any and all claims and demands whatsoever arising out of or related to their duties as trustees, except with respect to liability to the Trust or any shareholder to which the trustee would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. |
Rights of Inspection: | The records of the Trust shall be open to inspection by shareholders to the same extent as is permitted stockholders of a Massachusetts business corporation under the Massachusetts Business Corporation Law. | The declaration of trust and by-laws, as amended and/or restated, minutes, and accounting books shall be open to inspection by shareholders during usual business hours of the Trust for a purpose reasonably related to the holder’s interests as a shareholder or as the holder of a voting trust certificate. |
Number of Authorized Shares; Par Value: | Unlimited; no par value per share. | Unlimited; $0.01 par value per share. |
Number of Votes: | Each shareholder is entitled to one vote for each whole share that they hold and a fractional vote for each fractional share that they hold. The declaration of trust and by-laws do not provide for cumulative voting. | Each whole share shall be entitled to one vote as to any matter on which it is entitled to vote and each fractional share shall be entitled to a proportionate fractional vote. There shall be no cumulative voting in the election of trustees. |
Amendment of Governing Instruments: | The Board has the right to amend the declaration of trust subject to a vote of a majority of the outstanding shares entitled to vote, except for certain amendments, such as the designation of series or classes, the change in name of the Trust or a series, or to supply any omission or cure an ambiguity. No amendment shall repeal the limitations on personal liability of any shareholder or trustee or repeal the prohibition of assessment upon the shareholders without the express consent of each shareholder or trustee involved. The by-laws may be amended or repealed by a majority of the trustees to the extent that the by-laws do not reserve that right to the shareholders. | The declaration of trust may be restated and/or amended at any time by an instrument in writing signed by a majority of the then trustees and, if required, by approval of such amendment by shareholders. The by-laws may be amended or repealed by a majority of the trustees to the extent that the by-laws do not reserve that right to the shareholders. |
(1) Such rights to indemnification are not exclusive and do not affect any other rights the trustee or officer may have, by contract or otherwise by law, including under any liability insurance policy. There is no statutory exclusion under Massachusetts law from liabilities for shareholders of a Massachusetts business trust. Therefore, under certain circumstances, shareholders of a Massachusetts business trust may be deemed liable for the obligations of the trust.
Shares. When issued and paid for in accordance with their respective prospectuses, shares of both Funds are fully paid and non-assessable, having no preemptive or subscription rights and are freely transferable. Each share of a Fund represents an equal interest in such Fund, although the fees and expenses relating to each class may vary. Shares of each Fund are entitled to receive their pro rata share of distributions of income and capital gains, if any, made with respect to that Fund as are declared by the Fund's Board of Trustees, although such distributions may vary in amount among the classes of a Fund to reflect class-specific expenses. Such distributions may be in cash, or in additional Fund shares. In any liquidation of a Fund, each
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shareholder is entitled to receive his or her pro rata share of the net assets of the Fund, after satisfaction of all outstanding liabilities and expenses of the Fund.
Series and Classes. The declaration of trust of each Trust gives broad authority to the trustees to establish series and classes in addition to those currently established and to determine the rights and preferences of the shares of the shares of the series and classes.
Submission of Shareholder Proposals. The declaration of trust and bylaws of each Trust do not contain provisions requiring that a shareholder provide notice to the applicable Fund in advance of a shareholder meeting to enable the shareholder to present a proposal at such meeting, although federal securities laws, which apply to each Fund, require that certain conditions be met to present any proposals at shareholder meetings.
VOTING INFORMATION CONCERNING THE SPECIAL MEETING
Proxies are being solicited by the Board on behalf of the Small Cap Value Opportunities Fund. The proxies will be voted at the Special Meeting of shareholders of the Small Cap Value Opportunities Fund. The cost of the solicitation, including the printing and mailing of proxy materials, will be borne by Touchstone Advisors regardless of whether the Plan is approved by shareholders or the Reorganization is completed.
The Small Cap Value Opportunities Fund has engaged the services of Broadridge Financial Solutions, Inc. (“Broadridge” or “Solicitor”) to assist in the solicitation of proxies for the Special Meeting. Solicitor’s fees and the cost of printing and mailing proxy materials are expected to be approximately $35,000. Proxies are expected to be solicited principally by mail, but the Small Cap Value Opportunities Fund or Solicitor may also solicit proxies by telephone, through the Internet or otherwise. Any telephonic solicitations will follow procedures reasonably designed to ensure accuracy and prevent fraud, including requiring identifying shareholder information, recording the shareholder’s instructions, and confirming to the shareholders after the fact. Shareholders who communicate proxies by telephone or by other electronic means have the same power and authority to issue, revoke, or otherwise change their voting instructions as shareholders submitting proxies in written form. Touchstone Advisors may reimburse custodians, nominees, and fiduciaries for the reasonable costs incurred by them in connection with forwarding solicitation materials to the beneficial owners of shares held of record by such persons. Although Broadridge representatives are permitted to answer questions about the voting process and may read any recommendation set forth in this Proxy Statement/Prospectus, they are not permitted to recommend to shareholders how to vote. Proxies may also be solicited by officers, employees and agents of Touchstone Advisors or their affiliates. Such solicitations may be by telephone, through the Internet or otherwise.
The purpose of the Special Meeting is set forth in the accompanying Notice. The Board knows of no other business that will be presented for consideration at the Special Meeting. Should other business properly be brought before the Special Meeting, proxies will be voted in accordance with the best judgment of the persons named as proxies.
Only shareholders of record on the Record Date will be entitled to vote at the Special Meeting. Each share of the Small Cap Value Opportunities Fund is entitled to one vote. Fractional shares are entitled to proportionate shares of one vote.
Any person conferring a proxy has the power to revoke it any time prior to its exercise by executing a superseding proxy or by submitting a written notice of revocation to the Secretary of the Target Trust. In addition, although mere attendance at the Special Meeting will not revoke a proxy, a shareholder present at the Special Meeting may withdraw his or her proxy and vote in person. All properly executed and unrevoked proxies received in time for the Special Meeting will be voted in accordance with the instructions contained in the proxies. If no instruction is given on a properly executed proxy, the persons named as proxies will vote the shares represented thereby in favor of approval of the Plan.
In order to hold the Special Meeting, a quorum of shareholders of the Small Cap Value Opportunities Fund must be present. Holders of a majority of the total number of shares entitled to vote, present in person or by proxy, shall constitute a quorum for the purpose of voting on the Reorganization proposal and for the purpose of transacting any other business that may come before the Special Meeting. Approval of the Reorganization requires the approval of the lesser of (i) 67% or more of the voting securities of the Small Cap Value Opportunities Fund entitled to vote on the Reorganization proposal that are present in person or by proxy at the Special Meeting if holders of shares representing more than 50% of the outstanding voting securities of the Fund are present or represented by proxy at the Special Meeting or (ii) more than 50% of the outstanding voting securities of the Small Cap Value Opportunities Fund entitled to vote on the Reorganization proposal.
For purposes of determining a quorum for transacting business at the Special Meeting, abstentions and broker “non-votes” (that is, proxies from brokers or nominees indicating that such persons have not received instructions from the beneficial owner or
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other persons entitled to vote shares on a particular matter with respect to which the brokers or nominees do not have discretionary power) will be treated as shares that are present but which have not been voted. For this reason, abstentions and broker non-votes will have the effect of a “no” vote for purposes of obtaining the requisite approval of the Reorganization.
If the necessary quorum to transact business or the vote required to approve the Reorganization proposal is not obtained at the Special Meeting, the persons named as proxies in the proxy card may propose one or more adjournments of the Special Meeting, in accordance with applicable law, to permit the further solicitation of proxies. Although a majority of the shares entitled to vote is a quorum for the transaction of business at a shareholders’ meeting, any lesser number is sufficient for adjournments.
Shareholder Information. Exhibit C to this Proxy Statement/Prospectus lists the name, address, and percent ownership of each person who, as of the Record Date, to the knowledge of each Fund, owned 5% or more of the outstanding shares of a class of the respective Fund. Exhibit C also lists those shareholders that would have owned 5% or more of the outstanding shares of a class of the combined Fund had the Reorganization taken place on the Record Date.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Small Cap Value Fund’s shares will be passed upon by Vedder Price P.C., located at 222 N. LaSalle Street, Chicago, Illinois 60601.
ADDITIONAL INFORMATION
The Trusts are subject to the informational requirements of the Securities Exchange Act of 1934 and the 1940 Act, and in accordance therewith files reports and other information including proxy materials, information statements and charter documents with the SEC. These items can be inspected and copied at the Public Reference Facilities maintained by the SEC in Washington, DC, and at the SEC’s Regional Offices located at Northeast Regional Office, 3 World Financial Center, Room 4300, New York, New York 10281; Southeast Regional Office, 801 Brickell Avenue, Suite 1800, Miami, Florida 33131; Midwest Regional Office, 175 W. Jackson Boulevard, Suite 900, Chicago, Illinois 60604; Central Regional Office, 1801 California Street, Suite 1500, Denver, Colorado 80202-2656; and Pacific Regional Office, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648. Copies of such materials can also be obtained at prescribed rates from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549.
Other Information
Officers and Directors. To the best knowledge of the Target Trust, as of December 31, 2017, the Trustees and executive officers of the Target Trust as a group owned less than 1% of the shares of the Small Cap Value Opportunities Fund.
Information About the Distributor. Touchstone Securities (the “Distributor”) and the Target Trust are parties to a distribution agreement (the “Distribution Agreement”) with respect to the Small Cap Value Opportunities Fund. The Distributor’s principal place of business is 303 Broadway, Suite 1100, Cincinnati, Ohio 45202. The Distributor is a registered broker-dealer, and an affiliate of Touchstone Advisors by reason of common ownership. For the fiscal year ended June 30, 2017, the Small Cap Value Opportunities Fund paid the Distributor $367 and $3 in the form of underwriting and broker commissions and contingent deferred sales charges on the Fund’s Class A and C shares, respectively.
Information About the Administrator. Touchstone Advisors serves as the Small Cap Value Opportunities Fund’s administrator pursuant to an administrative agreement between the Target Trust, on the Fund’s behalf, and Touchstone Advisors. Touchstone Advisors has engaged The Bank of New York Mellon, located at 4400 Computer Drive, Westborough, Massachusetts 01581, to serve as the Target Trust’s sub-administrator. For the fiscal year ended June 30, 2017, the Small Cap Value Opportunities Fund paid Touchstone Advisors $190,665 in administration fees.
Portfolio Transactions. There were no affiliated brokerage transactions for the Small Cap Value Opportunities Fund’s most recently completed fiscal year end.
Shareholders Sharing the Same Address. If two or more shareholders share the same address, only one copy of this Proxy Statement/Prospectus is being delivered to that address, unless the Target Trust has received contrary instructions from one or more of the shareholders at that shared address. Upon written or oral request, the Target Trust will deliver promptly a separate copy of this Proxy Statement/Prospectus to a shareholder at a shared address. Please call (800) 543-0407 or forward a written request to the Target Trust, P.O. Box 9878, Providence, Rhode Island 02940 if you would like to (1) receive a separate copy of
39
this Proxy Statement/Prospectus; (2) receive your annual reports or information statements separately in the future; or (3) request delivery of a single copy of annual reports or information statements if you are currently receiving multiple copies at a shared address.
OTHER BUSINESS
The Board does not intend to present any other business at the Special Meeting. If, however, any other matters are properly brought before the Special Meeting, the persons named in the accompanying proxy card will vote thereon in accordance with their judgment.
THE BOARD RECOMMENDS APPROVAL OF THE PLAN OF REORGANIZATION FOR THE SMALL CAP VALUE OPPORTUNITIES FUND AND ANY PROPERLY EXECUTED BUT UNMARKED PROXY CARDS WILL BE VOTED IN FAVOR OF APPROVAL OF THE PLAN OF REORGANIZATION.
40
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each Fund’s financial performance for the past five years or since commencement of operations, as applicable. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in the Fund, assuming reinvestment of all dividends and distributions. The financial highlights for the Small Cap Value Opportunities Fund and the Small Cap Value Fund were audited by Ernst & Young LLP for each of the five years ended June 30 and September 30, respectively. Ernst & Young LLP’s report, along with the Fund’s financial statements, is included in each Fund’s annual report. You can obtain the Funds' annual and semi-annual reports at no charge by calling (800) 543-0407 or by downloading a copy from the Touchstone Investments website at: TouchstoneInvestments.com/home/formslit.
Touchstone Small Cap Value Opportunities Fund — Class A
Selected Data for a Share Outstanding Throughout Each Period
Six Months Ended December 31, 2017 | Year Ended June 30, | |||||||||||||||||||||||||||||
(Unaudited) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||
Net asset value at beginning of period | $ | 16.76 | $ | 14.84 | $ | 18.67 | $ | 20.92 | $ | 18.75 | $ | 16.97 | ||||||||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||||||||||
Net investment income (loss) | (0.01 | ) | (0.13 | ) | (0.06 | ) | 0.04 | (0.05 | ) | 0.09 | (A) | |||||||||||||||||||
Net realized and unrealized gains (losses) on investments | 0.99 | 2.07 | (2.51 | ) | 0.39 | 5.88 | (B) | 3.66 | ||||||||||||||||||||||
Total from investment operations | 0.98 | 1.94 | (2.57 | ) | 0.43 | 5.83 | 3.75 | |||||||||||||||||||||||
Distributions from: | ||||||||||||||||||||||||||||||
Net investment income | — | — | — | (0.31 | ) | (0.02 | ) | (0.09 | ) | |||||||||||||||||||||
Realized capital gains | — | (0.02 | ) | (1.26 | ) | (2.37 | ) | (3.64 | ) | (1.88 | ) | |||||||||||||||||||
Total distributions | — | (0.02 | ) | (1.26 | ) | (2.68 | ) | (3.66 | ) | (1.97 | ) | |||||||||||||||||||
Net asset value at end of period | $ | 17.74 | $ | 16.76 | $ | 14.84 | $ | 18.67 | $ | 20.92 | $ | 18.75 | ||||||||||||||||||
Total return(C) | 5.85 | % | (D) | 13.08 | % | (13.72 | )% | 2.68 | % | 33.35 | % | (B) | 24.31 | % | ||||||||||||||||
Ratios and supplemental data: | ||||||||||||||||||||||||||||||
Net assets at end of period (000's) | $ | 2,589 | $ | 2,849 | $ | 4,503 | $ | 15,219 | $ | 13,332 | $ | 1,309 | ||||||||||||||||||
Ratio to average net assets: | ||||||||||||||||||||||||||||||
Net expenses | 1.43 | % | (E) | 1.43 | % | 1.43 | % | 1.45 | % | 1.50 | % | 1.50 | % | |||||||||||||||||
Gross expenses | 2.43 | % | (E) | 2.03 | % | 1.82 | % | 1.70 | % | 1.93 | % | 2.46 | % | |||||||||||||||||
Net investment income (loss) | (0.07 | )% | (E) | (0.29 | )% | (0.22 | )% | 0.31 | % | (0.09 | )% | 0.53 | % | |||||||||||||||||
Portfolio turnover rate | 24 | % | (D) | 59 | % | 42 | % | 57 | % | 73 | % | 95 | % | |||||||||||||||||
(A) | The net investment income (loss) per share was based on average shares outstanding for the period. |
(B) | Impact of payment from affiliate was less than $0.01 per share and 0.01%, respectively. |
(C) | Total returns shown exclude the effect of applicable sales loads. If these charges were included, the returns would be lower. |
(D) | Not annualized. |
(E) | Annualized. |
41
Touchstone Small Cap Value Opportunities Fund — Class C
Selected Data for a Share Outstanding Throughout Each Period
Six Months Ended December 31, 2017 | Year Ended June 30, | |||||||||||||||||||||||||||||
(Unaudited) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||
Net asset value at beginning of period | $ | 16.18 | $ | 14.44 | $ | 18.34 | $ | 20.70 | $ | 18.69 | $ | 16.95 | ||||||||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||||||||||
Net investment income (loss) | (0.08 | ) | (0.32 | ) | (0.20 | ) | 0.03 | (0.14 | ) | (0.04 | ) | (A) | ||||||||||||||||||
Net realized and unrealized gains (losses) on investments | 0.96 | 2.08 | (2.44 | ) | 0.25 | 5.79 | (B) | 3.66 | ||||||||||||||||||||||
Total from investment operations | 0.88 | 1.76 | (2.64 | ) | 0.28 | 5.65 | 3.62 | |||||||||||||||||||||||
Distributions from: | ||||||||||||||||||||||||||||||
Net investment income | — | — | — | (0.27 | ) | — | — | |||||||||||||||||||||||
Realized capital gains | — | (0.02 | ) | (1.26 | ) | (2.37 | ) | (3.64 | ) | (1.88 | ) | |||||||||||||||||||
Total distributions | — | (0.02 | ) | (1.26 | ) | (2.64 | ) | (3.64 | ) | (1.88 | ) | |||||||||||||||||||
Net asset value at end of period | $ | 17.06 | $ | 16.18 | $ | 14.44 | $ | 18.34 | $ | 20.70 | $ | 18.69 | ||||||||||||||||||
Total return(C) | 5.44 | % | (D) | 12.19 | % | (14.38 | )% | 1.93 | % | 32.43 | % | (B) | 23.44 | % | ||||||||||||||||
Ratios and supplemental data: | ||||||||||||||||||||||||||||||
Net assets at end of period (000's) | $ | 668 | $ | 801 | $ | 1,121 | $ | 2,077 | $ | 558 | $ | 36 | ||||||||||||||||||
Ratio to average net assets: | ||||||||||||||||||||||||||||||
Net expenses | 2.18 | % | (E) | 2.18 | % | 2.18 | % | 2.19 | % | 2.25 | % | 2.25 | % | |||||||||||||||||
Gross expenses | 4.06 | % | (E) | 3.53 | % | 2.79 | % | 2.63 | % | 5.09 | % | 25.27 | % | |||||||||||||||||
Net investment loss | (0.82 | )% | (E) | (1.04 | )% | (0.97 | )% | (0.44 | )% | (0.84 | )% | (0.22 | )% | |||||||||||||||||
Portfolio turnover rate | 24 | % | (D) | 59 | % | 42 | % | 57 | % | 73 | % | 95 | % | |||||||||||||||||
(A) | The net investment income (loss) per share was based on average shares outstanding for the period. |
(B) | Impact of payment from affiliate was less than $0.01 per share and 0.01%, respectively. |
(C) | Total returns shown exclude the effect of applicable sales loads. If these charges were included, the returns would be lower. |
(D) | Not annualized. |
(E) | Annualized. |
42
Touchstone Small Cap Value Opportunities Fund — Class Y
Selected Data for a Share Outstanding Throughout Each Period
Six Months Ended December 31, 2017 | Year Ended June 30, | |||||||||||||||||||||||||||||||
(Unaudited) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||||
Net asset value at beginning of period | $ | 17.84 | $ | 15.77 | $ | 19.69 | $ | 21.90 | $ | 19.45 | $ | 17.51 | ||||||||||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||||||||||||
Net investment income (loss) | 0.02 | (—) | (A) | 0.01 | 0.09 | 0.04 | 0.15 | (B) | ||||||||||||||||||||||||
Net realized and unrealized gains (losses) on investments | 1.04 | 2.10 | (2.67 | ) | 0.41 | 6.11 | (C) | 3.77 | ||||||||||||||||||||||||
Total from investment operations | 1.06 | 2.10 | (2.66 | ) | 0.50 | 6.15 | 3.92 | |||||||||||||||||||||||||
Distributions from: | ||||||||||||||||||||||||||||||||
Net investment income | — | (0.01 | ) | — | (0.34 | ) | (0.06 | ) | (0.10 | ) | ||||||||||||||||||||||
Realized capital gains | — | (0.02 | ) | (1.26 | ) | (2.37 | ) | (3.64 | ) | (1.88 | ) | |||||||||||||||||||||
Total distributions | — | (0.03 | ) | (1.26 | ) | (2.71 | ) | (3.70 | ) | (1.98 | ) | |||||||||||||||||||||
Net asset value at end of period | $ | 18.90 | $ | 17.84 | $ | 15.77 | $ | 19.69 | $ | 21.90 | $ | 19.45 | ||||||||||||||||||||
Total return | 5.94 | % | (D) | 13.30 | % | (13.46 | )% | 2.92 | % | 33.80 | % | (C) | 24.68 | % | ||||||||||||||||||
Ratios and supplemental data: | ||||||||||||||||||||||||||||||||
Net assets at end of period (000's) | $ | 97,673 | $ | 105,692 | $ | 104,377 | $ | 149,852 | $ | 140,689 | $ | 96,584 | ||||||||||||||||||||
Ratio to average net assets: | ||||||||||||||||||||||||||||||||
Net expenses | 1.18 | % | (E) | 1.18 | % | 1.18 | % | 1.20 | % | 1.17 | % | 1.19 | % | |||||||||||||||||||
Gross expenses | 1.30 | % | (E) | 1.29 | % | 1.28 | % | 1.26 | % | 1.24 | % | 1.29 | % | |||||||||||||||||||
Net investment income (loss) | 0.18 | % | (E) | (0.04 | )% | 0.03 | % | 0.55 | % | 0.24 | % | 0.84 | % | |||||||||||||||||||
Portfolio turnover rate | 24 | % | (D) | 59 | % | 42 | % | 57 | % | 73 | % | 95 | % | |||||||||||||||||||
(A) | Less than $0.005 per share. |
(B) | The net investment income (loss) per share was based on average shares outstanding for the period. |
(C) | Impact of payment from affiliate was less than $0.01 per share and 0.01%, respectively. |
(D) | Not annualized. |
(E) | Annualized. |
43
Touchstone Small Cap Value Opportunities Fund — Institutional Class
Selected Data for a Share Outstanding Throughout Each Period
Six Months Ended December 31, 2017 | Year Ended June 30, | |||||||||||||||||||||||||||||
(Unaudited) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||
Net asset value at beginning of period | $ | 18.10 | $ | 15.99 | $ | 19.94 | $ | 22.13 | $ | 19.62 | $ | 17.63 | ||||||||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||||||||||
Net investment income | 0.02 | 0.09 | 0.02 | 0.16 | 0.04 | 0.17 | (A) | |||||||||||||||||||||||
Net realized and unrealized gains (losses) on investments | 1.07 | 2.06 | (2.71 | ) | 0.37 | 6.18 | (B) | 3.82 | ||||||||||||||||||||||
Total from investment operations | 1.09 | 2.15 | (2.69 | ) | 0.53 | 6.22 | 3.99 | |||||||||||||||||||||||
Distributions from: | ||||||||||||||||||||||||||||||
Net investment income | — | (0.02 | ) | — | (0.35 | ) | (0.07 | ) | (0.12 | ) | ||||||||||||||||||||
Realized capital gains | — | (0.02 | ) | (1.26 | ) | (2.37 | ) | (3.64 | ) | (1.88 | ) | |||||||||||||||||||
Total distributions | — | (0.04 | ) | (1.26 | ) | (2.72 | ) | (3.71 | ) | (2.00 | ) | |||||||||||||||||||
Net asset value at end of period | $ | 19.19 | $ | 18.10 | $ | 15.99 | $ | 19.94 | $ | 22.13 | $ | 19.62 | ||||||||||||||||||
Total return | 6.02 | % | (C) | 13.46 | % | (13.44 | )% | 3.04 | % | 33.90 | % | (B) | 24.82 | % | ||||||||||||||||
Ratios and supplemental data: | ||||||||||||||||||||||||||||||
Net assets at end of period (000's) | $ | 6,219 | $ | 5,257 | $ | 26,483 | $ | 31,318 | $ | 26,466 | $ | 8,096 | ||||||||||||||||||
Ratio to average net assets: | ||||||||||||||||||||||||||||||
Net expenses | 1.10 | % | (D) | 1.10 | % | 1.10 | % | 1.10 | % | 1.10 | % | 1.10 | % | |||||||||||||||||
Gross expenses | 1.55 | % | (D) | 1.30 | % | 1.24 | % | 1.32 | % | 1.37 | % | 1.46 | % | |||||||||||||||||
Net investment income | 0.26 | % | (D) | 0.04 | % | 0.11 | % | 0.66 | % | 0.31 | % | 0.93 | % | |||||||||||||||||
Portfolio turnover rate | 24 | % | (C) | 59 | % | 42 | % | 57 | % | 73 | % | 95 | % | |||||||||||||||||
(A) | The net investment income (loss) per share was based on average shares outstanding for the period. |
(B) | Impact of payment from affiliate was less than $0.01 per share and 0.01%, respectively. |
(C) | Not annualized. |
(D) | Annualized. |
44
Touchstone Small Cap Value Fund—Class A
Selected Data for a Share Outstanding Throughout Each Period
Six Months Ended March 31, 2018 | Year Ended September 30, | |||||||||||||||||||||||||||||
(Unaudited) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||
Net asset value at beginning of period | $ | 26.06 | $ | 22.20 | $ | 20.17 | $ | 23.23 | $ | 22.79 | $ | 18.33 | ||||||||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||||||||||
Net investment income | 0.02 | 0.03 | 0.23 | 0.36 | 0.36 | 0.41 | ||||||||||||||||||||||||
Net realized and unrealized gains (losses) on investments | (0.41 | ) | 3.85 | 2.80 | (2.15 | ) | 0.39 | 4.45 | ||||||||||||||||||||||
Total from investment operations | (0.39 | ) | 3.88 | 3.03 | (1.79 | ) | 0.75 | 4.86 | ||||||||||||||||||||||
Distributions from: | ||||||||||||||||||||||||||||||
Net investment income | — | (A) | (0.02 | ) | (0.27 | ) | (0.35 | ) | (0.31 | ) | (0.40 | ) | ||||||||||||||||||
Realized capital gains | — | — | (0.73 | ) | (0.92 | ) | — | — | ||||||||||||||||||||||
Total distributions | — | (0.02 | ) | (1.00 | ) | (1.27 | ) | (0.31 | ) | (0.40 | ) | |||||||||||||||||||
Net asset value at end of period | $ | 25.67 | $ | 26.06 | $ | 22.20 | $ | 20.17 | $ | 23.23 | $ | 22.79 | ||||||||||||||||||
Total return(B) | (1.49 | )% | (C) | 17.46 | % | 15.63 | % | (8.32 | )% | 3.19 | % | 26.82 | % | |||||||||||||||||
Ratios and supplemental data: | ||||||||||||||||||||||||||||||
Net assets at end of period (000's) | $ | 74,483 | $ | 76,884 | $ 150,081 | $ | 24,659 | $ | 31,773 | $ | 34,826 | |||||||||||||||||||
Ratio to average net assets: | ||||||||||||||||||||||||||||||
Net expenses | 1.38 | % | (D) | 1.38 | % | 1.38 | % | 1.38 | % | 1.43 | % | 1.43 | % | |||||||||||||||||
Gross expenses | 1.78 | % | (D) | 1.83 | % | 1.67 | % | 1.60 | % | 1.67 | % | 1.78 | % | |||||||||||||||||
Net investment income | 0.16 | % | (D) | 0.07 | % | 1.05 | % | 1.51 | % | 1.44 | % | 1.98 | % | |||||||||||||||||
Portfolio turnover rate | 19 | % | (C) | 63 | % | (E) | 155 | % | 112 | % | 100 | % | (F)(G) | 98 | % | |||||||||||||||
(A) | Less than $0.005 per share. |
(B) | Total returns shown exclude the effect of applicable sales loads. If these charges were included, the returns would be lower. |
(C) | Not annualized. |
(D) | Annualized. |
(E) | Portfolio turnover excludes securities delivered from processing a redemption-in-kind. |
(F) | Portfolio turnover excludes securities received from a subscription-in-kind. |
(G) | Portfolio turnover excludes the purchases and sales of securities of the Touchstone Small Company Value Fund acquired on March 21, 2014. If these transactions were included, portfolio turnover would have been higher. |
45
Touchstone Small Cap Value Fund—Class C
Selected Data for a Share Outstanding Throughout Each Period
Six Months Ended March 31, 2018 | Year Ended September 30, | |||||||||||||||||||||||||||||
(Unaudited) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||
Net asset value at beginning of period | $ | 25.60 | $ | 21.95 | $ | 19.98 | $ | 23.00 | $ | 22.61 | $ | 18.23 | ||||||||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||||||||||
Net investment income (loss) | (0.13 | ) | (0.22 | ) | 0.06 | 0.17 | 0.16 | 0.29 | ||||||||||||||||||||||
Net realized and unrealized gains (losses) on investments | (0.35 | ) | 3.87 | 2.77 | (2.10 | ) | 0.40 | 4.39 | ||||||||||||||||||||||
Total from investment operations | (0.48 | ) | 3.65 | 2.83 | (1.93 | ) | 0.56 | 4.68 | ||||||||||||||||||||||
Distributions from: | ||||||||||||||||||||||||||||||
Net investment income | — | — | (0.13 | ) | (0.17 | ) | (0.17 | ) | (0.30 | ) | ||||||||||||||||||||
Realized capital gains | — | — | (0.73 | ) | (0.92 | ) | — | — | ||||||||||||||||||||||
Total distributions | — | — | (0.86 | ) | (1.09 | ) | (0.17 | ) | (0.30 | ) | ||||||||||||||||||||
Net asset value at end of period | $ | 25.12 | $ | 25.60 | $ | 21.95 | $ | 19.98 | $ | 23.00 | $ | 22.61 | ||||||||||||||||||
Total return(A) | (1.87 | )% | (B) | 16.63 | % | 14.72 | % | (9.01 | )% | 2.46 | % | 25.90 | % | |||||||||||||||||
Ratios and supplemental data: | ||||||||||||||||||||||||||||||
Net assets at end of period (000's) | $ | 1,059 | $ | 1,223 | $ | 1,376 | $ | 1,396 | $ | 2,169 | $ | 841 | ||||||||||||||||||
Ratio to average net assets: | ||||||||||||||||||||||||||||||
Net expenses | 2.13 | % | (C) | 2.13 | % | 2.13 | % | 2.13 | % | 2.18 | % | 2.18 | % | |||||||||||||||||
Gross expenses | 3.66 | % | (C) | 3.69 | % | 3.39 | % | 3.13 | % | 3.25 | % | 5.19 | % | |||||||||||||||||
Net investment income (loss) | (0.59 | )% | (C) | (0.68 | )% | 0.30 | % | 0.76 | % | 0.69 | % | 1.23 | % | |||||||||||||||||
Portfolio turnover rate | 19 | % | (B) | 63 | % | (D) | 155 | % | 112 | % | 100 | % | (E)(F) | 98 | % | |||||||||||||||
(A) | Total returns shown exclude the effect of applicable sales loads. If these charges were included, the returns would be lower. |
(B) | Not annualized. |
(C) | Annualized. |
(D) | Portfolio turnover excludes securities delivered from processing a redemption-in-kind. |
(E) | Portfolio turnover excludes securities received from a subscription-in-kind. |
(F) | Portfolio turnover excludes the purchases and sales of securities of the Touchstone Small Company Value Fund acquired on March 21, 2014. If these transactions were included, portfolio turnover would have been higher. |
46
Touchstone Small Cap Value Fund—Class Y
Selected Data for a Share Outstanding Throughout Each Period
Six Months Ended March 31, 2018 | Year Ended September 30, | |||||||||||||||||||||||||||||
(Unaudited) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||
Net asset value at beginning of period | $ | 26.14 | $ | 22.24 | $ | 20.20 | $ | 23.25 | $ | 22.82 | $ | 18.36 | ||||||||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||||||||||
Net investment income | 0.05 | 0.06 | 0.24 | 0.42 | 0.35 | 0.48 | ||||||||||||||||||||||||
Net realized and unrealized gains (losses) on investments | (0.41 | ) | 3.88 | 2.84 | (2.14 | ) | 0.46 | 4.44 | ||||||||||||||||||||||
Total from investment operations | (0.36 | ) | 3.94 | 3.08 | (1.72 | ) | 0.81 | 4.92 | ||||||||||||||||||||||
Distributions from: | ||||||||||||||||||||||||||||||
Net investment income | (0.07 | ) | (0.04 | ) | (0.31 | ) | (0.41 | ) | (0.38 | ) | (0.46 | ) | ||||||||||||||||||
Realized capital gains | — | — | (0.73 | ) | (0.92 | ) | — | — | ||||||||||||||||||||||
Total distributions | (0.07 | ) | (0.04 | ) | (1.04 | ) | (1.33 | ) | (0.38 | ) | (0.46 | ) | ||||||||||||||||||
Net asset value at end of period | $ | 25.71 | $ | 26.14 | $ | 22.24 | $ | 20.20 | $ | 23.25 | $ | 22.82 | ||||||||||||||||||
Total return | (1.37 | )% | (A) | 17.80 | % | 15.86 | % | (8.08 | )% | 3.47 | % | 27.11 | % | |||||||||||||||||
Ratios and supplemental data: | ||||||||||||||||||||||||||||||
Net assets at end of period (000's) | $ | 2,723 | $ | 2,829 | $ | 3,080 | $ | 4,419 | $ | 9,097 | $ | 769 | ||||||||||||||||||
Ratio to average net assets: | ||||||||||||||||||||||||||||||
Net expenses | 1.13 | % | (B) | 1.13 | % | 1.13 | % | 1.13 | % | 1.18 | % | 1.18 | % | |||||||||||||||||
Gross expenses | 1.94 | % | (B) | 1.95 | % | 1.70 | % | 1.44 | % | 1.65 | % | 3.45 | % | |||||||||||||||||
Net investment income | 0.41 | % | (B) | 0.32 | % | 1.30 | % | 1.76 | % | 1.70 | % | 2.23 | % | |||||||||||||||||
Portfolio turnover rate | 19 | % | (A) | 63 | % | (C) | 155 | % | 112 | % | 100 | % | (D)(E) | 98 | % | |||||||||||||||
(A) | Not Annualized. |
(B) | Annualized. |
(C) | Portfolio turnover excludes securities delivered from processing a redemption-in-kind. |
(D) | Portfolio turnover excludes securities received from a subscription-in-kind. |
(E) | Portfolio turnover excludes the purchases and sales of securities of the Touchstone Small Company Value Fund acquired on March 21, 2014. If these transactions were included, portfolio turnover would have been higher. |
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Touchstone Small Cap Value Fund—Institutional Class
Selected Data for a Share Outstanding Throughout Each Period
Six Months Ended March 31, 2018 | Year Ended September 30, | |||||||||||||||||||||||||||||
(Unaudited) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||||||
Net asset value at beginning of period | $ | 26.14 | $ | 22.22 | $ | 20.19 | $ | 23.24 | $ | 22.81 | $ | 18.35 | ||||||||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||||||||||
Net investment income (loss) | 0.17 | (0.06 | ) | 0.30 | 0.45 | 0.40 | 0.48 | |||||||||||||||||||||||
Net realized and unrealized gains (losses) on investments | (0.51 | ) | 4.04 | 2.80 | (2.13 | ) | 0.44 | 4.47 | ||||||||||||||||||||||
Total from investment operations | (0.34 | ) | 3.98 | 3.10 | (1.68 | ) | 0.84 | 4.95 | ||||||||||||||||||||||
Distributions from: | ||||||||||||||||||||||||||||||
Net investment income | (0.12 | ) | (0.06 | ) | (0.34 | ) | (0.45 | ) | (0.41 | ) | (0.49 | ) | ||||||||||||||||||
Realized capital gains | — | — | (0.73 | ) | (0.92 | ) | — | — | ||||||||||||||||||||||
Total distributions | (0.12 | ) | (0.06 | ) | (1.07 | ) | (1.37 | ) | (0.41 | ) | (0.49 | ) | ||||||||||||||||||
Net asset value at end of period | $ | 25.68 | $ | 26.14 | $ | 22.22 | $ | 20.19 | $ | 23.24 | $ | 22.81 | ||||||||||||||||||
Total return | (1.30 | )% | (A) | 17.93 | % | 16.05 | % | (7.93 | )% | 3.59 | % | 27.30 | % | |||||||||||||||||
Ratios and supplemental data: | ||||||||||||||||||||||||||||||
Net assets at end of period (000's) | $ | 17,335 | $ | 7,699 | $ | 23,740 | $ | 25,968 | $ | 29,831 | $ | 2,665 | ||||||||||||||||||
Ratio to average net assets: | ||||||||||||||||||||||||||||||
Net expenses | 0.98 | % | (B) | 0.98 | % | 0.98 | % | 0.98 | % | 1.03 | % | 1.03 | % | |||||||||||||||||
Gross expenses | 1.32 | % | (B) | 1.52 | % | 1.22 | % | 1.19 | % | 1.30 | % | 1.83 | % | |||||||||||||||||
Net investment income | 0.56 | % | (B) | 0.47 | % | 1.45 | % | 1.91 | % | 1.84 | % | 2.38 | % | |||||||||||||||||
Portfolio turnover rate | 19 | % | (A) | 63 | % | (C) | 155 | % | 112 | % | 100 | % | (D)(E) | 98 | % | |||||||||||||||
(A) | Not Annualized. |
(B) | Annualized. |
(C) | Portfolio turnover excludes securities delivered from processing a redemption-in-kind. |
(D) | Portfolio turnover excludes securities received from a subscription-in-kind. |
(E) | Portfolio turnover excludes the purchases and sales of securities of the Touchstone Small Company Value Fund acquired on March 21, 2014. If these transactions were included, portfolio turnover would have been higher. |
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OTHER INFORMATION REGARDING APPOINTMENT OF LMCG AS SUB-ADVISOR TO
THE SMALL CAP VALUE OPPORTUNITIES FUND
LMCG was appointed to serve as sub-advisor to the Small Cap Value Opportunities Fund effective July 30, 2018. Generally, the 1940 Act requires an investment advisory agreement to be approved by the board, including the independent trustees, and the fund’s shareholders in order for it to become effective. However, the SEC has granted an exemptive order that permits each Trust or Touchstone Advisors, Inc. (previously defined as “Touchstone Advisors”), under certain conditions, to select or change unaffiliated sub-advisors, enter into new sub-advisory agreements or amend existing sub-advisory agreements without first obtaining shareholder approval. A condition of this order requires Touchstone Advisors to furnish shareholders with information about LMCG and the new sub-advisory agreement for the Small Cap Value Opportunities Fund between LMCG and Touchstone Advisors (the “Sub-Advisory Agreement”). A form of the Sub-Advisory Agreement is attached hereto as Exhibit D. The following information is intended to provide shareholders of the Small Cap Value Opportunities Fund with information about LMCG and the Sub-Advisory Agreement. It is intended that the following information, along with the information contained in the Proxy Statement/Prospectus, will satisfy the information statement requirements of the exemptive order.
Background
Thompson, Siegel & Walmsley LLC (previously defined as "TS&W") currently serves as sub-advisor to the Fund pursuant to a sub-advisory agreement dated April 16, 2012 between TS&W and Touchstone Advisors (the “Prior Sub-Advisory Agreement”), which was last approved by the Board on November 16, 2017. At a meeting on May 17, 2018, the Board, including the Independent Trustees, approved the selection of LMCG as sub-advisor and the Sub-Advisory Agreement. TS&W is expected to serve as sub-advisor to the Fund through July 29, 2018, at which time LMCG will begin serving as sub-advisor pursuant to the Sub-Advisory Agreement.
As the Small Cap Value Opportunities Fund’s sub-advisor, LMCG will manage the Fund in accordance with LMCG's small cap value strategy, which is described in the "Summary - How do the Funds’ investment goals and principal investment strategies compare?" section of this Proxy Statement/Prospectus.
Board Considerations
The Board, including the Independent Trustees, considered the approval of the Sub-Advisory Agreement at an in-person meeting on May 17, 2018. The Independent Trustees met separately from the “interested” Trustees of the Target Trust and any officers of Touchstone Advisors, LMCG or their affiliates to consider the approval of the Sub-Advisory Agreement and were assisted by independent legal counsel in their deliberations. The Board considered information provided at the May 17, 2018 Board meeting. Among the matters considered by the Board, including the Independent Trustees, in connection with the approval of the Sub-Advisory Agreement were the following:
Nature, Extent and Quality of Services Provided; Investment Personnel. The Board considered information provided by Touchstone regarding the services to be provided by LMCG. The Board considered LMCG’s level of knowledge and investment style. The Board reviewed the experience and credentials of the investment personnel who would be responsible for managing the investment of portfolio securities with respect to the Small Cap Value Opportunities Fund. The Board also took into consideration that Touchstone was satisfied with LMCG’s in-house risk and compliance teams and its familiarity with LMCG given LMCG's management of other Touchstone Funds.
Profitability. The Board took into consideration the financial condition of LMCG and any direct and indirect benefits to be derived by LMCG’s relationship with the Small Cap Value Opportunities Fund. In considering the anticipated level of profitability to LMCG, the Board noted the proposed contractual undertaking of Touchstone to maintain expense limitations for the Small Cap Value Opportunities Fund and also noted that the sub-advisory fee under the Sub-Advisory Agreement would be paid by Touchstone out of the advisory fee that it receives from the Fund, and that the sub-advisory fee was negotiated at arm’s length between Touchstone and LMCG. As a consequence, the anticipated level of profitability to LMCG from its relationship with the Small Cap Value Opportunities Fund was not a substantial factor in the Board’s deliberations. For similar reasons, the Board did not consider potential economies of scale in LMCG’s management of the Small Cap Value Opportunities Fund to be a substantial factor in its consideration.
Sub-Advisory Fee. The Board considered that the Small Cap Value Opportunities Fund would pay an advisory fee to Touchstone and that Touchstone would pay a sub-advisory fee to LMCG. The Board compared LMCG’s proposed sub-advisory fee to the sub-advisory fee paid to the current sub-advisor to the Small Cap Value Opportunities Fund, noting that the proposed sub-advisory fee rate was lower than or equal to the current sub-advisory fee schedule. The Board took into account
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the sub-advisory fees other Touchstone funds had paid for sub-advisory services provided by LMCG, noting that the proposed sub-advisory fee was comparable to those other fees. The Board considered the amount of the advisory fee to be retained by Touchstone and the amount to be paid to LMCG, with respect to the various services to be provided by Touchstone and LMCG. The Board also noted that Touchstone negotiated the sub-advisory fee with LMCG at arm’s length. Based upon their review, the Trustees concluded that the Small Cap Value Opportunities Fund’s proposed sub-advisory fee was reasonable in light of the services to be received by the Fund from LMCG.
Fund Performance. The Board also considered LMCG’s investment performance and the Small Cap Value Opportunities Fund’s performance record under the management of the current sub-advisor. The Trustees also noted that LMCG has served as sub-advisor for other Touchstone Funds, including the Touchstone Small Cap Value Fund that uses a small cap value strategy substantially similar to the strategy proposed to be used in managing the Small Cap Value Opportunities Fund and that Touchstone was satisfied with LMCG’s management of those funds.
Conclusion. The Board reached the following conclusions regarding the Sub-Advisory Agreement: (a) LMCG is qualified to manage the Small Cap Value Opportunities Fund’s assets in accordance with the Fund’s investment goal and policies; (b) LMCG maintains an appropriate compliance program; (c) the Fund’s proposed sub-advisory fee is reasonable in relation to the services provided and fees charged to other Touchstone funds; and (d) LMCG’s proposed investment strategies are appropriate for managing the Fund. In considering the approval of the Sub-Advisory Agreement, the Board, including the Independent Trustees, did not identify any single factor as controlling, and each Trustee attributed different weights to the various factors. Based on its conclusions, the Board determined that approval of the Sub-Advisory Agreement was in the best interests of the Small Cap Value Opportunities Fund and its shareholders.
Information About the Sub-Advisor
LMCG Investments, LLC (previously defined as “LMCG”), located at 200 Clarendon Street, 28th Floor, Boston, Massachusetts, 02116, an investment advisor registered with the Securities and Exchange Commission, also serves as the sub-advisor to the Touchstone Mid Cap Value Fund and the Touchstone Small Cap Value Fund. As the sub-advisor, LMCG will make investment decisions for the Fund and will also ensure compliance with the Fund’s investment policies and guidelines. LMCG is a board-managed limited liability company owned by its employees, Lee P. Munder, and Royal Bank of Canada (“RBC”). LMCG operates independently of RBC, a publicly held Canadian bank that on November 2, 2015 acquired City National Corporation, LMCG’s former majority owner. As of March 31, 2018, LMCG had approximately $8 billion in assets under management.
The name and principal occupation of the principal executive officers of LMCG are listed below.
Name | Title and Occupation | |
Jeffrey P. Davis | Chief Investment Officer | |
Edmund H. Price | Chief Legal Officer | |
Kenneth L. Swan | President, Chief Executive Officer | |
Joseph F. Tower III | Chief Compliance Officer, Chief Operating Officer | |
The address for each person listed above is 200 Clarendon Street, 28th Floor, Boston, Massachusetts, 02116.
During the fiscal year ended June 30, 2017, Touchstone Advisors earned gross investment advisory fees of $1,249,186 for services provided to the Small Cap Value Opportunities Fund, and Touchstone Advisors paid $722,147 in sub-advisory fees to TS&W with respect to the Fund during the last fiscal year. If the Sub-Advisory Agreement with LMCG had been in effect during the fiscal year ended June 30, 2017, Touchstone Advisors would have paid LMCG $591,720 in sub-advisory fees. The percentage difference between the sub-advisory rates paid by Touchstone Advisors and the sub-advisory rates that would have been paid by Touchstone Advisors if the Sub-Advisory Agreement with LMCG was in effect is (.10)% for the Small Cap Value Opportunities Fund. In addition, effective September 21, 2018, the advisory fee rate of the Small Cap Value Fund will contractually be lowered to 0.85% of the average daily net assets of the Fund.
Touchstone Advisors will use a portion of its advisory fee to pay LMCG’s sub-advisory fee. Because Touchstone Advisors will pay LMCG’s sub-advisory fees out of its own fees received from the Small Cap Value Opportunities Fund, there will be no “duplication” of advisory fees paid.
Description of the Sub-Advisory Agreement
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A form of the Sub-Advisory Agreement is attached to this Proxy Statement/Prospectus as Exhibit D. The contractual terms and conditions of the Sub-Advisory Agreement are similar to those of the Prior Sub-Advisory Agreement with TS&W. A description of several important provisions of the Sub-Advisory Agreement is set forth below and is qualified in its entirety by reference to Exhibit D.
General. LMCG will manage the investment and reinvestment of the portion of the assets of the Small Cap Value Opportunities Fund allocated to it by Touchstone Advisors (“Fund Assets”), subject to and in accordance with the investment goal, policies, and restrictions of the Fund and in conformity with the Fund’s currently effective registration statement. LMCG will make all determinations with respect to the investment of the Fund Assets and the purchase and sale of portfolio securities. LMCG also will determine the manner in which voting rights, rights to consent to corporate action and any other rights pertaining to the Fund Assets will be exercised. LMCG will provide regular reports to the Target Trust's Board and Touchstone Advisors. LMCG will place orders for portfolio transactions on behalf of the Small Cap Value Opportunities Fund in accordance with the Target Trust's policies and shall be responsible for obtaining the most favorable price and execution available for the Fund.
Compensation. Pursuant to the terms of the Sub-Advisory Agreement, Touchstone Advisors will pay LMCG a monthly fee based on the average daily net Fund Assets, without regard to any total expense limitation applied by the Target Trust and Touchstone Advisors. The sub-advisory fee is computed and accrued daily.
The sub-advisory fee rate payable to LMCG was negotiated at arm's length, based on a variety of factors, including the value of the services to be provided, the investment characteristics of the Small Cap Value Opportunities Fund relative to other similar funds and the fees charged to comparable products within the industry. There will be no change in the advisory fee rate paid by the Small Cap Value Opportunities Fund to Touchstone Advisors as a result of the appointment of LMCG as the sub-advisor to the Fund.
Liability. LMCG has agreed to indemnify and hold harmless the Target Trust, Touchstone Advisors and all of their affiliated persons and all controlling persons against any and all direct losses, claims, damages, or liabilities (including reasonable legal and other expenses) incurred by reason of or arising out of: (a) LMCG being in material violation of any applicable federal or state law, rule or regulation or any investment policy or restriction set forth in the Small Cap Value Opportunities Fund’s registration statement or any written guidelines or instruction provided in writing by the Board, or (b) LMCG’s willful misfeasance, bad faith or gross negligence generally in the performance of its duties under the Sub-Advisory Agreement or its reckless disregard of its obligations and duties under the Sub-Advisory Agreement.
Limit on Trust Liability. LMCG agrees that (i) the Target Trust’s obligations to LMCG under the Sub-Advisory Agreement (or indirectly under the Advisory Agreement) shall be limited in any event to the Fund Assets and (ii) LMCG shall not seek satisfaction of any such obligation from the shareholders of the Small Cap Value Opportunities Fund, other than Touchstone Advisors, nor from any Trustee, officer, employee or agent of the Target Trust.
Term. The terms of the Sub-Advisory Agreement provide for it to remain in effect from July 30, 2018 through July 29, 2020, unless sooner terminated in accordance with the Sub-Advisory Agreement, and for successive annual terms thereafter provided that such continuance of the Sub-Advisory Agreement is approved by the parties to the Sub-Advisory Agreement and is approved at least annually by (i) the vote of the holders of a majority of the outstanding voting securities of the Small Cap Value Opportunities Fund or (ii) by vote of a majority of the Board including the vote of a majority of the Trustees who are not parties to this Agreement or interested persons of either Touchstone Advisors or LMCG, cast in person at a meeting called for the purpose of voting on such approval.
Amendment. The Sub-Advisory Agreement may be amended at any time by the parties to the Sub-Advisory Agreement, subject to approval by the Board and, if required by applicable SEC rules and regulations, a vote of the majority of the outstanding voting securities of the Small Cap Value Opportunities Fund affected by such change.
Termination. The Sub-Advisory Agreement may be terminated at any time, without payment of any penalty, (i) by Touchstone Advisors upon not more than sixty (60) days’ nor less than thirty (30) days’ prior written notice; (ii) by LMCG upon not less than sixty (60) days’ written notice; or (iii) by the Target Trust upon either (y) the majority vote of the Board or (z) the affirmative vote of a majority of the outstanding voting securities of the Small Cap Value Opportunities Fund. The Sub-Advisory Agreement will terminate automatically in the event of its “assignment” as such term is defined under the 1940 Act. The same termination terms applied to the Prior Sub-Advisory Agreement.
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EXHIBIT A: FORM OF AGREEMENT AND PLAN OF REORGANIZATION
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the “Agreement”) is made as of [ ], 2018, among Touchstone Small Cap Value Fund (the “Acquiring Fund”), a series of Touchstone Funds Group Trust (the “Acquiring Trust”), a Delaware statutory trust; Touchstone Small Cap Value Opportunities Fund (the “Target Fund,” and collectively with the Acquiring Fund, the “Funds” and each, a “Fund”), a series of Touchstone Strategic Trust (the “Target Trust” and collectively with the Acquiring Trust, the “Trusts”), a Massachusetts business trust; and Touchstone Advisors, Inc. (for purposes of Section 9.1 only of this Agreement). The Acquiring Trust and the Target Trust each has its principal place of business at 303 Broadway, Suite 1100, Cincinnati, Ohio 45202.
WHEREAS, the reorganization will consist of (i) the transfer of all of the assets of the Target Fund to the Acquiring Fund in exchange solely for voting shares of beneficial interest, without par value, of the corresponding class of shares of the Acquiring Fund set forth on Exhibit A (the “Acquiring Fund Shares”) and the assumption by the Acquiring Fund of all of the liabilities of the Target Fund; and (ii) the pro rata distribution of the Acquiring Fund Shares to the shareholders of the Target Fund in complete liquidation and termination of the Target Fund, all upon the terms and conditions in this Agreement (the “Reorganization”);
WHEREAS, the parties intend that this Agreement be a plan of reorganization and that the Reorganization shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and the Treasury Regulations promulgated thereunder;
WHEREAS, the Target Fund and the Acquiring Fund are each a separate investment series of an open‑end registered management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), and the Target Fund owns securities that generally are assets of the type and character in which the Acquiring Fund is permitted to invest;
WHEREAS, the Target Fund and the Acquiring Fund are authorized to issue their shares of beneficial interest;
WHEREAS, the Board of Trustees of the Acquiring Trust, including a majority of the Trustees who are not “interested persons” of the Acquiring Trust, as defined in the 1940 Act, has determined that the Reorganization will be in the best interests of the Acquiring Fund and its shareholders and that the interests of the existing shareholders of the Acquiring Fund will not be diluted in value as a result of the Reorganization;
WHEREAS, the Board of Trustees of the Target Trust, including a majority of the Trustees who are not “interested persons” of the Target Trust, as defined in the 1940 Act, has determined that the Reorganization will be in the best interests of the Target Fund and its shareholders and that the interests of the shareholders of the Target Fund will not be diluted in value as a result of the Reorganization;
NOW, THEREFORE, in consideration of the premises and of the covenants and agreements in this Agreement, the parties hereto covenant and agree as follows:
ARTICLE I
TRANSFER OF ASSETS OF THE TARGET FUND IN EXCHANGE FOR
ACQUIRING FUND SHARES AND THE ASSUMPTION OF TARGET FUND
LIABILITIES AND LIQUIDATION OF THE TARGET FUND
1.1 THE EXCHANGE. Subject to the terms and conditions of this Agreement and on the basis of the representations and warranties contained herein, the Target Trust, on behalf of the Target Fund, agrees to transfer all of the Target Fund’s assets to the Acquiring Fund as set forth in Section 1.2, free and clear of all liens, encumbrances and claims whatsoever. The Acquiring Trust, on behalf of the Acquiring Fund, agrees in exchange for the Target Fund’s assets (i) to deliver to the Target Fund the number of Acquiring Fund Shares, including fractional Acquiring Fund Shares, computed in the manner and as of the time and date set forth in Sections 2.2 and 2.3; and (ii) to assume all of the liabilities of the Target Fund, as set forth in Section 1.3. Such transactions shall take place at the Closing provided for in Section 3.1.
1.2 ASSETS TO BE ACQUIRED. The assets of the Target Fund to be acquired by the Acquiring Fund shall consist of all property, including, without limitation, all cash, securities, commodities, interests in futures and other financial instruments, and claims (whether absolute or contingent, known or unknown) and receivables (including dividends or interest receivables),
52
that is owned by the Target Fund and any deferred or prepaid expenses shown as an asset on the books of the Target Fund as of the Closing (as defined below).
The Target Trust, on behalf of the Target Fund, has provided the Acquiring Fund with its most recent audited financial statements, which contain a list of all of the Target Fund’s assets as of the date thereof. The Target Trust, on behalf of the Target Fund, represents that as of the date of the execution of this Agreement there have been no changes in the financial position of the Target Fund as reflected in said financial statements other than those occurring in the ordinary course of its business in connection with the purchase and sale of portfolio securities, purchases and redemptions of Target Fund shares, the payment of its normal operating expenses and the distribution of its net income and net capital gain. The Target Trust, with respect to the Target Fund, reserves the right to buy and sell any securities or other assets in accordance with its investment objective and policies.
1.3 LIABILITIES TO BE ASSUMED. The Target Trust will endeavor to discharge all of the Target Fund’s known liabilities and obligations prior to the Valuation Time (as defined below). The Acquiring Fund shall assume all of the Target Fund’s liabilities and obligations of any kind whatsoever, whether absolute, accrued, contingent or otherwise in existence as of the Closing.
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing as is practicable (the “Liquidation Date”), (a) the Target Fund will completely liquidate and distribute pro rata to the Target Fund’s shareholders of record of each class, determined as of the time of such distribution (the “Target Fund Shareholders”), the Acquiring Fund Shares of the corresponding class (as set forth in Section 2.3) received by the Target Fund pursuant to Section 1.1; and (b) the Target Fund will proceed to terminate in accordance with applicable laws of the Commonwealth of Massachusetts as set forth in Section 1.7 below. Such liquidation and distribution will be accomplished by the transfer of the Acquiring Fund Shares then credited to the account of the Target Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring Fund in the names of the Target Fund Shareholders and representing the respective pro rata number of the Acquiring Fund Shares, by class, due such shareholders. All issued and outstanding shares of the Target Fund will simultaneously be canceled on the books of the Target Fund and will be null and void. The Acquiring Fund shall not issue certificates representing the Acquiring Fund Shares in connection with such exchange; Acquiring Fund Shares distributed to Target Fund Shareholders will be reflected on the books of the Acquiring Fund as uncertificated shares.
1.5 TRANSFER TAXES. Any transfer taxes payable upon issuance of the Acquiring Fund Shares in a name other than the registered holder of the Target Fund shares on the books of the Target Fund as of the Closing shall, as a condition of such issuance and transfer, be paid by the person to whom such Acquiring Fund Shares are to be issued and transferred.
1.6 REPORTING RESPONSIBILITY. Any reporting responsibility of the Target Fund is and shall remain the responsibility of the Target Fund up to and including the Closing Date and such later date on which the Target Fund is terminated.
1.7 TERMINATION. The Target Trust shall take all necessary and appropriate steps under applicable law to terminate the Target Fund promptly following the Closing and the making of all distributions pursuant to Section 1.4.
1.8 WAIVER OF INVESTMENT MINIMUMS AND SALES LOADS. In connection with the Reorganization, any minimum investment amounts or sales loads applicable to initial investments in the Acquiring Fund will be waived with respect to the Target Fund Shareholders’ initial receipt of Acquiring Fund Shares in the Reorganization.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Target Fund’s assets to be acquired by the Acquiring Fund and the amount of the Target Fund’s liabilities to be assumed by the Acquiring Fund shall be computed as of the close of business on the New York Stock Exchange on the Closing Date (the “Valuation Time”), using the valuation procedures approved by the Boards of the Trusts for regular use in determining net asset value or such other valuation procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of each class of the Acquiring Fund shall be the net asset value per share of such class of such Fund computed as of the Valuation Time, using the valuation procedures approved by the Boards of the Trusts for regular use in determining net asset value or such other valuation procedures as shall be mutually agreed upon by the parties.
2.3 SHARES TO BE ISSUED. The number of full and fractional Acquiring Fund Shares to be issued in exchange for the Target Fund’s net assets will be determined with respect to each class by dividing (a) the net assets attributable to such
53
class of the Target Fund, determined in accordance with Section 2.1, by (b) the net asset value per share of the corresponding class of the Acquiring Fund, determined in accordance with Section 2.2. Holders of each class of shares of the Target Fund will receive full and fractional shares of the corresponding class of the Acquiring Fund, as set forth on Exhibit A to this Agreement.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by BNY Mellon Investment Servicing (US) Inc., the Acquiring Fund’s and the Target Fund’s accounting agent, in accordance with its regular practice in pricing the shares and assets of the Acquiring Fund and the Target Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. Subject to the satisfaction or waiver of the conditions precedent set forth in Articles VI, VII and VIII, the closing of the Reorganization (the “Closing”) shall take place on or about [ ], 2018 or such other date as the parties may agree to in writing (the “Closing Date”). All acts taking place at the Closing shall be deemed to take place simultaneously as of 5:00 p.m. Eastern Time on the Closing Date unless otherwise provided. The Closing shall be held as of 5:00 p.m. Eastern Time at the offices of the Acquiring Trust and the Target Trust, or at such other time or place as the parties hereto may agree.
3.2 EFFECT OF SUSPENSION IN TRADING. In the event that on the day on which the Valuation Time occurs (a) the New York Stock Exchange or another primary trading market for portfolio securities of the Acquiring Fund or the Target Fund shall be closed to trading or trading thereon shall be restricted; or (b) trading or the reporting of trading on said Exchange or elsewhere shall be disrupted so that an accurate determination of the value of the net assets of the Acquiring Fund or the Target Fund is impracticable, the Closing Date shall be postponed until the first business day after the day when trading shall have been fully resumed and reporting shall have been restored or such other date as the parties hereto may agree.
3.3 DELIVERY OF ASSETS. Delivery of the Target Fund’s assets will be made by delivery to Brown Brothers Harriman & Co., the Acquiring Fund’s custodian (the “Custodian”), for the account of the Acquiring Fund, in accordance with the customary practices of the Custodian, with all securities not in bearer or book-entry form duly endorsed, or accompanied by duly executed separate assignments or stock powers, in proper form for transfer, with signatures guaranteed, and with all necessary stock transfer stamps, sufficient to transfer good and marketable title thereto (including all accrued interest and dividends and rights pertaining thereto) to the Custodian for the account of the Acquiring Fund free and clear of all liens, encumbrances, rights, restrictions and claims. All cash delivered will be in the form of immediately available funds payable to the order of the Custodian for the account of the Acquiring Fund. If the Target Trust, on behalf of the Target Fund, is unable to make delivery to the Custodian pursuant to this Section 3.3 of any assets for the reason that any of such assets have not yet been delivered to the Target Fund by the Target Fund’s broker, dealer or other counterparty, then, in lieu of such delivery, the Target Trust, on behalf of the Target Fund, will deliver with respect to said assets executed copies of an agreement of assignment and due bills executed on behalf of said broker, dealer or other counterparty, together with such other documents as may be required by the Acquiring Trust, on behalf of the Acquiring Fund, or the Custodian, including broker confirmation slips.
3.4 TRANSFER AGENT CERTIFICATES. The Target Fund shall cause its transfer agent to deliver at the Closing a certificate of an authorized officer stating that its records contain the names and addresses of the Target Fund Shareholders and the number, class and percentage ownership of outstanding shares owned by each such shareholder at the Closing. The Acquiring Fund shall issue and deliver, or cause its transfer agent, to issue and deliver, to the Secretary of the Target Trust a confirmation evidencing the Acquiring Fund Shares to be credited at the Closing or provide evidence satisfactory to the Target Fund that such Acquiring Fund Shares have been credited to the Target Fund’s account on the books of the Acquiring Fund. At the Closing, each Fund shall deliver to the other such bills of sale, checks, assignments, share certificates, if any, receipts and other documents as such other Fund or its counsel may reasonably request.
3.5 CUSTODIAN CERTIFICATES. The Target Fund shall cause the custodian for the Target Fund to deliver to the Acquiring Fund at the Closing a certificate of an authorized officer stating that: (a) the Target Fund’s portfolio securities, cash, and any other assets have been delivered in proper form to the Acquiring Fund on the Closing Date; and (b) all necessary taxes, including all applicable federal and state stock transfer stamps, if any, have been paid, or provision for payment shall have been made, in conjunction with the delivery of portfolio securities by the Target Fund. The Acquiring Fund shall cause the Custodian for the Acquiring Fund to deliver to the Target Fund at the Closing a certificate of an authorized officer acknowledging that the Acquiring Fund has received the Target Fund’s portfolio securities, cash and any other assets on the Closing Date.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE TARGET FUND. The Target Trust, on behalf of the Target Fund, represents and warrants to the Acquiring Fund as follows:
(a) The Target Fund is a separate investment series of the Target Trust, a business trust duly organized, validly existing, and in good standing under the laws of Massachusetts.
(b) The Target Fund is a separate investment series of the Target Trust, which is registered as an investment company classified as a management company of the open‑end type, and its registration with the Securities and Exchange Commission (the “Commission”) as an investment company under the 1940 Act, is in full force and effect.
(c) The current prospectus and statement of additional information of the Target Fund conform in all material respects to the applicable requirements of the Securities Act of 1933, as amended (the “1933 Act”), and the 1940 Act and the rules and regulations of the Commission and do not include any untrue statement of a material fact or omit to state any material fact required to be stated or necessary to make the statements, in light of the circumstances under which they were made, not misleading.
(d) The Target Fund is not, and the execution, delivery, and performance of this Agreement will not result, in violation of any provision of the Target Trust’s Restated Agreement and Declaration of Trust, as amended or Amended and Restated By‑Laws or of any material agreement, indenture, instrument, contract, lease, or other undertaking to which the Target Fund is a party or by which it is bound.
(e) The Target Fund has no material contracts or other commitments (other than this Agreement) that will be terminated with liability to it on or prior to the Closing, except for liabilities, if any, to be discharged as provided in Section 1.3.
(f) Except as otherwise disclosed in writing to and accepted by the Acquiring Fund, no litigation, administrative proceeding, or investigation of or before any court or governmental body is presently pending or to its knowledge threatened against the Target Fund or any of its properties or assets, which, if adversely determined, would materially and adversely affect its financial condition, the conduct of its business, or the ability of the Target Fund to carry out the Reorganization. The Target Fund knows of no facts that might form the basis for the institution of such proceedings and is not a party to or subject to the provisions of any order, decree, or judgment of any court or governmental body that materially and adversely affects its business or its ability to consummate the Reorganization or the transactions contemplated herein.
(g) The audited financial statements of the Target Fund dated June 30, 2017 are in accordance with generally accepted accounting principles consistently applied, and such statements (copies of which have been furnished to the Acquiring Fund) fairly reflect the financial condition of the Target Fund as of such date, and there are no known contingent liabilities of the Target Fund as of such date not disclosed therein.
(h) The financial statements of the Target Fund as of December 31, 2017 and for the period then ended are in accordance with generally accepted accounting principles consistently applied, and such statements (copies of which have been furnished to the Acquiring Fund) fairly reflect the financial condition of the Target Fund as of such date, and there are no known contingent liabilities of the Target Fund as of such date not disclosed therein.
(i) Since the date of the financial statements referred to in subsection (h) above, there has not been any material adverse change in the Target Fund’s financial condition, assets, liabilities, or business other than changes occurring in the ordinary course of business, or any incurrence by the Target Fund of indebtedness maturing more than one year from the date such indebtedness was incurred, except as otherwise disclosed to and accepted by the Acquiring Fund. For the purposes of this subsection (i), a decline in the net asset value of the Target Fund shall not constitute a material adverse change.
(j) All federal, state, local and other tax returns and reports of the Target Fund required by law to be filed by it (taking into account permitted extensions for filing) have been timely filed and are complete and correct in all material respects. All federal, state, local and other taxes of the Target Fund required to be paid (whether or not shown as due on any such return or report) have been paid, or provision shall have been made for the payment thereof and any such unpaid taxes as of the date of the financial statements referred to in subsection (h) above are properly reflected on such financial statements. To the Target Fund’s knowledge, no tax authority is currently auditing or preparing to audit the Target Fund, and no assessment or deficiency for taxes, interest, additions to tax or penalties has been asserted against the Target Fund.
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(k) For each taxable year of its operations (including the taxable year ending on the Closing Date), the Target Fund has been or will be treated as a separate corporation for federal income tax purposes pursuant to Section 851(g) of the Code, has met or will meet the requirements of Subchapter M of the Code for qualification as a regulated investment company and has elected to be treated as such, has been and will be eligible to compute and has computed and will compute its federal income tax under Section 852 of the Code, and will have distributed on or prior to the Closing Date all its investment company taxable income (determined without regard to the deduction for dividends paid), the excess of its interest income excludable from gross income under Section 103(a) of the Code over its deductions disallowed under Sections 265 and 171(a)(2) of the Code, and its net capital gain (after reduction for any available capital loss carryover as of the Closing Date and excluding any net capital gain on which the Target Fund paid tax under Section 852(b)(3)(A) of the Code) (as such terms are defined in the Code), in each case that has accrued or will accrue on or prior to the Closing Date.
(l) The Target Fund is not under the jurisdiction of a court in a “Title 11 or similar case” (within the meaning of Section 368(a)(3)(A) of the Code).
(m) All issued and outstanding shares of the Target Fund are, and at the Closing will be, duly and validly issued and outstanding, fully paid and non‑assessable by the Target Fund. All of the issued and outstanding shares of the Target Fund will, at the time of the Closing, be held by the persons and in the amounts set forth in the records of the transfer agent as provided in Section 3.4. The Target Fund does not have outstanding any options, warrants, or other rights to subscribe for or purchase any Target Fund shares, nor is there outstanding any security convertible into any Target Fund shares.
(n) At the Closing, the Target Fund will have good and marketable title to the Target Fund’s assets to be transferred to the Acquiring Fund pursuant to Section 1.1 and full right, power, and authority to sell, assign, transfer, and deliver such assets hereunder, and, upon delivery and payment for such assets, the Acquiring Fund will acquire good and marketable title, subject to no restrictions on the full transfer, including such restrictions as might arise under the 1933 Act, other than as disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(o) The execution, delivery, and performance of this Agreement have been duly authorized by all necessary action on the part of the Target Trust’s Board of Trustees and this Agreement constitutes a valid and legally binding obligation of the Target Fund, enforceable in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors’ rights and to general equity principles.
(p) The information furnished by the Target Fund for use in no‑action letters, applications for orders, registration statements, proxy materials, and other documents that may be necessary in connection with the Reorganization is accurate and complete in all material respects and complies in all material respects with applicable federal securities and other laws and regulations.
(q) The Target Fund has provided the Acquiring Fund with information reasonably necessary for the preparation of the Proxy Statement/Prospectus, all of which was included in a Registration Statement on Form N-14 of the Acquiring Fund (the “Registration Statement”), in compliance with the 1933 Act, the Securities Exchange Act of 1934, as amended, and the 1940 Act in connection with the Reorganization. The Proxy Statement/Prospectus included in the Registration Statement (only as it relates to the Target Fund) does not contain any untrue statement of a material fact or omit to state a material fact required to be stated or necessary to make the statements, in light of the circumstances under which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring Trust, on behalf of the Acquiring Fund, represents and warrants to the Target Fund as follows:
(a) The Acquiring Fund is a separate investment series of the Acquiring Trust, a statutory trust duly organized, validly existing, and in good standing under the laws of Delaware.
(b) The Acquiring Fund is a separate investment series of the Acquiring Trust, which is registered as an investment company classified as a management company of the open‑end type, and its registration with the Commission as an investment company under the 1940 Act is in full force and effect.
(c) The current prospectus and statement of additional information, as of the date of the Proxy Statement/Prospectus, of the Acquiring Fund conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the rules and regulations of the Commission and do not include any untrue statement of a material fact or omit to state any material fact required to be stated or necessary to make the statements, in light of the circumstances under which they were made, not misleading.
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(d) The Acquiring Fund is not, and the execution, delivery and performance of this Agreement will not result, in violation of the Acquiring Trust’s Amended and Restated Agreement and Declaration of Trust or By‑Laws, or of any material agreement, indenture, instrument, contract, lease, or other undertaking to which the Acquiring Fund is a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Target Fund and accepted by the Target Fund, no litigation, administrative proceeding or investigation of or before any court or governmental body is presently pending or to its knowledge threatened against the Acquiring Fund or any of its properties or assets, which, if adversely determined, would materially and adversely affect its financial condition and the conduct of its business or the ability of the Acquiring Fund to carry out the Reorganization. The Acquiring Fund knows of no facts that might form the basis for the institution of such proceedings and is not a party to or subject to the provisions of any order, decree, or judgment of any court or governmental body that materially and adversely affects its business or its ability to consummate the Reorganization or the transactions contemplated herein.
(f) The audited financial statements of the Acquiring Fund dated September 30, 2017 are in accordance with generally accepted accounting principles consistently applied, and such statements (copies of which have been furnished to the Target Fund) fairly reflect the financial condition of the Acquiring Fund as of such date, and there are no known contingent liabilities of the Acquiring Fund as of such date not disclosed therein.
(g) The financial statements of the Acquiring Fund as of March 31, 2018 and for the period then ended are in accordance with generally accepted accounting principles consistently applied, and such statements (copies of which have been furnished to the Target Fund) fairly reflect the financial condition of the Acquiring Fund as of such date, and there are no known contingent liabilities of the Acquiring Fund as of such date not disclosed therein.
(h) Since the date of the financial statements referred to in subsection (g) above, there has not been any material adverse change in the Acquiring Fund’s financial condition, assets, liabilities, or business other than changes occurring in the ordinary course of business, or any incurrence by the Acquiring Fund of indebtedness maturing more than one year from the date such indebtedness was incurred, except as otherwise disclosed to and accepted by the Target Fund. For the purposes of this subsection (g), a decline in the net asset value of the Acquiring Fund shall not constitute a material adverse change.
(i) All federal, state, local and other tax returns and reports of the Acquiring Fund required by law to be filed by it (taking into account permitted extensions for filing) have been timely filed and are complete and correct in all material respects. All federal, state, local and other taxes of the Acquiring Fund required to be paid (whether or not shown as due on any such return or report) have been paid or provision shall have been made for the payment thereof and any such unpaid taxes as of the date of the financial statements referred to in subsection (g) above are properly reflected on such financial statements. To the Acquiring Fund’s knowledge, no tax authority is currently auditing or preparing to audit the Acquiring Fund, and no assessment or deficiency for taxes, interest, additions to tax or penalties has been asserted against the Acquiring Fund.
(j) For each taxable year of its operation, the Acquiring Fund has been treated as a separate corporation for federal income tax purposes pursuant to Section 851(g) of the Code, has met the requirements of Subchapter M of the Code for qualification as a regulated investment company and has elected to be treated as such, and has been eligible to compute and has computed its federal income tax under Section 852 of the Code. In addition, the Acquiring Fund will satisfy each of the foregoing with respect to its taxable year that includes the Closing Date.
(k) All issued and outstanding Acquiring Fund shares are, and at the Closing will be, duly and validly issued and outstanding, fully paid and non‑assessable by the Acquiring Fund. The Acquiring Fund does not have outstanding any options, warrants, or other rights to subscribe for or purchase any Acquiring Fund shares, nor is there outstanding any security convertible into any Acquiring Fund shares.
(l) The execution, delivery, and performance of this Agreement have been duly authorized by all necessary action on the part of the Acquiring Trust’s Board of Trustees and this Agreement constitutes a valid and legally binding obligation of the Acquiring Fund enforceable in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other laws relating to or affecting creditors’ rights and to general equity principles.
(m) The Acquiring Fund Shares to be issued and delivered to the Target Fund, for the account of the Target Fund Shareholders, pursuant to the terms of this Agreement will, at the Closing, have been duly authorized and, when so issued and delivered, will be duly and validly issued Acquiring Fund Shares, and will be fully paid and non‑assessable by the Acquiring Fund.
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(n) The information furnished by the Acquiring Fund for use in no‑action letters, applications for orders, registration statements, proxy materials, and other documents that may be necessary in connection with the Reorganization is accurate and complete in all material respects and complies in all material respects with applicable federal securities and other laws and regulations.
(o) The Proxy Statement/Prospectus included in the Registration Statement (only as it relates to the Acquiring Fund) does not contain any untrue statement of a material fact or omit to state a material fact required to be stated or necessary to make the statements, in light of the circumstances under which such statements were made, not misleading.
(p) The Acquiring Fund agrees to use all reasonable efforts to obtain the approvals and authorizations required by the 1933 Act, the 1940 Act, and such of the state Blue Sky or securities laws as it may deem appropriate in order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE TARGET FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Target Fund each will operate its business in the ordinary course between the date of this Agreement and the Closing, it being understood that such ordinary course of business will include purchases and redemptions of shares, customary dividends and distributions and any other distributions necessary or desirable to avoid federal income or excise taxes.
5.2 SHAREHOLDER MEETING. The Target Fund will call a meeting of the Target Fund shareholders to consider and act upon this Agreement and to take all other action necessary to obtain approval of the transactions contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Target Fund covenants that the Acquiring Fund Shares to be issued are not being acquired for the purpose of making any distribution other than in accordance with the terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Target Fund will assist the Acquiring Fund in obtaining such information as the Acquiring Fund reasonably requests concerning the beneficial ownership of the Target Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the Acquiring Fund and the Target Fund will each take, or cause to be taken, all action, and do or cause to be done, all things reasonably necessary, proper or advisable to consummate and make effective the Reorganization, including any actions required to be taken after the Closing Date.
5.6 TAX STATUS OF REORGANIZATION. It is the intention of the parties hereto that the transaction contemplated by this Agreement with respect to the Target Fund and the Acquiring Fund will qualify as a reorganization within the meaning of Section 368(a) of the Code. Except as otherwise expressly provided in this Agreement, none of the Target Trust, the Acquiring Trust, the Target Fund, or the Acquiring Fund shall take any action or cause any action to be taken (including without limitation the filing of any tax return) that is inconsistent with such treatment or results in the failure of the transaction to qualify as a reorganization within the meaning of Section 368(a) of the Code. At or prior to the Closing, the parties to this Agreement will take such reasonable action, or cause such action to be taken, as is reasonably necessary to enable Vedder Price P.C. to render the tax opinion contemplated in this Agreement.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE TARGET FUND
The obligations of the Target Fund to consummate the Reorganization shall be subject, at its election, to the performance by the Acquiring Fund of all the obligations to be performed by it at or before the Closing, and, in addition, the following further condition:
6.1 All representations and warranties of the Acquiring Fund contained in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing with the same force and effect as if made at and as of the Closing. The Acquiring Fund shall have delivered to the Target Fund at the Closing a certificate executed in its name by the Acquiring Trust’s President or Vice President, in form and substance reasonably satisfactory to the Target Fund and dated as of the Closing Date, to such effect and as to such other matters as the Target Fund shall reasonably request.
ARTICLE VII
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CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the Reorganization shall be subject, at its election, to the performance by the Target Fund of all the obligations to be performed by it at or before the Closing and, in addition, the following conditions:
7.1 All representations and warranties of the Target Fund contained in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing with the same force and effect as if made at and as of the Closing. The Target Fund shall have delivered to the Acquiring Fund at the Closing a certificate executed in its name by the Target Trust’s President or Vice President, in form and substance satisfactory to the Acquiring Fund and dated as of the Closing Date, to such effect and as to such other matters as the Acquiring Fund shall reasonably request.
7.2 The Target Fund shall have delivered to the Acquiring Fund a statement of the Target Fund’s assets and liabilities, together with a list of the Target Fund’s portfolio securities showing the tax basis of such securities by lot and the holding periods of such securities, as of the Closing, certified by the Treasurer or Assistant Treasurer of the Target Trust.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE TARGET FUND
If any of the conditions set forth below have not been satisfied at or before the Closing with respect to the Target Fund or the Acquiring Fund, the other Fund shall, at its option, not be required to consummate the Reorganization:
8.1 This Agreement and the transactions contemplated herein shall have been approved by the requisite vote of the holders of the outstanding shares of the Target Fund in accordance with the provisions of the Target Trust’s Declaration of Trust and the 1940 Act. Notwithstanding anything in this Agreement to the contrary, neither the Target Fund nor the Acquiring Fund may waive the condition set forth in this Section 8.1.
8.2 On the Closing Date, the Commission shall not have issued an unfavorable report under Section 25(b) of the 1940 Act, nor instituted any proceeding seeking to enjoin the consummation of the transactions contemplated by this Agreement under Section 25(c) of the 1940 Act and no action, suit, or other proceeding shall be threatened or pending before any court or governmental agency in which it is sought to restrain or prohibit, or obtain damages or other relief in connection with, this Agreement or the Reorganization.
8.3 All required consents of other parties and all other consents, orders, and permits of federal, state, and local regulatory authorities (including those of the Commission and of state Blue Sky securities authorities, including any necessary “no‑action” positions of and exemptive orders from such federal and state authorities) to permit consummation of the Reorganization shall have been obtained, except where failure to obtain any such consent, order, or permit would not involve a risk of a material adverse effect on the assets or properties of the Acquiring Fund or the Target Fund, provided that either party may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the 1933 Act, and no stop orders suspending the effectiveness of the Registration Statement shall have been issued and, to the best knowledge of the parties, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened, or contemplated under the 1933 Act.
8.5 Prior to the Valuation Time, the Target Trust, with respect to the Target Fund, shall have declared and paid a dividend or dividends which, together with all previous such dividends, shall have the effect of distributing to the Target Fund’s shareholders at least all of the Target Fund’s investment company taxable income (within the meaning of Section 852(b)(2) of the Code) for all taxable years or periods ending on or before the Closing Date (computed without regard to any deduction for dividends paid), the excess of the Target Fund’s interest income excludable from gross income under Section 103(a) of the Code over its disallowed deductions under Sections 265 and 171(a)(2) of the Code for all taxable years or periods ending on or before the Closing Date, and all of the Target Fund’s net capital gain (as defined in Section 1222(11) of the Code) realized in all taxable years or periods ending on or before the Closing Date (after reduction for any available capital loss carryforward and excluding any net capital gain on which the Target Fund paid tax under Section 852(b)(3)(A) of the Code).
8.6 Each of the Acquiring Fund and the Target Fund shall have received an opinion of Vedder Price P.C. substantially to the effect that, for federal income tax purposes:
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(a) The transfer by the Target Fund of all its assets to the Acquiring Fund solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of all the liabilities of the Target Fund, immediately followed by the pro rata, by class, distribution of all the Acquiring Fund Shares so received by the Target Fund to the Target Fund’s shareholders of record in complete liquidation of the Target Fund and the termination of the Target Fund as soon as practicable thereafter, will constitute a “reorganization” within the meaning of Section 368(a)(1) of the Code and the Acquiring Fund and the Target Fund will each be “a party to a reorganization,” within the meaning of Section 368(b) of the Code, with respect to the Reorganization.
(b) No gain or loss will be recognized by the Acquiring Fund upon the receipt of all the assets of the Target Fund solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of all the liabilities of the Target Fund.
(c) No gain or loss will be recognized by the Target Fund upon the transfer of all its assets to the Acquiring Fund solely in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of all the liabilities of the Target Fund or upon the distribution (whether actual or constructive) of the Acquiring Fund Shares so received to the Target Fund’s shareholders solely in exchange for such shareholders’ shares of the Target Fund in complete liquidation of the Target Fund.
(d) No gain or loss will be recognized by the Target Fund’s shareholders upon the exchange, of all their shares of the Target Fund solely for Acquiring Fund Shares in the Reorganization.
(e) The aggregate basis of the Acquiring Fund Shares received by each Target Fund shareholder pursuant to the Reorganization will be the same as the aggregate basis of the Target Fund shares exchanged therefor by such shareholder.
(f) The holding period of the Acquiring Fund Shares received by each Target Fund shareholder in the Reorganization will include the period during which the shares of the Target Fund exchanged therefor were held by such shareholder, provided such Target Fund shares were held as capital assets at the effective time of the Reorganization.
(g) The basis of the assets of the Target Fund received by the Acquiring Fund will be the same as the basis of such assets in the hands of the Target Fund immediately before the effective time of the Reorganization.
(h) The holding period of the assets of the Target Fund received by the Acquiring Fund will include the period during which such assets were held by the Target Fund.
No opinion will be expressed as to (1) the effect of the Reorganization on the Acquiring Fund, the Target Fund, or any Target Fund shareholder with respect to any asset (including without limitation any stock held in a passive foreign investment company as defined in Section 1297(a) of the Code) as to which any unrealized gain or loss is required to be recognized for federal income tax purposes (a) at the end of a taxable year or upon the termination thereof, or (b) upon the transfer of such asset regardless of whether such transfer would otherwise be a non-taxable transaction under the Code, or (2) any other federal tax issues (except those set forth above) and all state, local or foreign tax issues of any kind.
Such opinion shall be based on customary assumptions, limitations, and such representations as Vedder Price P.C. may reasonably request. The Target Fund and Acquiring Fund will cooperate to make and certify the accuracy of such representations. Such opinion may contain such assumptions and limitations as shall be in the opinion of such counsel appropriate to render the opinions expressed. Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor the Target Fund may waive the conditions set forth in this Section 8.6.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided, all expenses of the Reorganization, whether incurred before or after the date of this Agreement, will be borne by Touchstone Advisors, Inc., the investment advisor to the Funds, whether or not the Reorganization is completed. Such expenses include, without limitation, (a) expenses incurred in connection with the entering into and the carrying out of the provisions of this Agreement; (b) expenses associated with the preparation and filing of the Registration Statement under the 1933 Act covering the Acquiring Fund Shares to be issued pursuant to the provisions of this Agreement; (c) registration or qualification fees and expenses of preparing and filing such forms as are necessary under applicable state securities laws to qualify the Acquiring Fund Shares to be issued in each state in which the Target Fund shareholders are residents as of the date of the mailing of the Proxy Statement/Prospectus to such shareholders; (d) postage; (e) printing; (f) accounting fees; (g) legal fees; and (h) shareholder solicitation costs.
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9.2 Notwithstanding the foregoing, expenses will in any event be paid by the party directly incurring such expenses if and to the extent that the payment by another party of such expenses would result in the disqualification of the Target Fund or the Acquiring Fund, as the case may be, as a regulated investment company within the meaning of Section 851 of the Code.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Target Fund agree that neither party has made any representation, warranty, or covenant not set forth in this Agreement and that this Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties, and covenants contained in this Agreement or in any document delivered pursuant to or in connection with this Agreement shall not survive the consummation of the Reorganization.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the Acquiring Fund and the Target Fund. In addition, the Acquiring Trust, on behalf of the Acquiring Fund, or the Target Trust, on behalf of the Target Fund, may at its option terminate this Agreement at or prior to the Closing because:
(a) of a breach by any party of any representation, warranty, or agreement contained in this Agreement to be performed at or prior to the Closing, if not cured within 30 days; or
(b) a condition in this Agreement expressed to be precedent to the obligations of the terminating party has not been met and it reasonably appears that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful default, there shall be no liability for damages on the part of the Acquiring Trust, Acquiring Fund, Target Trust or Target Fund, or their Trustees or officers, to the other party.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such manner as may be mutually agreed upon in writing by the authorized officers of the Acquiring Trust and Target Trust.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions of that state; provided that, in the case of any conflict between those laws and the federal securities laws, the latter shall govern.
13.4 This Agreement shall bind and inure to the benefit of the Funds and their respective successors and assigns, but no assignment, transfer, or any rights or obligations of this Agreement shall be made by any Fund without the written consent of the other Fund. Nothing in this Agreement expressed or implied is intended or shall be construed to confer upon or give any person, firm, or corporation, other than the parties and their respective successors and permitted assigns, any rights or remedies under or by reason of this Agreement.
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13.5 With respect to the Target Trust, the names used in this Agreement refer respectively to the Target Trust and the Target Fund and, as the case may be, the Trustees, as trustees but not individually or personally, acting under the Restated Agreement and Declaration of Trust, as amended, which is filed with the Secretary of the Commonwealth of Massachusetts and also on file at the principal office of the Target Trust. The obligations of the Target Trust entered into in the name or on behalf of any of the Trustees, representatives, or agents of the Target Trust, are made not individually, but in such capacities, and are not binding upon any of the Trustees, shareholders, or representatives of the Target Trust personally, but bind only the property of the applicable Fund and all persons dealing with the Target Fund must look solely to property belonging to the Target Fund for the enforcement of any claims against the Target Fund.
13.6 The Acquiring Trust is a Delaware statutory trust organized in series of which the Acquiring Fund constitutes one such series, and the Acquiring Trust is executing this Agreement with respect to the Acquiring Fund only. Pursuant to the Declaration of Trust of the Acquiring Trust and Section 3804(a) of the Delaware Statutory Trust Act, there is a limitation on liabilities of each series such that (a) the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the Acquiring Fund are enforceable against the assets of the Acquiring Fund only, and not against the assets of the Acquiring Trust generally or the assets of any other series thereof and (b) none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the Acquiring Trust generally or any other series thereof are enforceable against the assets of the Acquiring Fund.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, all as of the date first written above.
TOUCHSTONE STRATEGIC TRUST, on behalf of Touchstone Small Cap Value Opportunities Fund By:_______________________________________ Name: Title: | |
TOUCHSTONE FUNDS GROUP TRUST, on behalf of Touchstone Small Cap Value Fund By:_______________________________________ Name: Title: | |
For purposes of Section 9.1 only: TOUCHSTONE ADVISORS, INC. By:_______________________________________ Name: Title: | |
By:_________________________________________ Name: Title: | |
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EXHIBIT A
Share Classes to be Issued | |
Target Fund Share Class | Corresponding Acquiring Fund Share Class |
A | A |
C | C |
Y | Y |
Institutional | Institutional |
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EXHIBIT B: FUNDAMENTAL INVESTMENT LIMITATIONS
A fundamental investment limitation cannot be changed with respect to a Fund without the consent of the holders of a majority of that Fund’s outstanding shares. The term “majority of the outstanding shares” means the vote of (i) 67% or more of a Fund’s shares present at a meeting, if more than 50% of the outstanding shares of a Fund are present or represented by proxy, or (ii) more than 50% of a Fund’s outstanding shares, whichever is less. Each Fund has similar fundamental investment limitations, which are set forth below.
Small Cap Value Fund | Small Cap Value Opportunities Fund | |||
Diversification | The Fund may not purchase securities of an issuer that would cause the Fund to fail to satisfy the diversification requirement for a diversified management company under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time. | The Fund is a “diversified company” as defined in the 1940 Act. This means that the Fund will not purchase the securities of any issuer if, as a result, the Fund would fail to be a diversified company within the meaning of the 1940 Act Laws, Interpretations and Exemptions. This restriction does not prevent the Fund from purchasing the securities of other investment companies to the extent permitted by the 1940 Act Laws, Interpretations and Exemptions. | ||
Borrowing Money/Senior Securities | The Fund may not engage in borrowing except as permitted by the 1940 Act, any rule, regulation, or order under the 1940 Act or any SEC staff interpretation of the 1940 Act. The Fund may not issue senior securities except as permitted by the 1940 Act, any rule, regulation or order under the 1940 Act or any SEC staff interpretation of the 1940 Act. | The Fund may not borrow money or issue senior securities, except as permitted by the 1940 Act Laws, Interpretations and Exemptions. | ||
Underwriting | The Fund may not underwrite securities issued by other persons, except to the extent that, in connection with the sale or disposition of portfolio securities, the Fund may be deemed to be an underwriter under certain federal securities laws or in connection with investments in other investment companies. | The Fund may not underwrite the securities of other issuers. This restriction does not prevent the Fund from engaging in transactions involving the acquisition, disposition or resale of its portfolio securities, regardless of whether the Fund may be considered to be an underwriter under the Securities Act of 1933, as amended. | ||
Concentration of Investments | The Fund may not purchase the securities of an issuer (other than securities issued or guaranteed by the United States Government, its agencies or its instrumentalities) if, as a result, more than 25% of the Fund’s total assets would be invested in the securities of companies whose principal business activities are in the same industry. | The Fund will not make investments that will result in the concentration (as that term may be defined or interpreted by the 1940 Act, Laws, Interpretations and Exemptions) of its investments in the securities of issuers primarily engaged in the same industry. This restriction does not limit the Fund’s investments in (i) obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, (ii) tax-exempt obligations issued by governments or political subdivisions of governments or (iii) repurchase agreements collateralized by such obligations. | ||
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Small Cap Value Fund | Small Cap Value Opportunities Fund | |||
Real Estate | The Fund may not purchase or sell real estate except that the Fund may (1) hold and sell real estate acquired as a result of the Fund’s ownership of securities or other instruments, (2) purchase or sell securities or other instruments backed by real estate or interests in real estate and (3) purchase or sell securities of entities or investment vehicles, including real estate investment trusts that invest, deal or otherwise engage in transactions in real estate or interests in real estate. | The Fund may not purchase or sell real estate unless acquired as a result of ownership of securities or other instruments. This restriction does not prevent the Fund from investing in issuers that invest, deal or otherwise engage in transactions in real estate or interests therein, or investing in securities that are secured by real estate or interests therein. | ||
Commodities | The Fund may not purchase or sell physical commodities except that the Fund may (1) hold and sell physical commodities acquired as a result of the Fund’s ownership of securities or other instruments, (2) purchase or sell securities or other instruments backed by physical commodities, (3) purchase or sell options, and (4) purchase or sell futures contracts. | The Fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments. This restriction does not prevent the Fund from engaging in transactions involving futures contracts and options thereon or investing in securities that are secured by physical commodities. | ||
Loans | The Fund may not make loans to other persons except that the Fund may (1) engage in repurchase agreements, (2) lend portfolio securities, (3) purchase debt securities, (4) purchase commercial paper, and (5) enter into any other lending arrangement permitted by the 1940 Act, any rule, regulation or order under the 1940 Act or any SEC staff interpretation of the 1940 Act. | The Fund may not make personal loans or loans of its assets to persons who control or are under common control with the Fund, except to the extent permitted by the 1940 Act Laws, Interpretations and Exemptions. This restriction does not prevent the Fund from, among other things, purchasing debt obligations, entering repurchase agreements, lending portfolio securities or investing in loans, including assignments and participation interests. | ||
Several of these investment limitations include the defined term “1940 Act Laws, Interpretations and Exemptions.” This term means the 1940 Act and the rules and regulations promulgated thereunder, as such statutes, rules and regulations are amended from time to time or are interpreted from time to time by the staff of the SEC, and any exemptive order or similar relief granted to a Fund.
With respect to each Fund, the following descriptions of certain provisions of the 1940 Act may assist investors in understanding the above policies and restrictions:
1. Borrowing. The 1940 Act allows a fund to borrow from any bank (including pledging, mortgaging or hypothecating assets) in an amount up to 33 1/3% of its total assets (not including temporary borrowings not in excess of 5% of its total assets).
2. Senior Securities. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as certain borrowings, short sales, reverse repurchase agreements, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligation.
3. Underwriting. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly. Under the 1940 Act, a diversified fund may not make any commitment as underwriter, if immediately thereafter the amount of its
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outstanding underwriting commitments, plus the value of its investments in securities of issuers (other than investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds 25% of the value of its total assets.
4. Lending. Under the 1940 Act, a fund may only make loans if expressly permitted by its investment policies. The Fund’s current investment policy on lending is as follows: the Fund may not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements that are collateralized fully; and (iii) engage in securities lending as described in its SAI.
5. Diversification. Under the 1940 Act, a diversified investment management company, as to 75% of its total assets, may not purchase securities of any issuer (other than securities issued or guaranteed by the U.S. Government, its agents or instrumentalities or securities of other investment companies) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer, or more than 10% of the issuer’s outstanding voting securities would be held by the fund.
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EXHIBIT C: CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The shareholders of the Small Cap Value Opportunities Fund at the close of business on the Record Date will be titled to be present and vote at the Special Meeting with respect to shares of the Small Cap Value Opportunities Fund owned as of the Record Date. As of the Record Date, the total number of shares of each of the Small Cap Value Opportunities Fund and the Small Cap Value Fund outstanding and, in the case of the Small Cap Value Opportunities Fund, entitled to vote was as follows:
Fund | Number of Shares |
Touchstone Small Cap Value Opportunities Fund | |
Class A | [ ] |
Class C | [ ] |
Class Y | [ ] |
Institutional Class | [ ] |
Total | [ ] |
Touchstone Small Cap Value Fund | |
Class A | [ ] |
Class C | [ ] |
Class Y | [ ] |
Institutional Class | [ ] |
Total | [ ] |
As of the Record Date, the Officers and Trustees of the Trusts owned less than 1% of any class of the Small Cap Value Opportunities Fund or the Small Cap Value Fund.
For each Fund, the following tables set forth the percentage of ownership of each person who, as of the Record Date, owns of record, or is known by the Fund to own of record or beneficially, 5% or more of the indicated class of shares of the Fund. The tables also set forth the estimated percentage of shares of each class of the Small Cap Value Fund that would have been owned by such parties assuming the Reorganization had occurred on the Record Date. A shareholder who owns beneficially 25% or more of the outstanding securities of a Fund is presumed to “control” the Fund as defined in the 1940 Act and may be able to determine the outcome of a shareholder meeting. Such control may affect the voting rights of other shareholders.
Fund | Name and Address | Class of Shares | Number of Shares | Percentage of Ownership of Class of Fund before the Reorganization | Percentage of Ownership of Small Cap Value Fund after the Reorganization (pro forma) | |||||||||
Small Cap Value Opportunities Fund | [ ] | [ ] | [ ] | [ ] | [ ] | |||||||||
Small Cap Value Fund | [ ] | [ ] | [ ] | [ ] | [ ] | |||||||||
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EXHIBIT D: FORM OF SUB-ADVISORY AGREEMENT
SUB-ADVISORY AGREEMENT
Touchstone Small Cap Value Opportunities Fund
A series of
Touchstone Strategic Trust
This Sub-Advisory Agreement (the “Agreement”) is made as of July 30, 2018, between Touchstone Advisors, Inc. (the “Advisor”), and LMCG Investments, LLC, a Delaware limited liability company (the “Sub-Advisor”).
WHEREAS, Touchstone Strategic Trust (the “Trust”) is a Massachusetts business trust organized pursuant to an Agreement and Declaration of Trust dated May 19, 1993 and registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”); and
WHEREAS, the Advisor is an investment advisor registered under the U.S. Investment Advisers Act of 1940, as amended (the “Advisers Act”) and has been retained by the Trust to provide investment advisory services with respect to certain assets of the Touchstone Small Cap Value Opportunities Fund (the “Fund”); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under the Advisers Act; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it with portfolio management services in connection with the Advisor’s investment advisory activities on behalf of the Fund, and the Sub-Advisor has agreed to furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions set forth below, it is agreed as follows:
1. Appointment of the Sub-Advisor. In accordance with and subject to the Investment Advisory Agreement between the Trust and the Advisor, attached as Exhibit A (the “Advisory Agreement”), the Advisor appoints the Sub-Advisor to manage the investment and reinvestment of that portion of the assets of the Fund allocated to it by the Advisor (the “Fund Assets”), in conformity with the Fund’s currently effective registration statement, including its prospectus and statement of additional information, as amended (collectively, the “Disclosure Documents”), and subject to the control and direction of the Advisor and the Trust’s Board of Trustees (the “Board”), for the period and on the terms set forth in this Agreement. The Sub-Advisor accepts such appointment and agrees during such period to render the services and to perform the duties called for by this Agreement for the compensation provided in Section 3 of this Agreement. The Sub-Advisor shall at all times maintain its registration as an investment advisor under the Advisers Act and shall otherwise comply in all material respects with all applicable laws and regulations, both state and federal. For purposes of this Agreement, the Sub-Advisor shall be deemed an independent contractor and shall, except as expressly provided or authorized by written Agreement with the Advisor, Fund, or Trust, have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust or the Fund.
2. Duties of the Sub-Advisor. The Sub-Advisor will provide the following services and undertake the following duties:
a.The Sub-Advisor will manage the investment and reinvestment of the Fund Assets, subject to and in accordance with the investment objectives, policies, and restrictions of the Fund, and in conformity with the Fund’s currently effective Disclosure Documents, and, to the extent they do not contradict the Fund’s currently effective Disclosure Documents, any written directions which the Advisor or the Trust’s Board may give pursuant to this Agreement. In furtherance of the foregoing, the Sub-Advisor will make all determinations with respect to the investment of the Fund Assets and the purchase and sale of portfolio securities and shall take such steps as may be necessary or advisable to implement the same. The Sub-Advisor also will determine the manner in which voting rights, rights to consent to corporate action, and any other rights pertaining to the portfolio securities will be exercised.
b.As reasonably requested, the Sub-Advisor will render regular reports to the Trust’s Board and to the Advisor (or such other service providers as the Advisor shall engage to assist it in the evaluation of the performance and activities of the Sub-Advisor). Such reports shall be made in such form and manner and with respect to such matters regarding the Fund and the Sub-Advisor as the Trust or the Advisor shall reasonably request; provided, however,
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that in the absence of extraordinary circumstances, the individual primarily responsible for management of Fund Assets for the Sub-Advisor will not be required to attend in-person more than one meeting per year with the Trust’s Board.
c.The Sub-Advisor may utilize the services of a third-party service provider to research and vote proxies on its behalf and on behalf of the Fund.
d.The Sub-Advisor shall not have custody of any of the Fund Assets and is not authorized to provide the Fund with legal or tax advice or to engage the Fund in any legal proceedings, including responding to class action claims; provided, however, that the Sub-Advisor shall promptly forward any notices it receives relating to class action claims to the Fund’s custodian or other duly designated Fund agent. The Sub-Advisor shall assist the custodian or other duly designated Fund agent in evaluating such securities class action claims, as reasonably requested in writing (provided that in so doing the Sub-Advisor shall not incur any extraordinary costs), but the Sub-Advisor will not be responsible for filing such claims. The Advisor acknowledges that the Fund’s custodian or other duly designated Fund agent will be responsible for evaluating and making all decisions regarding class action claims involving securities presently or formerly held by the Fund.
e.The Sub-Advisor may, to the extent permitted by applicable law and regulations, aggregate purchase and sale orders of securities placed with respect to the Fund Assets with similar orders being made simultaneously for other accounts managed by the Sub-Advisor or its affiliates, if, in the Sub-Advisor’s reasonable judgment, such aggregation shall result in an overall economic benefit to the Fund. In forming this judgment the Sub-Advisor shall consider the selling or purchase price, brokerage commissions, and other expenses. In the event that a purchase or sale of the Fund Assets occurs as part of any aggregate sale or purchase order, the objective of the Sub-Advisor and any of its affiliates involved in such transaction shall be to allocate the securities so purchased or sold, as well as expenses incurred in the transaction, among the Fund and other accounts in a fair and equitable manner.
f.Whenever the Fund and one or more other investment advisory clients of the Sub-Advisor have available funds for investment, investments suitable and appropriate for each will be allocated in a manner believed by the Sub-Advisor to be fair and equitable to each. Moreover, it is possible that due to differing investment objectives or for other reasons, the Sub-Advisor and its affiliates may purchase securities of an issuer for one client and at approximately the same time recommend selling or sell the same or similar types of securities for another client, including the Fund.
g. The Sub-Advisor will not arrange purchases or sales of securities between the Fund and other accounts advised by the Sub-Advisor or its affiliates unless (a) such purchases or sales are in accordance with applicable law and regulation (including Rule 17a-7 under the 1940 Act) and the Fund’s policies and procedures, (b) the Sub-Advisor determines the purchase or sale is in the best interests of the Fund, and (c) the Fund’s Board has approved these types of transactions.
h. The Sub-Advisor shall promptly notify the Advisor if the Sub-Advisor reasonably believes that the value of any security held by the Fund and reflected on the books and records of the Fund may not reflect fair value. The Sub-Advisor agrees to provide any pricing information of which the Sub-Advisor is aware to the Advisor and any Fund pricing agent to assist in the determination of the fair value of any Fund holdings for which market quotations are not readily available or as otherwise required in accordance with the 1940 Act or the Fund’s adopted valuation procedures, which may be amended by the Board. Notwithstanding the foregoing, the parties recognize that the Sub-Advisor is not an official pricing source and has no responsibility for calculating the Fund’s net asset value.
i. Regulatory Compliance.
(i)The Sub-Advisor will comply in all material respects with federal and state securities laws, including the 1940 Act, the Advisers Act, the Securities Act of 1933 (the “1933 Act”), the Securities Exchange Act of 1934 (the “1934 Act”), the Commodity Exchange Act of 1936, each as amended, and the rules and regulations adopted by the Securities and Exchange Commission, the Commodities Futures Trading Commission, or state securities regulator that are applicable to a registered investment advisor providing services to registered open-end investment companies including, without limitation, Rule 206(4)-7 under the Advisers Act.
(ii)The Sub-Advisor shall cause the Fund to comply with the diversification and source of income requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), for qualification as a regulated investment company.
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(iii)The Sub-Advisor will cooperate fully with the Trust’s Chief Compliance Officers in the execution of his or her responsibilities to monitor service providers to the Trust pursuant to Rule 38a-1 under the 1940 Act.
(iv)Subject to the Advisor’s supervision, the Sub-Advisor will prepare and cause to be filed in a timely manner Form 13F and, if required, Schedule 13G, each under the 1934 Act, with respect to securities held for the account of the Fund.
(v)The Sub-Advisor has adopted a written code of ethics that it reasonably believes complies with the requirements of Rule 17j-1 under the 1940 Act (the “Code of Ethics”). The Sub-Advisor will provide its code of ethics to the Advisor and the Fund. The Sub-Advisor shall ensure that its Access Persons (as defined in the Sub-Advisor’s Code of Ethics) comply in all material respects with the Sub-Advisor’s Code of Ethics, as in effect. Upon request, the Sub-Advisor shall provide the Fund with (i) a copy of the Sub-Advisor’s current Code of Ethics, as in effect, and (ii) a certification that it has adopted procedures reasonably necessary to prevent Access Persons from engaging in any conduct prohibited by the Sub-Advisor’s Code of Ethics. No less frequently than annually, the Sub-Advisor shall furnish to the Fund and the Advisor a written report, which complies with the requirements of Rule 17j-1 under the 1940 Act, concerning the Sub-Advisor’s Code of Ethics. The Sub-Advisor shall promptly respond to any requests for information from the Advisor as to violations of the Sub-Advisor’s Code of Ethics by Access Persons and the sanctions imposed by the Sub-Advisor. The Sub-Advisor shall promptly notify the Advisor of any material violation of the Sub-Advisor’s Code of Ethics, whether or not such violation relates to a security held by the Fund.
(vi)The Sub-Advisor shall notify the Trust’s Chief Compliance Officer and Advisor immediately upon detection of (i) any material failure to manage the Fund in accordance with its investment objectives and policies or any applicable law; or (ii) any material breach of any of the Fund’s or the Advisor’s policies, guidelines, or procedures (to the extent such policies, guidelines, or procedures have been provided to the Sub-Advisor). In addition, the Sub-Advisor shall provide a quarterly report regarding its compliance with applicable law, including but not limited to the 1940 Act and the Code, and the Fund’s and the Advisor’s investment objectives policies, guidelines, or procedures as applicable to the Sub-Advisor’s obligations under this Agreement. The Sub-Advisor acknowledges and agrees that the Advisor may, in its sole discretion, provide such quarterly compliance certifications to the Board. The Sub-Advisor agrees to correct any such failure promptly and to take any action that the Board or the Advisor may reasonably request in connection with any such breach. The Sub-Advisor shall also provide the officers of the Trust with supporting certifications in connection with certifications of the Fund’s financial statements and disclosure controls pursuant to the Sarbanes-Oxley Act of 2002, as amended. The Sub-Advisor will promptly notify the Trust in the event (i) the Sub-Advisor is served or otherwise receives notice of any action, suit, proceeding, inquiry, or investigation, at law or in equity, before or by any court, public board, or body, involving the affairs of the Trust (excluding class action suits in which the Fund is a member of the plaintiff class by reason of the Fund’s ownership of shares in the defendant) or the compliance by the Sub-Advisor with the federal or state securities laws in connection with the services provided to the Fund under this Agreement or (ii) the controlling stockholder of the Sub-Advisor changes or an actual change in control resulting in an “assignment” (as defined in the 1940 Act) has occurred or is otherwise proposed to occur.
(vii)The Sub-Advisor shall maintain separate books and detailed records of all matters pertaining to the Fund Assets advised by the Sub-Advisor as required by Rule 31a-1 under the 1940 Act (other than those records being maintained by the Advisor, custodian, or transfer agent appointed by the Fund), and relating to its responsibilities under this Agreement. The Sub-Advisor shall preserve such records for the periods and in a manner prescribed by Rule 31a-2 under the 1940 Act (the “Fund Books and Records”). The Fund Books and Records shall be available to the Advisor and the Board, which shall be delivered upon request to the Trust, at the Advisor’s expense, upon the termination of this Agreement and shall be available for telecopying without delay during any day the Fund is open for business. The Sub-Advisor may retain a copy of the Fund Books and Records for its own recordkeeping purposes.
j. The Sub-Advisor shall provide support to the Advisor with respect to the marketing of the Fund, including but not limited to: (i) permission to use the Sub-Advisor’s name and logo in accordance with Section 6 of this Agreement; (ii) permission to use the past performance and investment history of the Sub-Advisor with respect to a composite of funds managed by the Sub-Advisor that are comparable, in investment objective and composition, to the Fund; (iii) access to the individual(s) responsible for day-to-day management of the Fund for marketing conferences,
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teleconferences, and other activities involving the promotion of the Fund, subject to the reasonable request of the Advisor; (iv) permission to use biographical and historical data of the Sub-Advisor and individual portfolio manager(s); and (v) permission to use photos of individual portfolio manager(s) in connection with the marketing of the Fund.
k. The Sub-Advisor will, in the name of the Fund, place orders for the execution of all portfolio transactions in accordance with the policies set forth in the Fund’s Disclosure Documents. When placing orders with brokers and dealers, the Sub-Advisor’s primary objective shall be to obtain the most favorable price and execution available for the Fund, and in placing such orders the Sub-Advisor may consider a number of factors, including, without limitation, the overall direct net economic result to the Fund (including commissions, which may not be the lowest available but ordinarily should not be higher than the generally prevailing competitive range); the financial strength and stability of the broker; the efficiency with which the transaction will be effected; the ability to effect the transaction at all where a large block is involved; and the availability of the broker or dealer to stand ready to execute possibly difficult transactions in the future. Consistent with the Conduct Rules of the Financial Industry Regulatory Authority, and subject to seeking most favorable price and execution and compliance with Rule 12b-1(h) under the 1940 Act, the Sub-Advisor may select brokers and dealers to execute portfolio transactions of the Fund that promote or sell shares of the Fund. The Sub-Advisor is specifically authorized, to the extent authorized by law (including, without limitation, Section 28(e) of the 1934 Act), to pay a broker or dealer who provides research services to the Sub-Advisor an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting such transaction. This excess payment (often referred to as “soft dollar” payments) in recognition of such additional research services rendered by the broker or dealer shall only be made if the Sub-Advisor determines in good faith that the excess commission is reasonable in relation to the value of the brokerage and research services provided by such broker or dealer viewed in terms of the particular transaction or the Sub-Advisor’s overall responsibilities with respect to discretionary accounts that it manages, and that the Fund derives or will derive a reasonable benefit from such research services. The Sub-Advisor will present a written report to the Board, at least quarterly, indicating total brokerage expenses, actual or imputed, as well as the services obtained in consideration for such expenses, broken down by broker-dealer and containing such information as the Board reasonably shall request.
l. The Sub-Advisor shall maintain errors and omissions insurance coverage in an appropriate amount and shall provide prior written notice to the Trust (i) of any material changes in its insurance policies or insurance coverage; or (ii) if any material claims will be made on its insurance policies related to the services provided to the Trust under this Agreement. Furthermore, the Sub-Advisor shall, upon reasonable request, provide the Trust with any information it may reasonably require concerning the amount of or scope of such insurance.
m. In the event of any reorganization or other material change in the Sub-Advisor, the Sub-Advisor shall give the Advisor and the Board written notice of such reorganization or change within a reasonable time (but not later than 30 days) after such reorganization or change.
n. The Sub-Advisor will bear its expenses of providing services to the Fund pursuant to this Agreement except such expenses as are expressly undertaken by the Advisor or the Fund.
o. The Advisor and Sub-Advisor acknowledge and agree that the Sub-Advisor shall be required to provide only the services expressly described in this Agreement, and shall have no responsibility to provide any other services to the Advisor or the Portfolio except as required by law. The Advisor shall remain responsible for the Funds overall compliance with the 1940 Act, the Code, and all other applicable federal and state laws and regulations.
p. The Advisor agrees to provide the Sub-Advisor with such assistance as may be reasonably requested by the Sub-Advisor in connection with its activities under this Agreement, including, without limitation, information concerning the Fund; its cash available, or to become available, for investment; and generally as to the conditions of the Fund or its affairs.
q. The Advisor will provide the Sub-Advisor with advance notice of, and the opportunity to comment on, any change in the Funds investment objectives, investment policy risks, and restrictions as stated in the Disclosure Documents, or in any procedures and policies adopted by the Board of the Trust or the Advisor that may affect the Sub-Advisor’s management of the Fund. The Sub-Advisor shall, in the performance of its duties and obligations under this Agreement, manage the Fund Assets in compliance with such changes following reasonable notice of the effectiveness of such changes from the Advisor. In addition to such notice, the Advisor shall provide to the Sub-Advisor a copy of any amendments or supplements to the Disclosure Documents. The Advisor acknowledges and agrees that the Disclosure Documents will at all times be in compliance with all disclosure requirements under all applicable federal and state laws and regulations relating to the Fund.
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r. The Advisor acknowledges and agrees that the Sub-Advisor does not guarantee the future performance or any specific level of performance for the Fund Assets, the success of any investment decision or strategy that the Sub-Advisor may use, or the success of the Sub-Advisor’s overall management of the Fund Assets. The Advisor acknowledges and agrees that investment decisions made with regard to the Fund Assets by the Sub-Advisor are subject to various market, currency, economic, political, and business risks, and that those investment decisions will not always be beneficial to the Fund. Additionally, there may be loss or depreciation of the value of the Fund Assets because of fluctuation of market values. These risks will be disclosed in the Fund’s Disclosure Documents.
3. Compensation of the Sub-Advisor.
a. As compensation for the services to be rendered and duties undertaken under this Agreement by the Sub-Advisor, the Advisor will pay to the Sub-Advisor a monthly fee equal on an annual basis to XX%; without regard to any total expense limitation or other fee waiver applied by the Trust or the Advisor. Such fee shall be computed and accrued daily. If the Sub-Advisor serves in such capacity for less than the whole of any period specified in Section 12a of this Agreement, the compensation to the Sub-Advisor shall be prorated. For purposes of calculating the Sub-Advisor’s fee, the daily value of the Fund Assets shall be computed by the same method as the Trust uses to compute the Fund’s net asset value for purposes of purchases and redemptions of shares.
b. The Sub-Advisor reserves the right to waive all or a part of its fees.
4. Ongoing Reporting of the Sub-Advisor.
a. Financial Reporting. The Sub-Advisor will report to the Board (at regular quarterly meetings and at such other times as the Board reasonably shall request, subject to the limitation on personal attendance at such meetings set forth in Section 2b of this Agreement): (i) the financial condition and financial prospects of the Sub-Advisor, (ii) the nature and amount of transactions that may be reasonably expected to effect the Fund that involve the Sub-Advisor and its affiliates, (iii) information regarding any potential conflicts of interest arising by reason of the Sub-Advisor’s continuing provision of advisory services to the Fund and to its other accounts, and (iv) such other information including but not limited to the performance of the specific strategy used to manage the Fund Assets and the capacity of the Sub-Advisor as it relates to the continuing ability of the Sub-Advisor to accept additional cash flow from the Advisor into the Fund. Upon request by the Advisor or the Board, the Sub-Advisor agrees to discuss with the Board its plans for the allocation of remaining capacity in the strategy used to manage the Fund, with respect to the Fund and to the Sub-Advisor’s other clients.
The Sub-Advisor will annually provide the Advisor with the Sub-Advisor’s financial statements, unless the Fund’s Board requests reports on a more frequent basis. For purposes of this paragraph 4(a), “financial statements” shall include the Sub-Advisor’s balance sheet, income statement, and notes to the financial statements.
b. Key Personnel Reporting. The Sub-Advisor agrees to promptly notify the Advisor upon becoming aware of any incapacity, resignation, termination, or other material change of key personnel. For purposes of this paragraph 4(b), “key personnel” include: (i) any portfolio manager of the Fund; and (ii) any chief executive officer, chief compliance officer, chief operations officer, chief investment officer, chief financial officer, chief administration officer, or any other principal or officer of similar title or position with the Sub-Advisor; and (iii) any member of its investment (or comparable) committee.
5. Representations of the Advisor. The Advisor represents that: (a) the Advisor has been duly appointed by the Board to provide investment services to the Fund Assets as contemplated in this Agreement; (b) the Advisor has all necessary power and authority to execute, deliver, and perform this Agreement on behalf of the Trust, and such execution, delivery, and performance will not violate any applicable law, regulation, organizational document, policy, or agreement binding on the Trust or its property; (c) the Trust has the full power and authority to enter into all transactions contemplated under this Agreement, to perform its obligations under such transactions and to authorize the Advisor to procure the Sub-Advisor to enter into such transactions on the Trust’s and Fund’s behalf; (d) the Advisor’s decision to appoint the Sub-Advisor was made in a manner consistent with its fiduciary duties under applicable law and the governing documents, contracts, or other material agreements or instruments governing the Fund’s investment or trading activities; (e) the Advisor will deliver to the Sub-Advisor a true and complete copy of the Fund’s Disclosure Documents, such other documents or instruments governing the investments of Fund Assets, and such other information as is necessary for the Sub-Advisor to carry out its obligations under this Agreement; and (f) the Trust is a “United States person” within the meaning of Section 7701(a)(30) of the Code.
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6. Use of Names.
a. Neither the Advisor nor the Trust shall use the name of the Sub-Advisor in any prospectus, sales literature, or other material relating to the Advisor or the Trust in any manner not approved in advance by the Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses of its name which merely refer in accurate terms to its appointment or which are required by the Securities and Exchange Commission (the “SEC”) or a state securities commission; and provided further, that in no event shall such approval be unreasonably withheld.
b. The Sub-Advisor shall not use the name of the Advisor or the Trust in any material relating to the Sub-Advisor in any manner not approved in advance by the Advisor or the Trust, as the case may be; provided, however, that the Advisor and the Trust will each approve all uses of their respective names which merely refer in accurate terms to the appointment of the Sub-Advisor as the Fund’s Sub-Advisor under this Agreement or which are required by the SEC or a state securities commission; and, provided further, that in no event shall such approval be unreasonably withheld.
c. Upon termination of this Agreement in accordance with Section 12, the Advisor shall cease using any references to the Sub-Advisor in Fund and Advisor documents unless such reference is required by law. Similarly, the Sub-Advisor shall cease using any references to the Advisor or Fund in any documents unless such reference is required by law. For purposes of this paragraph, documents include but are not limited to, marketing materials, regulatory filings, and performance reporting.
7. Liability of the Sub-Advisor. The Sub-Advisor shall indemnify and hold harmless the Trust, the Advisor, and all their affiliated persons (within the meaning of Section 2(a)(3) of the 1940 Act) and all controlling persons (as described in Section 15 of the 1933 Act) (collectively, the “Sub-Advisor Indemnitees”) against any and all direct losses, claims, damages, or liabilities (including reasonable legal and other expenses) (collectively, “Losses”) incurred by reason of or arising out of: (a) the Sub-Advisor being in material violation of any applicable federal or state law, rule, or regulation or any investment policy or restriction set forth in the Fund’s Disclosure Documents or any written guidelines or instruction provided in writing by the Board; or (b) the Sub-Advisor’s willful misfeasance, bad faith, gross negligence, or its reckless disregard of its obligations and duties under this Agreement.
8. Liability of the Advisor. The Advisor shall indemnify and hold harmless the Sub-Advisor and all affiliated persons (within the meaning of Section 2(a)(3) of the 1940 Act) and all controlling persons (as described in Section 15 of the 1933 Act) (collectively, the “Advisor Indemnitees”) against any and all direct Losses incurred by reason of or arising out of: (a) the Advisor being in material violation of any applicable federal or state law, rule, or regulation; or (b) the Advisor’s willful misfeasance, bad faith, gross negligence, or its reckless disregard of its obligations and duties under this Agreement.
9. Limitation of Trust’s Liability. The Sub-Advisor acknowledges that it has received notice of and accepts the limitations upon the Trust’s liability set forth in its Declaration of Trust. The Sub-Advisor agrees that (i) the Trust’s obligations to the Sub-Advisor under this Agreement (or indirectly under the Advisory Agreement) shall be limited in any event to the Fund Assets and (ii) the Sub-Advisor shall not seek satisfaction of any such obligation from the shareholders of the Fund, other than the Advisor, nor from any Trustee, officer, employee, or agent of the Trust.
10. Force Majeure. The Sub-Advisor shall not be liable for delays or errors occurring by reason of circumstances beyond its control, including but not limited to acts of civil or military authority, national emergencies, work stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or failure of communication or power supply. In the event of equipment breakdowns beyond its control, the Sub-Advisor shall take all reasonable steps to minimize service interruptions.
11. Confidentiality. Each party expressly undertakes to protect and to preserve the confidentiality of all information and know-how made available under or in connection with this Agreement, or the parties’ activities that are either designated as being confidential or which, by the nature of the circumstances surrounding the disclosure, ought in good faith to be treated as proprietary or confidential (collectively, the “Confidential Information”). Each party shall take reasonable security precautions, at least as great as the precautions it takes to protect its own confidential information but in any event using a commercially reasonable standard of care, to keep confidential the Confidential Information. Neither party shall disclose Confidential Information except: (a) to its employees, directors, officers, legal advisors, or auditors having a need to know such Confidential Information; (b) in accordance with a judicial or other governmental order or when such disclosure is required by law, provided that prior to such disclosure the receiving party shall provide the disclosing party with written notice and shall comply with any protective order or equivalent; or (c) in accordance with a regulatory audit or inquiry, without prior notice to the disclosing party, provided that the receiving party shall obtain a confidentiality undertaking from the regulatory agency where possible.
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Neither party will make use of any Confidential Information except as expressly authorized in this Agreement or as agreed to in writing between the parties. However, the receiving party shall have no obligation to maintain the confidentiality of information that: (a) it received rightfully from another party prior to its receipt from the disclosing party; (b) the disclosing party discloses generally without any obligation of confidentiality; (c) is or subsequently becomes publicly available without the receiving party’s breach of any obligation owed the disclosing party; or (d) is independently developed by the receiving party without reliance upon or use of any Confidential Information. Each party’s obligations under this clause shall survive for a period of three years following the expiration or termination of this Agreement.
Notwithstanding anything to the contrary, each party to this Agreement may disclose any information with respect to the United States federal income tax treatment and tax structure (and any fact that may be relevant to understanding the purported or claimed federal income tax treatment of the transaction) of the transactions contemplated in this Agreement.
12. Renewal, Termination and Amendment.
a. This Agreement shall continue in effect, unless sooner terminated under this Agreement, through July 29, 2020; and it shall thereafter continue for successive annual terms provided that such continuance is specifically approved by the parties and, in addition, at least annually by (i) the vote of the holders of a majority of the outstanding voting securities of the Fund or (ii) by vote of a majority of the Trust’s Board including the vote of a majority of the Trustees who are not parties to this Agreement or interested persons of either the Advisor or the Sub-Advisor, cast in person at a meeting called for the purpose of voting on such approval.
b. This Agreement may be terminated at any time, without payment of any penalty, (i) by the Advisor upon not more than 60-day's nor less than 30-day's prior written notice delivered to the Sub-Advisor; (ii) by the Sub-Advisor upon not less than 60-day's prior written notice delivered to the Advisor; or (iii) by the Trust, upon either (y) the majority vote of the Board or (z) the affirmative vote of a majority of the outstanding voting securities of the Fund. This Agreement shall terminate automatically in the event of its assignment.
c. This Agreement may be amended at any time by the parties, subject to approval by the Board and, if required by applicable SEC rules and regulations, a vote of the majority of the outstanding voting securities of the Fund affected by such change.
d. The terms “assignment,” “interested persons” and “majority of the outstanding voting securities” shall have the meaning set forth for such terms in the 1940 Act.
13. Severability. If any provision of this Agreement shall become or shall be found to be invalid by a court decision, statute, rule, or otherwise, the remainder of this Agreement shall not be affected.
14. Notice. Any notices under this Agreement shall be in writing and sent to the address or facsimile number, as applicable, of the party receiving such notice or instruction and (a) delivered personally; (b) sent by electronic mail (“email”) or facsimile transmission, with notice or confirmation of receipt received; (c) delivered by a nationally recognized overnight courier; or (d) sent by prepaid first-class mail. Until further notice to the other party, it is agreed that the addresses of the Trust and the Advisor for this purpose shall be 303 Broadway, Suite 1100, Cincinnati, Ohio 45202 and that the address of the Sub-Advisor shall be 200 Clarendon Street, 28th Floor, Boston, MA 02116.
15. Miscellaneous. Each party agrees to perform such further actions and execute such further documents as are necessary to effectuate the purposes hereof. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Ohio. The captions in this Agreement are included for convenience only and in no way define or delimit any of the Agreement provisions or otherwise affect their construction or effect. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument.
16. Entire Agreement. This Agreement, including any attached Schedules, constitutes the sole and entire agreement of the parties with respect to the Agreement’s subject matter.
17. Customer Notification. By executing this Agreement, the Advisor acknowledges that as required by the Advisers Act the Sub-Advisor has supplied to the Advisor and the Trust copies of the Sub-Advisor’s Form ADV with all exhibits and attachments (including the Sub-Advisor’s statement of financial condition) and will promptly supply to the Advisor copies of all amendments or restatements of such document. U.S. law also requires the Sub-Advisor to obtain, verify, and record information that identifies each person or entity that opens an account. The Sub-Advisor will ask for the Trust’s legal name,
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principal place of business address, and Taxpayer Identification or other identification number, and may ask for other identifying information.
Signatures on next page.
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The parties’ duly authorized officers have signed and delivered this Agreement as of the date first above written.
TOUCHSTONE ADVISORS, INC. | |||
BY: | |||
Name: | |||
Title: | |||
BY: | |||
Name: | |||
Title: | |||
LMCG Investments, LLC | |||
BY: | |||
Name: | |||
Title: | |||
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EXHIBIT E: PRIOR PERFORMANCE FOR SIMILAR ACCOUNTS MANAGED BY LMCG FOR THE
TOUCHSTONE SMALL CAP VALUE FUND
The following table sets forth composite performance data relating to the historical performance of all accounts managed by LMCG for the periods indicated with investment objectives, policies, strategies, and risks substantially similar to those of the Touchstone Small Cap Value Fund. The data is provided to illustrate the past performance of the sub-advisor in managing substantially similar accounts and does not represent the performance of the Touchstone Funds.
Performance Comparison
LMCG Small Cap Value Composite
Average Annual Total Returns
For the period ended March 31, 2018
1 Year | 3 Years | 5 Years | 10 Years | Since Composite Inception (July 1, 2002) | |
LMCG Small Cap Value Strategy (Net) (%) | 1.83 | 7.79 | 9.69 | 9.32 | 10.22 |
Russell 2000® Value Index (%) | 5.13 | 7.87 | 9.96 | 8.61 | 8.61 |
The Small Cap Value Composite (the “Composite”), which is managed by LMCG, represents the investment performance track record of LMCG's small cap value strategy, which is the strategy that will be used to manage the Touchstone Small Cap Value Fund. During the periods shown, the Composite was comprised of approximately 60 accounts on average. The accounts comprising the Composite are not subject to the same types of expenses to which the Touchstone Small Cap Value Fund is subject, certain investment limitations, diversification requirements, and other restrictions imposed by the Investment Company Act of 1940, as amended, and the Internal Revenue Code of 1986, as amended. Thus, the performance results for the Composite could have been adversely affected if the account had been regulated as an investment company under federal securities and tax laws.
The Composite’s returns are net of actual fees and expenses and reflect the reinvestment of all income. Actual fees are not reflective of the expenses of the Touchstone Funds and may vary depending on, among other things, the applicable fee schedule and portfolio size. All returns are expressed in U.S. dollars. Past performance of the Composite is not indicative of future results. As with any investment there is always the potential for gains as well as the possibility of losses.
TSF-02438-1806
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The information contained in this Statement of Additional Information is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Statement of Additional Information is not an offer to sell these securities, and it is not a solicitation of an offer to buy these securities, in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION,
DATED JUNE 11, 2018
STATEMENT OF ADDITIONAL INFORMATION
July [ ], 2018
Touchstone Strategic Trust and Touchstone Funds Group Trust
303 Broadway, Suite 1100
Cincinnati, Ohio 45202
(800) 543-0407
This Statement of Additional Information (“SAI”), which is not a prospectus, supplements and should be read in conjunction with the Proxy Statement/Prospectus dated July [ ], 2018, relating specifically to the proposal providing for (i) the transfer of all of the assets of the Touchstone Small Cap Value Opportunities Fund to the Small Cap Value Fund in exchange solely for Class A, Class C, Class Y, and Institutional Class shares of the Touchstone Small Cap Value Fund and the assumption by the Touchstone Small Cap Value Fund of all of the liabilities of the Touchstone Small Cap Value Opportunities Fund; and (ii) the pro rata distribution by class of the Touchstone Small Cap Value Fund's shares to the Touchstone Small Value Opportunities Fund's shareholders in complete liquidation and termination of the Touchstone Small Cap Value Opportunities Fund. Each transfer is to occur pursuant to an Agreement and Plan of Reorganization, which is discussed in more detail in the Proxy Statement/Prospectus.
A copy of the Proxy Statement/Prospectus may be obtained without charge by calling or writing to Touchstone Strategic Trust at the telephone number or address set forth above or by visiting the Touchstone website at touchstoneinvestments.com/our-company/regulatory-documents.htm.
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Table of Contents
A. General Information | 3 | |
B. Incorporation by Reference | 3 | |
C. Pro Forma Financial Information (Unaudited) | 3 | |
EXHIBIT A: Statement of Additional Information for the Touchstone Small Cap Value Fund | A-1 | |
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A. General Information
This SAI relates to the proposal providing for (i) the transfer of all of the assets of the Touchstone Small Cap Value Opportunities Fund to the Touchstone Small Cap Value Fund in exchange solely for Class A, Class C, Class Y, and Institutional Class shares of the Touchstone Small Cap Value Fund and the assumption by the Touchstone Small Cap Value Fund of all of the liabilities of the Touchstone Small Cap Value Opportunities Fund; and (ii) the pro rata distribution by class of the Touchstone Small Cap Value Fund's shares to the Touchstone Small Value Opportunities Fund's shareholders in complete liquidation and termination of the Touchstone Small Cap Value Opportunities Fund.
Further information is included in the Proxy Statement/Prospectus and in the documents listed below, which are incorporated by reference into this SAI. Copies of the Proxy Statement/Prospectus and the documents listed below may be obtained upon request, and without charge, by writing to Touchstone at P.O. Box 9878, Providence, RI 02940, by calling (800) 543-0407 toll-free, or by visiting touchstoneinvestments.com/literature-center/fund-literature.htm and touchstoneinvestments.com/our-company/regulatory-documents.htm. In addition, the currently effective SAI relating to the Touchstone Small Cap Value Fund is included as Exhibit A to this SAI.
B. Incorporation by Reference
This SAI incorporates by reference the following documents (which means that they are legally considered to be a part of this SAI):
(1) Annual Report relating to the Touchstone Small Cap Value Opportunities Fund for the fiscal year ended June 30, 2017 (previously filed on EDGAR, Accession No. 0001144204-17-045647).
(2) Annual Report relating to the Touchstone Small Cap Value Fund for the fiscal year ended September 30, 2017 (previously filed on EDGAR, Accession No. 0001144204-17-061506).
(3) Semi-Annual Report relating to the Touchstone Small Cap Value Opportunities Fund for the six months ended December 31, 2017 (previously filed on EDGAR, Accession No. 0001144204-18-012448).
(4) Semi-Annual Report relating to the Touchstone Small Cap Value Fund for the six months ended March 31, 2018 (previously filed on EDGAR, Accession No. 0001144204-18-031904).
C. Pro Forma Financial Information (Unaudited)
The unaudited pro forma financial information set forth below is for informational purposes only and does not purport to be indicative of the financial condition that actually would have resulted if the Reorganization had been consummated. These pro forma numbers have been estimated in good faith based on information regarding the Touchstone Small Cap Value Opportunities Fund (the “Target Fund”) and the Touchstone Small Cap Value Fund (the “Acquiring Fund”) as of March 31, 2018. The Acquiring Fund’s information was prepared using the financial information as of and for the twelve month period ended March 31, 2018. The Target Fund’s information was prepared using the financial information as of and for the twelve month period ended December 31, 2017. The unaudited pro forma financial information should be read in conjunction with the historical financial statements of the Target Fund and Acquiring Fund, which are available in their annual and semi-annual shareholder reports.
Narrative Description of the Pro Forma Effects of the Reorganization
Note 1—Reorganization
The unaudited pro forma information has been prepared to give effect to the proposed reorganization of the Target Fund into the Acquiring Fund pursuant to an Agreement and Plan of Reorganization (the “Plan”) as if the Reorganization occurred on as of the beginning of the 12-month period ended March 31, 2018.
Target Fund | Acquiring Fund | |
Touchstone Small Cap Value Opportunities Fund, a series of Touchstone Strategic Trust | Touchstone Small Cap Value Fund, a series of Touchstone Funds Group Trust | |
Note 2—Basis of Pro Forma
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The Reorganization will be accounted for as a tax-free reorganization for federal income tax purposes; therefore, no gain or loss will be recognized by the Target Fund or its shareholders as a direct result of the Reorganization. The Target Fund is a series of Touchstone Strategic Trust and the Acquiring Fund is a series of Touchstone Funds Group Trust; each Trust is a registered open-end management investment company. The Reorganization would be accomplished by the transfer of the assets and the liabilities of the Target Fund to the Acquiring Fund in exchange for shares of the Acquiring Fund, pro-rata distribution of such shares of the corresponding class to the shareholders of the Target Fund, and liquidation and termination of the Target Fund.
The table below shows the number of shares of each class of the Acquiring Fund that the Target Fund shareholders would have received had the Reorganization occurred on March 31, 2018.
Target Fund Share Class | Acquiring Fund Shares Issued | Acquiring Fund Share Class | ||
Class A | 88,819 | Class A | ||
Class C | 21,580 | Class C | ||
Class Y | 2,929,901 | Class Y | ||
Institutional Class | 277,411 | Institutional Class | ||
In accordance with U.S. generally accepted accounting principles, for financial reporting purposes, the historical cost basis of the investments received from the Target Fund will be carried forward to align with ongoing reporting of the realized and unrealized gains and losses of the surviving fund (which will be the Acquiring Fund) with amounts distributable to shareholders for tax purposes. The table below sets forth the net assets of each Fund and the pro forma net assets of the combined Fund as of March 31, 2018.
Fund | Net Assets | As-of Date | ||||
Touchstone Small Cap Value Opportunities Fund (Target Fund) | $ | 85,271,301 | March 31, 2018 | |||
Touchstone Small Cap Value Fund (Acquiring Fund) | $ | 95,599,697 | March 31, 2018 | |||
Touchstone Small Cap Value Fund (Pro Forma Fund) | $ | 180,870,998 | March 31, 2018 | |||
Note 3—Pro Forma Expense Adjustments
The table below reflects adjustments to annual expenses made to the Pro Forma Fund financial information as if the Reorganization had been in effect on the first day of the twelve-month period ended March 31, 2018 using the fees and expenses information shown in the Proxy Statement/Prospectus. The pro forma information has been derived from the books and records used in calculating daily net asset values of the Target Fund and the Acquiring Fund and has been prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates and assumptions that affect this information. Percentages presented below represent the increase (decrease) in expenses divided by the Pro Forma Fund net assets presented in Note 2. Actual results could differ from those estimates. No other significant pro forma effects are expected to result from the Reorganization.
Fee and Expense Increase (Decrease) | |||||||||
Net Expense Category | Dollar Amount | Percentage | |||||||
Investment advisory fees(1) | $ | (152,977 | ) | (0.0770 | )% | ||||
Professional fees(2) | $ | (25,553 | ) | (0.0129 | )% | ||||
Registration fees(2) | $ | (47,918 | ) | (0.0241 | )% | ||||
Trustee Fees and Expenses(2) | $ | (16,581 | ) | (0.0084 | )% | ||||
Other Expenses(2) | $ | (99,900 | ) | (0.0503 | )% | ||||
Reimbursement(3) | $ | 284,368 | 0.1432 | % | |||||
Total Pro Forma Net Expense Adjustment | $ | (58,561 | ) | (0.0295 | )% | ||||
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(1) Reflects the impact of applying the Acquiring Fund’s Investment Advisory Fee rates following the Reorganization to the combined Fund’s average net assets.
(2) Reflects the anticipated reduction of certain duplicative expenses eliminated as a result of the Reorganization.
(3) Reflects the decrease in expense reimbursement payments the adviser would have made to the combined Fund if the Reorganization had occurred on the first day of the twelve-month period ended March 31, 2018.
No significant accounting policies will change as a result of the Reorganization, specifically policies regarding security valuation or compliance with Subchapter M of the Internal Revenue Code of 1986, as amended. No significant changes to any existing contracts of the Acquiring Fund are expected as a result of the Reorganization.
Note 4—Portfolio Repositioning
In connection with the appointment of LMCG as the sub-advisor to the Target Fund, which is separate from the Reorganization and does not require shareholder approval, it is expected that the Target Fund will sell approximately 90.7% (or $77.3 million) of its investment portfolio as of March 31, 2018. This repositioning will occur whether or not the Reorganization is consummated. Taking into account the repositioning of the Target Fund, the Acquiring Fund is not expected to sell a material portion (less than 5% of net assets) of the Target Fund received in the Reorganization.
It is estimated that portfolio repositioning in connection with the appointment of LMCG as the sub-advisor would have resulted in brokerage commissions or other transaction costs of approximately $147,866 for the Target Fund, based on average commission rates charged by transition managers, if such sales occurred on March 31, 2018, and realized gains of approximately $10.4 million, or approximately $2.26 per share, if the securities had been sold on March 31, 2018. These sales of portfolio securities may result in realized capital gains, which may reduce capital loss carryforwards of the Funds described in Note 7 below and may affect the amount of the distribution(s) that the Target Fund is required to declare and pay to its shareholders on or prior to the closing date of the Reorganization.
Note 5—Reorganization Costs
Touchstone Advisors, Inc. estimates that expenses for the Reorganization will be approximately $95,000. These costs represent management’s estimate of professional services fees, printing costs and mailing charges related to the Reorganization and do not include brokerage transaction costs associated with portfolio repositioning. Touchstone Advisors, Inc., and not the Target Fund or the Acquiring Fund, will pay the costs of the Reorganization whether or not the Reorganization is completed.
Note 6—Accounting Survivor
The Acquiring Fund will be the accounting survivor. The surviving fund will have the portfolio manager, portfolio composition, investment goal, expense structure and investment policies and limitations of the Acquiring Fund.
Note 7—Capital Loss Carryforwards
As of June 30, 2017, the Target Fund had unused capital loss carryforwards of $3,480,339 available for federal income tax purposes to be applied against future capital gains, if any. As of September 30, 2017, the Acquiring Fund had unused capital loss carryforwards of $1,969,934 available for federal income tax purposes to be applied against future capital gains, if any. If not applied, the capital loss carryforwards will expire as follows:
Fund | Expiration Date | Total | ||||
Target Fund | No Expiration | $ | 3,480,339 | |||
Acquiring Fund | September 30, 2018 | $ | 1,969,934 | |||
TSF-2438-1806
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EXHIBIT A: STATEMENT OF ADDITIONAL INFORMATION FOR TOUCHSTONE SMALL CAP VALUE FUND
TOUCHSTONE FUNDS GROUP TRUST
STATEMENT OF ADDITIONAL INFORMATION
January 30, 2018
Class A | Class C | Class S | Class Y | Class Z | Institutional Class | |||||||
Touchstone Active Bond Fund | TOBAX | TODCX | TOBYX | TOBIX | ||||||||
Touchstone Arbitrage Fund | TMARX | TMACX | TMAYX | TARBX | ||||||||
Touchstone Emerging Markets Small Cap Fund | TEMAX | TEFCX | TEMYX | TMEIX | ||||||||
Touchstone High Yield Fund | THYAX | THYCX | THYYX | THIYX | ||||||||
Touchstone Merger Arbitrage Fund | TMGAX | TMGCX | TMGYX | TMGLX | ||||||||
Touchstone Mid Cap Fund | TMAPX | TMCJX | TMCPX | TMCTX | TMPIX | |||||||
Touchstone Mid Cap Value Fund | TCVAX | TMFCX | TCVYX | TCVIX | ||||||||
Touchstone Premium Yield Equity Fund | TPYAX | TPYCX | TPYYX | |||||||||
Touchstone Sands Capital Select Growth Fund | TSNAX | TSNCX | CFSIX | PTSGX | ||||||||
Touchstone Small Cap Fund | TSFAX | TSFCX | TSFYX | TSFIX | ||||||||
Touchstone Small Cap Value Fund | TVOAX | TVOCX | TVOYX | TVOIX | ||||||||
Touchstone Total Return Bond Fund | TCPAX | TCPCX | TCPYX | TCPNX | ||||||||
Touchstone Ultra Short Duration Fixed Income Fund | TSDAX | TSDCX | SSSGX | TSYYX | TSDOX | TSDIX | ||||||
This Statement of Additional Information (“SAI”) is not a prospectus and relates only to the above-referenced funds (each a “Fund” and, together, the “Funds”). It is intended to provide additional information regarding the activities and operations of Touchstone Funds Group Trust (the “Trust”) and should be read in conjunction with the Funds’ prospectus dated January 30, 2018, as may be amended. The Trust’s audited financial statements for the fiscal year ended September 30, 2017, including the notes thereto and the report of Ernst & Young LLP thereon, included in the annual report to shareholders (the “Annual Report”), are hereby incorporated into this SAI by reference. A copy of the Trust's prospectus and Annual Report may be obtained without charge by writing to the Trust at P.O. Box 9878, Providence, Rhode Island 02940, by calling 1.800.543.0407, or by downloading a copy at TouchstoneInvestments.com.
TABLE OF CONTENTS
TRUSTEES AND OFFICERS OF THE TRUST | ||
TOUCHSTONE SECURITIES | ||
CONTROL PERSONS AND PRINCIPAL SECURITY HOLDERS | 82 | |
DISTRIBUTIONS | 105 | |
FEDERAL INCOME TAXES | ||
115 | ||
115 | ||
115 | ||
115 | ||
116 | ||
THE TRUST
Touchstone Funds Group Trust (the “Trust”), an open-end management investment company, was organized as a Delaware statutory trust under an Agreement and Declaration of Trust dated October 25, 1993, (as amended the “Declaration of Trust”). Prior to November 20, 2006, the name of the Trust was Constellation Funds. Effective November 20, 2006, the Trust’s name changed to Touchstone Funds Group Trust. The Declaration of Trust permits the Trust to offer separate series of units of beneficial interest (the “shares”) and separate classes of shares. Each Fund is a separate mutual fund and each share of each Fund represents an equal proportionate interest in that Fund. This SAI relates to the following separate series of the Trust: Touchstone Active Bond Fund (the “Active Bond Fund”), Touchstone Arbitrage Fund (the “Arbitrage Fund”), Touchstone Emerging Markets Small Cap Fund (the “Emerging Markets Small Cap Fund”), Touchstone High Yield Fund (the “High Yield Fund”), Touchstone Merger Arbitrage Fund (the “Merger Arbitrage Fund”), Touchstone Mid Cap Fund (the “Mid Cap Fund”), Touchstone Mid Cap Value Fund (the “Mid Cap Value Fund”), Touchstone Premium Yield Equity Fund (the “Premium Yield Equity Fund”), Touchstone Sands Capital Select Growth Fund (the “Sands Capital Select Growth Fund”), Touchstone Small Cap Fund (the “Small Cap Fund”), Touchstone Small Cap Value Fund (the “Small Cap Value Fund”), Touchstone Total Return Bond Fund (the “Total Return Bond Fund”), and Touchstone Ultra Short Duration Fixed Income Fund (the “Ultra Short Duration Fixed Income Fund”). Each of the Trust's Funds are diversified except for the Arbitrage Fund, the Merger Arbitrage Fund, Sands Capital Select Growth Fund, and the Small Cap Fund.
Touchstone Advisors, Inc. (the “Advisor”) is the investment advisor and administrator for each Fund. The Advisor has selected one or more sub-advisor(s) to manage, on a daily basis, the assets of each Fund. The Advisor has sub-contracted certain of the Trust complex's administrative and accounting services to The Bank of New York Mellon and the Trust complex's Transfer Agent services to BNY Mellon Investment Servicing (US) Inc. (collectively referred to herein as “BNY Mellon”). Touchstone Securities, Inc. (“Touchstone Securities” or the “Distributor”) is the principal distributor of the Funds’ shares. The Distributor is an affiliate of the Advisor.
The Trust offers six separate classes of shares: Classes A, C, S, Y, Z, and Institutional Class. The shares of a Fund represent an interest in the same assets of that Fund.
The shares have the same rights and are identical in all material respects except that: (i) each class of shares may bear different (or no) distribution fees; (ii) each class of shares may be subject to different (or no) sales charges; (iii) certain other class specific expenses will be borne solely by the class to which such expenses are attributable, including transfer agent fees attributable to a specific class of shares, printing and postage expenses related to preparing and distributing materials to current shareholders of a specific class, registration fees incurred by a specific class of shares, the expenses of administrative personnel and services required to support the shareholders of a specific class, litigation or other legal expenses relating to a class of shares, Trustees’ fees or expenses incurred as a result of issues relating to a specific class of shares and accounting fees and expenses relating to a specific class of shares; (iv) each class has exclusive voting rights with respect to matters relating to its own distribution arrangements; and (v) certain classes offer different features and services to shareholders and may have different investment minimums. The Board of Trustees (the “Board”) may classify and reclassify the shares of a Fund into additional classes of shares at a future date.
The Trust’s Funds and Classes that are currently offered are listed below:
Funds | Class A | Class C | Class S | Class Y | Class Z | Institutional Class | ||||||
Active Bond Fund | x | x | x | x | ||||||||
Arbitrage Fund | x | x | x | x | ||||||||
Emerging Markets Small Cap Fund | x | x | x | x | ||||||||
High Yield Fund | x | x | x | x | ||||||||
Merger Arbitrage Fund | x | x | x | x | ||||||||
Mid Cap Fund | x | x | x | x | x | |||||||
Mid Cap Value Fund | x | x | x | x | ||||||||
Premium Yield Equity Fund | x | x | x | |||||||||
Sands Capital Select Growth Fund | x | x | x | x | ||||||||
Small Cap Fund | x | x | x | x | ||||||||
Small Cap Value Fund | x | x | x | x | ||||||||
Total Return Bond Fund | x | x | x | x | ||||||||
Ultra Short Duration Fixed Income Fund | x | x | x | x | x | x | ||||||
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History of the Funds
Active Bond Fund. Before the Fund commenced operations, the assets of the Active Bond Fund, a series of Touchstone Investment Trust (the "Active Bond Predecessor Fund"), were acquired by the Fund in a tax-free reorganization as set forth in an agreement and Plan of reorganization (the “Active Bond Reorganization”) between the Trust, on behalf of the Fund, and Touchstone Investment Trust, a Massachusetts business trust, on behalf of the Active Bond Predecessor Fund. The Active Bond Reorganization occurred on January 27, 2017. The Active Bond Reorganization occurred within the Touchstone family of mutual funds. The only material change between the Active Bond Predecessor Fund and the Fund is the state of domicile: the Active Bond Predecessor Fund was a series of a Massachusetts business trust, while the Fund is a series of a Delaware statutory trust. As a result of the Active Bond Reorganization, the performance and accounting history of the Active Bond Predecessor Fund were assumed by the Fund. Financial and performance information prior to the date of the Active Bond Reorganization included herein is that of the Active Bond Predecessor Fund.
On October 27, 2017, the Active Bond Fund acquired all of the assets and liabilities of the Sentinel Government Securities Fund and the Sentinel Total Return Bond Fund pursuant to an Agreement and Plan of Reorganization dated July 26, 2017.
Arbitrage Fund. The inception date of the Arbitrage Fund is September 30, 2013.
Emerging Markets Small Cap Fund. Effective on April 19, 2016, the Fund changed its name from Touchstone Emerging Markets Equity Fund to Touchstone Emerging Markets Small Cap Fund. Also on April 19, 2016, the Emerging Markets Small Cap Fund replaced its sub–advisor, AFG Investments America, Inc., with Copper Rock Capital Partners, LLC.
High Yield Fund. Before the Fund commenced operations, the assets of the High Yield Fund, a series of Touchstone Investment Trust, a Massachusetts business trust (the "High Yield Predecessor Fund" and together with the Active Bond Predecessor Fund, the "Predecessor Funds"), were acquired by the Fund in a tax-free reorganization as set forth in an agreement and plan of reorganization (the “High Yield Reorganization” and together with the Active Bond Reorganization, the "Reorganizations") between the Trust, on behalf of the Fund, and Touchstone Investment Trust, on behalf of the High Yield Predecessor Fund. The High Yield Reorganization occurred on January 27, 2017. The High Yield Reorganization occurred within the Touchstone family of mutual funds. The only material change between the High Yield Predecessor Fund and the Fund is the state of domicile: the High Yield Predecessor Fund was a series of a Massachusetts business trust, while the Fund is a series of a Delaware statutory trust. As a result of the High Yield Reorganization, the performance and accounting history of the High Yield Predecessor Fund were assumed by the Fund. Financial and performance information prior to the date of the High Yield Reorganization included herein is that of the High Yield Predecessor Fund.
Merger Arbitrage Fund. The inception date of the Merger Arbitrage Fund is August 9, 2011.
Mid Cap Fund. From the Mid Cap Fund’s inception on January 2, 2003 until April 14, 2005, the Fund operated as the Midcap Core Portfolio, a separate series of Constellation Institutional Portfolios. Turner Investment Partners, Inc. (“TIP”) served as the Midcap Core Portfolio’s investment advisor from January 2, 2003 until March 1, 2004, and as the Midcap Core Portfolio’s investment sub-advisor with day-to-day portfolio management responsibility from March 1, 2004 until April 14, 2005. On April 14, 2005, the Midcap Core Portfolio was reorganized into the Constellation TIP Mid Cap Fund. On November 20, 2006, the Constellation TIP Mid Cap Fund was renamed the Touchstone Mid Cap Fund. TIP remained as the sub-advisor after these changes. On February 2, 2009, the Fund’s Class Y shares were renamed the Institutional Class shares. On January 28, 2010, the Institutional Class shares were renamed the Class Y shares. On December 8, 2011, the Mid Cap Fund replaced its sub-advisor, TIP, with The London Company of Virginia d/b/a The London Company (“The London Company”).
Mid Cap Value Fund. The inception date of the Mid Cap Value Fund is September 30, 2009.
Premium Yield Equity Fund. The inception date of the Premium Yield Fund is December 3, 2007.
Sands Capital Select Growth Fund. From the Sands Capital Select Growth Fund’s inception on August 11, 2000 until August 1, 2004, the Fund operated as the Pitcairn Select Growth Fund and was managed by Sands Capital. On August 1, 2004, the Pitcairn Select Growth Fund was reorganized into the Constellation Sands Capital Select Growth Fund. On November 20, 2006, the Constellation Sands Capital Select Growth Fund was renamed the Touchstone Sands Capital Select Growth Fund. Sands Capital remained as the sub-advisor after the change.
Small Cap Fund. Effective on January 30, 2016, the Fund changed its name from Touchstone Small Cap Core Fund to Touchstone Small Cap Fund.
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Small Cap Value Fund. From the Small Cap Value Fund’s inception on March 4, 2002 until May 7, 2004, the Fund operated as the Turner Small Cap Value Opportunities Fund, a portfolio of the Turner Funds, and was advised by Turner Investment Management, LLC, a majority-owned subsidiary of TIP. On May 7, 2004, the Turner Small Cap Value Opportunities Fund was reorganized into the Constellation TIP Small Cap Value Opportunities Fund. Effective December 22, 2005, the Fund’s name was changed to Constellation Small Cap Value Opportunities Fund. On November 20, 2006, the Constellation Small Cap Value Opportunities Fund was renamed the Touchstone Small Cap Value Opportunities Fund. Turner Investment Partners, Inc. and Diamond Hill Capital Management, Inc. remained as the sub-advisors to the Fund after the change. James Investment Research, Inc. became a sub-advisor to the Fund on June 20, 2007. Diamond Hill Capital Management, Inc. and James Investment Research, Inc. were removed as sub-advisors to the Fund on June 16, 2008. Turner Investment Partners, Inc. was replaced as sub-advisor to the Fund on December 6, 2010 by DePrince, Race and Zollo, Inc. ("DRZ"). On December 6, 2010, the Touchstone Small Cap Value Opportunities Fund was renamed the Touchstone Small Cap Value Fund. On July 1, 2016, the Small Cap Value Fund replaced its sub–advisor, DRZ, with LMCG Investments, LLC.
Total Return Bond Fund. On April 19, 2011, the Core Plus Fixed Income Fund replaced its sub-advisor, Bradford & Marzec LLC (“Bradford & Marzec”), with EARNEST Partners LLC and changed its name to the Touchstone Total Return Bond Fund. On August 1, 2011, the EARNEST Partners Fixed Income Trust (the “EARNEST Trust”), a series of the Nottingham Investment Trust II, was reorganized into the Touchstone Total Return Bond Fund (the “Reorganization”). Prior to the Reorganization, the EARNEST Trust had an investment goal and principal investment strategies similar to those of the Fund. Performance information presented prior to August 1, 2011 refers to the Fund’s performance as the EARNEST Trust.
On April 16, 2012, the Total Return Bond Fund acquired all of the assets and liabilities of the Old Mutual Barrow Hanley Core Bond Fund pursuant to an Agreement and Plan of Reorganization dated October 4, 2011.
Ultra Short Duration Fixed Income Fund. From the Ultra Short Duration Fixed Income Fund’s inception on March 1, 1994 until July 1, 1999, the Fund operated as the Alpha Select Short Duration Government Funds — One Year Portfolio. On July 1, 1999, the Fund converted to the TIP Funds (now Turner Funds) Turner Short Duration Government Funds — One Year Portfolio, and later the Turner Ultra Short Duration Fixed Income Fund. On May 7, 2004, the Turner Ultra Short Duration Fixed Income Fund was reorganized into the Constellation Chartwell Ultra Short Duration Fixed Income Fund. On November 20, 2006 the Constellation Chartwell Ultra Short Duration Fixed Income Fund was renamed the Touchstone Ultra Short Duration Fixed Income Fund. In October 2008, the Fund replaced its previous sub-advisor with Fort Washington Investment Advisors, Inc. The performance shown prior to October 2008 represents the performance of the previous sub-advisor. On May 17, 2013, the Touchstone Short Duration Fixed Income Fund was reorganized into the Ultra Short Duration Fixed Income Fund.
On April 16, 2012, the Ultra Short Duration Fixed Income Fund acquired all of the assets and liabilities of the Old Mutual Dwight Short Term Fixed Income Fund pursuant to an Agreement and Plan of Reorganization dated October 4, 2011.
On October 27, 2017, the Ultra Short Duration Fixed Income Fund acquired all of the assets and liabilities of the Sentinel Low Duration Bond Fund pursuant to an Agreement and Plan of Reorganization dated July 26, 2017.
PERMITTED INVESTMENTS AND RISK FACTORS
Each Fund’s principal investment strategies and principal risks are described in the Funds' prospectus. The following supplements the information contained in the prospectus concerning each Fund’s principal investment strategies and principal risks. In addition, although not principal strategies of the Funds, the Funds may invest in other types of securities and engage in other investment practices as described in the prospectus or in this SAI. Unless otherwise indicated, each Fund is permitted to invest in each of the investments listed below, or engage in each of the investment techniques listed below consistent with the Fund’s investment goals, investment limitations, policies and strategies. In addition to the investment limitations set forth under the section of this SAI entitled "Investment Limitations," the investment limitations below are considered to be non-fundamental policies which may be changed at any time by a vote of the Trust’s Board, unless designated as a “fundamental” policy. In addition, any stated percentage limitations are measured at the time of the purchase of a security.
Adjustable-Rate Mortgage Securities ("ARMS"). Generally, ARMS have a specified maturity date and amortize principal over their life. In periods of declining interest rates there is a reasonable likelihood that ARMS will experience increased rates of prepayment of principal. However, the major difference between ARMS and fixed-rate mortgage securities is that the interest rate can and does change in accordance with movements in a particular, pre-specified, published interest rate index. There are two main categories of indices: those based on U.S. Treasury obligations and those derived from a calculated measure, such as a cost of funds index or a moving average of mortgage rates. The amount of interest on an adjustable rate mortgage is calculated by
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adding a specified amount to the applicable index, subject to limitations on the maximum and minimum interest that is charged during the life of the mortgage or to maximum and minimum changes to that interest rate during a given period.
The underlying mortgages which collateralize the ARMS will frequently have caps and floors which limit the maximum amount by which the loan rate to the residential borrower may change up or down (1) per reset or adjustment interval and (2) over the life of the loan. Some residential mortgage loans restrict periodic adjustments by limiting changes in the borrower’s monthly principal and interest payments rather than limiting interest rate changes. These payment caps may result in negative amortization. The value of mortgage-related securities in which a Fund invests may be affected if market interest rates rise or fall faster and farther than the allowable caps or floors on the underlying residential mortgage loans. Additionally, even though the interest rates on the underlying residential mortgages are adjustable, amortization and prepayments may occur, thereby causing the effective maturities of the mortgage-related securities in which a Fund invests to be shorter than the maturities stated in the underlying mortgages.
ADRs, ADSs, EDRs, CDRs, and GDRs. American Depositary Receipts ("ADRs"), American Depositary Shares ("ADSs"), Global Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs"), and Continental Depositary Receipts ("CDRs") are U.S. dollar-denominated receipts typically issued by domestic banks or trust companies that represent the deposit with those entities of securities of a foreign issuer. They are publicly traded on exchanges or over-the-counter in the United States. EDRs, which are sometimes referred to as CDRs, and GDRs may also be purchased by the Funds. EDRs, CDRs and GDRs are generally issued by foreign banks and evidence ownership of either foreign or domestic securities. Certain institutions issuing ADRs, ADSs, GDRs or EDRs may not be sponsored by the issuer of the underlying foreign securities. A non-sponsored depositary may not provide the same shareholder information that a sponsored depositary is required to provide under its contractual arrangements with the issuer of the underlying foreign securities. Holders of an unsponsored depositary receipt generally bear all the costs of the unsponsored facility. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through to the holders of the receipts voting rights with respect to the deposited securities.
The Ultra Short Duration Fixed Income Fund does not invest in depositary receipts. The Mid Cap Value Fund may invest up to 10% of its assets in depositary receipts.
Asset-Backed Securities ("ABS"). A Fund may invest in certain ABS such as securities whose assets consist of a pool of motor vehicle retail installment sales contracts and security interests in the vehicles securing the contracts or a pool of credit card loan receivables. The credit quality of an ABS transaction depends on the performance of the underlying assets. To protect ABS investors from the possibility that some borrowers could miss payments or even default on their loans, ABS may include various forms of credit enhancement. Some ABS are subject to interest-rate risk and prepayment risk. A change in interest rates can affect the pace of payments on the underlying loans, which in turn, affects total return on the securities. ABS also carry credit or default risk. If many borrowers on the underlying loans default, losses could exceed the credit enhancement level and result in losses to investors in an ABS transaction. Finally, ABS have structure risk due to a unique characteristic known as early amortization, or early payout, risk. Built into the structure of most ABS are triggers for early payout, designed to protect investors from losses. These triggers are unique to each transaction and can include: a big rise in defaults on the underlying loans, a sharp drop in the credit enhancement level, or even the bankruptcy of the originator. Once early amortization begins, all incoming loan payments (after expenses are paid) are used to pay investors as quickly as possible based upon a predetermined priority of payment.
Bank Debt Instruments. Bank debt instruments in which the Funds may invest consist of certificates of deposit, bankers’ acceptances and time deposits issued by national banks and state banks, trust companies and mutual savings banks, or of banks or institutions the accounts of which are insured by the Federal Deposit Insurance Corporation. Certificates of deposit are negotiable certificates evidencing the indebtedness of a commercial bank to repay funds deposited with it for a definite period of time (usually from fourteen days one year, although certificates of deposit may have longer terms) at a stated or variable interest rate. Bankers’ acceptances are credit instruments evidencing the obligation of a bank to pay a draft that has been drawn on it by a customer, which instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. Time deposits are nonnegotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Investments in time deposits maturing in more than seven days will be subject to the Funds’ restrictions on illiquid investments (see “Investment Limitations”).
The Funds may invest in certificates of deposit, bankers’ acceptances and time deposits issued by foreign branches of national banks. Eurodollar certificates of deposit are negotiable U.S. dollar denominated certificates of deposit issued by foreign branches of major U.S. commercial banks. Eurodollar bankers’ acceptances are U.S. dollar denominated bankers’ acceptances “accepted” by foreign branches of major U.S. commercial banks. Investments in the obligations of foreign branches of U.S. commercial banks may be subject to special risks, including future political and economic developments, imposition of withholding taxes on income, establishment of exchange controls or other restrictions, less governmental supervision and the lack of uniform accounting, auditing and financial reporting standards that might affect an investment adversely. Payment of interest and principal upon these obligations
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may also be affected by governmental action in the country of domicile of the branch (generally referred to as sovereign risk). In addition, evidences of ownership of portfolio securities may be held outside of the U.S. and the Funds may be subject to the risks associated with the holding of such property overseas. Various provisions of federal law governing the establishment and operation of domestic branches do not apply to foreign branches of domestic banks. The Sub-Advisor, subject to the oversight of the Board, considers these factors when making investments. The Funds do not limit the amount of their assets that can be invested in any one type of instrument or in any foreign country in which a branch of a U.S. bank or the parent of a U.S. branch is located. Investments in obligations of foreign banks are subject to the overall limit of 25% of total assets that may be invested in a single industry.
Bear Funds. The Funds may invest in bear funds. Bear funds are designed to allow investors to speculate on anticipated decreases in the S&P 500 ® Index or another securities market index or to hedge an existing portfolio of securities or mutual fund shares. Due to the nature of bear funds, investors could experience substantial losses during sustained periods of rising equity prices. This is the opposite result expected of investing in a traditional equity mutual fund in a generally rising stock market. Bear funds employ certain investment techniques, including engaging in short sales and in certain transactions in stock index futures contracts, options on stock index futures contracts, and options on securities and stock indexes. Using these techniques, bear funds will generally incur a loss if the price of the underlying security or index increases between the date of the employment of the technique and the date on which the fund terminates the position. Bear funds will generally realize a gain if the underlying security or index declines in price between those dates. The amount of any gain or loss on an investment technique may be affected by any premium or amounts in lieu of dividends or interest that the Funds pay or receive as a result of the transaction.
Borrowing. Borrowing may exaggerate changes in the net asset value ("NAV") of a Fund’s shares and in the return on the Fund’s portfolio. Although the principal of any borrowing will be fixed, a Fund’s assets may change in value during the time the borrowing is outstanding. The Funds may be required to liquidate portfolio securities at a time when it would be disadvantageous to do so in order to make payments with respect to any borrowing. The Funds may be required to earmark or segregate liquid assets in an amount sufficient to meet their obligations in connection with such borrowings. In an interest rate arbitrage transaction, a Fund borrows money at one interest rate and lends the proceeds at another, higher interest rate. These transactions involve a number of risks including the risk that the borrower will fail or otherwise become insolvent or that there will be a significant change in prevailing interest rates.
The Funds have adopted fundamental limitations and non-fundamental limitations which restrict circumstances in which and degree to which the Funds can engage in borrowing. See the section entitled “Investment Limitations,” below.
Borrowing and Pledging. Each Fund may borrow money from banks (including their custodian bank) or from other lenders to the extent permitted by applicable law. The Investment Company Act of 1940 Act, as amended (the "1940 Act") requires the Funds to maintain asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of at least 300% for all such borrowings. If at any time the value of a Fund’s assets should fail to meet this 300% coverage test, the Fund, within 3 days (not including Sundays and holidays), will reduce the amount of its borrowings to the extent necessary to meet this test. A Fund will not make any borrowing or enter into a reverse repurchase agreement or dollar roll transaction that would cause its outstanding borrowings to exceed one-third of the value of its total assets.
To reduce its borrowings, a Fund might be required to sell securities at a time when it would be disadvantageous to do so. In addition, because interest on money borrowed is a Fund expense that it would not otherwise incur, the Fund may have less net investment income during periods when its borrowings are substantial. The interest paid by a Fund on borrowings may be more or less than the yield on the securities purchased with borrowed funds, depending on prevailing market conditions. Borrowing magnifies the potential for gain or loss on a Fund’s portfolio securities and, therefore, if employed, increases the possibility of fluctuation in its NAV. This is the speculative factor known as leverage. To reduce the risks of borrowing, the Funds will limit their borrowings as described below. In addition, the Active Bond Fund may enter into reverse repurchase agreements and dollar roll transactions that are treated as borrowings by the Fund.
The Funds have adopted non-fundamental limitations which restrict circumstances in which and the degree to which the Funds can engage in borrowing. As a matter of current operating policy, and except for the use of reverse repurchase agreements and dollar rolls, the Active Bond Fund may borrow money from banks or other persons in an amount not exceeding 10% of its total assets, as a temporary measure for extraordinary or emergency purposes. The Active Bond Fund may pledge assets in connection with such borrowings but will not pledge more than 10% of its total assets. The Active Bond Fund will not make any additional purchases of portfolio securities if outstanding borrowings, other than reverse repurchase agreements and dollar rolls, exceed 5% of the value of its total assets. These operating policies are not fundamental and may be changed by the Board without shareholder approval.
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As a matter of current operating policy, the High Yield Fund may borrow money from banks or other persons in an amount not exceeding 10% of its total assets, as a temporary measure for extraordinary or emergency purposes. The High Yield Fund may pledge assets in connection with such borrowings but will not pledge more than 10% of its total assets. The High Yield Fund will not make any additional purchases of portfolio securities if outstanding borrowings exceed 5% of the value of its total assets. These operating policies are not fundamental and may be changed by the Board without shareholder approval.
Business Development Companies (“BDCs”). BDCs are a type of closed-end fund regulated under the 1940 Act. BDCs are publicly-traded mezzanine/private equity funds that typically invest in and lend to small and medium-sized private companies that may not have access to public equity markets for capital raising. BDCs are unique in that at least 70% of their investments must be made to private U.S. businesses, and BDCs are required to make available significant managerial assistance to their portfolio companies. BDCs are not taxed on income distributed to shareholders provided they comply with the applicable requirements of the Internal Revenue Code of 1986, as amended (the “Code”). BDCs have expenses associated with their operations. Accordingly, a Fund will indirectly bear its proportionate share of any management and other expenses, and of any performance based fees, charged by the BDCs in which it invests.
Investments in BDCs are subject to various risks, including management’s ability to meet the BDC’s investment objective, and to manage the BDC’s portfolio when the underlying securities are redeemed or sold, during periods of market turmoil and as investors’ perceptions regarding a BDC or its underlying investments change. BDC shares are not redeemable at the option of the BDC shareholder and, as with shares of other closed-end funds, they may trade in the secondary market at a discount to their NAV.
The Premium Yield Equity Fund may invest up to 10% of its net assets in BDCs.
Canadian Income Trusts. A Canadian Income Trust is a qualified income trust as designated by the Canada Revenue Agency that operates as a profit-seeking corporation. This type of income trust, which pays out all earnings to unit holders before paying taxes, is usually traded publicly on a securities exchange. Canadian Income Trusts enjoy special Canadian corporate tax privileges.
The Premium Yield Equity Fund may invest up to 10% of its net assets in Canadian Income Trusts.
Collateralized Mortgage Obligations ("CMOs"). The Funds may invest in CMOs. CMOs are fully-collateralized bonds that are the general obligations of the issuer thereof. CMOs may be less liquid and may exhibit greater price volatility than other types of mortgage- or asset-backed securities.
The key feature of the CMO structure is the prioritization of the cash flows from a pool of mortgages among the several classes of CMO holders, thereby creating a series of obligations with varying rates and maturities appealing to a wide range of investors. CMOs generally are secured by an assignment to a trustee under an indenture pursuant to which the bonds are issued for collateral consisting of a pool of mortgages. Payments with respect to the underlying mortgages generally are made to the trustee under the indenture. Payments of principal and interest on the underlying mortgages are not passed through to the holders of the CMOs as such (that is, the character of payments of principal and interest is not passed through and therefore payments to holders of CMOs attributable to interest paid and principal repaid on the underlying mortgages do not necessarily constitute income and return of capital, respectively, to such holders), but such payments are dedicated to payment of interest on, and repayment of, principal of the CMOs. CMOs are issued in two or more classes or series with varying maturities and stated rates of interest determined by the issuer. Because interest and principal payments on the underlying mortgages are not passed through to holders of CMOs, CMOs of varying maturities may be secured by the same pool of mortgages, the payments on which are used to pay interest on each class and to retire successive maturities in sequence. CMOs are designed to be retired as the underlying mortgages are repaid. In the event of sufficient early prepayments on such mortgages, the class or series of CMO first to mature generally will be retired prior to maturity. Therefore, although in most cases the issuer of CMOs will not supply additional collateral in the event of such prepayments, there will be sufficient collateral to secure CMOs that remain outstanding.
Since Federal Home Loan Mortgage Corporation (FHLMC) ("Freddie Mac") CMOs are the general obligations of Freddie Mac, it will be obligated to use its general funds to make payments thereon if payments generated by the underlying mortgages are insufficient to pay principal and interest in its CMOs. In addition, CMOs are issued by private entities, such as financial institutions, mortgage bankers and subsidiaries of homebuilding companies. The structural features of privately issued CMOs will vary considerably from issue to issue, and the Sub-Advisor will consider such features, together with the character of the underlying mortgage pool and the liquidity and credit rating of the issue.
Several classes of securities are issued against a pool of mortgage collateral. The most common structure contains four classes of securities; the first three classes pay interest at their stated rates beginning with the issue date and the final class is typically an accrual class (or Z bond). The cash flows from the underlying mortgage collateral are applied first to pay interest and then to retire securities. The classes of securities are retired sequentially. All principal payments are directed first to the shortest-maturity
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class (or A bonds). When those securities are completely retired, all principal payments are then directed to the next-shortest-maturity security (or B bond). This process continues until all of the classes have been paid off. Because the cash flow is distributed sequentially instead of pro rata as with pass-through securities, the cash flows and average lives of CMOs are more predictable, and there is a period of time during which the investors into the longer maturity classes receive no principal paydowns.
One or more tranches of a CMO may have coupon rates that reset periodically at a specified increment over an index, such as the London Interbank Offered Rate (“LIBOR”). These adjustable rate tranches, known as “floating-rate CMOs,” will be treated as Adjustable Rate Mortgage Securities (“ARMS”). Floating-rate CMOs may be backed by fixed-rate or adjustable-rate mortgages. Floating-rate CMOs are typically issued with lifetime “caps” on the coupon rate. These caps, similar to the caps on ARMS, represent a ceiling beyond which the coupon rate may not be increased, regardless of increases in the underlying interest rate index.
Mortgage-related securities such as CMOs may not be readily marketable. To the extent any of these securities are not readily marketable in the judgment of the Sub-Advisor, the Active Bond Fund and the High Yield Fund may not invest more than 15% of total assets in such securities and other illiquid securities.
Commercial Paper and Other Short-Term Obligations. Commercial paper (including variable amount master demand notes) consists of short-term unsecured promissory notes issued by U.S. corporations, partnerships, trusts or other entities in order to finance short-term credit needs and non-convertible debt securities (e.g., bonds and debentures) with no more than 397 days remaining to maturity at the date of purchase. Certain notes may have floating or variable rates. Variable and floating rate notes with a demand notice period exceeding seven days will be subject to the Funds’ restrictions on illiquid investments (see “Investment Limitations”) unless, in the judgment of the Sub-Advisor, subject to the oversight of the Board, such note is liquid.
Commodity Futures Trading Commission Regulation. The Active Bond Fund and the Advisor claimed exclusion or exemption from registering with the Commodity Futures Trading Commission (the “CFTC”). The Fund complies with Rule 4.5 under the Commodity Exchange Act (the “CEA”), which allows a mutual fund to be conditionally excluded from the definition of the term “commodity pool.” Similarly, so long as the Fund satisfies this conditional exclusion, the Advisor intends to comply with Rule 4.5, which allows the Advisor to be conditionally excluded from the definition of “commodity pool operator” (“CPO”), and Rule 4.14(a)(5), which provides a conditional exemption from registering as a “commodity trading advisor.” The Advisor, on behalf of the Active Bond Fund and itself, has filed a claim with the CFTC claiming the CPO exemption. Therefore, neither the Fund nor the Advisor expect to become subject to registration under the CEA.
Common Stocks. Common stocks are securities that represent units of ownership in a company. Common stocks usually carry voting rights and earn dividends. Unlike preferred stocks, which are described below, dividends on common stocks are not fixed but are declared at the discretion of the board of directors of the issuing company.
Convertible Securities. Convertible securities are corporate securities that are exchangeable for a set number of another security at a pre-stated price. Convertible securities typically have characteristics of both fixed-income and equity securities. Because of the conversion feature, the market value of a convertible security tends to move with the market value of the underlying stock. The value of a convertible security is also affected by prevailing interest rates, the credit quality of the issuer and any call provisions.
A synthetic convertible security is a combination investment in which a Fund purchases both (i) high-grade cash equivalents or a high grade debt obligation of an issuer or U.S. government securities and (ii) call options or warrants on the common stock of the same or different issuer with some or all of the anticipated interest income from the associated debt obligation that is earned over the holding period of the option or warrant.
While providing a fixed-income stream (generally higher in yield than the income derivable from common stock but lower than that afforded by a similar non-convertible security), a convertible security also affords a shareholder the opportunity, through its conversion feature, to participate in the capital appreciation attendant upon a market price advance in the convertible security’s underlying common stock. A synthetic convertible position has similar investment characteristics, but may differ with respect to credit quality, time to maturity, trading characteristics and other factors. Because a Fund will create synthetic convertible positions only out of high grade fixed-income securities, the credit rating associated with a Fund’s synthetic convertible investments is generally expected to be higher than that of the average convertible security, many of which are rated below high grade. However, because the options used to create synthetic convertible positions will generally have expirations between one month and three years of the time of purchase, the maturity of these positions will generally be shorter than average for convertible securities. Since the option component of a convertible security or synthetic convertible position is a wasting asset (in the sense of losing “time value” as maturity approaches), a synthetic convertible position may lose such value more rapidly than a convertible security of longer maturity; however, the gain in option value due to appreciation of the underlying stock may exceed such time value loss. The market price of the option component generally reflects these differences in maturities, and the Advisor and applicable sub-advisor take such differences into account when evaluating such positions. When a synthetic convertible position “matures” because
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of the expiration of the associated option, a Fund may extend the maturity by investing in a new option with longer maturity on the common stock of the same or different issuer. If a Fund does not so extend the maturity of a position, it may continue to hold the associated fixed-income security.
Corporate Debt Securities. Corporate debt securities are obligations of a corporation to pay interest and repay principal. Corporate debt securities include commercial paper, notes and bonds.
Covered Dollar Rolls. A Fund may enter into dollar rolls in which a Fund sells mortgage-based or other fixed-income securities and simultaneously commits to repurchase substantially similar, but not identical, securities on a specified future date. In a simple dollar-roll transaction, the cash proceeds from this sale will be reinvested in high quality, short-term instruments, the maturity of which will coincide with the settlement date of the roll transaction. A strategy may also be used with respect to the dollar roll, where a series of 6-12 consecutive dollar-roll transactions (approximately 30 days per transaction) are executed.
This allows a Fund to purchase a slightly longer duration security with the cash proceeds from the sale and capitalize on potentially higher available yields. The additional duration from this strategy would be minimal.
A Fund will not use such transactions for leveraging purposes and, accordingly, at the time a Fund enters into a dollar roll, it will segregate liquid assets to satisfy its obligation for the forward commitment to buy the securities. The value of such segregated assets must be at least equal to the value of the forward commitment or repurchase obligation (principal plus accrued interest), as applicable. The segregated assets effectively collateralize a Fund’s right to receive the securities at the end of the roll period(s), and also serve to minimize the leveraging effect of the transaction.
In the case of dollar rolls involving mortgage-related securities, the mortgage-related securities that are purchased typically will be of the same type and will have the same or similar interest rate and maturity as those sold, but will be supported by different pools of mortgages. The Fund forgoes principal and interest, including prepayments, paid during the roll period on the securities sold in a dollar roll, but it is compensated by the difference between the current sales price and the price for the future purchase as well as by any interest earned on the proceeds of the securities sold. A Fund could also be compensated through receipt of fee income. Dollar rolls may be renewed over a period of several months with a different repurchase price and a cash settlement made at each renewal without physical delivery of securities. Moreover, the transaction may be preceded by a firm commitment agreement pursuant to which a Fund agrees to buy a security on a future date.
Dollar-roll transactions are considered to be borrowings by a Fund and the use of such transactions will be subject to a Fund’s investment limitations on borrowings. See “Borrowing and Pledging” and “Investment Limitations.”
The risks associated with dollar rolls are market risk, since the price of the securities could drop lower than the agreed upon repurchase price during the roll period, or the securities that the Fund is required to repurchase may be worth less than the securities that the Fund originally held; and credit risk, since the counterparty to the transaction could fail to deliver the securities. If the counterparty to whom a Fund sells the securities becomes insolvent, a Fund’s right to purchase or repurchase the securities may be restricted. Finally, there can be no assurance that a Fund’s use of the cash that it receives from a dollar roll will provide a return that exceeds borrowing costs. Further, although a Fund can estimate the amount of expected principal prepayment over the term of the dollar roll, a variation in the actual amount of prepayment could increase or decrease the cost of the Fund’s borrowing.
Custody Receipts. The Funds may invest in custody receipts that represent corporate debt securities. Custody receipts, such as Morgan Stanley TRACERs, are derivative products which, in the aggregate, evidence direct ownership in a pool of securities. Typically, a sponsor will deposit a pool of securities with a custodian in exchange for custody receipts evidencing those securities. Generally the sponsor will then sell those custody receipts in negotiated transactions at varying prices that are determined at the time of sale. Each custody receipt evidences the individual securities in the pool, and the holder of a custody receipt generally will have all the rights and privileges of owners of those securities. Each holder of a custody receipt will be treated as directly purchasing its pro rata share of the securities in the pool, for an amount equal to the amount that such holder paid for its custody receipt. If a custody receipt is sold, a holder will be treated as having directly disposed of its pro rata share of the securities evidenced by the custody receipt. Additionally, the holder of a custody receipt may withdraw the securities represented by a custody receipt subject to certain conditions.
Custody receipts are generally subject to the same risks as those securities evidenced by the receipts which, in the case of the Funds, are corporate debt securities. Additionally, custody receipts may be less liquid than the underlying securities if the sponsor fails to maintain a trading market.
Cyber Security Risk. The Funds and their service providers may be subject to operational and information security risks resulting from cyber security breaches. Cyber security breaches may result from deliberate cyber attacks, although unintentional events
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may have effects similar to those caused by cyber attacks. Cyber attacks may include the stealing or corrupting of data maintained online or digitally, denial-of-service attacks on Fund websites, the unauthorized release of confidential information or other operational disruption. Successful cyber attacks against, or security breaches of, a Fund or the Advisor, a Sub-Advisor, the Funds' distributor, custodians, the transfer agent, selling agents and/or other third party service providers may adversely impact the Funds or its shareholders. Similar types of cyber security risks are also present for issuers of securities or other instruments in which the Funds invest, which could result in material adverse consequences for such issuers, and may cause the Funds’ investment therein to lose value.
Derivatives. The Funds may invest in various instruments that are commonly known as derivatives. Generally, a derivative is a financial arrangement, the value of which is based on, or “derived” from, a traditional security, asset, or market index. Some “derivatives” such as certain mortgage-related and other asset-backed securities are in many respects like any other investment, although they may be more volatile or less liquid than more traditional debt securities. There are, in fact, many different types of derivatives and many different ways to use them. There is a range of risks associated with those uses. Futures and options are commonly used for traditional hedging purposes to attempt to protect a Fund from exposure to changing interest rates, securities prices, or currency exchange rates and as a low cost method of gaining exposure to a particular securities market without investing directly in those securities. However, some derivatives are used for leverage, which tends to magnify the effects of an instrument’s price changes as market conditions change. Leverage involves the use of a small amount of money to control a large amount of financial assets, and can in some circumstances, lead to significant losses. The Sub-Advisor will use derivatives only in circumstances where the Sub-Advisor believes they offer the most economic means of improving the risk/reward profile of a Fund. Derivatives will not be used to increase portfolio risk above the level that could be achieved using only traditional investment securities or to acquire exposure to changes in the value of assets or indexes that by themselves would not be purchased for the Fund. The use of derivatives for non-hedging purposes may be considered speculative. A description of the specific derivatives that the Funds may use and some of their associated risks is discussed below under the captions “Forward Foreign Currency Contracts”, “Futures Contracts and Options on Futures Contracts” and "Swap Agreements".
Emerging Market Securities. Emerging market countries are generally countries that are included in the Morgan Stanley Capital International ("MSCI") Emerging Markets Index, or otherwise excluded from the MSCI World Index. As of December 31, 2017, the countries in the MSCI World Index included: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The country composition of the MSCI Emerging Markets Index and the MSCI World Index can change over time. Frontier market countries, which are those emerging market countries that have the smallest, least mature economies and least developed capital markets, are generally countries that are included in the MSCI Frontier Markets Index.
Investments in the securities of issuers domiciled in countries with emerging capital markets involve certain additional risks that do not generally apply to investments in securities of issuers in more developed capital markets, such as (i) low or non-existent trading volume, resulting in a lack of liquidity and increased volatility in prices for such securities, as compared to securities of comparable issuers in more developed capital markets; (ii) uncertain national policies and social, political and economic instability, increasing the potential for expropriation of assets, confiscatory taxation, high rates of inflation or unfavorable diplomatic developments; (iii) possible fluctuations in exchange rates, differing legal systems and the existence or possible imposition of exchange controls, custodial restrictions or other foreign or U.S. governmental laws or restrictions applicable to such investments; (iv) national policies that may limit a Fund’s investment opportunities such as restrictions on investment in issuers or industries deemed sensitive to national interests; and (v) the lack or relatively early development of legal structures governing private and foreign investments and private property. In addition to withholding taxes on investment income, some countries with emerging markets may impose capital gains taxes on foreign investors.
Political and economic structures in emerging market countries may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic stability characteristic of more developed countries. In such a dynamic environment, there can be no assurance that any or all of these capital markets will continue to present viable investment opportunities for a Fund. Some of these countries may have in the past failed to recognize private property rights and have at times nationalized or expropriated the assets of private companies. There is no assurance that such expropriations will not reoccur. In such an event, it is possible that a Fund could lose the entire value of its investments in the affected market. As a result, the risks described above, including the risks of nationalization or expropriation of assets, may be heightened. In addition, unanticipated political or social developments may affect the value of investments in these countries and the availability to a Fund of additional investments. The small size and inexperience of the securities markets in certain of these countries and the limited volume of trading in securities in these countries may make investments in the countries illiquid and more volatile than investments in Japan or most Western European countries.
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Also, there may be less publicly available information about issuers in emerging markets than would be available about issuers in more developed capital markets, and such issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those to which U.S. companies are subject. In certain countries with emerging capital markets, reporting standards vary widely. As a result, traditional investment measurements used in the United States, such as price/earnings ratios, may not be applicable. Emerging market securities may be substantially less liquid and more volatile than those of mature markets, and company shares may be held by a limited number of persons. This may adversely affect the timing and pricing of a Fund’s acquisition or disposal of securities.
Practices in relation to settlement of securities transactions in emerging markets involve higher risks than those in developed markets, in part because a Fund will need to use brokers and counterparties that are less well capitalized, and custody and registration of assets in some countries may be unreliable. The possibility of fraud, negligence, undue influence being exerted by the issuer or refusal to recognize ownership exists in some emerging markets, and, along with other factors, could result in ownership registration being completely lost. A Fund would absorb any loss resulting from such registration problems and may have no successful claim for compensation.
Some emerging market countries currently prohibit direct foreign investment in the securities of their companies. Certain emerging market countries, however, permit indirect foreign investment in the securities of companies listed and traded on their stock exchanges through investment funds that they have specifically authorized. Investments in these investment funds may be subject to the provisions of the 1940 Act limiting investments in other investment companies. Shareholders of a Fund that invests in such investment funds will bear not only their proportionate share of the expenses of a Fund (including operating expenses and the fees of the adviser), but also will indirectly bear similar expenses of the underlying investment funds. In addition, these investment funds may trade at a discount or premium to the fund’s NAV.
Participatory notes (commonly known as P-notes) are offshore derivative instruments issued to foreign institutional investors and their sub-accounts against underlying Indian securities listed on the Indian bourses. These securities are not registered with the Securities and Exchange Board of India. Participatory notes are similar to American depositary receipts (“ADRs”), which are negotiable certificates issued by a U.S. bank and traded on U.S. exchanges. ADRs are denominated in U.S. dollars and represent a specified number of shares in a foreign security held by a U.S. financial institution located in a foreign country. Both P-notes and ADRs are subject to the risks discussed above with respect to securities of foreign issuers in general.
With respect to the Emerging Markets Small Cap Fund, emerging market countries include those that are included in the MSCI Emerging Markets Index; are considered by the Sub-Advisor to have an economy and financial system comparable to countries included in the MSCI Emerging Markets Index; or whose economic activity and capital markets are dependent on emerging market countries (examples include Hong Kong and Singapore). When the Fund invests in securities of a company in an emerging market country, it invests in securities issued by a company that (i) is organized under the laws of an emerging market country, (ii) maintains its principal place of business in an emerging market country, (iii) has its principal trading market for its securities in an emerging market country, or (iv) derives at least 50% of its revenues or profits from operations within emerging market countries, or has at least 50% of its assets located in emerging market countries.
The Premium Yield Equity Fund may invest up to 40% of its total assets in emerging market securities. The Mid Cap Value Fund may invest up to 10% of its net assets in depositary receipts representing interests in securities of emerging market issuers. The Total Return Bond Fund may invest up to 10% of its net assets in investment-grade emerging-market debt securities and up to 10% of its net assets in non-investment-grade emerging-market debt securities. The Emerging Markets Small Cap Fund may also invest up to 20% of its net assets in participatory notes (commonly known as P-notes), which are offshore derivative instruments issued to foreign institutional investors and their sub-accounts against underlying Indian securities listed on the Indian bourses. These securities are not registered with the Securities and Exchange Board of India. Participatory notes are similar to depositary receipts and the risks of investing in participatory notes are similar to those discussed above with respect to securities of foreign issuers in general.
The Active Bond Fund and the High Yield Fund may invest up to 10% of their total assets at the time of purchase in emerging market securities.
Equity-Linked Notes ("ELNs"). A Fund may purchase ELNs. The principal or coupon payment on an ELN is linked to the performance of an underlying security or index. ELNs may be used, among other things, to provide a Fund with exposure to international markets while providing a mechanism to reduce foreign tax or regulatory restrictions imposed on foreign investors. The risks associated with purchasing ELNs include the creditworthiness of the issuer and the risk of counterparty default. Further, a Fund’s ability to dispose of an ELN will depend on the availability of liquid markets in the instruments. The purchase and sale of an ELN is also subject to the risks regarding adverse market movements, possible intervention by governmental authorities, and the effects of other political and economic events.
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Equity-Linked Warrants. Equity-linked warrants provide a way for investors to access markets where entry is difficult and time consuming due to regulation. Typically, a broker issues warrants to an investor and then purchases shares in the local market and issues a call warrant hedged on the underlying holding. If the investor exercises his call and closes his position, the shares are sold and the warrant is redeemed with the proceeds.
Each warrant represents one share of the underlying stock. Therefore, the price, performance and liquidity of the warrant are all directly linked to the underlying stock. The warrants can be redeemed for 100% of the value of the underlying stock (less transaction costs). The Funds invest in American style warrants, which can be exercised at any time. The warrants in which the Funds invest are U.S. dollar denominated and priced daily on several international stock exchanges.
Eurobonds. A Eurobond is a bond denominated in U.S. dollars or another currency and sold to investors outside of the country whose currency is used. Eurobonds may be issued by government or corporate issuers, and are typically underwritten by banks and brokerage firms from numerous countries. While Eurobonds typically pay principal and interest in Eurodollars (U.S. dollars held in banks outside of the United States), they may pay principal and interest in other currencies.
Exchange-Traded Funds (“ETFs”). An ETF is a fund that holds a portfolio of common stocks designed to track the performance of a particular securities index or sector of an index, such as the S&P 500® Index, or a portfolio of bonds that may be designed to track a bond index. Because they may be traded like stocks on a securities exchange (e.g., the New York Stock Exchange; the NYSE MKT or the NASDAQ Stock Market), ETFs may be purchased and sold throughout the trading day based on their market price. Each share of an ETF represents an undivided ownership interest in the portfolio held by an ETF. ETFs that track indices or sectors of indices hold either:
• | shares of all of the companies (or, for a fixed-income ETF, bonds) that are represented by a particular index in the same proportion that is represented in the index itself; or |
• | shares of a sampling of the companies (or, for a fixed-income ETF, bonds) that are represented by a particular index in a proportion meant to track the performance of the entire index. |
ETFs are generally registered as investment companies and issue large blocks of shares (typically 50,000) called “creation units” in exchange for a specified portfolio of the ETF’s underlying securities, plus a cash payment generally equal to accumulated dividends of the securities (net of expenses) up to the time of deposit. Creation units are redeemed in kind for a portfolio of the underlying securities (based on the ETF’s NAV), together with a cash payment generally equal to accumulated dividends as of the date of redemption. As investment companies, ETFs incur fees and expenses such as advisory fees, trustee fees, operating expenses, licensing fees, registration fees, and marketing expenses, each of which will be reflected in the NAV of ETFs. Accordingly, ETF shareholders (including a Fund) pay their proportionate share of these expenses.
Foreign Securities. Except as expressly set forth herein and in the prospectus, the Funds may invest in securities of foreign issuers and in sponsored and unsponsored depositary receipts. Foreign companies are companies that meet all of the following criteria: they are organized under the laws of a foreign country; they maintain their principal place of business in a foreign country; the principal trading market for their securities is located in a foreign country; they derive at least 50% of their revenues or profits from operations in foreign countries; and they have at least 50% of their assets located in foreign countries. Investing in securities issued by foreign companies and governments involves considerations and potential risks not typically associated with investing in obligations issued by the U.S. government and domestic corporations. Less information may be available about foreign companies than about domestic companies and foreign companies generally are not subject to uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements comparable to those applicable to domestic companies. The values of foreign investments are affected by changes in currency rates or exchange control regulations, restrictions or prohibitions on the repatriation of foreign currencies, application of foreign tax laws, including withholding taxes, changes in governmental administration or economic or monetary policy (in the United States or abroad) or changed circumstances in dealings between nations. Costs are also incurred in connection with conversions between various currencies. In addition, foreign brokerage commissions and custody fees are generally higher than those charged in the United States, and foreign securities markets may be less liquid, more volatile and less subject to governmental supervision than in the United States. Investments in foreign countries could be affected by other factors not present in the United States, including expropriation, confiscatory taxation, lack of uniform accounting and auditing standards and potential difficulties in enforcing contractual obligations and could be subject to extended clearance and settlement periods.
In addition, there are risks relating to ongoing concerns regarding the economies of certain European countries and their sovereign debt, as well as the potential for one or more countries to leave the European Union. In June 2016, the United Kingdom held a referendum resulting in a vote in favor of the United Kingdom leaving the European Union. These circumstances and potential future developments could have a negative effect on the United Kingdom’s and other European countries’ economies and may
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result in greater volatility in global financial and currency markets. The Emerging Markets Small Cap Fund invests in securities of foreign issuers as part of its principal investment strategy as more fully described in the prospectus. The Mid Cap Value Fund may invest up to 10% of its net assets in foreign securities. The Total Return Bond Fund may invest up to 50% of its net assets in securities of foreign issuers of which up to 20% may be denominated in a foreign currency.
Foreign Market Risk. A Fund is subject to the risk that, because there are generally fewer investors on foreign exchanges and a smaller number of shares traded each day, it may be difficult for a Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may fluctuate more than prices of securities traded in the United States. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of punitive taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries. Any of these actions could severely affect security prices, impair a Fund’s ability to purchase or sell foreign securities or transfer a Fund’s assets or income back into the United States or otherwise adversely affect a Fund’s operations. Other potential foreign market risks include exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing favorable legal judgments in foreign courts and political and social conditions, such as diplomatic relations, confiscatory taxation, expropriation, limitation on the removal of funds or assets or imposition of (or change in) exchange control regulations. Legal remedies available to investors in certain foreign countries may be less extensive than those available to investors in the United States or other foreign countries. In addition, changes in government administrations or economic or monetary policies in the United States or abroad could result in appreciation or depreciation of portfolio securities and could favorably or adversely affect a Fund’s operations.
Public Availability of Information. In general, less information is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial reporting requirements applicable to issuers in the United States. A Fund’s foreign investments may be less liquid and their prices may be more volatile than comparable investments in securities in U.S. companies. In addition, there is generally less government supervision and regulation of securities exchanges, brokers and issuers in foreign countries than in the United States.
Settlement Risk. Settlement and clearance procedures in certain foreign markets differ significantly from those in the United States. Foreign settlement procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically generated by the settlement of U.S. investments. Communications between the United States and certain non-U.S. countries may be unreliable, increasing the risk of delayed settlements or losses of security certificates in markets that still rely on physical settlement. Settlements in certain foreign countries at times have not kept pace with the number of securities transactions; these problems may make it difficult for a Fund to carry out transactions. If a Fund cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment opportunities and certain of its assets may be uninvested with no return earned thereon for some period. If a Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to sell the security to another party, a Fund could be liable to that party for any losses incurred. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign taxes on income from sources in such countries.
Governmental Supervision and Regulation/Accounting Standards. Many foreign governments supervise and regulate stock exchanges, brokers and the sale of securities less than the United States does. Some countries may not have laws to protect investors comparable to the U.S. securities laws. For example, some foreign countries may have no laws or rules against insider trading. Insider trading occurs when a person buys or sells a company’s securities based on nonpublic information about that company. In addition, the U.S. government has from time to time in the past imposed restrictions, through penalties and otherwise, on foreign investments by U.S. investors such as a Fund. Accounting standards in other countries are not necessarily the same as in the United States. If the accounting standards in another country do not require as much detail as U.S. accounting standards, it may be harder for a Fund to completely and accurately determine a company’s financial condition. Also, brokerage commissions and other costs of buying or selling securities often are higher in foreign countries than they are in the United States. This reduces the amount a Fund can earn on its investments.
Foreign Currency Risk. While a Fund’s net assets are valued in U.S. dollars, the securities of foreign companies are frequently denominated in foreign currencies. Thus, a change in the value of a foreign currency against the U.S. dollar will result in a corresponding change in value of securities denominated in that currency. Some of the factors that may impair the investments denominated in a foreign currency are: (1) it may be expensive to convert foreign currencies into U.S. dollars and vice versa; (2) complex political and economic factors may significantly affect the values of various currencies, including U.S. dollars, and their exchange rates; (3) government intervention may increase risks involved in purchasing or selling foreign currency options, forward contracts and futures contracts, since exchange rates may not be free to fluctuate in response to other market forces; (4) there may be no systematic reporting of last sale information for foreign currencies or regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis; (5) available quotation information is generally representative of very large round-lot transactions in the inter-bank market and thus may not reflect exchange rates for smaller odd-lot transactions
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(less than $1 million) where rates may be less favorable; and (6) the inter-bank market in foreign currencies is a global, around-the-clock market. To the extent that a market is closed while the markets for the underlying currencies remain open, certain markets may not always reflect significant price and rate movements.
The Active Bond Fund may invest in debt securities denominated in foreign currencies (up to 20% of total assets). The High Yield Fund may invest in securities of foreign companies (up to 15% of total assets), but only up to 5% of its total assets in securities of foreign companies that are denominated in a currency other than the U.S. dollar.
Forward Foreign Currency Contracts. The Funds may enter into forward foreign currency contracts to manage foreign currency exposure and as a hedge against possible variations in foreign exchange rates. A Fund may enter into forward foreign currency contracts to hedge a specific security transaction or to hedge a portfolio position.
These contracts may be bought or sold to protect a Fund, to some degree, against possible losses resulting from an adverse change in the relationship between foreign currencies and the U.S. dollar. A Fund also may invest in foreign currency futures and in options on currencies. A forward contract involves an obligation to purchase or sell a specific currency amount at a future date, agreed upon by the parties, at a price set at the time of the contract. A Fund may enter into a contract to sell, for a fixed amount of U.S. dollars or other appropriate currency, the amount of foreign currency approximating the value of some or all of a Fund’s securities denominated in such foreign currency.
By entering into forward foreign currency contracts, a Fund will seek to protect the value of its investment securities against a decline in the value of a currency. However, these forward foreign currency contracts will not eliminate fluctuations in the underlying prices of the securities. Rather, they simply establish a rate of exchange which one can obtain at some future point in time. Although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain which might result should the value of such currency increase. At the maturity of a forward contract, a Fund may either sell a portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an “offsetting” contract with the same currency trader, obligating it to purchase, on the same maturity date, the same amount of the foreign currency. A Fund may realize a gain or loss from currency transactions.
When entering into a contract for the purchase or sale of a security in a foreign currency, a Fund may enter into a forward foreign currency contract for the amount of the purchase or sale price to protect against variations, between the date the security is purchased or sold and the date on which payment is made or received, in the value of the foreign currency relative to the U.S. dollar or other foreign currency.
Also, when a Fund’s portfolio manager anticipates that a particular foreign currency may decline substantially relative to the U.S. dollar or other leading currencies, in order to reduce risk, a Fund may enter into a forward contract to sell, for a fixed amount, the amount of foreign currency approximating the value of its securities denominated in such foreign currency. With respect to any such forward foreign currency contract, it will not generally be possible to match precisely the amount covered by that contract and the value of the securities involved due to changes in the values of such securities resulting from market movements between the date the forward contract is entered into and the date it matures. In addition, while forward foreign currency contracts may offer protection from losses resulting from declines in value of a particular foreign currency, they also limit potential gains which might result from increases in the value of such currency. A Fund will also incur costs in connection with forward foreign currency contracts and conversions of foreign currencies into U.S. dollars. A Fund will place assets in a segregated account or otherwise earmark assets as cover to ensure that its obligations under forward foreign currency contracts are covered.
The forecasting of currency market movement is extremely difficult, and whether any hedging strategy will be successful is highly uncertain. Moreover, it is impossible to forecast with precision the market value of portfolio securities at the expiration of a forward foreign currency contract. Accordingly, a Fund may be required to buy or sell additional currency on the spot market (and bear the expense of such transaction) if the Sub-Advisor’s predictions regarding the movement of foreign currency or securities markets prove inaccurate. Because foreign currency forward contracts are privately negotiated transactions, there can be no assurance that a Fund will have flexibility to roll-over a forward foreign currency contract upon its expiration if it desires to do so. Additionally, there can be no assurance that the other party to the contract will perform its services thereunder.
Futures Contracts and Options on Futures Contracts. Futures contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during the term of the option. A Fund may use futures contracts and related options for bona fide hedging purposes, to offset changes in the value of securities held or expected to be acquired or be disposed of, to minimize fluctuations in foreign currencies, or to gain exposure to a particular market or instrument. Some strategies reduce a Fund’s exposure to price fluctuations,
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while others tend to increase its exposure. A Fund will minimize the risk that it will be unable to close out a futures contract by only entering into futures contracts which are traded on national futures exchanges. In addition, a Fund will only sell covered futures contracts and options on futures contracts.
Stock and bond index futures are futures contracts for various stock and bond indices that are traded on registered securities exchanges. Stock and bond index futures contracts obligate the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock or bond index at the close of the last trading day of the contract and the price at which the agreement is made.
Stock and bond index futures contracts are bilateral agreements pursuant to which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the stock or bond index value at the close of trading of the contract and the price at which the futures contract is originally struck. No physical delivery of the stocks or bonds comprising the index is made; generally contracts are closed out prior to the expiration date of the contracts.
No price is paid upon entering into futures contracts. Instead, a Fund would be required to deposit an amount of cash or U.S. Treasury securities known as “initial margin.” Subsequent payments, called “variation margin,” to and from the broker, would be made on a daily basis as the value of the futures position varies (a process known as “marking to market”). The margin is in the nature of a performance bond or good-faith deposit on a futures contract.
There are risks associated with these activities, including the following: (1) the success of a hedging strategy may depend on an ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates; (2) there may be an imperfect or no correlation between the changes in market value of the securities held by a Fund and the prices of futures and options on futures; (3) there may not be a liquid secondary market for a futures contract or option; (4) trading restrictions or limitations may be imposed by an exchange; and (5) government regulations may restrict trading in futures contracts and futures options.
A Fund may buy and sell futures contracts and related options to manage its exposure to changing interest rates and securities prices. Some strategies reduce a Fund’s exposure to price fluctuations, while others tend to increase its market exposure. Futures and options on futures can be volatile instruments and involve certain risks that could negatively impact a Fund’s return. When a Fund purchases or sells a futures contract, or sells an option thereon, the Fund is required to “cover” its position in order to limit the risk associated with the use of leverage and other related risks. To cover its position, the Fund may maintain with its custodian bank (and marked-to-market on a daily basis), a segregated account consisting of cash or liquid securities that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise “cover” its position in a manner consistent with the 1940 Act or the rules and interpretations of the staff of the Securities and Exchange Commission (“SEC”) thereunder. If the Fund continues to engage in the described investment techniques and properly covers its investment in the manner described above, the segregated account or other form of coverage will function as a practical limit on the amount of leverage which the Fund may undertake and on the potential increase in the speculative character of the Fund’s outstanding investments. Additionally, such coverage will generally assure the availability of adequate funds to meet the obligations of the Fund arising from such investment activities.
Each Fund, other than the Total Return Bond Fund, may invest in futures contracts and options on futures contracts.
Government Pass-Through Securities. Government pass-through securities are securities that are issued or guaranteed by a U.S. government agency representing an interest in a pool of mortgage loans. The primary issuers or guarantors of these mortgage-backed securities are the Government National Mortgage Association (GNMA) ("Ginnie Mae"), the Federal National Mortgage Association (FNMA) ("Fannie Mae") and Freddie Mac. Ginnie Mae, Fannie Mae and Freddie Mac guarantee timely distributions of interest to certificate holders. Ginnie Mae and Fannie Mae also guarantee timely distributions of scheduled principal. Freddie Mac generally guarantees only the ultimate collection of principal of the underlying mortgage loan. Certain federal agencies, such as Ginnie Mae, have been established as instrumentalities of the United States government to supervise and finance certain types of activities. Issues of these agencies, while not direct obligations of the United States government, are either backed by the full faith and credit of the United States (e.g., Ginnie Mae securities) or supported by the issuing agencies’ right to borrow from the U.S. Treasury. The issues of other agencies are supported by the credit of the instrumentality (e.g., Fannie Mae securities). Government and private guarantees do not extend to the securities’ value, which is likely to vary inversely with fluctuations in interest rates.
There are a number of important differences among the agencies and instrumentalities of the U.S. government that issue mortgage-backed securities and among the securities that they issue. Mortgage-related securities issued by Ginnie Mae include GNMA Mortgage Pass-Through Certificates (also known as “Ginnie Mae Pass-Throughs”), which are guaranteed as to the timely payment of principal and interest by Ginnie Mae and such guarantee is backed by the full faith and credit of the U.S. Government. Ginnie
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Mae Pass-Throughs are created by an “issuer,” which is a Federal Housing Administration (“FHA”) approved mortgagee that also meets criteria imposed by Ginnie Mae. The issuer assembles a pool of FHA, Farmers’ Home Administration or Veterans’ Administration (“VA”) insured or guaranteed mortgages which are homogeneous as to interest rate, maturity and type of dwelling. Upon application by the issuer, and after approval by Ginnie Mae of the pool, Ginnie Mae provides its commitment to guarantee timely payment of principal and interest on the Ginnie Mae Pass-Throughs backed by the mortgages included in the pool. The Ginnie Mae Pass-Throughs, endorsed by Ginnie Mae, then are sold by the issuer through securities dealers. Ginnie Mae Pass-Throughs bear a stated “coupon rate” which represents the effective FHA-VA mortgage rate at the time of issuance, less fees from Ginnie Mae and the issuer. Ginnie Mae is authorized under the National Housing Act to guarantee timely payment of principal and interest on Ginnie Mae Pass-Throughs. This guarantee is backed by the full faith and credit of the U.S. government. Ginnie Mae may borrow U.S. Treasury funds to the extent needed to make payments under its guarantee. When mortgages in the pool underlying a Ginnie Mae Pass-Through are prepaid by mortgagors or by result of foreclosure, such principal payments are passed through to the certificate holders. Accordingly, the life of the Ginnie Mae Pass-Through is likely to be substantially shorter than the stated maturity of the mortgages in the underlying pool. Because of such variation in prepayment rates, it is not possible to predict the life of a particular Ginnie Mae Pass-Through. Payments to holders of Ginnie Mae Pass-Throughs consist of the monthly distributions of interest and principal less fees from Ginnie Mae and the issuer. The actual yield to be earned by a holder of a Ginnie Mae Pass-Through is calculated by dividing interest payments by the purchase price paid for the Ginnie Mae Pass-Through (which may be at a premium or a discount from the face value of the certificate). Monthly distributions of interest, as contrasted to semi-annual distributions which are common for other fixed interest investments, have the effect of compounding and thereby raising the effective annual yield earned on Ginnie Mae Pass-Throughs.
Mortgage-related securities issued by Fannie Mae include Fannie Mae Guaranteed Mortgage Pass-Through Certificates (also known as “Fannie Mae Pass-Throughs”) that are solely the obligations of Fannie Mae and are not backed by or entitled to the full faith and credit of the United States. Fannie Mae Pass-Throughs are guaranteed as to timely payment of the principal and interest by Fannie Mae.
Mortgage-related securities issued by Freddie Mac include FHLMC Mortgage Participation Certificates (also known as “Freddie Mac PCs”). Freddie Mac PCs are not guaranteed by the United States or by any Federal Home Loan Banks and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by Freddie Mac. Freddie Mac guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When Freddie Mac does not guarantee timely payment of principal, Freddie Mac may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable.
Guaranteed Investment Contracts. A Fund may make investments in obligations issued by highly rated U.S. insurance companies, such as guaranteed investment contracts and similar funding agreements (collectively “GICs”). A GIC is a general obligation of the issuing insurance company and not a separate account. Under these contracts, a Fund makes cash contributions to a deposit fund of the insurance company’s general account. The insurance company then credits to the Fund on a monthly basis guaranteed interest that is based on an index. The GICs provide that this guaranteed interest will not be less than a certain minimum rate. GIC investments that do not provide for payment within seven days after notice are subject to the Fund’s policy regarding investments in illiquid securities.
Illiquid Securities. Subject to the limitations in the 1940 Act and the rules and interpretations of the staff of the SEC thereunder, the Funds may invest in illiquid securities. Illiquid securities are securities that cannot be disposed of within seven business days at approximately the price at which they are being carried on a Fund’s books.
Illiquid securities include demand instruments with demand notice periods exceeding seven days, securities for which there is no active secondary market, and repurchase agreements with maturities of over seven days in length. The Funds may invest in securities that are neither listed on a stock exchange nor traded over-the-counter, including privately placed securities. Investing in unlisted securities, including investments in new and early stage companies, may involve a high degree of business and financial risk that can result in substantial losses. As a result of the absence of a public trading market for these securities, they may be less liquid than publicly traded securities. Because these types of securities are thinly traded, if at all, and market prices for these types of securities are generally not readily available, the Fund typically determines the price for these types of securities in good faith in accordance with policies and procedures adopted by the Board. Although these securities may be resold in privately negotiated transactions, the prices realized from these sales could be less than those originally paid by a Fund, or less than what may be considered the fair value of such securities. Further, companies whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements which might be applicable if their securities were publicly traded. If such securities are required to be registered under the securities laws of one or more jurisdictions before being resold, a Fund may be required to bear the expenses of registration.
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In addition, the Funds believe that certain investments in joint ventures, cooperatives, partnerships, private placements, unlisted securities and other similar situations (collectively, ‘‘special situations’’) could enhance the Funds’ capital appreciation potential. To the extent these investments are deemed illiquid, the Funds’ investment in them will be consistent with their applicable restriction on investment in illiquid securities. Investments in special situations and certain other instruments may be liquid, as determined by the Funds’ Advisor or sub-advisors based on criteria approved by the Board.
Inflation-Indexed Bonds. The Funds may invest in inflation-indexed bonds, which are fixed-income securities whose return is periodically adjusted according to the rate of inflation as indicated by the Consumer Price Index (“CPI”). Inflation-indexed bonds may be issued by the U.S. government and agencies or instrumentalities of the U.S. government and by corporations. There are two common accrual structures for inflation-indexed bonds. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the CPI accruals as part of a semiannual coupon.
Inflation-indexed securities are issued with various maturities. The securities issued by the U.S. Treasury, called Treasury Inflation Protected Securities, or "TIPS", pay interest on a semiannual basis, equal to a fixed percentage of the inflation-adjusted principal amount. For example, if the Fund purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semiannually), and inflation over the first six months were 1%, the mid-year par value of the bond would be $1,010 and the first semiannual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the year reached 3%, the end-of-year par value of the bond would be $1,030 and the second semiannual interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. The Fund may also invest in other inflation related bonds, which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation, investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer Price Index for Urban Consumers (“CPI-U”), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy.
Any increase in the principal amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity.
Interests in Publicly Traded Limited Partnerships. Interests in publicly traded limited partnerships (limited partnership interests or units) represent equity interests in the assets and earnings of the partnership’s trade or business. Unlike common stock in a corporation, limited partnership interests have limited or no voting rights. However, many of the risks of investing in common stocks are still applicable to investments in limited partnership interests. In addition, limited partnership interests are subject to risks not present in common stock. For example, income generated from limited partnerships deemed not to be “publicly traded” may not be considered “qualifying income” for purposes of the regulated investment company requirements under the Code, and may trigger adverse tax consequences (please refer to the “Taxes” section of this SAI for a discussion of relevant tax risks). Also, since publicly traded limited partnerships are a less common form of organizational structure than corporations, the limited partnership units may be less liquid than publicly traded common stock. Also, because of the difference in organizational structure, the fair value of limited partnership units in a Fund’s portfolio may be based either upon the current market price of such units, or if there is no current market price, upon the pro rata value of the underlying assets of the partnership. Limited partnership units also have the risk that the limited partnership might, under certain circumstances, be treated as a general partnership giving rise to broader liability exposure to the limited partners for activities of the partnership. Further, the general partners of a limited partnership may be able to significantly change the business or asset structure of a limited partnership without the limited partners
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having any ability to disapprove any such changes. In certain limited partnerships, limited partners may also be required to return distributions previously made in the event that excess distributions have been made by the partnership, or in the event that the general partners, or their affiliates, are entitled to indemnification.
Initial Public Offerings (“IPOs”). Due to the typically small size of the IPO allocation available to the Funds and the nature and market capitalization of the companies involved in IPOs, the sub-advisors will often purchase IPO shares that would qualify as a permissible investment for a Fund but will instead decide to allocate those IPO purchases to other funds they advise. Any such allocation will be done in a fair and equitable manner according to a specific and consistent process. Because IPO shares frequently are volatile in price, a Fund may hold IPO shares for a very short period of time. This may increase the turnover of a Fund’s portfolio and may lead to increased expenses to a Fund, such as commissions and transaction costs. By selling shares of an IPO, a Fund may realize taxable capital gains that it will subsequently distribute to shareholders.
Most IPOs involve a high degree of risk not normally associated with offerings of more seasoned companies. Companies involved in IPOs generally have limited operating histories, and their prospects for future profitability are uncertain. These companies often are engaged in new and evolving businesses and are particularly vulnerable to competition and to changes in technology, markets and economic conditions. They may be dependent on certain key managers and third parties, need more personnel and other resources to manage growth and require significant additional capital. They may also be dependent on limited product lines and uncertain property rights and need regulatory approvals. Investors in IPOs can be affected by substantial dilution in the value of their shares, by sales of additional shares and by concentration of control in existing management and principal shareholders. Stock prices of IPOs can also be highly unstable, due to the absence of a prior public market, the small number of shares available for trading and limited investor information.
Interfund Lending. Each Fund’s investment restrictions and an SEC exemptive order permit the Fund to participate in an interfund lending program with other funds in the Touchstone family of funds, including the Funds. This program allows the Touchstone Funds to borrow money from, and lend money to, each other for temporary or emergency purposes, such as to satisfy redemption requests or to cover unanticipated cash shortfalls. A Fund may not borrow through the interfund lending program for leverage purposes. To the extent permitted by its investment objective, strategies, and policies, a Fund may (1) lend uninvested cash to other Touchstone Funds in an amount up to 15% of the lending Fund's net assets at the time of the loan (including lending up to 5% of its net assets to any single Touchstone Fund) and (2) borrow money from other Touchstone Funds provided that total outstanding borrowings from all sources do not exceed 33 1 / 3 % of its total assets. A Fund may borrow through the interfund lending program on an unsecured basis (i.e., without posting collateral) if its aggregate borrowings from all sources immediately after the interfund borrowing represent 10% or less of the Fund’s total assets. However, if a Fund’s aggregate borrowings from all sources immediately after the interfund borrowing would exceed 10% of the Fund’s total assets, the Fund may borrow through the interfund lending program on a secured basis only. Any Fund that has outstanding interfund borrowings may not cause its outstanding borrowings, from all sources, to exceed 10% of its total assets without first securing each interfund loan. If a Fund has any outstanding secured borrowings from other sources, including another fund, at the time it requests an interfund loan, the Fund's interfund borrowing will be secured on at least an equal priority basis with at least an equivalent percentage of collateral to loan value as any outstanding collateralized loan.
Any loan made through the interfund lending program is required to be more beneficial to a borrowing Fund (i.e., at a lower interest rate) than borrowing from a bank and more beneficial to a lending Fund (i.e., at a higher rate of return) than an alternative short-term investment. The term of an interfund loan is limited to the time required to obtain sufficient cash to repay the loan through either the sale of the Fund's portfolio securities or net sales of Fund shares, but in no event more than seven days. In addition, an interfund loan is callable with one business day’s notice.
The limitations discussed above, other conditions of the SEC exemptive order, and related policies and procedures implemented by Touchstone are designed to minimize the risks associated with interfund lending for both borrowing Funds and lending Funds. However, no borrowing or lending activity is without risk. When a Fund borrows money from another Touchstone Fund, there is a risk that the loan could be called on one business day’s notice or not renewed, in which case the Fund may need to borrow from a bank at higher rates if an interfund loan were not available from another Touchstone Fund. Furthermore, a delay in repayment to a lending Fund could result in a lost investment opportunity or additional lending costs.
Investment Company Shares. Investment companies include open- and closed-end funds, ETFs, and any other pooled investment vehicle that meets the definition of an investment company under the 1940 Act, whether such companies are required to register under the 1940 Act or not. As a shareholder of another investment company, a Fund would be subject to the sames risks as any other investor in that investment company. A Fund’s purchase of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying Fund expenses. Investments in registered investment company shares are subject to limitations prescribed by the 1940 Act and its rules, and applicable SEC staff interpretations or applicable exemptive
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relief granted by the SEC. The 1940 Act currently provides, in part, that a Fund generally may not purchase shares of a registered investment company if (a) such a purchase would cause a Fund to own in the aggregate more than 3% of the total outstanding voting stock of the investment company or (b) such a purchase would cause a Fund to have more than 5% of its total assets invested in the investment company or (c) more than 10% of a Fund’s total assets would be invested in the aggregate in all registered investment companies. See also “Investment Limitations” and “Exchange-Traded Funds.”
Leveraging. Leveraging a Fund through borrowing or other means (e.g., certain uses of derivatives) creates an opportunity for increased net income, but, at the same time, creates special risk considerations. For example, leveraging may exaggerate changes in the NAV of a Fund’s shares and in the yield on the Fund’s portfolio. Although the principal amount of such borrowings will be fixed, a Fund’s assets may change in value during the time the borrowing is outstanding. Leveraging creates interest expenses for a Fund which could exceed the income from the assets retained. To the extent the income derived from securities purchased with borrowed funds exceeds the interest that a Fund will have to pay, the Fund’s net income will be greater than if leveraging were not used. Conversely, if the income from the assets retained with borrowed funds is not sufficient to cover the cost of leveraging, the net income of a Fund will be less than if leveraging were not used, and therefore the amount available for distribution to shareholders as dividends will be reduced.
Because the SEC staff believes that, among other transactions, reverse repurchase agreements and dollar roll transactions are collateralized borrowings, the SEC staff believes that they create leverage. The requirement that such transactions be fully collateralized by assets segregated by the Funds’ custodian or otherwise subject to “covering” techniques imposes a practical limit on the leverage these transactions create.
Loan Participations. The Active Bond Fund may invest, subject to an overall 33% limit on loans, in loan participations, typically made by a syndicate of banks to U.S. and non-U.S. corporate or governmental borrowers for a variety of purposes. The underlying loans may be secured or unsecured, and will vary in term and legal structure. When purchasing such instruments, the Fund may assume the credit risks associated with the original bank lender as well as the credit risks associated with the borrower. Investments in loan participations present the possibility that the Fund could be held liable as a co-lender under emerging legal theories of lender liability. In addition, if the loan is foreclosed, the Fund could be part owner of any collateral, and could bear the costs and liabilities of owning and disposing of the collateral. Loan participations are generally not rated by major rating agencies and may not be protected by securities laws. Also, loan participations are generally considered to be illiquid and are therefore subject to the Fund’s overall 15% limitation on illiquid securities.
Loans. A Fund may invest in senior and subordinated loans to corporations and other business entities.
Senior Loans : Senior loans generally hold a first or second lien priority and typically pay interest at rates that are determined periodically on the basis of a floating base lending rate, primarily the London Interbank Offered Rate (“LIBOR”), plus a spread. Senior loans are typically made to U.S. and, to a lesser extent, non-U.S. borrowers. Borrowers may obtain senior loans, among other reasons, to refinance existing debt, engage in acquisitions, pay dividends, recapitalize, complete leveraged buyouts and for general corporate purposes. Senior loans rated below investment grade are sometimes referred to as “leveraged loans.” A Fund may invest in senior loans through assignments of or, to a lesser extent, participations in senior loans.
The senior loans in which a Fund will invest will primarily be rated below investment grade, but may also be unrated and of comparable credit quality. As a result, although senior loans are senior and typically secured in a first or second lien position in contrast to other below investment grade fixed income instruments, which are often subordinated or unsecured, the risks associated with such senior loans are generally similar to the risks of other below investment grade fixed income instruments. See “Lower-Rated Securities” below. Investments in below investment grade senior loans are considered speculative because of the credit risk of the borrowers. Such borrowers are more likely than investment grade borrowers to default on their payments of interest and principal owed to a Fund, and such defaults could reduce a Fund’s NAV and income distributions. An economic downturn would generally lead to a higher non-payment rate, and a senior loan may lose significant market value before a default occurs. Moreover, any specific collateral used to secure a senior loan may decline in value or become illiquid, which would adversely affect the senior loan’s value. Senior loans are subject to a number of risks described elsewhere in this prospectus, including non-payment of principal, liquidity risk and the risk of investing in below investment grade fixed income instruments.
Senior loans are subject to the risk of non-payment of scheduled interest or principal. Such non-payment would result in a reduction of income to a Fund, a reduction in the value of the investment and a potential decrease in the Fund’s NAV. There can be no assurance that the liquidation of any collateral securing a senior loan would satisfy the borrower’s obligation in the event of non-payment of scheduled interest or principal payments, whether when due or upon acceleration, or that the collateral could be liquidated, readily or otherwise. In the event of bankruptcy or insolvency of a borrower, the Fund could experience delays or limitations with respect to its ability to realize the benefits of the collateral, if any, securing a senior loan. The collateral securing a senior loan, if any, may lose all or substantially all of its value in the event of the bankruptcy or insolvency of a borrower. Some
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senior loans are subject to the risk that a court, pursuant to fraudulent conveyance or other similar laws, could subordinate such senior loans to presently existing or future indebtedness of the borrower or take other action detrimental to the holders of senior loans including, in certain circumstances, invalidating such senior loans or causing interest previously paid to be refunded to the borrower. Additionally, a senior loan may be “primed” in bankruptcy, which reduces the ability of the holders of the senior loan to recover on the collateral. Priming takes place when a debtor in bankruptcy is allowed to incur additional indebtedness by the bankruptcy court and such indebtedness has a senior or pari passu lien with the debtor’s existing secured indebtedness, such as existing senior loans or secured corporate bonds.
There may be less readily available information about most senior loans and the borrowers thereunder than is the case for many other types of securities, including securities issued in transactions registered under the Securities Act of 1933, as amended (“1933 Act”). Senior loans may be issued by companies that are not subject to SEC reporting requirements, and these companies, therefore, do not file reports with the SEC that must comply with SEC form requirements and in addition are subject to a less stringent liability disclosure regime than companies subject to SEC reporting requirements. As a result, the sub-advisor will rely primarily on its own evaluation of a borrower’s credit quality rather than on any available independent sources. Therefore, a Fund will be particularly dependent on the analytical abilities of the sub-advisor.
The secondary trading market for senior loans may be less liquid than the secondary trading market for registered investment grade debt securities. No active trading market may exist for certain senior loans, which may make it difficult to value them. Illiquidity and adverse market conditions may mean that a Fund may not be able to sell senior loans quickly or at a fair price. To the extent that a secondary market does exist for certain senior loans, the market for them may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods.
Senior loans and other variable rate debt instruments are subject to the risk of payment defaults of scheduled interest or principal. Such payment defaults would result in a reduction of income to a Fund, a reduction in the value of the investment and a potential decrease in the NAV of the common shares. Similarly, a sudden and significant increase in market interest rates may increase the risk of payment defaults and cause a decline in the value of these investments and in a Fund’s NAV. Other factors (including, but not limited to, rating downgrades, credit deterioration, a large downward movement in stock prices, a disparity in supply and demand of certain securities or market conditions that reduce liquidity) can reduce the value of senior loans and other debt obligations, impairing the NAV of the common shares.
Senior Loans are subject to legislative risk. If legislation or state or federal regulations impose additional requirements or restrictions on the ability of financial institutions to make loans, the availability of senior loans for investment by the Fund may be adversely affected. In addition, such requirements or restrictions could reduce or eliminate sources of financing for certain borrowers. This would increase the risk of default. If legislation or federal or state regulations require financial institutions to increase their capital requirements, this may cause financial institutions to dispose of senior loans that are considered highly levered transactions. Such sales could result in prices that, in the opinion of the sub-advisor, do not represent fair value. If the Fund attempts to sell a senior loan at a time when a financial institution is engaging in such a sale, the price the Fund could receive for the senior loan may be adversely affected.
A Fund expects to acquire senior loans primarily through assignments and, to a lesser extent, through participations. The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to the debt obligation; however, the purchaser’s rights can be more restricted than those of the assigning institution, and a Fund may not be able to unilaterally enforce all rights and remedies under the loan and with regard to any associated collateral. In general, a participation is a contractual relationship only with the institution participating out the interest, not with the borrower. Sellers of participations typically include banks, broker-dealers, other financial institutions and lending institutions. In purchasing participations, a Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement against the borrower, and the Fund may not directly benefit from the collateral supporting the debt obligation in which it has purchased the participation. As a result, (i) a Fund will be exposed to the credit risk of both the borrower and the institution selling the participation. Further, in purchasing participations in lending syndicates, a Fund may be more limited than it otherwise would be in its ability to conduct due diligence on the borrower. In addition, as a holder of the participations, the Fund may not have voting rights or inspection rights that the Fund would otherwise have if it were investing directly in the senior loan, which may result in the Fund being exposed to greater credit or fraud risk with respect to the borrower or the senior loan.
Subordinated Loans . A Fund may also invest in subordinated loans. Subordinated loans generally have similar characteristics as senior loans except that such loans are subordinated in payment and/or lower in lien priority to first lien holders.
Although the Funds do not expect subordinated loans to be a significant component of its portfolios, it may invest in such instruments from time to time. Subordinated loans generally are subject to similar risks as those associated with investments in senior loans,
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except that such loans are subordinated in payment and/or lower in lien priority to first lien holders. In the event of default on a subordinated loan, the first priority lien holder has first claim to the underlying collateral of the loan to the extent such claim is secured. Additionally, an over-secured creditor may be entitled to additional interest and other charges in bankruptcy increasing the amount of their allowed claim. Subordinated loans are subject to the additional risk that the cash flow of the borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments after giving effect to the senior obligations of the borrower. This risk is generally higher for subordinated unsecured loans or debt, which are not backed by a security interest in any specific collateral. Subordinated loans generally have greater price volatility than senior loans and may be less liquid.
Lower-Rated and Unrated Securities. The Funds may invest in higher yielding (and, therefore, higher risk), lower-rated fixed-income securities, including non-investment-grade securities, or "junk bonds," and unrated securities. Securities rated in the fourth highest category by S&P or Moody’s, BBB and Baa, respectively, although considered investment grade, may possess speculative characteristics, and changes in economic or other conditions are more likely to impair the ability of issuers of these securities to make interest and principal payments than is the case with respect to issuers of higher grade bonds.
Generally, medium or lower-rated securities and unrated securities of comparable quality, sometimes referred to as “junk bonds,” offer a higher current yield than is offered by higher rated securities, but also (i) will likely have some quality and protective characteristics that, in the judgment of the rating organizations, are outweighed by large uncertainties or major risk exposures to adverse conditions and (ii) are predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal in accordance with the terms of the obligation. The yield of junk bonds will fluctuate over time.
The market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher quality bonds. In addition, medium and lower-rated securities and comparable unrated securities generally present a higher degree of credit risk. The risk of loss due to default by these issuers is significantly greater because medium and lower-rated securities and unrated securities of comparable quality generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness. Since the risk of default is higher for lower-rated debt securities, the Sub-Advisor’s research and credit analysis are an especially important part of managing securities of this type held by a Fund. In light of these risks, the Sub-Advisor, in evaluating the creditworthiness of an issue, whether rated or unrated, will take various factors into consideration, which may include, as applicable, the issuer’s financial resources, its sensitivity to economic conditions and trends, the operating history of and the community support for the facility financed by the issue, the ability of the issuer’s management and regulatory matters.
In addition, the market value of securities in lower-rated categories is more volatile than that of higher quality securities, and the markets in which medium and lower-rated or unrated securities are traded are more limited than those in which higher rated securities are traded. The existence of limited markets may make it more difficult for the Funds to obtain accurate market quotations for purposes of valuing their respective portfolios and calculating their respective NAVs. Moreover, the lack of a liquid trading market may restrict the availability of securities for the Funds to purchase and may also have the effect of limiting the ability of a Fund to sell securities at their fair value either to meet redemption requests or to respond to changes in the economy or the financial markets.
Lower-rated debt obligations also present risks based on payment expectations. If an issuer calls the obligation for redemption, a Fund may have to replace the security with a lower yielding security, resulting in a decreased return for shareholders. Also, as the principal value of bonds moves inversely with movements in interest rates, in the event of rising interest rates the value of lower-rated securities held by a Fund may decline relatively proportionately more than a portfolio consisting of higher rated securities. If a Fund experiences unexpected net redemptions, it may be forced to sell its higher rated bonds, resulting in a decline in the overall credit quality of the securities held by the Fund and increasing the exposure of the Fund to the risks of lower-rated securities.
Subsequent to its purchase by a Fund, a security may cease to be rated or its rating may be reduced. Neither event will require sale of the security by the Fund, but the Sub-Advisor will consider this event in its determination of whether the Fund should continue to hold the security.
The market for lower-rated debt securities may be thinner and less active than that for higher-rated debt securities, which can adversely affect the prices at which the former are sold. If market quotations are not available, lower-rated debt securities will be valued in accordance with procedures established by the Board, including the use of outside pricing services. Judgment plays a greater role in valuing high yield corporate debt securities than is the case for securities for which more external sources for quotations and last sale information is available. Adverse publicity and changing investor perception may affect the ability of outside pricing services to value lower-rated debt securities and the ability of holders of such securities to dispose of them.
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In considering investments for a Fund, the Sub-Advisor will attempt to identify those issuers of high yielding debt securities whose financial condition is adequate to meet future obligations, has improved or is expected to improve in the future. The Sub-Advisor’s analysis focuses on relative values based on such factors as interest or dividend coverage, asset coverage, earnings prospects and the experience and managerial strength of the issuer.
A Fund may choose, at its expense or in conjunction with others, to pursue litigation or otherwise exercise its rights as a security holder to seek to protect the interest of security holders if it determines this to be in the best interest of the Fund.
Market Disruption. During periods of extreme market volatility, prices of securities held by the Funds may be negatively impacted due to imbalances between market participants seeking to sell the same or similar securities and market participants willing or able to buy such securities. As a result, the market prices of securities held by the Funds could go down, at times without regard to the financial condition of or specific events impacting the issuer of the security.
Instability in financial markets has in the past led governments to take a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced extreme volatility, and in some cases a lack of liquidity. Federal, state, and other governments, their regulatory agencies, or self-regulatory organizations may take actions that affect the regulation of the instruments in which the Fund invests, or the issuers of such instruments, in ways that are unforeseeable. Legislation or regulation may also change the way in which the Funds themselves are regulated. Such legislation or regulation could limit or preclude the Funds’ ability to achieve their investment goals.
Master Limited Partnerships ("MLPs"). MLPs are limited partnerships in which the ownership units are publicly traded. MLP units are registered with the SEC and are freely traded on a securities exchange or in the over-the-counter market. MLPs often own several properties or businesses (or own interests) that are related to oil and gas industries, but they also may finance research and development and other projects. Generally, an MLP is operated under the supervision of one or more managing general partners. Limited partners (like the Fund that invests in a MLP) are not involved in the day-to-day management of the partnership. They are allocated income and capital gains associated with the partnership project in accordance with the terms established in the partnership agreement. Generally speaking, MLP investment returns are enhanced during periods of declining/low interest rates and tend to be negatively influenced when interest rates are rising. As an income vehicle, the unit price can be influenced by general interest rate trends independent of specific underlying fundamentals. In addition, most MLPs are leveraged and typically carry a portion of “floating” rate debt. As such, a significant upward swing in interest rates would also drive interest expense higher. Furthermore, most MLPs grow by acquisitions partly financed by debt, and higher interest rates could make it more difficult to transact accretive acquisitions. To the extent that an MLP’s interests are all in a particular industry, the MLP will, accordingly, be negatively impacted by economic events impacting that industry. For instance, a decline in commodity prices may negatively affect the business and market value of an MLP that owns assets related to the oil and gas industries. The risks of investing in an MLP typically more closely resemble those involved in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded to investors in an MLP than investors in a corporation. In addition, MLPs may be subject to state taxation in certain jurisdictions which will have the effect of reducing the amount of income paid by the MLP to its investors. An MLP may be taxed as a corporation, contrary to its intention to be taxed as a partnership, resulting in decreased returns to the Fund invested in the MLP. A Fund’s investment in an MLP may generate unrelated business taxable income (“UBTI”) to tax-exempt shareholders of the Fund. Tax-exempt shareholders are urged and advised to consult their own tax advisors to determine the impact on them of a Fund’s investment in an MLP.
Micro-Cap Securities. The Funds may invest in companies whose total market capitalization at the time of investment is generally between $30 million and $500 million, referred to as micro-cap companies. Micro-cap companies may not be well-known to the investing public, may not have significant institutional ownership and may have cyclical, static or only moderate growth prospects. Micro-cap companies may have greater risk and volatility than large companies and may lack the management depth of larger, mature issuers. Micro-cap companies may have relatively small revenues and limited product lines, markets, or financial resources, and their securities may trade less frequently and in more limited volume than those of larger, more mature companies. In addition, micro-cap companies may be developing or marketing new products or services for which markets are not yet established and may never become established. As a result, the prices of their securities may fluctuate more than those of larger issuers.
Money Market Instruments. Money market securities are high-quality, dollar-denominated, short-term debt instruments. They include: (i) bankers’ acceptances, certificates of deposits, notes and time deposits of highly-rated U.S. banks and U.S. branches of foreign banks; (ii) U.S. Treasury obligations and obligations issued or guaranteed by the agencies and instrumentalities of the U.S. government; (iii) high-quality commercial paper issued by U.S. and foreign corporations; (iv) debt obligations with a maturity of one year or less issued by corporations with outstanding high-quality commercial paper ratings; and (v) repurchase agreements involving any of the foregoing obligations entered into with highly-rated banks and broker-dealers.
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Mortgage-Related and Other Asset-Backed Securities. Each Fund may invest in mortgage-related securities. Mortgage-related securities represent groups of mortgage loans that are combined for sale to investors. The loans may be grouped together by U.S. government agencies and sponsored entities, such as Ginnie Mae, Fannie Mae and Freddie Mac. The loans may also be grouped together by private issuers such as: commercial banks; savings and loan institutions; mortgage bankers; and private mortgage insurance companies. Mortgage-related securities include CMOs and Real Estate Mortgage Investment Conduits ("REMICs").
Interests in pools of mortgage-related securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a “pass-through” of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-related securities are described as “modified pass-through.” These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
There are several risks associated with mortgage-related securities generally. One is that the monthly cash inflow from the underlying loans may not be sufficient to meet the monthly payment requirements of the mortgage-related security. Another is prepayment of principal by mortgagors or mortgage foreclosures.
The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective duration of the security relative to what was anticipated at the time of purchase. To the extent that unanticipated rates of prepayment on underlying mortgages increase the effective duration of a mortgage-related security, the volatility of such security can be expected to increase. But prepayment may also shorten the term of the underlying mortgage pool for a mortgage-related security. Early returns of principal will affect the average life of the mortgage-related securities remaining in a Fund. The occurrence of mortgage prepayments is affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. In periods of rising interest rates, the rate of prepayment tends to decrease, thereby lengthening the average life of a pool of mortgage-related securities. Conversely, in periods of falling interest rates the rate of prepayment tends to increase, thereby shortening the average life of a pool. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield of a Fund. Because prepayments of principal generally occur when interest rates are declining, it is likely that a Fund will have to reinvest the proceeds of prepayments at lower interest rates than those at which the assets were previously invested. If this occurs, a Fund’s yield will correspondingly decline. Thus, mortgage-related securities may have less potential for capital appreciation in periods of falling interest rates than other fixed-income securities of comparable maturity, although these securities may have a comparable risk of decline in market value in periods of rising interest rates. To the extent that a Fund purchases mortgage-related securities at a premium, unscheduled prepayments, which are made at par, will result in a loss equal to any unamortized premium.
Finally, mortgage-related securities may also be subject to liquidity risks due to tightening markets. Delinquencies and losses on residential mortgage loans (especially subprime and second-lien mortgage loans) and a decline in or flattening of housing values may exacerbate such delinquencies and losses. Borrowers with adjustable rate mortgage loans are more sensitive to changes in interest rates, which affect their monthly mortgage payments, and may be unable to secure replacement mortgages at comparably low interest rates. Also, residential mortgage loan originators may experience serious financial difficulties or bankruptcy during tighter markets. In summary, reduced investor demand for mortgage loans and mortgage-related securities and increased investor yield requirements may limit liquidity in the secondary market for mortgage-related securities, which can adversely affect the market value of mortgage-related securities.
Asset-Backed Securities ("ABS"). ABS are secured by non-mortgage assets such as company receivables, truck and auto loans, leases and credit card receivables. Such securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in the underlying pools of assets. Such securities also may be debt instruments, which are also known as collateralized loan obligations and are generally issued as the debt of a special purpose entity, such as a trust, organized solely for the purpose of owning such assets and issuing such debt. Covered bonds are a type of asset backed security that is created from public sector loans or mortgage loans where the security is backed by a separate group of loans. Covered bonds typically carry a 2 to 10 year maturity rate and enjoy relatively high credit ratings, depending on the quality of the pool of loans backing the bond.
The credit quality of an ABS transaction depends on the performance of the underlying assets. ABS can be structured with various forms of credit enhancement to address the possibility that some borrowers could miss payments or even default on their loans. Some ABS are subject to interest-rate risk and prepayment risk. A change in interest rates can affect the pace of payments on the
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underlying loans, which in turn, affects total return on the securities. ABS also carry credit or default risk. If many borrowers on the underlying loans default, losses could exceed the credit enhancement level and result in losses to investors in an ABS transaction. Finally, ABS have structure risk due to a unique characteristic known as early amortization, or early payout, risk. Built into the structure of most ABS are triggers for early payout, designed to protect investors from losses. These triggers are unique to each transaction and can include: a big rise in defaults on the underlying loans, a sharp drop in the credit enhancement level, or even the bankruptcy of the originator. Once early amortization begins, all incoming loan payments (after expenses are paid) are used to pay investors as quickly as possible based upon a predetermined priority of payment.
Mortgage Pass-Through Securities. Interests in pools of mortgage-related securities differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a “pass-through” of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-related securities (such as securities issued by Government National Mortgage Association (GNMA) ("Ginnie Mae")) are described as “modified pass-through.” These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
Government Pass-Through Securities. Government pass-through securities are securities that are issued or guaranteed by a U.S. government agency representing an interest in a pool of mortgage loans. The primary issuers or guarantors of these mortgage-backed securities are Ginnie Mae, Federal National Mortgage Association (FNMA) (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (FHLMC) (“Freddie Mac”). Ginnie Mae, Fannie Mae and Freddie Mac guarantee timely distributions of interest to certificate holders. Ginnie Mae and Fannie Mae also guarantee timely distributions of scheduled principal. Freddie Mac generally guarantees only the ultimate collection of principal of the underlying mortgage loan. Certain federal agencies, such as Ginnie Mae, have been established as instrumentalities of the United States government to supervise and finance certain types of activities. Issues of these agencies, while not direct obligations of the United States government, are either backed by the full faith and credit of the United States (e.g., Ginnie Mae securities) or supported by the issuing agencies’ right to borrow from the U.S. Treasury. The issues of other agencies are supported by the credit of the instrumentality (e.g., Fannie Mae securities). Government and private guarantees do not extend to the securities’ value, which is likely to vary inversely with fluctuations in interest rates.
There are a number of important differences among the agencies and instrumentalities of the U.S. government that issue mortgage-backed securities and among the securities that they issue. Mortgage-related securities issued by Ginnie Mae include GNMA Mortgage Pass-Through Certificates (also known as “Ginnie Mae Pass-Throughs”) which are guaranteed as to the timely payment of principal and interest by Ginnie Mae and such guarantee is backed by the full faith and credit of the U.S. Government. Ginnie Mae Pass-Throughs are created by an “issuer,” which is a Federal Housing Administration (“FHA”) approved mortgagee that also meets criteria imposed by Ginnie Mae. The issuer assembles a pool of FHA, Farmers’ Home Administration or Veterans’ Administration (“VA”) insured or guaranteed mortgages which are homogeneous as to interest rate, maturity and type of dwelling. Upon application by the issuer, and after approval by Ginnie Mae of the pool, Ginnie Mae provides its commitment to guarantee timely payment of principal and interest on the Ginnie Mae Pass-Throughs backed by the mortgages included in the pool. The Ginnie Mae Pass-Throughs, endorsed by Ginnie Mae, then are sold by the issuer through securities dealers. Ginnie Mae Pass-Throughs bear a stated “coupon rate” which represents the effective FHA-VA mortgage rate at the time of issuance, less fees from Ginnie Mae and the issuer. Ginnie Mae is authorized under the National Housing Act to guarantee timely payment of principal and interest on Ginnie Mae Pass-Throughs. This guarantee is backed by the full faith and credit of the U.S. Government. Ginnie Mae may borrow Treasury funds to the extent needed to make payments under its guarantee. When mortgages in the pool underlying a Ginnie Mae Pass-Through are prepaid by mortgagors or by result of foreclosure, such principal payments are passed through to the certificate holders. Accordingly, the life of the Ginnie Mae Pass-Through is likely to be substantially shorter than the stated maturity of the mortgages in the underlying pool. Because of such variation in prepayment rates, it is not possible to predict the life of a particular Ginnie Mae Pass-Through. Payments to holders of Ginnie Mae Pass-Throughs consist of the monthly distributions of interest and principal less the fees of Ginnie Mae and the issuer. The actual yield to be earned by a holder of a Ginnie Mae Pass-Through is calculated by dividing interest payments by the purchase price paid for the Ginnie Mae Pass-Through (which may be at a premium or a discount from the face value of the certificate). Monthly distributions of interest, as contrasted to semi-annual distributions which are common for other fixed interest investments, have the effect of compounding and thereby raising the effective annual yield earned on Ginnie Mae Pass-Throughs.
Mortgage-related securities issued by Fannie Mae include Fannie Mae Guaranteed Mortgage Pass-Through Certificates (also known as “Fannie Mae Pass-Throughs”) that are solely the obligations of Fannie Mae and are not backed by or entitled to the full
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faith and credit of the United States. Fannie Mae Pass-Throughs are guaranteed as to timely payment of the principal and interest by Fannie Mae.
Mortgage-related securities issued by Freddie Mac include FHLMC Mortgage Participation Certificates (also known as “Freddie Mac PCs”). Freddie Mac PCs are not guaranteed by the United States or by any Federal Home Loan Banks and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Freddie Mac PCs entitle the holder to timely payment of interest, which is guaranteed by Freddie Mac. Freddie Mac guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When Freddie Mac does not guarantee timely payment of principal, Freddie Mac may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable.
Real Estate Mortgage Investment Conduits (“REMICs”). REMICs are private entities formed for the purpose of holding a fixed pool of mortgages secured by interests in real property. For Freddie Mac REMIC certificates, Freddie Mac guarantees the timely payment of interest, and also guarantees the payment of principal as payments are required to be made on the underlying mortgage participation certificates. Fannie Mae REMIC certificates are issued and guaranteed as to timely distribution of principal and interest by Fannie Mae.
The Total Return Bond Fund may invest up to 25% of its net assets in REMICs.
Collateralized Mortgage Obligations (“CMOs”). A CMO is a debt obligation of a legal entity that is collateralized by mortgages and divided into classes. Similar to a bond, interest and prepaid principal is paid, in most cases, on a monthly basis. CMOs may be collateralized by whole mortgage loans or private mortgage bonds, but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, Freddie Mac, or Fannie Mae, and their income streams.
CMOs are structured into multiple classes, often referred to as “tranches,” with each class bearing a different stated maturity and entitled to a different schedule for payments of principal and interest, including pre-payments. Actual maturity and average life will depend upon the pre-payment experience of the collateral. In the case of certain CMOs (known as “sequential pay” CMOs), payments of principal received from the pool of underlying mortgages, including pre-payments, are applied to the classes of CMOs in the order of their respective final distribution dates. Thus, no payment of principal will be made on any class of sequential pay CMOs until all other classes having an earlier final distribution date have been paid in full.
The Total Return Bond Fund may invest up to 25% of its net assets in CMOs.
Commercial Mortgage-Backed Securities (“CMBS”). CMBS are mortgage-backed securities that reflect an interest in, and are secured by, mortgage loans on commercial real property. The market for CMBS developed more recently and in terms of total outstanding principal amount of issues is relatively small compared to the market for residential single-family mortgage-backed securities. Many of the risks of investing in CMBS reflect the risks of investing in the real estate securing the underlying mortgage loans. These risks reflect the effects of local and other economic conditions on real estate markets, the ability of tenants to make loan payments, and the ability of a property to attract and retain tenants. CMBS may be less liquid and exhibit greater price volatility than other types of mortgage- or asset-backed securities.
Because CMBS are generally considered to be illiquid, they are subject to a Fund’s overall 15% limitation on illiquid securities. The Total Return Bond Fund may invest up to 15% of its net assets in CMBS.
Mortgage Dollar Rolls. Mortgage “dollar rolls” are transactions in which mortgage-backed securities are sold for delivery in the current month and the seller simultaneously contracts to repurchase substantially similar securities on a specified future date. The difference between the sale price and the purchase price (plus any interest earned on the cash proceeds of the sale) is netted against the interest income foregone on the securities sold to arrive at an implied borrowing rate. Alternatively, the sale and purchase transactions can be executed at the same price, with a Fund being paid a fee as consideration for entering into the commitment to purchase. Mortgage dollar rolls may be renewed prior to cash settlement and initially may involve only a firm commitment agreement by a Fund to buy a security. If the broker-dealer to whom a Fund sells the security becomes insolvent, the Fund’s right to repurchase the security may be restricted. Other risks involved in entering into mortgage dollar rolls include the risk that the value of the security may change adversely over the term of the mortgage dollar roll and that the security a Fund is required to repurchase may be worth less than the security that the Fund originally held. A Fund will place U.S. government or other liquid securities in a segregated account in an amount sufficient to cover its repurchase obligation or otherwise “cover” its position in a manner consistent with the 1940 Act or the rules and SEC interpretations thereunder.
The Total Return Bond Fund may invest up to 45% of its net assets in mortgage dollar rolls.
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Stripped Mortgage-Backed Securities (“SMBS”). SMBS are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. Government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing. SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder of the principal.
In the most extreme case, one class will receive all of the interest (the interest-only or “IO” class), while the other class will receive the entire principal (the principal-only or “PO” class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including pre-payments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on a Fund’s yield to maturity from these securities. If the assets underlying the interest-only securities experience greater than anticipated prepayments of principal, a Fund may fail to recoup fully its initial investment in these securities. Conversely, principal-only securities tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. The secondary market for SMBS may be more volatile and less liquid than that for other mortgage-backed securities, potentially limiting a Fund’s ability to buy or sell these securities at any particular time.
The Total Return Bond Fund may invest up to 5% of its net assets in interest-only SMBS and up to 5% of its net assets in principal-only SMBS.
Municipal Securities. The Active Bond Fund may invest in taxable and tax-exempt municipal securities. Municipal securities consist of (i) debt obligations issued by or on behalf of public authorities to obtain funds to be used for various public facilities, for refunding outstanding obligations, for general operating expenses, and for lending such funds to other public institutions and facilities; and (ii) certain private activity and industrial development bonds issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair, or improvement of privately operated facilities. Municipal notes include general obligation notes, tax anticipation notes, revenue anticipation notes, bond anticipation notes, certificates of indebtedness, demand notes and construction loan notes and participation interests in municipal notes. Municipal bonds include general obligation bonds, revenue or special obligation bonds, private activity and industrial development bonds, and participation interests in municipal bonds. General obligation bonds are backed by the taxing power of the issuing municipality. Revenue bonds are backed by the revenues of a project or facility. The payment of principal and interest on private activity and industrial development bonds generally is dependent solely on the ability of the facility’s user to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment. Yields on municipal securities are the product of a variety of factors, including the general conditions of the money market and of the municipal bond and municipal note markets, the size of a particular offering, the maturity of the obligation and the rating of the issue. Although the interest on municipal securities may be exempt from federal income tax, dividends paid by the Fund to its shareholders may not be tax-exempt.
Obligations of Supranational Entities. Obligations of supranational entities are obligations of entities established through the joint participation of several governments, such as the Asian Development Bank, the Inter-American Development Bank, International Bank of Reconstruction and Development (World Bank), African Development Bank, European Economic Community, European Investment Bank and the Nordic Investment Bank.
Options. A put option gives the purchaser of the option the right to sell, and the writer of the option the obligation to buy, the underlying security at any time during the option period. A call option gives the purchaser of the option the right to buy, and the writer of the option the obligation to sell, the underlying security at any time during the option period. The premium paid to the writer is the consideration for undertaking the obligations under the option contract. The initial purchase (sale) of an option contract is an “opening transaction.” In order to close out an option position, a Fund may enter into a “closing transaction,” which is simply the sale (purchase) of an option contract on the same security with the same exercise price and expiration date as the option contract originally opened. If a Fund is unable to effect a closing purchase transaction with respect to an option it has written, it will not be able to sell the underlying security until the option expires or the Fund delivers the security upon exercise.
A Fund may purchase put and call options to protect against a decline in the market value of the securities in its portfolio or to anticipate an increase in the market value of securities that the Fund may seek to purchase in the future. A Fund will pay a premium when purchasing put and call options. If price movements in the underlying securities are such that exercise of the options would not be profitable for a Fund, loss of the premium paid may be offset by an increase in the value of the Fund’s securities or by a decrease in the cost of acquisition of securities by the Fund.
A Fund may write both covered call and put options. A Fund may write covered call options as a means of increasing the yield on its portfolio and as a means of providing limited protection against decreases in its market value. When a Fund sells an option, if the underlying securities do not increase or decrease to a price level that would make the exercise of the option profitable to the holder thereof, the option generally will expire without being exercised and the Fund will realize as profit the premium received
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for such option. When a call option written by a Fund is exercised, the Fund will be required to sell the underlying securities to the option holder at the strike price, and will not participate in any increase in the price of such securities above the strike price. When a put option written by a Fund is exercised, the Fund will be required to purchase the underlying securities at the strike price, which may be in excess of the market value of such securities.
A Fund may purchase and write options on an exchange or over-the-counter. Over-the-counter options (“OTC options”) differ from exchange-traded options in several respects. They are transacted directly with dealers and not with a clearing corporation, and therefore entail the risk of non-performance by the dealer. OTC options are available for a greater variety of securities and for a wider range of expiration dates and exercise prices than are available for exchange-traded options. Because OTC options are not traded on an exchange, pricing is done normally by reference to information from a market maker. It is the position of the staff of the SEC that OTC options are generally illiquid.
A Fund may purchase and write put and call options on foreign currencies (traded on U.S. and foreign exchanges or over-the-counter markets) to manage its exposure to exchange rates. Call options on foreign currencies written by a Fund will be “covered,” which means that the Fund will own an equal amount of the underlying foreign currency. With respect to put options on foreign currency written by a Fund, the Fund will establish a segregated account with its custodian consisting of cash or liquid, high grade debt securities in an amount equal to the amount the Fund would be required to pay upon exercise of the put, earmark assets as cover, or otherwise “cover” its position in a manner consistent with the 1940 Act or the rules and SEC interpretations.
Buyers and sellers of foreign currency options are subject to the same risks that apply to options generally. There are certain additional risks associated with foreign currency options. The markets in foreign currency options are relatively new, and a Fund’s ability to establish and close out positions on such options is subject to the maintenance of a liquid secondary market. There can be no assurance that a liquid secondary market will exist for a particular option at any specific time. In addition, options on foreign currencies are affected by all of those factors that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the underlying currency relative to the U.S. dollar. As a result, the price of the option position may vary with changes in the value of either or both currencies and may have no relationship to the investment merits of a foreign security. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those that may be involved in the use of foreign currency options, investors may be disadvantaged by having to deal in an odd lot market (generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign currencies or any regulatory requirement that quotations available through dealers or other market sources be firm or revised on a timely basis. Available quotation information is generally representative of very large transactions in the interbank market and thus may not reflect relatively smaller transactions (i.e., less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that the U.S. option markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that cannot be reflected in the options markets until they reopen.
A Fund may purchase and write put and call options on indices and enter into related closing transactions. Put and call options on indices are similar to options on securities except that options on an index give the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the underlying index is greater than (or less than, in the case of puts) the exercise price of the option. This amount of cash is equal to the difference between the closing price of the index and the exercise price of the option, expressed in dollars multiplied by a specified number. Thus, unlike options on individual securities, all settlements are in cash, and gain or loss depends on price movements in the particular market represented by the index generally, rather than the price movements in individual securities. A Fund may choose to terminate an option position by entering into a closing transaction. The ability of a Fund to enter into closing transactions depends upon the existence of a liquid secondary market for such transactions.
All options written on indices must be covered. When a Fund writes an option on an index, it will establish a segregated account containing cash or liquid securities with its custodian in an amount at least equal to the market value of the option and will maintain the account while the option is open or will otherwise cover the transaction.
A Fund will not engage in transactions involving interest rate futures contracts for speculation but only as a hedge against changes in the market values of debt securities held or intended to be purchased by the Fund and where the transactions are appropriate to reduce the Fund’s interest rate risks. There can be no assurance that hedging transactions will be successful. A Fund also could be exposed to risks if it cannot close out its futures or options positions because of any illiquid secondary market.
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Futures and options have effective durations that, in general, are closely related to the effective duration of the securities that underlie them. Holding purchased futures or call option positions (backed by segregated cash or other liquid securities) will lengthen the duration of a Fund’s portfolio.
Risks associated with options transactions include: (1) the success of a hedging strategy may depend on an ability to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates; (2) there may be an imperfect correlation between the movement in prices of options and the securities underlying them; (3) there may not be a liquid secondary market for options; and (4) while a Fund will receive a premium when it writes covered call options, it may not participate fully in a rise in the market value of the underlying security.
The Total Return Bond Fund will not invest in options. The Emerging Markets Small Cap Fund and Mid Cap Value Fund may invest in options for hedging purposes only.
Caps, Collars and Floors. Caps and floors have an effect similar to buying or writing options. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level. The seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor.
Inverse Floaters. A Fund may invest in inverse floaters. Inverse floaters are derivative securities whose interest rates vary inversely to changes in short-term interest rates and whose values fluctuate inversely to changes in long-term interest rates. The value of certain inverse floaters will fluctuate substantially more in response to a given change in long-term rates than would a traditional debt security. These securities have investment characteristics similar to leverage, in that interest rate changes have a magnified effect on the value of inverse floaters.
Ordinary Shares. Ordinary shares are shares of foreign issuers that are traded abroad and on a United States exchange. Ordinary shares may be purchased with and sold for U.S. dollars. Investing in foreign companies may involve risks not typically associated with investing in United States companies. See “Securities of Foreign Issuers.”
Other Investment Companies. Investment companies include open- and closed-end funds, exchange-traded funds, and any other pooled investment vehicle that meets the definition of an investment company under the 1940 Act, whether such companies are required to register under the 1940 Act or not. These investment companies typically incur fees that are separate from those fees incurred directly by a Fund. A Fund’s purchase of such investment company securities results in the layering of expenses, such that shareholders would indirectly bear a proportionate share of the operating expenses of such investment companies, including advisory fees, in addition to paying Fund expenses. Investments in registered investment company shares are subject to limitations prescribed by the 1940 Act and its rules, and applicable SEC staff interpretations or applicable exemptive relief granted by the SEC. The 1940 Act currently provides, in part, that a Fund generally may not purchase shares of a registered investment company if (a) such a purchase would cause a Fund to own in the aggregate more than 3% of the total outstanding voting stock of the investment company or (b) such a purchase would cause a Fund to have more than 5% of its total assets invested in the investment company or (c) more than 10% of a Fund’s total assets would be invested in the aggregate in all registered investment companies.
Overseas Private Investment Corporation Certificates. The Funds may invest in Certificates of Participation issued by the Overseas Private Investment Corporation (“OPIC”). OPIC is a U.S. government agency that sells political risk insurance and loans to help U.S. businesses invest and compete in over 150 emerging markets and developing nations worldwide. OPIC provides medium to long-term debt financing through loans and guaranties to projects involving significant equity or management participation. OPIC can lend on either a project finance or a corporate finance basis in countries where conventional institutions are often unable or unwilling to lend on such a basis. OPIC issues Certificates of Participation to finance projects undertaken by U.S. companies. These certificates are guaranteed by OPIC and backed by the full faith and credit of the U.S. government.
Over-The-Counter Stocks. A Fund may invest in over-the-counter stocks. In contrast to the securities exchanges, the over-the-counter market is not a centralized facility that limits trading activity to securities of companies which initially satisfy certain defined standards. Generally, the volume of trading in an unlisted or over-the-counter common stock is less than the volume of trading in a listed stock. This means that the depth of market liquidity of some stocks in which a Fund invests may not be as great as that of other securities and, if a Fund were to dispose of such a stock, it might have to offer the shares at a discount from recent prices, or sell the shares in small lots over an extended period of time.
Participation Interests. A Fund may invest in participation interests in fixed-income securities. A participation interest provides the certificate holder with a specified interest in an issue of fixed-income securities.
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Some participation interests give the holders differing interests in the underlying securities, depending upon the type or class of certificate purchased. For example, coupon strip certificates give the holder the right to receive a specific portion of interest payments on the underlying securities; principal strip certificates give the holder the right to receive principal payments and the portion of interest not payable to coupon strip certificate holders. Holders of certificates of participation in interest payments may be entitled to receive a fixed rate of interest, a variable rate that is periodically reset to reflect the current market rate or an auction rate that is periodically reset at auction. Asset-backed residuals represent interests in any excess cash flow remaining after required payments of principal and interest have been made.
More complex participation interests involve special risk considerations. Since these instruments have only recently been developed, there can be no assurance that any market will develop or be maintained for the instruments. Generally, the fixed-income securities that are deposited in trust for the holders of these interests are the sole source of payments on the interests; holders cannot look to the sponsor or trustee of the trust or to the issuers of the securities held in trust or to any of their affiliates for payment.
Participation interests purchased at a discount may experience price volatility. Certain types of interests are sensitive to fluctuations in market interest rates and to prepayments on the underlying securities. A rapid rate of prepayment can result in the failure to recover the holder’s initial investment.
The extent to which the yield to maturity of a participation interest is sensitive to prepayments depends, in part, upon whether the interest was purchased at a discount or premium, and if so, the size of that discount or premium. Generally, if a participation interest is purchased at a premium and principal distributions occur at a rate faster than that anticipated at the time of purchase, the holder’s actual yield to maturity will be lower than that assumed at the time of purchase. Conversely, if a participation interest is purchased at a discount and principal distributions occur at a rate faster than that assumed at the time of purchase, the investor’s actual yield to maturity will be higher than that assumed at the time of purchase.
Participation interests in pools of fixed-income securities backed by certain types of debt obligations involve special risk considerations. The issuers of securities backed by automobile and truck receivables typically file financing statements evidencing security interests in the receivables, and the servicers of those obligations take and retain custody of the obligations. If the servicers, in contravention of their duty to the holders of the securities backed by the receivables, were to sell the obligations, the third party purchasers could acquire an interest superior to the interest of the security holders. Also, most states require that a security interest in a vehicle must be noted on the certificate of title and the certificate of title may not be amended to reflect the assignment of the lender’s security interest. Therefore, the recovery of the collateral in some cases may not be available to support payments on the securities. Securities backed by credit card receivables are generally unsecured, and both federal and state consumer protection laws may allow set-offs against certain amounts owed.
Pay-In-Kind Bonds. Pay-in-kind bonds are securities which, at the issuer’s option, pay interest in either cash or additional securities for a specified period. Pay-in-kind bonds, like zero coupon bonds, are designed to give an issuer flexibility in managing cash flow. Pay-in-kind bonds are expected to reflect the market value of the underlying debt plus an amount representing accrued interest since the last payment. Pay-in-kind bonds are usually less volatile than zero coupon bonds, but more volatile than cash pay securities.
The Total Return Bond Fund may invest up to 5% of its net assets in pay-in-kind bonds.
Preferred Stock. Preferred stock has a preference over common stock in liquidation (and generally for dividend receipts as well) but is subordinated to the liabilities of the issuer in all respects. As a general rule, the market value of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk, while the market price of convertible preferred stock generally also reflects some element of conversion value. Because preferred stock is junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics. Unlike interest payments on debt securities, preferred stock dividends generally are payable only if declared by the issuer’s board of directors. Preferred stock also may be subject to optional or mandatory redemption provisions.
The Active Bond Fund, High Yield Fund, Total Return Bond Fund and Mid Cap Value Fund may invest up to 10% of their net assets in preferred stock.
Private Placement Investments. The Funds may invest in commercial paper issued in reliance on the exemption from registration afforded by Section 4(a)(2) of the 1933 Act. Section 4(a)(2) commercial paper is restricted as to disposition under federal securities laws and is generally sold to institutional investors who agree that they are purchasing the paper for investment purposes and not with a view to public distribution. Any resale by the purchaser must be in an exempt transaction. Section 4(a)(2) commercial
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paper is normally resold to other institutional investors through or with the assistance of the issuer or investment dealers who make a market in Section 4(a)(2) commercial paper, thus providing liquidity. If a sub-advisor determines that Section 4(a)(2) commercial paper and other restricted securities that meet the criteria for liquidity established pursuant to procedures approved by the Board are sufficiently liquid, then the Funds may exclude such restricted securities from the investment limitation applicable to illiquid securities. In addition, because Section 4(a)(2) commercial paper is liquid, the Funds do not intend to subject such paper to the limitation applicable to restricted securities.
The Board has adopted procedures that require a sub-advisor to consider the following criteria in determining the liquidity of certain restricted securities (including Section 4(a)(2) commercial paper): the frequency of trades and quotes for the security; the number of dealers willing to purchase or sell the security and the number of other potential buyers; dealer undertakings to make a market in the security; and the nature of the security and the nature of the marketplace trades. The Board has delegated to the Sub-Advisor the daily function of determining and monitoring the liquidity of restricted securities pursuant to the above criteria and guidelines adopted by the Board. The Board will monitor and periodically review the sub-advisor’s determinations as to its liquidity.
Privatization. Privatizations are foreign government programs for selling all or part of the interests in government owned or controlled enterprises. The ability of a U.S. entity to participate in privatizations in certain foreign countries may be limited by local law, or the terms on which a Fund may be permitted to participate may be less advantageous than those applicable for local investors. There can be no assurance that foreign governments will continue to sell their interests in companies currently owned or controlled by them or that privatization programs will be successful.
Rating Agencies. The Nationally Recognized Statistical Rating Organization (“NRSRO”) ratings applicable to the Funds’ fixed-income investments appear in the Appendix A to this SAI.
Receipts. Receipts are sold as zero coupon securities, which means that they are sold at a substantial discount and redeemed at face value at their maturity date without interim cash payments of interest or principal. This discount is accreted over the life of the security, and such accretion will constitute the income earned on a security for both accounting and federal income tax purposes. Because of these features, such securities may be subject to greater interest rate volatility than interest paying investments.
Real Estate Investment Trusts (“REITs”). The Funds may invest in REITs, which pool investors’ money for investment in income producing commercial real estate or real estate related loans or interests.
A REIT is not subject to federal income tax on income distributed to its shareholders or unitholders if it complies with regulatory requirements relating to its organization, ownership, assets and income, and with a regulatory requirement that it distribute to its shareholders or unitholders at least 90% of its taxable income for each taxable year. Generally, REITs can be classified as Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs invest the majority of their assets directly in real property and derive their income primarily from rents and capital gains from appreciation realized through property sales. Mortgage REITs invest the majority of their assets in real estate mortgages and derive their income primarily from interest payments. Hybrid REITs combine the characteristics of both Equity and Mortgage REITs. A shareholder in a Fund should realize that by investing in REITs indirectly through the Fund, he or she will bear not only his or her proportionate share of the expenses of the Fund, but also indirectly, similar expenses of underlying REITs.
A Fund may be subject to certain risks associated with the direct investments of the REITs. REITs may be affected by changes in their underlying properties and by defaults by borrowers or tenants. Mortgage REITs may be affected by the quality of the credit extended. Furthermore, REITs are dependent on specialized management skills. Some REITs may have limited diversification and may be subject to risks inherent in financing a limited number of properties. REITs depend generally on their ability to generate cash flow to make distributions to shareholders or unitholders, and may be subject to defaults by borrowers and to self-liquidations. In addition, the performance of a REIT may be affected by its failure to qualify for tax-free pass-through of income under the Code or its failure to maintain exemption from registration under the 1940 Act.
The Emerging Markets Small Cap Fund may invest up to 25% of its net assets in REITs.
ReFlow Liquidity Program. The Funds may participate in the ReFlow liquidity program, which is designed to provide an alternative liquidity source for mutual funds experiencing redemptions of their shares. In order to pay cash to shareholders who redeem their shares on a given day, a mutual fund typically must hold cash in its portfolio, liquidate portfolio securities, or borrow money, all of which impose certain costs on the fund. ReFlow Fund, LLC ("ReFlow") provides participating mutual funds with another source of cash by standing ready to purchase shares from a fund up to the amount of the fund’s net redemptions on a given day. ReFlow then generally redeems those shares when the fund experiences net sales. In return for this service, a Fund will pay a fee to ReFlow at a rate determined by a daily auction with other participating mutual funds. The costs to a Fund for participating
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in ReFlow are expected to be influenced by and comparable to the cost of other sources of liquidity, such as a Fund’s short-term lending arrangements or the costs of selling portfolio securities to meet redemptions. In accordance with federal securities laws, ReFlow is prohibited from acquiring more than 3% of the outstanding voting securities of a Fund. There is no assurance that ReFlow will have sufficient funds available to meet a Fund's liquidity needs on a particular day. Investments in the Funds by ReFlow in connection with the ReFlow liquidity program are not subject to the market timing limitations described in the Funds’ prospectus.
Real Estate Mortgage Investment Conduits (“REMICs”). REMICs are private entities formed to hold a fixed pool of mortgages secured by an interest in real property. For Freddie Mac REMIC Certificates, Freddie Mac guarantees the timely payment of interest, and also guarantees the payment of principal as payments are required to be made on the underlying mortgage participation certificates. Fannie Mae REMIC Certificates are issued and guaranteed as to timely distribution of principal and interest by Fannie Mae. A REMIC is a type of CMO that qualifies for special tax treatment under the the Code.
Repurchase Agreements. Repurchase agreements are transactions by which a Fund purchases a security and simultaneously commits to resell that security to the seller at an agreed upon time and price, thereby determining the yield during the term of the agreement. In the event of a bankruptcy or other default of the seller of a repurchase agreement, a Fund could experience both delays in liquidating the underlying security and losses. To minimize these possibilities, each Fund intends to enter into repurchase agreements only with its custodian, with banks having assets in excess of $10 billion and with broker-dealers who are recognized as primary dealers in U.S. government obligations by the Federal Reserve Bank of New York. Collateral for repurchase agreements is held in safekeeping in the customer-only account of a Fund’s custodian at the Federal Reserve Bank. A Fund will not enter into a repurchase agreement not terminable within seven days if, as a result thereof, more than 15% of the value of its net assets would be invested in such securities and other illiquid securities.
Although the securities subject to a repurchase agreement might bear maturities exceeding one year, settlement for the repurchase would never be more than one year after a Fund’s acquisition of the securities and normally would be within a shorter period of time. The resale price will be in excess of the purchase price, reflecting an agreed upon market rate effective for the period of time a Fund’s money will be invested in the securities, and will not be related to the coupon rate of the purchased security. At the time a Fund enters into a repurchase agreement, the value of the underlying security, including accrued interest, will equal or exceed the value of the repurchase agreement, and in the case of a repurchase agreement exceeding one day, the seller will agree that the value of the underlying security, including accrued interest, will at all times equal or exceed the value of the repurchase agreement. The collateral securing the seller’s obligation must consist of cash or securities that are issued or guaranteed by the United States government or its agencies. The collateral will be held by the custodian or in the Federal Reserve Book Entry System.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from a Fund to the seller subject to the repurchase agreement and is therefore subject to that Fund’s investment restriction applicable to loans. It is not clear whether a court would consider the securities purchased by a Fund subject to a repurchase agreement as being owned by that Fund or as being collateral for a loan by the Fund to the seller. In the event of the commencement of bankruptcy or insolvency proceedings with respect to the seller of the securities before repurchase of the security under a repurchase agreement, a Fund may encounter delays and incur costs before being able to sell the security. Delays may involve loss of interest or decline in price of the security. If a court characterized the transaction as a loan and a Fund has not perfected a security interest in the security, that Fund may be required to return the security to the seller’s estate and be treated as an unsecured creditor of the seller. As an unsecured creditor, a Fund would be at risk of losing some or all of the principal and income involved in the transaction. As with any unsecured debt obligation purchased for a Fund, the sub-advisor seeks to minimize the risk of loss through repurchase agreements by analyzing the creditworthiness of the obligor, in this case, the seller. Apart from the risk of bankruptcy or insolvency proceedings, there is also the risk that the seller may fail to repurchase the security, in which case a Fund may incur a loss if the proceeds to that Fund of the sale of the security to a third party are less than the repurchase price. However, if the market value of the securities subject to the repurchase agreement becomes less than the repurchase price (including interest), the Fund involved will direct the seller of the security to deliver additional securities so that the market value of all securities subject to the repurchase agreement will equal or exceed the repurchase price. It is possible that a Fund will be unsuccessful in seeking to enforce the seller’s contractual obligation to deliver additional securities.
The Active Bond Fund and the Ultra Short Duration Fixed Income Fund each may invest in repurchase agreements as part of its principal investment strategies described in the prospectus.
Restricted Securities. Each Fund may invest up to 10% of its total assets in restricted securities (other than securities deemed to be liquid pursuant to procedures approved by the Fund’s Board). Restricted securities cannot be sold to the public without registration under the 1933 Act. The absence of a trading market can make it difficult to ascertain a market value of illiquid investments. Disposing of illiquid investments may involve time-consuming negotiation and legal expenses. Restricted securities generally can be sold in a privately negotiated transaction, pursuant to an exemption from registration under the 1933 Act, or in
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a registered public offering. Where registration is required, a Fund may be obligated to pay all or part of the registration expense and a considerable period may elapse between the time it decides to seek registration and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, a Fund might obtain a less favorable price than prevailed when it decided to seek registration of the shares. However, in general, the Funds anticipate holding restricted securities to maturity or selling them in an exempt transaction.
Reverse Repurchase Agreement, Dollar Roll, and Reverse Dollar Roll Transactions. A reverse repurchase agreement involves a sale by a Fund of securities that it holds to a bank, broker-dealer or other financial institution concurrently with an agreement by the Fund to repurchase the same securities at an agreed-upon price and date. Reverse repurchase agreements are considered borrowing by a Fund and are subject to a Fund’s limitations on borrowing. A dollar roll transaction involves a sale by a Fund of an eligible security to a financial institution concurrently with an agreement by the Fund to repurchase a similar eligible security from the institution at a later date at an agreed-upon price. A reverse dollar roll transaction involves a purchase by a Fund of an eligible security from a financial institution concurrently with an agreement by the Fund to resell a similar security to the institution at a later date at an agreed-upon price. Each Fund will fully collateralize its reverse repurchase agreements, dollar roll and reverse dollar roll transactions in an amount at least equal to the Fund’s obligations under the reverse repurchase agreement, dollar roll or reverse dollar roll transaction by segregating cash or other liquid securities, earmarking cash or other liquid securities, or otherwise “cover” its position in a manner consistent with the 1940 Act or the rules and SEC interpretations.
The Total Return Bond Fund may invest up to 5% of its net assets in reverse repurchase agreements.
Royalty Trusts. Royalty trusts are structured similarly to REITs. A royalty trust generally acquires an interest in natural resource companies or chemical companies and distributes the income it receives to the investors of the royalty trust. A sustained decline in demand for crude oil, natural gas and refined petroleum products could adversely affect income and royalty trust revenues and cash flows. Factors that could lead to a decrease in market demand include a recession or other adverse economic conditions, an increase in the market price of the underlying commodity, higher taxes or other regulatory actions that increase costs, or a shift in consumer demand for such products. A rising interest rate environment could adversely impact the performance of royalty trusts. Rising interest rates could limit the capital appreciation of royalty trusts because of the increased availability of alternative investments at more competitive yields.
The Premium Yield Equity Fund may invest up to 10% of its net assets in royalty income trusts.
Rule 144A Securities. Rule 144A securities are securities exempt from registration on resale pursuant to Rule 144A under the 1933 Act. Rule 144A securities are traded in the institutional market pursuant to this registration exemption, and, as a result, may not be as liquid as exchange-traded securities since they may only be resold to certain qualified institutional investors. Due to the relatively limited size of this institutional market, these securities may affect the liquidity of Rule 144A securities to the extent that qualified institutional buyers become, for a time, uninterested in purchasing such securities. Nevertheless, Rule 144A securities may be treated as liquid securities pursuant to procedures adopted by the Trust’s Board.
The Mid Cap Fund may not purchase Rule 144A securities. The Total Return Bond Fund may invest up to 25% of its net assets in Rule 144A securities. The Emerging Markets Small Cap Fund may invest up to 10% of its net assets in Rule 144A securities.
Securities Lending. In order to generate additional income, a Fund may lend its securities pursuant to agreements requiring that the loan be continuously secured by collateral consisting of: (1) cash in U.S. dollars; (2) securities issued or fully guaranteed by the United States government or issued and unconditionally guaranteed by any agencies thereof; or (3) irrevocable performance letters of credit issued by banks approved by each Fund. All collateral must equal at least 100% of the market value of the loaned securities. A Fund continues to receive interest on the loaned securities while simultaneously earning interest on the investment of cash collateral. Collateral is marked to market daily. There may be risks of delay in recovery of the securities or even loss of rights in the collateral should the borrower of the securities fail financially or become insolvent. In addition, cash collateral invested by the lending Fund is subject to investment risk and the Fund may experience losses with respect to its collateral investments. The SEC currently requires that the following conditions must be met whenever a Fund’s portfolio securities are loaned: (1) the Fund must receive at least 100% cash collateral from the borrower; (2) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (3) the Fund must be able to terminate the loan at any time; (4) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities, and any increase in market value; (5) the Fund may pay only reasonable custodian fees approved by the Board in connection with the loan; (6) while voting rights on the loaned securities may pass to the borrower, the Fund must have the ability to terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs, and (7) the Fund may not loan its portfolio securities so that the value of the loaned securities is more than one-third of its total asset value, including collateral received from such loans.
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The dollar amounts of income and fees and compensation paid to all service providers related to the Funds that participated in securities lending activities during the fiscal year ended September 30, 2017 were as follows:
Fund Name | Investment Income | Premium Income | Agency Fee | Admin Fee | Rebate Paid to Borrower | Indemnification Fee | Other Fee | Fees paid for Cash Collateral Management | Net Income | Average on Loan Value* |
Active Bond | $4,167 | $4,310 | $1,018 | N/A | $1,690 | N/A | N/A | $807 | $4,962 | $539,223 |
Arbitrage | $20,584 | $55,995 | $10,156 | N/A | $8,873 | N/A | N/A | $4,539 | $53,011 | $3,034,259 |
Emerging Markets Small Cap | $854 | $3,427 | $612 | N/A | $201 | N/A | N/A | $210 | $3,258 | $140,443 |
High Yield | $24,730 | $22,154 | $5,931 | N/A | $7,343 | N/A | N/A | $5,662 | $27,948 | $3,785,204 |
Merger Arbitrage | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
Mid Cap | $73,622 | $26,292 | $11,719 | N/A | $21,787 | N/A | N/A | $24,664 | $41,744 | $16,487,831 |
Mid Cap Value | $59,253 | $292,322 | $49,498 | N/A | $21,586 | N/A | N/A | $13,860 | $266,631 | $9,265,380 |
Premium Yield Equity | $8,163 | $24,639 | $4,856 | N/A | $431 | N/A | N/A | $1,396 | $26,119 | $933,069 |
Sands Capital Select Growth | $281,601 | $3,491,185 | $559,167 | N/A | $45,007 | N/A | N/A | $68,410 | $3,100,202 | $45,731,569 |
Small Cap | $264,359 | $457,196 | $100,152 | N/A | $53,870 | N/A | N/A | $72,256 | $495,277 | $48,302,382 |
Small Cap Value | $19,071 | $47,104 | $8,913 | N/A | $6,753 | N/A | N/A | $4,633 | $45,876 | $3,096,879 |
Total Return Bond | $6,033 | $1,784 | $1,036 | N/A | $909 | N/A | N/A | $1,430 | $4,442 | $955,956 |
Ultra Short Duration Fixed Income | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
* The Average Loan Value amount covers the period from October 1, 2016 to September 30, 2017.
Sovereign Debt. Investment in sovereign debt can involve a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal or interest when due in accordance with the terms of such debt. A governmental entity’s willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entity’s policy towards the International Monetary Fund and the political constraints to which a governmental entity may be subject. Governmental entities may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on the implementation of economic reforms or economic performance and the timely service of such debtor’s obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties’ commitments to lend funds to the governmental entity, which may further impair such debtor’s ability or willingness to timely service its debts. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. In the event of a default by a governmental entity, there may be few or no effective legal remedies for collecting on such debt.
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Short Sales. In a short sale, a Fund sells a security, which it does not own, in anticipation of a decline in the market value of the security. To complete the sale, the Fund must borrow the security (generally from the broker through which the short sale is made) in order to make delivery to the buyer. The Fund must replace the security borrowed by purchasing it at the market price at the time of replacement. The Fund is said to have a “short position” in the securities sold until it delivers them to the broker. The period during which the Fund has a short position can range from one day to more than a year. Until the Fund replaces the security, the proceeds of the short sale are retained by the broker, and the Fund must pay to the broker a negotiated portion of any dividends or interest, which accrues during the period of the loan. A short sale is “against the box” if at all times during which the short position is open, a Fund owns at least an equal amount of the securities or securities convertible into, or exchangeable without further consideration for, securities of the same issue as the securities that are sold short. A short sale against the box is a taxable transaction to the Fund with respect to the securities that are sold short.
In the view of the SEC, a short sale involves the creation of a “senior security” as such term is defined in the 1940 Act, unless the sale is “against the box” and the securities sold short are placed in a segregated account (not with the broker), or unless the Fund’s obligation to deliver the securities sold short is otherwise “covered,” whether by placing assets in a segregated account or otherwise earmarking assets as cover in an amount equal to the difference between the market value of the securities sold short at the time of the short sale and any such collateral required to be deposited with a broker in connection with the sale (not including the proceeds from the short sale), which difference is adjusted daily for changes in the value of the securities sold short, or otherwise. Any Fund that engages in short sales will comply with these requirements.
Stripped Mortgage-Backed Securities (“SMBs”). SMBs may be issued by agencies or instrumentalities of the U.S. government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing. SMBs are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBs will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder of the principal.
In the most extreme case, one class will receive all of the interest (the interest-only or “IO” class), while the other class will receive the entire principal (the principal-only or “PO” class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on a Fund’s yield to maturity from these securities. If the assets underlying the IO securities experience greater than anticipated prepayments of principal, a Fund may fail to recoup fully its initial investment in these securities. Conversely, PO securities tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. The secondary market for SMBs may be more volatile and less liquid than that for other mortgage-backed securities, potentially limiting a Fund’s ability to buy or sell these securities at any particular time.
Separate Trading of Registered Interest and Principal Securities ("STRIPS"). STRIPS are U.S. Treasury bills, notes, and bonds that have been issued without interest coupons or stripped of their unmatured interest coupons, interest coupons that have been stripped from such U.S. Treasury securities, and receipts or certificates representing interests in such stripped U.S. Treasury securities and coupons. A STRIPS security pays no interest in cash to its holder during its life although interest is accrued for federal income tax purposes. Its value to an investor consists of the difference between its face value at the time of maturity and the price for which it was acquired, which is generally an amount significantly less than its face value. Investing in STRIPS may help to preserve capital during periods of declining interest rates. For example, if interest rates decline, Ginnie Mae Certificates owned by a Fund which were purchased at greater than par are more likely to be prepaid, which would cause a loss of principal. In anticipation of this, a Fund might purchase STRIPS, the value of which would be expected to increase when interest rates decline.
STRIPS do not entitle the holder to any periodic payments of interest prior to maturity. Accordingly, such securities usually trade at a deep discount from their face or par value and will be subject to greater fluctuations of market value in response to changing interest rates than debt obligations of comparable maturities that make periodic distributions of interest. On the other hand, because there are no periodic interest payments to be reinvested prior to maturity, STRIPS eliminate the reinvestment risk and lock in a rate of return to maturity. Current federal income tax law requires that a holder of a STRIPS security accrue a portion of the discount at which the security was purchased as income each year even though the Fund received no interest payment in cash on the security during the year.
Step Coupon Bonds (“STEPS”). A Fund may invest in STEPS, which pay interest at a series of different rates (including 0%) in accordance with a stated schedule for a series of periods. In addition to the risks associated with the credit rating of the issuers, these securities may be subject to more volatility risk than fixed rate debt securities.
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Structured Notes. A Fund may invest in structured notes, including “total rate of return swaps,” with rates of return determined by reference to the total rate of return on one or more loans referenced in such notes. The rate of return on the structured note may be determined by applying a multiplier to the rate of total return on the referenced loan or loans. Application of a multiplier is comparable to the use of leverage, which magnifies the risk of loss, because a relatively small decline in the value of a referenced note could result in a relatively large loss in value.
Swap Agreements. A swap is a financial instrument that typically involves the exchange of cash flows between two parties on specified dates (settlement dates), where the cash flows are based on agreed-upon prices, rates, indices, etc. The nominal amount on which the cash flows are calculated is called the notional amount. Swaps are individually negotiated and structured to include exposure to a variety of different types of investments or market factors, such as interest rates, foreign currency rates, mortgage securities, corporate borrowing rates, security prices, indexes or inflation rates.
Swap agreements may increase or decrease the overall volatility of the investments of a Fund and its share price. The performance of swap agreements may be affected by a change in the specific interest rate, currency, or other factors that determine the amounts of payments due to and from a Fund. If a swap agreement calls for payments by a Fund, the Fund must be prepared to make such payments when due. In addition, if the counterparty’s creditworthiness declines, the value of a swap agreement would be likely to decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon by the parties. The agreement can be terminated before the maturity date only under limited circumstances, such as default by one of the parties or insolvency, among others, and can be transferred by a party only with the prior written consent of the other party. A Fund may be able to eliminate its exposure under a swap agreement either by assignment or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. If the counter-party is unable to meet its obligations under the contract, declares bankruptcy, defaults or becomes insolvent, a Fund may not be able to recover the money it expected to receive under the contract.
A swap agreement can be a form of leverage, which can magnify a Fund’s gains or losses. If a Fund enters into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of the Fund’s accrued obligations under the swap agreement over the accrued amount the Fund is entitled to receive under the agreement. If a Fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of the Fund’s accrued obligations under the agreement.
Equity Swaps. In a typical equity swap, one party agrees to pay another party the return on a stock, stock index or basket of stocks in return for a specified interest rate. By entering into an equity index swap, for example, the index receiver can gain exposure to stocks making up the index of securities without actually purchasing those stocks. Equity index swaps involve not only the risk associated with investment in the securities represented in the index, but also the risk that the performance of such securities, including dividends, will not exceed the return on the interest rate that a Fund will be committed to pay.
Interest Rate Swaps. Interest rate swaps are financial instruments that involve the exchange of one type of interest rate for another type of interest rate cash flow on specified dates in the future. Some of the different types of interest rate swaps are “fixed-for floating rate swaps,” “termed basis swaps” and “index amortizing swaps.” Fixed-for floating rate swaps involve the exchange of fixed interest rate cash flows for floating rate cash flows. Termed basis swaps entail cash flows to both parties based on floating interest rates, where the interest rate indices are different. Index amortizing swaps are typically fixed-for floating swaps where the notional amount changes if certain conditions are met.
Like a traditional investment in a debt security, a Fund could lose money by investing in an interest rate swap if interest rates change adversely. For example, if a Fund enters into a swap where it agrees to exchange a floating rate of interest for a fixed rate of interest, a Fund may have to pay more money than it receives. Similarly, if a Fund enters into a swap where it agrees to exchange a fixed rate of interest for a floating rate of interest, a Fund may receive less money than it has agreed to pay.
Currency Swaps. A currency swap is an agreement between two parties in which one party agrees to make interest rate payments in one currency and the other promises to make interest rate payments in another currency. A Fund may enter into a currency swap when it has one currency and desires a different currency. Typically the interest rates that determine the currency swap payments are fixed, although occasionally one or both parties may pay a floating rate of interest. Unlike an interest rate swap, however, the principal amounts are exchanged at the beginning of the contract and returned at the end of the contract. Changes in foreign exchange rates and changes in interest rates, as described above, may negatively affect currency swaps.
Credit Default Swaps (“CDSs”). A CDS is an agreement between a Fund and a counterparty that enables a Fund to buy or sell protection against a credit event related to a referenced debt obligation. One party, acting as a “protection buyer,” makes periodic payments to the other party, a “protection seller,” in exchange for a promise by the protection seller to make a payment to the
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protection buyer if a negative credit event (such as a delinquent payment or default) occurs with respect to a referenced bond or group of bonds. Acting as a protection seller allows a Fund to create an investment exposure similar to owning a bond. Acting as a protection buyer allows a Fund potentially to reduce its credit exposure to a bond it owns or to take a “short” position in a bond it does not own.
As the protection buyer in a CDS, a Fund may pay a premium (by means of periodic payments) in return for the right to deliver specified bonds or loans to the protection seller and receive the par (or other agreed-upon) value upon default or similar events by the issuer of the underlying reference obligation. If no default occurs, the protection seller would keep the stream of payments and would have no further obligations to the Fund. As the protection buyer, a Fund bears the risk that the investment might expire worthless or that the protection seller may fail to satisfy its payment obligations to a Fund in the event of a default or similar event. In addition, when a Fund is a protection buyer, the Fund’s investment would only generate income in the event of an actual default or similar event by the issuer of the underlying reference obligation. A Fund may also use credit default swaps for investment purposes by selling a CDS, in which case, the Fund, as the protection seller, would be required to pay the par (or other agreed-upon) value of a referenced debt obligation to the protection buyer in the event of a default or similar event by the third-party issuer of the underlying reference obligation. In return for its obligation, a Fund would receive from the protection buyer a periodic stream of payments over the term of the contract. If no credit event occurs, a Fund would keep the stream of payments and would have no payment obligations. As the protection seller in a CDS, a Fund effectively adds economic leverage to its portfolio because, in addition to its total net assets, the Fund is subject to investment exposure on the notional amount of the swap. Consistent with SEC staff guidance, if a Fund sells a CDS it will segregate assets equal to the full notional amount of the swap in order to cover its obligations under the instrument.
In addition to the risks applicable to derivatives generally, CDSs involve special risks because they may be difficult to value, are highly susceptible to liquidity and credit risk, and generally pay a return to the party that has paid the premium only in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial difficulty).
Options on Swap Agreements (“swaptions”). The Funds also may enter into swaptions. A swaption is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. The Funds may write (sell) and purchase put and call swaptions. Depending on the terms of the particular swaption, a Fund will generally incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When a Fund purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when a Fund writes a swaption, upon exercise of the option by the buyer of the option, the Fund will become obligated according to the terms of the underlying swap agreement.
Whether a Fund’s use of swap agreements or swaptions will be successful in furthering its investment goals will depend on the sub-advisors’ ability to predict correctly whether certain types of investments are likely to produce greater returns than other investments. Moreover, a Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty.
Other Types of Financial Instruments. If other types of financial instruments, including other types of options, futures contracts, or futures options are traded in the future, the Funds may also use those instruments, provided that such instruments are consistent with the Funds’ investment goals.
Technology Securities. The value of technology securities may fluctuate dramatically and technology securities may be subject to greater than average financial and market risk. Investments in the high technology sector include the risk that certain products may be subject to competitive pressures and aggressive pricing and may become obsolete and the risk that new products will not meet expectations or even reach the market.
Temporary Defensive Positions. A Fund may take temporary defensive positions that are inconsistent with the Fund’s normal investment strategies in response to adverse or unusual market, economic, political, or other conditions as determined by a Fund’s sub-advisor. Such positions could include, but are not limited to, investments in (1) highly liquid short-term fixed-income securities issued by or on behalf of municipal or corporate issuers, obligations of the U.S. government and its agencies, commercial paper, and bank certificates of deposit; (2) repurchase agreements involving any such securities; and (3) other money market instruments. In addition, a Fund may hold uninvested cash on a temporary basis if, in a sub-advisor’s discretion, market conditions warrant. A Fund’s uninvested cash balances may or may not earn interest while maintained at the Fund’s custodian. There is no limit on the extent to which a Fund may take temporary defensive positions. In taking such positions, the Fund may fail to achieve its investment goals.
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Tender Option Bonds. A tender option bond is a municipal security (generally held pursuant to a custodial arrangement) having a relatively long maturity and bearing interest at a fixed rate substantially higher than prevailing short-term tax-exempt rates, that has been coupled with the agreement of a third party, such as a bank, broker-dealer or other financial institution, pursuant to which such institution grants the security holders the option, at periodic intervals, to tender their securities to the institution and receive the face value thereof. As consideration for providing the option, the financial institution receives periodic fees equal to the difference between the municipal security’s fixed coupon rate and the rate, as determined by a remarketing or similar agent at or near the commencement of such period, that would cause the securities, coupled with the tender option, to trade at par on the date of such determination. Thus, after payment of this fee, the security holder effectively holds a demand obligation that bears interest at the prevailing short-term tax exempt rate. The Advisor or sub-advisor as the case may be, will consider on an ongoing basis the creditworthiness of the issuer of the underlying municipal securities, of any custodian, and of the third-party provider of the tender option. In certain instances and for certain tender option bonds, the option may be terminable in the event of a default in payment of principal of interest on the underlying municipal securities and for other reasons.
Time Deposits. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds. Like a certificate of deposit, it earns a specified rate of interest over a definite period of time; however, it cannot be traded in the secondary market. Time deposits with a withdrawal penalty are considered to be illiquid securities.
Trust Preferred Securities. Trust preferred securities are issued by a special purpose trust subsidiary backed by subordinated debt of the corporate parent. Trust preferred securities currently permit the issuing entity to treat the interest payments as a tax-deductible cost. These securities, which have no voting rights, have a final stated maturity date and a fixed schedule for periodic payments. In addition, these securities have provisions which afford preference over common and preferred stock upon liquidation, although the securities are subordinated to other, more senior debt securities of the same issuer. The issuers of these securities have the right to defer interest payments for a period of up to five years, although interest continues to accrue cumulatively. The deferral of payments may not exceed the stated maturity date of the securities themselves. The non-payment of deferred interest at the end of the permissible period will be treated as an event of default. At the present time, the Internal Revenue Service treats trust preferred securities as debt.
U.S. Government Securities. U.S. government securities include: securities issued directly by the U.S. Treasury such as Treasury bills, notes and bonds; securities issued by agencies or instrumentalities of the U.S. government, such as Ginnie Mae, Fannie Mae, Freddie Mac, Federal Government Loan Mortgage Corporation (“FGLMC”), Student Loan Marketing Association (“SLMA”), Small Business Administration (“SBA”), Tennessee Valley Authority (“TVA”) and OPIC; STRIPS and TIPS.
Some U.S. government securities are backed by the full faith and credit of the U.S. government, meaning that payment of principal and interest is guaranteed by the U.S. government. Other U.S. government securities are backed only by the credit of the agency or instrumentality issuing the security, which may include the right of the issuer to borrow from the U.S. Treasury. Securities backed by the full faith and credit of the U.S. government include U.S. Treasury bills, U.S. Treasury notes, U.S. Treasury bonds, Ginnie Mae securities and OPIC securities. Securities backed only by the credit of the government agency issuing the security include securities issued by the Fannie Mae, Freddie Mac, FGLMC, SLMA, SBA and TVA.
U.S. Treasury Obligations. U.S. Treasury Obligations are bills, notes and bonds issued by the U.S. Treasury, and separately traded interest and principal component parts of such obligations that are transferable through the federal book-entry system known as STRIPS and coupons under book entry safekeeping (“CUBES”). They also include TIPS.
Variable and Floating Rate Instruments. Certain obligations may carry variable or floating rates of interest, and may involve a conditional or unconditional demand feature. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly, or some other reset period, and may have a floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations may not accurately reflect existing market interest rates. A demand instrument with a demand notice exceeding seven days may be considered illiquid if there is no secondary market for such security.
Variable-Rate Demand Instruments. The Funds may purchase variable-rate demand instruments. Variable-rate demand instruments that the Funds will purchase are obligations that provide for a periodic adjustment in the interest rate paid on the instrument and permit the holder to demand payment of the unpaid principal balance plus accrued interest at specified intervals
upon a specific number of days’ notice either from the issuer or by drawing on a bank letter of credit, a guarantee, insurance or
other credit facility issued with respect to such instrument.
The variable-rate demand instruments in which the Funds may invest are payable on not more than thirty calendar days’ notice either on demand or at specified intervals not exceeding thirteen months depending upon the terms of the instrument. The terms
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of the instruments provide that interest rates are adjustable at intervals ranging from daily to up to thirteen months and their adjustments are based upon LIBOR or other prevailing interest rates as provided in the respective instruments. A security is priced at a coupon rate that causes its value to approximate par. Each Fund may only purchase variable rate demand instruments which have received a short-term rating meeting that Fund’s quality standards from an NRSRO or unrated variable rate demand instruments determined by the Sub-Advisor to be of comparable quality. If such an instrument does not have a demand feature exercisable by a Fund in the event of default in the payment of principal or interest on the underlying securities, then the Fund will also require that the instrument have a rating as long-term debt in one of the top two categories by any NRSRO. The Sub-Advisor may determine that an unrated variable rate demand instrument meets a Fund’s quality criteria if it is backed by a letter of credit or guarantee or insurance or other credit facility that meets the quality criteria for the Fund or on the basis of a credit evaluation of the underlying obligor. If an instrument is ever deemed to not meet a Fund’s quality standards, such Fund either will sell it in the market or exercise the demand feature as soon as practicable.
While the value of the underlying variable-rate demand instruments may change with changes in interest rates generally, the variable rate nature of the underlying variable rate demand instruments should minimize changes in value of the instruments. Accordingly, as interest rates decrease or increase, the potential for capital depreciation is less than would be the case with a portfolio of fixed-income securities. Each Fund may hold variable-rate demand instruments on which stated minimum or maximum rates limit the degree to which interest on such variable rate-demand instruments may fluctuate; to the extent an instruments has such limits, increases or decreases in its value may be greater than would be the case without such limits. Because the adjustment of interest rates on the variable-rate demand instruments is made in relation to movements of the applicable banks’ “prime rate,” or other interest rate adjustment index, the variable rate demand instruments are not comparable to long-term fixed-rate securities. Accordingly, interest rates on the variable-rate demand instruments may be higher or lower than current market rates for fixed rate obligations or obligations of comparable quality with similar maturities.
As a matter of current operating policy, each of the Active Bond Fund and the High Yield Fund will not invest more than 15%, of its net assets in (1) variable rate demand instruments as to which it cannot exercise the demand feature on not more than seven days’ notice if it is determined that there is no secondary market available for these obligations and (2) all other illiquid securities. These operating policies are not fundamental and may be changed by the Board without shareholder approval. The Funds intend to exercise the demand repurchase feature only (1) upon a default under the terms of the bond documents, (2) as needed to provide liquidity to a Fund in order to make redemptions of its shares, or (3) to maintain the quality standards of a Fund’s investment portfolio.
Warrants and Rights. Warrants are instruments giving holders the right, but not the obligation, to buy equity or fixed-income securities of a company at a given price during a specified period. Rights are similar to warrants but normally have a short life span to expiration. The purchase of warrants or rights involves the risk that a Fund could lose the purchase value of a warrant or right if the right to subscribe to additional shares is not exercised prior to the warrants’ or rights’ expiration. Also, the purchase of warrants and/or rights involves the risk that the effective price paid for the warrants and/or rights added to the subscription price of the related security may exceed the value of the subscribed security’s market price such as when there is no movement in the level of the underlying security. Buying a warrant does not make a Fund a shareholder of the underlying stock. The warrant holder has no voting or dividend rights with respect to the underlying stock. A warrant does not carry any right to assets of the issuer, and for this reason investment in warrants may be more speculative than other equity-based investments.
When-Issued, Delayed Delivery Securities and Forward Commitment Transactions. A Fund may purchase securities on a when-issued or delayed-delivery basis, in which case delivery of the securities occurs beyond the normal settlement period; payment for or delivery of the securities would be made prior to the reciprocal delivery or payment by the other party to the transaction. When-issued or delayed delivery securities are subject to market fluctuations due to changes in market interest rates and it is possible that the market value at the time of settlement could be higher or lower than the purchase price if the general level of interest rates has changed. Although a Fund generally purchases securities on a when-issued or forward commitment basis with the intention of actually acquiring the securities for its investment portfolio, a Fund may dispose of a when-issued security or forward commitment prior to settlement if it deems appropriate.
When-Issued Securities and Securities Purchased on a To-Be-Announced Basis. The Funds will only make commitments to purchase securities on a when-issued or to-be-announced (“TBA”) basis with the intention of actually acquiring the securities. A Fund may sell the securities before the settlement date if it is otherwise deemed advisable as a matter of investment strategy or in order to meet its obligations, although it would not normally expect to do so. When-issued securities are securities purchased for delivery beyond the normal settlement date at a stated price and yield and involve the risk that the yield obtained in the transaction will be less than that available in the market when delivery takes place. In a TBA transaction, a Fund has committed to purchasing or selling securities for which all specific information is not yet known at the time of the trade, particularly the face amount in transactions involving mortgage-related securities.
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TBA securities are paid for and delivered within 15 to 45 days from their date of purchase. In connection with these investments, each Fund will direct the custodian to segregate cash or liquid securities in an amount sufficient to make payment for the securities to be purchased. When a segregated account is maintained because a Fund purchases securities on a when-issued or TBA basis, the assets deposited in the segregated account will be valued daily at market for the purpose of determining the adequacy of the securities in the account. If the market value of such securities declines, additional cash or securities will be placed in the account on a daily basis so that the market value of the account will equal the amount of a Fund’s commitments to purchase securities on a when-issued or TBA basis. To the extent funds are in a segregated account, they will not be available for new investment or to meet redemptions. Securities purchased on a when-issued or TBA basis and the securities held in a Fund’s portfolio are subject to changes in market value based upon changes in the level of interest rates (which will generally result in all of those securities changing in value in the same way, i.e., all those securities experiencing appreciation when interest rates decline and depreciation when interest rates rise). Therefore, if in order to achieve higher returns, a Fund remains substantially fully invested at the same time that it has purchased securities on a when-issued or TBA basis, there will be a possibility that the market value of the Fund’s assets will experience greater fluctuation. The purchase of securities on a when-issued or TBA basis may involve a risk of loss if the seller fails to deliver after the value of the securities has risen.
When the time comes for a Fund to make payment for securities purchased on a when-issued or TBA basis, the Fund will do so by using then available cash flow, by sale of the securities held in the segregated account, by sale of other securities or, although it would not normally expect to do so, by directing the sale of the securities purchased on a when-issued or TBA basis themselves (which may have a market value greater or less than the Fund’s payment obligation).
The Active Bond Fund may invest up to 33% of its assets in dollar-roll transactions involving when-issued securities.
Yankee Obligations. Yankee obligations (“Yankees”) are U.S. dollar-denominated instruments of foreign issuers who either register with the SEC or issue securities under Rule 144A under the 1933 Act. These consist of debt securities (including preferred or preference stock of non-governmental issuers), certificates of deposit, fixed time deposits and bankers’ acceptances issued by foreign banks, and debt obligations of foreign governments or their subdivisions, agencies and instrumentalities, international agencies and supranational entities. Some securities issued by foreign governments or their subdivisions, agencies and instrumentalities may not be backed by the full faith and credit of the foreign government. Yankee obligations, as obligations of foreign issuers, are subject to the same types of risks discussed above in “Securities of Foreign Issuers.”
The Yankee obligations selected for the Funds will adhere to the same quality standards as those utilized for the selection of domestic debt obligations.
Zero Coupon Securities. The Funds may invest in zero coupon bonds of governmental or private issuers that generally pay no interest to their holders prior to maturity. Since zero coupon bonds do not make regular interest payments, they allow an issuer to avoid the need to generate cash to meet current interest payments and may involve greater credit risks than bonds paying interest currently. The Code requires that a Fund accrue interest income on zero coupon bonds for each taxable year, even though no cash has been paid on the bonds, and generally requires the Fund to distribute such income (net of deductible expenses, if any) to avoid being subject to federal income tax and to continue to maintain its status as a regulated investment company under the Code. Because no cash is generally received at the time of accrual, a Fund may be required to sell investments (even if such sales are not advantageous) to obtain sufficient cash to satisfy the distribution requirements applicable to the Fund under the Code. See "Federal Income Taxes.”
Zero coupon securities may include treasury securities that have had their interest payments (“coupons”) separated from the underlying principal (“corpus”) by their holder, typically a custodian bank or investment brokerage firm. Once the holder of the security has stripped or separated corpus and coupons, it may sell each component separately. The principal or corpus is then sold at a deep discount because the buyer receives only the right to receive a future fixed payment on the security and does not receive any rights to periodic interest (cash) payments. Typically, the coupons are sold separately or grouped with other coupons with like maturity dates and sold bundled in such form. The underlying treasury security is held in book-entry form at the Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered securities which are owned ostensibly by the bearer or holder thereof), in trust on behalf of the owners thereof. Purchasers of stripped obligations acquire, in effect, discount obligations that are economically identical to the zero coupon securities that the U.S. Treasury sells itself.
The U.S. Treasury has facilitated transfers of ownership of zero coupon securities by accounting separately for the beneficial ownership of particular interest coupon and corpus payments on Treasury securities through the Federal Reserve book-entry record keeping system. Under a Federal Reserve program known as “STRIPS” or “Separate Trading of Registered Interest and Principal of Securities,” the Fund may record its beneficial ownership of the coupon or corpus directly in the book-entry record-keeping system.
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INVESTMENT LIMITATIONS
Fundamental Investment Limitations. Below are each Fund's fundamental investment limitations (or policies), which it cannot change without the consent of the holders of a majority of that Fund's outstanding shares. The term "majority of the outstanding shares" means the vote of (i) 67% or more of a Fund's shares at present meeting, if more than 50% of the outstanding shares of that Fund are present or represented by proxy, or (ii) more than 50% of a Fund's outstanding shares, whichever is less.
For the bank borrowing policy, which contains percentage limits, the Fund must meet these percentage limits at all times, regardless of whether a portfolio transaction is occurring or the changes are caused by market conditions or other circumstances beyond the Fund’s control. For all other fundamental policies with a percentage limit (collectively, the “Other Policies”), a Fund must apply each policy to each proposed portfolio transaction. For example, both the initial purchase of a security and each subsequent addition to that position must satisfy the Other Policies. However, if a Fund satisfies the Other Policies at the time of a transaction, then later changes in percentages resulting from market conditions or other circumstances beyond the Fund’s control will not violate those policies; but the Fund would not be able to make subsequent additions to that position and other similar positions until the Other Policies are satisfied.
Several of these fundamental investment limitations include the defined term “1940 Act Laws, Interpretations and Exemptions.” This term means the 1940 Act and the rules and regulations promulgated thereunder, as such statutes, rules and regulations are amended from time to time or are interpreted from time to time by the staff of the SEC and any exemptive order or similar relief applicable to a Fund.
The Ultra Short Duration Fixed Income Fund may not, except as otherwise provided below:
1. With respect to 75% of the Fund’s assets: (i) purchase securities of any issuer (except securities issued or guaranteed by the United States government, its agencies or instrumentalities and repurchase agreements involving such securities) if, as a result, more than 5% of the total assets of the Fund would be invested in the securities of such issuer; or (ii) acquire more than 10% of the outstanding voting securities of any one issuer.
2. Invest more than 25% of the Fund’s assets in securities issued by companies in a single industry or related group of industries.
3. Borrow money in an amount exceeding 331/3% of the value of its total assets, provided that, for purposes of this limitation, investment strategies which either obligate a Fund to purchase securities or require a fund to segregate assets are not considered to be borrowings. Asset coverage of at least 300% is required for all borrowings, except where the Fund has borrowed money for temporary purposes in amounts not exceeding 5% of its total assets. Each Fund will not purchase securities while its borrowings exceed 5% of its total assets.
4. Make loans to other persons except through the lending of its portfolio securities, provided that this limitation does not apply to the purchase of debt securities and loan participations or engaging in direct corporate loans or repurchase agreements in accordance with its investment objectives and policies. The loans cannot exceed 331/3% of a Fund’s assets. A Fund may also make loans to other investment companies to the extent permitted by the 1940 Act or any exemptions which may be granted to the Fund by the SEC.
For example, at a minimum, a Fund will not make any such loans unless all requirements regarding common control and ownership of Fund shares are met.
5. Purchase or sell real estate, physical commodities, or commodities contracts, except that each Fund may purchase (i) marketable securities issued by companies which own or invest in real estate (including REITs), commodities, or commodities contracts; and (ii) commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
6. Issue senior securities as defined in the 1940 Act except as permitted by rule, regulation, or order of the SEC.
7. Act as an underwriter of securities of other issuers except as it may be deemed an underwriter in selling a portfolio security.
8. Invest in interests in oil, gas, or other mineral exploration or development programs and oil, gas, or mineral leases.
The Sands Capital Select Growth Fund and Premium Yield Equity Fund may not:
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1. Purchase any securities which would cause 25% or more of the net assets of a Fund to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that this limitation does not apply to investments in obligations issued or guaranteed by the United States government, its agencies or instrumentalities.
2. Borrow money from banks in an amount which exceeds 331/3% of the value of its total assets (including the amount borrowed) less a Fund’s liabilities (other than borrowings), except that a Fund may borrow up to an additional 5% of its total assets (not including the amount borrowed) from a bank for temporary or emergency purposes.
3. Purchase or sell real estate, although it may purchase or sell securities secured by real estate or interests therein, or securities issued by companies which invest in real estate, or interests therein (including REITs).
4. Purchase or sell physical commodities (which shall not, for purposes of this restriction, include currencies), or commodities contracts, except that each Fund may (i) purchase or sell marketable securities issued by companies which own or invest in commodities (including currencies), or commodities contracts; and (ii) enter into commodities and futures contracts relating to securities, currencies, indexes or any other financial instruments, such as financial futures contracts and options on such contracts.
5. Make loans to other persons except through the lending of its portfolio securities, provided that this limitation does not apply to the purchase of debt securities and loan participations or engaging in direct corporate loans or repurchase agreements in accordance with its investment objectives and policies. The loans cannot exceed 331/3% of a Fund’s assets. A Fund may also make loans to other investment companies to the extent permitted by the 1940 Act or any exemptions which may be granted to the Fund by the SEC.
For example, at a minimum, a Fund will not make any such loans unless all requirements regarding common control and ownership of Fund shares are met.
6. Issue senior securities (as defined in the 1940 Act) except as permitted by rule, regulation, or order of the SEC, or SEC staff interpretation.
7. Act as an underwriter of securities of other issuers except as it may be deemed an underwriter in selling a portfolio security or when selling its own shares.
8. The Premium Yield Equity Fund may not, with respect to 75% of its total assets, (i) purchase the securities of any issuer (except securities issued or guaranteed by the United States government, its agencies or instrumentalities or cash items) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer; or (ii) acquire more than 10% of the outstanding voting securities of any one issuer.
The Mid Cap Fund may not:
1. Invest 25% or more of the value of its total assets in the securities (other than U.S. government securities) of issuers engaged in any single industry.
2. Issue senior securities representing stock, except to the extent permitted by the 1940 Act. In addition, the Fund will not issue senior securities representing indebtedness, except as otherwise permitted under the 1940 Act.
3. Underwrite securities of other issuers, except insofar as the Fund may be deemed an underwriter under the Securities Act in connection with the disposition of its portfolio securities.
4. Make loans of money or securities to other persons, except through purchasing fixed-income securities, lending portfolio securities or entering into repurchase agreements in a manner consistent with the Fund’s investment policies.
5. Purchase or sell physical commodities or commodity contracts, except that the Fund may purchase commodities contracts relating to financial instruments, such as financial futures contracts and options on such contracts.
6. Purchase or sell real estate or interests therein, except that it may invest in securities of issuers engaged in the real estate industry and may invest in securities secured by real estate or interests therein.
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7. Purchase securities of an issuer, except as consistent with the maintenance of its status as an open-end diversified company under the 1940 Act, the rules, or regulations or any exemption, as such statute, rules, or regulations may be interpreted from time to time.
8. Borrow money except from banks and then in an amount which does not exceed 331/3% of the value of its total assets (including the amount borrowed) less the Fund’s liabilities (other than borrowings), except that the Fund may borrow up to an additional 5% of its total assets (not including the amount borrowed) from a bank for temporary or emergency purposes.
The Active Bond Fund, Arbitrage Fund, Emerging Markets Small Cap Fund, High Yield Fund, Merger Arbitrage Fund, Mid Cap Value Fund, Small Cap Fund, and Total Return Bond Fund may not:
1. Diversification. For each diversified fund only, the Funds may not purchase securities of an issuer that would cause the Funds to fail to satisfy the diversification requirement for a diversified management company under the 1940 Act, the rules, or regulations or any exemption, as such statute, rules, or regulations may be amended or interpreted from time to time.
2. Borrowing Money. The Funds may not engage in borrowing except as permitted by the 1940 Act, any rule, regulation, or order under the 1940 Act or any SEC staff interpretation of the 1940 Act.
3. Underwriting. The Funds may not underwrite securities issued by other persons, except to the extent that, in connection with the sale or disposition of portfolio securities, a Fund may be deemed to be an underwriter under certain federal securities laws or in connection with investments in other investment companies.
4. Loans. The Funds may not make loans to other persons except that a Fund may (1) engage in repurchase agreements, (2) lend portfolio securities, (3) purchase debt securities, (4) purchase commercial paper, and (5) enter into any other lending arrangement permitted by the 1940 Act, any rule, regulation, or order under the 1940 Act or any SEC staff interpretation of the 1940 Act.
5. Real Estate. The Funds may not purchase or sell real estate except that a Fund may (1) hold and sell real estate acquired as a result of the Fund’s ownership of securities or other instruments (2) purchase or sell securities or other instruments backed by real estate or interests in real estate and (3) purchase or sell securities of entities or investment vehicles, including real estate investment trusts that invest, deal or otherwise engage in transactions in real estate or interests in real estate.
6. Commodities. The Funds may not purchase or sell physical commodities except that a Fund may (1) hold and sell physical commodities acquired as a result of the Fund’s ownership of securities or other instruments, (2) purchase or sell securities or other instruments backed by physical commodities, (3) purchase or sell options, and (4) purchase or sell futures contracts.
7. Concentration of Investments (except Active Bond Fund and High Yield Fund). The Funds may not purchase the securities of an issuer (other than securities issued or guaranteed by the United States government, its agencies or its instrumentalities) if, as a result, more than 25% of the Fund’s total assets would be invested in the securities of companies in the same industry or group of industries.
Concentration (Active Bond Fund and High Yield Fund only). The Funds may not purchase the securities of an issuer (other than securities issued or guaranteed by the United States government, its agencies or its instrumentalities) if, as a result, more than 25% of a Fund’s total assets would be invested in the securities of companies whose principal business activities are in the same industry.
8. Senior Securities. The Funds may not issue senior securities except as permitted by the 1940 Act, any rule, regulation, or order under the 1940 Act or any SEC staff interpretation of the 1940 Act.
The fundamental limitations for the Small Cap Value Fund are:
1. Diversification. The Fund may not purchase securities of an issuer that would cause the Fund to fail to satisfy the diversification requirement for a diversified management company under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or interpreted from time to time.
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2. Borrowing Money. The Fund may not engage in borrowing except as permitted by the 1940 Act, any rule, regulation, or order under the 1940 Act or any SEC staff interpretation of the 1940 Act.
3. Underwriting. The Fund may not underwrite securities issued by other persons, except to the extent that, in connection with the sale or disposition of portfolio securities, the Fund may be deemed to be an underwriter under certain federal securities laws or in connection with investments in other investment companies.
4. Loans. The Fund may not make loans to other persons except that the Fund may (1) engage in repurchase agreements, (2) lend portfolio securities, (3) purchase debt securities, (4) purchase commercial paper, and (5) enter into any other lending arrangement permitted by the 1940 Act, any rule, regulation or order under the 1940 Act or any SEC staff interpretation of the 1940 Act.
5. Real Estate. The Fund may not purchase or sell real estate except that the Fund may (1) hold and sell real estate acquired as a result of the Fund’s ownership of securities or other instruments (2) purchase or sell securities or other instruments backed by real estate or interests in real estate and (3) purchase or sell securities of entities or investment vehicles, including real estate investment trusts that invest, deal or otherwise engage in transactions in real estate or interests in real estate.
6. Commodities. The Fund may not purchase or sell physical commodities except that the Fund may (1) hold and sell physical commodities acquired as a result of the Fund’s ownership of securities or other instruments, (2) purchase or sell securities or other instruments backed by physical commodities, (3) purchase or sell options, and (4) purchase or sell futures contracts.
7. Concentration of Investments. The Fund may not purchase the securities of an issuer (other than securities issued or guaranteed by the United States Government, its agencies or its instrumentalities) if, as a result, more than 25% of the Fund’s total assets would be invested in the securities of companies whose principal business activities are in the same industry.
8. Senior Securities. The Fund may not issue senior securities except as permitted by the 1940 Act, any rule, regulation or order under the 1940 Act or any SEC staff interpretation of the 1940 Act.
Non-Fundamental Investment Limitations. Each Fund also has adopted certain non-fundamental investment limitations. A non-fundamental investment limitation may be amended by the Board without a vote of shareholders upon 60 days' notice to shareholders. The non-fundamental investment limitations listed below are in addition to other non-fundamental investment limitations disclosed elsewhere in this SAI and in the prospectus.
For the illiquid securities policy, which contains percentage limits, the Fund must meet these percentage limits at all times, regardless of whether a portfolio transaction is occurring or the changes are caused by market conditions or other circumstances beyond the Fund’s control. For all other non-fundamental policies with a percentage limit (collectively, the “Other Policies”), a Fund must apply each policy to each proposed portfolio transaction. For example, both the initial purchase of a security and each subsequent addition to that position must satisfy the Other Policies. However, if a Fund satisfies the Other Policies at the time of a transaction, then later changes in percentages resulting from market conditions or other circumstances beyond the Fund’s control will not violate those policies; but the Fund would not be able to make subsequent additions to that position and other similar positions until the Other Policies are satisfied.
The following non-fundamental investment limitations apply to the Mid Cap Fund, Premium Yield Equity Fund, Sands Capital Select Growth Fund, Small Cap Value Fund, and Ultra Short Duration Fixed Income Fund. None of these Funds may:
1. Pledge, mortgage, or hypothecate assets except to secure borrowings (not to exceed 331/3% of a Fund’s assets) permitted by the Fund’s fundamental limitation on borrowing.
2. Purchase securities on margin or effect short sales, except that each Fund may (i) obtain short-term credits as necessary for the clearance of security transactions; (ii) provide initial and variation margin payments in connection with transactions involving futures contracts and options on such contracts; and (iii) make short sales “against the box” or in compliance with the SEC’s position regarding the asset segregation requirements imposed by Section 18 of the 1940 Act.
3. Purchase or hold illiquid securities, i.e., securities that cannot be disposed of for their approximate carrying value in seven days or less (which term includes repurchase agreements and time deposits maturing in more than seven days) if, in the aggregate, more than 15% (or 10%, with respect to the Ultra Short Duration Fixed Income Fund) of its net assets would be invested in illiquid securities. Unregistered securities sold in reliance on the exemption from registration in Section 4(a)
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(2) of the 1933 Act and securities exempt from registration on re-sale pursuant to Rule 144A under the 1933 Act may be treated as liquid securities under procedures adopted by the Board.
4. The Ultra Short Duration Fixed Income Fund, Small Cap Value Fund, and Mid Cap Fund may not invest in companies for the purpose of exercising control.
5. The Ultra Short Duration Fixed Income Fund, Small Cap Value Fund, and Mid Cap Fund may not invest its assets in securities of any investment company, except as permitted by the 1940 Act.
6. The Ultra Short Duration Fixed Income Fund, Small Cap Value Fund, and Mid Cap Fund may not enter into futures contracts and options on futures contracts except as permitted by guidelines in the Funds’ SAI.
7. Make investments in securities when outstanding borrowings exceed 5% of a Fund’s total assets.
The following non-fundamental investment policies apply to the Mid Cap Fund, Premium Yield Equity Fund, Sands Capital Select Growth Fund, Small Cap Value Fund, and Ultra Short Duration Fixed Income Fund:
1. Each Fund may purchase securities on a when-issued basis and borrow money (borrowing money is permitted by the Funds’ fundamental limitation on borrowing).
2. Each Fund may enter into futures and options transactions.
3. Each Fund may hold up to 15% (10% for the Ultra Short Duration Fixed Income Fund) of its net assets in illiquid securities.
4. Each Fund, except the Ultra Short Duration Fixed Income Fund, may purchase convertible securities.
5. Each Fund may enter into repurchase agreements not to exceed 331/3% of a Fund’s assets.
6. Each Fund may purchase fixed-income securities, including variable- and floating-rate instruments and zero coupon securities.
7. Each Fund, except for the Mid Cap Fund, may purchase Rule 144A securities and other restricted securities.
8. Each Fund may purchase obligations of supranational entities in an amount totaling less than 25% of the Fund’s total assets.
9. Each Fund may, for temporary defensive purposes, invest up to 100% of its total assets in money market instruments (including U.S. government securities, bank obligations, commercial paper rated in the highest rating category by an NRSRO and repurchase agreements involving the foregoing securities), shares of money market investment companies (to the extent permitted by applicable law and subject to certain restrictions) and cash.
The following are non-fundamental investment limitations for each of the Active Bond Fund and the High Yield Fund as applicable (except that Item 1 below applies only to the High Yield Fund and Item 2 below applies only to the Active Bond Fund). The Active Bond Fund and High Yield Fund do not intend to pledge, mortgage or hypothecate their assets.
1. | Borrow money (including through reverse repurchase agreements or forward-roll transactions involving mortgage-backed securities or similar investment techniques entered into for leveraging purposes), except that the Fund may borrow for temporary or emergency purposes up to 10% of its total assets; provided, however, that no Fund may purchase any security while outstanding borrowings exceed 5%. This limitation applies only to the High Yield Fund; |
2. | Borrow money, except through reverse repurchase agreements and dollar rolls, and except that the Fund may borrow through means other than reverse repurchase agreements or dollar rolls for temporary or emergency purposes up to 10% of its total assets; provided, however, that no Fund may purchase any security while outstanding borrowings, excluding dollar rolls and reverse repurchase agreements, exceed 5%. This limitation applies only to the Active Bond Fund; |
3. | Pledge, mortgage, or hypothecate for any purpose in excess of 10% of a Fund’s total assets (taken at market value), provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, dollar rolls, and reverse repurchase agreements are not considered a pledge of assets for purposes of this restriction; |
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4. | Purchase any security or evidence of interest therein on margin, except that such short-term credit as may be necessary for the clearance of purchases and sales of securities may be obtained and except that deposits of initial deposit and variation margin may be made in connection with the purchase, ownership, holding or sale of futures; |
5. | Sell any security which it does not own unless by virtue of its ownership of other securities it has at the time of sale a right to obtain securities, without payment of further consideration, equivalent in kind and amount to the securities sold and provided that if such right is conditional the sale is made upon the same conditions; |
6. Invest for the purpose of exercising control or management;
7. | Hold more than 15% of a Fund’s net assets (taken at the greater of cost or market value) in securities that are illiquid or not readily marketable (defined as a security that cannot be sold in the ordinary course of business within seven days at approximately the value at which the Fund has valued the security) not including (a) Rule 144A securities that have been determined to be liquid by the Board; and (b) commercial paper that is sold under section 4(a)(2) of the 1933 Act which is not traded flat or in default as to interest or principal and either (i) is rated in one of the two highest categories by at least two nationally recognized statistical rating organizations and the Fund’s Board has determined the commercial paper to be liquid; or (ii) is rated in one of the two highest categories by one nationally recognized statistical rating organization and the Fund’s Board has determined that the commercial paper is equivalent quality and is liquid; |
8. | Invest more than 10% of a Fund’s total assets in securities that are restricted from being sold to the public without registration under the 1933 Act (other than Rule 144A Securities deemed liquid by the Fund’s Board); |
9. | Purchase securities of any issuer if such purchase at the time thereof would cause the Fund to hold more than 10% of any class of securities of such issuer, for which purposes all indebtedness of an issuer shall be deemed a single class and all preferred stock of an issuer shall be deemed a single class, except that futures or option contracts shall not be subject to this restriction; |
10. | Make short sales of securities or maintain a short position, unless at all times when a short position is open it owns an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue and equal in amount to, the securities sold short, and unless not more than 10% of a Fund’s net assets (taken at market value) is represented by such securities, or securities convertible into or exchangeable for such securities, at any one time (the Funds have no current intention to engage in short selling); and |
11. | Purchase puts, calls, straddles, spreads, and any combination thereof if by reason thereof the value of the Fund’s aggregate investment in such classes of securities will exceed 5% of its total assets. |
The following descriptions of certain provisions of the 1940 Act may assist investors in understanding the above policies and restrictions. The following are also non-fundamental investment limitations of the Active Bond Fund and High Yield Fund.
1. | Diversification. Under the 1940 Act, a diversified investment management company may not, with respect to 75% of its total assets, (i) purchase securities of any issuer (except securities issued or guaranteed by the U.S. government, its agents or instrumentalities, cash item or, in certain circumstances, securities of other investment companies) if, as a result, more than 5% of its total assets would be invested in the securities of such issuer; or (ii) acquire more than 10% of the outstanding voting securities of any one issuer. |
2. | Borrowing. The 1940 Act allows a fund to borrow from any bank (including pledging, mortgaging or hypothecating assets) in an amount up to 331/3% of its total assets (not including temporary borrowings not in excess of 5% of its total assets). |
3. | Underwriting. Under the 1940 Act, underwriting securities involves a fund purchasing securities directly from an issuer for the purpose of selling (distributing) them or participating in any such activity either directly or indirectly. Under the 1940 Act, a diversified fund may not make any commitment as underwriter, if immediately thereafter the amount of its outstanding underwriting commitments, plus the value of its investments in securities of issuers (other than investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds 25% of the value of its total assets. |
4. | Lending. Under the 1940 Act, a Fund may only make loans if expressly permitted by its investment policies. The Fund’s current investment policy on lending is as follows: the Fund may not make loans if, as a result, more than 331/3% of its total assets would be lent to other parties, except that the Fund may: (i) purchase or hold debt instruments in accordance |
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with its investment objective and policies; (ii) enter into repurchase agreements that are collateralized fully; and (iii) engage in securities lending as described in its SAI.
5. | Senior Securities. Senior securities may include any obligation or instrument issued by a fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as certain borrowings, short sales, reverse repurchase agreements, firm commitment agreements and standby commitments, with appropriate earmarking or segregation of assets to cover such obligation. |
A Fund will determine compliance with the fundamental and non-fundamental investment restriction percentages above (with the exception of the restriction relating to borrowing) and other investment restrictions in this SAI immediately after and as a result of its acquisition of such security or other asset. Accordingly, a Fund will not consider changes in values, net assets, or other circumstances when determining whether the investment complies with its investment restrictions.
TRUSTEES AND OFFICERS OF THE TRUST
The following is a list of the Trustees and executive officers of the Trust, the length of time served, principal occupations for the past five years, number of funds overseen in the Touchstone Fund Complex and other directorships held. All funds managed by the Advisor, the "Touchstone Funds" are part of the “Touchstone Fund Complex.” The Touchstone Fund Complex consists of the Trust, Touchstone Institutional Funds Trust, Touchstone Strategic Trust and Touchstone Variable Series Trust. The Trustees who are not interested persons of the Trust, as defined in the 1940 Act, are referred to as “Independent Trustees.”
Interested Trustees(1):
Name Address Year of Birth | Position Held with Trust | Term of Office And Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Funds Overseen in the Touchstone Fund Complex(2) | Other Directorships Held During the Past 5 Years(3) | |||||
Jill T. McGruder Touchstone Advisors, Inc. 303 Broadway Suite 1100 Cincinnati, Ohio 45202 Year of Birth: 1955 | Trustee and President | Until retirement at age 75 or until she resigns or is removed Trustee since 1999 | President and CEO of IFS Financial Services, Inc. (a holding company). | 49 | IFS Financial Services, Inc. (a holding company) from 1999 to the present; Integrity and National Integrity Life Insurance Co. from 2005 to the present; Touchstone Securities (the Trust’s distributor) from 1999 to the present; Touchstone Advisors (the Trust’s investment advisor and administrator) from 1999 to the present; W&S Brokerage Services (a brokerage company) from 1999 to the present; W&S Financial Group Distributors (a distribution company) from 1999 to the present; Cincinnati Analysts, Inc. from 2012 to present; Columbus Life Insurance Co. from 2016 to present; and The Lafayette Life Insurance Co. from 2016 to present. Taft Museum of Art from 2007 to the present; YWCA of Greater Cincinnati from 2012 to the present; and LL Global, Inc. from 2016 to the present. | |||||
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Independent Trustees:
Name Address Year of Birth | Position Held with Trust | Term of Office And Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Funds Overseen in the Touchstone Fund Complex(2) | Other Directorships Held During the Past 5 Years(3) | |||||
Phillip R. Cox c/o Touchstone Advisors, Inc. 303 Broadway Suite 1100 Cincinnati, Ohio 45202 Year of Birth: 1947 | Trustee | Until retirement at age 75 or until he resigns or is removed Trustee since 1999 | President and Chief Executive Officer of Cox Financial Corp. (a financial services company) from 1971 to the present. | 49 | Director of Cincinnati Bell (a communications company) from 1994 to the present; Bethesda Inc. (a hospital) from 2005 to the present; Timken Co. (a manufacturing company) from 2004 to the 2014; TimkenSteel from 2014 to the present; Diebold, Inc. (a technology solutions company) from 2004 to the present; and Ohio Business Alliance for Higher Education and the Economy from 2005 to the present. | |||||
William C. Gale c/o Touchstone Advisors, Inc. 303 Broadway Suite 1100 Cincinnati, Ohio 45202 Year of Birth: 1952 | Trustee | Until retirement at age 75 or until he resigns or is removed Trustee since 2013 | Retired; formerly Senior Vice President and Chief Financial Officer (from 2003 to January 2015) of Cintas Corporation (a business services company). | 49 | None. | |||||
Susan J. Hickenlooper c/o Touchstone Advisors, Inc. 303 Broadway Suite 1100 Cincinnati, Ohio Year of Birth: 1946 | Trustee | Until retirement at age 75 or until she resigns or is removed Trustee since 2009 | Retired; formerly Financial Analyst for Impact 100 (charitable organization) from November 2012 to 2013. | 49 | Trustee of Diocese of Southern Ohio from 2014 to the present; and Trustee of Cincinnati Parks Foundation from 2000 to 2016. | |||||
Kevin A. Robie c/o Touchstone Advisors, Inc. 303 Broadway Suite 1100 Cincinnati, Ohio 45202 Year of Birth: 1956 | Trustee | Until retirement at age 75 or until he resigns or is removed Trustee since 2013 | Vice President of Portfolio Management at Soin International LLC (a private multinational holding company) from 2004 to the present. | 49 | SaverSystems, Inc. from 2015 to present; Director of Buckeye EcoCare, Inc. (a lawn care company) from 2013 to the present; Trustee of Dayton Region New Market Fund, LLC (a private fund) from 2010 to the present; Trustee of the Entrepreneurs Center, Inc. (a small business incubator) from 2006 to the present. | |||||
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Name Address Year of Birth | Position Held with Trust | Term of Office And Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Funds Overseen in the Touchstone Fund Complex(2) | Other Directorships Held During the Past 5 Years(3) | |||||
Edward J. VonderBrink c/o Touchstone Advisors, Inc. 303 Broadway Suite 1100 Cincinnati, Ohio 45202 Year of Birth: 1944 | Trustee | Until retirement at age 75 or until he resigns or is removed Trustee since 2013 | Consultant, VonderBrink Consulting LLC from 2000 to the present. | 49 | Director of Streamline Health Solutions, Inc. (healthcare IT) from 2006 to 2015; Mercy Health from 2013 to the present; Mercy Health Foundation (healthcare nonprofit) from 2008 to the present; Al Neyer Inc. (a construction company) from 2013 to the present; and BASCO Shower Door from 2010 to the present. | |||||
(1) Ms. McGruder, as a director of the Advisor and the Distributor and an officer of affiliates of the Advisor and the Distributor, is an “interested person” of the Trust within the meaning of Section 2(a)(19) of the 1940 Act.
(2) As of January 30, 2018, the Touchstone Fund Complex consists of 13 series of the Trust, 1 series of Touchstone Institutional Funds Trust, 25 series of Touchstone Strategic Trust and 10 variable annuity series of Touchstone Variable Series Trust.
(3) Each Trustee is also a Trustee of Touchstone Institutional Funds Trust, Touchstone Strategic Trust and Touchstone Variable Series Trust.
Principal Officers:
Name Address Year of Birth | Position Held with Trust(1) | Term of Office and Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Jill T. McGruder Touchstone Advisors, Inc. 303 Broadway Suite 1100 Cincinnati, Ohio 45202 Year of Birth: 1955 | President and Trustee | Until resignation, removal or disqualification President since 2006 | See biography above. | |||
Steven M. Graziano Touchstone Advisors, Inc. 303 Broadway Suite 1100 Cincinnati, Ohio 45202 Year of Birth: 1954 | Vice President | Until resignation, removal or disqualification Vice President since 2009 | President of Touchstone Advisors, Inc. | |||
Timothy D. Paulin Touchstone Advisors, Inc. 303 Broadway Suite 1100 Cincinnati, Ohio 45202 Year of Birth: 1963 | Vice President | Until resignation, removal or disqualification Vice President since 2010 | Senior Vice President of Investment Research and Product Management of Touchstone Advisors, Inc. | |||
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Name Address Year of Birth | Position Held with Trust(1) | Term of Office and Length of Time Served | Principal Occupation(s) During Past 5 Years | |||
Timothy S. Stearns Touchstone Advisors Inc. 303 Broadway Suite 1100 Cincinnati, Ohio 45202 Year of Birth: 1963 | Chief Compliance Officer | Until resignation, removal or disqualification Chief Compliance Officer since 2013 | Chief Compliance Officer of Touchstone Advisors, Inc.; Chief Compliance Officer of Envestnet Asset Management, Inc. (2009 to 2013). | |||
Terrie A. Wiedenheft Touchstone Advisors, Inc. 303 Broadway Suite 1100 Cincinnati, Ohio 45202 Year of Birth: 1962 | Controller and Treasurer | Until resignation, removal or disqualification Controller and Treasurer since 2006 | Senior Vice President, Chief Financial Officer, and Chief Operations Officer of IFS Financial Services, Inc. (a holding company). | |||
Ellen Blanchard The Bank of New York Mellon 201 Washington Street, 13th Fl Boston, Massachusetts 02108 Year of Birth: 1973 | Secretary | Until resignation, removal or disqualification Secretary since 2015 | Director of The Bank of New York Mellon | |||
(1) Each officer also holds the same office with Touchstone Institutional Funds Trust, Touchstone Strategic Trust and Touchstone Variable Series Trust.
Additional Information about the Trustees
The Board believes that each Trustee’s experience, qualifications, attributes, or skills on an individual basis and in combination with those of the other Trustees lead to the conclusion that the Trustees possess the requisite experience, qualifications, attributes, and skills to serve on the Board. The Board believes that the Trustees’ ability to review critically, evaluate, question and discuss information provided to them; to interact effectively with the Advisor, sub-advisors, other service providers, counsel and independent auditors; and to exercise effective business judgment in the performance of their duties, support this conclusion. The Board has also considered the contributions that each Trustee can make to the Board and the Funds.
In addition, the following specific experience, qualifications, attributes and skills apply as to each Trustee: Ms. McGruder has experience as a chief executive officer of a financial services company and director of various other businesses, as well as executive and leadership roles within the Advisor; Mr. Cox has experience as a chief executive officer of a financial services company and as a director of companies from varied industries; Mr. Gale has experience as a chief financial officer, an internal auditor of various global companies, and has accounting experience as a manager at a major accounting firm; Ms. Hickenlooper has executive and board experience at various businesses, foundations and charitable organizations; Mr. Robie has portfolio management experience at a private multinational holding company; and Mr. VonderBrink has experience as a consultant and director of other corporations. In its periodic self-assessment of its effectiveness, the Board considers the complementary individual skills and experience of the individual Trustees primarily in the broader context of the Board’s overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the Funds. References to the qualifications, attributes and skills of Trustees are pursuant to requirements of the SEC, do not constitute holding out the Board or any Trustee as having any special expertise or experience, and shall not impose any greater responsibility on any Trustee or on the Board by reason thereof.
Board Structure
The Board is composed of five Independent Trustees and one Interested Trustee, Jill T. McGruder, who is Chairperson of the Board. The full Board has appointed Phillip R. Cox to serve as the Lead Independent Trustee. Ms. McGruder oversees the day-to-day business affairs of the Trust and communicates with Mr. Cox regularly on various Trust issues, as appropriate. Mr. Cox, among other things, chairs meetings of the Independent Trustees, serves as a spokesperson for the Independent Trustees and serves
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as a liaison between the Independent Trustees and the Trust’s management between Board meetings. Except for any duties specified, the designation of Lead Independent Trustee does not impose on such Independent Trustee any duties, obligations or liability that is greater than the duties, obligations or liability imposed on such person as a member of the Board, generally. The Independent Trustees are advised at these meetings, as well as at other times, by separate, independent legal counsel.
The Board holds four regular meetings each year to consider and address matters involving the Trust and its Funds. The Board also may hold special meetings to address matters arising between regular meetings. The Independent Trustees also regularly meet outside the presence of management and are advised by independent legal counsel. These meetings may take place in-person or by telephone.
The Board has established a committee structure that includes an Audit Committee and a Governance Committee (discussed in more detail below). The Board conducts much of its work through these Committees. Each Committee is comprised entirely of Independent Trustees, which ensures that the Funds have effective and independent governance and oversight.
The Board reviews its structure regularly and believes that its leadership structure, including having a super-majority of Independent Trustees, coupled with an Interested Chairperson and a Lead Independent Trustee, is appropriate and in the best interests of the Trust because it allows the Board to exercise informed and independent judgment over matters under its purview, and it allocates areas of responsibility among committees and the full Board in a manner that enhances effective oversight. The Board believes that having an Interested Chairperson is appropriate and in the best interests of the Trust given: (1) the extensive oversight provided by the Trust’s Advisor over the affiliated and unaffiliated sub-advisors that conduct the day-to-day management of the Funds of the Trust, (2) the extent to which the work of the Board is conducted through the standing Committees, (3) the extent to which the Independent Trustees meet regularly, together with independent legal counsel, in the absence of the Interested Chairperson and (4) the Interested Chairperson’s additional roles as a director of the Advisor and the Distributor and senior executive of IFS Financial Services, Inc., the Advisor’s parent company, and of other affiliates of the Advisor, which enhance the Board’s understanding of the operations of the Advisor and the role of the Trust and the Advisor within Western & Southern Financial Group, Inc. The Board also believes that the role of the Lead Independent Trustee within the leadership structure is integral to promoting independent oversight of the Funds’ operations and meaningful representation of the shareholders’ interests. In addition, the Board believes its leadership structure facilitates the orderly and efficient flow of information to the Independent Trustees from the Trust’s management.
Board Oversight of Risk
Consistent with its responsibilities for oversight of the Trust and its Funds, the Board, among other things, oversees risk management of each Fund’s investment program and business affairs directly and through the committee structure that it has established. Risks to the Funds include, among others, investment risk, credit risk, liquidity risk, valuation risk and operational risk, as well as the overall business risk relating to the Funds. The Board has adopted, and periodically reviews, policies and procedures designed to address these risks. Under the overall oversight of the Board, the Advisor, sub-advisors, and other key service providers to the Funds, including the administrator, the distributor, the transfer agent, the custodian, and the independent auditors, have also implemented a variety of processes, procedures and controls to address these risks. Different processes, procedures and controls are employed with respect to different types of risks. These processes include those that are embedded in the conduct of regular business by the Board and in the responsibilities of officers of the Trust and other service providers.
The Board requires senior officers of the Trust, including the Chief Compliance Officer (“CCO”), to report to the Board on a variety of matters at regular and special meetings of the Board, including matters relating to risk management. The Board and the Audit Committee receive regular reports from the Trust’s independent auditors on internal control and financial reporting matters. On at least a quarterly basis, the Board meets with the Trust’s CCO, including meetings in executive sessions, to discuss issues related to portfolio compliance and, on at least an annual basis, receives a report from the CCO regarding the effectiveness of the Trust’s compliance program. In addition, the Board also receives reports from the Advisor on the investments and securities trading of the Funds, including their investment performance and asset weightings compared to appropriate benchmarks, as well as reports regarding the valuation of those investments. The Board also receives reports from the Trust’s primary service providers on a periodic or regular basis, including the sub-advisors to the Funds.
Standing Committees of the Board
The Board is responsible for overseeing the operations of the Trust in accordance with the provisions of the 1940 Act and other applicable laws and the Trust’s Declaration of Trust. The Board has established the following Committees to assist in its oversight functions. Each Committee is composed entirely of Independent Trustees.
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Audit Committee. All of the Independent Trustees are members of the Audit Committee. The Audit Committee is responsible for overseeing the Trust’s accounting and financial reporting policies, practices and internal controls. Mr. Gale is the Chair of the Audit Committee. During the fiscal year ended September 30, 2017, the Audit Committee held four meetings.
Governance Committee . All of the Independent Trustees are members of the Governance Committee. The Governance Committee is responsible for overseeing the Trust’s compliance program and compliance issues, procedures for valuing securities and responding to any pricing issues. Ms. Hickenlooper is the Chair of the Governance Committee. The Governance Committee held four meetings during the fiscal year ended September 30, 2017.
In addition, the Governance Committee is responsible for recommending candidates to serve on the Board. The Governance Committee will consider shareholder recommendations for nomination to the Board only in the event that there is a vacancy on the Board. Shareholders who wish to submit recommendations for nominations to the Board to fill the vacancy must submit their recommendations in writing to Ms. Susan J. Hickenlooper, Chair of the Governance Committee, c/o Touchstone Funds, 303 Broadway, Suite 1100, Cincinnati, Ohio 45202. Shareholders should include appropriate information on the background and qualifications of any person recommended to the Governance Committee (e.g., a resume), as well as the candidate’s contact information and a written consent from the candidate to serve if nominated and elected. Shareholder recommendations for nominations to the Board will be accepted on an ongoing basis and such recommendations will be kept on file for consideration in the event of a future vacancy on the Board.
Trustee Ownership in the Touchstone Fund Complex
The following table reflects the Trustees’ beneficial ownership in the Funds (i.e., dollar range of securities in each Fund) and the Touchstone Fund Complex as of December 31, 2017.
Interested Trustee | Independent Trustees | |||||||||||
Funds | Jill T. McGruder | Phillip R. Cox | William C. Gale | Susan J. Hickenlooper | Kevin A. Robie | Edward J. VonderBrink | ||||||
Active Bond Fund | $10,001-$50,000 | None | None | None | None | $50,001-$100,000 | ||||||
Arbitrage Fund | None | None | None | None | None | None | ||||||
Emerging Markets Small Cap Fund | $1-$10,000 | None | None | None | None | None | ||||||
High Yield Fund | Over $100,000 | None | None | None | None | None | ||||||
Merger Arbitrage Fund | None | None | None | None | None | None | ||||||
Mid Cap Fund | None | None | None | $50,001-$100,000 | None | None | ||||||
Mid Cap Value Fund | $50,001-$100,000 | None | None | $50,001-$100,000 | None | None | ||||||
Premium Yield Equity Fund | None | None | None | None | None | None | ||||||
Sands Capital Select Growth Fund | $10,001-$50,000 | None | None | $50,001-$100,000 | None | None | ||||||
Small Cap Fund | Over $100,000 | None | None | $50,001-$100,000 | None | None | ||||||
Small Cap Value Fund | None | None | None | None | None | None | ||||||
Total Return Bond Fund | None | None | None | None | None | None | ||||||
Ultra Short Duration Fixed Income Fund | None | None | None | None | None | None | ||||||
Aggregate Dollar Range of Securities in the Touchstone Fund Complex(1) | Over $100,000 | None | None | Over $100,000 | None | Over $100,000 | ||||||
(1) As of January 30, 2018, the Touchstone Fund Complex consisted of 13 series of the Trust, 1 series of Touchstone Institutional Funds Trust, 25 series of Touchstone Strategic Trust and 10 variable annuity series of Touchstone Variable Series Trust.
Trustee Compensation
The following table shows the compensation paid to the Trustees by the Trust and the aggregate compensation paid by the Touchstone Fund Complex during the fiscal year ended September 30, 2017.
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Name | Compensation from the Trust | Aggregate Compensation from the Touchstone Fund Complex(1) | ||||||
Interested Trustee | ||||||||
Jill T. McGruder | $ | 0 | $ | 0 | ||||
Independent Trustees(2) | ||||||||
Phillip R. Cox | $ | 43,293 | $ | 147,000 | ||||
William C. Gale | $ | 39,634 | $ | 135,000 | ||||
Susan J. Hickenlooper | $ | 39,634 | $ | 135,000 | ||||
Kevin A. Robie | $ | 35,976 | $ | 123,000 | ||||
Edward J. VonderBrink | $ | 35,976 | $ | 123,000 | ||||
(1) As of January 30, 2018, the Touchstone Fund Complex consists of 13 series of the Trust, 1 series of Touchstone Institutional Funds Trust, 25 series of Touchstone Strategic Trust and 10 variable annuity series of Touchstone Variable Series Trust.
(2) The Independent Trustees are eligible to participate in the Touchstone Trustee Deferred Compensation Plan, which allows them to defer payment of a specific amount of their Trustee compensation, subject to a minimum quarterly reduction of $1,000. The total amount of deferred compensation accrued by the Independent Trustees from the Touchstone Fund Complex during the fiscal year ended September 30, 2017 was $116,500.
The following table shows the Trustee quarterly compensation schedule:
Retainer | Governance Committee Meeting Attendance Fees | Audit Committee Meeting Attendance Fees | Board Meeting Attendance Fees | |||||||||||
Compensation Beginning 1/1/18 1/1/16-12/31/17 | $18,000 $15,500 | $4,500 $4,500 | $4,500 $4,500 | $5,000 $5,000 | ||||||||||
Lead Independent Trustee Fees | $ | 6,000 | ||||||||||||
Committee Chair Fees | $ | 1,000 | $ | 2,000 | $ | 2,000 | ||||||||
Telephonic Meeting Attendance Fee = $1,500 | ||||||||||||||
Independent Trustee compensation and Trustee and officer expenses are typically divided equally among the series comprising the Touchstone Fund Complex.
THE ADVISOR
Touchstone Advisors, Inc. (previously defined as the “Advisor” or “Touchstone Advisors”), is the Funds’ investment advisor under the terms of an advisory agreement (the “Advisory Agreement”) dated February 17, 2006. Under the Advisory Agreement, the Advisor reviews, supervises, and administers the Funds’ investment program, subject to the oversight of, and policies established by, the Board of the Trust (the “Trustees”). The Advisor determines the appropriate allocation of assets to each Fund’s sub-advisor(s).
The Advisory Agreement provides that the Advisor shall not be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in carrying out its duties, but shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties.
The continuance of the Advisory Agreement as to the Funds after the first two years must be specifically approved at least annually (i) by the vote of the Board or by a vote of the shareholders of the Fund, and, in either case, (ii) by the vote of a majority of the Board who are not parties to the Advisory Agreement or “interested persons” (as defined in the 1940 Act) of any party thereto, cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Board or, with respect to a Fund, by a majority of the outstanding shares of the Fund, on not less than 30 days' nor more than 60 days' written notice to the Advisor, or by the Advisor on 90 days' written notice to the Trust.
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The Advisor is a wholly-owned subsidiary of IFS Financial Services, Inc., which is a wholly-owned subsidiary of Western-Southern Life Assurance Company. Western-Southern Life Assurance Company is a wholly-owned subsidiary of The Western and Southern Life Insurance Company, which is a wholly-owned subsidiary of Western & Southern Financial Group, Inc. Western & Southern Financial Group Inc. is a wholly-owned subsidiary of Western & Southern Mutual Holding Company (“Western & Southern”). Western & Southern is located at 400 Broadway, Cincinnati, Ohio 45202. Ms. Jill T. McGruder may be deemed to be an affiliate of the Advisor because she is a Director of the Advisor and an officer of affiliates of the Advisor. Ms. McGruder, by reason of these affiliations, may directly or indirectly receive benefits from the advisory fees paid to the Advisor.
Manager-of-Managers Structure
The SEC has granted an exemptive order that permits the Trust or the Advisor, under certain circumstances, to select or change unaffiliated sub-advisors, enter into new sub-advisory agreements or amend existing sub-advisory agreements without first obtaining shareholder approval (a “manager-of-managers structure”). The Trust, on behalf of each Fund, seeks to achieve its investment goal by using a “manager-of-managers” structure. Under a manager-of-managers structure, the Advisor acts as investment advisor, subject to direction from and oversight by the Board, to allocate and reallocate the Fund’s assets among sub-advisors, and to recommend that the Trustees hire, terminate or replace unaffiliated sub-advisors without shareholder approval. By reducing the number of shareholder meetings that may have to be held to approve new or additional sub-advisors for the Fund, the Trust anticipates that there will be substantial potential cost savings, as well as the opportunity to achieve certain management efficiencies, with respect to any Fund in which the manager-of-managers approach is chosen. Shareholders of a Fund will be notified of a change in its sub-advisor.
Fees Paid to the Advisor
For its services, the Advisor is entitled to receive an investment advisory fee from each Fund at an annualized rate, based on the average daily net assets of the Fund, as set forth below. Each Fund’s advisory fee is accrued daily and paid monthly, based on the Fund’s average net assets during the current month.
Fund | Investment Advisory Fee | |
Active Bond Fund | 0.40% on the first $300 million of assets; and 0.35% on assets over $300 million | |
Arbitrage Fund | 1.05% on the first $500 million of assets; 1.00% on the next $500 million of assets; and 0.95% on assets over $1 billion | |
Emerging Markets Small Cap Fund | 1.05% on the first $200 million of assets; 1.00% on the next $200 million of assets; and 0.90% on assets over $400 million | |
High Yield Fund | 0.60% on the first $50 million of assets; 0.50% on the next $250 million of assets; and 0.45% on assets over $300 million | |
Merger Arbitrage Fund | 1.05% | |
Mid Cap Fund | 0.80% on the first $500 million; 0.75% on the next $500 million; and 0.70% on assets over $1 billion | |
Mid Cap Value Fund | 0.85% on the first $100 million of assets; 0.80% on the next $300 million of assets; and 0.75% on assets over $400 million | |
Premium Yield Equity Fund | 0.70% on the first $100 million of assets; and 0.65% on assets over $100 million | |
Small Cap Fund | 0.85% | |
Small Cap Value Fund | 0.90% | |
Total Return Bond Fund | 0.35% | |
Ultra Short Duration Fixed Income Fund | 0.25% | |
As described in the prospectus, the Sands Capital Select Growth Fund is subject to base investment advisory fees that may be adjusted if the Fund outperforms or under-performs a stated benchmark. The “Highest/Lowest Possible Advisory Fee” column represents the maximum and minimum amount that the Advisor may receive pursuant to the performance fee under the Advisory Agreement. Set forth below is information about the advisory fee arrangements of the Sands Capital Select Growth Fund:
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Fund | Benchmark | Required Excess Performance | Base Advisory Fee | Annual Adjustment Rate | Highest / Lowest Possible Advisory Fee | |||||
Sands Capital Select Growth Fund | Russell 1000® Growth Index | +/- 2.50% | 0.85% on the first $1 billion of assets; 0.80% on the next $500 million of assets; 0.75% on the next $500 million of assets; 0.70% on assets above $2 billion | +/-0.15% | 1.00% / 0.55% | |||||
The Sands Capital Select Growth Fund’s performance adjustment is calculated and paid monthly by comparing the Fund’s performance to the performance of the Fund’s benchmark over a “performance period.” The performance period consists of a rolling 12-month period that includes the most current month for which performance is available plus the previous 11 months. The Fund’s annual performance adjustment rate is multiplied by the average net assets of the Fund over the performance period, which is then multiplied by a fraction, the numerator of which is the number of days in the current month and the denominator of which is 365 (366 in leap years). The resulting amount is then added (in the case of over-performance) or subtracted from (in the case of underperformance) to the Fund’s base fee.
For example, assume that the Sands Capital Select Growth Fund’s average net assets as of March 31 were $55,000,000, the average net assets of the Fund over the 12-month period ending March 31 was $50,000,000, and that it is not a leap year. The Fund’s base fee for March is $39,705 ($55,000,000 x 0.85%, x 31/365). If the Fund outperformed (or underperformed) the Russell 1000® Growth Index by less than 2.50% over this performance period, then there is no adjustment to the Fund’s base fee. If the Fund outperformed (or underperformed) the Russell 1000® Growth Index by 2.50% or more over this performance period, then the Advisor’s advisory fee would increase (or decrease) by a maximum of $6,370 ($50,000,000 x 0.15%, x 31/365).
Because the adjustment to the Sands Capital Select Growth Fund’s base advisory fee is based upon the Fund’s performance compared to the investment record of its stated benchmark, the controlling factor as to whether a performance adjustment will be made is not whether the Fund’s performance is up or down per se, but whether it is up or down more or less than the record of its respective benchmark. Moreover, the comparative investment performance of the Fund is based solely on the relevant performance period without regard to relative performance over a longer or shorter period of time.
Each Fund shall pay the expenses of its operation, including but not limited to (i) charges and expenses of outside pricing services, (ii) the charges and expenses of auditors; (iii) the charges and expenses of its custodian, transfer agent and administrative agent appointed by the Trust with respect to a Fund; (iv) brokers’ commissions, and issue and transfer taxes chargeable to a Fund in connection with securities transactions to which a Fund is a party; (v) insurance premiums, interest charges, dues and fees for membership in trade associations and all taxes and fees payable to federal, state or other governmental agencies; (vi) fees and expenses involved in registering and maintaining registrations of the Funds with the SEC, state or blue sky securities agencies and foreign countries; (vii) all expenses of meetings of Trustees and of shareholders of the Trust and of preparing, printing and distributing prospectuses, notices, proxy statements and all reports to shareholders and to governmental agencies; (viii) charges and expenses of legal counsel to the Trust and the Independent Trustees; (ix) compensation of the Independent Trustees of the Trust; (x) compliance fees and expenses; and (xi) interest on borrowed money, if any. The compensation and expenses of any officer, Trustee or employee of the Trust who is an affiliated person of the Advisor is paid by the Advisor. Each class of shares of a Fund pays its representative pro rata portion of the advisory fee payable by the Fund.
Expense Limitation Agreement. Touchstone Advisors has contractually agreed to waive fees and reimburse expenses to the extent necessary to ensure each Fund’s (except as noted for the Sands Capital Select Growth Fund) total annual operating expenses (excluding dividend and interest expenses relating to short sales, interest, taxes, brokerage commissions and other transaction costs; portfolio transaction and investment related expenses, including expenses associated with the Fund's liquidity providers; other expenditures which are capitalized in accordance with U.S. generally accepted accounting principles, the cost of “Acquired Fund Fees and Expenses,” if any, and other extraordinary expenses not incurred in the ordinary course of business ("Excluded Expenses") do not exceed the contractual limit set forth in the fee table. The Fund bears the costs of these Excluded Expenses. The Expense Limitation Agreement for Sands Capital Select Growth Fund limits other operating expenses to 0.25% for all classes of the Fund. Other operating expenses include all operating expenses of the Fund except for investment advisory fees, performance fees, and amounts, if any, payable pursuant to a shareholder servicing plan; and amounts, if any, payable pursuant to a plan adopted in accordance with Rule 12b–1 under the 1940 Act and any Excluded Expenses. The contractual limits set forth in the fee table have been adjusted to include the effect of Rule 12b-1 fees, shareholder servicing fees and other anticipated class specific expenses, if applicable. Fee waivers or expense reimbursements are calculated and applied monthly, based on the Fund’s average net assets during the month. The terms of Touchstone Advisors’ contractual waiver agreement provide that Touchstone Advisors is entitled to recoup, subject to approval by the Fund’s Board, such amounts waived or reimbursed for a period of up to three years from the
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date on which Touchstone Advisors reduced its compensation or assumed expenses for the Fund. The Fund will make repayments to the Advisor only if such repayment does not cause the Fund’s contractual limit set (after the repayment is taken into account) to exceed both (1) the expense cap in place when such amounts were waived and (2) the Fund’s current expense limitation.
Advisory Fees and Fee Waivers or Reimbursements. For the fiscal years ended September 30, 2015, 2016 and 2017, the Funds paid advisory fees and received waivers or reimbursements as shown in the following table:
Advisory Fees Paid | Fee Waivers or Reimbursements | |||||||||||||||||||||||
Fund | 2015 | 2016 | 2017 | 2015 | 2016 | 2017 | ||||||||||||||||||
Active Bond Fund* | $ | 464,359 | $ | 417,361 | $ | 450,402 | $ | 304,005 | $ | 292,704 | $ | 282,492 | ||||||||||||
Arbitrage Fund | $ | 1,598,028 | $ | 1,327,181 | $ | 2,086,717 | $ | 7,282 | $ | 35,383 | $ | 48,650 | ||||||||||||
Emerging Markets Small Cap Fund** | $ | 3,349,536 | $ | 405,474 | $ | 115,252 | $ | 145,098 | $ | 371,480 | $ | 280,316 | ||||||||||||
High Yield Fund* | $ | 1,383,148 | $ | 1,085,856 | $ | 1,221,630 | $ | 177,038 | $ | 209,551 | $ | 180,995 | ||||||||||||
Merger Arbitrage Fund | $ | 3,187,301 | $ | 2,103,187 | $ | 2,102,332 | $ | 0 | $ | 8,474 | $ | 42,403 | ||||||||||||
Mid Cap Fund | $ | 4,854,261 | $ | 5,567,483 | $ | 5,706,913 | $ | 721,862 | $ | 657,760 | $ | 669,491 | ||||||||||||
Mid Cap Value Fund | $ | 2,889,296 | $ | 3,084,251 | $ | 4,803,086 | $ | 448,793 | $ | 476,709 | $ | 645,620 | ||||||||||||
Premium Yield Equity Fund | $ | 1,336,085 | $ | 1,023,138 | $ | 929,532 | $ | 66,988 | $ | 138,887 | $ | 110,170 | ||||||||||||
Sands Capital Select Growth Fund | $ | 35,695,416 | $ | 22,940,604 | $ | 18,801,425 | $ | 946,970 | $ | 831,974 | $ | 528,582 | ||||||||||||
Small Cap Fund | $ | 6,781,951 | $ | 5,543,019 | $ | 4,028,859 | $ | 38,284 | $ | 92,604 | $ | 89,097 | ||||||||||||
Small Cap Value Fund | $ | 643,163 | $ | 685,757 | $ | 1,295,102 | $ | 176,031 | $ | 234,463 | $ | 681,628 | ||||||||||||
Total Return Bond Fund | $ | 602,913 | $ | 713,723 | $ | 818,677 | $ | 196,165 | $ | 235,052 | $ | 275,614 | ||||||||||||
Ultra Short Duration Fixed Income Fund | $ | 1,544,932 | $ | 1,444,677 | $ | 1,613,669 | $ | 512,896 | $ | 552,999 | $ | 507,207 | ||||||||||||
*Prior to January 27, 2017, Predecessor Funds paid advisory fees and received waivers and/or reimbursements.
**Prior to April 19, 2016, the Fund was known as Touchstone Emerging Markets Equity Fund.
THE SUB-ADVISORS AND PORTFOLIO MANAGERS
The Advisor has selected sub-advisors (each a “Sub-Advisor” or collectively the “Sub-Advisors”) to manage all or a portion of a Fund’s assets, as determined by the Advisor. The Sub-Advisors make the investment decisions for the Fund assets allocated to them, and continuously review, supervise and administer a separate investment program, subject to the oversight of, and policies established by, the Board.
Each sub-advisory agreement provides that a Sub-Advisor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith or gross negligence on its part in the performance of its duties, or from reckless disregard of its obligations or duties thereunder.
For their respective services, the Sub-Advisors receive a fee from the Advisor. As described in the prospectus, each Sub-Advisor receives sub-advisory fees with respect to each Fund that it sub-advises, except Sands Capital Management, LLC which receives a base investment sub-advisory fee that may be adjusted if the Fund outperforms or under performs its stated benchmark. Each Sub-Advisor’s fee with respect to each Fund is accrued daily and paid monthly, based on the Fund’s average net assets allocated to the Sub-Advisor during the current month. The performance adjustment for the Sands Capital Select Growth Fund is calculated as set forth above.
The Advisor pays sub-advisory fees to the Sub-Advisors from its advisory fee. The compensation of any officer, director or employee of a Sub-Advisor who is rendering services to a Fund is paid by the Sub-Advisor. For the fiscal years ended September 30, 2015, 2016 and 2017, the Advisor paid the following sub-advisory fees with respect to each Fund:
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2015 | 2016 | 2017 | |||||||||
Active Bond Fund* | $ | 270,137 | $ | 234,915 | $ | 253,181 | |||||
Arbitrage Fund | $ | 989,255 | $ | 822,113 | $ | 1,291,059 | |||||
Emerging Markets Small Cap Fund** | $ | 1,724,768 | $ | 205,930 | $ | 60,341 | |||||
High Yield Fund* | $ | 849,986 | $ | 672,027 | $ | 752,468 | |||||
Merger Arbitrage Fund | $ | 1,921,315 | $ | 1,301,844 | $ | 1,298,762 | |||||
Mid Cap Fund | $ | 2,703,231 | $ | 3,088,192 | $ | 3,158,275 | |||||
Mid Cap Value Fund | $ | 1,444,716 | $ | 1,522,582 | $ | 2,426,865 | |||||
Premium Yield Equity Fund | $ | 742,507 | $ | 574,432 | $ | 523,204 | |||||
Sands Capital Select Growth Fund | $ | 31,446,266 | $ | 20,781,135 | $ | 12,872,721 | |||||
Small Cap Fund | $ | 3,989,383 | $ | 3,263,077 | $ | 2,367,851 | |||||
Small Cap Value Fund*** | $ | 357,313 | $ | 347,454 | $ | 646,973 | |||||
Total Return Bond Fund | $ | 387,587 | $ | 459,116 | $ | 525,937 | |||||
Ultra Short Duration Fixed Income Fund | $ | 705,473 | $ | 665,817 | $ | 732,496 | |||||
*Prior to January 27, 2017, fees were paid to the Predecessor Funds' Sub-Advisor.
**Prior to April 19, 2016, the Fund was known as Touchstone Emerging Markets Equity Fund and was sub-advised by another sub-advisor. For the period February 20, 2016 through April 18, 2016, the Emerging Markets Small Cap Fund was sub–advised by an interim sub–advisor.
***Prior to July 1, 2016, the Small Cap Value Fund was sub-advised by another sub-advisor. For the period May 20, 2016 through June 30, 2016, Small Cap Value Fund was sub-advised by an interim sub-advisor.
A description of certain information with respect to each Sub-Advisor is below. In addition, the following charts list the Funds’ portfolio managers, the number of their other managed accounts per investment category, the total assets in each category of managed accounts and their beneficial ownership in their managed Fund(s) at the end of the September 30, 2017 fiscal year. Listed below the charts is (i) a description of each portfolio manager's compensation structure as of September 30, 2017, and (ii) a description of any material conflicts that may arise in connection with each portfolio manager’s management of the Fund’s investments and the investments of the other accounts included in the chart and any material conflicts in allocation of investment opportunities between the Fund and other accounts managed by each portfolio manager as of September 30, 2017. Also as of September 30, 2017, for some of the Sub-Advisors, certain portfolio managers managed accounts subject to both an advisory and a performance fee.
Sub-Advisor Control. This section presents the Sub-Advisor’s control persons.
• | Copper Rock Capital Partners, LLC (“Copper Rock”) is an SEC registered investment adviser. The firm a subsidiary of Old Mutual Asset Management (US) LLC, which is a subsidiary of Old Mutual plc. |
• | EARNEST Partners, LLC (“EARNEST”) is an SEC registered investment adviser. The firm is owned approximately 87% by Westchester Limited, LLC and 13% by EP Partner Pool, LLC. Westchester Limited, LLC also owns 25% of GREYBULL Partners, LLC, an affiliated registered investment adviser. Paul E. Viera indirectly owns more than 25% of the firm through Westchester Limited, LLC. |
• | Fort Washington Investment Advisors, Inc. ("Fort Washington") is an SEC registered investment adviser. The firm a wholly owned subsidiary of Western & Southern and is therefore an affiliate of Touchstone Advisors and Touchstone Securities. Ms. McGruder may be deemed to be an affiliate of Fort Washington. |
• | LMCG Investments, LLC (“LMCG”) is an SEC registered investment adviser. LMCG is a board-managed limited liability company owned directly or indirectly by Royal Bank of Canada (“RBC”), Lee Paul Munder and their employees. RBC indirectly owns more than 25% of LMCG. LMCG operates independently of RBC and does not conduct joint operations or provide investment advice that is formulated, in whole or in part, with RBC or any of its other affiliates. |
• | London Company of Virginia, doing business as The London Company (“The London Company”), is an SEC registered investment advisor. TLC Holdings owns approximately 75% of The London Company. Stephen Goddard owns 95% of TLC Holdings. Stephen Goddard is deemed a control person for The London Company based on his ownership of TLC Holdings. |
• | Longfellow Investment Management Co., LLC (“Longfellow”) is an SEC registered investment adviser. LIM is 100% employee-owned. A total of eight employees currently have an ownership stake in Longfellow. As of March 29, 2017, Barbara McKenna is the only person who owns 25% or more of Longfellow. |
• | Miller/Howard Investments, Inc. (“Miller/Howard”) is an SEC registered investment adviser. Lowell Glaser Miller, CIO, is the only person who owns 25% or more of Miller/Howard. |
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• | Sands Capital Management, LLC (“Sands Capital”) is an SEC registered investment adviser. The firm is controlled by Frank M. Sands, Sr. and Frank M. Sands, Jr. |
Emerging Markets Small Cap Fund
Sub-Advisor: Copper Rock
Portfolio Manager/ Types of Accounts | Total Number of Other Accounts Managed | Total Other Assets (million) | Number of Other Accounts Managed subject to a Performance Based Advisory Fee | Total Other Assets Managed subject to a Performance Based Advisory Fee (million) | ||||
Stephen Dexter | ||||||||
Registered Investment Companies | 6 | $725 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 3 | $1,837 | 0 | $0 | ||||
Other Accounts | 24 | $2,763 | 3 | $723 | ||||
H. David Shea | ||||||||
Registered Investment Companies | 6 | $725 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 3 | $1,837 | 0 | $0 | ||||
Other Accounts | 24 | $2,763 | 0 | $723 | ||||
Fund Ownership . The following table indicates for the Emerging Markets Small Cap Fund the dollar range of shares beneficially owned by the Funds’ portfolio manager as of September 30, 2017.
Portfolio Manager | Dollar Range of Beneficial Ownership | |
Stephen Dexter | None | |
H. David Shea | None | |
Material Conflicts of Interest. The portfolio managers manage other accounts for other clients of Copper Rock. These client accounts may include registered investment companies, other types of pooled accounts, and separate accounts (i.e., accounts managed on behalf of individuals or public or private institutions). The portfolio managers provide services for multiple clients simultaneously. A summary of certain portfolio conflicts of interest is provided below. Please note, however, that this summary is not intended to describe every possible conflict of interest that members of the portfolio management teams may face.
Copper Rock may receive differential compensation from different advisory clients and each advisory client may be more or less profitable to Copper Rock than other advisory clients (e.g., clients also may demand different levels of service or have larger, smaller, or multiple relationships with Copper Rock). The portfolio managers may also make personal investments in accounts they manage or support.
Portfolios within the same product type are managed substantially the same, all portfolios have substantially the same percentage ownership, other than client specific restrictions and rounding.
The portfolio managers may not be able to acquire enough of a certain security to fill all the orders across all client portfolios. Copper Rock has a written procedure that requires the available shares to be distributed on a pro-rata basis across the appropriate portfolios.
Compensation. Copper Rock is committed to retaining all members of its senior management team by offering a competitive salary, broad distribution of equity, and partnership bonuses.
• | Base Salary. Each investment professional is paid a fixed base salary, which varies among investment professional depending on the experience and responsibilities of the portfolio manager as well as the market forces at the time the portfolio manager is hired or upon any renewal period. |
• | Bonus. Each investment professional is eligible to receive an annual bonus. Bonus amounts are principally tied to firm profitability and the individual’s contribution to the team. Greater emphasis is placed on investment performance and a smaller portion of the bonus is based on qualitative factors, which may include marketing and client service activities. |
• | Equity Distribution. The majority of all investment professionals have a substantial equity stake in the firm. |
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Total Return Bond Fund
Sub-Advisor: EARNEST
Portfolio Manager/ Types of Accounts | Total Number of Other Accounts Managed | Total Other Assets (million) | Number of Other Accounts Managed subject to a Performance Based Advisory Fee | Total Other Assets Managed subject to a Performance Based Advisory Fee (million) | ||||
Douglas Folk | ||||||||
Registered Investment Companies | 0 | $0 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 5 | $34.2 | 0 | $0 | ||||
Other Accounts | 80 | $5,641.2 | 0 | $0 | ||||
Chris Fitze | ||||||||
Registered Investment Companies | 0 | $0 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 5 | $34.2 | 0 | $0 | ||||
Other Accounts | 80 | $5,641.2 | 0 | $0 | ||||
Fund Ownership . The following table indicates for the Total Return Bond Fund, the dollar range of shares beneficially owned by the Fund’s portfolio managers as of September 30, 2017.
Portfolio Managers | Dollar Range of Beneficial Ownership | |
Douglas Folk | $10,001 - $50,000 | |
Chris Fitze | None | |
Conflicts of Interest . EARNEST is responsible for managing the Total Return Bond Fund in addition to other client accounts which may include, but are not limited to, proprietary accounts, separate accounts and other pooled investment vehicles. EARNEST may manage other client accounts which may have higher fee arrangements than the Total Return Bond Fund or may also have performance-based fees. Side-by-side management of these other client accounts may create potential conflicts of interest which may relate to, among other things, the allocation of investment opportunities and the aggregation and allocation of transactions. EARNEST has adopted policies and procedures it believes are reasonably designed to address such conflicts.
EARNEST seeks best execution with respect to all securities transactions and to aggregate and allocate the securities to client accounts in a manner that EARNEST believes to be fair and equitable. EARNEST has implemented policies and procedures that it believes are reasonably designed to mitigate and manage the potential conflicts of interest that may arise from side-by-side management. Specifically, EARNEST manages client accounts to model portfolios that are approved by its investment committee, and aggregates and then allocates securities transactions to client accounts in a manner that EARNEST believes to be fair and equitable.
Compensation. EARNEST personnel are paid a salary and a discretionary bonus. A portion of the bonus may consist of profit sharing or deferred compensation. EARNEST also matches a portion of employees’ 401(k) contributions, if any. The bonus is a function of client satisfaction with respect to investment results and service. Equity ownership is another component of compensation for certain portfolio managers. EARNEST is employee-owned.
Ultra Short Duration Fixed Income Fund
Sub-Advisor: Fort Washington
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Portfolio Manager/ Types of Accounts | Total Number of Other Accounts Managed | Total Other Assets (million) | Number of Other Accounts Managed subject to a Performance Based Advisory Fee | Total Other Assets Managed subject to a Performance Based Advisory Fee (million) | ||||
Scott D. Weston | ||||||||
Registered Investment Companies | 0 | $0 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 0 | $0 | 0 | $0 | ||||
Other Accounts | 8 | $452 | 0 | $0 | ||||
Brent A. Miller | ||||||||
Registered Investment Companies | 0 | $0 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 0 | $0 | 0 | $0 | ||||
Other Accounts | 8 | $452 | 0 | $0 | ||||
Ownership of Shares of the Fund . The following table indicates for the Ultra Short Duration Fixed Income Fund the dollar range of shares beneficially owned by the portfolio managers as of September 30, 2017:
Portfolio Managers | Dollar Range of Beneficial Ownership | |
Scott D. Weston | 0 | |
Brent A. Miller | 0 | |
Active Bond Fund
Sub-Advisor: Fort Washington
Portfolio Manager/ Types of Accounts | Total Number of Other Accounts Managed | Total Other Assets (million) | Number of Other Accounts Managed subject to a Performance Based Advisory Fee | Total Other Assets Managed subject to a Performance Based Advisory Fee (million) | ||||
Timothy J. Policinski | ||||||||
Registered Investment Companies | 1 | $57 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 1 | $627 | 0 | $0 | ||||
Other Accounts | 50 | $1,580 | 0 | $0 | ||||
Daniel J. Carter | ||||||||
Registered Investment Companies | 1 | $57 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 1 | $627 | 0 | $0 | ||||
Other Accounts | 50 | $1,580 | 0 | $0 | ||||
Ownership of Shares of the Fund . The following table indicates for the Fund, the dollar range of shares beneficially owned by the portfolio managers as of September 30, 2017:
Portfolio Managers | Dollar Range of Beneficial Ownership | |
Timothy J. Policinski | $1 - $10,000 | |
Daniel J. Carter | $100,001 - $500,000 | |
High Yield Fund
Sub-Advisor: Fort Washington
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Portfolio Manager/ Types of Accounts | Total Number of Other Accounts Managed | Total Other Assets (million) | Number of Other Accounts Managed subject to a Performance Based Advisory Fee | Total Other Assets Managed subject to a Performance Based Advisory Fee (million) | ||||
Brendan M. White | ||||||||
Registered Investment Companies | 1 | $454 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 2 | $615 | 0 | $0 | ||||
Other Accounts | 29 | $2,935 | 0 | $0 | ||||
Timothy Jossart | ||||||||
Registered Investment Companies | 1 | $454 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 2 | $615 | 0 | $0 | ||||
Other Accounts | 29 | $2,935 | 0 | $0 | ||||
Garrick Bauer | ||||||||
Registered Investment Companies | 1 | $454 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 2 | $615 | 0 | $0 | ||||
Other Accounts | 29 | $2,935 | 0 | $0 | ||||
Ownership of Shares of the Fund . The following table indicates for the Fund, the dollar range of shares beneficially owned by the portfolio managers as of September 30, 2017:
Portfolio Managers | Dollar Range of Beneficial Ownership | |
Brendan White | $500,001 - $1,000,000 | |
Timothy Jossart | $10,001 - $50,000 | |
Garrick Bauer | None | |
Conflicts of Interest . Actual or potential conflicts of interest may arise when a portfolio manager has management responsibilities to more than one account (including the Funds). This would include devotion of unequal time and attention to the management of the accounts, inability to allocate limited investment opportunities across a broad array of accounts and incentive to allocate opportunities to an account where the portfolio manager has a greater financial incentive, such as allocation opportunities for performance based accounts. Fort Washington has adopted policies and procedures it believes are reasonably designed to address such conflicts.
Compensation . All of Fort Washington’s portfolio managers receive a fixed base salary and annual performance bonuses. Bonuses are based primarily on the overall performance of Fort Washington as well as the pre-tax performance (relative to the appropriate benchmark: Barclays US Aggregate Bond Index for Active Bond Fund, Barclays Ba/B Index, with longer term deference to Barclays US High Yield Index for High Yield Fund, and Merrill Lynch 3 Month T-Bill Index for Ultra Short Duration Fixed Income Fund) of their respective asset category over a one-year and a three-year time horizon. Secondarily, portfolio managers are also assessed on their ability to retain clients and attract new clients. Additionally, a long-term retention plan was instituted in 2000, whereby certain investment professionals are periodically granted participation units with a 7-year cliff vesting schedule. The structure includes long-term vesting provisions. The percentage of compensation allocated to performance bonuses, asset-increase incentives and long-term incentive compensation is determined annually by the firm’s president and approved by the Board of Directors.
Fort Washington’s parent company also provides all personnel a defined benefit retirement plan, which provides a lifetime annuity upon retirement that is based on a percentage of final average pay and years of service under the plan.
Associates are also eligible to participate in a 401(k) plan. The 401(k) company match is 50% of the first 6% of earnings saved.
Mid Cap Value Fund
Sub-Advisor: LMCG
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Portfolio Manager/Types of Accounts | Total Number of Other Accounts Managed | Total Other Assets (million) | Number of Other Accounts Managed subject to a Performance Based Advisory Fee | Total Other Assets Managed subject to a Performance Based Advisory Fee (million) | ||||
R. Todd Vingers | ||||||||
Registered Investment Companies | 1 | $88.6 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 16 | $184.1 | 0 | $0 | ||||
Other Accounts | 20 | $205.6 | 0 | $0 | ||||
Jay C. Willadsen | ||||||||
Registered Investment Companies | 1 | $88.6 | 0 | 0 | ||||
Other Pooled Investment Vehicles | 16 | $184.1 | 0 | 0 | ||||
Other Accounts | 20 | $205.6 | 0 | 0 | ||||
Fund Ownership . The following table indicates for the Mid Cap Value Fund, the dollar range of shares beneficially owned by the Fund’s portfolio manager as of September 30, 2017.
Portfolio Manager | Dollar Range of Beneficial Ownership | |
R. Todd Vingers | $100,001 - $500,000 | |
Jay C. Willadsen | $100,001 - $500,000 | |
Small Cap Value Fund
Sub-Advisor: LMCG
Portfolio Manager/Types of Accounts | Total Number of Other Accounts Managed | Total Other Assets (million) | Number of Other Accounts Managed subject to a Performance Based Advisory Fee | Total Other Assets Managed subject to a Performance Based Advisory Fee (million) | ||||
R. Todd Vingers | ||||||||
Registered Investment Companies | 5 | $727.6 | 0 | 0 | ||||
Other Pooled Investment Vehicles | 21 | $381.3 | 0 | 0 | ||||
Other Accounts | 71 | $1,227.5 | 0 | 0 | ||||
The following table indicates for the Fund the dollar range of shares beneficially owned by the portfolio manager as of September 30, 2017:
Portfolio Manager | Dollar Range of Beneficial Ownership | |
R. Todd Vingers | $100,001 - $500,000 | |
Conflicts of Interest . LMCG’s portfolio managers are often responsible for managing one or more funds as well as other accounts, including proprietary accounts, separate accounts and other pooled investment vehicles. A portfolio manager may also manage a separate account or other pooled investment vehicle which may have materially higher fee arrangements than a Fund and may also have a performance-based fee. The side-by-side management of these funds and accounts may raise potential conflicts of interest relating to the allocation of investment opportunities and the aggregation and allocation of trades. LMCG has fiduciary responsibility to manage all client accounts in a fair and equitable manner. It seeks to provide best execution of all securities transactions and aggregate and then allocate securities to client accounts in a fair and timely manner. Similarly, trading in securities by LMCG personnel for their own accounts potentially could conflict with the interest of clients. LMCG has policies and procedures in place to detect, monitor and resolve these and other potential conflicts of interest that are inherent to its business as a registered investment adviser.
Compensation. Portfolio managers at LMCG are compensated through a combination of base salary and incentive bonus. LMCG’s incentive bonus plan for investment teams is a revenue-share model based on strategy performance relative to a peer group universe of retail and institutional managers. The incentive formula is based on the teams’ performance rankings within the universe for a blended time period which includes one year, three years, five years and since inception performance. Incentive bonuses are not calculated on specific client or specific Fund assets.
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Small Cap Fund
Sub-Advisor: The London Company
Portfolio Manager/Types of Accounts | Total Number of Other Accounts Managed | Total Other Assets (million) | Number of Other Accounts Managed subject to a Performance Based Advisory Fee | Total Other Assets Managed subject to a Performance Based Advisory Fee (million) | ||||
Stephen Goddard | ||||||||
Registered Investment Companies | 4 | $2,441 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 0 | $0 | 0 | $0 | ||||
Other Accounts | 576 | $8,086 | 2 | $7.0 | ||||
Jonathan Moody | ||||||||
Registered Investment Companies | 4 | $2,441 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 0 | $0 | 0 | $0 | ||||
Other Accounts | 576 | $8,086 | 0 | $0 | ||||
J. Brian Campbell | ||||||||
Registered Investment Companies | 4 | $2,441 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 0 | $0 | 0 | $0 | ||||
Other Accounts | 576 | $8,086 | 0 | $0 | ||||
Mark E. DeVaul | ||||||||
Registered Investment Companies | 4 | $2,441 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 0 | $0 | 0 | $0 | ||||
Other Accounts | 576 | $8,086 | 0 | $0 | ||||
Mid Cap Fund
Sub-Advisor: London Company of Virginia d/b/a The London Company.
Portfolio Manager/Types of Accounts | Total Number of Other Accounts Managed | Total Other Assets (million) | Number of Other Accounts Managed subject to a Performance Based Advisory Fee | Total Other Assets Managed subject to a Performance Based Advisory Fee (million) | ||||
Stephen Goddard | ||||||||
Registered Investment Companies | 4 | $1,895 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 0 | $0 | 0 | $0 | ||||
Other Accounts | 576 | $8,086 | 2 | $7.0 | ||||
Jonathan Moody | ||||||||
Registered Investment Companies | 4 | $1,895 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 0 | $0 | 0 | $0 | ||||
Other Accounts | 576 | $8,086 | 0 | $0 | ||||
J. Brian Campbell | ||||||||
Registered Investment Companies | 4 | $1,895 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 0 | $0 | 0 | $0 | ||||
Other Accounts | 576 | $8,086 | 0 | $0 | ||||
Mark E. DeVaul | ||||||||
Registered Investment Companies | 4 | $1,895 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 0 | $0 | 0 | $0 | ||||
Other Accounts | 576 | $8,086 | 0 | $0 | ||||
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Dollar Range of Beneficial Ownership | ||||
Portfolio Managers | Mid Cap Fund | Small Cap Fund | ||
Stephen Goddard | None | Over $1,000,000 | ||
Jonathan Moody | None | None | ||
J. Brian Campbell | None | None | ||
Mark E. DeVaul | None | None | ||
Conflicts of Interest . Actual or potential conflicts of interest may arise when the portfolio manager has management responsibilities for more than one client account including and not limited to the execution and allocation of investment opportunities, use of soft dollars and other brokerage practices, and personal securities trading. The London Company has adopted policies and procedures it believes are reasonably designed to address such conflicts.
Compensation. Portfolio managers are compensated through salary and bonus. In addition to base salaries, portfolio managers are eligible to receive bonus compensation based on their individual contribution to the research effort as well as client retention, sales and overall firm performance. They also have a potential for ownership after a reasonable tenure with the firm.
Arbitrage Fund
Sub-Advisor: Longfellow
Portfolio Manager/ Types of Accounts | Total Number of Other Accounts Managed | Total Other Assets (million) | Number of Other Accounts Managed subject to a Performance Based Advisory Fee | Total Other Assets Managed subject to a Performance Based Advisory Fee (million) | ||||
Barbara J. McKenna | ||||||||
Registered Investment Companies | 3 | $351 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 2 | $230 | 0 | $0 | ||||
Other Accounts | 37 | $4,434 | 1 | $5 | ||||
David C. Stuehr | ||||||||
Registered Investment Companies | 3 | $351 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 2 | $230 | 0 | $0 | ||||
Other Accounts | 20 | $173 | 1 | $5 | ||||
Andrew G. Bail | ||||||||
Registered Investment Companies | 1 | $215 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 1 | $25 | 0 | $0 | ||||
Other Accounts | 1 | $5 | 1 | $5 | ||||
Alexander R. Graham | ||||||||
Registered Investment Companies | 1 | $215 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 1 | $25 | 0 | $0 | ||||
Other Accounts | 1 | $2 | 1 | $5 | ||||
Merger Arbitrage Fund
Sub-Advisor: Longfellow
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Portfolio Manager/ Types of Accounts | Total Number of Other Accounts Managed | Total Other Assets (million) | Number of Other Accounts Managed subject to a Performance Based Advisory Fee | Total Other Assets Managed subject to a Performance Based Advisory Fee (million) | ||||
Barbara J. McKenna | ||||||||
Registered Investment Companies | 3 | $378 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 2 | $230 | 0 | $0 | ||||
Other Accounts | 37 | $4,434 | 1 | $5 | ||||
David C. Stuehr | ||||||||
Registered Investment Companies | 3 | $378 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 2 | $230 | 0 | $0 | ||||
Other Accounts | 20 | $173 | 1 | $5 | ||||
Andrew G. Bail | ||||||||
Registered Investment Companies | 1 | $242 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 1 | $25 | 0 | $0 | ||||
Other Accounts | 1 | $5 | 1 | $5 | ||||
Alexander R. Graham | ||||||||
Registered Investment Companies | 1 | $242 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 1 | $25 | 0 | $0 | ||||
Other Accounts | 1 | $5 | 1 | $5 | ||||
Dollar Range of Beneficial Ownership | ||||
Portfolio Managers | Arbitrage Fund | Merger Arbitrage Fund | ||
Barbara J. McKenna | None | None | ||
David C. Stuehr | $1 - $10,000 | $1 - $10,000 | ||
Andrew G. Bail | None | None | ||
Alexander R. Graham | $50,001 - $100,000 | $10,001 - $50,000 | ||
Conflicts of Interest . Actual or potential conflicts of interest may arise when a portfolio manager has management responsibilities to more than one account (including the Arbitrage Fund and Merger Arbitrage Fund). This would include devotion of unequal time and attention to the management of the accounts and the inability to allocate limited investment opportunities across a broad array of accounts. Longfellow has adopted policies and procedures it believes are reasonably designed to address such conflicts.
Compensation. Longfellow’s professionals receive a base salary that considers their responsibilities and their experience. They also are awarded a significant annual bonus based upon their specific contributions to the success and profitability of the firm. Longfellow is 100% owned by 8 employees. Owners receive a portion of the firm’s profits in addition to base salary and bonus.
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Premium Yield Equity Fund
Sub-Advisor: Miller/Howard
Portfolio Manager/ Types of Accounts | Total Number of Other Accounts Managed | Total Other Assets (million) | Number of Other Accounts Managed subject to a Performance Based Advisory Fee | Total Other Assets Managed subject to a Performance Based Advisory Fee (million) | ||||
Lowell G. Miller | ||||||||
Registered Investment Companies | 3 | $321.2 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 2 | $54.1 | 0 | $0 | ||||
Other Accounts | 3,014 | $5,157.1 | 0 | $0 | ||||
Bryan J. Spratt | ||||||||
Registered Investment Companies | 3 | $321.2 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 2 | $54.1 | 0 | $0 | ||||
Other Accounts | 3,014 | $5,157.1 | 0 | $0 | ||||
John E. Leslie III | ||||||||
Registered Investment Companies | 3 | $321.2 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 2 | $54.1 | 0 | $0 | ||||
Other Accounts | 3,014 | $5,157.1 | 0 | $0 | ||||
Deepak Ahuja | ||||||||
Registered Investment Companies | 3 | $321.2 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 2 | $54.1 | 0 | $0 | ||||
Other Accounts | 3,014 | $5,157.1 | 0 | $0 | ||||
Gregory L. Powell | ||||||||
Registered Investment Companies | 3 | $321.2 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 2 | $54.1 | 0 | $0 | ||||
Other Accounts | 3,014 | $5,157.1 | 0 | $0 | ||||
Fund Ownership . The following table indicates for the Premium Yield Equity Fund, the dollar range of shares beneficially owned by the Fund’s portfolio managers as of September 30, 2017.
Portfolio Managers | Dollar Range of Beneficial Ownership | |
Lowell G. Miller | None | |
Bryan J. Spratt | None | |
John E. Leslie III | None | |
Deepak Ahuja | $10,001 - $50,000 | |
Gregory L. Powell | None | |
Conflicts of Interest . As an investment advisor to multiple types of clients, Miller/Howard recognizes that actual or potential conflicts of interest may arise. For example, conflicts of interest could result from a portfolio managers’ management of multiple accounts for multiple clients, the allocation and execution of investment opportunities, multiple fee arrangements, and personal trading. Miller/Howard addresses potential conflicts by developing policies and procedures it believes are reasonably designed to treat all clients in a fair and equitable manner. Miller/Howard’s policies and procedures cover such issues as execution of portfolio transactions, aggregation and allocation of trades, brokerage and soft dollars. Miller/Howard has adopted a Code of Ethics that addresses rules on personal trading and insider information which all employees are required to observe. Miller/Howard has also adopted policies and procedures it believes are reasonably designed to address such conflicts.
Compensation. Miller/Howard’s investment professionals receive a base salary in line with industry and geographic standards, bonus based on performance, company contribution to a retirement plan, participation in the company health insurance plan and profit sharing based on ownership. Investment professionals are evaluated annually by the company’s Board of Directors for their contribution to portfolio performance as well as participation in proprietary research projects that the firm conducts on an ongoing basis. Mr. Miller, Mr. Spratt and Mr. Leslie are currently equity owners in the firm, and each receives an annual share of firm profits available after all expenses are paid. Each member of the Investment Team shares in the progress of the firm and shares responsibility for that progress through stock selection, monitoring, and the development of the firm’s information and research
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expertise. The firm makes no real distinction between “portfolio manager” and “analyst,” and each member of the investment team is evaluated based on his or her performance with regard to management, analysis, and basic research.
Sands Capital Select Growth Fund
Sub-Advisor: Sands Capital
Portfolio Manager/ Types of Accounts | Total Number of Other Accounts Managed | Total Other Assets (million) | Number of Other Accounts Managed subject to a Performance Based Advisory Fee | Total Other Assets Managed subject to a Performance Based Advisory Fee (million) | ||||
Frank M. Sands, CFA | ||||||||
Registered Investment Companies* | 4 | $2,715 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 10 | $895 | 0 | $0 | ||||
Other Accounts | 329 | $14,784 | 10 | $1,959 | ||||
A. Michael Sramek, CFA | ||||||||
Registered Investment Companies* | 4 | $2,715 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 10 | $895 | 0 | $0 | ||||
Other Accounts | 329 | $14,784 | 10 | $1,959 | ||||
Wesley A. Johnston, CFA | ||||||||
Registered Investment Companies* | 4 | $2,715 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 10 | $895 | 0 | $0 | ||||
Other Accounts | 329 | $14,784 | 10 | $1,959 | ||||
Thomas H. Trentman, CFA** | ||||||||
Registered Investment Companies* | 3 | $2,716 | 0 | $0 | ||||
Other Pooled Investment Vehicles | 9 | $908 | 0 | $0 | ||||
Other Accounts | 389 | $15,254 | 10 | $2,017 | ||||
*Touchstone Sands Capital Select Growth Fund is not included in the count.
** As of November 1, 2017.
Fund Ownership . The following table indicates for the Sands Capital Select Growth Fund, the dollar range of shares beneficially owned by the Fund’s portfolio manager as of September 30, 2017.
Portfolio Manager | Dollar Range of Beneficial Ownership | |
Frank M. Sands | None | |
A. Michael Sramek | None | |
Wesley A. Johnston | None | |
Thomas H. Trentman* | None | |
*As of November 1, 2017.
Sands Capital’s performance adjustment with respect to the Sands Capital Select Growth Fund’s performance is calculated and paid monthly by comparing the Fund’s performance to the performance of the Fund’s benchmark, the Russell 1000 ® Growth Index, over a “performance period.” The performance period consists of a rolling 12-month period that includes the current month for which performance is available plus the previous 11 months. The Fund’s annual performance adjustment rate is multiplied by the average net assets of the Fund over the performance period, which is then multiplied by a fraction, the numerator of which is the number of days in the current month and the denominator of which is 365 (366 in leap years). The resulting amount is then added to (in the case of over-performance) or subtracted from (in the case of underperformance) the Sands Capital’s base fee, provided such over-performance or underperformance exceeds a designated “hurdle rate.”
Conflicts of Interest . As an investment advisor to a variety of clients, Sands Capital recognizes there may be actual or potential conflicts of interest inherent in its business. For example, conflicts of interest could result from a portfolio managers’ management of multiple accounts for multiple clients, the execution and allocation of investment opportunities, the use of brokerage commission to obtain research, and personal trading by firm employees. Sands Capital has addressed these conflicts by developing policies and procedures it believes are reasonably designed to treat all clients in a fair and equitable manner over time. Sands Capital’s policies and procedures address such issues as execution of portfolio transactions, aggregation and allocation of trades, directed
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brokerage, and the use of brokerage commissions. Additionally, Sands Capital maintains a Code of Ethics that addresses rules on personal trading and insider information. Sands Capital has also adopted policies and procedures it believes are reasonably designed to address such conflicts.
Other Accounts . Sands Capital employs a growth strategy for all investors called the Sands Capital Large Cap Growth Equity strategy (“Select Growth”) which is its primary strategy. As of September 30, 2017, the Select Growth’s assets under management totaled $20.8 billion of the firm’s $40.5 billion assets under management.
Compensation. Investment professionals benefit from a salary competitive in the industry, an annual qualitative bonus based on subjective review of the employees’ overall contribution, and a standard profit sharing plan and 401(k) plan. Additional incentives include equity participation. The investment professionals also participate in an investment results bonus. The investment results bonus is calculated from the pre-tax performance variance of the Sands Capital composite returns and their respective benchmarks over 1, 3, and 5 year periods, weighted towards the 3 and 5 year results.
THE ADMINISTRATOR
The Advisor entered into an Administration Agreement with the Trust, whereby the Advisor is responsible for: supplying executive and regulatory compliance services; supervising the preparation of tax returns; coordinating the preparation of reports to shareholders and reports to, and filings with, the SEC and state securities authorities, as well as materials for meetings of the Board of Trustees; calculating the daily NAV per share; and maintaining the financial books and records of each Fund.
For its services through December 31, 2014, the Advisor’s annual administration fee was:
0.20% on the first $6 billion of the aggregate average daily net assets;
0.16% on the next $4 billion of aggregate average daily net assets; and
0.12% on the aggregate average daily net assets over $10 billion.
The fee was computed and allocated among the Touchstone Fund Complex (excluding Touchstone Institutional Money Market Fund, Touchstone Institutional Funds Trust, and Touchstone Variable Series Trust) on the basis of relative daily net assets.
Effective as of January 1, 2015, the Advisor’s annual administration fee is:
0.145% on the first $20 billion of the aggregate average daily net assets;
0.11% on the next $10 billion of aggregate average daily net assets;
0.09% on the next $10 billion of aggregate average daily net assets; and
0.07% on the aggregate average daily net assets over $40 billion.
The fee is computed and allocated among the Touchstone Fund Complex (excluding Touchstone Institutional Funds Trust) on the basis of relative daily net assets.
The Advisor has engaged BNY Mellon as the sub-administrative and transfer agent to the Trust. BNY Mellon provides administrative, accounting, and transfer agent services to the Trust and is compensated directly by the Advisor, not the Trust. (See “Transfer and Sub-Administrative Agent” in this SAI).
The following shows administration fees incurred by the Funds listed below for three most recent fiscal years (or periods) ended September 30.
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Administration Fees Paid | ||||||||||||
Fund | 2015 | 2016 | 2017 | |||||||||
Active Bond Fund* | $ | 156,874 | $ | 151,294 | $ | 163,271 | ||||||
Arbitrage Fund | $ | 227,764 | $ | 183,277 | $ | 288,166 | ||||||
Emerging Markets Small Cap Fund** | $ | 484,082 | $ | 56,131 | $ | 15,916 | ||||||
High Yield Fund* | $ | 397,704 | $ | 300,398 | $ | 339,773 | ||||||
Merger Arbitrage Fund | $ | 455,127 | $ | 290,440 | $ | 290,322 | ||||||
Mid Cap Fund | $ | 908,700 | $ | 1,028,047 | $ | 1,055,003 | ||||||
Mid Cap Value Fund | $ | 528,342 | $ | 551,588 | $ | 880,263 | ||||||
Premium Yield Equity Fund | $ | 294,151 | $ | 217,084 | $ | 196,203 | ||||||
Sands Capital Select Growth Fund | $ | 8,921,142 | $ | 5,843,408 | $ | 3,733,391 | ||||||
Small Cap Fund | $ | 1,186,303 | $ | 945,574 | $ | 687,276 | ||||||
Small Cap Value Fund | $ | 106,472 | $ | 110,483 | $ | 208,655 | ||||||
Total Return Bond Fund | $ | 255,348 | $ | 295,685 | $ | 339,166 | ||||||
Ultra Short Duration Fixed Income Fund | $ | 922,569 | $ | 837,913 | $ | 935,920 | ||||||
*Prior to January 27, 2017 fees paid by the Predecessor Funds.
**Prior to April 19, 2016, the Fund was known as Touchstone Emerging Markets Equity Fund.
TOUCHSTONE SECURITIES
Touchstone Securities, Inc. (“Touchstone Securities” or the “Distributor”) and the Trust are parties to a distribution agreement (“Distribution Agreement”) with respect to the Funds. The Distributor’s principal place of business is 303 Broadway, Suite 1100, Cincinnati, Ohio 45202. The Distributor is a registered broker-dealer, and an affiliate of the Advisor by reason of common ownership. The Distributor is obligated to sell shares on a best efforts basis only against purchase orders for the shares. Shares of each Fund are offered to the public on a continuous basis. The Distributor currently allows concessions to dealers who sell shares of the Funds. The Distributor retains that portion of the sales charge that is not re-allowed to dealers who sell shares of a Fund. The Distributor retains the entire sales charge on all direct initial investments in a Fund and on all investments in accounts with no designated dealer of record.
The table below sets forth the aggregate underwriting commissions on sales of the Funds, including the amounts the Distributor paid to broker-dealers, the amounts the Distributor earned as a broker-dealer in the selling network, and the amounts of underwriting commissions retained by the Distributor for the three most recent fiscal years ended September 30, 2017, 2016 and 2015.
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Fund | Aggregate Underwriting Commissions on Sales | Amount Retained in Underwriting Commissions | ||||||
Active Bond Fund* | ||||||||
2017 | $ | 14,183 | $ | 2,551 | ||||
2016 | $ | 10,641 | $ | 2,136 | ||||
2015 | $ | 42,843 | $ | 12,675 | ||||
Arbitrage Fund | ||||||||
2017 | $ | 37,665 | $ | 6,716 | ||||
2016 | $ | 22,846 | $ | 4,183 | ||||
2015 | $ | 11,252 | $ | 1,948 | ||||
Emerging Markets Small Cap Fund** | ||||||||
2017 | $ | 7,722 | $ | 985 | ||||
2016 | $ | 6,371 | $ | 1,365 | ||||
2015 | $ | 2,820 | $ | 478 | ||||
High Yield Fund* | ||||||||
2017 | $ | 16,018 | $ | 2,961 | ||||
2016 | $ | 22,793 | $ | 4,106 | ||||
2015 | $ | 31,788 | $ | 5,576 | ||||
Merger Arbitrage Fund | ||||||||
2017 | $ | 9,092 | $ | 1,317 | ||||
2016 | $ | 581 | $ | 124 | ||||
2015 | $ | 1,100 | $ | 141 | ||||
Mid Cap Fund | ||||||||
2017 | $ | 113,459 | $ | 17,314 | ||||
2016 | $ | 106,184 | $ | 15,460 | ||||
2015 | $ | 317,921 | $ | 47,592 | ||||
Mid Cap Value Fund | ||||||||
2017 | $ | 79,938 | $ | 11,880 | ||||
2016 | $ | 27,193 | $ | 3,869 | ||||
2015 | $ | 65,505 | $ | 10,381 | ||||
Premium Yield Equity Fund | ||||||||
2017 | $ | 41,906 | $ | 6,717 | ||||
2016 | $ | 24,680 | $ | 3,688 | ||||
2015 | $ | 143,725 | $ | 22,131 | ||||
Sands Capital Select Growth Fund | ||||||||
2017 | $ | 89,388 | $ | 14,381 | ||||
2016 | $ | 27,092 | $ | 4,870 | ||||
2015 | $ | 84,522 | $ | 14,045 | ||||
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Fund | Aggregate Underwriting Commissions on Sales | Amount Retained in Underwriting Commissions | ||||||
Small Cap Fund | ||||||||
2017 | $ | 1,759 | $ | 304 | ||||
2016 | $ | 4,563 | $ | 739 | ||||
2015 | $ | 10,649 | $ | 2,096 | ||||
Small Cap Value Fund | ||||||||
2017 | $ | 16,015 | $ | 3,311 | ||||
2016 | $ | 2,983 | $ | 559 | ||||
2015 | $ | 12,567 | $ | 1,730 | ||||
Total Return Bond Fund | ||||||||
2017 | $ | 3,094 | $ | 503 | ||||
2016 | $ | 9,255 | $ | 1,529 | ||||
2015 | $ | 44,776 | $ | 9,391 | ||||
Ultra Short Duration Fixed Income Fund | ||||||||
2017 | $ | 9,173 | $ | 1,375 | ||||
2016 | $ | 8,819 | $ | 1,129 | ||||
2015 | $ | 8,735 | $ | 1,137 | ||||
*Amounts shown are for the Predecessor Funds prior to January 27, 2017.
**Prior to April 19, 2016, the Fund was known as Touchstone Emerging Markets Equity Fund.
The Distributor retains the contingent deferred sales charge on redemptions of Class C shares of the Funds that are subject to a contingent deferred sales charge. For the three most recent fiscal years ended September 30, 2017, 2016 and 2015, the Distributor retained the following contingent deferred sales charges:
Amount Retained from CDSC on Class C Shares | ||||||||||||
Fund | 2015 | 2016 | 2017 | |||||||||
Active Bond Fund* | $ | 115 | $ | 1,030 | $ | 19 | ||||||
Arbitrage Fund | $ | 1,202 | $ | 0 | $ | 97 | ||||||
Emerging Markets Small Cap Fund** | $ | 756 | $ | 2 | $ | 16 | ||||||
High Yield Fund* | $ | 593 | $ | 84 | $ | 13 | ||||||
Merger Arbitrage Fund | $ | 118 | $ | 0 | $ | 0 | ||||||
Mid Cap Fund | $ | 1,852 | $ | 1,992 | $ | 693 | ||||||
Mid Cap Value Fund | $ | 0 | $ | 390 | $ | 935 | ||||||
Premium Yield Equity Fund | $ | 618 | $ | 133 | $ | 0 | ||||||
Sands Capital Select Growth Fund | $ | 4,650 | $ | 721 | $ | 3,501 | ||||||
Small Cap Fund | $ | 97 | $ | 130 | $ | 0 | ||||||
Small Cap Value Fund | $ | 20 | $ | 0 | $ | 3 | ||||||
Total Return Bond Fund | $ | 1 | $ | 39 | $ | 467 | ||||||
Ultra Short Duration Fixed Income Fund | $ | 3,501 | $ | 306 | $ | 256 | ||||||
*Amounts shown are for the Predecessor Funds prior to January 27, 2017.
**Prior to April 19, 2016, the Fund was known as Touchstone Emerging Markets Equity Fund.
Ms. McGruder may be deemed to be an affiliate of the Distributor because she is a Director of the Distributor and an officer of affiliates of the Distributor. Ms. McGruder, by reason of such affiliation, may directly or indirectly be deemed to receive benefits from the underwriting fees paid to the Distributor.
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The Distribution Agreement shall remain in effect for a period of two years after the effective date of the agreement and is renewable annually thereafter. The Distribution Agreement may be terminated as to any Fund at any time by (i) the Trust, (a) by the vote of a majority of the Trustees of the Trust who are not “interested persons” of the Trust or the Distributor, (b) by vote of the Board of the Trust, or (c) by the “vote of majority of the outstanding voting securities” of the Fund, or (ii) by the Distributor, in any case without payment of any penalty on not more than 60 days’ nor less than 30 days’ written notice to the other party. The Distribution Agreement shall also automatically terminate in the event of its assignment.
Touchstone Securities may pay from its own resources cash bonuses or other incentives to selected dealers in connection with the sale of shares of the Funds. On some occasions, such bonuses or incentives may be conditioned upon the sale of a specified minimum dollar amount of the shares of the Funds or other funds in the Touchstone Fund Complex during a specific period of time. Such bonuses or incentives may include financial assistance to dealers in connection with conferences, sales or training programs for their employees, seminars for the public, advertising, sales campaigns and other dealer-sponsored programs or events. The Advisor, at its expense, may also provide additional compensation to certain affiliated and unaffiliated dealers, financial intermediaries or service providers for distribution, administrative or shareholder servicing activities. The Advisor may also reimburse the Distributor for making these payments.
Touchstone Securities, at its expense, may provide additional compensation to financial intermediaries which sell or arrange for the sale of shares of the Touchstone Funds. Other compensation may be offered to the extent not prohibited by federal or state laws or any self-regulatory agency, such as the Financial Industry Regulatory Authority (“FINRA”).
Touchstone Securities makes payments for entertainment events it deems appropriate, subject to it s guidelines and applicable law. These payments may vary depending upon the nature of the event or the relationship. As of December 31, 2017, the Distributor anticipates that the following broker-dealers or their affiliates will receive additional payments as described in the Fund’s prospectus and SAI:
Name of Broker-Dealer |
American Enterprise Investment Services Inc. |
First Clearing LLC / Wells Fargo Advisors LLC |
First Command Financial Planning, Inc. |
Janney Montgomery Scott LLC |
LPL Financial Services |
Merrill Lynch, Pierce, Fenner & Smith Inc. |
Morgan Stanley Wealth Management |
Pershing LLC |
Raymond James & Associates, Inc. |
RBC Capital Markets Corporation |
UBS Financial Services, Inc. |
Touchstone Securities is motivated to make payments to the broker-dealers described above because they promote the sale of Fund shares and the retention of those investments by clients of financial advisors. To the extent financial advisors sell more shares of the Funds or retain shares of the Funds in their clients’ accounts, the Advisor benefits from the incremental management and other fees paid to the Advisor by the Funds with respect to those assets.
Your financial intermediary may charge you additional fees or commissions other than those disclosed in this SAI. You can ask your financial intermediary about any payments it receives from Touchstone Securities or the Funds, as well as about fees or commissions it charges. You should consult disclosures made by your financial intermediary at the time of purchase.
The Funds may compensate dealers, including the Distributor and its affiliates, based on the average balance of all accounts in the Funds for which the dealer is designated as the party responsible for the account.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICE ARRANGEMENTS
Certain Funds have adopted a distribution or shareholder servicing plan for certain classes of shares which permits a Fund to pay for expenses incurred in the distribution and promotion of its shares pursuant to Rule 12b-1 under the 1940 Act and account maintenance and other shareholder services in connection with maintaining such account. Touchstone Securities may provide
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those services itself or enter into arrangements under which third parties provide such services and are compensated by the Distributor.
Class A Shares. With respect to its Class A shares, each Fund has adopted a plan of distribution and shareholder service (the “Class A Plan”) under which the Distributor is paid up to, but not exceeding, twenty-five basis points (0.25%) for distribution payments. Of the total compensation authorized, the Fund may pay for shareholder services in an amount up to 0.25%.
Class C Shares. With respect to its Class C shares, each Fund has adopted a plan of distribution and shareholder service (the “Class C Plan” and, together with the Class A Plan, the “Plans”) under which the Distributor is paid up to, but not exceeding one hundred basis points (1.00%) in the aggregate, with twenty-five basis points (0.25%) for shareholder service fees and seventy-five basis points (0.75%) for distribution payments. The Ultra Short Duration Fixed Income Fund intends to limit the amount of the 12b-1 fees for Class C shares to seventy-five basis points (0.75%) for at least one year from the date of the prospectus relating to the Fund.
Class S Shares. With respect to its Class S shares, the Fund has adopted a plan of distribution and shareholder service (the “Class S Plan”) under which the Distributor is paid up to, but not exceeding, 0.50% of average daily net assets that are attributable to Class S shares (of which up to 0.50% is a distribution fee and up to 0.25% is a shareholder servicing fee).
Class Z Shares. With respect to its Class Z shares, each Fund has adopted a shareholder service plan (the “Class Z Plan”) under which the Distributor is paid up to, but not exceeding, twenty-five basis points (0.25%) for shareholder service fees.
General Information. In connection with the distribution of shares, the Distributor may use the payments for: (i) compensation for its services in distribution assistance; or (ii) payments to financial institutions and intermediaries such as banks, savings and loan associations, insurance companies and investment counselors, broker-dealers, mutual fund supermarkets and the Distributor’s affiliates and subsidiaries as compensation for services or reimbursement of expenses incurred in connection with distribution assistance.
In addition, the Distributor may use payments to provide or enter into written agreements with service providers who will provide shareholder services, including: (i) maintaining accounts relating to shareholders that invest in shares; (ii) arranging for bank wires; (iii) responding to client inquiries relating to the services performed by the Distributor or service providers; (iv) responding to inquiries from shareholders concerning their investment in shares; (v) assisting shareholders in changing dividend options, account designations and addresses; (vi) providing information periodically to shareholders showing their position in shares; (vii) forwarding shareholder communications from the Funds such as proxies, shareholder reports, annual reports, dividend distribution and tax notices to shareholders; (viii) processing purchase, exchange and redemption requests from shareholders and placing orders with the Funds or the service providers; (ix) processing dividend payments from the Funds on behalf of shareholders; and (x) providing such other similar services as a Fund may reasonably request.
Agreements implementing the Plans (the “Implementation Agreements”), including agreements with dealers wherein such dealers agree for a fee to act as agents for the sale of the Funds’ shares, are in writing and have been approved by the Board. All payments made pursuant to the Plans are made in accordance with written Implementation Agreements. Some financial intermediaries charge fees in excess of the amounts available under the Plans, in which case the Advisor pays the additional fees.
The continuance of the Plans and the Implementation Agreements must be specifically approved at least annually by a vote of the Trust’s Board and by a vote of the Independent Trustees who have no direct or indirect financial interest in the Plans or any Implementation Agreement at a meeting called for the purpose of voting on such continuance. A Plan may be terminated at any time by a vote of a majority of the Independent Trustees or by a vote of the holders of a majority of the outstanding shares of a Fund or the applicable class of a Fund. In the event a Plan is terminated in accordance with its terms, the affected Fund (or class) will not be required to make any payments for expenses incurred by the Distributor after the termination date. Each Implementation Agreement terminates automatically in the event of its assignment and may be terminated at any time by a vote of a majority of the Independent Trustees or by a vote of the holders of a majority of the outstanding shares of a Fund (or the applicable class) on not more than 60 days’ written notice to any other party to the Implementation Agreement. The Plans may not be amended to increase materially the amount to be spent for distribution without shareholder approval. All material amendments to the Plans must be approved by a vote of the Trust’s Board and by a vote of the Independent Trustees.
In approving the Plans, the Trustees determined, in the exercise of their business judgment and in light of their fiduciary duties as Trustees, that there is a reasonable likelihood that the Plans will benefit the Funds and their shareholders. The Board believes that expenditure of the Funds’ assets for distribution expenses under the Plans should assist in the growth of the Funds, which will benefit each Fund and its shareholders through increased economies of scale, greater investment flexibility, greater portfolio diversification and less chance of disruption of planned investment strategies. The Plans will be renewed only if the Trustees make
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a similar determination for each subsequent year of the Plans. There can be no assurance that the benefits anticipated from the expenditure of the Funds’ assets for distribution will be realized. While the Plans are in effect, all amounts spent by the Funds pursuant to the Plans and the purposes for which such expenditures were made must be reported quarterly to the Board for its review. Distribution expenses attributable to the sale of more than one class of shares of a Fund will be allocated at least annually to each class of shares based upon the ratio in which the sales of each class of shares bears to the sales of all the shares of the Fund. In addition, the selection and nomination of those Trustees who are not interested persons of the Trust are committed to the discretion of the Independent Trustees during such period.
Jill T. McGruder, as an interested person of the Trust, may be deemed to have a financial interest in the operation of the Plans and the Implementation Agreements.
The Funds paid the following in distribution and shareholder servicing fees for the fiscal year ended September 30, 2017:
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12b-1 and Shareholder Service Plan Expenses | ||||||||||||||||||||||||
Fund | Printing and Mailing | Distribution Services | Compensation to Broker Dealers | Compensation to Sales Personnel | Service Providers | Total | ||||||||||||||||||
Active Bond Fund* | ||||||||||||||||||||||||
Class A | $ | 225 | $ | 26,522 | $ | 32,199 | $ | 253 | $ | 0 | $ | 59,199 | ||||||||||||
Class C | $ | 68 | $ | 10,173 | $ | 44,573 | $ | 12 | $ | 0 | $ | 54,826 | ||||||||||||
Arbitrage Fund | ||||||||||||||||||||||||
Class A | $ | 56 | $ | 9,388 | $ | 9,229 | $ | 4,727 | $ | 0 | $ | 23,400 | ||||||||||||
Class C | $ | 100 | $ | 34,596 | $ | 47,783 | $ | 7,529 | $ | 0 | $ | 90,008 | ||||||||||||
Emerging Markets Small Cap Fund** | ||||||||||||||||||||||||
Class A | $ | 12 | $ | 1,578 | $ | 2,125 | $ | 3,414 | $ | 0 | $ | 7,129 | ||||||||||||
Class C | $ | 8 | $ | 2,682 | $ | 5,521 | $ | 314 | $ | 0 | $ | 8,525 | ||||||||||||
High Yield Fund* | ||||||||||||||||||||||||
Class A | $ | 167 | $ | 15,315 | $ | 27,255 | $ | 5,411 | $ | 0 | $ | 48,148 | ||||||||||||
Class C | $ | 180 | $ | 28,864 | $ | 115,978 | $ | 789 | $ | 0 | $ | 145,811 | ||||||||||||
Merger Arbitrage Fund | ||||||||||||||||||||||||
Class A | $ | 120 | $ | 10,624 | $ | 20,318 | $ | 4,626 | $ | 0 | $ | 35,688 | ||||||||||||
Class C | $ | 159 | $ | 19,716 | $ | 105,740 | $ | 761 | $ | 0 | $ | 126,376 | ||||||||||||
Mid Cap Fund | ||||||||||||||||||||||||
Class A | $ | 347 | $ | 35,489 | $ | 58,216 | $ | 11,593 | $ | 0 | $ | 105,645 | ||||||||||||
Class C | $ | 719 | $ | 144,464 | $ | 418,349 | $ | 20,380 | $ | 0 | $ | 583,912 | ||||||||||||
Class Z | N/A | N/A | $ | 58,007 | N/A | N/A | $ | 58,007 | ||||||||||||||||
Mid Cap Value Fund | ||||||||||||||||||||||||
Class A | $ | 144 | $ | 21,436 | $ | 19,665 | $ | 11,713 | $ | 0 | $ | 52,958 | ||||||||||||
Class C | $ | 91 | $ | 49,184 | $ | 22,215 | $ | 15,925 | $ | 0 | $ | 87,415 | ||||||||||||
Premium Yield Equity Fund | ||||||||||||||||||||||||
Class A | $ | 213 | $ | 18,901 | $ | 36,436 | $ | 4,032 | $ | 0 | $ | 59,582 | ||||||||||||
Class C | $ | 296 | $ | 46,236 | $ | 187,838 | $ | 3,293 | $ | 0 | $ | 237,663 | ||||||||||||
Sands Capital Select Growth Fund | ||||||||||||||||||||||||
Class A | $ | 906 | $ | 91,500 | $ | 154,466 | $ | 6,859 | $ | 0 | $ | 253,731 | ||||||||||||
Class C | $ | 1,032 | $ | 125,533 | $ | 705,865 | $ | 2,668 | $ | 0 | $ | 835,098 | ||||||||||||
Class Z | N/A | N/A | $ | 1,826,919 | N/A | N/A | $ | 1,826,919 | ||||||||||||||||
Small Cap Fund | ||||||||||||||||||||||||
Class A | $ | 190 | $ | 24,578 | $ | 31,149 | $ | 1,504 | $ | 0 | $ | 57,421 | ||||||||||||
Class C | $ | 147 | $ | 24,733 | $ | 97,488 | $ | 357 | $ | 0 | $ | 122,725 | ||||||||||||
Small Cap Value Fund | ||||||||||||||||||||||||
Class A | $ | 1,632 | $ | 95,503 | $ | 220,499 | $ | 18,192 | $ | 0 | $ | 335,826 | ||||||||||||
Class C | $ | 17 | $ | 2,576 | $ | 10,470 | $ | 110 | $ | 0 | $ | 13,173 | ||||||||||||
Total Return Bond Fund | ||||||||||||||||||||||||
Class A | $ | 54 | $ | 9,924 | $ | 6,960 | $ | 744 | $ | 0 | $ | 17,682 | ||||||||||||
Class C | $ | 27 | $ | 6,008 | $ | 15,685 | $ | 700 | $ | 0 | $ | 22,420 | ||||||||||||
Ultra Short Duration Fixed Income Fund | ||||||||||||||||||||||||
Class A | $ | 101 | $ | 12,032 | $ | 14,725 | $ | 9,745 | $ | 0 | $ | 36,603 | ||||||||||||
Class C | $ | 73 | $ | 12,884 | $ | 38,890 | $ | 483 | $ | 0 | $ | 52,330 | ||||||||||||
Class S | N/A | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||
Class Z | N/A | N/A | $ | 655,449 | N/A | N/A | $ | 655,449 | ||||||||||||||||
*Amounts shown are for the Predecessor Funds prior to January 27, 2017.
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**Prior to April 19, 2016, the Fund was known as Touchstone Emerging Markets Equity Fund.
BROKERAGE TRANSACTIONS
Decisions to buy and sell securities for the Funds and the placing of the Funds’ securities transactions and negotiation of commission rates where applicable are made by the Sub-Advisors and are subject to oversight by the Advisor and the Board. In the purchase and sale of portfolio securities, the sub-advisor’s primary objective will be to obtain the most favorable price and execution for a Fund, taking into account such factors as the overall direct net economic result to a Fund (including commissions, which may not be the lowest available but ordinarily should not be higher than the generally prevailing competitive range), the financial strength and stability of the broker, the efficiency with which the transaction will be effected, the ability to effect the transaction at all where a large block is involved and the availability of the broker or dealer to stand ready to execute possibly difficult transactions in the future.
Each sub-advisor is specifically authorized, subject to certain limitations, to pay a trading commission to a broker who provides research services that is higher than the amount of trading commission another broker would have charged for the same transaction. This excess commission recognizes the additional research services rendered by the broker, but only if the sub-advisor determines in good faith that the excess commission is reasonable in relation to the value of the research services provided and that a Fund derives or will derive a reasonably significant benefit from such research services.
Research services include securities and economic analyses, reports on issuers’ financial conditions and future business prospects, newsletters and opinions relating to interest trends, general advice on the relative merits of possible investment securities for the Funds and statistical services and information with respect to the availability of securities or purchasers or sellers of securities. Although this information is useful to the Funds and the sub-advisors, it is not possible to place a dollar value on it. Research services furnished by brokers through whom a Fund effects securities transactions may be used by the sub-advisor in servicing all of its accounts and not all such services may be used by the Sub-Advisor in connection with a Fund.
The Funds have no obligation to deal with any broker or dealer in the execution of securities transactions. However, the Funds may execute securities transactions on a national securities exchange or in the over-the-counter market conducted on an agency basis. A Fund will not execute any brokerage transactions in its portfolio securities with an affiliated broker if such transactions would be unfair or unreasonable to its shareholders. Over-the-counter transactions will be placed either directly with principal market makers or with broker-dealers. Although the Funds do not anticipate any ongoing arrangements with other brokerage firms, brokerage business may be transacted with other firms. Affiliated broker-dealers of the Trust will not receive reciprocal brokerage business as a result of the brokerage business transacted by the Funds with other brokers. The Funds may direct transactions to certain brokers in order to reduce brokerage commissions through commission recapture programs offered by Frank Russell Securities, Inc. and Cowen and Company LLC.
In certain instances, there may be securities that are suitable for a Fund as well as for one or more of the respective sub-advisor’s other clients. The sub-advisor makes investment decisions for a Fund and for its other clients to achieve their respective investment objectives. The sub-advisor may buy or sell a particular security for one client even though it is buying, selling, or holding the same security for another client. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment advisor, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the sub-advisor will allocate the securities among clients in a fair and equitable manner. This system may detrimentally affect the price of a security purchased, sold, or held by the Fund, but this detrimental effect may be offset by a Fund’s ability to participate in volume transactions, which could lead to better executions for the Fund.
For the fiscal years ended September 30, 2017, 2016 and 2015, the Funds paid the following in aggregate brokerage commissions on portfolio transactions:
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Aggregate Brokerage Commissions | ||||||||||||
Fund | 2017 | 2016 | 2015 | |||||||||
Active Bond Fund* | $ | 4,383 | $ | 14,717 | $ | 2,039 | ||||||
Arbitrage Fund | $ | 459,443 | $ | 368,196 | $ | 247,848 | ||||||
Emerging Markets Small Cap Fund** | $ | 32,835 | $ | 329,901 | $ | 300,847 | ||||||
High Yield Fund* | $ | — | $ | — | $ | — | ||||||
Merger Arbitrage Fund | $ | 421,207 | $ | 424,132 | $ | 392,724 | ||||||
Mid Cap Fund | $ | 131,291 | $ | 270,101 | $ | 264,148 | ||||||
Mid Cap Value Fund | $ | 280,342 | $ | 231,904 | $ | 200,494 | ||||||
Premium Yield Equity Fund | $ | 96,215 | $ | 122,912 | $ | 114,363 | ||||||
Sands Capital Select Growth Fund*** | $ | 782,271 | $ | 1,711,687 | $ | 1,798,848 | ||||||
Small Cap Fund | $ | 375,364 | $ | 359,383 | $ | 439,502 | ||||||
Small Cap Value Fund | $ | 131,838 | $ | 265,279 | $ | 190,853 | ||||||
Total Return Bond Fund | N/A | N/A | N/A | |||||||||
Ultra Short Duration Fixed Income Fund | N/A | N/A | N/A | |||||||||
*All payments through January 27, 2017 were made by the Predecessor Funds.
**Prior to April 19, 2016, the Fund was known as Touchstone Emerging Markets Equity Fund.
***For the period from October 1, 2014 through December 31, 2014, Sands Capital did not have in place any contractual arrangements with any brokerage firms that required it to direct a certain amount of commissions. During that period, Sands Capital accepted proprietary bundled research from its approved brokers.
Effective January 1, 2015 (the “Effective Date”), Sands Capital entered into client commission sharing arrangements (“CSAs”) that are consistent with the requirements of Section 28(e) of the Securities Exchange Act of 1934. Sands Capital obtains some of its soft dollar benefits through CSAs with selected brokers. Under CSAs, Sands Capital arranges with executing brokers to allocate a portion of total commissions paid to a pool of “credits” maintained by the broker that can be used to obtain soft dollar benefits made available by third-party service providers. After accumulating a number of credits within the pool, Sands Capital may direct the broker to use those credits to pay appropriate third-party service providers for eligible soft dollar benefits made available to Sands Capital by the broker.
During the fiscal year ended September 30, 2017, the amount of brokerage transactions and related commissions for the Funds directed to brokers in return for research services were:
Fund | Amount of Transactions to Brokers Providing Research | Related Commission | ||||||
Active Bond Fund | $ | 0 | $ | 0 | ||||
Arbitrage Fund | $ | 0 | $ | 0 | ||||
Emerging Markets Small Cap Fund | $ | 4,086,002 | $ | 4,925 | ||||
High Yield Fund | $ | 0 | $ | 0 | ||||
Merger Arbitrage Fund | $ | 0 | $ | 0 | ||||
Mid Cap Fund | $ | 79,786,199 | $ | 30,259 | ||||
Mid Cap Value Fund | $ | 460,347,271 | $ | 219,614 | ||||
Premium Yield Equity Fund | $ | 90,496,363 | $ | 63,598 | ||||
Sands Capital Select Growth Fund* | $ | 1,828,339,673 | $ | 624,789 | ||||
Small Cap Fund | $ | 191,572,020 | $ | 98,211 | ||||
Small Cap Value Fund | $ | 141,639,977 | $ | 103,675 | ||||
Total Return Bond Fund | $ | 0 | $ | 0 | ||||
Ultra Short Duration Fixed Income Fund | $ | 0 | $ | 0 | ||||
* Dollar amount reflects the amount of directed Fund’s brokerage transactions to a broker due to research service provided through an agreement or understanding with a broker, or otherwise through an internal allocation procedure.
As of September 30, 2017, there were no securities held by regular broker-dealers.
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PROXY VOTING
Each Fund has adopted the policies and procedures of its Sub-Advisor for voting proxies relating to portfolio securities held by the Fund, including procedures used when a vote presents a conflict between the interests of the Fund’s shareholders and those of the Sub-Advisor or its affiliates. A copy or summary of each Sub-Advisor's proxy voting policies is included in Appendix B. Information about how the Funds voted proxies relating to their portfolio securities during the most recent year ending June 30 is available by August 31 st of that year without charge, upon request by calling 1.800.543.0407 and on the SEC’s website at sec.gov. Each Fund’s N-PX will also be available on the SEC’s website at sec.gov and on the Touchstone website at TouchstoneInvestments.com.
CODE OF ETHICS
The Trust has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Advisor, each Sub-Advisor and Distributor have adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics apply to the personal investing activities of Trustees, officers, and certain employees (“access persons”). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with the purchase or sale of securities by access persons. Under each Code of Ethics, access persons are permitted to invest in securities (including securities that may be purchased or held by a Fund), but are required to report their personal securities transactions for monitoring purposes. In addition, certain access persons are required to obtain approval before investing in initial public offerings or private placements. Copies of these Codes of Ethics are on file with the SEC, and are available to the public.
PORTFOLIO TURNOVER
A Fund’s portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities for the fiscal year by the monthly average of the value of the portfolio securities owned by the Fund during the fiscal year. High portfolio turnover involves correspondingly greater brokerage commissions and other transaction costs, which will be borne directly by the Fund. High turnover may result in a Fund recognizing greater amounts of income and capital gains, which would increase the amount of taxes payable by shareholders and increase the amount of commissions paid by the Fund. A 100% turnover rate would occur if all of a Fund’s portfolio securities were replaced once within a one-year period. The rate of portfolio turnover will depend upon market and other conditions, and will not be a limiting factor when the Sub-Advisor believes that portfolio changes are appropriate. A Fund may engage in active trading to achieve its investment goals and, as a result, may have substantial portfolio turnover.
During the two most recent fiscal years ended September 30, the portfolio turnover rate for each Fund was as follows:
Fund | 2016 | 2017 | ||||
Active Bond Fund* | 590 | % | 496 | % | ||
Arbitrage Fund | 451 | % | 358 | % | ||
Emerging Markets Small Cap Fund** | 68 | % | 115 | % | ||
High Yield Fund* | 56 | % | 69 | % | ||
Merger Arbitrage Fund | 400 | % | 331 | % | ||
Mid Cap Fund | 19 | % | 19 | % | ||
Mid Cap Value Fund | 45 | % | 43 | % | ||
Premium Yield Equity Fund | 38 | % | 39 | % | ||
Sands Capital Select Growth Fund | 46 | % | 22 | % | ||
Small Cap Fund | 17 | % | 18 | % | ||
Small Cap Value Fund*** | 155% | 63 | % | |||
Total Return Bond Fund | 12 | % | 18 | % | ||
Ultra Short Duration Fixed Income Fund | 169 | % | 136 | % | ||
*The portfolio turnover rates reflected are those of the Predecessor Funds prior to January 27, 2017.
**Effective April 19, 2016, the Fund changed its name to Touchstone Emerging Markets Small Cap Fund. At that time, the Fund adopted certain changes to its principal investment strategy, principal risks and benchmark index. Prior to April 19, 2016, the Fund was known as Touchstone Emerging Markets Equity Fund.
***Effective July 1, 2016, LMCG Investments, LLC was appointed sub-advisor to the Touchstone Small Cap Value Fund. LMCG manages the Fund in accordance with its small cap value strategy.
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DISCLOSURE OF PORTFOLIO HOLDINGS
The Touchstone Funds have adopted policies and procedures for disclosing the Funds’ portfolio holdings to any person requesting this information. These policies and procedures are monitored by the Board through periodic reporting by the Funds’ CCO. No compensation will be received by a Fund, the Advisor, any Sub-Advisor, or any other party in connection with the disclosure of information about portfolio securities.
The procedures prohibit the disclosure of portfolio holdings except under the following conditions:
1) A request made by a Sub-Advisor for a Fund (or that portion of a Fund) that it manages.
2) A request by executive officers of the Advisor for routine oversight and management purposes.
3) For use in preparing and distributing routine shareholder reports, including disclosure to the Funds’ independent registered public accounting firm, typesetter and printer. Routine shareholder reports are filed as of the end of each fiscal quarter with the SEC within 60 days after the quarter end and routine shareholder reports are distributed to shareholders within 60 days after the applicable six-month semi-annual period. The Funds provide their full holdings to their independent registered public accounting firm annually, as of the end of their fiscal year, within one to ten business days after fiscal year end. The Funds provide their full holdings to their typesetter at least 50 days after the end of the calendar quarter. The Funds provide their full holdings to their printer at least 50 days after the applicable six-month semi-annual period.
4) A request by service providers to fulfill their contractual duties relating to the Fund, subject to approval by the CCO.
5) A request by a newly hired sub-advisor or sub-advisor candidate prior to the commencement of its duties to facilitate its transition as a new sub-advisor, subject to the conditions set forth in Item 8.
6) A request by a potential merger candidate for the purpose of conducting due diligence, subject to the conditions set forth in Item 8.
7) A request by a rating or ranking agency, subject to the conditions set forth in Item 8.
Other portfolio holdings disclosure policies of the Funds include:
• | The Funds (except the Sands Capital Select Growth Fund) provide their top ten holdings on their publicly available website and to market data agencies monthly, as of the end of a calendar month, at least seven business days after month end. |
• | The Funds (except the Sands Capital Select Growth Fund) provide their full holdings on their publicly available website, and to market data agencies, their typesetter and printer, quarterly, as of the end of a calendar quarter, at least fifteen days after quarter end. |
• | The Sands Capital Select Growth Fund provides its full holdings on its publicly available website and to market data agencies quarterly, as of the end of a quarter, at least thirty days after quarter end. |
• | The Sands Capital Select Growth Fund discloses its top ten holdings on its publicly available website at least seven business days after quarter end. |
• | The Sands Capital Select Growth Fund provides its full holdings to its typesetter and printer quarterly, as of the end of a calendar quarter, at least fifteen days after quarter end. |
You may access the public website at TouchstoneInvestments.com.
8) The CCO may authorize disclosing non-public portfolio holdings to third parties more frequently or at different periods than as described above prior to when such information is made public, provided that certain conditions are met. The third-party must (i) specifically request in writing the more current non-public portfolio holdings, providing a reasonable basis for the request; (ii) execute an agreement to keep such information confidential, to only use the information for the authorized purpose, and not to use the information for their personal benefit; (iii) agree not to trade on such information, either directly or indirectly; and (iv) unless specifically approved by the CCO in writing, the non-public portfolio holdings are subject to a ten day time delay before dissemination. Any non-public portfolio holdings that are disclosed will not include any material information about a Fund’s trading strategies or pending portfolio transactions.
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As of December 31, 2017, one or more Touchstone Funds discloses portfolio holdings information to the following parties based on ongoing arrangements:
CMS Bondedge
Bloomberg LP
Morningstar, Inc.
Employees of the Advisor and the Funds’ Sub-Advisors that are access persons under the Funds’ Code of Ethics have access to Fund holdings on a regular basis, but are subject to confidentiality requirements and trading prohibitions in the Code of Ethics. In addition, custodians of the Funds’ assets and the Funds’ accounting services agent, each of whose agreements contains a confidentiality provision (which includes a duty not to trade on non-public information), have access to the current Fund holdings on a daily basis.
The CCO is authorized to determine whether disclosure of a Fund’s portfolio securities is for a legitimate business purpose and is in the best interests of a Fund and its shareholders. Any conflict between the interests of shareholders and the interests of the Advisor, Touchstone Securities, or any affiliates, will be reported to the Board, which will make a determination that is in the best interests of shareholders.
DETERMINATION OF NET ASSET VALUE
The securities of each Fund are valued under the direction of the Advisor and under the general oversight of the Trustees. The Advisor or its delegates may use independent pricing services to obtain valuations of securities. The pricing services rely primarily on prices of actual market transactions as well as on trade quotations obtained from third parties. Prices are generally determined using readily available market prices. If market prices are unavailable or believed to be unreliable, the Sub-Administrative Agent will initiate a process by which the Trust’s Fair Value Committee will make a good faith determination as to the “fair value” of the security using procedures approved by the Trustees. The pricing services may use a matrix system to determine valuations of fixed-income securities when market prices are not readily available. This system considers such factors as security prices, yields, maturities, call features, ratings and developments relating to specific securities in arriving at valuations. The procedures used by any such pricing service and its valuation results are reviewed by the officers of the Trust under the general oversight of the Trustees. Some Funds may hold portfolio securities that are listed on foreign exchanges. Under certain circumstances these investments may be valued under the Fund’s fair value policies and procedures, such as when U.S. exchanges are open but a foreign exchange is closed.
Securities with remaining maturities of 60 days or less may be valued by the amortized cost method, which involves valuing a security at its cost on the date of purchase and thereafter (absent unusual circumstances) assuming a constant amortization of maturity of any discount or premium, provided such amount approximates market value.
DESCRIPTION OF SHARES
The Trust’s Declaration of Trust authorizes the issuance of an unlimited number of Funds and shares of each Fund. Each share of a Fund represents an equal proportionate interest in that Fund with each other share. Upon liquidation, shares are entitled to a pro rata share in the net assets of the Fund, after taking into account additional distribution and shareholder servicing expenses attributable to the Class. Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the Trust may create additional series of shares or separate classes of funds. All consideration received by the Trust for shares of any portfolio or separate class and all assets in which such consideration is invested would belong to that portfolio or separate class and would be subject to the liabilities related thereto. Share certificates representing shares will not be issued.
The Trust is an entity of the type commonly known as a Delaware statutory trust. The Trust’s Declaration of Trust states that neither the Trust nor the Trustees, nor any officer, employee or agent of the Trust shall have any power to bind personally any shareholder, nor, except as specifically provided therein, to call upon any shareholder for the payment of any sum of money or assessment whatsoever other than such as the shareholder may at any time personally agree to pay.
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful defaults and, if reasonable care has been exercised in the selection of officers, agents, employees or investment advisors, shall not be liable for any neglect or wrongdoing of any such person. The Declaration of Trust also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with actual or threatened litigation in which they may be involved because of their offices with the Trust unless it is determined in the manner provided in the Declaration of Trust that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration
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of Trust shall protect or indemnify a Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties.
Each whole share shall be entitled to one vote as to any matter on which it is entitled to vote and each fractional share shall be entitled to a proportionate fractional vote. Shares issued by each Fund have no preemptive, conversion, or subscription rights. Voting rights are not cumulative. Each Fund, as a separate series of the Trust, votes separately on matters affecting only that Fund. Shareholders of each Class of each Fund will vote separately on matters pertaining solely to that Fund or that Class. As a Delaware statutory trust, the Trust is not required to hold annual meetings of shareholders, but approval will be sought for certain changes in the operation of the Trust and for the election of Trustees under certain circumstances.
In addition, a Trustee may be removed by the remaining Trustees or by shareholders at a special meeting called upon written request of shareholders owning at least 10% of the outstanding shares of the Trust. In the event that such a meeting is requested, the Trust will provide appropriate assistance and information to the shareholders requesting the meeting.
Derivative Claims of Shareholders.
The Trust’s Amended and Restated By-Laws (the “By-Laws”) contain provisions regarding derivative claims of shareholders. Under these provisions, a shareholder must make a pre-suit demand upon the Trustees to bring the subject action unless an effort to cause the Trustees to bring such an action is not likely to succeed. For purposes of the foregoing sentence, a demand on the Trustees shall only be deemed not likely to succeed and therefore excused if a majority of the Board, or a majority of any committee of the Board established to consider the merits of such action, has a personal financial interest in the transaction at issue, and a Trustee shall not be deemed interested in a transaction or otherwise disqualified from ruling on the merits of a shareholder demand by virtue of the fact that such Trustee receives remuneration for his service on the Board or on the boards of one or more Trusts that are under common management with or otherwise affiliated with the Trust.
Unless a demand is not required under the foregoing paragraph, (a) shareholders eligible to bring such derivative action under the Delaware Statutory Trust Act who hold at least 10% of the outstanding shares of the Trust, or 10% of the outstanding shares of the Fund or class to which such action relates, shall join in the request for the Trustees to commence such action; and (b) the Trustees must be afforded a reasonable amount of time to consider such shareholder request and to investigate the basis of such claim. The Trustees shall be entitled to retain counsel or other advisors in considering the merits of the request and shall require an undertaking by the shareholders making such request to reimburse the Trust for the expense of any such advisors in the event that the Trustees determine not to bring such action.
Forum for Adjudication of Disputes.
The By-Laws provide that, unless the Trust consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Trust, (ii) any action asserting a claim of breach of a fiduciary duty owed by any Trustee, officer, or other employee of the Trust to the Trust or the Trust’s shareholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware Statutory Trust Act, the Declaration of Trust or the By-Laws, (iv) any action to interpret, apply, enforce or determine the validity of the Declaration of Trust or the By-Laws, or (v) any action asserting a claim governed by the internal affairs doctrine shall be the U.S. District Court for the District of Delaware or the Court of Chancery of the State of Delaware, or, if the Court of Chancery of the State of Delaware does not have jurisdiction, the Superior Court of the State of Delaware (each, a “Covered Action”). The By-Laws further provide that if any Covered Action is filed in a court other than the U.S. District Court for the District of Delaware, the Court of Chancery of the State of Delaware or the Superior Court of the State of Delaware (a “Foreign Action”) in the name of any shareholder, such shareholder shall be deemed to have consented to (i) the personal jurisdiction of the U.S. District Court for the District of Delaware or the Superior Court of the State of Delaware in connection with any action brought in any such courts to enforce the preceding sentence (an “Enforcement Action”) and (ii) having service of process made upon such shareholder in any such Enforcement Action by service upon such shareholder’s counsel in the Foreign Action as agent for such shareholder.
The By-Laws provide that any person purchasing or otherwise acquiring or holding any interest in shares of beneficial interest of the Trust shall be (i) deemed to have notice of and consented to the provisions of the foregoing paragraph and (ii) deemed to have waived any argument relating to the inconvenience of the forums referenced above in connection with any action or proceeding described in the foregoing paragraph.
This forum selection provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with Trustees, officers or other agents of the Trust and its service providers, which may discourage such lawsuits with respect to such claims. If a court were to find the forum selection provision contained in the By-Laws to be inapplicable or unenforceable in an action, the Trust may incur additional costs associated with resolving such action in other jurisdictions.
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CONTROL PERSONS AND PRINCIPAL SECURITY HOLDERS
Persons or organizations beneficially owning more than 25% of the outstanding shares of a Fund are presumed to “control” the Fund. As a result, those persons or organizations could have the ability to influence an action taken by a Fund if such action requires a shareholder vote.
As of December 29, 2017 the name, address, and percentage ownership of each entity or person that owned of record or beneficially 5% or more of the outstanding shares of any class of a Fund are as follows:
Fund and Share Class | Name and Address of Account Owner | Percent of Class | |||
ACTIVE BOND FUND CLASS A | NO 5% OR GREATER BENEFICIAL OWNERS TO REPORT | ||||
ACTIVE BOND FUND CLASS C | WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBOEXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 14.44% | |||
PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 13.46% | ||||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 12.24% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 9.30% | ||||
MLPF & S THE SOLE BENEFIT OF FOR IT'S CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 8.06% | ||||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT FIRM 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 7.15% | ||||
ACTIVE BOND FUND CLASS Y | CHARLES SCHWAB & CO INC REINVEST ACCOUNT ATTN MUTUAL FUND DEPARTMENT 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4151 | 21.38% | |||
NATIONAL LIFE INSURANCE CO SEPARATE ACCOUNT II ATTN NANCY LECLERC INVESTMENT ACCT G DEPT 1 NATIONAL LIFE DRIVE MONTPELIER VT 05602-3377 | 14.78% | ||||
BAND & CO C/O US BANK NA 1555 N. RIVERCENTER DRIVE STE. 302 MILWAUKEE WI 53212 | 13.10% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN, NJ 07086 | 12.30% | ||||
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WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS, MO 63103 | 10.67% | ||||
NATIONAL FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY NJ 07310-2010 | 5.26% | ||||
ACTIVE BOND FUND INSTITUTIONAL CLASS SHARES | BAND & CO C/O US BANK NA 1555 N. RIVERCENTER DRIVE STE. 302 MILWAUKEE WI 53212 | 61.33% | |||
CHARLES SCHWAB & CO INC REINVEST ACCOUNT ATTN MUTUAL FUND DEPARTMENT 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4151 | 16.30% | ||||
CAPINCO C/O US BANK NA 1555 N. RIVERCENTER DRIVE STE. 302 MILWAUKEE WI 53212 | 12.70% | ||||
ARBITRAGE FUND CLASS A | MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 61.54% | |||
LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT 4707 EXECUTIVE DRIVE SAN DIEGO CA 92121 | 7.05% | ||||
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 6.90% | ||||
PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 6.74% | ||||
RBC CAPITAL MARKETS LLC MUTUAL FUND OMNIBUS PROCESSING OMNIBUS ATTN MUTUAL FUND OPS MANAGER 60 SOUTH SIXTH STREET-P08 MINNEAPOLIS MN 55402-4400 | 6.42% | ||||
ARBITRAGE FUND CLASS C | MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 49.02% | |||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 10.13% | ||||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT FIRM 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 7.73% | ||||
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LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT 4707 EXECUTIVE DRIVE SAN DIEGO CA 92121 | 5.50% | ||||
ARBITRAGE FUND CLASS Y | PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 42.32% | |||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 32.16% | ||||
UBS WM USA FBO 3UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 8.95% | ||||
LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT 4707 EXECUTIVE DRIVE SAN DIEGO CA 92121 | 8.00% | ||||
ARBITRAGE FUND INSTITUTIONAL CLASS SHARES | TOUCHSTONE CONTROLLED GROWTH WITH INCOME FUND 303 BROADWAY ST STE 1100 CINCINNATI OH 45202-4220 | 37.22% | *** | ||
MAC & CO 525 WILLIAM PENN PLACE, RM 153-3602 500 GRANT STREET ROOM 151-1010 PITTSBURGH PA 15258 | 6.74% | ||||
EMERGING MARKETS SMALL CAP FUND CLASS A | PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 41.55% | |||
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 25.43% | ||||
EMERGING MARKETS SMALL CAP FUND CLASS C | WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 42.38% | |||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 23.39% | ||||
LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT 4707 EXECUTIVE DRIVE SAN DIEGO CA 92121 | 9.95% | ||||
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 ST PETERSBURG FL 33716 | 8.52% | ||||
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RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 5.70% | ||||
EMERGING MARKETS SMALL CAP FUND CLASS Y | THE WESTERN & SOUTHERN LIFE INSURANCE CO DEFERRED COMP PLAN FBO 6 POST 04 DEFERRALS - INSTALLMENT 400 BROADWAY CINCINNATI OH 45202 | 29.61% | |||
THE WESTERN & SOUTHERN LIFE INSURANCE CO DEFERRED COMP PLAN FBO 134 POST 04 DEFERRALS - INSTALLMENT 400 BROADWAY CINCINNATI OH 45202 | 12.34% | ||||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 11.29% | ||||
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 9.65% | ||||
THE WESTERN & SOUTHERN LIFE INSURANCE CO DEFERRED COMP PLAN FBO 6 POST 04 DEFERRALS - INSTALLMENT 400 BROADWAY CINCINNATI OH 45202 | 7.28% | ||||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT FIRM 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 5.78% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN, NJ 07086 | 5.30% | ||||
NATIONAL FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 5.22% | ||||
EMERGING MARKETS SMALL CAP FUND INSTITUTIONAL CLASS SHARES | CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 85.20% | |||
NATIONAL FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 13.58% | ||||
HIGH YIELD FUND CLASS A | PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 18.35% | |||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 6.53% | ||||
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MLPF & S THE SOLE BENEFIT OF FOR IT'S CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 5.52% | ||||
HIGH YIELD FUND CLASS C | UBS WM USA SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 25.79% | |||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 16.13% | ||||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT FIRM 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 10.87% | ||||
MLPF & S THE SOLE BENEFIT OF FOR IT'S CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 8.32% | ||||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 7.20% | ||||
PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 5.82% | ||||
CHARLES SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4122 | 5.33% | ||||
HIGH YIELD FUND CLASS Y | CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 36.07% | |||
FIFTH THIRD BANK TTEE FBO WESTERN & SOUTHERN LIFE INS CO 401K SAVINGS PLAN 8515 E ORCHARD RD 2T2 CENTENNIAL CO 80111 | 17.91% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN, NJ 07086 | 13.45% | ||||
BAND & CO C/O US BANK NA 1555 N. RIVERCENTER DRIVE STE. 302 MILWAUKEE WI 53212 | 6.86% | ||||
HIGH YIELD FUND INSTITUTIONAL CLASS SHARES | UBATCO & CO FBO ACES TRUST FUND 6811 S 27TH ST LINCOLN NE 68512 | 38.52% | |||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN, NJ 07086 | 34.96% | ||||
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CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 14.34% | ||||
WELLS FARGO BANK FBO VARIOUS RETIREMENT PLANS 1525 WEST WT HARRIS BLVD CHARLOTTE, NC 28288-1076 | 6.20% | ||||
MERGER ARBITRAGE FUND CLASS A | TD AMERITRADE INC FOR THE EXCLUSIVE BENEFIT OF OUR CLIENTS PO BOX 2226 OMAHA NE 68103-2226 | 35.82% | |||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 13.01% | ||||
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 9.14% | ||||
PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 7.76% | ||||
LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT 4707 EXECUTIVE DRIVE SAN DIEGO CA 92121 | 5.69% | ||||
MERGER ARBITRAGE FUND CLASS C | MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 54.57% | |||
CHARLES SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4122 | 29.29% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 7.98% | ||||
MERGER ARBITRAGE FUND CLASS Y | NATIONAL FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 31.71% | |||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 22.01% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 15.62% | ||||
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 12.83% | ||||
RBC CAPITAL MARKETS LLC MUTUAL FUND OMNIBUS PROCESSING OMNIBUS ATTN MUTUAL FUND OPS MANAGER 60 SOUTH SIXTH STREET-P08 MINNEAPOLIS MN 55402-4400 | 8.01% | ||||
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MERGER ARBITRAGE FUND INSTITUTIONAL CLASS SHARES | JHF II ALTERNATIVE ASSET ALLOC FUND 601 CONGRESS ST BOSTON MA 02210-2804 | 46.69% | |||
NATIONAL FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 17.29% | ||||
GREENLEAF TRUST 211 SOUTH ROSE STREET KALAMAZOO MI 49007 | 13.76% | ||||
GREENLEAF TRUST 211 SOUTH ROSE STREET KALAMAZOO MI 49007 | 6.10% | ||||
GREENLEAF TRUST 211 SOUTH ROSE STREET KALAMAZOO MI 49007 | 6.05% | ||||
MID CAP FUND CLASS A | LPL FINANCIAL 9785 TOWNE CENTRE DRIVE SAN DIEGO CA 92121-1968 | 13.5% | |||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN, NJ 07086 | 13.31% | ||||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 12.67% | ||||
CHARLES SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4122 | 10.67% | ||||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS ATTN COURTNEY WALLER 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 6.69% | ||||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 6.00% | ||||
MID CAP FUND CLASS C | MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 21.05% | |||
MLPF & S THE SOLE BENEFIT OF ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FL JACKSONVILLE FL 32246 | 15.33% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN, NJ 07086 | 14.40% | ||||
LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT ATTN LINDSAY OTOOLE 4707 EXECUTIVE DRIVE SAN DIEGO CA 92121 | 13.01% | ||||
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CHARLES SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4122 | 11.83% | ||||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 7.09% | ||||
MID CAP FUND CLASS Y | WELLS FARGO BANK SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 23.95% | |||
NATIONAL FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 16.52% | ||||
CHARLES SCHWAB CO INC ATTN MUTUAL FUNDS TEAM S 4500 CHERRY CREEK 3 DR S FL DENVER CO 80209-0000 | 14.32% | ||||
LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT 4707 EXECUTIVE DRIVE SAN DIEGO CA 92121 | 10.05% | ||||
MLPF & S THE SOLE BENEFIT OF FOR IT'S CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 9.59% | ||||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 9.44% | ||||
MID CAP FUND CLASS Z | PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 47.84% | |||
CHARLES SCHWAB CO INC ATTN MUTUAL FUNDS TEAM S 4500 CHERRY CREEK 3 DR S FL DENVER CO 80209-0000 | 28.81% | ||||
NATIONAL FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 17.21% | ||||
MID CAP FUND INSTITUTIONAL CLASS SHARES | WELLS FARGO BANK NA FBO OMNIBUS ACCOUNT CASH/CASH PO BOX 1533 MINNEAPOLIS MN 55480 | 22.57% | |||
RELIANCE TRUST COMPANY FBO RIS-100 C/R PO BOX 48529 ATLANTA GA 30362 | 20.94% | ||||
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 12.34% | ||||
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NATIONAL FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 8.87% | ||||
MITRA & CO FBO VA C/O BMO HARRIS BANK NA ATTN: MF 480 PILGRIM WAY STE 1000 GREEN BAY WI 54304 | 8.19% | ||||
DCGT AS TTEE AND/OR CUST FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS ATTN NPIO TRADE DESK 711 HIGH STREET DES MOINES IA 50392 | 6.02% | ||||
WELLS FARGO BANK NA FBO AWG RET - PRAIRIE CAPITAL PO BOX 1533 MINNEAPOLIS MN 55480 | 5.84% | ||||
MID CAP VALUE FUND CLASS A | CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4122 | 26.43% | |||
MLPF & S THE SOLE BENEFIT OF FOR ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 15.66% | ||||
LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT 4707 EXECUTIVE DRIVE SAN DIEGO CA 92121 | 5.95% | ||||
GREAT-WEST TRUST FBO RTC TTEE FBO CERTAIN RETIREMENT PLANS 8515 E ORCHARD ROAD 2T2 GREENWOOD VILLAGE CO 80111 | 5.51% | ||||
MID CAP VALUE FUND CLASS C | WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 25.95% | |||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 0711 | 12.66% | ||||
LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT 4707 EXECUTIVE DRIVE SAN DIEGO CA 92121 | 11.60% | ||||
PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 9.86% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN, NJ 07086 | 9.39% | ||||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT FIRM 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 5.12% | ||||
A-90
MID CAP VALUE FUND CLASS Y | WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 45.19% | |||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 10.53% | ||||
NATIONAL FINANCIAL SERVICES LLC FBO ITS CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 9.32% | ||||
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 6.93% | ||||
MID CAP VALUE FUND INSTITUTIONAL CLASS SHARES | NATIONAL FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 41.60% | |||
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 21.19% | ||||
WELLS FARGO BANK NA FBO OMNIBUS ACCOUNT CASH/CASH PO BOX 1533 MINNEAPOLIS MN 55480 | 20.22% | ||||
TD AMERITRADE INC FOR THE EXCLUSIVE BENEFIT OF OUR CLIENTS PO BOX 2226 OMAHA NE 68103-2226 | 6.11% | ||||
WELLS FARGO BANK FBO VARIOUS RETIREMENT PLANS 1525 WEST WT HARRIS BLVD CHARLOTTE NC 28288-1076 | 5.88% | ||||
PREMIUM YIELD EQUITY FUND CLASS A | NFS LLC FEBO ASSETMARK TRUST COMPANY FBO ASSETMARK & MUTUAL CLIENTS FBO OTHER CUSTODIAL CLIENTS 3200 N CENTRAL AVE FL 7 PHOENIX AZ 85012-2425 | 26.93% | |||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 10.96% | ||||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 7.91% | ||||
LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT 4707 EXECUTIVE DRIVE SAN DIEGO CA 92121 | 7.75% | ||||
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 6.27% | ||||
A-91
PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 6.22% | ||||
PREMIUM YIELD EQUITY FUND CLASS C | UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN, NJ 07086 | 27.08% | |||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 25.35% | ||||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 21.62% | ||||
MLPF & S THE SOLE BENEFIT OF ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 6.88% | ||||
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 5.74% | ||||
PREMIUM YIELD EQUITY FUND CLASS Y | TD AMERITRADE INC FOR THE EXCLUSIVE BENEFIT OF OUR CLIENTS PO BOX 2226 OMAHA NE 68103-2226 | 40.85% | |||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 10.35% | ||||
TOUCHSTONE DYNAMIC DIVERSIFIED INCOME FUND 303 BROADWAY ST STE 1100 CINCINNATI OH 45202-4220 | 7.96% | ||||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 7.38% | ||||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 5.90% | ||||
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 5.24% | ||||
SANDS CAPITAL SELECT GROWTH FUND CLASS A | MLPF & S THE SOLE BENEFIT OF ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 27.28% | |||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 15.56% | ||||
A-92
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 7.06% | ||||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 6.88% | ||||
SANDS CAPITAL SELECT GROWTH FUND CLASS C | MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 27.03% | |||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 14.24% | ||||
MLPF & S THE SOLE BENEFIT OF ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 13.93% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 8.50% | ||||
CHARLES SCHWAB & CO INC SPECIAL CUSTODY ACCOUNT FOR THE BENEFIT OF CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4151 | 8.10% | ||||
LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT 4707 EXECUTIVE DRIVE SAN DIEGO CA 92121 | 5.50% | ||||
SANDS CAPITAL SELECT GROWTH FUND CLASS Y | MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 24.96% | |||
PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 22.82% | ||||
SAXON & CO P.O. BOX 7780-1888 PHILADELPHIA PA 19182 | 11.34% | ||||
CHARLES SCHWAB CO INC ATTN MUTUAL FUNDS TEAM S 4500 CHERRY CREEK 3 DR S FL DENVER CO 80209-0000 | 10.29% | ||||
NATIONAL FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 4TH FL 499 WASHINGTON BLVD JERSEY CITY NJ 07310-2010 | 8.38% | ||||
MLPF & S THE SOLE BENEFIT OF FOR ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 7.96% | ||||
A-93
SANDS CAPITAL SELECT GROWTH FUND CLASS Z | NATIONAL FINANCIAL SERVICES CORP (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 55.64% | |||
CHARLES SCHWAB & CO INC SPECIAL CUSTODY ACCOUNT FOR THE BENEFIT OF CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4151 | 23.40% | ||||
PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 9.23% | ||||
SMALL CAP FUND CLASS A | CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 20.57% | |||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT FIRM 9 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 20.41% | ||||
CHARLES SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4122 | 9.17% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 6.66% | ||||
MLPF & S THE SOLE BENEFIT OF ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 5.35% | ||||
SMALL CAP FUND CLASS C | UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN, NJ 07086 | 41.03% | |||
CHARLES SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4122 | 11.20% | ||||
MLPF & S THE SOLE BENEFIT OF ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 10.82% | ||||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT FIRM 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 10.16% | ||||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 8.89% | ||||
SMALL CAP FUND CLASS Y | CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 36.81% | |||
A-94
TD AMERITRADE INC FOR THE EXCLUSIVE BENEFIT OF OUR CLIENTS PO BOX 2226 OMAHA NE 68103-2226 | 21.27% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 16.99% | ||||
MLPF & S THE SOLE BENEFIT OF FOR ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 7.52% | ||||
NATIONAL FINANCIAL SERVICES LLC FEBO ITS CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 6.64% | ||||
SMALL CAP FUND INSTITUTIONAL CLASS SHARES | CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 37.80% | |||
WELLS FARGO BANK NA FBO OMNIBUS ACCOUNT CASH/CASH PO BOX 1533 MINNEAPOLIS MN 55480 | 23.22% | ||||
NATIONAL FINANCIAL SERVICES LLC FEBO ITS CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 13.56% | ||||
NABANK & CO. PO BOX 2180 TULSA OK 74101 | 5.93% | ||||
SMALL CAP VALUE FUND CLASS A | CHARLES SCHWAB CO INC ATTN MUTUAL FUNDS TEAM S 4500 CHERRY CREEK 3 DR S FL DENVER CO 80209-0000 | 13.05% | |||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 7.35% | ||||
SMALL CAP VALUE FUND CLASS C | MORGAN STANLEY SMITH HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 27.23% | |||
MLPF & S THE SOLE BENEFIT OF FOR ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 22.81% | ||||
PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 10.95% | ||||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 10.26% | ||||
A-95
CHARLES SCHWAB & CO INC SPECIAL CUSTODY ACCT FBO CUSTOMERS ATTN MUTUAL FUNDS 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4122 | 6.37% | ||||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT FIRM 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 5.33% | ||||
SMALL CAP VALUE FUND CLASS Y | CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 26.94% | |||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 24.23% | ||||
NATIONAL FINANCIAL SERVICES LLC FEBO ITS CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 14.79% | ||||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 11.30% | ||||
SMALL CAP VALUE FUND INSTITUTIONAL CLASS SHARES | CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 22.87% | |||
SAXON & CO. P.O. BOX 7780-1888 PHILADELPHIA PA 19182 | 10.46% | ||||
SAXON & CO. P.O. BOX 7780-1888 PHILADELPHIA PA 19182 | 6.97% | ||||
SAXON & CO. P.O. BOX 7780-1888 PHILADELPHIA PA 19182 | 6.90% | ||||
SAXON & CO. P.O. BOX 94597 CLEVELAND OH 44101 | 5.52% | ||||
TOTAL RETURN BOND FUND CLASS A | VOYA RETIREMENT INSURANCE AND ANNUITY COMPANY ONE ORANGE WAY WINDSOR CT 060954774 | 38.47% | |||
MLPF & S THE SOLE BENEFIT OF FOR ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 15.13% | ||||
CHARLES SCHWAB & CO 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 14.21% | ||||
ELEMENT INDUSTRIES DBA GMT COMPOSITES INC PSP & TRUST FBO DAVID SCHWARTZ JONATHAN & JULIE CRAIG TTEES 48 BALLOU BLVD BRISTOL RI 02809-2728 | 7.11% | ||||
A-96
TOTAL RETURN BOND FUND CLASS C | MLPF & S THE SOLE BENEFIT OF ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 30.71% | |||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT FIRM 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 30.32% | ||||
LPL FINANCIAL OMNIBUS CUSTOMER ACCOUNT 4707 EXECUTIVE DRIVE SAN DIEGO CA 92121 | 5.38% | ||||
TOTAL RETURN BOND FUND CLASS Y | DC PLUS MODEL PORTFOLIOS 457 C/O ICMA RETIREMENT CORPORATION 777 NORTH CAPITOL STREET, NE WASHINGTON DC 20002 | 26.54% | |||
RBC CAPITAL MARKETS LLC MUTUAL FUND OMNIBUS PROCESSING OMNIBUS ATTN MUTUAL FUND OPS MANAGER 60 SOUTH SIXTH STREET-P08 MINNEAPOLIS MN 55402-4400 | 16.24% | ||||
DC PLUS MODEL PORTFOLIOS 401 C/O ICMA RETIREMENT CORPORATION 777 NORTH CAPITOL STREET, NE WASHINGTON DC 20002 | 12.21% | ||||
MLPF & S THE SOLE BENEFIT OF FOR ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 5.81% | ||||
CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 5.30% | ||||
GREAT-WEST TRUST COMPANY LLC TTEE F YEE BENEFITS CLIENTS 401K 8515 E ORCHARD RD 2T2 GREENWOOD VILLAGE CO 80111 | 5.23% | ||||
TOTAL RETURN BOND FUND INSTITUTIONAL CLASS SHARES | CHARLES SCHWAB & CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104 | 41.39% | |||
NATIONAL FINANCIAL SERVICES LLC FBO ITS CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 30.93% | ||||
TOUCHSTONE DYNAMIC GLOBAL ALLOCATION FUND 303 BROADWAY ST STE 1100 CINCINNATI OH 45202-4220 | 9.11% | *** | |||
MARIL & CO FBO JI C/O BMO HARRIS BANK NA ATTN MF 480 PILGRIM WAY, SUITE 1000 GREEN BAY WI 54304 | 6.40% | ||||
ULTRA SHORT DURATION FIXED INCOME FUND CLASS A | MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 9.18% | |||
A-97
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 7.47% | ||||
PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 5.55% | ||||
ULTRA SHORT DURATION FIXED INCOME FUND CLASS C | MLPF & S THE SOLE BENEFIT OF ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 20.25% | |||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 15.24% | ||||
PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 13.71% | ||||
MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 11.95% | ||||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT FIRM 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 9.51% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN, NJ 07086 | 5.65% | ||||
ULTRA SHORT DURATION FIXED INCOME FUND CLASS Y | MLPF & S THE SOLE BENEFIT OF ITS CUSTOMERS ATTN FUND ADMINISTRATION 4800 DEER LAKE DR EAST-2ND FLR JACKSONVILLE FL 32246 | 28.89% | |||
CHARLES SCHWAB & CO INC REINVEST ACCOUNT ATTN MUTUAL FUND DEPARTMENT 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4151 | 18.14% | ||||
NATIONAL FINANCIAL SERVICES LLC FEBO ITS CUSTOMERS (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD 4TH FL JERSEY CITY NJ 07310-2010 | 17.82% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 8.38% | ||||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 7.17% | ||||
A-98
ULTRA SHORT DURATION FIXED INCOME FUND CLASS S | MORGAN STANLEY SMITH BARNEY HARBORSIDE FINANCIAL CENTER PLAZA 2 3RD FLOOR JERSEY CITY NJ 07311 | 31.46% | |||
WELLS FARGO CLEARING SVCS LLC SPECIAL CUSTODY ACCT FBO EXCLUSIVE BENEFIT OF CUSTOMER 2801 MARKET ST SAINT LOUIS MO 63103 | 25.51% | ||||
UBS WM USA FBO SPEC CDY A/C EXL BEN CUSTOMERS OF UBSFSI 1000 HARBOR BLVD WEEHAWKEN NJ 07086 | 8.46% | ||||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT FIRM 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 5.66% | ||||
PERSHING LLC 1 PERSHING PLAZA JERSEY CITY NJ 07399 | 5.14% | ||||
ULTRA SHORT DURATION FIXED INCOME FUND CLASS Z | CHARLES SCHWAB & CO INC REINVEST ACCOUNT ATTN MUTUAL FUND DEPARTMENT 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4151 | 58.05% | |||
NATIONAL FINANCIAL SERVICES LLC FEBO ITS CUSTOMERS (FBO) OUR CUSTOMERS ATTN MUTUAL FUNDS DEPARTMENT 499 WASHINGTON BLVD, 4TH FL JERSEY CITY NJ 07310-2010 | 23.80% | ||||
ULTRA SHORT DURATION FIXED INCOME FUND INSTITUTIONAL CLASS SHARES | CHARLES SCHWAB CO INC 101 MONTGOMERY ST SAN FRANCISCO CA 94104-4151 | 40.93% | |||
OLTRUST & CO. - REINVEST/REINVEST P.O. BOX 966 EVANSVILLE IN 47706-0966 | 19.61% | ||||
RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS HOUSE ACCT FIRM 880 CARILLON PARKWAY ST PETERSBURG FL 33716 | 19.01% | ||||
BAND & CO C/O US BANK NA 1555 N. RIVERCENTER DRIVE STE. 302 MILWAUKEE WI 53212 | 7.00% | ||||
* Indicates that shares are held beneficially.
** May be deemed to control a Fund because it owned beneficially more than 25% of the outstanding shares of a Fund as of December 29, 2017. As a result, those persons or organizations could have the ability to influence the outcome of a vote of the Fund’s shareholders.
*** The Touchstone Controlled Growth with Income Fund, the Touchstone Dynamic Diversified Income Fund and the Touchstone Dynamic Global Allocation Fund (the “Asset Allocation Funds”) are each structured as a fund-of-funds. Pursuant to the proxy voting policies of Touchstone Advisors, the Asset Allocation Funds vote their shares in the same proportion as the votes of all other shareholders in that underlying Touchstone Fund.
As of December 31, 2017, the Trustees and officers of the Trust as a group owned of record or beneficially less than 1% of the outstanding shares of the Trust and of each Fund.
A-99
CHOOSING A CLASS OF SHARES
Each Fund offers the following classes of shares.
Class A | Class C | Class S | Class Y | Class Z | Institutional Class | |||||||
Active Bond Fund | X | X | X | X | ||||||||
Arbitrage Fund | X | X | X | X | ||||||||
Emerging Markets Small Cap Fund | X | X | X | X | ||||||||
High Yield Fund | X | X | X | X | ||||||||
Merger Arbitrage Fund | X | X | X | X | ||||||||
Mid Cap Fund | X | X | X | X | X | |||||||
Mid Cap Value Fund | X | X | X | X | ||||||||
Premium Yield Equity Fund | X | X | X | |||||||||
Sands Capital Select Growth Fund | X | X | X | X | ||||||||
Small Cap Fund | X | X | X | X | ||||||||
Small Cap Value Fund | X | X | X | X | ||||||||
Total Return Bond Fund | X | X | X | X | ||||||||
Ultra Short Duration Fixed Income Fund | X | X | X | X | X | X | ||||||
The Funds participate in fund “supermarket” arrangements. In such an arrangement, a program is made available by a broker or other institution (a sponsor) that allows investors to purchase and redeem shares of the Funds through the sponsor of the fund supermarket.
In connection with these supermarket arrangements, each Fund has authorized one or more brokers to accept on its behalf purchase and redemption orders. In turn, the brokers are authorized to designate other intermediaries to accept purchase and redemption orders on the Funds’ behalf. As such, a Fund will be deemed to have received a purchase or redemption order when an authorized broker or, if applicable, a broker’s authorized designee, accepts the order. The customer order will be priced at the Fund’s NAV next computed after acceptance by an authorized broker or the broker’s authorized designee. In addition, a broker may charge transaction fees on the purchase or sale of Fund shares. Also in connection with fund supermarket arrangements, the performance of a participating Fund may be compared in publications to the performance of various indices and investments for which reliable performance data is available and compared in publications to averages, performance rankings, or other information prepared by recognized mutual fund statistical services. The Funds' annual report contains additional performance information and will be made available to investors upon request and without charge.
The Touchstone Funds are intended for sale to residents of the U.S. and, with very limited exceptions, are not registered or otherwise offered for sale in other jurisdictions. The above restrictions are generally not applicable to sales in U.S. territories or to diplomatic staff members or members of the U.S. military with an APO or FPO address outside of the U.S. Investors are responsible for compliance with tax, securities, currency exchange or other regulations applicable to redemption and purchase transactions in any state or jurisdiction to which they may be subject. Investors should consult with their financial intermediary and appropriate tax and legal advisors to obtain information on the rules applicable to these transactions.
The shares of the Funds may not be directly or indirectly offered or distributed in any country outside of the United States. If an investor becomes a resident of another jurisdiction after purchasing shares of the Touchstone Funds, the investor will not be able to purchase any additional shares of the Funds (other than reinvestment of dividends and capital gains) or exchange shares of the Touchstone Funds for other U.S. registered Touchstone Funds.
Class A Shares. For initial purchases of Class A shares(1) of $1 million or more and subsequent purchases further increasing the size of an individual shareholder account, participating dealers may receive compensation of up to 1.00% (a “Finder's Fee”) of such purchases from Touchstone Securities according to the following schedule:
Amount of Investment | Finder's Fee | ||
$1 million but less than $3 million | 1.00 | % | |
$3 million but less than $5 million | 0.75 | % | |
$5 million but less than $25 million | 0.50 | % | |
$25 million or more | 0.25 | % | |
(1) This does not apply to the Ultra Short Duration Fixed Income Fund.
A-100
The Distributor does not have an annual reset for Finder’s Fees. In determining a dealer’s eligibility for a Finder’s Fee, purchases of Class A shares of an individual shareholder account in a Touchstone Fund may be aggregated with concurrent purchases of Class A shares of other Touchstone Funds for that individual shareholder. If a Finder’s Fee was paid to a participating dealer that dealer is not eligible to receive 12b-1 fees on the shares that were used to generate the Finder’s Fee until they have aged for a period of one year. Additionally, if a Finder’s Fee was paid and the Class A shares are redeemed within a year of their purchase, a contingent deferred sales charge (“CDSC”) of up to 1.00% will be charged on the redemption. Dealers should contact the Distributor for more information on the calculation of the dealer’s commission in the case of combined purchases.
A dealer is eligible for a Finder's Fee only if the dealer has not previously received a Finder's Fee on the assets used to meet the required investment amount. Similarly, an exchange from any other Touchstone Fund will not qualify for a Finder's Fee unless the dealer did not receive any compensation on those assets at the time of the initial investment. In all cases Touchstone Securities reserves the right to deny payment of a Finder's Fee if it reasonably believes such a fee has already been paid on those assets.
Share Class Conversions. Class A and Class C shareholders who are eligible to invest in Class Y shares or Institutional Class shares are eligible to exchange their Class A shares and/or Class C shares for Class Y shares or Institutional Class shares of the same Fund, if offered in their state and such an exchange can be accommodated by their financial institution. Class Y shares may be available through financial institutions that have appropriate selling agreements with Touchstone Securities, or through “processing organizations” (e.g., mutual fund supermarkets) that purchase shares for their customers. Additionally, Class C shareholders may exchange their Class C shares for Class A shares of the same Fund, if offered in their state and such an exchange can be accommodated by their financial institution. No front-end sales charges will apply to any such exchange. However, if the Class C shares have been held less than 12 months and a 1% commission was paid to the broker at the time of purchase, a CDSC of 1% will be assessed on the exchange transaction, which may be processed as a liquidation and a purchase. Class Y shareholders that meet the required minimum for Institutional Class shares may exchange their Class Y shares for Institutional Class shares within the same Fund if offered in their state and if such an exchange can be accommodated by their financial institution.
Class S shares of the Fund may be exchanged for Class A shares of any other Touchstone Fund. Class S shareholders who are eligible to invest in Institutional Class shares are eligible to exchange their Class S shares for Institutional Class shares of the same Fund, if offered in their state; and such an exchange can be accommodated by their financial intermediary.
For federal income tax purposes, exchanges of one share class for a different share class of the same fund (even if processed as a liquidation and a purchase) should not result in the realization by the investor of a capital gain or loss. There can be no assurance of any particular tax treatment and you are urged and advised to consult with your own tax advisor before entering into a share class exchange.
Financial intermediaries may convert shares in a customer or client’s account to a more expensive share class if prior to the conversion the intermediary determines that the higher priced share class is more suitable to the customer’s interests and the intermediary discloses any additional compensation to the customer, including revenue sharing arrangements with the Advisor or Distributor.
If a financial institution, processing organization or intermediary (a “converting entity”) is initiating a share class conversion(s) for Touchstone Funds on a platform, then the converting entity should contact Touchstone Securities at least 60 days in advance and obtain Touchstone Securities’ approval of the share class conversion.
Additional Information on the CDSC. The CDSC is waived under the following circumstances:
• | Any partial or complete redemption following death or disability (as defined in the Code) of a shareholder (including one who owns the shares with his or her spouse as a joint tenant with rights of survivorship) from an account in which the deceased or disabled is named. Touchstone Securities may require documentation prior to waiver of the charge, including death certificates, physicians’ certificates, etc. |
• | Redemptions from a systematic withdrawal plan. If the systematic withdrawal plan is based on a fixed dollar amount or number of shares, systematic withdrawal redemptions are limited to no more than 10% of your account value or number of shares per year, as of the date the transfer agent receives your request. If the systematic withdrawal plan is based on a fixed percentage of your account value, each redemption is limited to an amount that would not exceed 10% of your annual account value at the time of withdrawal. |
• | Redemptions from retirement plans qualified under Section 401 of the Code. The CDSC will be waived for benefit payments made by Touchstone directly to plan participants. Benefit payments will include, but are not limited to, payments |
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resulting from death, disability, retirement, separation from service, required minimum distributions (as described under Section 401(a)(9) of the Code), in-service distributions, hardships, loans and qualified domestic relations orders. The CDSC waiver will not apply in the event of termination of the plan or transfer of the plan to another financial institution.
• | Redemptions that are mandatory withdrawals from a traditional IRA account after age 70½. |
• | Shareholders of Class C shares of Active Bond Fund and Ultra Short Duration Fixed Income Fund that were received pursuant to the October 27, 2017 reorganization of series of Sentinel Group Funds, Inc. (“Sentinel Funds”) will not be assessed a CDSC upon redemption of their shares. |
• | Please see Appendix A — Intermediary-Specific Sales Charge Waivers and Discounts in the prospectus for a description of variation in sales charges and waivers for Fund shares purchased through Merrill Lynch. |
General. All sales charges imposed on redemptions are paid to the Distributor. In determining whether the CDSC is payable, it is assumed that shares not subject to the CDSC are the first redeemed followed by other shares held for the longest period of time. The CDSC will not be imposed upon shares representing reinvested dividends or capital gains distributions, or upon amounts representing share appreciation.
CDSC for Certain Redemptions of Class A Shares. A CDSC is imposed upon certain redemptions of Class A shares of the Funds (or shares into which such Class A shares were exchanged) purchased at NAV in amounts totaling $1 million or more, if the dealer’s commission described above was paid by the Distributor and the shares are redeemed within one year from the date of purchase. The CDSC will be paid to the Distributor and will be equal to the commission percentage paid at the time of purchase as applied to the lesser of (1) the NAV at the time of purchase of the Class A shares being redeemed, or (2) the NAV of such Class A shares at the time of redemption. If a purchase of Class A shares is subject to the CDSC, you will be notified on the confirmation you receive for your purchase. Redemptions of such Class A shares of the Funds held for at least one year will not be subject to the CDSC. Shareholders of Class A shares of Active Bond Fund and Ultra Short Duration Fixed Income Fund that were received pursuant to the October 27, 2017 reorganization of series of Sentinel Group Funds, Inc. will not be assessed a CDSC upon redemption of their shares.
Examples. The following example will illustrate the operation of the CDSC. Assume that you open an account and purchase 1,000 shares at $10 per share and that six months later the NAV per share is $12 and, during such time, you have acquired then 50 additional shares through reinvestment of distributions. If, at such time you should redeem 450 shares (totaling proceeds of $5,400), 50 shares will not be subject to the charge because of dividend reinvestment. With respect to the remaining 400 shares, the charge is applied only to the original cost of $10 per share and not to the increase in NAV of $2 per share. Therefore, $4,000 of the $5,400 redemption proceeds will pay the charge. At the rate of 1.00%, the CDSC would be $40 for redemptions of Class C shares. In determining whether an amount is available for redemption without incurring a deferred sales charge, the purchase payments made for all shares in your account are aggregated.
OTHER PURCHASE AND REDEMPTION INFORMATION
Waiver of Minimum Investment Requirements. The minimum and subsequent investment requirements for purchases in the Funds may not apply to:
1. | Any director, officer or other employee* (and their immediate family members**, as defined below) of Western & Southern Financial Group, Inc. or any of its affiliates or any portfolio advisor or service provider to the Trust. |
2. | Any employee benefit plan that is provided administrative services by a third-party administrator that has entered into a special service arrangement with Touchstone Securities. |
In addition, a Fund reserves the right to waive investment minimums in the case of significant extenuating circumstances.
Waiver of Class A Sales Charges. In addition to the categories of purchasers described in the prospectus for whom the sales charge on purchases of Class A shares of the Funds may be waived, Class A shares issued or purchased in the following transactions are not subject to sales charges (and no concessions are paid by the Distributor on such purchases):
1. | Purchases into a Fund by any director, officer, employee* (and their immediate family members**), or current separate account client of or referral by a sub-advisor to that particular Fund; |
2. | Purchases by any director, officer or other employee* (and their immediate family members**) of Western & Southern Financial Group or any of its affiliates; and |
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3. | Purchases by any employees of BNY Mellon who provide services for the Touchstone Funds, Touchstone Advisors, or Touchstone Securities. |
Exemptions must be qualified in advance by the Distributor. At the option of the Trust, the front-end sales charge may be included on purchases by such persons in the future.
* The term “employee” is deemed to include current and retired employees.
** Immediate family members are defined as the parents, mother-in-law or father-in-law, spouse, brother-in-law or sister-in-law, son-in-law or daughter-in-law, and children, of a registered representative or employee and any other individual to whom the registered representative or employee provides material support.
Waiver of Class A Sales Charge for Clients of Financial Intermediaries. Touchstone Securities has agreed to waive the Class A sales charge for clients of financial intermediaries that have entered into an agreement with Touchstone Securities to offer shares to self-directed investment brokerage accounts that may or may not charge a transaction fee to their customers. As of the date of this Statement of Additional information, this arrangement applies to shareholders purchasing Fund shares through platforms at the following intermediaries:
• | Merrill Lynch |
• | RBC |
• | JP Morgan Securities |
Waiver of Class A Sales Charge for former Constellation Shareholders. Shareholders who owned shares of the Trust as of November 17, 2006 who are purchasing additional shares for their accounts or opening new accounts in any Touchstone Fund are not subject to the front-end sales charge for purchases of Class A shares. If you are purchasing shares through a financial intermediary, you must notify the intermediary at the time of purchase that a purchase qualifies for a sales load waiver and you may be required to provide copies of account statements verifying your qualification.
Waiver of Class A Sales Charge for former Navellier Shareholders. Shareholders who owned shares of the Navellier International Growth Portfolio as of September 26, 2008 who are purchasing additional shares for their accounts or opening new accounts in any Touchstone Fund are not subject to the front-end sales charge for purchases of Class A shares. If you are purchasing shares through a financial intermediary, you must notify the intermediary at the time of purchase that a purchase qualifies for a sales load waiver and you may be required to provide copies of account statements verifying your qualification.
Waiver of Class A Sales Charge for former Bramwell Shareholders. Former shareholders of the Bramwell Growth Fund or the Bramwell Focus Fund, each a series of the Bramwell Funds, Inc., who in those funds' 2006 reorganization received Class A shares of the Sentinel Capital Growth or Sentinel Growth Leaders Funds who are purchasing additional shares for their accounts or opening new accounts in any Touchstone Fund are not subject to the front-end sales charge for purchases of Class A shares. If you are purchasing shares through a financial intermediary, you must notify the intermediary at the time of purchase that a purchase qualifies for a sales load waiver and you may be required to provide copies of account statements verifying your qualification.
Waiver of Class A Sales Charge for former Citizens Shareholders. Former shareholders of the Citizens Funds, who in those funds' 2008 reorganization received shares of a Sentinel Fund who are purchasing additional shares for their accounts or opening new accounts in any Touchstone Fund are not subject to the front-end sales charge for purchases of Class A shares. If you are purchasing shares through a financial intermediary, you must notify the intermediary at the time of purchase that a purchase qualifies for a sales load waiver and you may be required to provide copies of account statements verifying your qualification.
Waiver of Small Cap Value Fund Class A Sales Charge for Former Class Z Shareholders. Shareholders who owned Class Z shares of the Small Cap Value Fund as of June 10, 2011 who are purchasing additional shares for their accounts or opening new accounts in the Small Cap Value Fund are not subject to the front-end sales charge for purchases of Class A shares of the Small Cap Value Fund. If you are purchasing shares through a financial intermediary, you must notify the intermediary at the time of purchase that a purchase qualifies for a sales load waiver and you may be required to provide copies of account statements verifying your qualification.
Shareholders who are eligible for the sales charge waivers listed above may open an account with the Fund directly to receive the sales charge waiver.
Waiver of Class A Sales Charge for Former Shareholders of Sentinel Group Funds, Inc. Shareholders who received Class A shares of Touchstone Funds pursuant to the October 27, 2017 reorganization of their respective Sentinel Funds and whose Sentinel
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Fund account was established with a net asset value purchase privilege may purchase additional Class A shares of Touchstone Funds at net asset value, provided that such shareholders provide notice of such eligibility prior to or at the time of purchase.
Class Y Shares “Grandfather” Clause. New purchases of the Class Y shares are no longer available directly through Touchstone Securities. Those shareholders who owned Class Y shares purchased directly through Touchstone Securities prior to February 2, 2009, or those former Old Mutual shareholders who owned Class Z shares which became Class Y shares on April 16, 2012, or those former Fifth Third Mutual Fund Shareholders who owned Institutional Class shares which became Class Y shares on September 10, 2012 may continue to hold Class Y shares of the corresponding Fund(s). In addition, those shareholders may continue to make subsequent purchases into existing accounts of Class Y shares of the Fund(s) they owned prior to February 2, 2009, April 16, 2012, and September 10, 2012, respectively.
Purchases in-Kind. In limited circumstances and subject to the prior consent of the Fund, the Fund may accept payment for shares in securities. Shares may be purchased by tendering payment in-kind in the form of marketable securities, including but not limited to shares of common stock, provided the acquisition of such securities is consistent with the applicable Fund’s investment goal and is otherwise acceptable to the Advisor. Transactions of this type are generally a taxable transaction. Before purchasing shares by tendering payment in-kind, investors are urged and advised to consult with their own tax advisor regarding the tax consequences of such a transaction.
Redemptions in-Kind. Under unusual circumstances, when the Board deems it in the best interests of a Fund’s shareholders, the Fund may make payment for shares repurchased or redeemed in whole or in part in securities of the Fund taken at current value. Should payment be made in securities, the redeeming shareholder will bear the market risk until the securities are sold and the redeeming shareholder will generally incur brokerage costs and other costs in converting such securities to cash. Portfolio securities that are issued in an in-kind redemption will be readily marketable. The Trust has filed an irrevocable election with the SEC under Rule 18f-1 of the 1940 Act wherein the Funds are committed to pay redemptions in cash, rather than in kind, to any shareholder of record of a Fund who redeems during any ninety day period, the lesser of $250,000 or 1% of a Fund’s NAV at the beginning of such period. Redemptions in kind are taxable for federal income tax purposes in the same manner as redemptions for cash. The Funds may also use redemption in-kind for certain Fund shares held by ReFlow.
Undeliverable Checks. Dividend and distribution checks issued from non-retirement accounts for less than $25 will be automatically reinvested in the Fund that pays them. If you elect to receive your dividends and distributions of $25 or more in cash, and the payment is returned as “undeliverable”, the outstanding payment on your account will be cancelled and the proceeds will be reinvested in the Fund at the per share NAV determined as of the date of cancellation. If your redemption proceeds are returned as “undeliverable”, your account will be considered a lost shareholder account, correspondence will be sent to you requesting that you contact the Fund, and the outstanding payment will be deposited into an account for potential escheatment to your state of residence. Upon contact, the Fund will no longer consider your account to be a lost shareholder account, and your outstanding payment will be reissued to your corrected address.
Uncashed Checks. All uncashed checks on your account will appear with your monthly or quarterly statement for your convenience. If your redemption proceeds, dividend, or distribution check is not cashed within six months (an “outstanding payment”), the outstanding payment on your account will be cancelled and the proceeds will be reinvested in the Fund at the per share NAV determined as of the date of cancellation. In the event the proceeds represent a full liquidation or a distribution from a retirement account, the proceeds will be deposited into a nonretirement account for you and invested in the Touchstone Ultra Short Duration Fixed Income Fund. In addition, if the payment was for dividends or distributions, your cash election will be automatically changed and future dividends and distributions will be reinvested in the Fund at the per share NAV determined as of the date of payment.
For redemption checks returned as “undeliverable”, the check will be voided and deposited into a lost shareholder account for the Fund. If the account holder contacts the Fund and provides proper documentation to update the address on the account, a check for the previously voided amount will be re-issued to the shareholder and sent to the new address of record.
Fund Shares Purchased by Check. We may delay the processing and payment of a redemption request for shares you recently purchased by check until your check clears, which may take up to 15 days. If you need your money sooner, you should purchase shares by bank wire.
Low Account Balances. (Only applicable for shares held through Touchstone Securities directly). If your balance falls below the minimum amount required for your account, based on actual amounts you have invested (as opposed to a reduction from market changes), Touchstone Securities may sell your shares and send the proceeds to you. Touchstone Securities will notify you if your shares are about to be sold and you will have 30 days to increase your account balance to the minimum amount.
Facilitated Transfers. In the event an existing Touchstone shareholder wishes to move money between their Touchstone mutual fund account and a money market fund, Touchstone has partnered with The Dreyfus Corporation to help facilitate this type of
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transaction pursuant to certain limitations. Please contact Touchstone Shareholder Services at 1.800.543.0407 for more information if you are interested in pursuing this type of transaction.
DISTRIBUTIONS
A Fund’s dividends and other distributions are taxable to shareholders (other than retirement plans and other tax-exempt investors) whether received in cash or reinvested in additional shares of the Fund. A dividend or distribution paid by a Fund has the effect of reducing the NAV per share on the ex-dividend date by the amount of the dividend or distribution. A dividend or distribution declared shortly after a purchase of shares by an investor would, therefore, represent, in substance, a return of capital to the shareholder with respect to such shares even though it would be subject to federal income taxes.
For most shareholders, a statement will be sent to you within 60 days after the end of each year detailing the federal income tax status of your distributions. Please see “ Federal Income Taxes” below for more information on the federal income tax consequences of dividends and other distributions made by the Funds.
FEDERAL INCOME TAXES
The following discussion summarizes certain U.S. federal income tax considerations affecting the Funds and their shareholders. This discussion is for general information only and does not purport to consider all aspects of U.S. federal income taxation that might be relevant to beneficial owners of shares of the Funds. Therefore, the summary discussion that follows may not be considered to be individual tax advice and may not be relied upon by any shareholder. The summary is based upon current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), applicable U.S. Treasury Regulations (the “Regulations”), and administrative and judicial interpretations thereof, all of which are subject to change, which change could be retroactive, and may affect the conclusions expressed herein. The summary applies only to beneficial owners of a Fund’s shares in whose hands such shares are capital assets within the meaning of Section 1221 of the Code, and may not apply to certain types of beneficial owners of a Fund’s shares, including, but not limited to insurance companies, tax-exempt organizations, shareholders holding a Fund’s shares through tax-advantaged accounts (such as an individual retirement account (an “IRA”), a 401(k) plan account, or other qualified retirement account), financial institutions, pass-through entities, broker-dealers, entities that are not organized under the laws of the United States or a political subdivision thereof, persons who are neither a citizen nor resident of the United States, shareholders holding a Fund’s shares as part of a hedge, straddle or conversion transaction, and shareholders who are subject to the alternative minimum tax. Persons who may be subject to tax in more than one country should consult the provisions of any applicable tax treaty to determine the potential tax consequences to them.
No Fund has requested nor will any Fund request an advance ruling from the Internal Revenue Service (the “IRS”) as to the federal income tax matters described below. The IRS could adopt positions contrary to those discussed below and such positions could be sustained. In addition, the following discussion applicable to shareholders of a Fund addresses only some of the federal income tax considerations generally affecting investments in such Fund.
Shareholders are urged and advised to consult their own tax advisor with respect to the tax consequences of the ownership, purchase and disposition of an investment in a Fund including, but not limited to, the applicability of state, local, foreign and other tax laws affecting the particular shareholder and to possible effects of changes in federal or other tax laws.
General. For federal income tax purposes, each Fund is treated as a separate corporation. Each Fund has elected, and intends to continue to qualify for, taxation as a regulated investment company (a “RIC”) under the Code. By qualifying as a RIC, a Fund (but not the shareholders) will not be subject to federal income tax on that portion of its investment company taxable income and realized net capital gains that it distributes to its shareholders.
Shareholders should be aware that investments made by a Fund, some of which are described below, may involve complex tax rules some of which may result in income or gain recognition by the Fund without the concurrent receipt of cash. Although each Fund seeks to avoid significant noncash income, such noncash income could be recognized by a Fund, in which case it may distribute cash derived from other sources in order to meet the minimum distribution requirements described below. Cash to make the required minimum distributions may be obtained from sales proceeds of securities held by a Fund (even if such sales are not advantageous) or, if permitted by its governing documents and other regulatory restrictions, through borrowing the amounts required to be distributed.
Qualification As A Regulated Investment Company. Qualification as a RIC under the Code requires, among other things, that each Fund: (a) derive at least 90% of its gross income for each taxable year from (i) dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures and forward contracts) derived with respect to its business of investing in such stock,
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securities or currencies, and (ii) net income from interests in qualified publicly traded partnerships (together with (i), the “Qualifying Income Requirement”); (b) diversify its holdings so that, at the close of each quarter of the taxable year: (i) at least 50% of the value of its assets is comprised of cash, cash items (including receivables), U.S. government securities, securities of other RICs and other securities, with those other securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of its total assets and that does not represent more than 10% of the outstanding voting securities of such issuer; and (ii) not more than 25% of the value of its assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer or the securities (other than the securities of other RICs) of two or more issuers controlled by it and engaged in the same, similar or related trades or businesses, or the securities of one or more “qualified publicly traded partnerships” (together with (i) the “Diversification Requirement”); and (c) distribute for each taxable year at least the sum of (i) 90% of its investment company taxable income (which includes dividends, taxable interest, taxable original issue discount income, market discount income, income from securities lending, net short-term capital gain in excess of net long-term capital loss, certain net realized foreign currency exchange gains, and any other taxable income other than “net capital gain” as defined below and is reduced by deductible expenses) determined without regard to any deduction for dividends paid; and (ii) 90% of its tax-exempt interest, if any, net of certain expenses allocable thereto (“net tax-exempt interest”).
The U.S. Treasury Department is authorized to promulgate regulations under which gains from foreign currencies (and options, futures, and forward contracts on foreign currency) would constitute qualifying income for purposes of the Qualifying Income Requirement only if such gains are directly related to the principal business of a Fund of investing in stock or securities or options and futures with respect to stock or securities. To date, the U.S. Treasury Department has not issued such regulations.
As a RIC, a Fund generally will not be subject to U.S. federal income tax on the portion of its income and capital gains that it distributes to its shareholders in any taxable year for which it distributes, in compliance with the Code’s timing and other requirements at least 90% of its investment company taxable income (determined without regard to the deduction for dividends paid) and at least 90% of its net tax-exempt interest. Each Fund may retain for investment all or a portion of its net capital gain (i.e., the excess of its net long-term capital gain over its net short-term capital loss). If a Fund retains any investment company taxable income or net capital gain, it will be subject to tax at regular corporate rates on the amount retained. If a Fund retains any net capital gain, it may designate the retained amount as undistributed net capital gain in a notice to its shareholders, who will be (i) required to include in income for federal income tax purposes, as long-term capital gain, their shares of such undistributed amount; and (ii) entitled to credit their proportionate shares of tax paid by such Fund against their federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax basis of the shares owned by a shareholder of a Fund will be increased by the amount of undistributed net capital gain included in the shareholder’s gross income and decreased by the federal income tax paid by such Fund on that amount of capital gain.
The Qualifying Income Requirement and Diversification Requirement that must be met under the Code in order for a Fund to qualify as a RIC, as described above, may limit the extent to which it will be able to engage in derivative transactions. Rules governing the federal income tax aspects of derivatives, including swap agreements, are not entirely clear in certain respects, particularly in light of two IRS revenue rulings issued in 2006. Revenue Ruling 2006-1 held that income from a derivative contract with respect to a commodity index is not qualifying income for a RIC. Subsequently, the IRS issued Revenue Ruling 2006-31 in which it stated that the holding in Revenue Ruling 2006-1 “was not intended to preclude a conclusion that the income from certain instruments (such as certain structured notes) that create a commodity exposure for the holder is qualifying income.” Accordingly, the Qualifying Income Requirement may limit each Fund’s ability to invest in commodity related derivative transactions and other derivative transactions. Each Fund will account for any investments in commodity derivative transactions in a manner it deems to be appropriate; the IRS, however, might not accept such treatment. If the IRS did not accept such treatment, the status of such Fund as a RIC might be jeopardized.
In general, for purposes of the Qualifying Income Requirement described above, income derived from a partnership is treated as qualifying income only to the extent such income is attributable to items of income of the partnership which would be qualifying income if realized directly by the RIC. However, all of the net income of a RIC derived from an interest in a qualified publicly traded partnership (defined as a partnership (x) the interests in which are traded on an established securities market or are readily tradable on a secondary market or the substantial equivalent thereof, and (y) that derives less than 90% of its income from the qualifying income described in clause (i) of the Qualifying Income Requirement described above) will be treated as qualifying income. In general, such entities will be treated as partnerships for federal income tax purposes if they meet the passive income requirement under Section 7704(c)(2) of the Code. In addition, although in general the passive loss rules of the Code do not apply to RICs, such rules do apply to a RIC with respect to items attributable to an interest in a qualified publicly traded partnership.
For purposes of the Diversification Requirement described above, the term “outstanding voting securities of such issuer” will include the equity securities of a qualified publicly traded partnership.
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If a Fund fails to satisfy the Qualifying Income Requirement or the Diversification Requirement in any taxable year, such Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided for certain de minimis failures to satisfy the Diversification Requirements where the Fund corrects the failure within a specified period of time. If the applicable relief provisions are not available or cannot be met, such Fund will fail to qualify as a RIC and will be subject to federal income tax in the same manner as an ordinary corporation at a tax rate of 21% and all distributions from earnings and profits (as determined under U.S. federal income tax principles) to its shareholders will be taxable as ordinary dividend income eligible for the dividends-received deduction for corporate shareholders and for qualified dividend income treatment for non-corporate shareholders.
Excise Tax. If a Fund fails to distribute by December 31 of each calendar year an amount equal to the sum of (1) at least 98% of its taxable ordinary income (excluding capital gains and losses) for such year, (2) at least 98.2% of the excess of its capital gains over its capital losses (as adjusted for certain ordinary losses) for the twelve month period ending on October 31 of such year, and (3) all taxable ordinary income and the excess of capital gains over capital losses for the prior year that were not distributed during such year and on which it did not pay federal income tax, such Fund will be subject to a nondeductible 4% excise tax (the “Excise Tax”) on the undistributed amounts. A distribution will be treated as paid on December 31 of the calendar year if it is declared by a Fund in October, November, or December of that year to shareholders of record on a date in such month and paid by it during January of the following year. Such distributions will be taxable to shareholders (other than those not subject to federal income tax) in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received. Each Fund generally intends to actually distribute or be deemed to have distributed substantially all of its net income and gain, if any, by the end of each calendar year in compliance with these requirements so that it will generally not be required to pay the Excise Tax. A Fund may in certain circumstances be required to liquidate its investments in order to make sufficient distributions to avoid the Excise Tax liability at a time when its Advisor might not otherwise have chosen to do so. Liquidation of investments in such circumstances may affect the ability of a Fund to satisfy the requirements for qualification as a RIC. However, no assurances can be given that a Fund will not be subject to the Excise Tax and, in fact, in certain instances if warranted, a Fund may choose to pay the Excise Tax as opposed to making an additional distribution.
Capital Loss Carryforwards. For losses arising from tax years beginning on or before December 22, 2010, a Fund is permitted to carry forward a net capital loss from any year to offset its capital gains, if any, realized during the eight years following the year of the loss and such Fund’s capital loss carryforward is treated as a short-term capital loss in the year to which it is carried. For capital losses realized with respect to tax years of a Fund beginning after December 22, 2010, such Fund may carry capital losses forward indefinitely. For capital losses realized in taxable years beginning after December 22, 2010, the excess of a Fund’s net short-term capital losses over its net long-term capital gain is treated as short-term capital losses arising on the first day of the Fund’s next taxable year and the excess of a Fund’s net long-term capital losses over its net short-term capital gain is treated as long-term capital losses arising on the first day of the Fund’s next taxable year. If carried forward capital losses offset future capital gains, such future capital gains are not subject to Fund-level federal income taxation, regardless of whether they are distributed to shareholders. A Fund cannot carry back or carry forward any net operating losses.
Original Issue Discount And Market Discount. A Fund may acquire debt securities that are treated as having original issue discount (“OID”) (generally a debt obligation with a purchase price less than its principal amount, such as a zero coupon bond). Generally, a Fund will be required to include the OID in income over the term of the debt security, even though it will not receive cash payments for such OID until a later time, usually when the debt security matures. A Fund may make one or more of the elections applicable to debt securities having OID which could affect the character and timing of recognition of income. Inflation-protected bonds generally can be expected to produce OID income as their principal amounts are adjusted upward for inflation. The IRS may treat a portion of the OID includible in income with respect to certain high-yield corporate debt securities as a dividend for federal income tax purposes.
A debt security acquired in the secondary market by a Fund may be treated as having market discount if acquired at a price below redemption value or adjusted issue price if issued with original issue discount. The Fund’s market discount accrues ratably, on a daily basis, over the period from the date of acquisition to the date of maturity even though the Fund will not receive cash. Absent an election by a Fund to include the market discount in income as it accrues, gain on its disposition of such an obligation will be treated as ordinary income rather than capital gain to the extent of the accrued market discount.
In addition, pay-in-kind securities will give rise to income which is required to be distributed and is taxable even though a Fund holding such securities receives no interest payments in cash on such securities during the year.
Each Fund generally will be required to make distributions to shareholders representing the income accruing on the securities, described above, that is currently includable in income, even though cash representing such income may not have been received by such Fund. Cash to pay these distributions may be obtained from sales proceeds of securities held by a Fund (even if such sales are not advantageous) or, if permitted by such Fund’s governing documents, through borrowing the amounts required to be
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distributed. In the event a Fund realizes net capital gains from such transactions, its shareholders may receive a larger capital gain distribution, if any, than they would have in the absence of such transactions.
Options, Futures, And Forward Contracts. The writing (selling) and purchasing of options and futures contracts and entering into forward currency contracts, involves complex rules that will determine for federal income tax purposes the amount, character and timing of recognition of the gains and losses a Fund realizes in connection with such transactions.
Gains and losses on the sale, lapse, or other termination of options and futures contracts, options thereon and certain forward contracts (except certain foreign currency options, forward contracts and futures contracts) will generally be treated as capital gains and losses. Some regulated futures contracts, certain foreign currency contracts, and certain non-equity options (such as certain listed options or options on broad based securities indexes) held by a Fund (“Section 1256 contracts”), other than contracts on which it has made a “mixed-straddle election”, will be required to be “marked-to-market” for federal income tax purposes, that is, treated as having been sold at their market value on the last day of such Fund’s taxable year. These provisions may require a Fund to recognize income or gains without a concurrent receipt of cash. Any gain or loss recognized on actual or deemed sales of Section 1256 contracts will be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss, although certain foreign currency gains and losses from such contracts may be treated as ordinary income or loss as described below. Transactions that qualify as designated hedges are exempt from the mark-to-market rule, but may require a Fund to defer the recognition of losses on futures contracts, foreign currency contracts and certain options to the extent of any unrecognized gains on related positions held by it.
The tax provisions described above applicable to options, futures and forward contracts may affect the amount, timing, and character of a Fund’s distributions to its shareholders. For example, the Section 1256 rules described above may operate to increase the amount a Fund must distribute to satisfy the minimum distribution requirement for the portion treated as short-term capital gain which will be taxable to its shareholders as ordinary income, and to increase the net capital gain it recognizes, without, in either case, increasing the cash available to it. A Fund may elect to exclude certain transactions from the operation of Section 1256, although doing so may have the effect of increasing the relative proportion of net short-term capital gain (taxable as ordinary income) and thus increasing the amount of dividends it must distribute. Section 1256 contracts also may be marked-to-market for purposes of the Excise Tax.
When a covered call or put option written (sold) by a Fund expires such Fund will realize a short-term capital gain equal to the amount of the premium it received for writing the option. When a Fund terminates its obligations under such an option by entering into a closing transaction, it will realize a short-term capital gain (or loss), depending on whether the cost of the closing transaction is less than (or exceeds) the premium received when it wrote the option. When a covered call option written by a Fund is exercised, such Fund will be treated as having sold the underlying security, producing long-term or short-term capital gain or loss, depending upon the holding period of the underlying security and whether the sum of the option price received upon the exercise plus the premium received when it wrote the option is more or less than the basis of the underlying security.
Straddles. Section 1092 deals with the taxation of straddles which also may affect the taxation of options in which a Fund may invest. Offsetting positions held by a Fund involving certain derivative instruments, such as options, futures and forward currency contracts, may be considered, for federal income tax purposes, to constitute “straddles.” Straddles are defined to include offsetting positions in actively traded personal property. In certain circumstances, the rules governing straddles override or modify the provisions of Section 1256, described above. If a Fund is treated as entering into a straddle and at least one (but not all) of its positions in derivative contracts comprising a part of such straddle is governed by Section 1256, then such straddle could be characterized as a “mixed straddle.” A Fund may make one or more elections with respect to mixed straddles. Depending on which election is made, if any, the results with respect to a Fund may differ. Generally, to the extent the straddle rules apply to positions established by a Fund, losses realized by it may be deferred to the extent of unrealized gain in any offsetting positions. Moreover, as a result of the straddle rules, short-term capital loss on straddle positions may be characterized as long-term capital loss, and long-term capital gain may be characterized as short-term capital gain. In addition, the existence of a straddle may affect the holding period of the offsetting positions and cause such sales to be subject to the “wash sale” and “short sale” rules. As a result, the straddle rules could cause distributions that would otherwise constitute “qualified dividend income” to fail to satisfy the applicable holding period requirements, described below, and therefore to be taxed as ordinary income. Further, a Fund may be required to capitalize, rather than deduct currently, any interest expense and carrying charges applicable to a position that is part of a straddle. Because the application of the straddle rules may affect the character and timing of gains and losses from affected straddle positions, the amount which must be distributed to shareholders, and which will be taxed to shareholders as ordinary income or long-term capital gain, may be increased or decreased substantially as compared to the situation where a Fund had not engaged in such transactions.
In circumstances where a Fund has invested in certain pass-through entities, the amount of long-term capital gain that it may recognize from certain derivative transactions with respect to interests in such pass-through entities is limited under the Code’s
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constructive ownership rules. The amount of long-term capital gain is limited to the amount of such gain a Fund would have had if it directly invested in the pass-through entity during the term of the derivative contract. Any gain in excess of this amount is treated as ordinary income. An interest charge is imposed on the amount of gain that is treated as ordinary income.
Swaps And Derivatives. As a result of entering into swap or derivative agreements, a Fund may make or receive periodic net payments. A Fund may also make or receive a payment when a swap or derivative is terminated prior to maturity through an assignment of the swap or derivative or other closing transaction. Periodic net payments will generally constitute ordinary income or deductions, while termination of a swap or derivative will generally result in capital gain or loss (which will be a long-term capital gain or loss if the Fund has been a party to a swap or derivative for more than one year). With respect to certain types of swaps or derivatives, a Fund may be required to currently recognize income or loss with respect to future payments on such swaps or derivatives or may elect under certain circumstances to mark such swaps or derivatives to market annually for tax purposes as ordinary income or loss.
Rules governing the tax aspects of swap or derivative agreements are not entirely clear in certain respects, in particular whether income generated is Qualifying Income. Accordingly, while each Fund intends to account for such transactions in a manner it deems appropriate, the IRS might not accept such treatment. If the IRS did not accept such treatment, the status of the Fund as a RIC might be adversely affected. The Funds intend to monitor developments in this area. Certain requirements that must be met under the Code in order for each Fund to qualify as a RIC may limit the extent to which a Fund will be able to engage in swap agreements and certain derivatives.
Constructive Sales. Certain rules may affect the timing and character of gain if a Fund engages in transactions that reduce or eliminate its risk of loss with respect to appreciated financial positions. If a Fund enters into certain transactions (including a short sale, an offsetting notional principal contract, a futures or forward contract, or other transactions identified in U.S. Treasury regulations) in property while holding an appreciated financial position in substantially identical property, it will be treated as if it had sold and immediately repurchased the appreciated financial position and will be taxed on any gain (but not loss) from the constructive sale. The character of gain from a constructive sale will depend upon a Fund’s holding period in the appreciated financial position. Loss from a constructive sale would be recognized when the position was subsequently disposed of, and its character would depend on a Fund’s holding period and the application of various loss deferral provisions of the Code.
In addition, if the appreciated financial position is itself a short sale, acquisition of the underlying property or substantially identical property by a Fund will be deemed a constructive sale. The foregoing will not apply, however, to a Fund’s transaction during any taxable year that otherwise would be treated as a constructive sale if the transaction is closed within 30 days after the end of that year and such Fund holds the appreciated financial position unhedged for 60 days after that closing (i.e., at no time during that 60-day period is such Fund’s risk of loss regarding the position reduced by reason of certain specified transactions with respect to substantially identical or related property, such as having an option to sell, being contractually obligated to sell, making a short sale or granting an option to buy substantially identical stock or securities).
Wash Sales. A Fund may in certain circumstances be impacted by special rules relating to “wash sales.” In general, the wash sale rules prevent the recognition of a loss by a Fund from the disposition of stock or securities at a loss in a case in which identical or substantially identical stock or securities (or an option to acquire such property) is or has been acquired by it within 30 days before or 30 days after the sale.
Short Sales. A Fund may make short sales of securities. Short sales may increase the amount of short-term capital gain realized by a Fund, which is taxed as ordinary income when distributed to its shareholders. Short sales also may be subject to the “Constructive Sales” rules, discussed above.
Tax Credit Bonds. If a Fund holds (directly or indirectly) one or more “tax credit bonds” (defined below) on one or more specified dates during a Fund’s taxable year, and it satisfies the minimum distribution requirement, it may elect for U.S. federal income tax purposes to pass through to shareholders tax credits otherwise allowable to it for that year with respect to such tax credit bonds. A tax credit bond is defined in the Code as a “qualified tax credit bond” (which includes a qualified forestry conservation bond, a new clean renewable energy bond, a qualified energy conservation bond, or a qualified zone academy bond, each of which must meet certain requirements specified in the Code), a “build America bond” (which includes certain qualified bonds issued before January 1, 2011) or certain other bonds specified in the Code. New tax credits bonds may not be issued after December 31, 2017. If a Fund were to make an election, a shareholder of such Fund would be required to include in gross income an amount equal to such shareholder’s proportionate share of the interest income attributable to such credits and would be entitled to claim as a tax credit an amount equal to a proportionate share of such credits. Certain limitations may apply on the extent to which the credit may be claimed.
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Other Regulated Investment Companies. Generally, the character of the income or capital gains that a Fund receives from another investment company will pass through to the Fund’s shareholders as long as the Fund and the other investment company each qualify as RICs under the Code. However, to the extent that another investment company that qualifies as a RIC realizes net losses on its investments for a given taxable year, a Fund will not be able to recognize its share of those losses until it disposes of shares of such investment company. Moreover, even when a Fund does make such a disposition, a portion of its loss may be recognized as a long-term capital loss. As a result of the foregoing rules, and certain other special rules, it is possible that the amounts of net investment income and net capital gains that a Fund will be required to distribute to shareholders will be greater than such amounts would have been had the Fund invested directly in the securities held by the investment companies in which it invests, rather than investing in shares of the investment companies. For similar reasons, the character of distributions from a Fund (e.g., long-term capital gain, qualified dividend income, etc.) will not necessarily be the same as it would have been had the Fund invested directly in the securities held by the investment companies in which it invests.
Passive Foreign Investment Companies. A Fund may invest in a non-U.S. corporation, which could be treated as a passive foreign investment company (a “PFIC”) or become a PFIC under the Code. A PFIC is generally defined as a foreign corporation that meets either of the following tests: (1) at least 75% of its gross income for its taxable year is income from passive sources (such as interest, dividends, certain rents and royalties, or capital gains); or (2) an average of at least 50% of its assets produce, or are held for the production of, such passive income. If a Fund acquires any equity interest in a PFIC, such Fund could be subject to federal income tax and interest charges on “excess distributions” received with respect to such PFIC stock or on any gain from the sale of such PFIC stock (collectively “PFIC income”), even if such Fund distributes the PFIC income as a taxable dividend to its shareholders. The balance of the PFIC income will be included in such Fund’s investment company taxable income and, accordingly, will not be taxable to it to the extent it distributes that income to its shareholders. A Fund’s distributions of PFIC income will be taxable as ordinary income even though, absent the application of the PFIC rules, some portion of the distributions may have been classified as capital gain.
A Fund will not be permitted to pass through to its shareholders any credit or deduction for taxes and interest charges incurred with respect to a PFIC. Payment of this tax would therefore reduce a Fund’s economic return from its investment in PFIC shares. To the extent a Fund invests in a PFIC, it may elect to treat the PFIC as a “qualified electing fund” (“QEF”), then instead of the tax and interest obligation described above on excess distributions, such Fund would be required to include in income each taxable year its pro rata share of the QEF’s annual ordinary earnings and net capital gain. As a result of a QEF election, a Fund would likely have to distribute to its shareholders an amount equal to the QEF’s annual ordinary earnings and net capital gain to satisfy the Code’s minimum distribution requirement described herein and avoid imposition of the Excise Tax, even if the QEF did not distribute those earnings and gain to such Fund. In most instances it will be very difficult, if not impossible, to make this election because of certain requirements in making the election.
A Fund may elect to “mark-to-market” its stock in any PFIC. “Marking-to-market,” in this context, means including in ordinary income each taxable year the excess, if any, of the fair market value of the PFIC stock over such Fund’s adjusted basis therein as of the end of that year. Pursuant to the election, a Fund also may deduct (as an ordinary, not capital, loss) the excess, if any, of its adjusted basis in the PFIC stock over the fair market value thereof as of the taxable year-end, but only to the extent of any net mark-to-market gains with respect to that stock it included in income for prior taxable years under the election. A Fund’s adjusted basis in its PFIC stock subject to the election would be adjusted to reflect the amounts of income included and deductions taken thereunder. In either case, a Fund may be required to recognize taxable income or gain without the concurrent receipt of cash.
Foreign Currency Transactions. Foreign currency gains and losses realized by a Fund in connection with certain transactions involving foreign currency-denominated debt instruments, certain options, futures contracts, forward contracts, and similar instruments relating to foreign currency, foreign currencies, and foreign currency-denominated payables and receivables are subject to Section 988 of the Code, which causes such gains and losses to be treated as ordinary income or loss and may affect the amount and timing of recognition of such Fund’s income. In some cases elections may be available that would alter this treatment, but such elections could be detrimental to a Fund by creating current recognition of income without the concurrent recognition of cash. If a foreign currency loss treated as an ordinary loss under Section 988 were to exceed a Fund’s investment company taxable income (computed without regard to such loss) for a taxable year the resulting loss would not be deductible by it or its shareholders in future years. The foreign currency income or loss will also increase or decrease a Fund’s investment company income distributable to its shareholders.
Foreign Taxation. Income received by a Fund from sources within foreign countries may be subject to foreign withholding and other taxes. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. If more than 50% of a Fund’s total assets at the close of any taxable year consist of stock or securities of foreign corporations, or if a Fund is a qualified fund of funds (i.e., a RIC that invests at least 50% of its total assets in other RICs at the close of each quarter of its taxable year) and the Fund meets the distribution requirements described above, such Fund may file an election (the “pass-through election”) with the IRS pursuant to which shareholders of the Fund would be required to (i) include in gross income (in addition
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to taxable dividends actually received) their pro rata shares of foreign income taxes paid by the Fund, or in the case of a qualified fund of funds, such taxes paid by an underlying fund that has made the pass-through election, even though not actually received by such shareholders; and (ii) treat such respective pro rata portions as foreign income taxes paid by them. Each Fund will furnish its shareholders with a written statement providing the amount of foreign taxes paid by the Fund that will “pass-through” for the year, if any.
Generally, a credit for foreign taxes is subject to the limitation that it may not exceed the shareholder’s U.S. tax attributable to his or her total foreign source taxable income. For this purpose, if the pass-through election is made, the source of a Fund’s income will flow through to shareholders. The limitation on the foreign tax credit is applied separately to foreign source passive income, and to certain other types of income. Shareholders may be unable to claim a credit for the full amount of their proportionate share of the foreign taxes paid by a Fund. Various limitations, including a minimum holding period requirement, apply to limit the credit and deduction for foreign taxes for purposes of regular federal income tax and alternative minimum tax.
REITs. A Fund may invest in REITs. Investments in REIT equity securities may require a Fund to accrue and distribute taxable income without the concurrent receipt of cash. To generate sufficient cash to make the requisite distributions, a Fund may be required to sell securities in its portfolio (including when it is not advantageous to do so) that it otherwise would have continued to hold. A Fund’s investments in REIT equity securities may at other times result in its receipt of cash in excess of the REIT’s earnings; if such Fund distributes these amounts, these distributions could constitute a return of capital to its shareholders for federal income tax purposes. Dividends received by a Fund from a REIT will not qualify for the corporate dividends recevied deduction and generally will not constitute qualified dividend income.
A Fund may invest in REITs that hold residual interests in REMICs or taxable mortgage pools (TMPs), or such REITs may themselves constitute TMPs. Under an IRS notice, and U.S. Treasury regulations that have yet to be issued but may apply retroactively, a portion of a Fund’s income from a REIT that is attributable to the REIT’s residual interest in a REMIC or a TMP (referred to in the Code as an “excess inclusion”) will be subject to federal income tax in all events. This notice also provides, and the regulations are expected to provide, that excess inclusion income of a RIC, such as the Funds, will be allocated to shareholders of the RIC in proportion to the dividends received by such shareholders, with the same consequences as if the shareholders held the related REMIC residual interest or invested in the TMP directly. As a result, the Fund may not be a suitable investment for certain tax exempt-shareholders, including a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan and other tax-exempt entities. See “Tax-Exempt Shareholders.”
MLPs. A Fund may invest to a limited degree in MLPs that are treated as qualified publicly traded partnerships for federal income tax purposes. Net income derived from an interest in a qualified publicly traded partnership is included in the sources of income that satisfy the Qualifying Income Requirement. However, under the Diversification Requirement, no more than 25% of the value of a RIC’s total assets at the end of each fiscal quarter may be invested in securities of qualified publicly traded partnerships. If an MLP in which a Fund invests is taxed as a partnership for federal income tax purposes, the Fund will be taxable on its allocable share of the MLP’s income regardless of whether the Fund receives any distribution from the MLP. Thus, the Fund may be required to sell other securities in order to satisfy the distribution requirements to qualify as a RIC and to avoid federal income tax and the Excise Tax. Distributions to a Fund from an MLP that is taxed as a partnership for federal income tax purposes will constitute a return of capital to the extent of the Fund’s basis in its interest in the MLP. If a Fund’s basis is reduced to zero, distributions will generally constitute capital gain for federal income tax purposes.
For taxable years beginning after December 31, 2017 and before January 1, 2026, ordinary REIT dividends and “qualified publicly traded partnership income” are treated as “qualified business income” that is eligible for a 20% federal income tax deduction in the case of individuals, trusts and estates. The Code currently does not contain a provision permitting a RIC to pass the special character of this income through to its shareholders. As a result, direct investors in REITs and MLPs that are publicly traded partnerships taxed as partnerships may be entitled to this deduction while investors that invest in a Fund that invests in REITs or MLPs will not.
Distributions. Distributions paid out of a Fund’s current and accumulated earnings and profits (as determined at the end of the year), whether reinvested in additional shares or paid in cash, are generally taxable and must be reported by each shareholder who is required to file a federal income tax return. Distributions in excess of a Fund’s current and accumulated earnings and profits, as computed for federal income tax purposes, will first be treated as a return of capital up to the amount of a shareholder’s tax basis in his or her Fund shares and then as capital gain.
For federal income tax purposes, distributions of net investment income are generally taxable as ordinary income, and distributions of gains from the sale of investments that a Fund owned (or is treated as owning) for one year or less will be taxable as ordinary income. Distributions designated by a Fund as “capital gain dividends” (distributions from the excess of net long-term capital gain over net short-term capital losses) will be taxable to shareholders as long-term capital gain regardless of the length of time they
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have held their shares of such Fund. Such dividends do not qualify as dividends for purposes of the dividends received deduction or for qualified dividend income purposes as described below.
Distributions of “qualified dividend income” received by non-corporate shareholders of a Fund may be eligible for the long-term capital gain rate. A Fund’s distribution will be treated as qualified dividend income and therefore eligible for the long-term capital gain rate to the extent the Fund receives dividend income from taxable domestic corporations and certain qualified foreign corporations, provided that certain holding period and other requirements are met. A corporate shareholder of a Fund may be eligible for the dividends received deduction on such Fund’s distributions attributable to dividends received by such Fund from domestic corporations, which, if received directly by the corporate shareholder, would qualify for such a deduction. For eligible corporate shareholders, the dividends received deduction may be subject to certain reductions, and a distribution by a Fund attributable to dividends of a domestic corporation will be eligible for the deduction only if certain holding period and other requirements are met.
An additional 3.8% Medicare tax is imposed on certain net investment income (including dividends and capital gain distributions received from a Fund and net gains from redemptions or other taxable dispositions of shares of a Fund) of U.S. individuals, estates and trusts to the extent that such person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds a threshold amount.
Each Fund will furnish a statement to shareholders providing the federal income tax status of its dividends and distributions including the portion of such dividends, if any, that qualifies as long-term capital gain.
Different tax treatment, including penalties on certain excess contributions and deferrals, certain pre-retirement and post-retirement distributions, and certain prohibited transactions, is accorded to accounts maintained as qualified retirement plans.
Shareholders are urged and advised to consult their own tax advisors for more information.
Purchases of Fund Shares. Prior to purchasing shares in a Fund, the impact of dividends or distributions which are expected to be or have been declared, but not paid, should be carefully considered. Any dividend or distribution declared shortly after a purchase of shares of a Fund prior to the record date will have the effect of reducing the per share NAV by the per share amount of the dividend or distribution, and to the extent the distribution consists of the Fund’s taxable income, the purchasing shareholder will be taxed on the taxable portion of the dividend or distribution received even though some or all of the amount distributed is effectively a return of capital.
Sales, Exchanges or Redemptions. Upon the disposition of shares of a Fund (whether by redemption, sale or exchange), a shareholder may realize a capital gain or loss. Such capital gain or loss will be long-term or short-term depending upon the shareholder’s holding period for the shares. The capital gain will be long-term if the shares were held for more than 12 months and short-term if held for 12 months or less. If a shareholder sells or exchanges Fund shares within 90 days of having acquired such shares and if, before January 31 of the calendar year following the calendar year of the sale or exchange, as a result of having initially acquired those shares, the shareholder subsequently pays a reduced sales charge on a new purchase of shares of the Fund or another Fund, the sales charge previously incurred in acquiring the Fund’s shares generally shall not be taken into account (to the extent the previous sales charges do not exceed the reduction in sales charges on the new purchase) for the purpose of determining the amount of gain or loss on the disposition, but generally will be treated as having been incurred in the new purchase. Any loss realized on a disposition will be disallowed under the “wash sale” rules to the extent that the shares disposed of by the shareholder are replaced by the shareholder (including through dividend reinvestment) within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a disposition of shares held by the shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of capital gain dividends received by the shareholder and disallowed to the extent of any distributions of exempt-interest dividends received by the shareholder with respect to such shares unless the Fund declared exempt-interest dividends on a daily basis in an amount equal to at least 90% of its net tax-exempt interest and distributes such dividends on a monthly or more frequent basis. Capital losses are generally deductible only against capital gains except that individuals may deduct up to $3,000 of capital losses against ordinary income.
The 3.8% Medicare contribution tax (described above) will apply to gains from the sale or exchange of a Fund’s shares.
Backup Withholding. Each Fund generally is required to withhold, and remit to the U.S. Treasury, subject to certain exemptions, an amount equal to 24% of all distributions and redemption proceeds paid or credited to a shareholder of such Fund if (i) the shareholder fails to furnish such Fund with the correct taxpayer identification number (“TIN”) certified under penalties of perjury, (ii) the shareholder fails to provide a certified statement that the shareholder is not subject to backup withholding, or (iii) the IRS or a broker has notified such Fund that the number furnished by the shareholder is incorrect or that the shareholder is subject to
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backup withholding as a result of failure to report interest or dividend income. If the backup withholding provisions are applicable, any such distributions or proceeds, whether taken in cash or reinvested in shares, will be reduced by the amounts required to be withheld. Backup withholding is not an additional tax. Any amounts withheld may be credited against a shareholder’s U.S. federal income tax liability.
State And Local Taxes. State and local laws often differ from federal income tax laws with respect to the treatment of specific items of income, gain, loss, deduction and credit. Shareholders are urged and advised to consult their own tax advisors for more information.
Non-U.S. Shareholders. Distributions made to non-U.S. shareholders attributable to net investment income generally are subject to U.S. federal income tax withholding at a 30% rate (or such lower rate provided under an applicable income tax treaty). However, a Fund will generally not be required to withhold tax on any amounts paid to a non-U.S. investor with respect to dividends attributable to “qualified short-term gain” (i.e., the excess of net short-term capital gain over net long-term capital loss) designated as such by the Fund and dividends attributable to certain U.S. source interest income that would not be subject to federal withholding tax if earned directly by a non-U.S. person, provided such amounts are properly designated by the Fund. A Fund may choose not to designate such amounts.
Notwithstanding the foregoing, if a distribution described above is effectively connected with the conduct of a trade or business carried on by a non-U.S. shareholder within the United States (or, if an income tax treaty applies, is attributable to a permanent establishment in the United States), federal income tax withholding and exemptions attributable to foreign persons will not apply and such distribution will be subject to the federal income tax, reporting and withholding requirements generally applicable to U.S. persons described above.
Under U.S. federal tax law, a non-U.S. shareholder is not, in general, subject to federal income tax or withholding tax on capital gains (and is not allowed a deduction for losses) realized on the sale of shares of a Fund or on capital gain dividends, provided that the Fund obtains a properly completed and signed certificate of foreign status, unless (i) such gains or distributions are effectively connected with the conduct of a trade or business carried on by the non-U.S. shareholder within the United States (or, if an income tax treaty applies, are attributable to a permanent establishment in the United States of the non-U.S. shareholder); (ii) in the case of an individual non-U.S. shareholder, the shareholder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale and certain other conditions are met; or (iii) the shares of the Fund constitute U.S. real property interests (USRPIs), as described below.
Special rules apply to foreign persons who receive distributions from a Fund that are attributable to gain from “United States real property interests” (“USRPIs”). The Code defines USRPIs to include direct holdings of U.S. real property and any interest (other than an interest solely as a creditor) in a “United States real property holding corporation” or former United States real property holding corporation. The Code defines a United States real property holding corporation as any corporation whose USRPIs make up 50% or more of the fair market value of its USRPIs, its interests in real property located outside the United States, plus any other assets it uses in a trade or business. In general, if a Fund is a United States real property holding company (determined without regard to certain exceptions), distributions by the Fund that are attributable to (a) gains realized on the disposition of USRPIs by the Fund and (b) distributions received by the Fund from a lower-tier RIC or REIT that the Fund is required to treat as USRPI gain in its hands will retain their character as gains realized from USRPIs in the hands of the foreign persons and will be subject to U.S. federal withholding tax. In addition, such distributions could result in the foreign shareholder being required to file a U.S. tax return and pay tax on the distributions at regular U.S. federal income tax rates. The consequences to a non-U.S. shareholder, including the rate of such withholding and character of such distributions (e.g., ordinary income or USRPI gain) will vary depending on the extent of the non-U.S. shareholder’s current and past ownership of a Fund.
In addition, if a Fund is a United States real property holding corporation or former United States real property holding corporation, the Fund may be required to withhold U.S. tax upon a redemption of shares by a greater-than-5% shareholder that is a foreign person, and that shareholder would be required to file a U.S. income tax return for the year of the disposition of the USRPI and pay any additional tax due on the gain. However, no such withholding is generally required with respect to amounts paid in redemption of shares of a fund if the fund is a domestically controlled qualified investment entity, or, in certain other limited cases, if a fund (whether or not domestically controlled) holds substantial investments in RICs that are domestically controlled qualified investment entities.
Subject to the additional rules described herein, federal income tax withholding will apply to distributions attributable to dividends and other investment income distributed by the Funds. The federal income tax withholding rate may be reduced (and, in some cases, eliminated) under an applicable tax treaty between the United States and the non-U.S. shareholder’s country of residence or incorporation. In order to qualify for treaty benefits, a non-U.S. shareholder must comply with applicable certification requirements relating to its foreign status (generally by providing a Fund with a properly completed Form W-8BEN).
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Sections 1471-1474 of the Code and the U.S. Treasury and IRS guidance issued thereunder (collectively, the "Foreign Account Tax Compliance Act" or "FATCA") generally require a Fund to obtain information sufficient to identify the status of each of its shareholders. If a shareholder fails to provide this information or otherwise fails to comply with FATCA, a Fund may be required to withhold under FATCA at a rate of 30% with respect to that shareholder on Fund dividends and distributions and on the proceeds of the sale, redemption, or exchange of Fund shares. A Fund may disclose the information that it receives from (or concerning) its shareholders to the IRS, non-U.S. taxing authorities or other parties as necessary to comply with FATCA, related intergovernmental agreements or other applicable law or regulation. Each investor is urged to consult its tax advisor regarding the applicability of FATCA and any other reporting requirements with respect to the investor’s own situation, including investments through an intermediary.
Foreign Bank And Financial Accounts And Foreign Financial Assets Reporting Requirements. A shareholder that owns directly or indirectly more than 50% by vote or value of a Fund, is urged and advised to consult its own tax advisor regarding its filing obligations with respect to FinCen Form 114, Report of Foreign Bank and Financial Accounts.
Tax-Exempt Shareholders. A tax-exempt shareholder could realize unrelated business taxable income (“UBTI”) by virtue of its investment in a Fund if shares in the Fund constitute debt financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b).
It is possible that a tax-exempt shareholder of a Fund will also recognize UBTI if such Fund recognizes “excess inclusion income” (as described above) derived from direct or indirect investments in REMIC residual interests or TMPs. Furthermore, any investment in a residual interest of a CMO that has elected to be treated as a REMIC can create complex tax consequences, especially if a Fund has state or local governments or other tax-exempt organizations as shareholders.
In addition, special tax consequences apply to charitable remainder trusts (“CRTs”) that invest in RICs that invest directly or indirectly in residual interests in REMICs or in TMPs.
Tax Shelter Reporting Regulations. Under U.S. Treasury regulations, if a shareholder recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders are urged and advised to consult their own tax advisors to determine the applicability of these regulations in light of their individual circumstances.
Shareholders are urged and advised to consult their own tax advisor with respect to the tax consequences of an investment in a Fund including, but not limited to, the applicability of state, local, foreign and other tax laws affecting the particular shareholder and to possible effects of changes in federal or other tax laws.
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CUSTODIAN
Brown Brothers Harriman & Co. (“BBH”), 50 Post Office Square, Boston, Massachusetts 02110, is the Trust’s custodian. BBH acts as the Trust’s depository, safe keeps its portfolio securities, collects all income and other payments with respect thereto, disburses money as instructed and maintains records in connection with its duties.
LEGAL COUNSEL
Vedder Price P.C., 222 North LaSalle Street, Chicago, Illinois 60601, serves as counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The firm of Ernst & Young LLP ("E&Y"), 312 Walnut Street, Cincinnati, Ohio 45202, has been selected as the independent registered public accounting firm for the Trust for the fiscal year ending September 30, 2018. E&Y will perform an annual audit of the Trust’s financial statements and advise the Trust as to certain accounting matters.
TRANSFER AND SUB-ADMINISTRATIVE AGENT
Transfer Agent. The Trust’s transfer agent is BNY Mellon Investment Servicing (US) Inc. (“BNY Mellon IS”), 4400 Computer Drive, Westborough, Massachusetts 01581. BNY Mellon IS maintains the records of each shareholder’s account, answers shareholders’ inquiries concerning their accounts, processes purchases and redemptions of the Funds’ shares, acts as dividend and distribution disbursing agent and performs other shareholder servicing functions. For providing transfer agent and shareholder services to the Trust, BNY Mellon IS receives a monthly per account fee from each Fund, plus out-of-pocket expenses.
The Funds may also pay a fee to certain servicing organizations (such as broker-dealers and financial institutions) that provide sub-transfer agency services. These services include maintaining shareholder records, processing shareholder transactions and distributing communications to shareholders.
Sub-Administrative Agent . The Advisor provides administrative services to the Trust under an Administration Agreement and has sub-contracted certain accounting and administrative services to The Bank of New York Mellon ("BNY Mellon"). The sub-administrative services sub-contracted to BNY Mellon include accounting and pricing services, SEC and state security filings, providing executive and administrative services and providing reports for meetings of the Board. The Advisor pays BNY Mellon a sub-administration fee out of its administration fee.
Set forth below are the sub-administrative fees paid by the Advisor with respect to each Fund during the fiscal years (or periods) ended September 30.
Sub-Administrative Fees Paid | |||||||||
Fund | 2015 | 2016 | 2017 | ||||||
Active Bond Fund* | $ | 36,550 | $ | 36,921 | $ | 38,934 | |||
Arbitrage Fund | $ | 46,810 | $ | 41,345 | $ | 56,383 | |||
Emerging Markets Small Cap Fund** | $ | 82,995 | $ | 23,759 | $ | 18,388 | |||
High Yield Fund* | $ | 70,822 | $ | 57,676 | $ | 63,538 | |||
Merger Arbitrage Fund | $ | 79,354 | $ | 56,166 | $ | 56,645 | |||
Mid Cap Fund | $ | 142,155 | $ | 158,184 | $ | 163,236 | |||
Mid Cap Value Fund | $ | 89,225 | $ | 92,286 | $ | 138,951 | |||
Premium Yield Equity Fund | $ | 55,959 | $ | 46,021 | $ | 43,486 | |||
Sands Capital Select Growth Fund | $ | 1,280,444 | $ | 824,192 | $ | 536,252 | |||
Small Cap Fund | $ | 182,259 | $ | 146,777 | $ | 111,732 | |||
Small Cap Value Fund | $ | 29,434 | $ | 31,277 | $ | 45,134 | |||
Total Return Bond Fund | $ | 50,341 | $ | 56,892 | $ | 63,462 | |||
Ultra Short Duration Fixed Income Fund | $ | 145,523 | $ | 131,887 | $ | 146,721 | |||
* Prior to January 27, 2017, fees were paid by the Predecessor Funds.
** Prior to April 19, 2016, the Fund was known as Touchstone Emerging Markets Equity Fund.
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FINANCIAL STATEMENTS
The Funds’ audited financial statements for the fiscal year ended September 30, 2017, including the notes thereto and the report of Ernst & Young LLP thereon, included in the Trust’s Annual Reports are incorporated into this SAI by reference. No other parts of the Trust’s Annual Report are hereby incorporated by reference. The Annual Report may be obtained free of charge by calling the Trust at 1.800.543.0407 or by downloading a copy at TouchstoneInvestments.com. You may also obtain the Annual Report or unaudited semi-annual report, as well as other information about the Trust, from the EDGAR Database on the SEC’s website at http://www.sec.gov.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
Moody’s Investors Service, Inc. (“Moody’s”), Standard &Poor’s Rating Services® (“S&P”) and Fitch Ratings, Inc. (“Fitch”) are private services that provide ratings of the credit quality of debt obligations. A description of the ratings assigned by Moody’s, S&P®, Fitch are provided below. These ratings represent the opinions of these rating services as to the quality of the securities that they undertake to rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. The Advisor or sub-advisor attempts to discern variations in credit rankings of the rating services and to anticipate changes in credit ranking. However, subsequent to purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum rating required for purchase by the Fund. In that event, the Advisor or Sub-Advisor will consider whether it is in the best interest of the Fund to continue to hold the securities.
Moody’s credit ratings are current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. Moody’s defines credit risk as the risk that an entity may not meet its contractual, financial obligations as they come due and any estimated financial loss in the event of default. Credit ratings do not address any other risk, including but not limited to: liquidity risk, market value risk, or price volatility. Credit ratings are not statements of current or historical fact. Credit ratings do not constitute investment or financial advice, and credit ratings are not recommendations to purchase, sell, or hold particular securities. Credit ratings do not comment on the suitability of an investment for any particular investor. Moody’s issues its credit ratings with the expectation and understanding that each investor will make its own study and evaluation of each security that is under consideration for purchase, holding, or sale.
An S&P issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects S&P’s view of the obligor’s capacity and willingness to meet its financial commitments as they come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.
Fitch credit ratings provide an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, and repayment of principal, insurance claims or counterparty obligations. Fitch credit ratings are used by investors as indications of the likelihood of receiving their money owed to them in accordance with the terms on which they invested. Fitch’s credit-ratings cover the global spectrum of corporate, sovereign (including supranational and sub-national), financial, bank, insurance, municipal and other public finance entities and the securities or other obligations they issue, as well as structured finance securities backed by receivables or other financial assets.
Short-Term Credit Ratings
Moody’s
Moody’s short-term ratings are opinions of the ability of issuers to honor short-term financial obligations. Ratings may be assigned to issuers, short-term programs or to individual short-term debt instruments. Such obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted.
Moody’s employs the following designations to indicate the relative repayment ability of rated issuers:
“P-1” - Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
“P-2” - Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
“P-3” - Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
“NP” - Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
Note: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the senior-most long-term rating of the issuer, its guarantor or support-provider.
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S&P
S&P’s short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 days—including commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. The result is a dual rating, in which the short-term rating addresses the put feature, in addition to the usual long-term rating.
The following summarizes the rating categories used by S&P for short-term issues:
“A-1” - Obligations are rated in the highest category and indicate that the obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.
“A-2” - Obligations are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.
“A-3” - Obligations exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
“B” - Obligations are regarded as vulnerable and having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet its financial commitments.
“C” - Obligations are currently vulnerable to nonpayment and are dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation.
“D” - Obligations are in payment default. The “D” rating category is used when payments on an obligation are not made on the date due, unless S&P believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks - Country risk considerations are a standard part of S&P’s analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An obligor’s capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency due to the sovereign government’s own relatively lower capacity to repay external versus domestic debt. These sovereign risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the same issuer.
Fitch
A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity or security stream, and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as “short term” based on market convention. Typically, this means up to 13 months for corporate, sovereign and structured obligations, and up to 36 months for obligations in U.S. public finance markets.
The following summarizes the rating categories used by Fitch for short-term obligations:
“F1” — Highest short-term credit quality. This designation indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.
“F2” — Good short-term credit quality. This designation indicates good intrinsic capacity for timely payment of financial commitments.
“F3” — Fair short-term credit quality. This designation indicates that the intrinsic capacity for timely payment of financial commitments is adequate.
“B” — Speculative short-term credit quality. This designation indicates minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.
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“C” — High short-term default risk. This designation indicates that default is a real possibility.
“RD” — Restricted default. This designation indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Or, the default of a specific short-term obligation.
“D” — Default. This designation indicates a broad-based default event for an entity, or the default of all short-term obligations.
Specific limitations relevant to the Short-Term Ratings scale include:
• | The ratings do not predict a specific percentage of default likelihood over any given time period. |
• | The ratings do not opine on the market value of any issuer’s securities or stock, or the likelihood that this value may change. |
• | The ratings do not opine on the liquidity of the issuer’s securities or stock. |
• | The ratings do not opine on the possible loss severity on an obligation should an obligation default. |
• | The ratings do not opine on any quality related to an issuer or transaction’s profile other than the agency’s opinion on the relative vulnerability to default of the rated issuer or obligation. |
Ratings assigned by Fitch Ratings articulate an opinion on discrete and specific areas of risk. The above list is not exhaustive.
Long-Term Credit Ratings
Moody’s
Moody’s long-term ratings are opinions of the relative credit risk of financial obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings use Moody’s Global Scale and reflect both the likelihood of default and any financial loss suffered in the event of default.
The following summarizes the ratings used by Moody’s for long-term debt:
“Aaa” - Obligations rated “Aaa” are judged to be of the highest quality, subject to the lowest level of credit risk.
“Aa” - Obligations rated “Aa” are judged to be of high quality and are subject to very low credit risk.
“A” - Obligations rated “A” are judged to be upper-medium grade and are subject to low credit risk.
“Baa” - Obligations rated “Baa” are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
“Ba” - Obligations rated “Ba” are judged to be speculative and are subject to substantial credit risk.
“B” - Obligations rated “B” are considered speculative and are subject to high credit risk.
“Caa” - Obligations rated “Caa” are judged to be of poor standing and are subject to very high credit risk.
“Ca” - Obligations rated “Ca” are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
“C” - Obligations rated “C” are the lowest rated class and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from “Aa” through “Caa.” The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
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S&P
Issue credit ratings are based, in varying degrees, on S&P’s analysis of the following considerations:
• | Likelihood of payment—capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; |
• | Nature of and provisions of the obligation; |
• | Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights. |
Issue ratings are an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
The following summarizes the ratings used by S&P for long-term issues:
“AAA” - An obligation rated “AAA” has the highest rating assigned by S&P. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.
“AA” - An obligation rated “AA” differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.
“A” - An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.
“BBB” - An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
Obligations rated “BB,” “B,” “CCC,” “CC,” and “C” are regarded as having significant speculative characteristics. “BB” indicates the least degree of speculation and “C” the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
“BB” - An obligation rated “BB” is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.
“B” - An obligation rated “B” is more vulnerable to nonpayment than obligations rated “BB,” but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.
“CCC” - An obligation rated “CCC” is currently vulnerable to nonpayment, and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
“CC” - An obligation rated “CC” is currently highly vulnerable to nonpayment.
“C” - A “C” rating is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that have payment arrearages allowed by the terms of the documents, or obligations of an issuer that is the subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the “C” rating may be assigned to subordinated debt, preferred stock or other obligations on which cash payments have been suspended in accordance with the instrument’s terms or when preferred stock is the subject of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
“D” - An obligation rated “D” is in payment default. The “D” rating category is used when payments on an obligation are not made on the date due, unless S&P believes that such payments will be made within five business days, irrespective of any grace
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period. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. An obligation’s rating is lowered to ‘D’ upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
Plus (+) or minus (-) - The ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
“NR” - This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular obligation as a matter of policy.
Local Currency and Foreign Currency Risks - Country risk considerations are a standard part of S&P’s analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An obligor’s capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency due to the sovereign government’s own relatively lower
capacity to repay external versus domestic debt. These sovereign risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make them different for the same issuer.
Fitch
Rated entities in a number of sectors, including financial and non-financial corporations, sovereigns and insurance companies, are generally assigned Issuer Default Ratings (IDRs). IDRs opine on an entity’s relative vulnerability to default on financial obligations. The “threshold” default risk addressed by the IDR is generally that of the financial obligations whose non-payment would best reflect the uncured failure of that entity. As such, IDRs also address relative vulnerability to bankruptcy, administrative receivership or similar concepts, although the agency recognizes that issuers may also make pre-emptive and therefore voluntary use of such mechanisms.
In aggregate, IDRs provide an ordinal ranking of issuers based on the agency’s view of their relative vulnerability to default, rather than a prediction of a specific percentage likelihood of default. For historical information on the default experience of Fitch-rated issuers, please consult the transition and default performance studies available from the Fitch Ratings website.
The following summarizes long-term IDR categories used by Fitch:
“AAA” — Highest credit quality. “AAA” ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
“AA” — Very high credit quality. “AA” ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
“A” — High credit quality. “A” ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
“BBB” — Good credit quality. “BBB” ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
“BB” — Speculative. “BB” ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists which supports the servicing of financial commitments.
“B” — Highly speculative. “B” ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.
“CCC” — Substantial credit risk. “CCC” ratings indicate that default is a real possibility.
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“CC” — Very high levels of credit risk. “CC” ratings indicate default of some kind appears probable.
“C” — Exceptionally high levels of credit risk. “C” ratings indicate default is imminent or inevitable, or the issuer is in standstill. Conditions that are indicative of a ‘C’ category rating for an issuer include:
a. | he issuer has entered into a grace or cure period following non-payment of a material financial obligation; |
b. | the issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation; or |
c. | Fitch otherwise believes a condition of “RD” or “D” to be imminent or inevitable, including through the formal announcement of a distressed debt exchange. |
“RD” - Restricted default. “RD” ratings indicate an issuer that in Fitch’s opinion has experienced an uncured payment default on a bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased business. This would include:
a. | the selective payment default on a specific class or currency of debt; |
b. | the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation; |
c. | the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel; or |
d. | execution of a distressed debt exchange on one or more material financial obligations. |
“D” — Default. “D” ratings indicate an issuer that in Fitch Ratings’ opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business.
Default ratings are not assigned prospectively to entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will generally not be considered a default until after the expiration of the deferral or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a distressed debt exchange.
“Imminent” default typically refers to the occasion where a payment default has been intimated by the issuer, and is all but inevitable. This may, for example, be where an issuer has missed a scheduled payment, but (as is typical) has a grace period during which it may cure the payment default. Another alternative would be where an issuer has formally announced a distressed debt exchange, but the date of the exchange still lies several days or weeks in the immediate future.
In all cases, the assignment of a default rating reflects the agency’s opinion as to the most appropriate rating category consistent with the rest of its universe of ratings, and may differ from the definition of default under the terms of an issuer’s financial obligations or local commercial practice.
Note: The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the “AAA” Long-Term IDR category, or to Long-Term IDR categories below “B.”
Specific limitations relevant to the issuer credit rating scale include:
• | The ratings do not predict a specific percentage of default likelihood over any given time period. |
• | The ratings do not opine on the market value of any issuer’s securities or stock, or the likelihood that this value may change. |
• | The ratings do not opine on the liquidity of the issuer’s securities or stock. |
• | The ratings do not opine on the possible loss severity on an obligation should an issuer default. |
• | The ratings do not opine on the suitability of an issuer as a counterparty to trade credit. |
• | The ratings do not opine on any quality related to an issuer’s business, operational or financial profile other than the agency’s opinion on its relative vulnerability to default. |
Ratings assigned by Fitch Ratings articulate an opinion on discrete and specific areas of risk. The above list is not exhaustive.
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Municipal Note Ratings
Moody’s
Moody’s uses three rating categories for short-term municipal obligations that are considered investment grade. These ratings are designated as Municipal Investment Grade (“MIG”) and are divided into three levels - “MIG 1” through “MIG 3”. In addition, those short-term obligations that are of speculative quality are designated “SG”, or speculative grade. MIG ratings expire at the maturity of the obligation.
The following summarizes the ratings used by Moody’s for these short-term obligations:
“MIG 1” - This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
“MIG 2” - This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
“MIG 3” - This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
“SG” - This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
In the case of variable rate demand obligations (“VRDOs”), a two-component rating is assigned: a long or short-term debt rating and a demand obligation rating. The first element represents Moody’s evaluation of risk associated with scheduled principal and interest payments. The second element represents Moody’s evaluation of risk associated with the ability to receive purchase price upon demand (“demand feature”). The second element uses a rating from a variation of the MIG scale called the Variable Municipal Investment Grade or “VMIG” scale.
When either the long- or short-term aspect of a VRDO is not rated, that piece is designated “NR”, e.g., “Aaa/NR” or “NR/VMIG 1”.
VMIG rating expirations are a function of each issue’s specific structural or credit features.
“VMIG 1” - This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
“VMIG 2” - This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
“VMIG 3” - This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
“SG” - This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural or legal protections necessary to ensure the timely payment of purchase price upon demand.
S&P
An S&P U.S. municipal note rating reflects S&P’s opinion about the liquidity factors and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, S&P’s analysis will review the following considerations:
• | Amortization schedule—the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and |
• | Source of payment—the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note. |
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Note rating symbols are as follows:
“SP-1” - The issuers of these municipal notes exhibit a strong capacity to pay principal and interest. Those issues determined to possess a very strong capacity to pay debt service are given a plus (+) designation.
“SP-2” - The issuers of these municipal notes exhibit a satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
“SP-3” - The issuers of these municipal notes exhibit speculative capacity to pay principal and interest.
Fitch
Fitch uses the same ratings for municipal securities as described above for other short-term credit ratings.
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APPENDIX B — PROXY VOTING POLICIES
Copper Rock Capital Partners, LLC
Proxy Voting Policy
PROXY VOTING POLICY
RESPONSIBILITY
The CCO, or designee, has overall responsibility for monitoring the firm’s proxy voting policy to ensure compliance.
BACKGROUND
When voting proxies on behalf of our clients, Copper Rock assumes a fiduciary responsibility to vote in our clients’ best interests. In addition, with respect to benefit plans under the Employee Retirement Income Securities Act of 1974 (ERISA), Copper Rock acknowledges its responsibility as a fiduciary to vote proxies prudently and solely in the best interest of plan participants and beneficiaries. So that it may fulfill these fiduciary responsibilities to clients, Copper Rock has adopted and implemented these written policies and procedures reasonably designed to ensure that it votes proxies in the best interest of clients.
Proxy Voting Guidelines
Copper Rock acknowledges it has a duty of care to its clients that requires it to monitor corporate events and vote client proxies. To assist in this effort, Copper Rock has retained Broadridge Investor Communication Solutions, Inc. (“Broadridge”) to research and vote proxies. Broadridge provides proxy-voting analysis and votes proxies in accordance with predetermined guidelines. Relying on Broadridge to vote proxies ensures that Copper Rock votes in the best interest of its clients and insulates Copper Rock’s voting decisions from potential conflicts of interest.
There may be occasions when Copper Rock determines that not voting a proxy may be in the best interest of clients; for example, when the cost of voting the proxy exceeds the expected benefit to the client. There may also be times when clients have instructed Copper Rock not to vote proxies or direct Copper Rock to vote proxies in a certain manner. Copper Rock will maintain written instructions from clients with respect to directing proxy votes.
Copper Rock also reserves the right to override Broadridge’s vote recommendations under certain circumstances. Copper Rock will only do so if it believes that changing such vote is in the best interest of clients. All overrides will be approved by an executive officer of Copper Rock and will be documented with the reasons for voting against the Broadridge recommendation.
Conflicts of Interest
Occasions may arise during the voting process in which the best interest of clients conflicts with Copper Rock’s interests. In these situations Broadridge will continue to follow the same predetermined guidelines as formally agreed upon between Copper Rock and Broadridge before such conflict of interest existed. Conflicts of interest generally include (i) Copper Rock’s having has a substantial business relationship with, or actively soliciting business from, a company soliciting proxies or (ii) personal or family relationships involving employees of Copper Rock, such as a spouse who serves as a director of a public company. A conflict could also exist if a substantial business relationship exists with a proponent or opponent of a particular initiative.
If Copper Rock learns that a conflict of interest exists, the proxy coordinator will prepare a report to the Compliance Committee that identifies (i) the details of the conflict of interest, (ii) whether or not the conflict is material, and (iii) procedures to ensure that Copper Rock makes proxy voting decisions based on the best interests of clients. If Copper Rock determines that a material conflict exists, it will defer to Broadridge to vote the proxy in accordance with the predetermined voting policy.
Voting Policies
Copper Rock has adopted the proxy voting policies developed by Broadridge. The policies have been developed based on Broadridge’s independent, objective analysis of leading corporate governance practices and the support of long-term shareholder value. Copper Rock may change its policies from time to time without providing notice of changes to clients.
Broadridge proxy voting policies include:
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Management Proposals: Proposals introduced by company management will generally be voted in accordance with management’s recommendations on the following types of routine management proposals:
· Election of Directors (uncontested)
· Approval of Independent Auditors
· Executive Compensation Plans
· Routine Corporate Structure, Share Issuance, Allocations of Income, Scrip Dividend Proposals, Increases in Capital or Par Value, and Share Repurchase Plans
Shareholder Proposals: At times shareholders will submit proposals that generally seek to change some aspect of a company’s corporate governance structure or its business operations. Proxies will generally be voted against proposals motivated by political, ethical or social concerns. Proposals will be examined solely from an economic perspective. Proxies will generally be voted with management in opposition to shareholder resolutions which could negatively impact the company’s ability to conduct business, and voted in support of the shareholder initiatives concerning the maximization of shareholder value.
Other (Non-Routine) Proposals: Non-routine proposals, introduced by company management or shareholders, are examined on a case-by-case basis. These are often more complex structural changes to a company such as a reorganization or merger, in which a variety of issues are considered including the benefits to shareholders’ existing and future earnings, preservation of shareholder value, financial terms of the transaction and the strategic rationale for the proposal. The following are examples of proposals that are voted on a case-by-case basis:
· Reorganizations/Restructurings
· Amendments to the Articles of Association
· Non-Executive Director Compensation Proposals (cash and share based components)
· Increasing Borrowing Powers
· Debt Issuance Requests
Voting Process
Copper Rock has appointed the manager of operations to act as proxy coordinator. The proxy coordinator acts as coordinator with Broadridge ensuring proxies Copper Rock is responsible to vote are forwarded to Broadridge and overseeing that Broadridge is voting assigned client accounts and maintaining appropriate authorization and voting records.
After Broadridge is notified by the custodian of a proxy that requires voting and/or after Broadridge cross references its database with a routine download of Copper Rock holdings and determines a proxy requires voting, Broadridge will review the proxy and make a voting proposal based on the recommendations provided by Broadridge’s research group. Any electronic proxy votes will be communicated to the proxy solicitor by Broadridge’s Global Proxy Distribution Service while non-electronic ballots, or paper ballots, will be faxed, telephoned or sent via Internet. Broadridge assumes responsibility for the proxies to be transmitted for voting in a timely fashion and maintains a record of each vote, which is provided to Copper Rock on a quarterly basis. Copper Rock will make votes available to all separately managed accountholders upon request and will communicate votes to all mutual fund clients no less frequently than once a year.
Proxy Voting Record
Copper Rock’s proxy coordinator will maintain a record, or maintain access to such records from the vendor, containing the following information regarding the voting of proxies: (i) the name of the issuer, (ii) the exchange ticker symbol, (iii) the CUSIP number, (iv) the shareholder meeting date, (v) a brief description of the matter brought to vote; (vi) whether the proposal was submitted by management or a shareholder, (vii) how Broadridge/Copper Rock voted the proxy (for, against, abstained); and (viii) whether the proxy was voted for or against management.
Obtaining a Voting Proxy Report
Clients may request a copy of these policies and procedures and/or a report on how their individual securities were voted by calling Copper Rock’s Head of Client Service, Lidney Motch, at (617) 369-7140. The report will be provided free of charge.
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EARNEST PARTNERS LLC
Proxy Policies
As a general rule, EARNEST Partners (the “Advisor”) will vote against actions which would reduce the rights or options of shareholders, reduce shareholder influence over the board of directors and management, reduce the alignment of interests between management and shareholders, or reduce the value of shareholders’ investments. A partial list of issues that may require special attention are as follows: classified boards, change of state of incorporation, poison pills, unequal voting rights plans, provisions requiring supermajority approval of a merger, executive severance agreements, and provisions limiting shareholder rights.
In addition, the following will generally be adhered to unless the Advisor is instructed otherwise in writing by the client:
• | The Advisor will not actively engage in conduct that involves an attempt to change or influence the control of a portfolio company. |
• | The Advisor will not announce its voting intentions or the reasons for a particular vote. |
• | The Advisor will not participate in a proxy solicitation or otherwise seek proxy voting authority from any other portfolio company shareholder. |
• | The Advisor will not act in concert with any other portfolio company shareholders in connection with any proxy issue or other activity involving the control or management of a portfolio company. |
• | All communications with portfolio companies or fellow shareholders will be for the sole purpose of expressing and discussing the Advisor’s concerns for its clients’ interests and not in an attempt to influence the control of management. |
Proxy Procedures
The Advisor has designated a Proxy Director. The Proxy Director will consider each issue presented on each portfolio company proxy. The Proxy Director will also use available resources, including proxy evaluation services, to assist in the analysis of proxy issues. Proxy issues presented to the Proxy Director will be voted in accordance with the judgment of the Proxy Director, taking into account the general policies outlined above and the Advisor’s Proxy Voting Guidelines (currently ISS Taft-Hartley Advisory Services Proxy Voting Guidelines). Therefore, it is possible that actual votes may differ from these general policies and the Advisor’s Proxy Voting Guidelines. In the case where the Advisor believes it has a material conflict of interest with a Client, the Proxy Director will utilize the services of outside third party professionals (currently ISS Taft-Hartley Advisory Services) to assist in its analysis of voting issues and the actual voting of proxies to ensure that a decision to vote the proxies was based on the Client’s best interest and was not the product of a conflict of interest. In general, ISS Taft-Hartley Advisory Services Proxy Voting Guidelines are based on a worker-owner view of long-term corporate value and conform to the AFL-CIO proxy voting policy. In the event the services of an outside third party professional are not available in connection with a conflict of interest, the Advisor will seek the advice of the Client.
A detailed description of the Advisor’s specific Proxy Voting Guidelines will be furnished upon written request. You may also obtain information about how the Advisor has voted with respect to portfolio company securities by calling, writing, or emailing us at:
EARNEST Partners
1180 Peachtree Street NE, Suite 2300
Atlanta, GA 30309
invest@earnestpartners.com
404-815-8772
The Advisor reserves the right to change these policies and procedures at any time without notice.
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FORT WASHINGTON INVESTMENT ADVISORS, INC.
Fort Washington’s policy is to vote proxies in the best interests of the Fund at all times. Fort Washington has adopted procedures that it believes are reasonably designed to ensure that proxies are voted in the best interests of the Fund in accordance with its fiduciary duties and SEC rules governing investment advisors. Reflecting a basic investment philosophy that good management is shareholder focused, proxy votes will generally be cast in support of management on routine corporate matters and in support of any management proposal that is plainly in the interest of all shareholders. Specifically, proxy votes generally will be cast in favor of proposals that:
• | maintain or strengthen the shared interests of stockholders and management; |
• | increase shareholder value; and |
• | maintain or increase shareholder rights generally. |
Proxy votes will generally be cast against proposals having the opposite effect of the above. Where Fort Washington perceives that a management proposal, if approved, would tend to limit or reduce the market value of the company’s securities, it will generally vote against it. Fort Washington generally supports shareholder rights and recapitalization measures undertaken unilaterally by boards of directors properly exercising their responsibilities and authority, unless we believe such measures could have the effect of reducing shareholder rights or potential shareholder value. In cases where shareholder proposals challenge such actions, Fort Washington’s voting position will generally favor not interfering with the directors’ proper function in the interest of all shareholders.
Fort Washington may delegate its responsibilities under its proxy voting procedures to a third party, provided that Fort Washington retains final authority and fiduciary responsibility for proxy voting. Fort Washington has retained Risk Metrics to assist it in the proxy voting process and will use Risk Metrics’ proxy voting guidelines as a resource in its proxy voting.
Fort Washington will review proxies to assess the extent, if any, to which there may be a material conflict between it and the interests of the Fund. If Fort Washington determines that a potential conflict may exist, it will be reported to the Proxy Voting Committee. The Proxy Voting Committee is authorized to resolve any conflict in a manner that is in the collective best interests of the Fund (excluding a potential conflict). The Proxy Voting Committee may resolve a potential conflict in any of the following manners:
• | If the proposal is specifically addressed in the proxy voting procedures, Fort Washington may vote the proxy in accordance with these policies, provided that such pre-determined policy involves little discretion on Fort Washington’s part; |
• | Fort Washington may engage an independent third party to determine how the proxy should be voted; |
• | Fort Washington may establish an ethical wall or other informational barriers between the person involved in the potential conflict and the persons making the voting decision in order to insulate the potential conflict from the decision maker. |
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LMCG Investments, LLC (“LMCG”)
Proxy Voting Guidelines Summary
The proxy voting guidelines contained herein are a sampling of select, key guidelines and are not all inclusive. LMCG will from time to time review our proxy voting policy and guidelines and may adopt changes. Proxy questions are considered within the individual circumstances of the issuer and therefore it is possible that individual circumstances might mean that a given proxy question could be voted differently than what is generally done in other cases. Clients may contact their Client Service Officer or the Compliance Office by calling (617) 380-5600 or via e-mail at clientservice@lmcg.com or compliance@lmcg.com for a copy of our current guidelines or to obtain a record of how proxies were voted for their account.
1. | Audit-related Items: |
Auditor Ratification
Generally vote FOR proposals to ratify auditors unless:
• | An auditor has a financial interest in or association with the company and is therefore not independent; |
• | There is reason to believe that the independent auditor has rendered an opinion which is neither accurate nor indicative of the company’s financial position; |
• | Poor accounting practices are identified such as fraud, misapplication of GAAP and material weaknesses are identified; or |
• | Fees for non-audit services are excessive |
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services.
2. | Board of Directors: |
Voting on Director Nominees in Uncontested Elections
Votes on director nominees should be determined CASE-BY-CASE.
Voting for Director Nominees in Contested Elections
Vote CASE-BY-CASE on the election of directors in contested elections, considering the following:
• | Management’s track record; |
• | Background to the proxy contest; |
• | Qualifications of Director nominees; |
• | Strategic plan of dissident slate and quality of critique against management; |
• | Likelihood that the proposed goals and objectives can be achieved; and |
• | Stock ownership positions |
Board responsiveness
Vote case-by-case on individual directors, committee members or the entire board of directors as appropriate if:
• | Material failures of governance, stewardship, risk oversight, or fiduciary responsibilities at the company |
• | Board failed to act on a shareholder proposal that received the support of a majority of shares cast in the previous year |
• | Board failed to act on takeover offer where majority of shares tendered |
• | Board failed to address issues related to a director receiving 50% or more withhold/against votes |
• | Board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the majority of votes |
Vote AGAINST or WITHHOLD from entire board of directors for problematic practices or material failures in the areas of accountability, independence or competence:
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Board accountability, including items such as:
• | A classified board structure |
• | A supermajority vote requirement |
• | Inability for shareholders to call special meetings |
• | Inability of shareholders to act by written consent |
• | Dual-class capital structure |
• | Non-shareholder approved poison pill |
• | Material failures of governance, stewardship, risk oversight, fiduciary responsibility |
• | Failure to replace management as appropriate |
Director independence, including items such as:
• | Inside or affiliated director serves on key committees |
• | Company lacks an audit, compensation or nominating committee |
• | Independent directors make up less than a majority of directors |
Director competence, including items such as:
• | Not all director’s attended 75% of the aggregate board and committee meetings |
• | Sit on more than six public company boards |
Independent Chair (Separate CEO/Chair)
Generally vote FOR shareholder proposals requiring that the chairman position be filled by an independent director unless there are substantial reasons to recommend against the proposal, such as counterbalancing governance structure.
Majority Vote Shareholder Proposals
Generally vote FOR binding resolutions requesting that the board change the company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast.
Audit Committee related items
Generally vote AGAINST or WITHHOLD from members of the Audit Committee if:
• | Non-audit fees paid to auditor are excessive |
• | Company receives an adverse opinion on financial statements |
• | Evidence of inappropriate indemnification language that limits ability of the company or shareholders to pursue legal recourse against audit firm |
Vote CASE-BY-CASE on members of the Audit Committee and potentially the full board if:
• | Poor accounting practices result in fraud, misapplication of GAAP, and/or other material weaknesses |
Compensation Committee related items
In the absence of an Advisory vote on executive compensation, vote AGAINST or WITHHOLD on members of the Compensation Committee or potentially the full board if:
• | There is significant misalignment between CEO pay and company performance |
• | Company maintains problematic pay practices related to non-performance based compensation elements, incentives that motivate excessive risk taking and options backdating |
• | Board exhibits significant level of poor communication and responsiveness to shareholders |
• | Company fails to submit one-time transfer of stock options to shareholder vote |
• | Company fails to fulfill terms of burn rate commitment made to shareholders |
Vote CASE-BY-CASE on members of the Compensation Committee and the MSOP proposal if the Company’s previous say-on-pay proposal received support of less than 70% of votes cast, taking into account:
• | Discloser of engagement efforts with major institutional shareholders regarding issues that led to low level of support |
• | Specific actions to address issues that contributed to low level of support |
• | Other recent compensation practices |
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• | Whether the issues raised are recurring or isolated |
• | Company’s ownership structure |
• | Whether support level was less than 50%, |
Performance/Governance Evaluation for Directors
Generally vote WITHHOLD or AGAINST on all director nominees if the board lacks accountability and oversight, coupled with sustained poor performance relative to peers.
Reimbursing Proxy Solicitation Expenses
Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses.
3. | Shareholder Rights and Defenses: |
Advanced Notice Requirements for Shareholder Proposals/Nominations
Vote CASE-BY-CASE on advance notice proposals, giving support to proposals that allow shareholders to submit proposals/nominations reasonably close to the meeting date within the broadest window possible.
Poison Pills
Generally vote FOR shareholder proposals requesting that the company submit its poison pill to a shareholder vote or redeem it unless the company has (1) a shareholder approved poison pill in place or (2) the company has adopted a policy concerning the adoption of a pill in the future specifying that the board will only adopt a shareholder rights plan if shareholders have approved the adoption of the plan or the board determines that it is in the best interest of shareholders to adopt a pill without delay.
Vote CASE-BY-CASE on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan.
Reincorporation Proposals
Evaluate management or shareholder proposals to change a company’s state of incorporation on a CASE-BY-CASE basis.
4. | Capital and Corporate Restructurings: |
Common Stock Authorization
Vote CASE-BY-CASE on proposals to increase the number of shares of common stock authorized for issuance.
Dual Class Structure
Generally vote AGAINST proposals to create a new class of common stock with superior voting rights
Share Repurchase Programs
Vote FOR management proposals to institute open market repurchase plans in which all shareholders may participate on equal terms.
Mergers and Acquisitions
Overall Approach - Vote CASE-BY-CASE
For mergers and acquisitions, review and evaluate the merits and drawbacks of the proposed transaction balancing various and sometimes countervailing factors including:
• | Valuation; |
• | Market reaction; |
• | Strategic rationale; |
• | Negotiations and process; |
• | Conflicts of Interest; and |
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• | Governance |
5. | Compensation: |
Advisory Vote on Executive Compensation (Say-on-Pay) Management Proposals
Vote CASE-BY-CASE on ballot items related to executive pay and practices
Vote AGAINST Advisory Votes on Executive Compensation (MSOP) if:
• | There is significant misalignment between CEO pay and company performance |
• | Company maintains problematic pay practices |
• | Board exhibits significant level of poor communication and responsiveness to shareholders |
Vote AGAINST or WITHHOLD from members of the Compensation Committee if:
•There is no MSOP on the ballot
• | Board fails to adequately respond to a previous MSOP proposal that received less than 70% support |
•The company has poor compensation practices
Vote FOR annual advisory votes on compensation.
Employee Stock Purchase Plans
Vote CASE-BY-CASE on non-qualified employee stock purchase plans.
Option Exchange Programs/Re-pricing Options
Vote CASE-BY-CASE on management proposals seeking approval to exchange/re-price options.
Equity Compensation Plans
Vote CASE-BY-CASE on equity-based compensation plans.
6. | Corporate Social Responsibility (CSR) Issues: |
General approach on CSR issues is to vote CASE-BY-CASE taking into account factors such as impact on shareholder value, significance of company’s business affected by the proposal, impact on company reputation, response by other companies to similar issue and degree to which proprietary or confidential information would be disclosed.
Some issues that fall under this topic include proposals on:
• | Company’s political spending, lobbying efforts and charitable contributions |
• | Animal welfare practices |
• | Energy and environmental issues |
• | Equal employment opportunity and discrimination |
• | Diversity |
• | Product safety and hazardous materials |
7. | Conflicts of Interest: |
Conflicts of interest could exist when the Firm holds a security issued by a client in client portfolios, and the Firm is required to vote that security. When there is a potential conflict with a client, the Firm will look to these guidelines and the ISS recommendation for voting guidance.
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LONDON COMPANY OF VIRGINIA D/B/A THE LONDON COMPANY
I. | POLICY |
The London Company of Virginia (the “Adviser”) acts as discretionary investment adviser for various clients, including clients governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) and registered open-end investment companies (“mutual funds”). The Adviser’s authority to vote proxies is established through the delegation of discretionary authority under its investment advisory contracts. Therefore, unless a client (including a “named fiduciary” under ERISA) specifically reserves the right, in writing, to vote its own proxies, the Adviser will vote all proxies in a timely manner as part of its full discretionary authority over client assets in accordance with these Policies and Procedures.
When voting proxies, the Adviser’s utmost concern is that all decisions be made solely in the best interest of the client (and for ERISA accounts, plan beneficiaries and participants, in accordance with the letter and spirit of ERISA). The Adviser will act in a prudent and diligent manner intended to enhance the economic value of the assets of the client’s account.
The Proxy Voting Committee meets periodically to monitor the firm’s overall adherence to the current policies and procedures, as well as provide advice for the revisions thereof. The Committee also reviews the rationale for proxy votes not covered by the policies and procedures, or that present a potential conflict of interest. As such, a periodic review of the Proxy Advisor Firm will be conducted and presented to the Proxy Voting Committee for consideration.
II. | PURPOSE |
The purpose of these Policies and Procedures is to memorialize the procedures and policies adopted by the Adviser to enable it to comply with its fiduciary responsibilities to clients and the requirements of Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended (“Advisers Act”). These Policies and Procedures also reflect the fiduciary standards and responsibilities set forth by the Department of Labor for ERISA accounts.
III. | PROCEDURES |
The Adviser is ultimately responsible for ensuring that all proxies received by the Adviser are voted in a timely manner and in a manner consistent with the Adviser’s determination of the client’s best interests. The Adviser recognizes that some proposals require special consideration which may dictate that the Adviser makes an exception to the Guidelines. The Adviser will vote the recommendation of the proxy voting service* on all proxy votes, unless otherwise directed by the Portfolio Managers.
(*London moved from ISS, utilizing Institutional Shareholder Services (ISS) and its proxy voting guidelines, to
Broadridge and Glass Lewis guidelines, in April, 2009. In February, 2014, London upgraded from utilizing Glass
Lewis Investment Management to Glass Lewis Full Service. In March, 2017, London completed a transition back to ISS, in order to better align with the firm’s voting preferences.)
1. | Conflicts of Interest |
Where a proxy proposal raises a material conflict between the Adviser’s interests and a client’s interest, including a mutual fund client, the Adviser will resolve the matter on a case-by-case basis by abstaining from the vote, voting in accordance with the guidelines set forth by the proxy voting service, or vote the way London feels is in the best interest of the client.
2. | Limitations |
In certain circumstances, in accordance with a client’s investment advisory contract (or other written directive), or where the Adviser has determined that it is in the client’s best interest, the Adviser will not vote proxies received. The following are certain circumstances where the Adviser will limit its role in voting proxies:
A. | Client Maintains Proxy Voting Authority: Where client specifies in writing that it will maintain the authority to vote proxies itself or that it has delegated the right to vote proxies to a third party, the Adviser will not vote the securities and will direct the relevant custodian to send the proxy material directly to the client. If any proxy material is received by the Adviser, it will promptly be forwarded to the client or specified third party. |
B. | Terminated Account: Once a client account has been terminated with the Adviser, in accordance with its investment advisory agreement, the Adviser will not vote any proxies received after the termination. However, the client may choose to specify, in writing, that proxies should be directed to the client (or a specified third party) for action. There may be occurrences in which a proxy may be voted by the Adviser, for a terminated account (i.e., the record date of a proxy vote occurs prior to termination). |
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C. | Limited Value: If the Adviser determines that the value of a client’s economic interest, or portfolio holding is indeterminable or insignificant, the Adviser may abstain from voting proxies. |
D. | Securities Lending Programs: When securities are out on loan, they are transferred into the borrower’s name and are voted by the borrower, in its discretion. However, where the Adviser determines that a proxy vote (or other shareholder action) is materially important to the client’s account, the Adviser may recall the security for purposes of voting. |
E. | Unjustifiable Costs: In certain circumstances, after doing a cost-benefit analysis, the Adviser may abstain from voting where the cost of voting a client’s proxy would exceed any anticipated benefits to the client of the proxy proposal. |
F. | Paper ballot does not arrive in the mail: On occasion, a paper ballot will not arrive in the mail until after the voting deadline. In this circumstance, Adviser is unable to vote the client’s proxy. |
3. | Procedures |
A. | During the onboarding process for a new account, the Portfolio Administrator will confirm, with certain custodians, as required, the address to which proxy ballots will be mailed. The Portfolio Administrator sends all new account information to the proxy voting service for accounts that elect to have the Adviser vote proxies on their behalf. The Adviser, in conjunction with the proxy voting service, contacts custodians to set up electronic voting. |
B. | When a ballot is received by US mail, the Portfolio Administrator will send ISS/ProxyExchange notification to establish electronic voting. |
C. | Each proxy statement, sample ballot and copies of any ballots voted by US mail will be available. (ProxyExchange retains voting history for those voted electronically, which is accessible through their web portal.) |
IV. | RECORDKEEPING |
In accordance with Rule 204-2 under the Advisers Act, the Adviser will maintain for the time periods set forth in the Rule (i) these proxy voting procedures and policies, and all amendments thereto; (ii) all proxy statements received regarding client securities (provided however, that the Adviser may rely on the proxy statement filed on EDGAR as its records); (iii) a record of all votes cast on behalf of clients; (iv) records of all client requests for proxy voting information; (v) any documents prepared by the Adviser that were material to making a decision how to vote or that memorialized the basis for the decision; and (vi) all records relating to requests made to clients regarding conflicts of interest in voting the proxy.
The Adviser will describe in its Part 2A of Form ADV (or other brochure fulfilling the requirement of Rule 204-3) its proxy voting policies and procedures and will inform clients how they may obtain information on how the Adviser voted proxies with respect to the clients’ portfolio securities. Clients may obtain information on how their securities were voted or a copy of the Adviser’s Policies and Procedures by written request addressed to the Adviser. The Adviser will coordinate with all mutual fund clients to assist in the provision of all information required to be filed by such mutual funds on Form N-PX.
Please refer to the Proxy Voting Policy for further information.
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LONGFELLOW INVESTMENT MANAGEMENT CO., LLC
Proxy Voting Policy, Overview
Where the power to vote proxies has been delegated to Longfellow Investment Management Co., LLC (LIM), LIM has the responsibility for voting in a manner that is in the best economic interests of the client. LIM shall consider only those factors that relate to the client’s investment or dictated by the client’s written instructions, including how its vote will economically impact and affect the value of the client’s investment. In some instances LIM may abstain from voting a client proxy, particularly when the effect on the client’s economic interest is insignificant or the cost of voting the proxy outweighs the benefit to the client’s portfolio. In voting on each and every issue, LIM shall vote in a prudent and timely fashion and only after a careful evaluation of the issue(s) presented on the ballot. Proxy votes will generally be cast in support of management on routine corporate matters and in support of any management proposal that is plainly in the interest of all shareholders. LIM would generally vote for proposals that increase shareholder value and maintain or increase shareholder rights. LIM will generally vote for management proposals for merger or reorganization. LIM will generally vote for the selection of independent auditors. Where LIM perceives that the proposal, if approved, would tend to limit or reduce the economic value of the client’s investment, LIM will generally vote against it. There may be instances where the interests of LIM may conflict or appear to conflict with the interests of its clients. For example: a situation where a portfolio holding is a client or an affiliate of a client of LIM. In such situations LIM, consistent with its duty of care and duty of loyalty, may engage an independent third party to determine how the proxy should be voted.
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MILLER/HOWARD INVESTMENTS, INC.
PROXY VOTING POLICY AND GUIDELINES
Miller/Howard Investments (“Miller/Howard”) recognizes, as a matter of policy and as a fiduciary to our clients, that proxy voting is a valuable right of shareholders. Proxy voting is one of the best ways for an investor to communicate to a company his or her opinions on management’s policies. Miller/Howard supports voting proxies consistent with our financial, social, and environmental objectives. For more information regarding these objectives, please refer to our ESG Investment Policy.
Each proxy season, in addition to the “standard” issues placed on the ballot by management, there may be a number of other important issues put forward by shareholders in the form of shareholder resolutions. Shareholder resolutions can cover a wide range of issues, such as environmental performance, workplace diversity, sustainability reporting, genetically modified foods, labor standards, and management transparency. We actively support resolutions that target labor issues, human rights, compensation, and also those that decrease emissions and increase renewable energy sources. The primary goal of the shareholder resolution process is to engage management in a dialogue. We support the right of both shareholders and stakeholders to pursue such discussions.
PROXY ADMINISTRATION
In January 2008, Miller/Howard enlisted the help of Broadridge Financial Solutions, Inc. (“Broadridge”) to administer electronic proxy voting. By using Broadridge to administer our voting, Miller/Howard is capable of customizing proxy reports, ballot recommendations, and research tools. Because the issues related to proxy voting are complex and directly impact investment values, we have chosen Broadridge to facilitate voting ESG recommendations as provided by Glass Lewis & Company (“Glass Lewis”).
Generally, Miller/Howard will vote in accordance with Glass Lewis’s ESG proxy voting guidelines. When issues arise outside of the ESG scope, we vote in accordance with Glass Lewis’s Proxy Paper Guidelines. Where Miller/Howard determines, however, that voting in such a manner would not be in the best interest of clients, Miller/Howard will vote differently.
If there is a conflict of interest on any management or shareholder proposal, the conflict will be reviewed on a case-by-case basis and voted in a manner that is in the best interest of clients.
Proxy voting responsibility will be determined at the opening of all new client relationships. For those clients who have retained proxy-voting authority, Miller/Howard has no responsibility to receive, vote, or otherwise advise voting.
Miller/Howard maintains relevant records, through EDGAR and Broadridge, including but not limited to, proxy reconciliation, ballots and research reports. Clients can receive a history of our proxy voting record upon request.
LIMITATIONS
Miller/Howard will generally vote on all proxies it receives. However, Miller/Howard may refrain from voting a proxy if the shares are no longer held by the client at the time of the meeting. Unsupervised securities, or securities held below the line, will also be excluded.
ANNUAL REVIEW OF PROXY POLICY
On an annual basis, Miller/Howard will amend or update, as necessary, to remain consistent and current with our proxy practices. Client interests, compliance, and regulatory requirements will be reviewed and addressed.
DISCLOSURE
Miller/Howard discloses a summary of our proxy voting policy in our Form ADV Part 2.
PROXY VOTING GUIDELINES
When voting proxies, Miller/Howard looks at each company independently. We apply our ESG criteria as voting guidelines, and generally vote in accordance with Glass Lewis recommendations. However, we review each issue on the proxy ballet and vote on a case-by-case basis.
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Management
Miller/Howard supports management proposals on a case-by-case review. In the past, we have voted to support the following shareholder proposals with regard to management issues:
• | Support for disclosure of budgets dedicated to public policy lobbying activities |
• | Support for independent board member with environmental expertise |
• | Approval of Risk Compensation Incentive Plan |
• | Proposals to Approve Executive Compensation-We look for the following principles to guide the design and administration of those compensation programs: |
• | Strong link between pay and performance |
• | Executives’ ‘interests should be aligned with stockholders’ interests |
• | Programs should reinforce business strategies and drive long-term sustained stockholder value |
If there is an indication that the compensation program is not in best interests of shareholders or if there is not a strong link between pay and performance Miller/Howard will not support the proposal.
Miller/Howard will not support excessive bonus compensation.
Environment
Miller/Howard supports environmental proposals on a case-by-case basis. Shareholder resolutions we have supported in the past include the following:
• | Annual sustainability reporting - including reporting by suppliers to strengthen the company’s ability to assess its suppliers’ performance |
• | Greenhouse gas emissions - company disclosure regarding emissions from their operations and products |
• | Water supply - company disclosure on dependency or preparation of reports pertaining to sustainable water supplies for operations |
• | Hydraulic fracturing impacts - disclosure of chemicals, emissions, recycling/management of water, reporting/disclosure on operations, community impacts |
• | Mountaintop removal impacts - reduction of environmental and health hazards associated with mining operations |
• | Coal ash - reduction of environmental and health hazards associated with coal combustion waste ponds, impoundments and mines |
• | Sustainable palm oil sourcing |
• | Sustainable forestry |
• | Support for energy efficiency and renewable energy |
Human Rights
Miller/Howard votes in support of shareholders resolutions with regard to human rights:
• | Support workplace safety, and human and worker rights, using internationally recognized standards, indicators and measurement protocols |
Animals
Miller/Howard votes in support of shareholder resolutions with regard to ethical treatment of animals:
• | Support for ethical/humane treatment of animals |
• | Support for alternatives to animal testing |
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Sands Capital Management, LLC
Proxy Voting Policy and Procedures
Most Recent Amendment: June 2017
Implementation Date: November 2006
_____________________________________________________________________________________
Issue
Rule 206(4)-6 under the Advisers Act requires registered investment advisers to adopt and implement written policies and procedures reasonably designed to ensure advisers vote proxies in the best interest of their clients. The procedures must address material conflicts that may arise in connection with proxy voting. Rule 206(4)-6 further requires advisers to describe to clients their proxy voting policies and procedures and to provide copies of such policies and procedures to clients upon their request. Lastly, the Rule requires advisers to disclose how clients may obtain information on how the adviser voted their proxies.
To comply with Rule 206(4)-6, Sands Capital Management, LLC (“SCM”) has adopted and implemented this Policy and the procedures described herein.
Policy
SCM’s policy is to vote client proxies in the best interest of its clients. Proxies are an asset of a client, which must be treated by SCM with the same care, diligence and loyalty as any asset belonging to a client. In voting proxies SCM should consider the short- and long-term implications of each proposal. In voting proxies, SCM typically is neither an activist in corporate governance nor an automatic supporter of management. However, because SCM believes that the management teams of most companies it invests in generally seek to serve shareholder interests, SCM believes that voting proxy proposals in the client’s best economic interests usually means voting with the recommendations of these management teams. Any specific voting instructions provided by an advisory client or its designated agent in writing will supersede this Policy. Clients with their own general or specific proxy voting and governance policies may wish to have their proxies voted by an independent third party or other named fiduciary or agent, at the client’s expense.
Proxy Committee
SCM has established a Proxy Committee, which consists of four permanent members: the Chief Administrative Officer (“CAO”), the Chief Compliance Officer (“CCO”), a Director of Client Relations, and a member of the Directing Research Team (the “DRT”). The Proxy Committee meets at least annually, and as necessary to fulfill its responsibilities. A majority of the members of the Proxy Committee constitutes a quorum for the transaction of business. The CAO acts as secretary of the Proxy Committee and maintains a record of Proxy Committee meetings and actions.
The Proxy Committee is responsible for: (i) the oversight and administration of proxy voting on behalf of SCM’s clients, including developing, authorizing, implementing and updating this Policy and the procedures described herein; (ii) overseeing the proxy voting process, including reviewing reports on proxy voting activity at least annually, and as necessary, to fulfill its responsibilities; and (iii) engaging and overseeing third-party service provider(s), as necessary or appropriate, to ensure SCM receives the applicable proxy statements or to provide SCM information, research or other services to facilitate SCM’s proxy voting decisions.
The Proxy Committee has developed a set of criteria to be used when evaluating proxy issues. These criteria and general proxy voting guidelines are set forth in the Proxy Voting Guidelines, which are attached hereto as Attachment A (the “Guidelines”). The Proxy Committee may amend or supplement the Guidelines from time to time. All Guidelines are to be applied generally and not absolutely, such that the evaluation of each proposal incorporates considerations specific to the company whose proxy is being voted.
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Procedures for Identification and Voting of Proxies
The following procedures are designed to resolve material conflicts of interest before voting client proxies.
1. | SCM maintains a list of all clients for which it votes proxies. The list may be maintained either in hard copy or electronically, and is updated by the Investment Operations Team, which obtains proxy voting information from client agreements or internal account onboarding documentation. |
2. | As part of the account opening procedure, the Investment Operations Team will note whether or not SCM is responsible for voting proxies for the client. |
3. | Where SCM has the authority to vote proxies, the Investment Operations and Client Relations Teams will work with the client to ensure that SCM is designated to receive proxy voting materials from companies or intermediaries. |
4. | SCM has retained one or more third parties to assist in the coordination, voting and recordkeeping of proxies. |
5. | The CAO, through a proxy voting designee working as a proxy administrator, receives all proxy voting materials and has overall responsibility for ensuring that proxies are voted and submitted in a timely manner. |
6. | SCM’s Investment Research Team (the “Research Team”) is responsible for reviewing proxy proposals for portfolio securities. Prior to a proxy voting deadline, the appropriate Research Team member will make a determination as how to vote each proxy proposal based on his or her analysis of the proposal and the Guidelines. In evaluating a proxy proposal, a Research Team member may consider information from a number of sources, including management of the company, shareholder groups and independent proxy research services. |
7. | SCM Staff Members involved in the process are responsible for assessing whether there is any material conflict between the interests of SCM or its affiliates or associates and the interests of its clients with respect to proxy voting by considering the situations identified in the Conflicts of Interest section of this Policy. |
8. | If no material conflicts of interest has been identified, SCM will vote proxies according to this Policy (including by not voting if SCM deems that to be in its clients’ best interest). |
9. | Upon detection of a conflict of interest, the conflict will be brought to the attention of the Proxy Committee for resolution. See Conflicts of Interest section for additional information. |
10. | SCM is not required to vote every client proxy provided that electing not to vote is consistent with SCM’s fiduciary obligations. SCM shall at no time ignore or neglect its proxy voting responsibilities. However, there may be times when refraining from voting is in the client’s best interest, such as when an analysis of a particular client proxy reveals that the cost of voting the proxy may exceed the expected benefit to the client. See Proxies of Certain Global Issuers below. |
11. | SCM may process certain proxies without voting them or may systematically vote with management. Examples include, without limitation, proxies issued by companies SCM has decided to sell, proxies issued for securities that SCM did not select for a client portfolio, such as, securities that were selected by a previous adviser, unsupervised or non-managed securities held in a client’s account (such as ETFs), money market securities, or other securities selected by clients or their representatives other than SCM. |
12. | In the event that SCM votes the same proxy in two directions, it shall maintain documentation to support its voting (this may occur if a client requires SCM to vote a certain way on an issue, while SCM deems it beneficial to vote in the opposite direction for its other clients) in SCM’s files. |
13. | The CAO and the applicable Research Team member must report any attempts by SCM’s personnel to influence the voting of client proxies in a manner that is inconsistent with this Policy, as well as any attempts by persons |
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or entities outside SCM seeking to influence the voting of client proxies. Reporting shall be made to the CCO, or if the CCO is the person attempting to influence the voting, then to SCM’s General Counsel.
14. | All proxy votes will be recorded and the following information must be maintained: |
• | The name of the issuer of the portfolio security; |
• | The security identifier of the portfolio holding. |
• | The Council on Uniform Securities Identification Procedures (“CUSIP”) or similar number, in each case, if any, for the security; |
• | The shareholder meeting date; |
• | The number of shares SCM is voting firm-wide; |
• | A brief identification of the matter voted on; |
• | Whether the matter was proposed by the issuer or by a security holder; |
• | Whether or not SCM cast its vote on the matter; |
• | How SCM voted (e.g., for or against proposal, or abstain; for or withhold regarding election of directors); |
• | Whether SCM cast its vote with or against management; and |
• | Whether any client requested an alternative vote of its proxy. |
Loaned Securities
If a client participates in a securities lending program, SCM will not be able to vote the proxy of the shares out on loan. SCM will generally not seek to recall for voting the client shares on loan. However, under rare circumstances, for voting issues that may have a particularly significant impact on the investment (a “Significant Event”), SCM may request a client to recall securities that are on loan if SCM determines that the benefit of voting outweighs the costs and lost revenue to the client and the administrative burden of retrieving the securities. The Research Team member who is responsible for voting the proxy will notify the Proxy Committee in the event they believe a recall of loaned securities is necessary.
In determining whether a recall of a security is warranted, SCM will take into consideration whether the benefit of the vote would be in the client’s best interest despite the costs and the lost revenue to the client and the administrative burden of retrieving the securities. SCM may use third-party service providers to assist it in identifying and evaluating whether an event constitutes a Significant Event. From time to time, the Proxy Committee will deem certain matters to be Significant Events and will adjust the foregoing standard accordingly.
Proxies of Issuers in Certain Countries
It is SCM’s policy to seek to vote all proxies for client securities over which it has proxy voting authority where SCM can reasonably determine that voting such proxies will be in the best interest of its clients.
Voting proxies of issuers in certain countries may give rise to a number of administrative or operational issues that may cause SCM to determine that voting such proxies are not in the best interest of its clients or that it is not reasonably possible to determine whether voting such proxies will be in the best interests of its clients. While not exhaustive, the following list of considerations highlights some potential instances in which a proxy vote might not be entered.
• | SCM may receive meeting notices without enough time to fully consider the proxy or after the cut-off date for voting. |
• | A market may require SCM to provide local agents with a power of attorney or consularization prior to implementing SCM’s voting instructions. |
• | Proxy materials may not be available in English. |
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• | SCM may be unable to enter an informed vote in certain circumstances due to the lack of information provided in the proxy statement or by the issuer or other resolution sponsor. |
• | Proxy voting in certain countries may require “share blocking.” In such cases, shareholders wishing to vote their proxies must deposit their shares shortly before the date of the meeting with a designated depositary. During this blocking period, shares that will be voted at the meeting cannot be sold until the meeting has taken place and the shares are returned to the clients’ custodian banks. Absent compelling reasons to the contrary, SCM believes that the benefit to the client of exercising the vote is outweighed by the cost of voting (i.e., not being able to sell the shares during this period). Accordingly, if share blocking is required SCM generally elects not to vote those shares. The applicable Research Team member in conjunction with the Proxy Committee retains the final authority to determine whether to block the shares in the client’s portfolio or to pass on voting the meeting. |
The rationale for not voting a client proxy must be documented and the documentation must be maintained in SCM’s files.
Conflicts of Interest
The following potential conflicts of interest have been identified:
• | SCM provides services to an institutional client, or is in the process of being engaged to provide services to an institutional client that is affiliated with an issuer that is held in the SCM’s client portfolios. For example, SCM may be retained to manage Company A’s pension fund, where Company A is a public company and SCM’s client accounts hold shares of Company A. Another example is SCM’s clients may hold an investment in an issuer affiliated with an adviser of a fund vehicle sub-advised by SCM. |
• | SCM provides services to an individual, or is in the process of being engaged to provide services to an individual, who is an officer or director of an issuer that is held in SCM’s client portfolios; |
• | A Staff Members maintain a personal or business relationship (not an advisory relationship) with issuers or individuals that serve as officers or directors of issuers. For example, the spouse of a Staff Member may be a high-level executive of an issuer that is held in SCM’s client portfolios. The spouse could attempt to influence SCM to vote in favor of management; and |
• | SCM or a Staff Member personally owns a significant number of an issuer’s securities that are also held in SCM’s client portfolios. The Staff Member may seek to vote proxies in a different direction for his or her personal holdings than would otherwise be warranted by this Policy. The Staff Member could oppose voting the proxies according to the policy and successfully influence SCM to vote proxies in contradiction to this Policy. |
Due to the difficulty of predicting and identifying all material conflicts, Staff Members are responsible for notifying the CAO or the CCO of any material conflict that may impair SCM’s ability to vote proxies in an objective manner. Upon such notification, the CAO or the CCO will notify the Proxy Committee of the conflict.
In the event that the Proxy Committee determines that SCM has a conflict of interest with respect to a proxy proposal, the Proxy Committee will also determine whether the conflict is “material” to that proposal. The Proxy Committee may determine on a case‑by-case basis that a particular proposal does not involve a material conflict of interest. To make this determination, the Proxy Committee must conclude that the proposal is not directly related to SCM’s conflict with the issuer. If the Proxy Committee determines that a conflict is not material, then SCM may vote the proxy in accordance with the recommendation of the relevant Research Team member.
In the event that the Proxy Committee determines that SCM has a material conflict of interest with respect to a proxy proposal, SCM will vote on the proposal in accordance with the determination of the Proxy Committee. Prior to voting
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on the proposal, SCM may: (i) contact an independent third party (such as another plan fiduciary) to recommend how to vote on the proposal and vote in accordance with the recommendation of such third party (or have the third party vote such proxy); or (ii) with respect to clients that are not subject to ERISA, fully disclose the nature of the conflict to the client and obtain the client’s consent as to how SCM will vote on the proposal (or otherwise obtain instructions from the client as to how to vote the proxy).
Recordkeeping
SCM must maintain the documentation described in the following section for a period of not less than five years in an easily accessible place, the first two years at its principal place of business. The CAO will be responsible for the following procedures and for ensuring that the required documentation is retained.
Outside third party request to review proxy votes:
• | Staff Members must be thoughtful and cautious in sharing how SCM plans to vote its clients’ proxies. Until the vote has been cast and the relevant shareholder meeting has transpired, SCM generally treats information about SCM’s voting as confidential. Staff Members may not disclose SCM’s vote prior to the meeting or commit to any third party to vote a certain way without the prior consent of the CCO or General Counsel. Notwithstanding the previous sentence, Staff Members are permitted to prudently express SCM’s thoughts or opinions on topics in discussions with the relevant companies, advisors (3rd party research providers), and other shareholders prior to voting as a part of SCM’s ongoing education and engagement. |
• | Once the vote has been cast and the relevant shareholder meeting has transpired, analysts can choose to share how SCM voted with the relevant company or other shareholders, if necessary, as part of SCM’s ongoing engagement with management and the company’s shareholder base. |
• | All disclosures of votes in response to requests for vote information not originating from the company must be approved by the CAO prior to the disclosure of the vote. All written requests must be retained in the permanent file. The CAO or designee will record the identity of the outside third party, the date of the request, and the disposition (e.g., provided a written or oral response to client’s request, referred to third party, not a proxy voting client, other dispositions, etc.) in a suitable place. |
• | As is consistent with SCM’s Advertising and Marketing Policy, all Staff Members must refer inquiries from the press to the Director, Portfolio Analysis and Communications. |
Proxy statements received regarding client securities:
• | Upon receipt of a proxy, the relevant Staff Member must copy or print a sample of the proxy statement or card and maintain the copy in a central file along with a sample of the proxy solicitation instructions. |
Note: SCM is permitted to rely on proxy statements filed on the SEC’s EDGAR system instead of keeping its own copies.
Proxy voting records:
• | Documents prepared or created by SCM that were material to making a decision on how to vote, or that memorialized the basis for the decision, must be maintained in accordance with this Policy. |
• | Documentation or notes or any communications received from third parties, other industry analysts, third-party service providers, company’s management discussions, etc. that were material in the basis for the decision, must be maintained in accordance with this Policy. |
• | Clients are permitted to request their proxy voting record for the 5-year period prior to their request. |
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Disclosure
SCM will ensure that Part 2A of Form ADV is updated as necessary to reflect: (i) all material changes to this Policy and the procedures described herein; and (ii) information about how clients may obtain information on how SCM voted their securities.
Procedures for SCM’s Receipt of Class Actions
SCM will not file “Class Actions” on behalf of any client. If “Class Action” documents are received by SCM from a client’s custodian, SCM will make a commercially reasonable best effort to forward the documents to the client. Likewise if “Class Action” documents are received by SCM from a client, SCM will make a commercially reasonable effort to gather, at the client’s request, any requisite information it has regarding the matter and forward it to the client, to enable the client to file the “Class Action.”
Responsibility
The CAO is responsible for overseeing and implementing this Policy.
Attachment A
PROXY VOTING GUIDELINES
The majority of votes presented to shareholders are proposals made by management, which have been approved and recommended by its board of directors. One of the primary factors SCM considers when determining the desirability of investing in a particular company is the quality and depth of its management. Accordingly, SCM believes that the recommendation of management on any issue should be given substantial weight in determining how proxy issues are resolved. For routine matters (e.g., those matters that are not expected to measurably change the structure, management, control or operation of the company and are consistent with customary industry standards and practices, and the laws of the state of incorporation of the applicable company), SCM will vote in accordance with the recommendation of management, unless, in SCM’s opinion, such recommendation is not conducive to long term value creation or otherwise in the best interest of its clients. Non-routine matters (e.g., those matters relating to directors’ liability and indemnity proposals; executive compensation plans; mergers, acquisitions, and other restructurings submitted to a shareholder vote; anti-takeover and related provisions; and shareholder proposals) require company-specific and a case-by-case review and analysis. With respect to matters that do not fit in the categories stated below, SCM will exercise its best judgment as a fiduciary to vote in accordance with the best interest of its clients.
I. The Board of Directors
A. Voting on Director Nominees in Uncontested Elections
These votes are made on a case-by-case basis, and SCM may consider the following:
• | Long-term performance record relative to a market index; |
• | Composition of board and key board committees; |
• | Attendance at board and committee meetings; |
• | Corporate governance provisions and takeover activity; |
• | Board decisions regarding executive pay; and |
• | Director compensation. |
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B. Director and Officer Indemnification and Liability Protection
These votes are evaluated on a case-by-case basis.
C. Voting for Director Nominees in Contest Elections
These are evaluated on a case-by-case basis, and SCM may consider the following:
• | Long-term performance relative to its industry; |
• | Management’s track record; |
• | Background to the proxy contest; |
• | Qualifications of director nominees (both slates); |
• | Evaluation of what each side is offering shareholders and the likelihood that the proposed objectives and goals can be met; and |
• | Stock ownership positions. |
D. Size of the Board
Proposals to limit the size of the Board will be evaluated on a case-by-case basis.
II. Auditors
Ratifying Auditors
SCM generally votes for proposals to ratify auditors, unless:
• | an auditor is not independent (i.e., it has a financial interest in or association with the company); |
• | there is reason to believe the auditor’s opinion is not accurate or indicative of the company’s financial position; |
• | poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; or material weaknesses in internal controls; |
• | Evidence that the committee approved an inappropriate indemnification agreement with the auditor; or |
• | Non-audit fees are excessive in relation to audit-related fees without adequate explanation. |
III. Proxy Contest Defenses
A. | Cumulative Voting |
Proposals on cumulative voting are voted on a case-by-case basis. SCM may consider the following, among other, factors: (i) the ability of significant stockholders to elect a director of their choosing; (ii) the ability of minority shareholders to concentrate their support in favor of a director or directors of their choosing; and (iii) the potential to limit the ability of directors to work for all shareholders.
B. | Proxy Contests |
Votes on proxy contests are made on a case-by-case basis considering the long term financial performance of the company relative to its industry, management’s track record, the qualifications of the shareholder’s nominees, and other factors.
C. | Proxy Solicitation Expenses |
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Decisions to provide full reimbursement for dissidents waging a proxy contest are made on a case-by-case basis.
D. | Proxy Access |
Shareholder proposals to provide shareholders proxy access are voted on a case-by-case basis taking into account, among other factors:
• | Company-specific factors; and |
• | Proposal-specific factors including: |
• | the ownership thresholds proposed in the resolutions; |
• | the maximum proportion of directors that shareholders may nominate each year; and |
• | the method of determining which nominations should appear on the ballot if multiple shareholders submit nominations. |
IV. Anti-Takeover Issues
SCM conducts an independent review of each anti-takeover proposal. SCM may vote with management when it concludes that the proposal is not onerous and would not harm clients’ interests as shareholders. Anti-takeover issues include the following:
A. | Poison Pills |
The “poison pill” entitles shareholders to purchase certain securities at discount prices in the event of a change in corporate control. Such a measure would make a potential takeover prohibitively expensive to the acquirer.
SCM votes on a case-by-case basis management proposals to ratify a poison pill.
A. | Fair Price Provisions |
Fair price provisions attempt to ensure approximately equal treatment for all shareholders in the event of a takeover. SCM may consider, among other factors: (i) the vote required to approve the proposed acquisition; (ii) the vote required to repeal the fair price provision; (iii) the mechanism for determining fair price; and (iv) whether these provisions are bundled with other anti-takeover measures (e.g., supermajority voting requirements) that may entrench management and discourage attractive tender offers.
Fair price proposals are voted on a case-by-case basis.
B. | Greenmail |
Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.
Proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments are voted on a case-by-case basis.
C. | Superstock |
Another takeover defense is superstock, i.e., shares that give holders disproportionate voting rights. For example, a company could propose authorizing a class of preferred stock which “could be issued in a private placement with one or more institutional investors” and “could be designated as having voting rights which might dilute or limit the present voting rights of the holders of common stock….” The purpose of this additional class of stock would be to give insiders an edge in fending off an unsolicited or hostile takeover attempt.
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SCM votes on case-by-case basis proposals that would authorize the creation of new classes of “superstock.”
D. | Supermajority Rules |
Supermajority provisions require approval by holders of minimum amounts of the common shares (usually 75% to 80%). While applied mainly to merger bids, supermajority rules also may be extended to cover substantive transfers of corporate assets, liquidations, reverse splits and removal of directors for reasons other than cause. A supermajority provision would make it nearly impossible in some cases for shareholders to benefit from a takeover attempt.
Supermajority shareholder vote requirements to approve mergers, amend the charter or bylaws are voted on a case-by-case basis.
E. | Board Classification |
A “classified” or “staggered” board is a structure in which only a portion of a company’s board of directors (typically one-third) is elected each year. A company may employ such a structure to promote continuity of leadership and thwart takeover attempts. In evaluating a classified board proposal, SCM may consider the following factors, among others: (i) the company’s long-term strategic plan; (ii) the extent to which continuity of leadership is necessary to advance that plan; and (iii) the need to guard against takeover attempts.
SCM votes on board classification on a case-by-case basis.
V. Miscellaneous Governance Provision
A. | Approval of Financial Statements |
In some markets, companies are required to submit their financial statements for shareholder approval. Approval of financial statements is voted on a case-by-case basis. However, SCM may abstain if the information is not available in advance of the meeting.
B. | Adopting or Amending the Charter, Bylaws, or Articles of Association |
SCM votes on a case-by-case basis proposals on adopting or amending the charter, bylaws, or articles of association, and may consider whether:
◦ | Shareholder rights are protected; |
◦ | There is negligible or positive impact on shareholder value; |
◦ | Management provides sufficiently valid reasons for the amendments; |
◦ | The company is required to do so by law (if applicable); and |
◦ | They are of a housekeeping nature (updates or corrections). |
C. | Bundled Proposals |
SCM votes on a case-by-case basis bundled or “conditioned” proxy proposals. In this case where items are conditioned upon each other, SCM examines the benefits and costs of the packages items. In instances when the joint effect of the conditioned items is not in shareholder’s best interests, SCM votes against the proposals. If the combined effect is positive, SCM votes for such proposals.
VI. Capital Structure
A. | Common Stock Authorization |
SCM votes on a case-by-case basis proposals to increase the number of shares of common stock authorized for issue.
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B. | Stock Distributions; Splits and Dividends |
SCM votes on a case-by-case basis proposals to increase the common share authorization for a stock split or share dividend.
C. | Debt Restructuring |
SCM votes on a case-by-case basis proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan.
VII. Executive and Director Compensation
SCM believes that because a company has exclusive knowledge of material information not available to shareholders regarding its business, financial condition, and prospects, the company itself usually is in the best position to make decisions about compensation and benefits. Accordingly, SCM generally votes with management on such matters. However, SCM may oppose management on a case-by-case basis if it deems a company’s compensation to be excessive or inconsistent with its peer companies’ compensation, SCM believes a company’s compensation measures do not foster a long-term focus among its executive officers and other employees, or SCM believes a company has not met performance expectations, among other reasons. Discussed below are some specific types of compensation-related proposals that SCM may encounter.
SCM votes on a case-by-case basis items related to executive pay and practices.
A. | Management Say on Pay |
“Say on pay” proposals give shareholders a nonbinding vote on executive compensation. These proposals are designed to serve as a means of conveying to company management shareholder concerns, if any, about executive compensation.
SCM votes case-by-case on management proposals seeking approval of advisory vote on executive compensation.
B. | Equity-Based Compensation Plans |
A company's equity-based compensation plan should be in alignment with the shareholders' long-term interests. SCM believes that executive compensation should be directly linked to the performance of the company.
SCM vote case-by-case on proposals for equity-based compensation plans.
C. | Incentive Bonus Plans and Tax Deductibility Proposals (Section 163(m)) |
SCM votes on a case-by-case basis on proposals for incentive bonus plans and tax deductibility proposals.
D. | Golden Parachutes |
Golden Parachutes assure key officers of a company lucrative compensation packages if the company is acquired and/or if the new owners terminate such officers. SCM recognizes that offering generous compensation packages that are triggered by a change in control may help attract qualified officers. However, such compensation packages cannot be so excessive that they are unfair to shareholders or make the company unattractive to potential bidders, thereby serving as a constructive anti-takeover mechanism.
SCM votes on a case-by-case basis proposals to submit severance plans.
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E. | Golden Coffins / Executive Death Benefits |
Survivor benefit compensation plans, or “golden coffins,” can require a company to make substantial payments or awards to a senior executive’s beneficiaries following the death of the senior executive. The compensation can take the form of unearned salary or bonuses, accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards. This compensation would not include compensation that the senior executive chooses to defer during his or her lifetime.
SCM recognizes that offering generous compensation packages that are triggered by the passing of senior executives may help attract qualified officers. However, such compensation packages cannot be so excessive that they are unfair to shareholders or make the company unattractive to potential bidders, thereby serving as a constructive anti-takeover mechanism.
SCM votes on a case-by-case basis proposals on Golden Coffins / Executive Death Benefits.
VIII. State of Incorporation
A. | Voting on State Takeover Statutes |
SCM votes on a case-by-case basis proposals to opt in or out of state takeover statutes (including control share acquisition statutes, control share cash-out statutes, freeze-out provisions, fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, anti-greenmail provisions and disgorgement provisions).
B. | Voting on Reincorporation Proposals |
SCM votes on a case-by-case basis proposals to change a company’s state of incorporation.
IX. Mergers and Corporate Restructurings
A. | Mergers and Acquisitions |
SCM votes on a case-by-case basis proposals on mergers and acquisitions.
B. | Corporate Restructuring |
SCM votes on a case-by-case basis proposal on corporate restructuring, including minority squeeze outs, leveraged buyouts, spin-offs, liquidations, and asset sales.
C. | Spin-offs |
SCM votes on a case-by-case basis proposals on spin-offs.
D. | Changing Corporate Name |
SCM votes on changing the corporate name on a case-by-case basis.
X. Socially Oriented Proposals
A. | Proposals of a Social or Environmental Nature |
Consistent with its fiduciary duty to clients, SCM will vote on social and environmental issues with a view toward promoting good corporate citizenship. However, SCM realizes that it cannot require a portfolio company to go beyond applicable legal requirements or put itself in a non‑competitive position.
SCM considers environmental and social issues alongside traditional financial measures to provide a more comprehensive view of the value, risk, and return potential of an investment. Companies may face significant financial, legal and reputational risks resulting from poor environmental and social practices, or negligent oversight of environmental or social issues. SCM’s Environmental, Social, and Governance Framework
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describes SCM’s approach to consideration of environmental, social, and governance issues within its processes and ownership practices.
SCM votes on a case-by-case basis proposals regarding environmental or social issues. To do this, SCM uses research reports from SCM’s external proxy advisors, company filings and sustainability reports, research from other investors and non-governmental organizations, and the Research Team.
B. | Political Spending and Lobby Proposals |
Companies may engage in certain political activities, within legal and regulatory limits, in order to influence public policy consistent with the companies’ values and strategies, and thus serve shareholders’ best long-term economic interests. These activities can create risks, including: the potential for allegations of corruption; the potential for reputational issues associated with a candidate, party or issue; and risks that arise from the complex legal, regulatory and compliance considerations associated with corporate political activity. SCM believes that companies which choose to engage in political activities should develop and maintain robust processes to guide these activities and to mitigate risks, including a level of board oversight.
When presented with shareholder proposals requesting increased disclosure on corporate political activities, SCM may consider the political activities of that company and its peers, the existing level of disclosure, and its view regarding the associated risks. SCM generally believes that it is the duty of boards and management to determine the appropriate level of disclosure of all types of corporate activity.
SCM votes on a case-by-case basis proposals regarding political spending and lobbying activities.
TSF-56-TFGT-SAI-1801
B-25
PART C. OTHER INFORMATION
Item 15. Indemnification
Article VII of the Agreement and Declaration of Trust empowers the Trustees of the Trust, to the full extent permitted by law, to purchase with Trust assets insurance for indemnification from liability and to pay for all expenses reasonably incurred or paid or expected to be paid by a Trustee or officer in connection with any claim, action, suit or proceeding in which he or she becomes involved by virtue of his or her capacity or former capacity with the Trust.
Article VI of the By-Laws of the Trust provides that the Trust shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that such person is or was an agent of the Trust, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if that person acted in good faith and reasonably believed his or her conduct to be in the best interests of the Trust. Indemnification will not be provided in certain circumstances, however, including instances of willful misfeasance, bad faith, gross negligence, and reckless disregard of the duties involved in the conduct of the particular office involved.
Item 16. Exhibits
(1)(a) | Registrant’s Certificate of Trust dated October 22, 1993 is herein incorporated by reference to Exhibit (1)(a) of Registrant’s Registration Statement on Form N-14 (File No. 333-193307), filed with the Securities and Exchange Commission (“SEC”) on January 10, 2014. |
(1)(b) | Registrant’s Agreement and Declaration of Trust dated October 25, 1993 is herein incorporated by reference to Exhibit (a)(1) of Post-Effective Amendment No. 8 to Registrant’s Registration Statement on Form N-1A (File No. 033-70958), filed with the SEC on November 24, 1998. |
(1)(c) | Certificate of Amendment of Agreement and Declaration of Trust of Corona Investment Trust dated December 11, 1993 is herein incorporated by reference to Exhibit (a)(2) of Post-Effective Amendment No. 8 to Registrant’s Registration Statement on Form N-1A (File No. 033-70958), filed with the SEC on November 24, 1998. |
(1)(d) | Certificate of Amendment and Restatement of Certificate of Trust dated January 27, 1994 is herein incorporated by reference to Exhibit (1)(d) of Registrant’s Registration Statement on Form N-14 (File No. 333-193307), filed with the SEC on January 10, 2014. |
(1)(e) | Certificate of Amendment of Agreement and Declaration of Trust and Certificate of Trust of the Solon Funds dated June 13, 1994 is herein incorporated by reference to Exhibit (a)(3) of Post-Effective Amendment No. 8 to Registrant’s Registration Statement on Form N-1A (File No. 033-70958), filed with the SEC on November 24, 1998. |
(1)(f) | Certificate of Amendment of Agreement and Declaration of Trust dated November 10, 1997 is herein incorporated by reference to Exhibit (1)(d) of Post-Effective Amendment No. 5 to Registrant’s Registration Statement on Form N-1A (File No. 033-70958), filed with the SEC on December 17, 1997. |
(1)(g) | Amended and Restated Agreement and Declaration of Trust dated October 8, 1998 is herein incorporated by reference to Exhibit (a)(5) of Post-Effective Amendment No. 8 to Registrant’s Registration Statement on Form N-1A (File No. 033-70958), filed with the SEC on November 24, 1998. |
(1)(h) | Certificate of Amendment of Amended and Restated Agreement and Declaration of Trust dated November 23, 1998 is herein incorporated by reference to Exhibit (a)(6) of Post-Effective Amendment No. 10 to Registrant’s Registration Statement on Form N-1A (File No. 033-70958), filed with the SEC on January 27, 1999. |
(1)(i) | Certificate of Amendment of Certificate of Trust dated March 24, 2004 is herein incorporated by reference to Exhibit (a)(7) of Post-Effective Amendment No. 18 to Registrant’s Registration Statement on Form N-1A (File No. 033-70958), filed with the SEC on May 3, 2004. |
(1)(j) | Certificate of Amendment of Certificate of Trust dated November 17, 2006 is herein incorporated by reference to Exhibit (a)(8) of Post-Effective Amendment No. 29 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on February 1, 2007. |
(1)(k) | Certificate of Correction of a Statutory Trust dated April 17, 2009 is herein incorporated by reference to Exhibit (1)(k) of Registrant’s Registration Statement on Form N-14 (File No. 333-193307), filed with the SEC on January 10, 2014. |
(2) | Amended and Restated By-Laws of the Trust as revised November 19, 2015 is herein incorporated by reference to Exhibit (b) of Post-Effective Amendment No. 77 to Registrant's Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 28, 2016. |
(3) | Not applicable |
(4) | Form of Agreement and Plan of Reorganization is filed herewith as Exhibit A to Part A of this Registration Statement. |
(5) | Instruments Defining Rights of Security Holders are herein incorporated by reference to Exhibit (c) of Post-Effective Amendment No. 34 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-03651), filed with the SEC on September 19, 2007. |
(6)(a)(i) | Investment Advisory Agreement between the Registrant and Touchstone Advisors, Inc. dated February 17, 2006 is herein incorporated by reference to Exhibit (d)(1) of Post-Effective Amendment No. 62 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on August 9, 2011. |
(6)(a)(ii) | Schedule C-1 of the Investment Advisory Agreement between the Registrant and Touchstone Advisors, Inc. dated January 27, 2017 is herein incorporated by reference to Exhibit (d)(1)(b) of Post-Effective Amendment No. 83 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 27, 2017. |
(6)(b) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and Sands Capital Management, LLC with respect to the Touchstone Sands Capital Select Growth Fund dated August 18, 2011 is herein incorporated by reference to Exhibit (d)(2)(b) of Post-Effective Amendment No. 65 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 30, 2012. |
(6)(c) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and Miller/Howard Investments, Inc. with respect to the Touchstone Premium Yield Equity Fund dated May 20, 2008 is herein incorporated by reference to Exhibit (d)(6) of Post-Effective Amendment No. 40 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on September 15, 2008. |
(6)(d) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and Fort Washington Investment Advisors, Inc. with respect to the Touchstone Ultra Short Duration Fixed Income Fund dated February 20, 2009 is herein incorporated by reference to Exhibit (d)(9) of Post-Effective Amendment No. 43 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on May 4, 2009. |
(6)(e) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and Copper Rock Capital Partners LLC with respect to the Touchstone Emerging Markets Small Cap Fund dated April 19, 2016 is herein incorporated by reference to Exhibit (d)(15) of Post-Effective Amendment No. 80 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on April 19, 2016. |
(6)(f) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and Lee Munder Investments, LLC with respect to the Touchstone Mid Cap Value Fund dated October 1, 2009 is herein incorporated by reference to Exhibit (d)(13) of Post-Effective Amendment No. 47 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on September 30, 2009. |
(6)(g) | Amendment to Sub-Advisory Agreement between Touchstone Advisors, Inc. and Lee Munder Investments, LLC with respect to the Touchstone Mid Cap Value Fund dated December 1, 2014 is herein incorporated by reference to Exhibit (d)(7) of Post-Effective Amendment No. 75 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 27, 2015. |
(6)(h) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and The London Company of Virginia with respect to the Touchstone Small Cap Core Fund dated October 1, 2009 is herein incorporated by reference to Exhibit (d)(16) of Post-Effective Amendment No. 47 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on September 30, 2009. |
(6)(i) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and The London Company of Virginia with respect to the Touchstone Mid Cap Fund dated December 8, 2011 is herein incorporated by reference to Exhibit (d)(13) of Post-Effective Amendment No. 65 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 30, 2012. |
(6)(j) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and EARNEST Partners, LLC with respect to the Touchstone Total Return Bond Fund dated May 19, 2011 is herein incorporated by reference to Exhibit (d)(20) of Post-Effective Amendment No. 62 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on August 9, 2011. |
(6)(k) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and Longfellow Investment Management Co. LLC with respect to the Touchstone Merger Arbitrage Fund dated August 9, 2011 is herein incorporated by reference to Exhibit (d)(21) of Post-Effective Amendment No. 62 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on August 9, 2011. |
(6)(l) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and Longfellow Investment Management Co. LLC with respect to the Touchstone Arbitrage Fund dated September 30, 2013, incorporated by reference to Exhibit (d)(15) of Post-Effective Amendment No. 70 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on September 30, 2013. |
(6)(m) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and Copper Rock Capital Partners LLC with respect to the Touchstone Emerging Markets Small Cap Fund dated April 19, 2016 is herein incorporated by reference to Exhibit (d)(15) of Post-Effective Amendment No. 80 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on April 19, 2016. |
(6)(n) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and Fort Washington Investment Advisors with respect to the Touchstone Active Bond Fund is herein incorporated by reference to Exhibit (d)(13) of Post-Effective Amendment No. 94 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 25, 2018. |
(6)(o) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and Fort Washington Investment Advisors with respect to the Touchstone High Yield Fund is herein incorporated by reference to Exhibit (d)(14) of Post-Effective Amendment No. 94 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 25, 2018. |
(6)(p) | Sub-Advisory Agreement between Touchstone Advisors, Inc. and LMCG Investments, LLC with respect to the Touchstone Small Cap Value Fund is herein incorporated by reference to Exhibit (d)(15) of Post-Effective Amendment No. 94 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 25, 2018. |
(6)(q) | Form of Sub-Advisor Agreement dated July 30, 2018 between Touchstone Advisors, Inc. and LMCG Investments, LLC with respect to the Touchstone Small Cap Value Opportunities Fund is filed herewith as Exhibit D to Part A of this Registration Statement. |
(7)(a) | Distribution Agreement between the Registrant and Touchstone Securities, Inc. is herein incorporated by reference to Exhibit (e)(1) of Post-Effective Amendment No. 28 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on September 21, 2006. |
(7)(b) | Form of Underwriter’s Dealer Agreement is herein incorporated by reference to Exhibit (e)(2) of Post-Effective Amendment No. 29 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on February 1, 2007. |
(8) | Touchstone Trustee Deferred Compensation Plan is herein incorporated by reference to Exhibit (f) of Post-Effective Amendment No. 51 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 28, 2010. |
(9)(a) | Custodian Agreement between the Registrant and Brown Brothers Harriman & Co. dated February 25, 2008 is herein incorporated by reference to Exhibit (g) of Post-Effective Amendment No. 41 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 28, 2009. |
(9)(b) | Amended Schedule of Global Services & Charges to the Custodian Agreement dated February 1, 2013 between the Trust and Brown Brothers Harriman & Co. Fund is herein incorporated by reference to Exhibit (g)(2) of Post-Effective Amendment No. 83 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 27, 2017. |
10(a)(i) | Distribution and Shareholder Services Plan for Class A shares is herein incorporated by reference to exhibit (m)(1) of Post-Effective Amendment No. 67 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 28, 2013. |
10(a)(ii) | Exhibit A to the Distribution and Shareholder Services Plan for Class A is herein incorporated by reference to Exhibit (m)(1)(b) of Post-Effective Amendment No. 83 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 27, 2017. |
10(b)(i) | Distribution and Shareholder Services Plan for Class C shares is herein incorporated by reference to exhibit (m)(2) of Post-Effective Amendment No. 67 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 28, 2013. |
10(b)(ii) | Exhibit A to the Distribution and Shareholder Services Plan for Class C shares is herein incorporated by reference to Exhibit (m)(2)(b) of Post-Effective Amendment No. 83 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 27, 2017. |
(10)(c) | Shareholder Services Plan for Class Z shares is herein incorporated by reference to Exhibit (m)(3) of Post-Effective Amendment No. 41 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 28, 2009. |
(10)(d) | Amended and Restated Rule 18f-3 Multiple Class Plan is herein incorporated by reference to Exhibit (n) of Post-Effective Amendment No. 67 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 28, 2013. |
(10)(e) | Amended Schedule A to the Amended and Restated Rule 18f-3 Multiple Class Plan is herein incorporated by reference to Exhibit (n)(2) of Post-Effective Amendment No. 89 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on October 30, 2017. |
(11) | Opinion of Vedder Price P.C., as to legality of securities being issued, is filed herewith. |
(12) | Form of Opinion of Vedder Price P.C., as to certain tax consequences, is filed herewith. |
(13)(a) | Amended Administration Agreement between the Registrant and Touchstone Advisors, Inc. is herein incorporated by reference to Exhibit (h)(1) of Post-Effective Amendment No. 67 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 28, 2013. |
(13)(b) | Amended and Restated Sub-Administration and Accounting Services Agreement between Touchstone Advisors, Inc. and BNY Mellon Investment Servicing (US) Inc. is herein incorporated by reference to Exhibit (h)(2) of Post-Effective Amendment No. 75 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 27, 2015. |
(13)(c) | Amended and Restated Transfer Agency and Shareholder Services Agreement with BNY Mellon Investment Servicing (US) Inc. dated January 1, 2015 is herein incorporated by reference to Exhibit (h)(3) of Post-Effective Amendment No. 75 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 27, 2015. |
(13)(d)(i) | State Filing Services Agreement between Registrant and BNY Mellon dated December 5, 2011 is herein incorporated by reference to Exhibit (h)(4) of Post-Effective Amendment No. 65 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 30, 2012. |
(13)(d)(ii) | Amended Schedule A dated September 30, 2013 to the State Filing Services Agreement between Registrant and BNY Mellon dated December 5, 2011 Mellon is herein incorporated by reference to Exhibit (h)(4)(b) of Post-Effective Amendment No. 72 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 27, 2014. |
(13)(e) | Fidelity Bond Allocation Agreement dated April 1, 2011 is herein incorporated by reference to Exhibit (13)(h) of Post-Effective Amendment No. 2 to Registrant’s Registration Statement on Form N-14 (File Nos. 333-177599 and 811-08104), filed with the SEC on April 25, 2012. |
(13)(f)(i) | Expense Limitation Agreement between Touchstone Advisors, Inc. and the Registrant effective as of January 25, 2013 is herein incorporated by reference to Exhibit (13)(a)(1) of Registrant’s Registration Statement on Form N-14 (File No. 333-193307), filed with the SEC on January 10, 2014. |
(13)(f)(ii) | Amendment to the Expense Limitation Agreement between Touchstone Advisors, Inc. and the Registrant dated August 31, 2015 is herein incorporated by reference to Exhibit (h)(6)(b) of Post-Effective Amendment No. 77 to Registrant's Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 28, 2016. |
(13)(f)(iii) | Schedule A to the Expense Limitation Agreement between Touchstone Advisors, Inc. and the Registrant effective as of January 30, 2018 is herein incorporated by reference to Exhibit (h)(6)(c) of Post-Effective Amendment No. 94 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 25, 2018. |
(13)(g)(i) | Expense Limitation Agreement between Touchstone Advisors, Inc. and the Registrant effective as of January 25, 2013 with respect to the Touchstone Sands Capital Select Growth Fund is herein incorporated by reference to Exhibit (13)(g)(1) of Registrant’s Registration Statement on Form N-14 (File No. 333-193307), filed with the SEC on January 10, 2014. |
(13)(g)(ii) | Amendment to the Expense Limitation Agreement between Touchstone Advisors, Inc. and the Registrant with respect to the Touchstone Sands Capital Select Growth Fund dated August 31, 2015 is herein incorporated by reference to Exhibit (h)(7)(b) of Post-Effective Amendment No. 77 to Registrant's Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 28, 2016. |
(13)(g)(iii) | Schedule A to the Expense Limitation Agreement between Touchstone Advisors, Inc. and the Registrant with respect to the Touchstone Sands Capital Select Growth Fund, effective as of January 30, 2018 is herein incorporated by reference to Exhibit (h)(7)(c) of Post-Effective Amendment No. 94 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 25, 2018. |
(13)(h) | Form of Securities Lending Agency Agreement between the Registrant and Brown Brothers Harriman & Co. dated February 1, 2013, Mellon is herein incorporated by reference to Exhibit (h)(8) of Post-Effective Amendment No. 72 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on January 27, 2014. |
(14) | Consent of Ernst & Young LLP is filed herewith. |
(15) | Not applicable. |
(16) | Power of Attorney is herein incorporated by reference to Exhibit (q) of Post-Effective Amendment No. 82 to Registrant’s Registration Statement on Form N-1A (File Nos. 033-70958 and 811-08104), filed with the SEC on November 10, 2016. |
(17) | Form of Proxy Card is filed herewith. |
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, as amended (the "1933 Act"), the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as a part of an amendment to the Registration Statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new Registration Statement for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them.
(3) Insofar as indemnification for liability arising under the 1933 Act may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue.
(4) The undersigned Registrant agrees that it shall file a final executed version of the legal opinion as to tax matters as an exhibit to the subsequent post-effective amendment to its Registration Statement on Form N-14 filed with the SEC upon the closing of the reorganizations contemplated by this Registration Statement on Form N-14.
SIGNATURES
As required by the Securities Act of 1933, as amended, this registration statement on Form N-14 has been signed on behalf of the Registrant, in the City of Cincinnati and State of Ohio on the 11th day of June, 2018.
TOUCHSTONE FUNDS GROUP TRUST | |
By:/s/Jill T. McGruder | |
Jill T. McGruder | |
President | |
As required by the Securities Act of 1933, as amended, this registration statement on Form N-14 has been signed by the following persons in the capacities and on the dates indicated.
* | Trustee | June 11, 2018 | ||
Phillip R. Cox | ||||
* | Trustee | June 11, 2018 | ||
William C. Gale | ||||
* | Trustee | June 11, 2018 | ||
Susan J. Hickenlooper | ||||
* | Trustee | June 11, 2018 | ||
Kevin A. Robie | ||||
* | Trustee | June 11, 2018 | ||
Edward J. VonderBrink | ||||
/s/ Jill T. McGruder | Trustee and President | June 11, 2018 | ||
Jill T. McGruder | ||||
/s/Terrie A. Wiedenheft | Controller, Treasurer and Principal Financial Officer | June 11, 2018 | ||
Terrie A. Wiedenheft | ||||
* By: | /s/ Terrie A. Wiedenheft | ||
Terrie A. Wiedenheft | |||
(Attorney-in-Fact Pursuant to Power of Attorney) | |||
EXHIBIT INDEX
(11) | Opinion of Vedder Price P.C., as to legality of securities being issued. | |
(12) | Form of Opinion of Vedder Price P.C., as to certain tax consequences. | |
(14) | Consent of Ernst & Young LLP. | |
(17) | Form of Proxy Card. | |
