OPTIMUM FUND TRUST
2005 Market
Street
Philadelphia, PA 19103-7094
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Nasdaq tickers
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Optimum Large
Cap Growth Fund
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Class
A
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OALGX
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Class
B
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OBLGX
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Class
C
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OCLGX
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Institutional
Class
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OILGX
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Optimum Large
Cap Value Fund
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Class
A
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OALVX
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Class
B
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OBLVX
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Class
C
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OCLVX
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Institutional
Class
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OILVX
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Optimum
Small-Mid Cap Growth Fund
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Class
A
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OASGX
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Class
B
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OBSGX
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Class
C
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OCSGX
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Institutional
Class
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OISGX
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Optimum
Small-Mid Cap Value Fund
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Class
A
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OASVX
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Class
B
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OBSVX
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Class
C
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OCSVX
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Institutional
Class
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OISVX
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Optimum
International Fund
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Class
A
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OAIEX
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Class
B
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OBIEX
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Class
C
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OCIEX
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Institutional
Class
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OIIEX
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Optimum Fixed
Income Fund
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Class
A
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OAFIX
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Class
B
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OBFIX
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Class
C
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OCFIX
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Institutional
Class
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OIFIX
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This Statement of
Additional Information (Part B) supplements the information contained in the
current prospectus for the Funds (the Prospectus), dated July 29, 2013, as it
may be amended from time to time. This Part B should be read in conjunction with
the Prospectus. This Part B is not itself a prospectus but is, in its entirety,
incorporated by reference into the Prospectus. A Prospectus may be obtained by
writing to or calling your participating securities dealer or other financial
intermediary. If you hold Fund shares directly with the Funds service agent,
Delaware Service Company, Inc., call toll-free 800 914-0278. Please do not send
any correspondence to the address above. The Funds financial statements, the
notes relating thereto, the financial highlights and the report of the
independent registered public accounting firm are incorporated by reference from
the Funds annual report (the Annual Report) into this Part B. The Annual
Report will accompany any request for Part B. The Annual Report can be obtained,
without charge, by calling 800 914-0278.
TABLE OF CONTENTS
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FUND HISTORY
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1
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INVESTMENT OBJECTIVES, RESTRICTIONS, AND
POLICIES
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1
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INVESTMENT STRATEGIES AND RISKS
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3
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DISCLOSURE OF PORTFOLIO HOLDINGS INFORMATION
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39
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MANAGEMENT OF THE TRUST
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40
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INVESTMENT MANAGER AND OTHER SERVICE PROVIDERS
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48
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PORTFOLIO MANAGERS
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58
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TRADING PRACTICES AND BROKERAGE
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82
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CAPITAL STRUCTURE
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85
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PURCHASING SHARES
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86
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INVESTMENT PLANS
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95
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DETERMINING OFFERING PRICE AND NET ASSET VALUE
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96
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REDEMPTION AND EXCHANGE
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97
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DISTRIBUTIONS AND TAXES
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101
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PERFORMANCE INFORMATION
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116
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FINANCIAL STATEMENTS
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116
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PRINCIPAL HOLDERS
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117
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APPENDIX A DESCRIPTION OF RATINGS
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118
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APPENDIX B PROXY VOTING POLICIES AND
PROCEDURES
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120
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i
This Part B
describes the shares of Optimum Large Cap Growth Fund, Optimum Large Cap Value
Fund, Optimum Small-Mid Cap Growth Fund, Optimum Small-Mid Cap Value Fund,
Optimum International Fund, and Optimum Fixed Income Fund (each a Fund and
collectively, the Funds), which are series of Optimum Fund Trust (the
Trust). Each Fund offers three retail classes: Class A shares, Class B shares,
and Class C shares (referred to collectively as the Fund Classes). Each Fund
also offers an Institutional Class. Each class may be referred to individually
as a Class and collectively as the Classes. The Funds investment manager is
Delaware Management Company (the Manager), a series of Delaware Management
Business Trust.
Organization
The Trust was organized as a Delaware
statutory trust on April 21, 2003.
Classification
The Trust is an open-end registered
management investment company. Each Fund operates as a diversified fund as
defined by the Investment Company Act of 1940, as amended (the 1940 Act). Each
Funds portfolio of assets is diversified as defined by the 1940 Act. The 1940
Act requires a diversified fund, with respect to 75% of the value of its total
assets, to invest (1) no more than 5% of the value of the funds total assets in
the securities of any one issuer and (2) in no more than 10% of the outstanding
voting securities of such issuer. This limitation generally requires a
diversified fund to invest in securities issued by a minimum of 16
issuers.
INVESTMENT OBJECTIVES, RESTRICTIONS, AND
POLICIES
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Investment
Objectives
The Funds investment objectives are
described in the Prospectus. Each Funds investment objective is nonfundamental,
and may be changed without shareholder approval. However, the Trusts Board of
Trustees (the Board) must approve any changes to nonfundamental investment
objectives and a Fund will notify shareholders at least 60 days prior to a
material change in the Funds objective.
Fundamental Investment
Restrictions
The Trust has adopted the following
restrictions for each Fund, which cannot be changed without approval by the
holders of a majority of the respective Funds outstanding shares, which is a
vote by the holders of the lesser of (a) 67% or more of the voting securities
present in person or by proxy at a meeting, if the holders of more than 50% of
the outstanding voting securities are present or represented by proxy; or (b)
more than 50% of the outstanding voting securities. The percentage limitations
contained in the restrictions and policies set forth herein apply at the time a
Fund purchases securities.
Each Fund may not:
1.
Purchase securities of any issuer (other
than securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities or securities issued by other investment companies) if, as a
result, more than 5% of the Funds total assets would be invested in securities
of that issuer or the Fund would own or hold more than 10% of the outstanding
voting securities of that issuer, except that up to 25% of the Funds total
assets may be invested without regard to this limitation.
1
2.
Make investments that
will result in the concentration (as that term may be defined in the 1940
Act), any rule or order thereunder, or U.S.
Securities and Exchange Commission (SEC) staff interpretation thereof) of its
investments in the securities of issuers primarily engaged in the same industry,
provided that this restriction does not limit the Fund from investing in
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or in tax-exempt securities or certificates of deposit.
3.
Borrow money or issue senior securities, except as the 1940 Act, any rule
or order thereunder, or
SEC staff interpretation
thereof, may permit.
4.
Underwrite the securities of other issuers, except that the Fund may
engage in transactions involving the acquisition, disposition or resale of its
portfolio securities, under circumstances where it may be considered to be an
underwriter under the Securities Act of 1933, as amended (the 1933 Act).
5.
Purchase or sell real estate, unless acquired as a result of ownership of
securities or other instruments, and provided that 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.
6.
Purchase or sell physical commodities, unless acquired as a result of
ownership of securities or other instruments, and provided that 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.
7.
Make loans, provided that this restriction does not prevent the Fund from
purchasing debt obligations, entering into repurchase agreements, loaning its
assets to broker/dealers or institutional investors, and investing in loans,
including assignments and participation interests.
Nonfundamental Investment
Restrictions
In addition to the fundamental policies
and investment restrictions described above, and the various general investment
policies described in the Prospectus, each Fund will be subject to the following
investment restrictions, which are considered nonfundamental and may be changed
by the Board without shareholder approval. The percentage limitations contained
in the restrictions and policies set forth herein apply at the time a Fund
purchases securities.
1. A Fund may not invest more than 15% of its respective net assets in
securities that it cannot sell or dispose of in the ordinary course of business
within seven days at approximately the value at which the Fund has valued the
investment.
2. A Fund may not purchase securities on margin, except for short-term
credit necessary for clearance of portfolio transactions and except that the
Fund may make margin deposits in connection with its use of financial options
and futures, forward and spot currency contracts, swap transactions, and other
financial contracts or derivative instruments.
3. A Fund may not sell securities short or maintain a short position,
except that the Fund may (a) sell short against the box and (b) maintain short
positions in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other financial contracts, or
derivative instruments.
4. A Fund may not purchase portfolio securities while borrowings in
excess of 5% of its total assets are outstanding.
2
Portfolio
Turnover
Portfolio trading will be undertaken principally to accomplish each
Funds investment objective. Each Fund is free to dispose of portfolio
securities at any time, subject to complying with the Internal Revenue Code of
1986, as amended (the Internal Revenue Code) and the 1940 Act, when changes in
circumstances or conditions make such a move desirable in light of such Funds
investment objective. The Funds will not attempt to achieve or be limited to a
predetermined rate of portfolio turnover. Such turnover always will be
incidental to transactions undertaken with a view to achieving a Funds
investment objective.
The portfolio turnover rate tells
you the amount of trading activity in a Funds portfolio. A turnover rate of
100% would occur, for example, if all of such Funds investments held at the
beginning of a year were replaced by the end of the year, or if a single
investment were frequently traded. The turnover rate also may be affected by
cash requirements from redemptions and repurchases of a Funds shares. A high
rate of portfolio turnover in any year may increase brokerage commissions paid
and could generate taxes for shareholders on realized investment gains. In
investing to achieve its investment objective, each Fund may hold securities for
any period of time.
Each Funds portfolio turnover rate
for the fiscal years ended March 31, 2012 and March 31, 2013, respectively, is
set forth below:
Fund
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2012
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2013
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Optimum Large Cap Growth Fund
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89%
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102%
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Optimum Large Cap Value Fund
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57%
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49%
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Optimum Small-Mid Cap Growth Fund
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82%
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78%
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Optimum Small-Mid Cap Value Fund
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30%
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36%
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Optimum International Fund
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50%
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70%
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Optimum Fixed Income Fund
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211%
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208%
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INVESTMENT STRATEGIES AND
RISKS
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The Prospectus discusses each Funds
investment objective and the strategies followed to seek to achieve those
objectives. The following discussion supplements the description of the Funds
investment strategies and risks that are included in the Prospectus. The Funds
investment strategies are nonfundamental and may be changed without shareholder
approval.
Asset-Backed
Securities
Each
Fund may invest in securities that are backed by assets such as mortgages,
loans, receivables or other assets. Asset-backed securities are often backed by
a pool of assets representing the obligations of a number of different parties.
The credit quality of most asset-backed securities depends primarily on the
credit quality of the assets underlying such securities, how well the entities
issuing the securities are insulated from the credit risk of the originator or
affiliated entities, and the amount of credit support provided to the
securities. Such receivables are securitized in either a pass-through or a
pay-through structure. Pass-through securities provide investors with an income
stream consisting of both principal and interest payments in respect of the
receivables in the underlying pool. Pay-through asset-backed securities are debt
obligations issued usually by a special purpose entity, which are collateralized
by the various receivables and in which the payments on the underlying
receivables provide the funds to pay the debt service on the debt obligations
issued.
To lessen the effect of failures by
obligors on underlying assets to make payments, such securities may contain
elements of credit support. Such credit support falls into two categories: (i)
liquidity protection, and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that the receipt of payments due on the underlying pool is
timely. Protection against losses resulting from ultimate default enhances the
likelihood of payments of the obligations on at least some of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
3
Examples of
credit support arising out of the structure of the transaction include
senior-subordinated securities (multiple class securities with one or more
classes subordinate to other classes as to the payment of principal thereof and
interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of reserve
funds (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and over collateralization (where the scheduled payments on, or the principal
amount of, the underlying assets exceed that required to make payments of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in such issue.
The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets.
Such rate of payments may be affected by economic and various other factors such
as changes in interest rates or the concentration of collateral in a particular
geographic area. Therefore, the yield may be difficult to predict and actual yield to
maturity may be more or less than the anticipated yield to maturity. Due to the
shorter maturity of the collateral backing such securities, there tends to be
less of a risk of substantial prepayment than with mortgage-backed securities,
but the risk of such a prepayment does exist. Such asset-backed securities do,
however, involve certain risks not associated with mortgage-backed securities,
including the risk that security interests cannot be adequately, or in many
cases ever, established, and other risks, which may be peculiar to particular
classes of collateral. For example, with respect to credit card receivables, a
number of state and federal consumer credit laws give debtors the right to set
off certain amounts owed on the credit cards, thereby reducing the outstanding
balance. In the case of automobile receivables, there is a risk that the holders
may not have either a proper or first security interest in all of the
obligations backing such receivables due to the large number of vehicles
involved in a typical issuance and technical requirements under state laws.
Therefore, recoveries on repossessed collateral may not always be available to
support payments on the securities.
Bank Capital
Securities
Optimum Fixed Income Fund may invest in
bank capital securities. Bank capital securities are issued by banks to help
fulfill their regulatory capital requirements. There are three common types of
bank capital: Lower Tier II, Upper Tier II and Tier I. Bank capital is
generally, but not always, of investment grade quality. Upper Tier II securities
are commonly thought of as hybrids of debt and preferred stock. Upper Tier II
securities are often perpetual (with no maturity date), callable, and have a
cumulative interest deferral feature. This means that under certain conditions,
the issuer bank can withhold payment of interest until a later date. However,
such deferred interest payments generally earn interest. Tier I securities often
take the form of trust-preferred securities.
Brady Bonds
Each Fund may
invest in Brady Bonds, which are securities created through the exchange of
existing commercial bank loans to public and private entities in certain
emerging markets for new bonds in connection with debt restructurings under a
debt restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady (the Brady Plan). Brady Plan debt restructurings have been
implemented in a number of countries including Argentina, Brazil, Bulgaria,
Costa Rica, Croatia, Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, Panama, Peru, the Philippines, Poland, Slovenia, Uruguay, and
Venezuela. Brady Bonds have been issued only recently, and for that reason do
not have a long payment history. Brady Bonds may be collateralized or
uncollateralized, are issued in various currencies (but primarily the U.S.
dollar) and are actively traded in over-the-counter secondary markets. U.S.
dollar-denominated, collateralized Brady Bonds, which may be fixed rate bonds or
floating-rate bonds, are generally collateralized in full as to principal by
U.S. Treasury zero coupon bonds having the same maturity as the bonds. Brady
Bonds are often viewed as having three or four valuation components: the
collateralized repayment of principal at final maturity; the collateralized
interest payments; the uncollateralized interest payments; and any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constituting the residual risk). In light of the residual risk of
Brady Bonds and the history of defaults of countries issuing Brady Bonds, with
respect to commercial bank loans by public and private entities, investments in
Brady Bonds may be viewed as speculative.
4
Collateralized Debt
Obligations
Optimum Fixed Income Fund may invest in
each of collateralized bond obligations (CBOs), collateralized loan
obligations (CLOs), other collateralized debt obligations (CDOs) and other
similarly structured securities. CBOs, CLOs and other CDOs are types of
asset-backed securities. A CBO is a trust that is backed by a diversified pool
of high risk, below investment grade fixed income securities. A CLO is a trust
typically collateralized by a pool of loans, which may include, among others,
domestic and foreign senior secured loans, senior unsecured loans, and
subordinate corporate loans, including loans that may be rated below investment
grade or equivalent unrated loans. CDOs may charge management fees and
administrative expenses.
For both CBOs and
CLOs, the cash flows from the trust are split into two or more portions, called
tranches, varying in risk and yield. The riskiest portion is the equity
tranche which bears the bulk of defaults from the bonds or loans in the trust
and serves to protect the other, more senior tranches from default in all but
the most severe circumstances. Since they are partially protected from defaults,
senior tranches from a CBO trust or CLO trust typically have higher ratings and
lower yields than their underlying securities, and can be rated investment
grade. Despite the protection from the equity tranche, CBO or CLO tranches can
experience substantial losses due to actual defaults, increased sensitivity to
defaults due to collateral default and disappearance of protecting tranches,
market anticipation of defaults, as well as aversion to CBO or CLO securities as
a class.
The risks of an investment in a CDO depend largely on the type of the
collateral securities and the class of the CDO in which the Fund invests.
Normally, CBOs, CLOs and other CDOs are privately offered and sold, and thus,
are not registered under the securities laws. As a result, investments in CDOs
may be characterized by the Funds as illiquid securities, however an active
dealer market may exist for CDOs allowing a CDO to qualify for Rule 144A
transactions. In addition to the normal risks associated with fixed income
securities, CDOs carry additional risks including, but not limited to, the
possibility that: (i) distributions from collateral securities will not be
adequate to make interest or other payments; (ii) the quality of the collateral
securities may decline in value or there may be a default in one or more of the
collateral securities; (iii) the CDOs in which the Funds may invest will be
subordinate to other classes; and (iv) the complex structure of a collateralized
security may not be fully understood at the time of investment and may produce
disputes with the issuer or unexpected investment results.
Combined
Transactions
A Fund may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple currency transactions (including forward currency
contracts), multiple interest rate transactions and any combination of futures,
options, currency and interest rate transactions (component transactions),
instead of a single transaction, as part of a single or combined strategy when,
in the opinion of the investment adviser, it is in the best interests of the
Fund to do so. A combined transaction will usually contain elements of risk that
are present in each of its component transactions. Although combined
transactions are normally entered into based on the investment advisers
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.
5
Convertible Debt and Non-Traditional
Equity Securities
A Fund may invest in convertible and debt securities of issuers in any
industry. A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted at a stated price within a specified period
of time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities rank ahead of common stock in a corporations
capital structure and therefore entail less risk than the corporations common
stock. However, convertible securities typically rank behind non-convertible
securities of the same issuer. Convertible and debt securities provide a fixed
income stream and the opportunity, through their conversion features, to
participate in the capital appreciation resulting from a market price advance in
the convertible securities underlying common stock. A convertible securitys
price depends on both its investment value (its value with the conversion
privilege), and its conversion value (its market value if it were exchanged
for the underlying security according to its conversion privilege). When a
convertible securitys investment value is greater than its conversion value,
its price will primarily reflect its investment value. In this scenario, price
will probably be most affected by interest rate changes, increasing when
interest rates fall and decreasing when interest rates rise, similar to a fixed
income security. Additionally, the credit standing of the issuer and other
factors also may have an effect on the convertible securitys value. Conversely,
when the conversion value approaches or exceeds the investment value, the price
of the convertible security will rise above its investment value. The higher the
convertible securitys price relative to its investment value, the more direct
the relationship between the changes in its price and changes in the price of
the underlying equity security.
A convertible securitys price will typically provide a premium over the
conversion value. This represents the additional price investors are willing to
pay for a security that offers income, ranks ahead of common stock in a
companys capital structure and also has the possibility of capital appreciation
due to the conversion privilege. Because a convertible security has fixed
interest or dividend payments, when the underlying stock declines, the
convertible securitys price is increasingly determined by its yield. For this
reason, the convertible security may not decline as much as the underlying
common stock. The extent of the price decline will also depend on the amount of
the premium over its conversion value.
Common stock acquired upon conversion of a convertible security will
generally be held for as long as the investment manager anticipates such stock
will provide a Fund with opportunities that are consistent with its investment
objectives and policies.
A Fund may invest in convertible debentures without regard to rating
categories. Investing in convertible debentures that are rated below investment
grade or unrated but of comparable quality entails certain risks, including the
risk of loss of principal, which may be greater than the risks involved in
investing in investment grade convertible debentures. Under rating-agency
guidelines, lower rated securities and comparable unrated securities will likely
have some quality and protective characteristics that are outweighed by large
uncertainties or major risk exposures to adverse conditions.
A Fund may have difficulty disposing of such lower rated convertible
debentures because the trading market for such securities may be thinner than
the market for higher rated convertible debentures. To the extent a secondary
trading market for these securities does exist, it generally is not as liquid as
the secondary trading market for higher rated securities. The lack of a liquid
secondary market, as well as adverse publicity with respect to these securities,
may have an adverse impact on market price and a Funds ability to dispose of
particular issues in response to a specific economic event such as deterioration
in the creditworthiness of the issuer. The lack of a liquid secondary market for
certain securities also may make it more difficult for a Fund to obtain accurate
market quotations for purposes of pricing the Funds portfolio and calculating
its net asset value (NAV). The market behavior of convertible securities in
lower rating categories is often more volatile than that of higher quality
securities. Lower quality convertible securities are judged by Moodys Investors
Service, Inc. (Moodys) and Standard & Poors Ratings Service (S&P)
to have speculative elements or characteristics; their future cannot be
considered as well assured, and their earnings and asset protection may be
moderate or poor in comparison to investment grade securities.
6
In addition, such
lower quality securities face major ongoing uncertainties or exposure to adverse
business, financial or economic conditions, which could lead to inadequate
capacity to meet timely payments. The market values of securities rated below
investment grade tend to be more sensitive to company-specific developments and
changes in economic conditions than higher rated securities. Issuers of these
securities are often highly leveraged so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. In addition, such issuers may not have
more traditional methods of financing available to them, and therefore may be
unable to repay debt at maturity by refinancing.
A Fund may invest in convertible preferred stocks that offer enhanced
yield features, such as Preferred Equity Redemption Cumulative Stock (PERCS),
which provide an investor with the opportunity to earn higher dividend income
than is available on a companys common stock. A PERCS is a preferred stock that
generally features a mandatory conversion date, as well as a capital
appreciation limit, which is usually expressed in terms of a stated price. Upon
the conversion date, most PERCS convert to common stock of the issuer (PERCS are
generally not convertible to cash at maturity). Under a typical arrangement, if
after a predetermined number of years the issuers common stock is trading at a
price below that set by the capital appreciation limit, each PERCS would convert
to one share of common stock. If, however, the issuers common stock is trading
at a price above that set by the capital appreciation limit, the holder of the
PERCS would receive less than one full share of common stock. The amount of that
fractional share of common stock received by the PERCS holder is determined by
dividing the price set by the capital appreciation limit of the PERCS by the
market price of the issuers common stock. PERCS can be called at any time prior
to maturity, and hence do not provide call protection. However, if called early,
the issuer may pay a call premium over the market price to the investor. This
call premium declines at a preset rate daily, up to the maturity date of the
PERCS.
A Fund also may invest in other enhanced convertible securities. These
include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities) and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS and DECS all have the
following features: they are company-issued convertible preferred stock; unlike
PERCS, they do not have capital appreciation limits; they seek to provide the
investor with high current income, with some prospect of future capital
appreciation; they are typically issued with three- to four-year maturities;
they typically have some built-in call protection for the first two to three
years; investors have the right to convert them into shares of common stock at a
preset conversion ratio or hold them until maturity; and upon maturity, they
automatically convert to either cash or a specified number of shares of common
stock. An investment in such securities may involve additional risks. Unlike
conventional convertible securities, enhanced convertible securities do not
usually have a fixed maturity (par) value. Rather, such securities generally
provide only for a mandatory conversion to cash or common stock. As a result, a
Fund risks loss of principal if the cash received, or the price of the
underlying common stock at the time of conversion, is less than the price paid
for the enhanced convertible security. Such securities may be more or less
liquid than conventional convertible securities or non-convertible debt
securities.
A synthetic convertible security may be created by combining separate
securities that possess the two principal characteristics of a traditional
convertible security, i.e., an income-producing security (income-producing
component and the right to acquire an equity security (convertible
component). The income-producing component is achieved by investing in
non-convertible, income-producing securities such as bonds, preferred stocks and
money market instruments, which may be represented by derivative instruments.
The convertible component is achieved by investing in securities or instruments
such as warrants or options to buy common stock at a certain exercise price, or
options on a stock index. Unlike a traditional convertible security, which is a
single security having a single market value, a synthetic convertible comprises
two or more separate securities, each with its own market value. Therefore, the
market value of a synthetic convertible security is the sum of the values of
its income-producing component and its convertible component. For this reason,
the values of a synthetic convertible security and a traditional convertible
security may respond differently to market fluctuations.
7
More flexibility
is possible in the assembly of a synthetic convertible security than in the
purchase of a convertible security. Although synthetic convertible securities
may be selected where the two components are issued by a single issuer, thus
making the synthetic convertible security similar to the traditional convertible
security, the character of a synthetic convertible security allows the
combination of components representing distinct issuers, when it is believed
that such a combination may better achieve a Funds investment objective. A
synthetic convertible security also is a more flexible investment in that its
two components may be purchased separately. For example, a Fund may purchase a
warrant for inclusion in a synthetic convertible security but temporarily hold
short-term investments while postponing the purchase of a corresponding bond
pending development of more favorable market conditions.
A holder of a synthetic convertible security faces the risk of a decline
in the price of the security or the level of the index involved in the
convertible component, causing a decline in the value of the security or
instrument, such as a call option or warrant, purchased to create the synthetic
convertible security. Should the price of the stock fall below the exercise
price and remain there throughout the exercise period, the entire amount paid
for the call option or warrant would be lost. Because a synthetic convertible
security includes the income-producing component as well, the holder of a
synthetic convertible security also faces the risk that interest rates will
rise, causing a decline in the value of the income-producing component.
A Fund also may purchase synthetic convertible securities created by
other parties, including convertible structured notes. Convertible structured
notes are income-producing debentures linked to equity, and are typically issued
by investment banks. Convertible structured notes have the attributes of a
convertible security; however, the investment bank that issues the convertible
note, rather than the issuer of the underlying common stock into which the note
is convertible, assumes credit risk associated with the underlying investment,
and the Fund in turn assumes credit risk associated with the convertible note.
Corporate
Reorganizations
A Fund may invest in securities for which
a tender or exchange offer has been made or announced and in securities of
companies for which a merger, consolidation, liquidation or reorganization
proposal has been announced if, in the judgment of the investment adviser, it is
consistent with the Funds investment objective and policies. The primary risk
of such investments is that if the contemplated transaction is abandoned,
revised, delayed or becomes subject to unanticipated uncertainties, the market
price of the securities may decline below the purchase price paid by the Fund.
In general, securities that are the subject of such an offer or proposal
sell at a premium to their historic market price immediately prior to the
announcement of the offer or proposal. However, the increased market price of
such securities may also discount what the stated or appraised value of the
security would be if the contemplated transaction were approved or consummated.
Such investments may be advantageous when the discount significantly overstates
the risk of the contingencies involved; significantly undervalues the
securities, assets or cash to be received by shareholders of the prospective
company as a result of the contemplated transaction; or fails adequately to
recognize the possibility that the offer or proposal may be replaced or
superseded by an offer or proposal of greater value. The evaluation of such
contingencies requires unusually broad knowledge and experience on the part of
the investment adviser, which must appraise not only the value of the issuer and
its component businesses, but also the financial resources and business
motivation of the offeror as well as the dynamics of the business climate when
the offer or proposal is in process.
8
Credit Default
Swaps
Each Fund
may enter into credit default swap (CDS) contracts to the extent consistent
with its investment objectives and strategies. A CDS contract is a risk-transfer
instrument (in the form of a derivative security) through which one party (the
purchaser of protection) transfers to another party (the seller of
protection) the financial risk of a Credit Event (as defined below), as it
relates to a particular reference security or basket of securities (such as an
index). In exchange for the protection offered by the seller of protection, the
purchaser of protection agrees to pay the seller of protection a periodic
premium. In the most general sense, the benefit for the purchaser of protection
is that, if a Credit Event should occur, it has an agreement that the seller of
protection will make it whole in return for the transfer to the seller of
protection of the reference security or securities. The benefit for the seller
of protection is the premium income it receives. A Fund might use CDS contracts
to limit or to reduce the risk exposure of the Fund to defaults of the issuer or
issuers of its holdings (i.e., to reduce risk when the Fund owns or has exposure
to such securities). A Fund also might use CDS contracts to create or vary
exposure to securities or markets.
CDS transactions may involve general market, illiquidity, counterparty
and credit risks. CDS prices may also be subject to rapid movements in response
to news and events affecting the underlying securities. As the purchaser or
seller of protection, a Fund may be required to segregate cash or other liquid
assets to cover its obligations under certain CDS contracts.
Where a Fund is a purchaser of protection, it will designate on its books
and records cash or liquid securities sufficient to cover its premium payments
under the CDS. To the extent that the Fund, as a purchaser of protection, may be
required in the event of a credit default to deliver to the counterparty (1) the
reference security (or basket of securities), (2) a security (or basket of
securities) deemed to be the equivalent of the reference security (or basket of
securities), or (3) the negotiated monetary value of the obligation, the Fund
will designate the reference security (or basket of securities) on its books and
records as being held to satisfy its obligation under the CDS or, where the Fund
does not own the reference security (or basket of securities), the Fund will
designate on its books and records cash or liquid securities sufficient to
satisfy the potential obligation. To the extent that the Fund, as a seller of
protection, may be required in the event of a credit default to deliver to the
counterparty some or all of the notional amount of the CDS, it will designate on
its books and records cash or liquid securities sufficient to cover the
obligation. Whether a credit default swap requires the Fund to cash settle its
obligations or to net its obligations (i.e., to offset its obligations against
the obligations of the counterparty), the Fund will designate on its books and
records cash or liquid securities sufficient to cover its obligations under the
credit default swap. All cash and liquid securities designated by the Fund to
cover its obligations under CDSs will be marked to market daily to cover these
obligations.
As the seller of protection in a CDS contract, a Fund would be required
to pay the par (or other agreed-upon) value of a reference security (or basket
of securities) to the counterparty in the event of a default, bankruptcy,
failure to pay, obligation acceleration, modified restructuring or agreed upon
event (each of these events is a Credit Event). If a Credit Event occurs, the
Fund generally would receive the security or securities to which the Credit
Event relates in return for the payment to the purchaser of the par value.
Provided that no Credit Event occurs, the Fund would receive from the
counterparty a periodic stream of payments over the term of the contract in
return for this credit protection. In addition, if no Credit Event occurs during
the term of the CDS contract, the Fund would have no delivery requirement or
payment obligation to the purchaser of protection. As the seller of protection,
a Fund would have credit exposure to the reference security (or basket of
securities). A Fund will not sell protection in a CDS contract if it cannot
otherwise hold the security (or basket of securities).
As the purchaser of protection in a CDS contract, a Fund would pay a
premium to the seller of protection. In return, the Fund would be protected by
the seller of protection from a Credit Event on the reference security (or
basket of securities). A risk in this type of transaction is that the seller of
protection may fail to satisfy its payment obligations to the Fund if a Credit
Event should occur. This risk is known as counterparty risk and is described in
further detail below.
9
If the purchaser
of protection does not own the reference security (or basket of securities), the
purchaser of protection may be required to purchase the reference security (or
basket of securities) in the case of a Credit Event on the reference security
(or basket of securities). If the purchaser of protection cannot obtain the
security (or basket of securities), it may be obligated to deliver a security
(or basket of securities) that is deemed to be equivalent to the reference
security (or basket of securities) or the negotiated monetary value of the
obligation.
Each CDS contract is individually negotiated. The term of a CDS contract,
assuming no Credit Event occurs, is typically between two and five years. CDS
contracts may be unwound through negotiation with the counterparty.
Additionally, a CDS contract may be assigned to a third party. In either case,
the unwinding or assignment involves the payment or receipt of a separate
payment by a Fund to terminate the CDS contract.
A significant risk in CDS transactions is the creditworthiness of the
counterparty because the integrity of the transaction depends on the willingness
and ability of the counterparty to meet its contractual obligations. If there is
a default by a counterparty who is a purchaser of protection, a Funds potential
loss is the agreed upon periodic stream of payments from the purchaser of
protection. If there is a default by a counterparty that is a seller of
protection, a Funds potential loss is the failure to receive the par value or
other agreed upon value from the seller of protection if a Credit Event should
occur. CDS contracts do not involve the delivery of collateral to support each
partys obligations; therefore, a Fund will only have contractual remedies
against the counterparty pursuant to the CDS agreement. As with any contractual
remedy, there is no guarantee that a Fund would be successful in pursuing such
remedies. For example, the counterparty may be judgment proof due to insolvency.
A Fund thus assumes the risk that it will be delayed or prevented from obtaining
payments owed to it.
Custodial
Receipts
A Fund may acquire U.S. government
securities and their unmatured interest coupons that have been separated
(stripped) by their holder, typically a custodian bank or investment brokerage
firm. Having separated the interest coupons from the underlying principal of the
U.S. government securities, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including Treasury
Receipts (TRs), Treasury Investment Growth Receipts (TIGRs), and
Certificates of Accrual on Treasury Securities (CATS). TIGRs and CATS are
interests in private proprietary accounts while TRs and Treasury Separate
Trading of Registered Interest and Principal of Securities (STRIPS) are
interests in accounts sponsored by the U.S. Treasury. The custodian holds the
interest and principal payments for the benefit of the registered owners of the
certificates or receipts. The custodian arranges for the issuance of the
certificates or receipts evidencing ownership and maintains the register. The
stripped coupons are sold separately from the underlying principal, which is
usually 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. The underlying U.S. Treasury bonds and
notes themselves are generally held in book-entry form at a Federal Reserve
Bank. Purchasers of the stripped securities generally are treated as the
beneficial holders of the underlying U.S. government securities for federal tax
and securities purposes.
Depositary
Receipts
A Fund may make foreign investments
through the purchase and sale of sponsored or unsponsored American, European,
and Global Depositary Receipts (ADRs, EDRs, and GDRs, respectively, and
collectively, Depositary Receipts). Depositary Receipts are receipts typically
issued by a U.S. or foreign bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation. Sponsored Depositary
Receipts are issued jointly by the issuer of the underlying security and a
depository, whereas unsponsored Depositary Receipts are issued without
participation of the issuer of the deposited security. Holders of unsponsored
Depositary Receipts generally bear all the costs of such facilities and the
depository 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 voting rights to the holders of such receipts in
respect of the deposited securities. Therefore, there may not be a correlation
between information concerning the issuer of the security and the market value
of an unsponsored Depositary Receipt.
10
ADRs may be
listed on a national securities exchange or may be traded in the
over-the-counter market. EDRs and GDRs traded in the over-the-counter market
that do not have an active or substantial secondary market will be considered
illiquid and therefore will be subject to a Funds limitation with respect to
such securities. ADR prices are denominated in U.S. dollars although the
underlying securities are denominated in a foreign currency. Investments in
ADRs, EDRs and GDRs involve risks similar to those accompanying direct
investments in foreign securities.
Equity
Securities
Equity securities represent ownership
interests in a company and consist of common stocks, preferred stocks, rights,
warrants to acquire common stock, and securities convertible into common stock.
Investments in equity securities in general are subject to market risks that may
cause their prices to fluctuate over time. The value of convertible equity
securities is also affected by prevailing interest rates, the credit quality of
the issuer and any call provisions. Fluctuations in the value of equity
securities in which a Fund invests will cause the NAV of the Fund to fluctuate.
Eurodollar
Instruments
A Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon that are linked to the London Interbank Offered
Rate (LIBOR), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. A Fund might use Eurodollar futures contracts and options thereon to
hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked.
Exchange Traded
Funds
Exchange traded funds (ETFs) are a type
of index fund bought and sold on a securities exchange. An ETF trades like
common stock and represents a fixed portfolio of securities designed to track a
particular market index. A Fund could purchase an ETF to temporarily gain
exposure to a portion of the U.S. market or a foreign market while awaiting
purchase of underlying securities. The risks of owning an ETF generally reflect
the risks of owning the underlying securities they are designed to track,
although lack of liquidity in an ETF could result in it being more volatile and
ETFs have management fees that increase their costs.
Foreign
Securities
Investing in securities of foreign
issuers involves certain considerations, including those described in the
Prospectus, which are not typically associated with investing in securities of
U.S. issuers. In determining whether companies or securities are U.S. or
foreign, among other factors, we will examine: the sources of a companys
income, the companys principal office and branch locations; the companys
domicile; the location of the companys assets; the currency denomination of the
security; and the registration of the company or security. For example, Yankee
Bonds are fixed income securities that trade in the U.S., are dollar-denominated
and may be registered in the U.S. However, such securities are issued by foreign
issuers and are therefore usually considered foreign securities for purposes of
determining compliance with investor limitations and will subject the portfolio
generally to the risks associated with foreign securities.
Investors should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations.
There is the possibility of expropriation, nationalization or confiscatory
taxation, taxation of income earned in foreign nations or other taxes imposed
with respect to investments in foreign nations, foreign exchange control (which
may include suspension of the ability to transfer currency from a given
country), default in foreign government securities, political or social
instability, or diplomatic developments, which could affect investments in
securities of issuers in those nations.
11
In addition, in
many countries, there is substantially less publicly available information about
issuers than is available in reports about companies in the U.S. and this
information tends to be of lesser quality. Foreign companies are not subject to
uniform accounting, auditing and financial reporting standards, and auditing
practices and requirements may not be comparable to those applicable to U.S.
companies. In particular, the assets and profits appearing on the financial
statements of a developing or emerging country issuer may not reflect its
financial position or results of operations in the way they would be reflected
had the financial statements been prepared in accordance with U.S. generally
accepted accounting principles. Also, for an issuer that keeps accounting
records in local currency, inflation accounting rules may require for both tax
and accounting purposes, that certain assets and liabilities be restated on the
issuers balance sheet in order to express items in terms of currency or
constant purchasing power. Inflation accounting may indirectly generate losses
or profits.
Consequently, financial data may be
materially affected by restatements for inflation and may not accurately reflect
the real condition of those issuers and securities markets.
Further, a Fund may encounter difficulty or be unable to pursue legal
remedies and obtain judgments in foreign courts. Commission rates on securities
transactions in foreign countries, which are sometimes fixed rather than subject
to negotiation as in the U.S., are likely to be higher. Further, the settlement
period of securities transactions in foreign markets may be longer than in
domestic markets, and may be subject to administrative uncertainties. In many
foreign countries, there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the U.S., and capital requirements for brokerage firms are generally
lower. The foreign securities markets of many of the countries in which a Fund
may invest may also be smaller, less liquid and subject to greater price
volatility than those in the U.S.
Compared to the U.S. and other developed countries, emerging countries
may have volatile social conditions, relatively unstable governments and
political systems, economies based on only a few industries and economic
structures that are less diverse and mature, and securities markets that trade a
small number of securities, which can result in a low or nonexistent volume of
trading. Prices in these securities markets tend to be volatile and, in the
past, securities in these countries have offered greater potential for gain (as
well as loss) than securities of companies located in developed countries. Until
recently, there has been an absence of a capital market structure or
market-oriented economy in certain emerging countries. Further, investments and
opportunities for investments by foreign investors are subject to a variety of
national policies and restrictions in many emerging countries. These
restrictions may take the form of prior governmental approval, limits on the
amount or type of securities held by foreigners, limits on the types of
companies in which foreigners may invest and prohibitions on foreign investments
in issuers or industries deemed sensitive to national interests. Additional
restrictions may be imposed at any time by these or other countries in which a
Fund invests. Also, the repatriation of both investment income and capital from
several foreign countries is restricted and controlled under certain
regulations, including, in some cases, the need for certain governmental
consents. Although these restrictions may in the future make it undesirable to
invest in emerging countries, the investment advisors for the Funds do not
believe that any current repatriation restrictions would affect their decision
to invest in such countries. Countries such as those in which a Fund may invest
have historically experienced and may continue to experience, substantial, and
in some periods extremely high rates of inflation for many years, high interest
rates, exchange rate fluctuations or currency depreciation, large amounts of
external debt, balance of payments and trade difficulties and extreme poverty
and unemployment. Other factors that may influence the ability or willingness to
service debt include, but are not limited to, a countrys cash flow situation,
the availability of sufficient foreign exchange on the date a payment is due,
the relative size of its debt service burden to the economy as a whole, its
governments policy towards the International Monetary Fund, the World Bank and
other international agencies and the political constraints to which a government
debtor may be subject.
12
Because the
securities of foreign issuers are frequently denominated in foreign currencies,
and because a Fund may temporarily hold uninvested reserves in bank deposits in
foreign currencies, a Fund will be affected favorably or unfavorably by changes
in currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies. The investment policies
of certain of the Funds permit them to enter into forward foreign currency
exchange contracts and various related currency transactions in order to hedge
the Funds holdings and commitments against changes in the level of future
currency rates. Such contracts involve an obligation to purchase or sell a
specific currency at a future date at a price set at the time of the contract.
Foreign Currency
Transactions
A Fund may purchase or sell currencies
and/or engage in forward foreign currency transactions (
i.e.
, contracts to exchange
one currency for another on some future date at a specified exchange rate) in
order to expedite settlement of portfolio transactions in connection with its
investment in foreign securities and to minimize currency value fluctuations.
Forward foreign currency contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades. A Fund will account for forward
contracts by marking to market each day at daily exchange rates.
When a Fund enters into a forward 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 that Funds assets denominated in such
foreign currency, the Fund will cover such contract by maintaining liquid
portfolio securities in an amount not less than the value of that Funds total
assets committed to the consummation of such contract. To the extent a Fund is
not able to cover its forward positions with underlying portfolio securities,
the Funds custodian bank or subcustodian will place cash or liquid high grade
debt securities in a separate account of the Fund in an amount not less than the
value of such Funds total assets committed to the consummation of such forward
contracts. If the additional cash or securities placed in the separate account
decline, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of the Funds
commitments with respect to such contracts.
Futures, swaps, and options on forward contracts may be used to hedge a
Funds exposure to potentially unfavorable currency changes. In certain
circumstances, a proxy currency may be substituted for the currency in which
the investment is denominated, a strategy known as proxy hedging. If a Fund
were to engage in any of these foreign currency transactions, they would be
primarily to protect the Funds foreign securities from adverse currency
movements relative to the dollar. Such transactions involve the risk that
anticipated currency movements will not occur, which could reduce a Funds total
return. There are certain markets, including many emerging markets, where it is
not possible to engage in effective foreign currency hedging.
Forward
Contracts
A forward contract is an agreement
between two parties in which one party is obligated to deliver a stated amount
of a stated asset at a specified time in the future and the other party is
obligated to pay a specified amount for the assets at the time of delivery. A
Fund may enter into forward contracts to purchase and sell government
securities, equity or income securities, foreign currencies or other financial
instruments. Forward contracts generally are traded in an interbank market
conducted directly between traders (usually large commercial banks) and their
customers. Unlike futures contracts, which are standardized contracts, forward
contracts can be specifically drawn to meet the needs of the parties that enter
into them. The parties to a forward contract may agree to offset or terminate
the contract before its maturity, or may hold the contract to maturity and
complete the contemplated exchange.
13
A Fund will cover
outstanding forward contracts by maintaining liquid portfolio securities in an
amount not less than the value of that Funds total assets committed to the
consummation of such contracts. To the extent that a Fund is not able to cover
its forward positions with underlying portfolio securities, the Funds custodian
will segregate cash or other liquid assets having a value equal to the aggregate
amount of such Funds commitments under forward contracts entered into with
respect to position hedges, cross-hedges and anticipatory hedges. If the value
of the securities used to cover a position or the value of segregated assets
declines, a Fund will find alternative cover or segregate additional cash or
liquid assets on a daily basis so that the value of the covered and segregated
assets will be equal to the amount of such Funds commitments with respect to
such contracts.
Futures Contracts and
Options
Futures Contracts.
A Fund may enter into futures
contracts relating to securities, securities indices, interest rates and
currencies. (Unless otherwise specified, interest rate futures contracts,
securities and securities index futures contracts and foreign currency futures
contracts are collectively referred to as futures contracts.) Futures, a type
of potentially high-risk derivative, are often used to manage or hedge risk
because they enable the investor to buy or sell an asset in the future at an
agreed-upon price. Futures contracts may be bought or sold for any number of
reasons, including: to manage a Funds exposure to changes in securities prices
and foreign currencies; as an efficient means of adjusting a Funds overall
exposure to certain markets; in an effort to enhance income; to protect the
value of portfolio securities; and as a cash management tool. Futures contracts
may not always be successful hedges; their prices can be highly volatile; using
them could lower a Funds total return; and the potential loss from the use of
futures can exceed a Funds initial investment in such contracts.
Purchases or sales of stock or bond index futures contracts are used for
hedging purposes to attempt to protect a Funds current or intended investments
from broad fluctuations in stock or bond prices. For example, a Fund may sell
stock or bond index futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of the Funds
securities portfolio that might otherwise result. If such decline occurs, the
loss in value of portfolio securities may be offset, in whole or part, by gains
on the futures position. When a Fund is not fully invested in the securities
market and anticipates a significant market advance, it may purchase stock or
bond index futures contracts in order to gain rapid market exposure that may, in
part or entirely, offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, the corresponding positions in
stock or bond index futures contracts will be closed out.
Interest rate futures contracts are purchased or sold for hedging
purposes to attempt to protect against the effects of interest rate changes on a
Funds current or intended investments in fixed income securities. For example,
if a Fund owned long-term bonds and interest rates were expected to increase,
that Fund might sell interest rate futures contracts. Such a sale would have
much the same effect as selling some of the long-term bonds in that Funds
portfolio. However, since the futures market is more liquid than the cash
market, the use of interest rate futures contracts as a hedging technique allows
a Fund to hedge its interest rate risk without having to sell its portfolio
securities. If interest rates did increase, the value of the debt securities in
the portfolio would decline, but the value of that Funds interest rate futures
contracts would be expected to increase at approximately the same rate, thereby
keeping the NAV of that Fund from declining as much as it otherwise would have.
On the other hand, if interest rates were expected to decline, interest rate
futures contracts could be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Because the fluctuations in the
value of the interest rate futures contracts should be similar to those of
long-term bonds, a Fund could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying them
until the necessary cash became available or the market had stabilized. At that
time, the interest rate futures contracts could be liquidated and that Funds
cash reserve could then be used to buy long-term bonds on the cash market.
A Fund may purchase and sell foreign currency futures contracts for
hedging purposes to attempt to protect current or intended investments from
fluctuations in currency exchange rates. Such fluctuations could reduce the
dollar value of portfolio securities denominated in foreign currencies, or
increase the cost of foreign-denominated securities to be acquired, even if the
value of such securities in the currencies in which they are denominated remains
constant. A Fund may sell futures contracts on a foreign currency, for example,
when that Fund holds securities denominated in such currency and it anticipates
a decline in the value of such currency relative to the dollar. In the event
such decline occurs, the resulting adverse effect on the value of
foreign-denominated securities may be offset, in whole or in part, by gains on
the futures contracts. However, if the value of the foreign currency increases
relative to the dollar, the Funds loss on the foreign currency futures contract
may or may not be offset by an increase in the value of the securities because a
decline in the price of the security stated in terms of the foreign currency may
be greater than the increase in value as a result of the change in exchange
rates.
14
Conversely, a
Fund could protect against a rise in the dollar cost of foreign-denominated
securities to be acquired by purchasing futures contracts on the relevant
currency, which could offset, in whole or in part, the increased cost of such
securities resulting from a rise in the dollar value of the underlying
currencies. When a Fund purchases futures contracts under such circumstances,
however, and the price of securities to be acquired instead declines as a result
of appreciation of the dollar, the Fund will sustain losses on its futures
position, which could reduce or eliminate the benefits of the reduced cost of
portfolio securities to be acquired.
A Fund also may engage in currency cross hedging when, in the opinion
of the investment adviser, the historical relationship among foreign currencies
suggests that the Fund may achieve protection against fluctuations in currency
exchange rates similar to that described above at a reduced cost through the use
of a futures contract relating to a currency other than the U.S. dollar or the
currency in which the foreign security is denominated. Such cross hedging is
subject to the same risks as those described above with respect to an
unanticipated increase or decline in the value of the subject currency relative
to the dollar.
Lastly, it should be noted that the Trust (on behalf of each Fund) has
filed with the National Futures Association a notice claiming an exclusion from
the definition of the term commodity pool operator (CPO) under the Commodity
Exchange Act, as amended, and the rules of the U.S. Commodity Futures Trading
Commission (CFTC) promulgated thereunder, with respect to each Funds
operation. Accordingly, the Funds are not subject to registration or regulation
as CPOs.
Options on Futures Contracts
:
A Fund may
purchase and write options on the types of futures contracts in which each Fund
may invest. The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities in a Funds portfolio.
If the futures price at expiration of the option is below the exercise price, a
Fund will retain the full amount of the option premium, which provides a partial
hedge against any decline that may have occurred in the Funds portfolio
holdings. The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the securities or other instruments
required to be delivered under the terms of the futures contract. If the futures
price at expiration of the put option is higher than the exercise price, a Fund
will retain the full amount of the option premium, which provides a partial
hedge against any increase in the price of securities that the Fund intends to
purchase. If a put or call option a Fund has written is exercised, the Fund will
incur a loss, which will be reduced by the amount of the premium it receives.
Depending on the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its options on futures
positions, a Funds losses from exercised options on futures may, to some
extent, be reduced or increased by changes in the value of portfolio securities.
A Fund may purchase options on futures contracts for hedging purposes
instead of purchasing or selling the underlying futures contracts. For example,
where a decrease in the value of portfolio securities is anticipated as a result
of a projected marketwide decline or changes in interest or exchange rates, a
Fund could, in lieu of selling futures contracts, purchase put options thereon.
In the event that such decrease occurs, it may be offset, in whole or in part,
by a profit on the option. If the market decline does not occur, the Fund will
suffer a loss equal to the price of the put. Where it is projected that the
value of securities to be acquired by a Fund will increase prior to acquisition,
due to a market advance or changes in interest or exchange rates, a Fund could
purchase call options on futures contracts, rather than purchasing the
underlying futures contracts. If the market advances, the increased cost of
securities to be purchased may be offset by a profit on the call. However, if
the market declines, the Fund will suffer a loss equal to the price of the call,
but the securities that the Fund intends to purchase may be less
expensive.
15
Options
on Foreign Currencies
:
A Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio that otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Fund may purchase call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movement in exchange rates. As in the case of other types of options, however,
the benefit to the Fund deriving from purchases of foreign currency options will
be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, the Fund could sustain losses on transactions in foreign
currency options, which would require the Fund to forego a portion or all of the
benefits of advantageous changes in such rates.
A Fund may write options on foreign currencies for the same types of
hedging purposes. For example, where the Fund anticipates a decline in the
dollar value of foreign-currency-denominated securities due to adverse
fluctuations in exchange rates, the Fund could, instead of purchasing a put
option, write a call option on the relevant currency. If the expected decline
occurs, the option will most likely not be exercised, and the diminution in the
value of portfolio securities will be offset by the amount of the premium
received.
Similarly, instead of purchasing a call option to hedge against the
anticipated increase in the dollar cost of securities to be acquired, the Fund
could write a put option on the relevant currency that, if rates move in the
manner projected, will expire unexercised and allow the Fund to hedge such
increased costs up to the value of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Fund would be required to purchase or sell the underlying currency at a loss,
which may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Fund also may be required to forego all or a
portion of the benefit that might otherwise have been obtained from favorable
movements in exchange rates.
A Fund also may write covered call options on foreign currencies. A call
option written on a foreign currency by a Fund is covered if the Fund owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by the Funds
custodian bank) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held is (a) equal to less than the exercise price of
the call written, or (b) greater than the exercise price of the call written if
the difference is maintained by the Fund in cash, U.S. government securities or
other high-grade liquid debt securities in a segregated account with its
custodian bank.
With respect to writing put options, at the time the put is written, a
Fund will establish a segregated account with its custodian bank consisting of
cash, U.S. government securities or other high-grade liquid debt securities in
an amount equal in value to the amount the Fund will be required to pay upon
exercise of the put. The account will be maintained until the put is exercised,
has expired, or the Fund has purchased a closing put of the same series as the
one previously written.
16
Options
:
Options, a type of potentially high-risk derivative, give the
investor the right (where the investor purchases the option), or the obligation
(where the investor writes or sells the option), to buy or sell an asset at a
predetermined price in the future. Options contracts may be bought or sold for
any number of reasons, including: to manage a Funds exposure to changes in
securities prices and foreign currencies; as an efficient means of adjusting a
Funds overall exposure to certain markets; in an effort to enhance income; to
protect the value of portfolio securities; and as a cash management tool. Call
or put options may be purchased or sold on securities, financial indices, and
foreign currencies. Options may not always be successful hedges; their prices
can be highly volatile; and using them could lower a Funds total return.
To the extent authorized to engage in option transactions, a Fund may
invest in options that are exchange listed or traded over the counter. Certain
over-the-counter options may be illiquid. A Fund will enter into an option
position only if there appears to be a liquid market for such options. However,
there can be no assurance that a liquid secondary market will be maintained.
Thus, it may not be possible to close option positions, which may have an
adverse impact on a Funds ability to effectively hedge its securities. A Fund
will enter into such options only to the extent consistent with its limitations
on investments in illiquid securities.
Covered Call Writing
A Fund may
write covered call options from time to time on such portion of its portfolio,
without limit, as the investment adviser determines is appropriate in seeking to
obtain the Funds investment objective. A call option gives the purchaser of
such option the right to buy, and the writer, in this case the Fund, has the
obligation to sell, the underlying security at the exercise price during the
option period. The advantage to a Fund of writing covered calls is that the Fund
receives a premium, which is additional income. However, if the security rises
in value, the Fund may not fully participate in the market appreciation.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction. A closing purchase transaction cannot be effected with respect to
an option once the option writer has received an exercise notice for such
option.
With respect to such options, a Fund may enter into closing purchase
transactions. A closing purchase transaction is one in which a Fund, when
obligated as a writer of an option, terminates its obligation by purchasing an
option of the same series as the option previously written.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable a Fund
to write another call option on the underlying security with either a different
exercise price or expiration date or both. A Fund may realize a net gain or loss
from a closing purchase transaction depending upon whether the net amount of the
original premium received on the call option is more or less than the cost of
effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be partially or entirely offset by the premium received
from a sale of a different call option on the same underlying security. Such a
loss may also be wholly or partially offset by unrealized appreciation in the
market value of the underlying security. Conversely, a gain resulting from a
closing purchase transaction could be offset in whole or in part by a decline in
the market value of the underlying security.
If a call option expires unexercised, a Fund will realize a short-term
capital gain in the amount of the premium on the option less the commission
paid. Such a gain, however, may be offset by depreciation in the market value of
the underlying security during the option period. If a call option is exercised,
a Fund will realize a gain or loss from the sale of the underlying security
equal to the difference between the cost of the underlying security and the
proceeds of the sale of the security plus the amount of the premium on the
option, less the commission paid.
17
The market
value of a call option generally reflects the market price of an underlying
security. Other principal factors affecting market value include supply and
demand, interest rates, the price volatility of the underlying security, and the
time remaining until the expiration date.
A Fund will write call options only on a covered basis, which means that
the Fund will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected, the
Fund would be required to continue to hold a security that it might otherwise
wish to sell or deliver a security it would want to hold. Options written by the
Fund will normally have expiration dates between one and nine months from the
date written. The exercise price of a call option may be lower than, equal to,
or greater than the current market value of the underlying security at the time
the option is written.
Purchasing Put Options
A Fund
may purchase put options. A Fund will, at all times during which it holds a put
option, own the security covered by such option. A put option purchased by a
Fund gives it the right to sell one of its securities for an agreed upon price
up to an agreed upon date. A Fund may purchase put options in order to protect
against a decline in market value of the underlying security below the exercise
price less the premium paid for the option (protective puts). The ability to
purchase put options allows a Fund to protect unrealized gain in an appreciated
security in its portfolio without actually selling the security. If the security
does not drop in value, the Fund will lose the value of the premium paid. A Fund
may sell a put option that it has previously purchased prior to the sale of the
securities underlying such option. Such sale will result in a net gain or loss
depending on whether the amount received on the sale is more or less than the
premium and other transaction costs paid on the put option that is sold.
A Fund may sell a put option purchased on individual portfolio
securities. Additionally, a Fund may enter into closing sale transactions. A
closing sale transaction is one in which a Fund, when it is the holder of an
outstanding option, liquidates its position by selling an option of the same
series as the option previously purchased.
Purchasing Call Options
A Fund
may purchase call options. When a Fund purchases a call option, in return for a
premium paid by the Fund to the writer of the option, the Fund obtains the right
to buy the security underlying the option at a specified exercise price at any
time during the term of the option. The writer of the call option, who receives
the premium upon writing the option, has the obligation, upon exercise of the
option, to deliver the underlying security against payment of the exercise
price. The advantage of purchasing call options is that the Fund may alter
portfolio characteristics and modify portfolio maturities without incurring the
cost associated with portfolio transactions.
A Fund may, following the purchase of a call option, liquidate its
position by effecting a closing sale transaction. This is accomplished by
selling an option of the same series as the option previously purchased. A Fund
will realize a profit from a closing sale transaction if the price received on
the transaction is more than the premium paid to purchase the original call
option; a Fund will realize a loss from a closing sale transaction if the price
received on the transaction is less than the premium paid to purchase the
original call option.
Although a Fund will generally purchase only those call options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time, and for some options no secondary market on an exchange
may exist. In such event, it may not be possible to effect closing transactions
in particular options, with the result that a Fund would have to exercise its
options in order to realize any profit and would incur brokerage commissions
upon the exercise of such options and upon the subsequent disposition of the
underlying securities acquired through the exercise of such options. Further,
unless the price of the underlying security changes sufficiently, a call option
purchased by a Fund may expire without any value to the Fund.
18
Options
on Stock Indices:
A Fund may write call options and purchase put options on
certain stock indices and enter into closing transactions in connection
therewith. A Fund also may sell a put option purchased on stock indices. A Fund
also may purchase call options on stock indices and enter into closing
transactions in connection therewith.
Options on stock indices are similar to options on stocks but have
different delivery requirements. Stock options provide the right to take or make
delivery of the underlying stock at a specified price. A stock index option
gives the holder the right to receive a cash exercise settlement amount equal
to (i) the amount by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed index
multiplier. Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than (in the case
of a call) or less than (in the case of a put) the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Gain or loss to a Fund on
transactions in stock index options will depend on price movements in the stock
market generally (or in a particular industry or segment of the market) rather
than price movements of individual securities.
As with stock options, a Fund may offset positions in a stock index
option prior to expiration, by entering into a closing transaction on an
exchange, or may let the option expire unexercised.
A stock index assigns relative values to the common stocks included in
the index with the index fluctuating with changes in the market values of the
underlying common stocks. Some stock index options are based on a broad market
index such as the Standard & Poors 500 Index or the New York Stock Exchange
Composite Index, or a narrower market index such as the Standard & Poors
100 Index. Indices are also based on an industry or market segment such as the
AMEX Oil and Gas Index or the Computer and Business Equipment Index. Options on
stock indices are currently traded on the following exchanges among others:
Chicago Board Options Exchange, New York Stock Exchange, and American Stock
Exchange.
A Funds ability to hedge effectively all or a portion of its securities
through transactions in options on a stock index depends on the degree to which
price movements in the underlying index correlate with price movements in the
Funds portfolio securities. Because a Funds portfolio will not duplicate the
components of an index, the correlation will not be exact. Consequently, a Fund
bears the risk that the prices of the securities being hedged will not move in
the same amount as the hedging instrument. It is also possible that there may be
a negative correlation between the index or other securities underlying the
hedging instrument and the hedged securities, which would result in a loss on
both such securities and the hedging instrument.
Positions in stock index options may be closed out only on an exchange
that provides a secondary market. There can be no assurance that a liquid
secondary market will exist for any particular stock index option. Thus, it may
not be possible to close such an option. The inability to close options
positions could have an adverse impact on a Funds ability to effectively hedge
its securities. A Fund will enter into an option position only if there appears
to be a liquid secondary market for such options.
A Fund will not engage in transactions in options on stock indices for
speculative purposes but only to protect appreciation attained, to offset
capital losses and to take advantage of the liquidity available in the option
markets.
19
Writing
Covered Puts
A Fund may purchase or sell
(write) put options on securities as a means of achieving additional return or
of hedging the value of the Funds portfolio. A put option is a contract that
gives the holder of the option the right to sell to the writer (seller), in
return for a premium, the underlying security at a specified price during the
term of the option. The writer of the put, who receives the premium, has the
obligation to buy the underlying security upon exercise, at the exercise price
during the option period. A Fund will write only covered options. In the case
of a put option written (sold) by the Fund, the Fund will maintain in a
segregated account cash or U.S. government securities in an amount not less than
the exercise price of the option at all times during the option period.
Closing Transactions:
If a Fund has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. There can be no
assurance that either a closing purchase or sale transaction can be effected
when a Fund so desires. An option position may be closed out only on an exchange
that provides a secondary market for an option of the same series. Although a
Fund will generally purchase or write only those options for which there appears
to be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option.
A Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; a Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option
generally will reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by appreciation of the underlying security owned by the
Fund. If a Fund purchases a put option, the loss to the Fund is limited to the
premium paid for, and transaction costs in connection with, the put plus the
initial excess, if any, of the market price of the underlying security over the
exercise price. However, if the market price of the security underlying the put
rises, the profit a Fund realizes on the sale of the security will be reduced by
the premium paid for the put option less any amount (net of transaction costs)
for which the put may be sold.
Hybrid
Instruments
Hybrid instruments (a type of potentially
high-risk derivative) that the Funds may invest in have been developed and
combine the elements of futures contracts or options with those of debt,
preferred equity, or a depository instrument (hereinafter hybrid instruments).
Generally, a hybrid instrument will be a debt security, preferred stock,
depository share, trust certificate, certificate of deposit, or other evidence
of indebtedness on which a portion of or all interest payments, and/or the
principal or stated amount payable at maturity, redemption, or retirement is
determined by reference to prices, changes in prices, or differences between
prices of securities, currencies, intangibles, goods, articles, or commodities
(collectively underlying assets) or by another objective index, economic
factor, or other measure, such as interest rates, currency exchange rates,
commodity indices, and securities indices (collectively benchmarks). Thus,
hybrid instruments may take a variety of forms, including, but not limited to,
debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity or securities
index at a future point in time, preferred stock with dividend rates determined
by reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
Hybrid instruments can be efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a Fund may wish to take advantage of expected declines in
interest rates in several European countries, but avoid the transaction costs
associated with buying and currency-hedging the foreign bond positions. One
solution would be to purchase a U.S. dollar-denominated hybrid instrument whose
redemption price is linked to the average three-year interest rate in a
designated group of countries. The redemption price formula would provide for
payoffs of greater than par if the average interest rate were lower than a
specified level, and payoffs of less than par if rates were above the specified
level. Furthermore, a Fund could limit the downside risk of the security by
establishing a minimum redemption price so that the principal paid at maturity
could not be below a predetermined minimum level if interest rates were to rise
significantly. The purpose of this arrangement, known as a structured security
with an embedded put option, would be to give the Fund the desired European bond
exposure while avoiding currency risk, limiting downside market risk, and
lowering transaction costs. Of course, there is no guarantee that the strategy
will be successful, and a Fund could lose money if, for example, interest rates
do not move as anticipated or credit problems develop with the issuer of the
hybrid instruments.
20
The risks of
investing in hybrid instruments reflect a combination of the risks of investing
in securities, options, futures, and currencies. Thus, an investment in a hybrid
instrument may entail significant risks that are not associated with a similar
investment in a traditional debt instrument that has a fixed principal amount,
is denominated in U.S. dollars, or bears interest either at a fixed rate or a
floating rate determined by reference to a common, nationally published
benchmark. The risks of a particular hybrid instrument will, of course, depend
upon the terms of the instrument, but may include, without limitation, the
possibility of significant changes in the benchmarks or the prices of underlying
assets to which the instrument is linked. Such risks generally depend upon
factors that are unrelated to the operations or credit quality of the issuer of
the hybrid instrument and that may not be readily foreseen by the purchaser,
such as economic and political events, the supply of and demand for the
underlying assets, and interest rate movements. In recent years, various
benchmarks and prices for underlying assets have been highly volatile, and such
volatility may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for a discussion of
the risks associated with such investments.
Hybrid instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular hybrid instrument, changes in a benchmark may be magnified by the
terms of the hybrid instrument and have an even more dramatic and substantial
effect upon the value of the hybrid instrument. Also, the prices of the hybrid
instrument and the benchmark or underlying asset may not move in the same
direction or at the same time.
Hybrid instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, hybrid instruments may
bear interest at above market rates but bear an increased risk of principal loss
(or gain). The latter scenario may result if leverage is used to structure the
hybrid instrument. Leverage risk occurs when the hybrid instrument is structured
so that a given change in a benchmark or underlying asset is multiplied to
produce a greater value change in the hybrid instrument, thereby magnifying the
risk of loss as well as the potential for gain.
Hybrid instruments may also carry liquidity risk since the instruments
are often customized to meet the portfolio needs of a particular investor and,
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
hybrid instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between a Fund
and the issuer of the hybrid instrument, the creditworthiness of the
counterparty or issuer of the hybrid instrument would be an additional risk
factor, which the Fund would have to consider and monitor. Hybrid instruments
also may not be subject to regulation by the CFTC, which generally regulates the
trading of commodity futures by U.S. persons, the SEC, which regulates the offer
and sale of securities by and to U.S. persons, or any other governmental
regulatory authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the NAV of a
Fund.
21
Illiquid
Securities
A Fund may invest up to 15% of its net assets in illiquid assets. A Fund
may invest in (i) securities that are sold in private placement transactions
between their issuers and their purchasers and that are neither listed on an
exchange nor traded over the counter, and (ii) securities that are sold in
transactions between qualified institutional buyers pursuant to Rule 144A under
the 1933 Act. Such securities are subject to contractual or legal restrictions
on subsequent transfer. As a result of the absence of a public trading market,
such restricted securities may in turn be less liquid and more difficult to
value than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from the sales could,
due to illiquidity, be less than those originally paid by a Fund or less than
their fair value and, in some instances, it may be difficult to locate any
purchaser. In addition, issuers whose securities are not publicly traded may not
be subject to the disclosure and other investor protection requirements that may
be applicable if their securities were publicly traded. If any privately placed
or Rule 144A securities held by a Fund are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Fund may
be required to bear the expenses of registration.
While maintaining oversight, the Board has delegated to each Funds
investment adviser the day-to-day functions of determining whether or not
individual securities are liquid for purposes of the limitations on investments
in illiquid assets. Rule 144A securities will be considered illiquid and
therefore subject to a Funds limit on the purchase of illiquid securities
unless the Board or the Funds investment adviser determines that the Rule 144A
securities are liquid. In determining the liquidity of a security, an investment
adviser considers the following factors: (i) the frequency of trades and trading
volume for the security; (ii) whether at least three dealers are willing to
purchase or sell the security and the number of potential purchasers; (iii)
whether at least two dealers are making a market in the security; (iv) the
nature of the security and the nature of the marketplace trades (
e.g.
, the time needed to
dispose of the security, the method of soliciting offers, the mechanics of
transfer and whether a security is listed on an electronic network for trading
the security). In the case of commercial paper, the investment adviser will also
consider whether the paper is traded flat or in default as to principal and
interest and any ratings of the paper by a nationally recognized statistical
rating organization (NRSRO). A foreign security that may be freely traded on
or through the facilities of an offshore exchange or other established offshore
securities market is not deemed to be a restricted security subject to these
procedures.
If the respective investment adviser determines that a security that was
previously determined to be liquid is no longer liquid and, as a result, the
applicable Funds holdings of illiquid securities exceed the Funds limit on
investment in such securities, the respective investment adviser will determine
what action shall be taken to ensure that the Fund continues to adhere to such
limitation.
Inverse
Floaters
Inverse floaters are debt instruments
whose interest bears an inverse relationship to the interest rate on another
security. The prices of inverse floaters can be considerably more volatile than
the prices of bonds with comparable maturities.
Investment Company
Securities
Each Fund is permitted to invest in other
investment companies, including open-end, closed-end or unregistered investment
companies, either within the percentage limits set forth in the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof, or without regard
to percentage limits in connection with a merger, reorganization, consolidation
or other similar transaction. However, none of the Funds may operate as a fund
of funds, which invests primarily in the shares of other investment companies
as permitted by Section 12(d)(1)(F) or (G) of the 1940 Act, if the shares of
such Fund are invested in by a fund that operates as a fund of funds. Any
investments that a Fund makes in other investment companies will be limited by
the 1940 Act, and would involve an indirect payment of a portion of the
expenses, including advisory fees, of such other investment companies. Under the
1940 Acts current limitations, a Fund may not (1) own more than 3% of the
voting stock of another investment company; and (2)
invest more than 5% of the Funds total assets in the shares of any one
investment company; or, (3) invest more than 10% of the Funds total assets in
shares of other investment companies. These percentage limitations also apply to
the Funds investments in unregistered investment companies.
22
Lending of Portfolio
Securities
A Fund may loan up to 25% of its assets to qualified broker/dealers or
institutional investors for their use relating to short sales or other security
transactions. It is the understanding of the Manager that the staff of the SEC
permits portfolio lending by registered investment companies if certain
conditions are met. These conditions are as follows: (i) each transaction must
have 100% collateral in the form of cash, short-term U.S. government securities,
or irrevocable letters of credit payable by banks acceptable to a Fund from the
borrower; (ii) this collateral must be valued daily and should the market value
of the loaned securities increase, the borrower must furnish additional
collateral to the Fund; (iii) the Fund must be able to terminate the loan after
notice, at any time; (iv) the Fund must receive reasonable interest on any loan,
and any dividends, interest, or other distributions on the lent securities, and
any increase in the market value of such securities; (v) the Fund may pay
reasonable custodian fees in connection with the loan; and (vi) the voting
rights on the lent securities may pass to the borrower; however, under certain
circumstances the Fund must attempt to enter into an arrangement to exercise
voting rights on the loaned securities. The major risk to which a Fund would be
exposed on a loan transaction is the risk that the borrower could go bankrupt at
a time when the value of the security goes up. Therefore, a Fund will only enter
into loan arrangements after a review of all pertinent facts by the investment
adviser, under the supervision of the Board as applicable, including the
creditworthiness of the borrowing broker, dealer or institution and then only if
the consideration to be received from such loans would justify the risk.
Creditworthiness will be monitored on an ongoing basis by the investment
adviser.
Cash collateral received is invested in a collective investment vehicle
(Collective Trust) established by the Funds custodian for the purpose of
investment on behalf of clients participating in its securities lending
programs. The Collective Trust invests in fixed income securities, with a
weighted average maturity not to exceed 90 days, rated in one of the top three
tiers by S&P or Moodys, or repurchase agreements collateralized by such
securities. However, in the event of default or bankruptcy by the lending agent,
realization and/or retention of the collateral may be subject to legal
proceedings. In the event the borrower fails to return loaned securities and the
collateral received is insufficient to cover the value of the loaned securities
and provided such collateral shortfall is not the result of investment losses,
the lending agent has agreed to pay the amount of the shortfall to the Fund or,
at the discretion of the lending agent, replace the loaned securities. The Fund
continues to record dividends or interest, as applicable, on the securities
loaned and is subject to change in value of the securities loaned that may occur
during the term of the loan. The Fund has the right under the lending agreement
to recover the securities from the borrower on demand. With respect to security
loans collateralized by U.S. Treasury obligations, the Fund receives a fee from
the security lending agent. With respect to security loans collateralized by
cash collateral, the earnings from the collateral investments are shared among
the Fund, the security lending agent, and the borrower. The Fund records
securities lending income net of allocations to the security lending agent and
the borrower.
Loans and Other Direct
Indebtedness
A Fund may purchase loans and other
direct indebtedness. In purchasing a loan, a Fund acquires some or all of the
interest of a bank or other lending institution in a loan to a corporate,
governmental or other borrower. Many such loans are secured, although some may
be unsecured. Such loans may be in default at the time of purchase. Loans that
are fully secured offer a Fund more protection than unsecured loans in the event
of non-payment of scheduled interest or principal. However, there is no
assurance that the liquidation of collateral from a secured loan would satisfy
the corporate borrowers obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution that has negotiated
and structured the loan and is responsible for collecting interest, principal and other amounts due on its own behalf and on
behalf of the others in the syndicate, and for enforcing its and their other
rights against the borrower. Alternatively, such loans may be structured as
novations, pursuant to which a Fund would assume all of the rights of the
lending institution in a loan or as an assignment, pursuant to which a Fund
would purchase an assignment of a portion of a lenders interest in a loan
either directly from the lender or through an intermediary.
23
A Fund may also
purchase trade or other claims against companies, which generally represent
money owed by the company to a supplier of goods or services. These claims may
also be purchased at a time when the company is in default.
Certain of the loans and the other direct indebtedness acquired by a Fund
may involve revolving credit facilities or other standby financing commitments,
which obligate a Fund to pay additional cash on a certain date or on demand.
These commitments may require a Fund to increase its investment in a company at
a time when that Fund might not otherwise decide to do so (including at a time
when the companys financial condition makes it unlikely that such amounts will
be repaid). To the extent that a Fund is committed to advance additional funds,
it will at all times hold and maintain in a segregated account cash or other
high grade debt obligations in an amount sufficient to meet such commitments. A
Funds ability to receive payment of principal, interest and other amounts due
in connection with these investments will depend primarily on the financial
condition of the borrower. In selecting the loans and other direct indebtedness
that a Fund will purchase, the investment adviser will rely upon its own (and
not the original lending institutions) credit analysis of the borrower. As a
Fund may be required to rely upon another lending institution to collect and
pass on to the Fund amounts payable with respect to the loan and to enforce the
Funds rights under the loan and other direct indebtedness, an insolvency,
bankruptcy or reorganization of the lending institution may delay or prevent the
Fund from receiving such amounts. In such cases, a Fund will evaluate as well
the creditworthiness of the lending institution and will treat both the borrower
and the lending institution as an issuer of the loan for purposes of
compliance with applicable law pertaining to the diversification of the Funds
portfolio investments. The highly leveraged nature of many such loans and other
direct indebtedness may make such loans and other direct indebtedness especially
vulnerable to adverse changes in economic or market conditions. Investments in
such loans and other direct indebtedness may involve additional risk to the
Funds.
Lower-Rated Debt Securities (Junk
Bonds) and Securities of Distressed Companies
High yield, high
risk securities are commonly known as junk bonds. These securities are rated
lower than BBB- by S&P or Baa by Moodys and, along with securities of
distressed companies, are often considered to be speculative and involve
significantly higher risk of default on the payment of principal and interest or
are more likely to experience significant price fluctuation due to changes in
the issuers creditworthiness. Market prices of these securities may fluctuate
more than higher-rated debt securities and may decline significantly in periods
of general economic difficulty, which may follow periods of rising interest
rates. Securities of distressed companies include both debt and equity
securities. Issuers of lower-rated and distressed company securities may be
involved in restructurings or bankruptcy proceedings that may not be successful.
Although the market for high yield corporate debt securities and securities of
distressed companies has been in existence for many years and has weathered
previous economic downturns, the market in recent years has experienced a
dramatic increase in the large-scale use of such securities to fund highly
leveraged corporate acquisitions and restructurings. Accordingly, past
experience may not provide an accurate indication of future performance of the
high yield bond market, especially during periods of economic recession. See
Appendix ADescription of Ratings.
The market for lower-rated securities and debt securities of distressed
companies may be less active than that for higher-rated securities, which can
adversely affect the prices at which these securities can be sold. If market
quotations are not available, these 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 numerous external sources
for quotations and last-sale information are available.
Adverse publicity and changing investor perceptions may affect the ability of
outside pricing services used by a Fund to value its portfolio securities and
the Funds ability to dispose of these types of securities.
24
Since the risk of
default is higher for lower-quality securities and debt securities of a
distressed company, a portfolio managers research and credit analysis is an
integral part of managing any securities of this type held by a Fund. In
considering investments for a Fund, a portfolio manager will attempt to identify
those issuers of high yielding securities whose financial condition is adequate
to meet future obligations, has improved, or is expected to improve in the
future. A portfolio managers 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. There can be no
assurance that such analysis will prove accurate.
A Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as security holder to seek to
protect the interests of security holders if it determines this to be in the
best interest of shareholders.
Master Limited
Partnerships
The Funds may invest in master limited
partnerships (MLPs). A MLP is a publicly traded company organized as a limited
partnership or limited liability company and treated as a partnership for
federal income tax purposes.
MLPs may derive income and gains from the exploration, development,
mining or production, processing, refining, transportation (including pipelines
transporting gas, oil, or products thereof), or the marketing of any mineral or
natural resources. MLPs generally have two classes of owners, the general
partner and limited partners. When investing in an MLP, a Fund intends to
purchase publicly traded common units issued to limited partners of the MLP. The
general partner of an MLP is typically owned by one or more of the following: a
major energy company, an investment fund, or the direct management of the MLP.
The general partner may be structured as a private or publicly traded
corporation or other entity. The general partner typically controls the
operations and management of the MLP through an up to 2% equity interest in the
MLP plus, in many cases, ownership of common units and subordinated units.
Limited partners own the remainder of the partnership, through ownership of
common units, and have a limited role in the partnerships operations and
management.
MLPs combine the tax advantages of a partnership with the liquidity of a
publicly traded stock. MLP income is generally not subject to entity-level tax.
Instead, an MLPs income, gain, loss, deductions and other tax items pass
through to common unitholders.
MLPs are typically structured such that common units and general partner
interests have first priority to receive quarterly cash distributions up to an
established minimum amount (minimum quarterly distributions or MQD). Common
and general partner interests also accrue arrearages in distributions to the
extent the MQD is not paid. Once common and general partner interests have been
paid, subordinated units receive distributions of up to the MQD; however,
subordinated units do not accrue arrearages. Distributable cash in excess of the
MQD paid to both common and subordinated units is distributed to both common and
subordinated units generally on a pro rata basis. The general partner is also
eligible to receive incentive distributions if the general partner operates the
business in a manner that results in distributions paid per common unit
surpassing specified target levels. As the general partner increases cash
distributions to the limited partners, the general partner receives an
increasingly higher percentage of the incremental cash distributions. A common
arrangement provides that the general partner can reach a tier where it receives
50% of every incremental dollar paid to common and subordinated unit holders.
These incentive distributions encourage the general partner to streamline costs,
increase capital expenditures and acquire assets in order to increase the
partnerships cash flow and raise the quarterly cash distribution in order to
reach higher tiers. Such results benefit all security holders of the MLP.
25
MLP common units represent limited partnership interests in the MLP.
Common units are listed and traded on U.S. securities exchanges, with their
values fluctuating predominantly based on prevailing market conditions and the
success of the MLP. To the extent that a Fund invests in MLPs, it intends to
purchase common units in market transactions. Unlike owners of common stock of a
corporation, owners of common units have limited voting rights and have no
ability annually to elect directors. In the event of liquidation, common units
have preference over subordinated units, but not debt or preferred units, to the
remaining assets of the MLP. A Fund intends to invest in MLPs only to an extent
and in a manner consistent with the Funds qualification as a regulated
investment company.
An investment in MLP units involves some risks that differ from an
investment in the common stock of a corporation. Holders of MLP units have
limited control and voting rights on matters affecting the partnership. Although
common unitholders are generally limited in their liability, similar to a
corporations shareholders, creditors typically have the right to seek the
return of distributions made to such unitholders if the liability in question
arose before the distribution was paid. This liability may stay attached to the
common unitholder even after the units are sold. Investing in MLPs involves
certain risks related to investing in the underlying assets of the MLPs and
risks associated with pooled investment vehicles. MLPs holding credit-related
investments are subject to interest rate risk and the risk of default on payment
obligations by debt issuers. MLPs that concentrate in a particular industry or a
particular geographic region are subject to risks associated with such industry
or region. Investments held by MLPs may be relatively illiquid, limiting the
MLPs ability to vary their portfolios promptly in response to changes in
economic or other conditions. MLPs may have limited financial resources, their
securities may trade infrequently and in limited volume, and they may be subject
to more abrupt or erratic price movements than securities of larger or more
broadly based companies.
Certain diversification and income requirements imposed by the Internal
Revenue Code will limit the Funds ability to invest in MLP securities. In
addition, a Funds ability to meet its investment objective may depend in part
on the level of taxable income and distributions and dividends received from the
MLP securities in which the Fund invests, a factor over which the Fund has no
control. The benefit derived from a Funds investment in MLPs is largely
dependent on the MLPs being treated as partnerships for federal income tax
purposes. If an MLP were classified as a corporation for federal income tax
purposes, the amount of cash available for distribution would be reduced and
distributions received by a Fund would be taxed entirely as dividend income.
As a limited partner in the MLPs in which a Fund invests, the Fund will
receive a pro rata share of income, gains, losses and deductions from those
MLPs. Historically, a significant portion of income from such MLPs has been
offset by tax deductions. A Funds shareholders will incur a current tax
liability on that portion of an MLPs income and gains that is not offset by tax
deductions and losses. The percentage of an MLPs income and gains that is
offset by tax deductions and losses will fluctuate over time for various
reasons.
Money Market
Instruments
A Fund may, from time to time, invest all
or part of its available assets in money market instruments maturing in one year
or less. The types of instruments that a Fund may purchase are described below:
1.
U.S. government Securities
Securities issued or guaranteed by the U.S. government, including
Treasury Bills, Notes and bonds.
2.
U.S. government Agency Securities
Obligations issued or guaranteed by agencies or instrumentalities of the U.S.
government whether supported by the full faith and credit of the U.S. Treasury
or the credit of a particular agency or instrumentality.
26
3.
Bank Obligations
Certificates of
deposit, bankers acceptances and other short-term obligations of U.S.
commercial banks and their overseas branches and foreign banks of comparable
quality, provided each such bank combined with its branches has total
assets of at least one billion dollars, and certificates and issues of domestic
savings and loan associations of one billion dollars in assets whose deposits
are insured by the Federal Deposit Insurance Corporation (FDIC). Any
obligations of foreign banks shall be denominated in U.S. dollars. Obligations
of foreign banks and obligations of overseas branches of U.S. banks are subject
to somewhat different regulations and risks than those of U.S. domestic banks.
In particular, a foreign country could impose exchange controls that might delay
the release of proceeds from that country. Such deposits are not covered by the
FDIC. Because of conflicting laws and regulations, an issuing bank could
maintain that liability for an investment is solely that of the overseas branch
and that could expose a Fund to a greater risk of loss. A Fund will buy
short-term instruments only in nations where these risks are minimal. A Fund
will consider these factors along with other appropriate factors in making an
investment decision to acquire such obligations and will acquire only those
that, in the opinion of the investment adviser, are of an investment quality
comparable to other debt securities bought by the Fund.
4.
Commercial Paper
A Fund may invest
in short-term promissory notes issued by corporations that, at the time of
purchase, are rated A-2 or better by S&P or P-2 or better by Moodys or that
have received comparable ratings from a NRSRO approved by the Board or, if not
rated, are issued or guaranteed by a corporation with outstanding debt rated AA
or better by S&P or Aa or better by Moodys.
5.
Short-term Corporate Debt
A Fund may
invest in corporate notes, bonds and debentures that, at the time of purchase
are rated AA or better by S&P or Aa or better by Moodys or that have
received comparable ratings from a NRSRO approved by the Board, provided such
securities have one year or less remaining to maturity. Such securities
generally have greater liquidity and are subject to considerably less market
fluctuation than longer issues.
The ratings of S&P, Moodys and other rating services represent their
opinions as to the quality of the money market instruments that they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. These ratings are the initial criteria for selection of
portfolio investments, but a Fund will further evaluate these securities. See
Appendix A--Description of Ratings in this Part B.
Mortgage-Backed
Securities
A Fund may invest in mortgage-backed
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities or government-sponsored corporations or those issued by
certain private, non-government corporations, such as financial institutions.
Those securities include, but are not limited to, certificates issued by the
Government National Mortgage Association (GNMA). Such securities differ from
other fixed income securities in that principal is paid back by the borrower
over the length of the loan rather than returned in a lump sum at maturity. When
prevailing interest rates rise, the value of a GNMA security may decrease as do
other debt securities. When prevailing interest rates decline, however, the
value of GNMA securities may not rise on a comparable basis with other debt
securities because of the prepayment feature of GNMA securities. Additionally,
if a GNMA certificate is purchased at a premium above its principal value
because its fixed rate of interest exceeds the prevailing level of yields, the
decline in price to par may result in a loss of the premium in the event of
prepayment. Funds received from prepayments may be reinvested at prevailing
interest rates, which may be lower than the rate of interest that had previously
been earned.
The Federal National Mortgage Association (FNMA), a federally chartered
and privately owned corporation, issues pass-through securities representing
interests in a pool of conventional mortgage loans. FNMA guarantees the timely
payment of principal and interest but this guarantee is not backed by the full
faith and credit of the U.S. government. The Federal Home Loan Mortgage
Corporation (FHLMC), a corporate instrumentality of the U.S. government,
issues participation certificates that represent an interest in a pool of
conventional mortgage loans. FHLMC guarantees the timely payment of interest and
the ultimate collection of principal, and maintains
reserves to protect holders against losses due to default, but the certificates
are not backed by the full faith and credit of the U.S. government.
27
As is the case
with GNMA certificates, the actual maturity of and realized yield on particular
FNMA and FHLMC pass-through securities will vary, based on the prepayments of
the underlying pool of mortgages, and cannot be predicted.
In September 2008, the U.S. Treasury Department and the Federal Housing
Finance Administration (FHFA) announced that FNMA and FHLMC would be placed
into a conservatorship under FHFA. The effect that this conservatorship will
have on these companies debt and equity securities is unclear.
A Fund also may invest in collateralized mortgage obligations (CMOs)
and real estate mortgage investment conduits (REMICs). CMOs are debt
securities issued by U.S. government agencies or by financial institutions and
other mortgage lenders and collateralized by a pool of mortgages held under an
indenture. CMOs are issued in a number of classes or series with different
maturities. The classes or series are retired in sequence as the underlying
mortgages are repaid. Prepayment may shorten the stated maturity of the
obligation and can result in a loss of premium, if any has been paid. Certain of
these securities may have variable or floating interest rates and others may be
stripped (securities that provide only the principal or interest feature of the
underlying security). REMICs are private entities formed for the purpose of
holding a fixed pool of mortgages secured by an interest in real property.
REMICs are similar to CMOs in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. A Fund may invest in CMOs and
REMICs issued by private entities, which are not collateralized by securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
so called non agency mortgage backed securities. Investments in these securities
generally may be made only if the securities (i) are rated at the time of
purchase in the four top rating categories by a NRSRO, or, if unrated,
determined by the investment adviser to be of comparable quality (e.g., BBB or
better by S&P or Baa or better by Moodys) and (ii) represent interests in
whole loan mortgages, multi-family mortgages, commercial mortgages and other
mortgage collateral supported by a first mortgage lien on real estate. Non
agency mortgage backed securities are subject to the interest rate and
prepayment risks, described above, to which other CMOs and REMICs issued by
private issuers are subject. Non agency mortgage backed securities may also be
subject to a greater risk of loss of interest and principal because they are not
collateralized by securities issued or guaranteed by the U.S. government. In
addition, timely information concerning the loans underlying these securities
may not be as readily available and the market for these securities may be less
liquid than for other CMOs and REMICs.
A Fund also may invest in CMO residuals, which are mortgage securities
issued by agencies or instrumentalities of the U.S. government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks
and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only class of stripped mortgage-backed securities (SMBS), as
described below. In addition, if a series of a CMO includes a class that bears
interest at an adjustable rate, the yield to maturity on
the related CMO residual will also be extremely sensitive to changes in the
level of the index upon which interest rate adjustments are based. In certain
circumstances, a Fund may fail to recoup fully its initial investment in a CMO
residual.
28
CMO residuals are
generally purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers. The CMO residual market
has only very recently developed and CMO residuals currently may not have the
liquidity of other more established securities trading in other markets.
Transactions in CMO residuals are generally completed only after careful review
of the characteristics of the securities in question. In addition, CMO residuals
may or, pursuant to an exemption therefrom, may not have been registered under
the 1933 Act. CMO residuals, whether or not registered under the 1933 Act, may
be subject to certain restrictions on transferability, and may be deemed
illiquid and subject to a Funds limitations on investment in illiquid
securities.
A Fund also may invest in SMBS, which 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 all of the principal (the
principal-only or PO class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on a Funds yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to recoup some or all of
its initial investment in these securities even if the securities are in one of
the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment-banking firms acting as brokers or dealers, these securities
were developed fairly recently. As a result, established trading markets have
not yet developed and, accordingly, these securities may be deemed illiquid
and subject to a Funds limitations on investment in illiquid securities.
Although the market for the foregoing securities has become increasingly
liquid over the past few years, currently, the market for such securities is
experiencing a period of extreme volatility, which has negatively impacted
market liquidity positions. Initially, the market participants concerns were
focused on the subprime segment of the mortgage-backed securities market.
However, these concerns have since expanded to include a broad range of
mortgaged-backed and asset-backed securities, as well as other fixed income
securities. These securities are more difficult to value and may be hard to
sell. In addition, in general, securities issued by certain private
organizations may not be readily marketable.
Municipal
Securities
Municipal securities are issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as bridges, highways, roads, schools, water and sewer
works, and other utilities. Other public purposes for which municipal securities
may be issued include refunding outstanding obligations, obtaining funds for
general operating expenses and obtaining funds to lend to other public
institutions and facilities. In addition, certain debt obligations known as
private activity bonds may be issued by or on behalf of municipalities and
public authorities to obtain funds to provide certain water, sewage and solid
waste facilities, qualified residential rental projects, certain local electric,
gas and other heating or cooling facilities, qualified hazardous waste facilities, high-speed intercity rail facilities,
governmentally owned airports, docks and wharves and mass commuting facilities,
certain qualified mortgages, student loan and redevelopment bonds and bonds used
for certain organizations exempt from federal income taxation. Certain debt
obligations known as industrial development bonds under prior federal tax law
may have been issued by or on behalf of public authorities to obtain funds to
provide certain privately operated housing facilities, sports facilities,
industrial parks, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities, sewage or
solid waste disposal facilities, and certain facilities for water supply. Other
private activity bonds and industrial development bonds issued to finance the
construction, improvement, equipment or repair of privately operated industrial,
distribution, research, or commercial facilities may also be municipal
securities, but the size of such issues is limited under current and prior
federal tax law.
29
Information about
the financial condition of issuers of municipal securities may be less available
than about corporations with a class of securities registered under the
Securities Exchange Act of 1934, as amended (the 1934 Act).
Preferred
Stock
Preferred stock represents an equity
interest in a company that generally entitles the holder to receive, in
preference to the holders of other stocks such as common stocks, dividends and a
fixed share of the proceeds resulting from a liquidation of the company. Some
preferred stocks also entitle their holders to receive additional liquidation
proceeds on the same basis as holders of a companys common stock, and thus also
represent an ownership interest in that company.
Preferred stocks may pay fixed or adjustable rates of return. Preferred
stock is subject to issuer-specific and market risks applicable generally to
equity securities. In addition, a companys preferred stock generally pays
dividends only after the company makes required payments to holders of its bonds
and other debt. For this reason, the value of preferred stock will usually react
more strongly than bonds and other debt to actual or perceived changes in the
companys financial condition or prospects. Preferred stock of smaller companies
may be more vulnerable to adverse developments than preferred stock of larger
companies.
Private
Placements
Private placement securities are
securities that have not been registered with the SEC and that are usually only
sold to large, institutional investors. For various reasons, an issuer may
prefer or be required as a practical matter to obtain private financing. Adverse
conditions in the public securities markets may preclude a public offering of an
issuers securities. An issuer often is willing to provide more attractive
features in securities issued privately because it has avoided the expense and
delay involved in a public offering. Private placements of debt securities have
frequently resulted in higher yields and restrictive covenants that provide
greater protection for the purchaser, such as longer call or refunding
protection than would typically be available with publicly offered securities of
the same type. Securities acquired through private placements may also have
special features not usually characteristic of similar securities offered to the
public, such as contingent interest or warrants for the purchase of the issuers
stock. See Illiquid Securities above.
Real Estate Investment Trusts
(REITs)
Investments in REITs present certain
further risks that are unique and in addition to the risks associated with
investing in the real estate industry in general. Equity REITs may be affected
by changes in the value of the underlying property owned by the REITs, while
mortgage REITs may be affected by the quality of any credit extended. REITs are
dependent on management skills, are not diversified, and are subject to the
risks of financing projects. REITs whose underlying assets include long-term
healthcare properties, such as nursing, retirement and assisted living homes,
may be impacted by federal regulations concerning the healthcare industry.
30
REITs (especially mortgage REITs) are also subject to interest rate risks
- when interest rates decline, the value of a REITs investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REITs investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REITs investments in such loans will gradually
align themselves to reflect changes in market interest rates, causing the value
of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
REITs may have limited financial resources, may trade less frequently and
in a limited volume, and may be subject to more abrupt or erratic price
movements than other securities.
Repurchase
Agreements
A Fund may, from time to time, enter into
repurchase agreement transactions. Under a repurchase agreement, the purchaser
generally acquires ownership of the security but the seller (usually a bank or a
securities dealer) agrees, at the time of sale, to repurchase it at a mutually
agreed-upon time and price. A Fund will limit its investment in repurchase
agreements to those that its investment adviser, under guidelines established by
the Board, as applicable, determines to present minimal credit risks and that
are of high quality. In addition, a Fund must have collateral of at least 102%
of the repurchase price, including the portion representing the Funds yield
under such agreements, which is monitored on a daily basis. Such collateral is
held by a custodian in book entry form. Such agreements may be considered loans
under the 1940 Act, but a Fund considers repurchase agreements contracts for the
purchase and sale of securities, and it seeks to perfect a security interest in
the collateral securities so that it has the right to keep and dispose of the
underlying collateral in the event of a default. The terms of these agreements
are usually from overnight to one week and never exceed one year. A Fund will
take custody of the collateral under repurchase agreements.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred. The resale price
is in excess of the purchase price and reflects an agreed-upon market rate
unrelated to the coupon rate or maturity of the purchase security. Such
transactions afford an opportunity for a Fund to invest temporarily available
cash. A Funds risk is limited to the sellers ability to buy the security back
at the agreed-upon sum at the agreed-upon time, since the repurchase agreement
is secured by the underlying obligation. Should such an issuer default, a Fund,
barring extraordinary circumstances, will be entitled to sell the underlying
securities or otherwise receive adequate protection for its interest in such
securities, although there could be a delay in recovery. A Fund considers the
creditworthiness of the bank or dealer from whom it purchases repurchase
agreements. A Fund will monitor such transactions to assure that the value of
the underlying securities subject to repurchase agreements is at least equal to
the repurchase price. The underlying securities will be limited to those
described above.
The funds for which the Manager or subsidiaries or affiliates thereof
serve as investment adviser have obtained an exemption from the
joint-transaction prohibitions of Section 17(d) of the 1940 Act (Order) to
allow such funds to jointly invest cash balances. A Fund may invest cash
balances in a joint repurchase agreement in accordance with the terms of the
Order and subject generally to the conditions described above.
Reverse Repurchase
Agreements
A reverse repurchase agreement is the
sale of a security by a Fund and its agreement to repurchase the security at a
specified time and price. A Fund will maintain, in a segregated account cash,
cash equivalents or U.S. government securities in an amount sufficient to cover
its obligations under reverse repurchase agreements with broker/dealers (but no
collateral is required on reverse repurchase agreements with banks). A Fund will
subject its investments in reverse repurchase agreements to the borrowing
provisions set forth in the 1940 Act. The use of reverse repurchase agreements
by a Fund creates leverage, which increases the Funds investment risk. If the
income and gains on securities purchased with the proceeds of reverse repurchase
agreements exceed the costs of the agreements, the
Funds earnings or NAV will increase faster than otherwise would be the case;
conversely, if the income and gains fail to exceed the costs, earnings or NAV
would decline faster than otherwise would be the case.
31
Roll
Transactions
A Fund may engage in roll transactions. A roll transaction is the
sale of securities together with a commitment (for which a Fund may receive a
fee) to purchase similar, but not identical, securities at a future date. Under
the 1940 Act, these transactions may be considered borrowings by a Fund;
accordingly, a Fund will limit its use of these transactions, together with any
other borrowings, to no more than one-third of its total assets. A Fund will
segregate liquid assets such as cash, U.S. government securities or other
high-grade debt obligations in an amount sufficient to meet its payment
obligations in these transactions. Although these transactions will not be
entered into for leveraging purposes, to the extent a Funds aggregate
commitments under these transactions exceed its holdings of cash and securities
that do not fluctuate in value (such as short-term money market instruments),
the Fund temporarily will be in a leveraged position (
i.e.
, it will have an amount greater
than its net assets subject to market risk). Should the market value of a Funds
portfolio securities decline while the Fund is in a leveraged position, greater
depreciation of its net assets would likely occur than were the Fund not in such
a position. As a Funds aggregate commitments under these transactions increase,
the opportunity for leverage similarly increases.
Short Sales Against the
Box
A Fund may engage in short sales against
the box. This technique involves selling either a security that a Fund owns, or
a security equivalent in kind and amount to the security sold short that a Fund
has the right to obtain, for delivery at a specified date in the future, without
the payment of additional cost. In a short sale against the box, a Fund does not
deliver from its portfolio the securities sold and does not receive immediately
the proceeds from the short sale. Instead, a Fund borrows the securities sold
short from a broker-dealer through which the short sale is executed, and the
broker-dealer delivers such securities, on behalf of the Fund, to the purchaser
of such securities. Such broker-dealer is entitled to retain the proceeds from
the short sale until the Fund delivers to such broker-dealer the securities sold
short. In addition, the Fund is required to pay to the broker-dealer the amount
of any dividends paid on shares sold short. Finally, to secure its obligation to
deliver to such broker-dealer the securities sold short, generally the Fund must
deposit and continuously maintain in a separate account with its custodian an
equivalent amount of the securities sold short or securities convertible into or
exchangeable for such securities without the payment of additional
consideration. A Fund is said to have a short position in the securities sold
until it delivers to the broker-dealer the securities sold, at which time the
Fund receives the proceeds of the sale. Because a Fund ordinarily will want to
continue to hold securities in its portfolio that are sold short, a Fund will
normally close out a short position by purchasing on the open market and
delivering to the broker-dealer an equal amount of the securities sold short,
rather than by delivering portfolio securities.
A Fund may enter into a short sale against the box to hedge against
anticipated declines in the market price of portfolio securities or for certain
other limited purposes. If the value of the securities sold short increases
prior to the scheduled delivery date, a Fund loses the opportunity to
participate in the gain.
Special
Situations
A Fund may use aggressive investment
techniques, including seeking to benefit from special situations, such as
mergers, reorganizations, or other unusual events expected to affect a
particular issuer. There is a risk that the special situation might not occur,
which could have a negative impact on the price of the issuers securities and
fail to produce the expected gains or produce a loss for the Fund.
32
Standby
Commitments
These instruments, which are similar to a
put, give a Fund the option to obligate a broker, dealer or bank to repurchase a
security held by that Fund at a specified price.
There is no guarantee that the securities subject to a standby commitment
agreement will be issued or, if such securities are issued, the value of the
securities on the date of issuance may be more or less than the purchase price.
A Fund will limit its investments in standby commitment agreements with
remaining terms exceeding seven days pursuant to the limitation on investments
in illiquid securities. A Fund will record the purchase of a standby commitment
agreement, and will reflect the value of the security in the Funds net asset
value, on the date on which the security can reasonably be expected to be
issued.
Structured
Products
The Funds may invest in structured
products, including instruments such as credit-linked securities,
commodity-linked notes and structured notes, which are potentially high-risk
derivatives. Structured products (a type of potentially high-risk derivative)
that the Funds may invest in have been developed and combine the elements of
futures contracts or options with those of debt, preferred equity, or a
depository instrument (hereinafter structured products). Generally, a
structured product will be a debt security, preferred stock, depository share,
trust certificate, certificate of deposit, or other evidence of indebtedness on
which a portion of or all interest payments, and/or the principal or stated
amount payable at maturity, redemption, or retirement is determined by reference
to prices, changes in prices, or differences between prices of securities,
currencies, intangibles, goods, articles, or commodities (collectively
underlying assets) or by another objective index, economic factor, or other
measure, such as interest rates, currency exchange rates, commodity indices, and
securities indices (collectively benchmarks). Thus, structured products may
take a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the value
of a currency, or convertible securities with the conversion terms related to a
particular commodity.
Structured products can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a Fund may wish to take advantage of expected declines in
interest rates in several European countries, but avoid the transaction costs
associated with buying and currency-hedging the foreign bond positions. One
solution would be to purchase a U.S. dollar-denominated structured product whose
redemption price is linked to the average three-year interest rate in a
designated group of countries. The redemption price formula would provide for
payoffs of greater than par if the average interest rate were lower than a
specified level, and payoffs of less than par if rates were above the specified
level. Furthermore, a Fund could limit the downside risk of the security by
establishing a minimum redemption price so that the principal paid at maturity
could not be below a predetermined minimum level if interest rates were to rise
significantly. The purpose of this arrangement, known as a structured security
with an embedded put option, would be to give the Fund the desired European bond
exposure while avoiding currency risk, limiting downside market risk, and
lowering transaction costs. Of course, there is no guarantee that the strategy
will be successful, and a Fund could lose money if, for example, interest rates
do not move as anticipated or credit problems develop with the issuer of the
structured products.
The risks of investing in structured products reflect a combination of
the risks of investing in securities, options, futures, and currencies. Thus, an
investment in a structured product may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has a
fixed principal amount, is denominated in U.S. dollars, or bears interest either
at a fixed rate or a floating rate determined by reference to a common,
nationally published benchmark. The risks of a particular structured product
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the benchmarks or
the prices of underlying assets to which the instrument is linked. Such risks
generally depend upon factors that are unrelated to the
operations or credit quality of the issuer of the structured product and that
may not be readily foreseen by the purchaser, such as economic and political
events, the supply of and demand for the underlying assets, and interest rate
movements. In recent years, various benchmarks and prices for underlying assets
have been highly volatile, and such volatility may be expected in the future.
Reference is also made to the discussion of futures, options, and forward
contracts herein for a discussion of the risks associated with such investments.
33
Structured
products are potentially more volatile and carry greater market risks than
traditional debt instruments. Depending on the construction of the particular
structured product, changes in a benchmark may be magnified by the terms of the
structured product and have an even more dramatic and substantial effect upon
the value of the structured product. Also, the prices of the structured product
and the benchmark or underlying asset may not move in the same direction or at
the same time.
Structured products may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, structured products
may bear interest at above market rates but bear an increased risk of principal
loss (or gain). The latter scenario may result if leverage is used to make up
the structured product. Leverage risk occurs when the structured product is
organized so that a given change in a benchmark or underlying asset is
multiplied to produce a greater value change in the structured product, thereby
magnifying the risk of loss as well as the potential for gain.
Structured products may also carry liquidity risk since the instruments
are often customized to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
structured products could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between a Fund
and the issuer of the structured product, the creditworthiness of the
counterparty or issuer of the structured product would be an additional risk
factor which the Fund would have to consider and monitor. Structured products
also may not be subject to regulation by the CFTC, which generally regulates the
trading of commodity futures by U.S. persons, the SEC, which regulates the offer
and sale of securities by and to U.S. persons, or any other governmental
regulatory authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the NAV of a Fund.
Certain issuers of structured products may be deemed to be investment
companies as defined in the 1940 Act. As a result, the Funds investments in
these structured products may be subject to limits applicable to investments in
investment companies and may be subject to restrictions contained in the 1940
Act.
Credit-Linked Securities.
Credit-linked securities are issued by a limited purpose
trust or other vehicle that, in turn, invests in a basket of derivative
instruments, such as credit default swaps, interest rate swaps and other
securities, in order to provide exposure to certain high yield or other fixed
income markets. For example, a Fund may invest in credit-linked securities as a
cash management tool in order to gain exposure to the high yield markets and/or
to remain fully invested when more traditional income-producing securities are
not available. Like an investment in a bond, investments in credit-linked
securities represent the right to receive periodic income payments (in the form
of distributions) and payment of principal at the end of the term of the
security. However, these payments are conditioned on the trusts receipt of
payments from, and the trusts potential obligations to, the counterparties to
the derivative instruments and other securities in which the trust invests. For
instance, the trust may sell one or more credit default swaps, under which the
trust would receive a stream of payments over the term of the swap agreements
provided that no event of default has occurred with respect to the referenced
debt obligation upon which the swap is based. If a default occurs, the stream of
payments may stop and the trust would be obligated to pay the counterparty the
par (or other agreed upon value) of the referenced debt obligation. This, in turn, would reduce the amount of income
and principal that a Fund would receive as an investor in the trust. A Funds
investments in these instruments are indirectly subject to the risks associated
with derivative instruments, including, among others, credit risk, default or
similar event risk, counterparty risk, interest rate risk, leverage risk and
management risk. It is expected that the securities will be exempt from
registration under the 1933 Act. Accordingly, there may be no established
trading market for the securities and they may constitute illiquid investments.
34
Swaps, Caps, Floors, and Collars
A Fund may enter
into interest rate, currency and index swaps and the purchase or sale of related
caps, floors and collars. It is expected that a Fund will enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. It also is expected
that a Fund will use these transactions as hedges and not speculative
investments and will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the Fund may be
obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest,
e.g.
, an
exchange of floating rate payments for fixed rate payments with respect to a
nominal amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
A Fund will usually enter into swaps on a net basis,
i.e.
, the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the
investment adviser and the Funds believe that such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to their borrowing restrictions. A Fund will not be permitted to
enter into any swap, cap, floor or collar transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the
counterparty, combined with any credit enhancements, is rated at least BBB- by
S&P or Baa3 by Moodys or is determined to be of equivalent credit quality
by the investment adviser. If there is a default by the counterparty, a Fund may
have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Caps, floors and collars are more recent innovations
for which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Temporary Defensive
Policies
Optimum Large Cap Growth Fund, Optimum
Large Cap Value Fund, Optimum Small-Mid Cap Growth Fund, Optimum Small-Mid Cap
Value Fund and Optimum Fixed Income Fund reserve the right to invest without
limitation in cash, money market instruments or high quality short-term debt
securities, including repurchase agreements, for temporary defensive purposes.
Optimum International Fund reserves the right to invest without limitation in
U.S. securities, cash, money market instruments or high quality short-term debt
securities, including repurchase agreements, for temporary defensive purposes.
35
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 securitys 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. A
Funds investment adviser 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 or interest on the underlying municipal
securities and for other reasons.
Trade Claims
The Funds may
purchase trade claims and similar obligations or claims against companies in
bankruptcy proceedings. Trade claims are non-securitized rights of payment
arising from obligations that typically arise when vendors and suppliers extend
credit to a company by offering payment terms for products and services. If the
company files for bankruptcy, payments on these trade claims stop and the claims
are subject to compromise along with the other debts of the company. Trade
claims may be purchased directly from the creditor or through brokers. There is
no guarantee that a debtor will ever be able to satisfy its trade claim
obligations. Trade claims are subject to the risks associated with low-quality
obligations.
Trust Preferred
Securities
The Funds may invest in trust preferred
securities. Trust preferred securities have the characteristics of both
subordinated debt and preferred stock. Generally, trust preferred securities are
issued by a trust that is wholly owned by a financial institution or other
corporate entity, typically a bank holding company. The financial institution
creates the trust and owns the trusts common securities. The trust uses the
sale proceeds of its common securities to purchase subordinated debt issued by
the financial institution. The financial institution uses the proceeds from the
subordinated debt sale to increase its capital while the trust receives periodic
interest payments from the financial institution for holding the subordinated
debt. The trust uses the funds received to make dividend payments to the holders
of the trust preferred securities. The primary advantage of this structure is
that the trust preferred securities are treated by the financial institution as
debt securities for tax purposes and as equity for the calculation of capital
requirements.
Trust preferred securities typically bear a market rate coupon comparable
to interest rates available on debt of a similarly rated issuer. Typical
characteristics include long-term maturities, early redemption by the issuer,
periodic fixed or variable interest payments, and maturities at face value.
Holders of trust preferred securities have limited voting rights to control the
activities of the trust and no voting rights with respect to the financial
institution. The market value of trust preferred securities may be more volatile
than those of conventional debt securities. Trust preferred securities may be
issued in reliance on Rule 144A under the 1933 Act and subject to restrictions
on resale. There can be no assurance as to the liquidity of trust preferred
securities and the ability of holders, such as a Fund, to sell their holdings.
The condition of the financial institution is looked at to identify the risks of
the trust preferred securities as the trust typically has no business operations
other than to issue the trust preferred securities. If the financial institution
defaults on interest payments to the trust, the trust will not be able to make
dividend payments to holders of its securities, such as a Fund.
36
Unseasoned
Companies
A
Fund may invest in relatively new or unseasoned companies that are in their
early stages of development, or small companies positioned in new and emerging
industries where the opportunity for rapid growth is expected to be above
average. Securities of unseasoned companies present greater risks than
securities of larger, more established companies. The companies in which a Fund
may invest may have relatively small revenues, limited product lines, and may
have a small share of the market for their products or services. Small companies
may lack depth of management, they may be unable to internally generate funds
necessary for growth or potential development or to generate such funds through
external financing on favorable terms, or they may be developing or marketing
new products or services for which markets are not yet established and may never
become established. Due to these and other factors, small companies may suffer
significant losses as well as realize substantial growth, and investments in
such companies tend to be volatile and are therefore speculative.
U.S. Government
Securities
The U.S. government securities in which a
Fund may invest for temporary purposes and otherwise include a variety of
securities that are issued or guaranteed as to the payment of principal and
interest by the U.S. government, and by various agencies or instrumentalities,
which have been established or sponsored by the U.S. government.
U.S. Treasury securities are backed by the full faith and credit of the
U.S. government. Securities issued or guaranteed by federal agencies and U.S.
government-sponsored instrumentalities may or may not be backed by the full
faith and credit of the U.S. government. In the case of securities not backed by
the full faith and credit of the U.S. government, investors in such securities
look principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the U.S. government itself in the event the agency or instrumentality does not
meet its commitment. Agencies that are backed by the full faith and credit of
the U.S. government include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain agencies and instrumentalities, such
as GNMA, are, in effect, backed by the full faith and credit of the U.S.
government through provisions in their charters that they may make indefinite
and unlimited drawings on the Treasury, if needed to service their debt. Debt
from certain other agencies and instrumentalities, including the Federal Home
Loan Bank and FNMA, are not guaranteed by the U.S. government, but those
institutions are protected by the discretionary authority for the U.S. Treasury
to purchase certain amounts of their securities to assist the institutions in
meeting their debt obligations. Finally, other agencies and instrumentalities,
such as the Farm Credit System and the FHLMC, are federally chartered
institutions under U.S. government supervision, but their debt securities are
backed only by the creditworthiness of those institutions, not the U.S.
government.
Some of the U.S. government agencies that issue or guarantee securities
include the Export-Import Bank of the U.S., Farmers Home Administration, Federal
Housing Administration, Maritime Administration, Small Business Administration,
and the Tennessee Valley Authority.
An instrumentality of a U.S. government agency is a government agency
organized under federal charter with government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal Immediate
Credit Banks and the FNMA.
Variable and Floating Rate
Notes
Variable rate master demand notes are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Because master demand notes are direct lending arrangements
between a Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, a Fund may demand payment of principal and
accrued interest at any time. While the notes are not
typically rated by credit rating agencies, issuers of variable amount master
demand notes (which are normally manufacturing, retail, financial, and other
business concerns) must satisfy the same criteria as set forth above for
commercial paper. In determining average weighted portfolio maturity, a variable
amount master demand note will be deemed to have a maturity equal to the period
of time remaining until the principal amount can be recovered from the issuer
through demand.
37
A variable rate
note is one whose terms provide for the adjustment of its interest rate on set
dates and which, upon such adjustment, can reasonably be expected to have a
market value that approximates its par value. A floating rate note is one whose
terms provide for the adjustment of its interest rate whenever a specified
interest rate changes and which, at any time, can reasonably be expected to have
a market value that approximates its par value. Such notes are frequently not
rated by credit rating agencies; however, unrated variable and floating rate
notes purchased by a Fund will be determined by the Funds investment adviser
under guidelines established by the Board to be of comparable quality at the
time of purchase to rated instruments eligible for purchase under the Funds
investment policies. In making such determinations, the investment adviser will
consider the earning power, cash flow and other liquidity ratios of the issuers
of such notes (such issuers include financial, merchandising, bank holding and
other companies) and will continuously monitor their financial condition.
Although there may be no active secondary market with respect to a particular
variable or floating rate note purchased by a Fund, the Fund may re-sell the
note at any time to a third party. The absence of such an active secondary
market, however, could make it difficult for a Fund to dispose of the variable
or floating rate note involved in the event the issuer of the note defaults on
its payment obligations, and a Fund could, for this or other reasons, suffer a
loss to the extent of the default. Variable or floating rate notes may be
secured by bank letters of credit.
Warrants
Warrants are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. The purchase of warrants
involves the risk that a Fund could lose the purchase value of a warrant if the
right to subscribe to additional shares is not exercised prior to the warrants
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed securitys market price such as
when there is no movement in the level of the underlying security.
When-Issued and Delayed Delivery
Securities
A Fund may purchase securities on a
when-issued or delayed delivery basis. In such transactions, instruments are
purchased with payment and delivery taking place in the future in order to
secure what is considered to be an advantageous yield or price at the time of
the transaction. Delivery of and payment for these securities may take as long
as a month or more after the date of the purchase commitment. A Fund will
maintain with its custodian a separate account with a segregated portfolio of
securities in an amount at least equal to these commitments. The payment
obligation and the interest rates that will be received are each fixed at the
time a Fund enters into the commitment and no interest accrues to the Fund until
settlement. Thus, 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.
Zero Coupon and Pay-In-Kind (PIK)
Bonds
Zero coupon bonds are debt obligations
that do not entitle the holder to any periodic payments of interest prior to
maturity or a specified date when the securities begin paying current interest,
and therefore are issued and traded at a discount from their face amounts or
values. PIK bonds pay interest through the issuance to holders of additional
securities. Zero coupon bonds and PIK bonds are generally considered to be more
interest-sensitive than income bearing bonds, to be more
speculative than interest-bearing bonds, and to have certain tax consequences
which could, under certain circumstances, be adverse to a Fund authorized to
invest in them. Investments in zero coupon or PIK bonds would require a Fund to
accrue and distribute income not yet received. In order to generate sufficient
cash to make these distributions, a Fund may be required to sell securities in
its portfolio that it otherwise might have continued to hold or to borrow. These
rules could affect the amount, timing and tax character of income distributed to
you by a Fund.
38
Special Risks related to Cybersecurity
Issues
As
an open-end management investment company, the Trust has delegated its
operational activities to third-party service providers, subject to the
oversight of the Board. Because the Trust operates its business through
third-party service providers, it does not itself have any operational or
security systems or infrastructure that is potentially subject to cyber attacks.
The third-party service providers that facilitate the Trusts business
activities, including, but not limited to, fund management, custody of Trust
assets, fund accounting and financial administration, and transfer agent
services, could be sources of operational and informational security risk to the
Trust and its shareholders, including from breakdowns or failures of the
third-party service providers own systems or capacity constraints. A failure or
breach of the operational or security systems or infrastructure of the Trusts
third-party service providers could disrupt the Trusts operations, result in
the disclosure or misuse of confidential or proprietary information, and cause
losses. Although the Trust and its third-party service providers have business
continuity plans and other safeguards in place, the operations of the Trusts
third-party service providers may be adversely affected by significant
disruption of their operating systems or physical infrastructure that support
the Trust and its shareholders.
The proliferation of new technologies, the use of the Internet and
telecommunications technologies to conduct business, as well as the increased
sophistication and activities of organized crime, hackers, terrorists,
activists, and others, have significantly increased the information security
risks to which the Trusts third-party service providers are subject. The
third-party service providers rely on digital technologies, computer and email
systems, software, and networks to conduct their business and the business of
the Trust. The Trusts third-party service providers have robust information
security procedures; however, their technologies may become the target of cyber
attacks or information security breaches that could result in the unauthorized
release, gathering, monitoring, misuse, loss or destruction of the Trusts or
its shareholders confidential and other information, or otherwise disrupt the
business operations of the Trust or its third-party service providers. Although
to date the Trust has not experienced any material losses relating to cyber
attacks or other information security breaches, there can be no assurance that
the Trust or its third-party service providers will not suffer such losses in
the future.
Disruptions or failures in the physical
infrastructure or operating systems that support the Trusts third-party service
providers, or cyber attacks or security breaches of the networks, systems, or
devices that the Trusts third-party service providers use to service the
Trusts operations, could result in financial losses, the inability of Trust
shareholders to transact business, violations of applicable privacy and other
laws, regulatory fines, penalties, reputational damage, reimbursement or other
compensation costs, and/or additional compliance costs. The business continuity
policies and procedures that the Trust and its third-party service providers
have established seek to identify and mitigate the types of risk to which the
Trust and its third-party service providers are subject. As with any risk
management system, there are inherent limitations to these business continuity
policies and procedures as there may exist, or develop in the future, risks that
have not been anticipated or identified.
DISCLOSURE
OF PORTFOLIO HOLDINGS
INFORMATION
|
Each Fund has adopted a policy generally prohibiting the disclosure of
portfolio holdings information to any person until after 30 calendar days have
passed. The Trust posts a list of the Funds portfolio holdings monthly, with a
30-day lag, on the Funds website, optimummutualfunds.com. In addition, on a
10-day lag, we also make available on the website a month-end summary listing of
the number of each Funds securities, country and asset allocations, and top 10
securities and sectors by percentage of holdings for each Fund. This information is available publicly to any and all
shareholders free of charge once posted on the Funds website,
optimummutualfunds.com, or by calling 800 914-0278.
39
Other entities,
including institutional investors and intermediaries that distribute the Funds
shares, are generally treated similarly and are not provided with the Funds
portfolio holdings in advance of when they are generally available to the
public.
The Funds may, from time to time, provide statistical data derived from
publicly available information to third parties, such as shareholders,
prospective shareholders, financial intermediaries, consultants, and ratings and
ranking organizations.
Third-party service providers and affiliated persons of the Funds are
provided with the Funds portfolio holdings only to the extent necessary to
perform services under agreements relating to the Funds. In accordance with the
policy, third-party service providers who receive non-public portfolio holdings
information on an ongoing basis are: the Managers affiliates (Delaware
Management Business Trust, Delaware Service Company, Inc., and the Distributor)
and the Funds independent registered public accounting firm, custodian, legal
counsel, financial printer (DG3), and proxy voting service. These entities are
obligated to keep such information confidential.
Third-party rating and ranking organizations and consultants who have
signed agreements (Non-Disclosure Agreements) with the Funds or the Manager
may receive portfolio holdings information more quickly than the 30 day lag. The
Non-Disclosure Agreements require that the receiving entity hold the information
in the strictest confidence and prohibit the receiving entity from disclosing
the information or trading on the information (either in Fund shares or in
shares of the Funds portfolio securities). In addition, the receiving party
must agree to provide copies of any research or reports generated using the
portfolio holdings information in order to allow for monitoring of use of the
information. Neither the Funds, the Manager nor any affiliate receive any
compensation or consideration with respect to these agreements.
To protect the shareholders interest and to avoid conflicts of interest,
Non-Disclosure Agreements must be approved by a member of the Managers Legal
Department and Compliance Department and any deviation in the use of the
portfolio holdings information by the receiving party must be approved in
writing by the Funds Chief Compliance Officer prior to such use.
The Board will be notified of any substantial change to the foregoing
procedures. The Board also receives an annual report from the Trusts Chief
Compliance Officer which, among other things, addresses the operation of the
Trusts procedures concerning the disclosure of portfolio holdings information.
Officers and
Trustees
The business and affairs of the Trust are
managed under the direction of its Board. Certain officers and Trustees of the
Trust hold identical positions in each of the funds in the Delaware
Investments
®
family of investment companies (each a Delaware
Investments
®
Fund and collectively, the Delaware
Investments
®
Funds). As of June 30, 2013, the Trusts officers and
Trustees owned less than 1% of the outstanding shares of each Class of each
Fund.
The Trusts Trustees and principal officers are noted below along with
their ages and their business experience for the past five years. The Trustees
serve for indefinite terms until their resignation, death or removal.
40
|
|
|
|
Number
of
|
|
|
|
|
|
Portfolios
in
|
|
|
Position(s)
|
Length
of
|
|
Fund Complex
1
|
Other
|
Name, Address
and
|
Held
with
|
Time
|
Principal
Occupation(s)
|
Overseen
by
|
Directorships
|
Age
|
the
Trust
|
Served
|
During Past 5
Years
|
Trustee
|
Held by
Trustee
|
Interested Trustees
|
Daniel H. Arnold
2
|
Trustee
|
September
|
Chief Financial Officer
|
6
|
None
|
2005
Market Street
|
|
19, 2012 to
|
LPL Financial
LLC
|
|
|
Philadelphia, PA
|
|
present
|
(2012-Present)
|
|
|
19103
|
|
|
|
|
|
Age
49
|
|
|
Managing Director
LPL
|
|
|
|
|
|
Financial LLC
(2007
|
|
|
|
|
|
Present)
|
|
|
J. Scott Coleman
2
|
Trustee,
|
June
16,
|
Executive
Vice President,
|
6
|
None
|
2005 Market Street
|
President
|
2011
to
|
Head of
Distribution and
|
|
|
Philadelphia, PA
|
and
Chief
|
present
|
Marketing,
Delaware
|
|
|
19103
|
Executive
|
|
Investments
|
|
|
Age 52
|
Officer
|
|
(2008Present)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managing
Director for
|
|
|
|
|
|
Investment
Consulting
|
|
|
|
|
|
Group
Goldman Sachs
|
|
|
|
|
|
Asset
Management
|
|
|
|
|
|
|
|
|
|
|
|
(20012008)
|
|
|
Independent Trustees
|
Robert J. Christian
|
Trustee
and
|
November
|
Private
Investor
|
6
|
Trustee
Fund
|
2005 Market Street
|
Chairman
|
1,
2007
|
(2006Present)
|
|
Vantage
Trust
|
Philadelphia, PA
|
|
to
present
|
|
|
(34
mutual
|
19103
|
|
|
Chief
Investment Officer
|
|
funds)
|
Age
64
|
|
|
|
|
|
|
|
|
Wilmington Trust
|
|
|
|
|
|
Corporation
|
|
|
|
|
|
(19962006)
|
|
|
Nicholas D. Constan
|
Trustee
|
July 17,
|
Adjunct Professor
|
6
|
None
|
2005
Market Street
|
|
2003 to
|
University of
Pennsylvania
|
|
|
Philadelphia, PA
|
|
present
|
(1972Present)
|
|
|
19103
|
|
|
|
|
|
Age
74
|
|
|
|
|
|
Durant Adams
|
Trustee
|
July
17
|
Principal
Ridgeway
|
6
|
None
|
Hunter
|
|
2003
to
|
Partners
|
|
|
2005 Market Street
|
|
present
|
(Executive
Recruiting)
|
|
|
Philadelphia, PA
|
|
|
(2004Present)
|
|
|
19103
|
|
|
|
|
|
Age 64
|
|
|
|
|
|
Stephen P. Mullin
|
Trustee
|
July 17,
|
President
Econsult
|
6
|
None
|
2005
Market Street
|
|
2003 to
|
Solutions, Inc.
|
|
|
Philadelphia, PA
|
|
present
|
(2013-Present)
|
|
|
19103
|
|
|
|
|
|
Age
57
|
|
|
Senior Vice President
|
|
|
|
|
|
Econsult
Corporation
|
|
|
|
|
|
(Economic
Consulting)
|
|
|
|
|
|
(2000Present)
|
|
|
41
|
|
|
|
Number
of
|
|
|
|
|
|
Portfolios
in
|
|
|
Position(s)
|
Length
of
|
|
Fund Complex
1
|
Other
|
Name, Address
and
|
Held
with
|
Time
|
Principal
Occupation(s)
|
Overseen
by
|
Directorships
|
Age
|
the
Trust
|
Served
|
During Past 5
Years
|
Trustee
|
Held by
Trustee
|
Robert A.
Rudell
|
Trustee
|
July 13,
|
Private Investor
|
6
|
Director and
|
2005 Market
Street
|
|
2003 to
|
(2002Present)
|
|
Independent
|
Philadelphia, PA
|
|
present
|
|
|
Chairman
|
19103
|
|
|
|
|
Heartland Funds
|
Age 64
|
|
|
|
|
(3 mutual funds)
|
|
|
|
|
|
(2005Present)
|
Jon E. Socolofsky
|
Trustee
|
July 17,
|
President H&S
|
6
|
None
|
2005 Market Street
|
|
2003 to
|
Enterprises of Minecque,
|
|
|
Philadelphia, PA
|
|
present
|
LLC
|
|
|
19103
|
|
|
(Commercial real estate
|
|
|
Age 67
|
|
|
developer)
|
|
|
|
|
|
(2005-Present)
|
|
|
|
|
|
|
|
|
|
|
|
Private Investor
|
|
|
|
|
|
(2002Present)
|
|
|
42
The following is additional information regarding investment professionals affiliated with the Trust.
|
|
|
|
Number
of
|
|
|
|
|
|
Portfolios
in
|
|
|
Position(s)
|
Length
of
|
|
Fund Complex
1
|
Other
|
Name, Address
and
|
Held
with
|
Time
|
Principal
Occupation(s)
|
Overseen
by
|
Directorships
|
Age
|
the
Trust
|
Served
|
During Past 5
Years
|
Officer
|
Held by
Trustee
|
Officers
|
David F. Connor
|
Vice
|
Vice
|
Mr. Connor has served
|
6
|
None
4
|
2005 Market Street
|
President,
|
President
|
as Vice President and
|
|
|
Philadelphia, PA
|
Deputy
|
since July 17,
|
Deputy General
|
|
|
19103
|
General
|
2003 and
|
Counsel at Delaware
|
|
|
Age: 48
|
Counsel,
|
Secretary
|
Investments
3
since
|
|
|
|
and
|
since
|
2000.
|
|
|
|
Secretary
|
December 6,
|
|
|
|
|
|
2005
|
|
|
|
David P.
OConnor
|
Executive
|
October 25,
|
Mr. OConnor has
|
6
|
None
4
|
2005 Market
Street
|
Vice
|
2005 to
|
served in various
|
|
|
Philadelphia, PA
|
President,
|
present
|
executive and legal
|
|
|
19103
|
General
|
|
capacities at different
|
|
|
Age: 46
|
Counsel,
|
|
times at Delaware
|
|
|
|
and Chief
|
|
Investments.
|
|
|
|
Legal
|
|
|
|
|
|
Officer
|
|
|
|
|
Richard Salus
|
Senior
|
January 1,
|
Mr. Salus has served in
|
6
|
None
4
|
2005 Market Street
|
Vice
|
2006 to
|
various executive
|
|
|
Philadelphia, PA
|
President
|
present
|
capacities at different
|
|
|
19103
|
and Chief
|
|
times at Delaware
|
|
|
Age: 48
|
Financial
|
|
Investments.
|
|
|
|
Officer
|
|
|
|
|
Daniel V.
Geatens
|
Vice
|
September
|
Mr. Geatens has served
|
6
|
None
4
|
2005 Market
Street
|
President
|
20, 2007 to
|
in various capacities at
|
|
|
Philadelphia, PA
|
and
|
present
|
different times at
|
|
|
19103
|
Treasurer
|
|
Delaware Investments.
|
|
|
Age: 39
|
|
|
|
|
|
1
The term Fund Complex refers to the
Trusts Funds.
2
Interested persons of the Funds by virtue of their executive and
management positions or relationships with the Funds service providers or
sub-service providers.
3
Delaware Investments is the marketing name for Delaware Management
Holdings, Inc. and its subsidiaries, including the Trusts Manager,
principal underwriter, and service agent.
4
Messrs. Connor, OConnor, Salus and Geatens also serve in similar
capacities for the Delaware Investments
®
Family of Funds, a
fund complex that has the same Manager, principal underwriter, and
transfer agent as the Trust.
|
43
The following
table shows each Trustees ownership of shares of the Funds and of all Delaware
Investments
®
Funds as of December 31, 2012.
|
|
Aggregate Dollar Range of Equity Securities
in
|
|
Dollar Range of Equity Securities in
|
All Registered Investment Companies
Overseen
|
Name
|
the Funds
|
by Trustee in Family of Investment
Companies
|
J. Scott Coleman
|
None
|
None
|
Daniel H. Arnold
|
None
|
None
|
Nicholas D.
Constan
|
Optimum Large Cap Growth Fund
|
$50,001 -
$100,000
|
$10,001 - $50,000
|
Optimum Large Cap Value Fund:
|
$10,001 - $50,000
|
Optimum Small-Mid Cap Growth
|
Fund:
|
$1 - $10,000
|
Optimum Small-Mid Cap Value
|
Fund:
|
$1 - $10,000
|
Optimum International Fund
|
$10,001 - $50,000
|
Durant A. Hunter
|
Optimum Large Cap Growth
Fund
|
More than $100,000
|
More than $100,000
|
Optimum Large Cap Value
Fund
|
More than $100,000
|
Optimum Small-Mid Cap
Growth
|
Fund
|
$10,001 - $50,000
|
Optimum Small-Mid Cap
Value Fund
|
$10,001 - $50,000
|
Optimum International
Fund
|
$50,001 - $100,000
|
Stephen P.
Mullin
|
Optimum Large Cap Growth Fund:
|
$50,001 -
$100,000
|
$10,001 - $50,000
|
Optimum Large Cap Value Fund:
|
$10,001 - $50,000
|
Optimum Small-Mid Cap Growth
|
Fund:
|
$1 - $10,000
|
Optimum Small-Mid Cap Value
|
Fund:
|
$1 - $10,000
|
Optimum International
Fund:
|
$1 - $10,000
|
Optimum Fixed
Income Fund:
|
$10,001 - $50,000
|
44
|
|
Aggregate Dollar Range of Equity Securities
in
|
|
Dollar Range of Equity Securities
in
|
All Registered Investment Companies
Overseen
|
Name
|
the Funds
|
by Trustee in Family of Investment
Companies
|
Robert A. Rudell
|
Optimum Large
Cap Growth Fund:
|
More than $100,000
|
$10,001 - $50,000
|
Optimum Large
Cap Value Fund:
|
$10,001 - $50,000
|
Optimum
Small-Mid Cap Growth
|
Fund:
|
$10,001 - $50,000
|
Optimum
Small-Mid Cap Value
|
Fund:
|
$10,001 - $50,000
|
Optimum
International Fund:
|
$10,001 - $50,000
|
Optimum Fixed
Income Fund:
|
$10,001 - $50,000
|
Jon E. Socolofsky
|
Optimum Large Cap Growth Fund:
|
$50,001 -
$100,000
|
$10,001 - $50,000
|
Optimum Large Cap Value Fund:
|
$10,001 - $50,000
|
Optimum Small-Mid Cap Growth
|
Fund:
|
$1 - $10,000
|
Optimum Small-Mid Cap Value
|
Fund:
|
$1 - $10,000
|
Optimum International Fund:
|
$1 - $10,000
|
Robert J. Christian
|
Optimum Fixed
Income Fund:
|
More than $100,000
|
$10,001 - $50,000
|
Optimum
International Fund:
|
$10,001 - $50,000
|
Optimum Large
Cap Growth Fund:
|
$10,001 - $50,000
|
Optimum Large
Cap Value Fund:
|
$10,001 - $50,000
|
Optimum Small Mid
Cap Value
|
Fund:
|
$10,001 -
$50,000
|
Optimum Small Mid
Cap Growth
|
Fund
|
$10,001-$50,000
|
45
The
following table describes the aggregate compensation for each Trustee entitled
to receive compensation, for the fiscal year ended March 31, 2012. Only the
Trustees of the Trust who are not interested persons as defined by the 1940
Act (the Independent Trustees) receive compensation from the Trust.
|
|
|
Total
Compensation
|
|
Aggregate
|
Pension or
Retirement
|
from the Trust
and
|
|
Compensation
|
Benefits Accrued
as
|
Fund Complex
paid
|
Trustee
|
From the
Trust
|
Part of Trust
Expenses
|
to each
Trustee
1
|
Nicholas D.
Constan
|
$64,750
|
None
|
$64,750
|
Durant A.
Hunter
|
$65,750
|
None
|
$65,750
|
Stephen P.
Mullin
|
$64,750
|
None
|
$64,750
|
Robert A.
Rudell
|
$68,375
|
None
|
$68,375
|
Jon E.
Socolofsky
|
$73,375
|
None
|
$73,375
|
Robert J.
Christian
|
$79,000
|
None
|
$79,000
|
1
As of January 1, 2013, each independent Trustee
receives a total annual retainer fee of $45,000 for serving as a Trustee,
plus $5,000 for each full, in-person Board Meeting that an independent
Trustee participates in ($500 per telephonic meeting). Members of the
Audit Committee (other than the Chairman) receive additional annual
compensation of $7,500. In addition, the chairman of the Audit Committee
receives an annual retainer of $12,500. Members of the Nominating
Committee (other than the chairman) receive additional annual compensation
of $2,000. In addition, the chairman of the Nominating Committee receives
an annual retainer of $3,000. The Independent Chairman receives an
additional annual retainer of
$12,500.
|
Board Leadership
Structure
Board Chairman:
Mr. Christian, an Independent Trustee,
serves as Chairman of the Board. The Chairman, in consultation with Fund
management, counsel and the other Trustees, proposes Board agenda topics,
actively participates in developing Board meeting agendas, and ensures that
appropriate and timely information is provided to the Board in connection with
Board meetings. The Chairman also conducts meetings of the Board. The Chairman
also generally serves as a liaison between outside Trustees, Fund officers and
counsel.
Chief Executive
Officer
: Mr. Coleman, who is
an Interested Trustee, serves as the Chief Executive Officer of the Trust. The
Board believes that having a representative of Fund management as the Trusts
CEO is beneficial to the Trust. Mr. Coleman is a member of the senior management
team of Delaware Investments and helps oversee the day-to-day business affairs
affecting the Manager and the Funds. Accordingly, his participation in the
Boards deliberations helps assure that the Boards decisions are informed and
appropriate. Mr. Colemans presence on the Board ensures that the Boards
decisions are accurately communicated to and implemented by Fund
management.
46
Size and composition of Board:
The Board is currently comprised of eight Trustees. The Trustees believe
that the current size of the Board is conducive to Board interaction, dialogue
and debate, resulting in an effective decision-making body. The Board is
comprised of Trustees with a variety of professional backgrounds. The Board
believes that the skill sets of its members are complementary and add to the
overall effectiveness of the Board.
Committees:
The Board has established committees, each of
which focuses on a particular substantive area and provides reports and
recommendations to the full Board.
The committee structure enables
the Board to manage efficiently and effectively the large volume of information
relevant to the Boards oversight of the Funds.
The committees benefit from the professional expertise of their members.
At the same time, membership on a committee enhances the expertise of its
members and benefits the overall effectiveness of the Board.
The Board has the following
committees:
Audit
Committee:
This
committee monitors accounting and financial reporting policies and practices,
and internal controls for the Trust. It also oversees the quality and
objectivity of the Trusts financial statements and the independent audit
thereof, and acts as a liaison between the Trusts independent registered public
accounting firm and the full Board. The Trusts Audit Committee consists of the
following three Independent Trustees: Jon E. Socolofsky, Chairperson; Robert J.
Christian; and Robert A. Rudell. The Audit Committee held 4 meetings during the
Trusts last fiscal year.
Nominating and Governance
Committee:
The
Nominating and Governance Committee recommends Board members for vacancies and
considers the qualifications of Board members. In reaching its determination
that an individual should serve or continue to serve as a Trustee of the Trust,
the committee considers, in light of the Trusts business and structure, the
individuals experience, qualifications, attributes and skills (the Selection
Factors). No one Selection Factor is determinative, but some of the relevant
factors that have been considered include: (i) the Trustees business and
professional experience and accomplishments, including prior experience in the
financial services industry or on other boards; (ii) the ability to work
effectively and collegially with other people; and (iii) how the Trustees
background and attributes contribute to the overall mix of skills and experience
on the Board as a whole. Information on the business activities of the Trustees
during the past five years appears in this SAI, and it is believed that the
specific background of each Trustee demonstrates that each Trustee has
appropriate Selection Factors to evidence the Trustees ability to serve on the
Board. In particular, Messrs. Christian, Socolofsky, Rudell, Arnold and Coleman
have each held senior management positions at major financial services firms,
and each of these individuals has had experience dealing with mutual funds and /
or asset managers prior to becoming Trustees. Mr. Mullin is an economist who
teaches at the Drexel University, and he is currently a principal in an economic
consulting firm. He also was previously the Finance Director for the City of
Philadelphia. Mr. Hunter is an executive recruiter and is currently a partner in
an executive search and board services firm. He focuses on investment
management. Mr. Constan has a law degree, and he has significant experience with
the University of Pennsylvania as both a professor and administrator. The
Nominating and Governance Committee held 4 meetings during the last fiscal
year.
Board role in risk oversight:
The Board performs a risk
oversight function for the Trust consisting, among other things, of the
following activities: (1) receiving and reviewing reports related to the
performance and operations of the Funds of the Trust; (2) reviewing, approving,
or modifying as applicable, the compliance policies and procedures of the Trust;
(3) meeting with portfolio management teams to discuss portfolio performance,
including investment risk; (4) addressing security valuation risk in connection
with its review of fair valuation decisions made by Fund management pursuant to
Board-approved procedures; (5) meeting with representatives of key service
providers, including the Manager, the Sub-Advisers, the Distributor, the
Transfer Agent, the custodian and the independent public accounting firm of the
Trust, to review and discuss the activities of the Funds of the Trust and to
provide direction with respect thereto; and (6) engaging the services of the
Chief Compliance Officer of the Funds of the Trust to test the compliance
procedures of the Trust and its service providers. The Trustees perform this
risk oversight function throughout the year in connection with each quarterly
Board meeting. In addition, the Audit Committee reviews valuation procedures and
results with the Funds auditors in connection with such Committees review of
the results of the audit or each Funds year-end financial statements, and meets
with the Managers internal audit and risk management personnel on a quarterly
basis to review the reports on their examinations of functions and processes
affecting the Funds.
47
Because risk is inherent in the operation of any business endeavor, and
particularly in connection with the making of financial investments, there can
be no assurance that the Board of Trustees approach to risk oversight will be
able to minimize or even mitigate any particular risk. Each Fund is designed for
investors that are prepared to accept investment risk, including the possibility
that as yet unforeseen risks may emerge in the future.
Codes of
Ethics
The Trust, the
Manager, and the Distributor have adopted Codes of Ethics in compliance with the
requirements of Rule 17j-1 under the 1940 Act, which govern personal securities
transactions. Under the Codes of Ethics, persons subject to the Codes are
permitted to engage in personal securities transactions, including securities
that may be purchased or held by the Funds, subject to the requirements set
forth in Rule 17j-1 under the 1940 Act and certain other procedures set forth in
the applicable Code of Ethics. Each Sub-Adviser also has adopted a Code of
Ethics under Rule 17j-1. The Codes of Ethics are on public file with, and are
available from, the SEC.
Proxy
Voting
The Board has
delegated to the Manager the responsibility for making all proxy voting
decisions in relation to the portfolio securities held by the Funds. The Manager
has, in turn, delegated to each Sub-Adviser the responsibility to vote proxies
with respect to portfolio securities held by the portion of a Fund that such
Sub-Adviser advises. The Manager has retained the responsibility to vote proxies
with respect to portfolio securities held by the Funds (or portions thereof)
that it advises directly. The Manager and each Sub-Adviser have adopted policies
and procedures with respect to voting proxies relating to securities held in
client accounts for which they have discretionary authority. It is possible that
one Sub-Adviser on a given Fund may vote differently than another Sub-Adviser on
the same Fund in regards to the same proxy issue based on that Sub-Advisers
proxy voting policies and procedures. Copies of the policies and procedures for
the Manager and each Sub-Adviser are included with this Part B. See Appendix B
Proxy Voting Policies and Procedures. Information, if any, regarding how the
Funds voted proxies relating to their respective portfolio securities during the
most recent 12-month period ended June 30 is available without charge: (i)
through the Funds website at optimummutualfunds.com; and (ii) on the SECs
website at sec.gov.
INVESTMENT MANAGER AND
OTHER SERVICE PROVIDERS
|
Investment
Manager
The Manager,
located at 2005 Market Street, Philadelphia, PA 19103-7094, furnishes investment
management services to each Fund, subject to the supervision and direction of
the Trusts Board. The Manager also provides investment management services to
the Delaware Investments
®
Funds. Affiliates of the Manager also
manage other investment accounts. While investment decisions for the Funds are
made independently from those of the other funds and accounts, investment
decisions for such other funds and accounts may be made at the same time as
investment decisions for the Funds. The Manager is registered under the
Investment Advisers Act of 1940, as amended (the Advisers Act).
48
As
of March 31, 2013, the Manager and its affiliates were managing in the aggregate
in excess of $180 billion in assets in various institutional or separately
managed, investment company and insurance accounts. The Manager is a series of
Delaware Management Business Trust, which is a subsidiary of Delaware Management
Holdings, Inc. (DMHI). DMHI is a subsidiary, and subject to the ultimate
control, of Macquarie Group Ltd. (Macquarie). Macquarie is a Sydney,
Australia-headquartered global provider of banking, financial, advisory,
investment and funds management services.
DMHI has consented to, and granted a
non-exclusive license for, the use by any Fund or by the Trust of the
identifying word Optimum in the name of any Fund or of the Trust. Such consent
is subject to revocation by DMHI in its discretion, if DMHI or a subsidiary or
affiliate thereof is not employed as the investment adviser of each Fund of the
Trust. As between the Trust and DMHI, DMHI controls the use of the name of the
Trust insofar as such name contains the identifying word Optimum. DMHI may,
from time to time, use the identifying word Optimum in other connections and
for other purposes, including, without limitation, in the names of other
investment companies, corporations or businesses that it may manage, advise,
sponsor or own or in which it may have a financial interest. DMHI may require
the Trust or any Fund thereof to cease using the identifying word Optimum in
the name of the Trust or any Fund thereof if the Trust or any Fund thereof
ceases to employ DMHI or a subsidiary or affiliate thereof as investment
adviser.
The Investment Management Agreement for
the Funds is dated January 4, 2010. Under the Agreement, the Manager has full
discretion and responsibility, subject to the overall supervision of the Trusts
Board, to select and contract with one or more investment sub-advisers
(Sub-Advisers), to manage the investment operations and composition of each
Fund, and to render investment advice for each Fund, including the purchase,
retention, and disposition of investments, securities and cash contained in each
Fund. The Agreement obligates the Manager to implement decisions with respect to
the allocation or reallocation of each Funds assets among one or more current
or additional Sub-Advisers, and to monitor the Sub-Advisers compliance with the
relevant Funds investment objective, policies and restrictions. Under the
Agreement, the Trust will bear the expenses of conducting its business. The
Trust and the Manager may share facilities in common to each, which may include
legal and accounting personnel, with appropriate pro ration of expenses between
them. In addition, the Manager pays the salaries of all officers and Trustees of
the Trust who are officers, directors or employees of the Manager or its
affiliates.
The Agreement had an initial term of two
years and may be renewed each year only so long as such renewal and continuance
are specifically approved at least annually by the Board or by vote of a
majority of the outstanding voting securities of each Fund, and only if the
terms of and the renewal thereof have been approved by the vote of a majority of
the Independent Trustees of the Trust who are not parties thereto or interested
persons of any such party, cast in person at a meeting called for the purpose of
voting on such approval. The Agreement is terminable without penalty on 60 days
notice by the Trustees of the Trust or by the Manager. The Agreement will
terminate automatically in the event of its assignment.
49
As compensation for services rendered
under the Management Agreement, the Manager is entitled to receive an annual fee
equal to the following percentage rates of the average daily net assets of each
Fund:
|
Annual Management
Fee Rate
|
Fund
|
(as a percentage
of average daily net assets)
|
Optimum Large Cap Growth Fund
|
0.8000%
of assets up to $250 million
|
|
0.7875%
of assets from $250 million to $300
million
|
|
0.7625%
of assets from $300 million to $400
million
|
|
0.7375% of assets
from $400 million to $500 million
|
|
0.7250% of assets
from $500 million to $1 billion
|
|
0.7100% of assets
from $1 billion to $1.5 billion
|
|
0.7000% of assets
over $1.5 billion
|
Optimum Large Cap Value Fund
|
0.8000% of assets up
to $100 million
|
|
0.7375% of assets
from $100 million to $250 million
|
|
0.7125% of assets
from $250 million to $500 million
|
|
0.6875% of assets
from $500 million to $1 billion
|
|
0.6675% of assets
from $1 billion to $1.5 billion
|
|
0.6475% of assets
over $1.5 billion
|
Optimum Small-Mid Cap
Growth Fund
|
1.1000% of
assets
|
Optimum Small-Mid Cap Value Fund
|
1.0500% of assets up
to $75 million
|
|
1.0250% of assets
from $75 million to $150 million
|
|
1.0000% of assets
over $150 million
|
Optimum International Fund
|
0.8750% of assets up
to $50 million
|
|
0.8000% of assets
from $50 to $100 million
|
|
0.7800% of assets
from $100 to $300 million
|
|
0.7650% of assets
from $300 to $400 million
|
|
0.7300% of assets
over $400 million
|
Optimum Fixed Income Fund
|
0.7000% of assets up
to $25 million
|
|
0.6500% of assets
from $25 million to $100 million
|
|
0.6000% of assets
from $100 million to $500 million
|
|
0.5500% of assets
from $500 million to $1 billion
|
|
0.5000% of assets
over $1 billion to $2.5 billion
|
|
0.4750% of assets
over $2.5 billion
|
Each
Funds (except Optimum Small-Mid Cap Growth Funds) management fee, as a
percentage of net assets, declines as assets increase above designated levels.
The Manager has contracted to waive
its investment advisory fees and/or pay Fund expenses (excluding any 12b-1 plan,
taxes, acquired fund fees and expenses, interest, short sale and dividend
interest expenses, brokerage fees, certain insurance costs, and nonroutine
expenses or costs, including, but not limited to, those relating to
reorganizations, litigation, conducting shareholder meetings, and liquidations)
to the extent necessary to prevent total annual fund operating expenses from
exceeding 1.00%, 1.40%, 1.25%, 1.20%, 1.43%, and 1.40% of the average daily net
assets of Optimum Fixed Income Fund, Optimum International Fund, Optimum Large
Cap Growth Fund, Optimum Large Cap Value Fund, Optimum Small-Mid Cap Growth
Fund, and Optimum Small-Mid Cap Value Fund, respectively, from July 29, 2013
through July 29, 2014.
50
The
investment management fees incurred for the last three fiscal years with respect
to each Fund were as follows:
Fund
|
March 31,
2011
|
March 31,
2012
|
March 31,
2013
|
Optimum Large Cap
Growth Fund
|
$5,492,182 earned
|
$5,529,721
earned
|
$6,131,426
earned
|
$5,301,115 paid
|
$5,307,939
paid
|
$5,925,433
paid
|
$191,067
waived
|
$221,782
waived
|
$205,993
waived
|
Optimum Large Cap
Value Fund
|
$4,792,020
earned
|
$5,003,853
earned
|
$5,632,349
earned
|
$4,672,634
paid
|
$4,781,227
paid
|
$5,489,880
paid
|
$119,386
waived
|
$222,626
waived
|
$142,469
waived
|
Optimum Small-Mid
Cap Growth Fund
|
$2,772,223
earned
|
$3,510,050
earned
|
$3,797,114
earned
|
$2,253,322
paid
|
$3,015,684
paid
|
$3,137,500
paid
|
$418,901
waived
|
$494,366
waived
|
$659,614
waived
|
Optimum Small-Mid
Cap Value Fund
|
$2,183,724
earned
|
$3,036,632
earned
|
$3,414,966
earned
|
$1,771,197
paid
|
$2,463,605
paid
|
$2,691,364
paid
|
$412,527
waived
|
$573,027
waived
|
$723,602
waived
|
Optimum
International Fund
|
$1,767,775
earned
|
$2,239,119
earned
|
$2,627,764
earned
|
$1,476,486
paid
|
$1,984,168
paid
|
$2,320,342
paid
|
$291,289
waived
|
$254,951
waived
|
$307,422
waived
|
Optimum Fixed
Income Fund
|
$5,249,690
earned
|
$6,407,321
earned
|
$7,649,618
earned
|
$4,243,390
paid
|
$5,440,243
paid
|
$6,928,210
paid
|
$1,006,300 waived
|
$967,078
waived
|
$721,408
waived
|
Except for those expenses borne by the
Manager under the Investment Management Agreements and the Distributor under the
Distribution Agreement, each Fund is responsible for all of its own expenses.
Among others, such expenses include the Funds proportionate share of certain
administrative expenses; investment management fees; transfer agent and dividend
disbursing fees and costs; accounting services; custodian expenses; federal and
state securities registration fees; proxy costs; and the costs of preparing
prospectuses and reports sent to shareholders.
51
The Manager has also entered into a
Consulting Services Agreement with LPL Financial LLC (LPL) to provide research
to assist the Manager in evaluating and monitoring Fund performance and the
Sub-Advisers and in making recommendations to the Trustees about hiring and
changing Sub-Advisers. The Manager is responsible for paying LPL the following
consulting fees on each Fund out of the Managers assets:
|
Annual
Consulting Fee Rate
|
Fund
|
(as a percentage
of average daily net assets)
|
Optimum Large Cap Growth
Fund
|
0.285%
of assets up to $250
million
|
|
0.280%
of assets from
$250
million to $300 million
|
|
0.270%
of assets from
$300
million to $400 million
|
|
0.260%
of assets from
$400
million to $500 million
|
|
0.250%
of assets over $500
million
|
Optimum Large Cap Value
Fund
|
0.285%
of assets up to $100
million
|
|
0.260%
of assets from
$100
million to $250 million
|
|
0.250%
of assets from
$250
million to $500 million
|
|
0.240%
of assets over $500
million
|
Optimum
Small-Mid Cap Growth Fund
|
0.285%
of assets
|
Optimum Small-Mid Cap
Value Fund
|
0.285%
of assets up to $75
million
|
|
0.280%
of assets from
$75 million to $150 million
|
|
0.270%
of assets over $150
million
|
Optimum International
Fund
|
0.285%
of assets up to $50
million
|
|
0.260%
of assets from
$50 to 100 million
|
|
0.250%
of assets from
$100
to 300 million
|
|
0.240%
of assets from
$300
to 400 million
|
|
0.230%
of assets over $400
million
|
Optimum Fixed Income
Fund
|
0.285%
of assets up to $25
million
|
|
0.270%
of assets from
$25 million to $100 million
|
|
0.250%
of assets from
$100
million to $500 million
|
|
0.230%
of assets from
$500
million to $1 billion
|
|
0.210%
of assets over $1
billion
|
The
Sub-Advisers
The Manager has entered into Sub-Advisory Agreements on behalf of each
Fund. The Sub-Advisory Agreements obligate T. Rowe Price Associates, Inc. (T.
Rowe Price), Massachusetts Financial Services Company (MFS), Columbia Wanger
Asset Management, LLC (CWAM), the Delafield Group, a division of Tocqueville
Asset Management L.P. (The Delafield Group of Tocqueville or Tocqueville),
The Killen Group, Inc. (Killen), Mondrian Investment Partners Limited
(Mondrian), Wellington Management Company, LLP (Wellington Management), Fred
Alger Management, Inc. (Alger), Westwood Management Corp.
(Westwood), BlackRock Advisors, LLC
(BlackRock), Pacific Investment Management Company LLC (PIMCO), and Herndon
Capital Management, LLC (Herndon) (referred to individually as a Sub-Adviser
and collectively as the Sub-Advisers) to:
|
(i)
|
|
make
investment decisions on behalf of their respective Funds;
|
|
(ii)
|
|
place all
orders for the purchase and sale of investments for their respective Funds
with brokers or dealers selected by the Manager and/or the Sub-Advisers;
and
|
|
(iii)
|
|
perform
certain limited related administrative functions in connection
therewith.
|
CWAM is an indirect, wholly owned subsidiary of Columbia Management
Investment Advisors, LLC, which in turn is a wholly owned subsidiary of
Ameriprise Financial, Inc. T. Rowe Price is a wholly owned subsidiary of T. Rowe
Price Group, Inc., which is a publicly traded financial services holding
company. MFS is a subsidiary of Sun Life of Canada (U.S.) Financial Services
Holdings, Inc., which in turn is an indirect majority-owned subsidiary of Sun
Life Financial Inc., a diversified financial services company. BlackRock
Advisors, LLC is an indirect wholly owned subsidiary of BlackRock, Inc.
BlackRock, Inc. is independent in ownership and governance, with no single
majority stockholder and a majority of independent directors. BlackRock, Inc. is
an affiliate of The PNC Financial Services Group, Inc. PIMCO is a majority-owned
subsidiary of Allianz Asset Management with a minority interest held by PIMCO
Partners, LLC, a California limited liability company. Prior to December 31,
2011, Allianz Asset Management was named Allianz Global Investors of America
L.P. PIMCO Partners, LLC is owned by the current managing directors and
executive management of PIMCO. Through various holding company structures,
Allianz Asset Management is majority owned by Allianz SE.
52
Pursuant to the terms of the Sub-Advisory Agreements, the investment
sub-advisory fees are paid by the Manager to the Sub-Advisers that are not
affiliated persons of the Manager as a percentage of the average daily net
assets of a given Fund managed by such Sub-Adviser. For the past three fiscal
years, the Manager paid the Sub-Advisers the following investment sub-advisory
fees (shown on an aggregated basis per Fund):
Fund
|
March 31,
2011
|
March 31,
2012
|
March 31,
2013
|
Optimum Large Cap
Growth Fund
|
$3,033,727
|
$3,053,929
|
$3,396,793
|
Optimum Large Cap
Value Fund
|
$2,396,958
|
$2,249,360
|
$2,504,697
|
Optimum Small-Mid Cap
Growth Fund
|
$1,890,152
|
$2,393,216
|
$2,588,941
|
Optimum Small-Mid Cap
Value Fund
|
$1,284,632
|
$1,754,117
|
$1,960,501
|
Optimum International
Fund
|
$877,064
|
$1,111,670
|
$1,322,542
|
Optimum Fixed Income
Fund
|
$1,011,917
|
$1,335,863
|
$1,654,249
|
The Manager recommends Sub-Advisers for
each Fund to the Trustees based upon its continuing quantitative and qualitative
evaluation of each Sub-Advisers skills in managing assets pursuant to specific
investment styles and strategies. Unlike many other mutual funds, the Funds are
not associated with any one portfolio manager, and benefit from independent
specialists selected from the investment management industry.
The Sub-Advisers have discretion, subject
to oversight by the Trustees and the Manager, to purchase and sell portfolio
assets, consistent with their respective Funds investment objectives, policies
and restrictions and specific investment strategies developed by the Manager.
Generally, no Sub-Adviser provides any
services to any Fund except asset management and related administrative and
recordkeeping services. However, a Sub-Adviser or its affiliated broker-dealer
may execute portfolio transactions for a Fund and receive brokerage commissions
in connection therewith as permitted by Section 17(e) of the 1940 Act.
The Sub-Advisers also provide investment
management and/or sub-advisory services to other mutual funds and may also
manage private investment accounts. Although investment decisions for a Fund are
made independently from those of other funds and accounts, investment decisions
for such other funds and accounts may be made at the same time as investment
decisions for a Fund.
Distributor
The Distributor, Delaware Distributors, L.P. (Distributor), located at
2005 Market Street, Philadelphia, PA 19103-7094, serves as the national
distributor of the Trusts shares under a Distribution Agreement dated January
4, 2010. The Distributor is an affiliate of the Manager and bears all of the
costs of promotion and distribution, except for payments by the Fund Classes
under their respective Rule 12b-1 Plans. The Distributor is an indirect
subsidiary of DMHI. The Distributor has agreed to use its best efforts to sell
shares of the Fund. See the Prospectus for information on how to invest. Shares
of the Fund are offered on a continuous basis by the Distributor and may be
purchased through authorized investment dealers or directly by contacting the
Distributor or the Trust. The Board annually reviews fees paid to the
Distributor.
53
During the Funds last three fiscal years, the Distributor received net
commissions from each Fund on behalf of its respective Class A shares, after
re-allowances to dealers, as follows:
|
Fiscal Year Ended
3/31/13
|
|
Total Amount of
|
Amounts
|
Net Commission
|
Fund
|
Underwriting Commission
|
Re-allowed to Dealers
|
to Distributor
|
Optimum Large Cap
Growth Fund
|
$83,438
|
$70,864
|
$12,574
|
Optimum Large Cap
Value Fund
|
$84,890
|
$72,275
|
$12,615
|
Optimum Small-Mid Cap
Growth Fund
|
$18,484
|
$15,838
|
$2,646
|
Optimum Small-Mid Cap
Value Fund
|
$13,284
|
$11,346
|
$1,938
|
Optimum International
Fund
|
$27,006
|
$22,924
|
$4,082
|
Optimum Fixed Income
Fund
|
$164,706
|
$143,167
|
$21,539
|
|
|
Fiscal Year Ended
3/31/12
|
|
Total Amount of
|
Amounts
|
Net Commission
|
Fund
|
Underwriting Commission
|
Re-allowed to Dealers
|
to Distributor
|
Optimum Large Cap
Growth Fund
|
$86,115
|
$73,441
|
$12,674
|
Optimum Large Cap
Value Fund
|
$79,189
|
$67,446
|
$11,743
|
Optimum Small-Mid Cap
Growth Fund
|
$13,783
|
$11,762
|
$2,021
|
Optimum Small-Mid Cap
Value Fund
|
$12,137
|
$10,325
|
$1,812
|
Optimum International
Fund
|
$27,470
|
$23,481
|
$3,989
|
Optimum Fixed Income
Fund
|
$150,261
|
$131,278
|
$18,983
|
|
|
Fiscal Year Ended
3/31/11
|
|
Total Amount of
|
Amounts
|
Net Commission
|
Fund
|
Underwriting Commission
|
Re-allowed to Dealers
|
to Distributor
|
Optimum Large Cap
Growth Fund
|
$114,988
|
$97,168
|
$17,820
|
Optimum Large Cap
Value Fund
|
$111,407
|
$94,199
|
$17,208
|
Optimum Small-Mid Cap
Growth Fund
|
$19,648
|
$16,560
|
$3,087
|
Optimum Small-Mid Cap
Value Fund
|
$17,254
|
$14,532
|
$2,722
|
Optimum International
Fund
|
$36,632
|
$30,956
|
$5,676
|
Optimum Fixed Income
Fund
|
$158,291
|
$138,623
|
$19,668
|
54
During the Funds last three fiscal years, the Distributor received, in
the aggregate, contingent deferred sales charge (CDSC) payments with respect
to Class B shares of the Funds as follows:
|
Fiscal Year
|
Fiscal Year
|
Fiscal Year
|
Fund
|
Ended 3/31/2011
|
Ended 3/31/2012
|
Ended 3/31/2013
|
Optimum Large Cap
Growth Fund
|
$9,914
|
$3,414
|
$830
|
Optimum Large Cap
Value Fund
|
$9,102
|
$2,951
|
$776
|
Optimum Small-Mid Cap
Growth Fund
|
$2,087
|
$547
|
$129
|
Optimum Small-Mid Cap
Value Fund
|
$1,712
|
$522
|
$110
|
Optimum International
Fund
|
$3,025
|
$1,096
|
$221
|
Optimum Fixed Income
Fund
|
$4,801
|
$1,910
|
$756
|
During the Funds last three fiscal
years, the Distributor received, in the aggregate, CDSC payments with respect to
Class C shares of the Funds as follows:
|
Fiscal Year
|
Fiscal Year
|
Fiscal Year
|
Fund
|
Ended 3/31/2011
|
Ended 3/31/2012
|
Ended 3/31/2013
|
Optimum Large Cap
Growth Fund
|
$7,819
|
$8,668
|
$7,320
|
Optimum Large Cap
Value Fund
|
$7,632
|
$8,542
|
$6,843
|
Optimum Small-Mid Cap
Growth Fund
|
$1,464
|
$1,443
|
$1,191
|
Optimum Small-Mid Cap
Value Fund
|
$1,302
|
$1,388
|
$1,167
|
Optimum International
Fund
|
$2,751
|
$2,922
|
$2,295
|
Optimum Fixed Income
Fund
|
$15,191
|
$16,914
|
$14,318
|
Fund
Accountants
The Bank of New
York Mellon ( BNY Mellon), One Wall Street, New York, NY 10286-0001, provides
fund accounting and financial administration services to the Funds. Those
services include performing functions related to calculating each Funds net
asset values (NAVs) and providing financial reporting information, regulatory
compliance testing, and other related accounting services. For these services,
the Funds pay BNY Mellon an asset-based fee, subject to certain fee minimums
plus certain out-of-pocket expenses and transactional charges. Delaware Service
Company, Inc. (DSC) provides fund accounting and financial administration
oversight services to the Funds. Those services include overseeing the Funds
pricing process, the calculation and payment of fund expenses, and financial
reporting in shareholder reports, registration statements and other regulatory
filings. DSC also manages the process for the payment of dividends and
distributions and the dissemination of Fund NAVs and performance data. For these
services, the Funds pay DSC an asset-based fee, plus certain out-of-pocket
expenses and transactional charges. The fees payable to BNY Mellon and DSC under
the service agreements described above will be allocated among all funds on a
relative NAV basis.
55
During the last three fiscal years, the Funds paid the following
amounts to BNY Mellon for fund accounting and financial administration
services:
|
Fiscal Year
|
Fiscal Year
|
Fiscal Year
|
Fund
|
Ended 3/31/11
|
Ended 3/31/12
|
Ended 3/31/13
|
Optimum Large Cap
Growth Fund
|
$249,359
|
$249,539
|
$274,992
|
Optimum Large Cap
Value Fund
|
$228,657
|
$237,786
|
$266,225
|
Optimum Small-Mid Cap
Growth Fund
|
$87,213
|
$109,730
|
$117,390
|
Optimum Small-Mid Cap
Value Fund
|
$73,612
|
$102,483
|
$114,217
|
Optimum International
Fund
|
$75,865
|
$96,836
|
$110,825
|
Optimum Fixed Income
Fund
|
$310,715
|
$384,820
|
$464,998
|
During the last three fiscal years, the
Funds paid the following amounts to DSC for fund accounting and financial
administration oversight services:
|
Fiscal Year
|
Fiscal Year
|
Fiscal Year
|
Fund
|
Ended 3/31/11
|
Ended 3/31/12
|
Ended 3/31/13
|
Optimum Large Cap
Growth Fund
|
$35,929
|
$35,822
|
$39,447
|
Optimum Large Cap
Value Fund
|
$32,946
|
$34,135
|
$38,188
|
Optimum Small-Mid Cap
Growth Fund
|
$12,566
|
$15,752
|
$16,840
|
Optimum Small-Mid Cap
Value Fund
|
$10,607
|
$14,712
|
$16,384
|
Optimum International
Fund
|
$10,932
|
$13,901
|
$16,122
|
Optimum Fixed Income
Fund
|
$44,769
|
$55,245
|
$66,700
|
Administrative and Transfer
Agency Services
DSC also provides
the Trust with administrative services including: preparation, filing and
maintaining governing documents; preparation of materials and reports for the
Board; and preparation and filing of registration statements and other
regulatory filings. DSC makes available the office space, equipment, personnel
and facilities required to provide such administrative services to the Trust.
For providing these administrative services, each Fund pays DSC the following
fee as a percentage of the Fund's average daily net assets (plus out-of-pocket
expenses): 0.165% of assets up to $500 million; 0.140% of assets from $500
million to $1 billion; and 0.115% of assets over $1 billion.
In addition, DSC serves as the
shareholder servicing, dividend disbursing, and transfer agent for each Fund.
DSC is an affiliate of the Manager and is a subsidiary of DMHI and, therefore,
of Macquarie.
For providing these transfer agency
services, the Trust pays DSC a fee at an annual rate of 0.225% of the Trust's
total average daily net assets, subject to a minimum fee of $2,000 per class per
Fund each month, plus out-of-pocket expenses. DSC will bill, and the Funds will
pay, such compensation monthly. Sub-transfer agency fees are passed on to and
paid directly by the Funds.
DSC may also contract to compensate
selling dealers for providing certain services to Fund shareholders. These
payments are made out of DSC's compensation. In addition to the asset-based fee
that LPL receives for services provided as consultant to the Manager, LPL has
entered into a sub-service agreement with DSC and DSC pays LPL a fee at an
annual rate of 0.18% of average daily net assets in connection with such
services.
56
BNY
Mellon Investment Servicing (US) Inc. (BNYMIS) provides sub-transfer agency
services to the Funds. In connection with these services, BNYMIS administers the
overnight investment of cash pending investment in the Funds or payment of
redemptions. The proceeds of this investment program are used to offset the
Funds transfer agency expenses.
Custodian
BNY Mellon also
serves as custodian of each Funds securities and cash. As custodian for each
Fund, BNY Mellon maintains a separate account or accounts for each Fund;
receives, holds, and releases portfolio securities on account of each Fund;
receives and disburses money on behalf of each Fund; and collects and receives
income and other payments and distributions on account of each Funds portfolio
securities. BNY Mellon also serves as the Funds custodian for their investments
in foreign securities.
Legal
Counsel
Stradley Ronon Stevens & Young, LLP serves as the Trusts legal
counsel.
57
B.
Other Accounts
Managed
The following
chart lists certain information about types of other accounts for which the
portfolio managers are primarily responsible as of March 31, 2013. Any accounts
managed in a personal capacity appear under Other Accounts along with other
accounts managed on a professional basis. The personal account information is
current as of the most recent calendar quarter. This disclosure has been
provided by the Manager and Sub-Adviser, as applicable.
Optimum Large
Cap Growth
|
|
|
|
|
Fund:
|
|
|
|
|
|
|
|
No. of Accounts
|
Total Assets
in
|
|
|
|
with
|
Accounts
with
|
|
No. of
|
Total Assets
|
Performance-
|
Performance-
|
|
Accounts
|
Managed
|
Based
Fees
|
Based
Fees
|
T. Rowe
Price
|
|
|
|
|
P. Robert Bartolo
|
|
|
|
|
Registered Investment Companies
|
9
|
$39.0 billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
1
|
$1.2 billion
|
0
|
$0
|
Other Accounts
|
9
|
$1.5 billion
|
0
|
$0
|
Alger
|
|
|
|
|
Patrick Kelly
|
|
|
|
|
Registered Investment Companies
|
6
|
$6.6 billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
3
|
$713 million
|
1
|
$8.3 million
|
Other Accounts
|
48
|
$3.7 billion
|
1
|
$238 million
|
58
Optimum
Large Cap Value Fund:
|
|
|
|
|
|
|
|
No. of
Accounts
|
Total Assets
in
|
|
|
|
with
|
Accounts
with
|
|
No. of
|
Total Assets
|
Performance-
|
Performance-
|
|
Accounts
|
Managed
|
Based Fees
|
Based
Fees
|
Herndon
|
|
|
|
|
Randall Cain, CFA
|
|
|
|
|
Registered Investment Companies
|
2
|
$863
million
|
0
|
$0
|
Other Pooled Investment Vehicles
|
3
|
$550
million
|
0
|
$0
|
Other Accounts
|
193
|
$6.55
billion
|
1
|
$37.8
million
|
MFS
|
|
|
|
|
Steven R. Gorham
|
|
|
|
|
Registered Investment Companies
|
18
|
$49.2
billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
5
|
$3.5
billion
|
0
|
$0
|
Other Accounts
|
38
|
$14
billion
|
0
|
$0
|
Nevin P. Chitkara
|
|
|
|
|
Registered Investment Companies
|
19
|
$49.3
billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
5
|
$3.5
billion
|
0
|
$0
|
Other Accounts
|
38
|
$14
billion
|
0
|
$0
|
Optimum
Small-Mid Cap Growth
|
|
|
|
|
Fund:
|
|
|
|
|
|
|
|
No. of
Accounts
|
Total Assets
in
|
|
|
|
with
|
Accounts
with
|
|
No. of
|
Total Assets
|
Performance-
|
Performance-
|
|
Accounts
|
Managed
|
Based Fees
|
Based
Fees
|
CWAM
|
|
|
|
|
Robert A.
Chalupnik
|
|
|
|
|
Registered Investment Companies
|
2
|
$1.2
billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
0
|
$0
|
0
|
$0
|
Other Accounts
|
9
|
$1.6
million
|
0
|
$0
|
Wellington
Management
|
|
|
|
|
Steven C. Angeli,
CFA
|
|
|
|
|
Registered Investment Companies
|
12
|
$3
billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
14
|
$883.5
million
|
2
|
$225
million
|
Other Accounts
|
25
|
$1.7
billion
|
3
|
$616
million
|
59
Optimum
Small-Mid Cap Value
|
|
|
|
|
Fund:
|
|
|
|
|
|
|
|
No. of
Accounts
|
Total Assets
in
|
|
|
|
with
|
Accounts
with
|
|
No. of
|
Total Assets
|
Performance-
|
Performance-
|
|
Accounts
|
Managed
|
Based Fees
|
Based
Fees
|
Westwood
|
|
|
|
|
Tom Lieu
|
|
|
|
|
Registered Investment Companies
|
2
|
$469.2
million
|
0
|
$0
|
Other Pooled Investment Vehicles
|
12
|
$883
million
|
0
|
$0
|
Other Accounts
|
50
|
$2.7
billion
|
0
|
$0
|
Ragen R. Stienke
|
|
|
|
|
Registered Investment Companies
|
2
|
$469.2
million
|
0
|
$0
|
Other Pooled Investment Vehicles
|
7
|
$673 million
|
0
|
$0
|
Other Accounts
|
42
|
$2.4
billion
|
0
|
$0
|
Grant Taber
|
|
|
0
|
0
|
Registered Investment Companies
|
2
|
$469.2
million
|
0
|
$0
|
Other Pooled Investment Vehicles
|
9
|
$836
million
|
0
|
$0
|
Other Accounts
|
53
|
$2.7
billion
|
0
|
$0
|
Graham Wong
|
|
|
|
|
Registered Investment Companies
|
4
|
$575.8
million
|
0
|
$0
|
Other Pooled Investment Vehicles
|
17
|
$977
million
|
0
|
$0
|
Other Accounts
|
57
|
$2.8
billion
|
0
|
$0
|
The Delafield
Group of Tocqueville
|
|
|
|
|
J. Dennis
Delafield
|
|
|
|
|
Registered Investment Companies
|
3
|
$1.9
billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
1
|
$4 million
|
0
|
$0
|
Other Accounts
|
70
|
$330.6
million
|
0
|
$0
|
Vincent
Sellecchia
|
|
|
|
|
Registered Investment Companies
|
3
|
$1.9
billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
1
|
$4 million
|
0
|
$0
|
Other Accounts
|
70
|
$330.6
million
|
0
|
$0
|
Killen
|
|
|
|
|
Lee S. Grout
|
|
|
|
|
Registered Investment Companies
|
1
|
$1.96
billion
|
0
|
0
|
Other Pooled Investment Vehicles
|
2
|
$12 million
|
1
|
$10 million
|
Other Accounts
|
144
|
$178
million
|
0
|
0
|
Robert E. Killen
|
|
|
|
|
Registered Investment Companies
|
1
|
$1.96
billion
|
0
|
0
|
Other Pooled Investment Vehicles
|
2
|
$12 million
|
1
|
$10 million
|
Other Accounts
|
144
|
$178
million
|
0
|
0
|
60
Optimum
International Fund:
|
|
|
|
|
|
|
|
No. of
Accounts
|
Total Assets
in
|
|
|
|
with
|
Accounts
with
|
|
No. of
|
Total Assets
|
Performance-
|
Performance-
|
|
Accounts
|
Managed
|
Based Fees
|
Based
Fees
|
Mondrian
|
|
|
|
|
Nigel May
|
|
|
|
|
Registered Investment Companies
|
3
|
$798
million
|
0
|
$0
|
Other Pooled Investment Vehicles
|
3
|
$415 million
|
0
|
$0
|
Other Accounts
|
16
|
$5.88
billion
|
0
|
$0
|
Melissa J.A.
Platt
|
|
|
|
|
Registered Investment Companies
|
6
|
$2.1 billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
3
|
$111 million
|
0
|
$0
|
Other Accounts
|
6
|
$605 million
|
0
|
$0
|
BlackRock
|
|
|
|
|
Thomas P. Callan
|
|
|
|
|
Registered Investment Companies
|
10
|
$9.25
Billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
12
|
$2.24
Billion
|
0
|
$0
|
Other Accounts
|
6
|
$2.01
Billion
|
3
|
$1.62
Billion
|
Ian Jamieson
|
|
|
|
|
Registered Investment Companies
|
6
|
$6.17
Billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
8
|
$1.2
Billion
|
0
|
$0
|
Other Accounts
|
4
|
$1.15
Billion
|
1
|
$758.9
Million
|
Nigel Hart
|
|
|
|
|
Registered Investment Companies
|
6
|
$6.17
Billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
7
|
$1.2
Billion
|
0
|
$0
|
Other Accounts
|
4
|
$1.15
Billion
|
1
|
$758.9
Million
|
Optimum Fixed
Income Fund:
|
|
|
|
|
|
|
|
No. of
Accounts
|
Total Assets
in
|
|
|
|
with
|
Accounts
with
|
|
No. of
|
Total Assets
|
Performance-
|
Performance-
|
|
Accounts
|
Managed
|
Based Fees
|
Based
Fees
|
The
Manager
|
|
|
|
|
Roger Early*
|
|
|
|
|
Registered Investment Companies
|
17
|
$25.8
billion
|
0
|
$0
|
Other pooled investment vehicles
|
0
|
$0
|
0
|
$0
|
Other accounts
|
45
|
$6.3 billion
|
0
|
$0
|
Paul Grillo*
|
|
|
|
|
Registered Investment Companies
|
20
|
$24.0
billion
|
0
|
$0
|
Other pooled investment vehicles
|
0
|
$0
|
0
|
$0
|
Other accounts
|
20
|
$1.9
billion
|
0
|
$0
|
Thomas Chow*
|
|
|
|
|
Registered Investment Companies
|
19
|
$23.7
billion
|
0
|
$0
|
Other pooled investment vehicles
|
0
|
$0
|
0
|
$0
|
Other accounts
|
19
|
$4.9
billion
|
0
|
$0
|
61
Optimum Fixed Income
Fund:
|
|
|
|
|
|
|
|
No. of
Accounts
|
Total Assets
in
|
|
|
|
with
|
Accounts
with
|
|
No. of
|
Total Assets
|
Performance-
|
Performance-
|
|
Accounts
|
Managed
|
Based Fees
|
Based
Fees
|
J.
David Hillmeyer*
|
|
|
|
|
Registered Investment Companies
|
6
|
$13.5
billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
0
|
$0
|
0
|
$0
|
Other Accounts
|
10
|
$471.4
million
|
0
|
$0
|
Wen-Dar
Chen*
|
|
|
|
|
Registered Investment Companies:
|
3
|
$12.6
billion
|
0
|
$0
|
Other pooled investment vehicles:
|
0
|
$0
|
0
|
$0
|
Other accounts:
|
4
|
$471.4
million
|
0
|
$0
|
PIMCO
|
|
|
|
|
Saumil H. Parikh
|
|
|
|
|
Registered Investment Companies
|
13
|
$11.6
billion
|
0
|
$0
|
Other Pooled Investment Vehicles
|
20
|
$8.2
billion
|
1
|
$1.2
billion
|
Other Accounts
|
99
|
$48.1
billion
|
7
|
$2.2
billion
|
|
*
|
|
Any accounts managed in a
personal capacity appear under Other Accounts along with other accounts
managed on a professional basis. The personal account information is
current as of a date as recent as practicable.
|
C.
Description of Potential Material
Conflicts of Interest
1.
Optimum Large
Cap Growth Fund:
T. Rowe Price
Portfolio
managers at T. Rowe Price typically manage multiple accounts. These accounts may
include, among others, mutual funds, separate accounts (assets managed on behalf
of institutions such as pension funds, colleges, universities, and foundations),
and commingled trust accounts. Portfolio managers make investment decisions for
each portfolio based on the investment objectives, policies, practices and other
relevant investment considerations that the managers believe are applicable to
that portfolio. Consequently, portfolio managers may purchase (or sell)
securities for one portfolio and not another portfolio. T. Rowe Price has
adopted brokerage and trade allocation policies and procedures which it believes
are reasonably designed to address any potential conflicts associated with
managing multiple accounts for multiple clients. Also, as disclosed under the
Portfolio Managers Compensation section, our portfolio managers compensation
is determined in the same manner with respect to all portfolios managed by the
portfolio manager.
Alger
To seek to
ensure that all clients are treated equitably, Alger has adopted policies and
procedures that address the allocation of investment opportunities and execution
of portfolio transactions, as well as personal trading by its employees.
Nevertheless, the portfolio manager is generally responsible for managing
several accounts for several clients. In addition to the Fund and other funds
advised or sub-advised by Alger, these other accounts may include separate
accounts and other investment vehicles. Moreover, the size of these accounts can
vary significantly from the size of the Fund. Potential conflicts of interest
exist when a portfolio manager has responsibility and makes investment decisions
involving such accounts. While investment decisions for accounts are made with
consideration of their respective investment objectives and constraints,
availability of cash for investment, current holdings and size of investment
positions, it is therefore possible that a particular security may be bought or
sold for only one account, or in different amounts and at different times for
different accounts. To
address this conflict, Alger has
developed trade allocation policies and procedures designed to avoid action that
would result in an intentional improper advantage or disadvantage to any one
account managed by Alger. Accordingly, transactions are generally allocated
among accounts in a manner believed by Alger to be most equitable to each
account, generally using a pro-rata allocation methodology. Exceptions to
pro-rata allocation are made to recognize the investment needs and particular
restrictions of each individual account, including but not limited to
consideration of issuer concentration, industry exposure, asset class exposure,
credit exposure, available cash, desire to eliminate and/or not establish de
minimis positions, and to accounts with specialized investment policies and
objectives.
62
Alger, and the Funds portfolio manager, furnish advisory services to
numerous clients in addition to the Fund, and Alger may, consistent with
applicable law, make investment decisions for other clients (including accounts
that have potentially higher fees paid to Alger or in which a portfolio manager
has personal investments) that may be the same as or different from those made
for the Fund. In addition, Alger and its affiliates, including Fred Alger &
Company, Incorporated, may or may not have an interest in the securities whose
purchase and sale Alger recommends to the Fund. Actions with respect to
securities of the same kind may be the same as or different than the action that
Alger or any of its affiliates may take with respect to the same securities.
2.
Optimum Large
Cap Value Fund:
Herndon
Herndon
seeks to identify potential conflicts of interest resulting from a portfolio
managers management of both a Fund and multiple separate accounts. A portfolio
manager makes decisions for each account including the Fund based on the
investment objectives, guidelines, directions, policies, practices and other
relevant investment considerations that the portfolio manager believes are
applicable to that account. Consequently, a portfolio manager may purchase
securities for one account and not another account, and the performance of
securities purchased for one account may vary from the performance of the
securities purchased for the accounts. A portfolio manager may place
transactions on behalf of other accounts that are contrary to investment
decisions made on behalf of the Fund, or make investment decisions that are
similar to those made for the Fund, both of which have the potential to
adversely affect the price paid or received by the Fund or the size of the
security position obtainable for the Fund. Herndon has adopted policies and
procedures that it believes address the potential conflicts of interest
including the allocation of investment opportunities on a fair and equitable
basis over time; although there is no assurance that such policies and
procedures will adequately address such conflicts. The firms Code of Ethics
governs personal trading by all employees and contains policies and procedures
to ensure that client interests are paramount.
MFS
MFS seeks
to identify potential conflicts of interest resulting from a portfolio managers
management of both the Fund and other accounts and has adopted policies and
procedures designed to address such potential conflicts.
The management of multiple funds and accounts (including proprietary
accounts) gives rise to potential conflicts of interest if the funds and
accounts have different objectives and strategies, benchmarks, time horizons and
fees as a portfolio manager must allocate his or her time and investment ideas
across multiple funds and accounts. In certain instances there are securities
which are suitable for the Funds portfolio as well as for accounts of MFS or
its subsidiaries with similar investment objectives. MFSs trade allocation
policies may give rise to conflicts of interest if the Funds orders do not get
fully executed or are delayed in getting executed due to being aggregated with
those of other accounts of MFS or its subsidiaries. A portfolio manager may
execute transactions for another fund or account that may adversely affect the
value of the Funds investments. Investments selected for funds or accounts
other than the Fund may outperform investments selected for the Fund.
63
When two or more clients are simultaneously engaged in the purchase or
sale of the same security, the securities are allocated among clients in a
manner believed by MFS to be fair and equitable to each. It is recognized that
in some cases this system could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned. In most cases, however, MFS
believes that the Funds ability to participate in volume transactions will
produce better executions for the Fund.
MFS and/or a portfolio manager may have a financial incentive to allocate
favorable or limited opportunity investments or structure the timing of
investments to favor accounts other than the Fund, for instance, those that pay
a higher advisory fee and/or have a performance adjustment and/or include an
investment by the portfolio manager.
3.
Optimum
Small-Mid Cap Growth Fund:
CWAM
Like other
investment professionals with multiple clients, the Funds portfolio manager(s)
may face certain potential conflicts of interest in connection with managing
both the Fund and other accounts at the same time. CWAM has adopted compliance
policies and procedures that attempt to address certain of the potential
conflicts that portfolio managers face in this regard. Certain of these
conflicts of interest are summarized below.
The management of accounts with different advisory fee rates and/or fee
structures, including accounts that pay advisory fees based on account
performance (performance fee accounts), if any, may raise potential conflicts of
interest for a portfolio manager by creating an incentive to favor higher fee
accounts. Potential conflicts of interest also may arise when a portfolio
manager has personal investments in other accounts that may create an incentive
to favor those accounts. As a general matter and subject to CWAMs Code of
Ethics and certain limited exceptions, CWAMs investment professionals do not
have the opportunity to invest in client accounts, other than the Funds.
A portfolio manager who is responsible for managing multiple funds and/or
accounts may devote unequal time and attention to the management of those funds
and/or accounts. The effects of this potential conflict may be more pronounced
where funds and/or accounts managed by a particular portfolio manager have
different investment strategies. A portfolio manager may be able to select or
influence the selection of the broker/dealers that are used to execute
securities transactions for the Fund. A portfolio managers decision as to the
selection of broker/dealers could produce disproportionate costs and benefits
among the Fund and the other accounts the portfolio manager manages.
A potential conflict of interest may arise when a portfolio manager buys
or sells the same securities for the Fund and other accounts. On occasions when
a portfolio manager considers the purchase or sale of a security to be in the
best interests of the Fund as well as other accounts, CWAMs trading desk may,
to the extent consistent with applicable laws and regulations, aggregate the
securities to be sold or bought in order to obtain the best execution and lower
brokerage commissions, if any. Aggregation of trades may create the potential
for unfairness to the Fund or another account if a portfolio manager favors one
account over another in allocating the securities bought or sold.
Cross trades, in which a portfolio manager sells a particular security
held by the Fund to another account (potentially saving transaction costs for
both accounts), could involve a potential conflict of interest if, for example,
a portfolio manager is permitted to sell a security from one account to another
account at a higher price than an independent third party would pay. CWAM has
adopted compliance procedures that provide that any transactions between the
Fund and another account managed by CWAM are to be made at an independent
current market price, consistent with applicable laws and regulations.
64
Another potential conflict of interest may arise based on the different
investment objectives and strategies of the Fund and other accounts managed by
its portfolio manager(s). Depending on another accounts objectives and other
factors, a portfolio manager may give advice to and make decisions for the Fund
that may differ from advice given, or the timing or nature of decisions made,
with respect to another account. A portfolio managers investment decisions are
the product of many factors in addition to basic suitability for the particular
account involved. Thus, a portfolio manager may buy or sell a particular
security for certain accounts, and not for the Fund, even though it could have
been bought or sold for the Fund at the same time. A portfolio manager also may
buy a particular security for one or more accounts when one or more other
accounts are selling the security (including short sales). There may be
circumstances when a portfolio managers purchases or sales of portfolio
securities for one or more accounts may have an adverse effect on other
accounts, including the Fund.
The Funds portfolio manager(s) also may have other potential conflicts
of interest in managing the Fund, and the description above is not a complete
description of every conflict that could be deemed to exist in managing both the
Fund and other accounts. Many of the potential conflicts of interest to which
CWAMs portfolio managers are subject are essentially the same as or similar to
the potential conflicts of interest related to the investment management
activities of CWAM and its affiliates.
Wellington
Management
Individual investment professionals at
Wellington Management manage multiple accounts for multiple clients. These
accounts may include mutual funds, separate accounts (assets managed on behalf
of institutions, such as pension funds, insurance companies, foundations, or
separately managed account programs sponsored by financial intermediaries), bank
common trust accounts, and hedge funds. The Funds manager listed in the
prospectus who is primarily responsible for the day-to-day management of the
Fund (Portfolio Manager) generally manages accounts in several different
investment styles. These accounts may have investment objectives, strategies,
time horizons, tax considerations and risk profiles that differ from those of
the Fund. The Portfolio Manager makes investment decisions for each account,
including the Fund, based on the investment objectives, policies, practices,
benchmarks, cash flows, tax and other relevant investment considerations
applicable to that account. Consequently, the Portfolio Manager may purchase or
sell securities, including IPOs, for one account and not another account, and
the performance of securities purchased for one account may vary from the
performance of securities purchased for other accounts. Alternatively, these
accounts may be managed in a similar fashion to the Fund and thus the accounts
may have similar, and in some cases nearly identical, objectives, strategies
and/or holdings to that of the Fund.
The Portfolio Manager or other investment professionals at Wellington
Management may place transactions on behalf of other accounts that are directly
or indirectly contrary to investment decisions made on behalf of the Fund, or
make investment decisions that are similar to those made for the Fund, both of
which have the potential to adversely impact the Fund depending on market
conditions. For example, an investment professional may purchase a security in
one account while appropriately selling that same security in another account.
Similarly, the Portfolio Manager may purchase the same security for the Fund and
one or more other accounts at or about the same time. In those instances the
other accounts will have access to their respective holdings prior to the public
disclosure of the Funds holdings. In addition, some of these accounts have fee
structures, including performance fees, which are or have the potential to be
higher, in some cases significantly higher, than the fees Wellington Management
receives for managing the Fund. Mr. Angeli also manages accounts which pay
performance allocations to Wellington Management or its affiliates. Because
incentive payments paid by Wellington Management to the Portfolio Manager are
tied to revenues earned by Wellington Management and, where noted, to the
performance achieved by the manager in each account, the incentives associated
with any given account may be significantly higher or lower than those
associated with other accounts managed by the Portfolio Manager. Finally, the
Portfolio Manager may hold shares or investments in the other pooled investment
vehicles and/or other accounts identified above.
65
Wellington Managements goal is to meet its fiduciary obligation to treat
all clients fairly and provide high quality investment services to all of its
clients. Wellington Management has adopted and implemented policies and
procedures, including brokerage and trade allocation policies and procedures,
which it believes address the conflicts associated with managing multiple
accounts for multiple clients. In addition, Wellington Management monitors a
variety of areas, including compliance with primary account guidelines, the
allocation of IPOs, and compliance with the firms Code of Ethics, and places
additional investment restrictions on investment professionals who manage hedge
funds and certain other accounts. Furthermore, senior investment and business
personnel at Wellington Management periodically review the performance of
Wellington Managements investment professionals. Although Wellington Management
does not track the time an investment professional spends on a single account,
Wellington Management does periodically assess whether an investment
professional has adequate time and resources to effectively manage the
investment professionals various client mandates.
4.
Optimum
Small-Mid Cap Value Fund:
The Delafield Group of
Tocqueville
As reflected above, the Portfolio Managers
may manage other accounts in addition to the Funds. A Portfolio Managers
management of these other accounts may give rise to potential conflicts of
interest. The Advisor has adopted policies and procedures that are designed to
identify and minimize the effects of these potential conflicts, however, there
can be no guarantee that these policies and procedures will be effective in
detecting potential conflicts, or in eliminating the effects of any such
conflicts.
Certain components of the Portfolio Managers compensation structure may
also give rise to potential conflicts of interest to the extent that a Portfolio
Manager may have an incentive to favor or devote more effort in managing
accounts that impact, or impact to a larger degree, their overall compensation.
As reflected above, each Portfolio Managers base remuneration is based on total
advisory fees collected each month, in arrears, for those accounts managed by
such Portfolio Manager, including the Fund. As a result, since their base
remuneration is directly tied to the percentage of the advisory fee charged to
the accounts, including the Funds, the Portfolio Managers may have an incentive
to favor accounts where the Advisor charges a higher advisory fee and those
accounts that have a larger asset base to the disadvantage of other accounts
that have a lower advisory fee and those accounts with lower total net
assets.
In addition, as described above, certain Portfolio Managers are paid a
discretionary annual bonus and the level of the discretionary annual bonus is
determined, in part, based upon the Advisors profitability. Such profits are
generally derived from the fees the Advisor receives for managing all of its
investment management accounts. To the extent that accounts other than the Fund
have the potential to generate more profits for the Advisor than the Fund, the
Portfolio Managers may have an incentive to favor such other accounts.
Because Portfolio Managers manage multiple accounts with similar
objectives, and thus frequently purchase and sell the same securities for such
accounts, certain allocation issues may arise. In particular, if a Portfolio
Manager identifies a limited investment opportunity which may be suitable for
more than one Fund or account, the Fund may not be able to take full advantage
of that opportunity due to an allocation of filled purchase or sale orders
across all eligible funds and other accounts. In addition, in the event a
Portfolio Manager determines to purchase a security for more than one account in
an aggregate amount that may influence the market price of the security,
accounts that purchased or sold the security first may receive a more favorable
price than accounts that made subsequent transactions. The Advisor has adopted
policies and procedures that are designed to manage the risk that an account
could be systematically advantaged or disadvantaged in connection with the
allocation of investment opportunities and aggregation of trade orders.
Nevertheless, there can be no assurance that such policies and procedures will
be effective in preventing instances where one account is advantaged or
disadvantaged over another.
66
Killen
Conflicts of
Interest.
Killen realizes that as investment
advisor it is a fiduciary and owes its clients a duty of undivided loyalty. As a
result, Killen has adopted written policies and procedures to deal with the
actual or potential conflicts of interest associated with the side by side
management of its mutual funds, individually managed accounts and a
performance-based private fund. Killen has developed these policies and
procedures so that it may reasonably be able to detect, manage and mitigate the
effects of actual or potential conflicts of interest in the areas of employee
personal trading, managing multiple accounts and allocating investment
opportunities. Among other things, these policies and procedures are intended to
ensure that trading is conducted in a manner that does not favor the
performance-based fee account. Quarterly audits of the trading process are
performed and the results are reviewed by the Best Execution Committee.
Employee Personal Trading.
Killen
has adopted a Code of Ethics that regulates the personal securities trading of
all employees. Employees are required to disclose their personal holdings upon
commencement of employment. If the employee maintains a brokerage account,
statements and trade confirmations are sent directly from the brokerage firm to
Killens compliance department. Employees without brokerage accounts must submit
quarterly reports on whether or not they engaged in any securities transactions.
Also, all employees must submit quarterly statements on any transactions in
mutual funds managed by Killen. With the exception of those securities in the
S&P 500 Index, employees may not purchase any security held in a clients
account and, if an employee owns a security held in a clients account, he or
she may only sell it during certain black out periods and all securities
transactions (excepting those involving securities in the S&P 500 Index)
must be pre-cleared.
Managing Multiple Accounts and Allocating Investment Opportunities.
Killen has an Investment Management
Committee (the Committee) of portfolio managers and analysts that manages all
client accounts. The Committee meets regularly to review portfolio holdings and
discuss purchase and sale activity. Committee members buy and sell securities
for clients as they see fit, guided by the clients investment objective.
Killen has adopted policies and procedures for the aggregation of
clients orders and the allocation of the aggregated trades. Orders are
aggregated to promote fairness. Orders may be aggregated only if the trader or
portfolio manager determines it is in the best interests of each client
participating in the order, it is consistent with Killens duty to obtain best
execution, and consistent with the terms of the advisory contract of each
participating client. The price of the securities purchased or sold in an
aggregated order will be at the average share price for all transactions of the
clients in that security on a given day. The allocation of securities obtained
in an aggregated securities order will be made in accordance with Killens trade
allocation procedures.
The Chief Compliance Officer of Killen will review periodically all
aggregated trades to ensure that the policies and procedures are being followed
and that no client is being systematically disadvantaged by the aggregation
procedures. The Chief Operating Officer shall be responsible for ensuring that
aggregated trades are allocated to client accounts in accordance with
procedures.
Westwood
Westwood
also manages institutional accounts, commingled funds and other mutual funds in
several different investment strategies. Westwoods management of other
accounts may give rise to potential conflicts of interest in connection with
their management of the Funds investments, on the one hand, and the investments
of the other accounts, on the other. The other accounts may have the same
investment objective as the Fund. Therefore, a potential conflict of interest
may arise as a result of the identical investment objectives, whereby Westwood
could favor one account over another. Another potential conflict could include
Westwoods knowledge about the size, timing and possible market impact of Fund
trades, whereby Westwood could use this information to the advantage of other
accounts and to the disadvantage of the Fund. In addition, Westwood currently
has a limited number of relationships for which it receives performance-based
fees. Performance-based fees may give rise to potential conflicts because the
potential to receive increased fees from a performance-based fee account creates
an
incentive to favor one account over another. However,
Westwood has established policies and procedures to ensure that the purchase and
sale of securities among all accounts it manages are fairly and equitably
allocated. Westwoods trade allocation policy is to aggregate client
transactions, including the Funds, where possible when it is believed that such
aggregation may facilitate Westwoods duty of best execution. Accounts for which
orders are aggregated receive the average price of such transaction. Any
transaction costs incurred in the transaction are shared pro rata based on each
clients participation in the transaction. Westwood generally allocates
securities among client accounts according to each accounts pre-determined
participation in the transaction. Westwoods policy prohibits any allocation of
trades that would favor any proprietary accounts, affiliated accounts, or any
particular client(s) or group of clients more over any other account(s).
Westwood prohibits late trading, frequent trading and/or market timing in the
funds and monitors trades daily to ensure this policy is not violated.
67
5.
Optimum
International Fund:
Mondrian
Identifying Conflicts of
Interest
Mondrian maintains and operates various
policies and procedures, which are designed to prevent conflicts of interest
materializing and damaging the interests of our clients.
For the purpose of identifying conflicts of interest that may arise in
the course of providing a service to our clients, we have considered whether
Mondrian or its employees are, directly or indirectly, likely to:
-
Make a financial gain, or avoid a financial loss,
at the expense of the client;
-
Have an interest in the outcome of a service
provided to a client or in a transaction carried out on behalf of the client,
which is distinct from the clients interest in that outcome;
-
Have a financial or other incentive to favor the
interest of one client or group of clients over the interest of another client
or group of clients;
-
Receive from a person other than the client an
inducement in relation to the service provided to the client, in the form of
monies, goods or services, other than the standard fee for that service.
Examples of Potential Conflicts
-
Access to non-public information
-
Allocation of aggregated trades
-
Allocation of investment opportunities
-
Allocation of IPO opportunities
-
Cherry picking/Dumping (inappropriate attempts to
improve the appearance of portfolio performance)
-
Dealing in investments as agent for more than one
party
-
Dealing in investments as principal in connection
with the provision of seed capital
-
Directorships and external arrangements
-
Dual agency
-
Employee compensation
-
Employee personal account dealing
-
Gifts and entertainment (received)
-
Gifts and entertainment (given)
-
Investment in shares issued by Companies who are
clients of Mondrian
-
Management of investment capacity
-
Performance fees
-
Portfolio holdings disclosure
-
Portfolio pumping
-
Pricing and valuation
-
Proxy voting
-
Relationships with consultants
-
Soft dollar arrangements
-
Step-out trades (where a broker shares commission
with a third party)
-
Transactions with affiliated brokers
-
Window dressing (inappropriate attempts to improve
the appearance of portfolio performance)
68
Mondrian maintains a Conflicts of Interest Register that lists all
potential conflicts of interest that have been identified, and records whether
Mondrian has written policies and procedures addressing each named conflict. Any
conflicts arising are logged immediately in the Conflicts of Interest Register.
Information logged includes the date that the conflict arose, the date logged
and details of the conflict, including its source or cause, and how it was
identified. Steps taken to ensure that the conflict either does not arise again,
or is correctly managed in the future must also be logged, together with any
details of necessary follow up.
Mondrians CMP incorporates periodic reviews of areas where conflicts of
interest might arise. Conflicts of interest arising from personal securities
trading and other areas covered by Mondrians Code of Ethics and the Policy
Statement on Insider Trading and Securities Fraud are also subject to regular
review.
Any apparent violations of the above procedures shall be investigated and
reported to the Chief Compliance Officer, who will determine any action
necessary, including amendments to existing procedures.
Any material findings would be reported to senior management and the
Compliance Committee and, where required, any relevant regulator.
BlackRock
BlackRock
has built a professional working environment, firm-wide compliance culture and
compliance procedures and systems designed to protect against potential
incentives that may favor one account over another. BlackRock has adopted
policies and procedures that address the allocation of investment opportunities,
execution of portfolio transactions, personal trading by employees and other
potential conflicts of interest that are designed to ensure that all client
accounts are treated equitably over time. Nevertheless, BlackRock furnishes
investment management and advisory services to numerous clients in addition to
the Fund, and BlackRock may, consistent with applicable law, make investment
recommendations to other clients or accounts (including accounts which are hedge
funds or have performance or higher fees paid to BlackRock, or in which
portfolio managers have a personal interest in the receipt of such fees), which
may be the same as or different from those made to the Fund. In addition,
BlackRock, its affiliates and significant shareholders and any officer,
director, shareholder or employee may or may not have an interest in the
securities whose purchase and sale BlackRock recommends to the Fund. BlackRock,
or any of its affiliates or significant shareholders, or any officer, director,
shareholder, employee or any member of their families may take different actions
than those recommended to the Fund by BlackRock with respect to the same
securities. Moreover, BlackRock may refrain from rendering any advice or
services concerning securities of companies of which any of BlackRocks (or its
affiliates or significant shareholders) officers, directors or employees are
directors or officers, or companies as to which BlackRock or any of its
affiliates or significant shareholders or the officers, directors and employees
of any of them has any substantial economic interest or possesses material
non-public information. Certain portfolio managers also may manage accounts
whose investment strategies may at times be opposed to the strategy utilized for
a fund. It should also be noted that Messrs. Jamieson, Hart, and Callan may be
managing hedge fund and/or long only accounts, or may be part of a team managing
hedge fund and/or long only accounts, subject to incentive fees. Messrs.
Jamieson, Hart, and Callan may therefore be entitled to receive a portion of any
incentive fees earned on such accounts.
69
As a fiduciary, BlackRock owes a duty of
loyalty to its clients and must treat each client fairly. When BlackRock
purchases or sells securities for more than one account, the trades must be
allocated in a manner consistent with its fiduciary duties. BlackRock attempts
to allocate investments in a fair and equitable manner among client accounts,
with no account receiving preferential treatment. To this end, BlackRock has
adopted policies that are intended to ensure reasonable efficiency in client
transactions and provide BlackRock with sufficient flexibility to allocate
investments in a manner that is consistent with the particular investment
discipline and client base, as appropriate.
6.
Optimum Fixed Income
Fund:
The
Manager
Individual portfolio managers may perform
investment management services for other accounts similar to those provided to
the Fund and the investment action for each account and the Fund may differ. For
example, one account or the Fund may be selling a security, while another
account or the Fund may be purchasing or holding the same security. As a result,
transactions executed for one account and the Fund may adversely affect the
value of securities held by another account. Additionally, the management of
multiple accounts and the Fund may give rise to potential conflicts of interest,
as a portfolio manager must allocate time and effort to multiple accounts and
the Fund. A portfolio manager may discover an investment opportunity that may be
suitable for more than one account or the Fund. The investment opportunity may
be limited, however, so that all accounts and the Fund for which the investment
would be suitable may not be able to participate. The Manager has adopted
procedures designed to allocate investments fairly across multiple accounts.
A portfolio managers management of
personal accounts also may present certain conflicts of interest. While the
Managers code of ethics is designed to address these potential conflicts, there
is no guarantee that it will do so.
PIMCO
From time to time,
potential and actual conflicts of interest may arise between a portfolio
managers management of the investments of the Fund, on the one hand, and the
management of other accounts, on the other. Potential and actual conflicts of
interest may also arise as a result of PIMCOs other business activities and
PIMCOs possession of material non-public information about an issuer. Other
accounts managed by a portfolio manager might have similar investment objectives
or strategies as the Fund or otherwise hold, purchase, or sell securities that
are eligible to be held, purchased or sold by the Fund. The other accounts might
also have different investment objectives or strategies than the Fund.
Knowledge and Timing of Fund
Trades.
A potential conflict of
interest may arise as a result of the portfolio managers day-to-day management
of the Fund. Because of their positions with the Fund, the portfolio managers
know the size, timing and possible market impact of the Funds trades. It is
theoretically possible that the portfolio managers could use this information to
the advantage of other accounts they manage and to the possible detriment of a
Fund.
Investment
Opportunities.
A potential
conflict of interest may arise as a result of the portfolio managers management
of a number of accounts with varying investment guidelines. Often, an investment
opportunity may be suitable for both a Fund and other accounts managed by the
portfolio manager, but may not be available in sufficient quantities for both
the Fund and the other accounts to participate fully. Similarly, there may be
limited opportunity to sell an investment held by a Fund and another account.
PIMCO has adopted policies and procedures reasonably designed to allocate
investment opportunities on a fair and equitable basis over time.
70
Under
PIMCOs allocation procedures, investment opportunities are allocated among
various investment strategies based on individual account investment guidelines
and PIMCOs investment outlook. PIMCO has also adopted additional procedures to
complement the general trade allocation policy that are designed to address
potential conflicts of interest due to the side-by-side management of the Funds
and certain pooled investment vehicles, including investment opportunity
allocation issues.
Conflicts potentially limiting the Funds
investment opportunities may also arise when the Fund and other PIMCO clients
invest in different parts of an issuers capital structure, such as when the
Fund owns senior debt obligations of an issuer and other clients own junior
tranches of the same issuer. In such circumstances, decisions over whether to
trigger an event of default, over the terms of any workout, or how to exit an
investment may result in conflicts of interest. In order to minimize such
conflicts, a portfolio manager may avoid certain investment opportunities that
would potentially give rise to conflicts with other PIMCO clients or PIMCO may
enact internal procedures designed to minimize such conflicts, which could have
the effect of limiting the Funds investment opportunities.
Additionally, if PIMCO acquires material
non-public confidential information in connection with its business activities
for other clients, a portfolio manager may be restricted from purchasing
securities or selling securities for the Fund. When making investment decisions
where a conflict of interest may arise, PIMCO will endeavor to act in a fair and
equitable manner as between the Fund and other clients; however, in certain
instances the resolution of the conflict may result in PIMCO acting on behalf of
another client in a manner that may not be in the best interest, or may be
opposed to the best interest, of the Fund.
Performance Fees.
A portfolio manager may advise certain accounts
with respect to which the advisory fee is based entirely or partially on
performance. Performance fee arrangements may create a conflict of interest for
the portfolio manager in that the portfolio manager may have an incentive to
allocate the investment opportunities that he or she believes might be the most
profitable to such other accounts instead of allocating them to a Fund. PIMCO
has adopted policies and procedures reasonably designed to allocate investment
opportunities between the Fund and such other accounts on a fair and equitable
basis over time.
D.
Compensation
Each portfolio managers compensation
consists of the following
:
1.
Optimum Large Cap
Growth Fund:
T. Rowe
Price
Portfolio
manager compensation consists primarily of a base salary, a cash bonus, and an
equity incentive that usually comes in the form of a stock option grant.
Occasionally, portfolio managers will also have the opportunity to participate
in venture capital partnerships. Compensation is variable and is determined
based on the following factors.
Investment performance over 1-, 3-,
5-, and 10-year periods is the most important input. The weightings for these
time periods are generally balanced and are applied consistently across similar
strategies. T. Rowe Price evaluates performance in absolute, relative, and
risk-adjusted terms. Relative performance and risk-adjusted performance are
determined with reference to the broad-based index (e.g., S&P 500) and the
Lipper index (e.g., Large-Cap Growth) set forth in the total returns table in
the funds prospectus, although other benchmarks may be used as well. Investment
results are also measured against comparably managed funds of competitive
investment management firms. The selection of comparable funds is approved by
the applicable investment steering committee and are the same as those presented
to the directors of the Price Funds in their regular review of fund
performance.
71
Performance is primarily measured on a pretax basis though tax
efficiency is considered and is especially important for tax-efficient funds.
The more consistent a managers performance over time, the higher the
compensation opportunity. The increase or decrease in a funds assets due to the
purchase or sale of fund shares is not considered a material factor. In
reviewing relative performance for fixed-income funds, a funds expense ratio is
usually taken into account. Contribution to T. Rowe Prices overall investment
process is an important consideration as well. Sharing ideas with other
portfolio managers, working effectively with and mentoring younger analysts, and
being good corporate citizens are important components of T. Rowe Prices
long-term success and are highly valued.
All employees of T. Rowe Price, including
portfolio managers, participate in a 401(k) plan sponsored by T. Rowe Price
Group. In addition, all employees are eligible to purchase T. Rowe Price common
stock through an employee stock purchase plan that features a limited corporate
matching contribution. Eligibility for and participation in these plans is on
the same basis as for all employees. Finally, all vice presidents of T. Rowe
Price Group, including all portfolio managers, receive supplemental
medical/hospital reimbursement benefits.
This compensation structure is used for
all portfolios managed by the portfolio manager.
Alger
An Alger portfolio managers compensation
generally consists of salary and an annual bonus. In addition, portfolio
managers are eligible for health and retirement benefits available to all Alger
employees, including a 401(k) plan sponsored by Alger. A portfolio managers
base salary is typically a function of the portfolio managers experience (with
consideration given to type, investment style and size of investment portfolios
previously managed), performance of his or her job responsibilities, and
financial services industry peer comparisons. Base salary is generally a fixed
amount that is subject to an annual review. The annual bonus is variable from
year to year, and considers various factors, including:
-
the firms overall financial results
and profitability;
-
the firms overall investment
management performance;
-
current years and prior years
pre-tax investment performance (both relative and absolute) of the portfolios
for which the individual is responsible based on the benchmark of each such
portfolio;
-
qualitative assessment of an
individuals performance with respect to the firms investment process and
standards; and
-
the individuals leadership
contribution within the firm.
While the benchmarks and peer groups used
in determining a portfolio managers compensation may change from time to time,
Alger may refer to benchmarks, such as those provided by Russell Investments and
Standard & Poors, and peer groups, such as those provided by Lipper Inc.
and Morningstar Inc., that are widely-recognized by the investment industry.
Alger has implemented a long-term
deferred compensation program (LTDC) which gives key personnel the opportunity
to have equity-like participation in the long-term growth and profitability of
the firm. There is broad participation in the LTDC program amongst the
investment professionals. The LTDC reinforces the portfolio managers' commitment
to generating superior investment performance for the firms clients. The awards
are invested in Alger mutual funds and have a four year vesting schedule. The
total award earned can increase or decrease with the firms investment and
earnings results over the four year period.
Additionally, the Alger Partner's Plan
provides key investment executives with phantom equity that allows participants
to pro-rata rights to growth in the firm's book value, dividend payments and
participation in any significant corporate transactions (e.g. partial sale,
initial public offering, merger, etc.). The firm does not have a limit on the
overall percentage of the firm's value it will convey through this program.
Further, participation in this program will be determined annually.
72
2.
Optimum Large Cap Value
Fund:
Herndon
Herndon Capital Management has implemented a
compensation program for their portfolio managers and analysts which includes
salary plus bonus. The compensation program is designed to attract qualified
talent, promote teamwork and to align employer and employee interests by giving
key employees a vested interest in the companys long term performance.
The compensation for portfolio managers
includes a component based on performance of the portfolios. Analysts
compensation includes a component based on the subjective assessment of their
contribution to the analytical portion of the investment process.
All employees will be entitled to receive
a bonus that will be driven by the profits of the company. Every year a bonus
pool will be funded be a pre-determined percent of the companys pre-tax
profits. This bonus/profit sharing will be distributed based on a combination of
factors including tenure, role within the organization, and an evaluation by the
employees immediate supervisor.
This bonus/profit sharing is expected to
become a significant component of every employees overall compensation as the
companys profitability grows over time.
Each of the principals has a 15%
ownership stake in the firm and will participate in ownership related
cash-flows.
MFS
Compensation
.
Portfolio manager compensation is reviewed annually. As of December 31, 2012,
portfolio manager total cash compensation is a combination of base salary and
performance bonus:
Base Salary
- Base salary represents a smaller percentage of
portfolio manager total cash compensation than performance bonus.
Performance Bonus
Generally, the performance bonus represents more
than a majority of portfolio manager total cash compensation. The performance
bonus is based on a combination of quantitative and qualitative factors,
generally with more weight given to the former and less weight given to the
latter.
The quantitative portion is based on
the pre-tax performance of assets managed by the portfolio manager over one-,
three-, and five-year periods relative to peer group universes and/or indices
(benchmarks). As of December 31, 2012, the following benchmarks were used to
measure each portfolio managers performance for the Fund:
Portfolio Manager
|
Benchmark(s)
|
Nevin P.
Chitkara
|
Russell
1000
®
Value
Index
|
|
|
Steven R. Gorham
|
Russell
1000
®
Value
Index
|
Additional or different benchmarks,
including versions of indices, custom indices, and linked indices that include
performance of different indices for different positions of the time period may
also be used. Primary weight is given to portfolio performance over a three-year
time period with lesser consideration given to portfolio performance over one-
and five-year periods (adjusted as appropriate if the portfolio manager has
served for less than five years).
73
The
qualitative portion is based on the results of an annual internal peer review
process (conducted by other portfolio managers, analysts and traders) and
managements assessment of overall portfolio manager contributions to investor
relations and the investment process (distinct from fund and other account
performance). This performance bonus may be in the form of cash and/or a
deferred cash award, at the discretion of management. A deferred cash award is
issued for a cash value and becomes payable over a three-year vesting period if
the portfolio manager remains in the continuous employ of MFS or its affiliates.
During the vesting period, the value of the unfunded deferred cash award will
fluctuate as though the portfolio manager had invested the cash value of the
award in an MFS Fund(s) selected by the portfolio manager. A selected fund may
be, but is not required to be, a fund that is managed by the portfolio manager.
Portfolio managers also typically benefit
from the opportunity to participate in the MFS Equity Plan. Equity interests
and/or options to acquire equity interests in MFS or its parent company are
awarded by management, on a discretionary basis, taking into account tenure at
MFS, contribution to the investment process and other factors.
Finally, portfolio managers also
participate in benefit plans (including a defined contribution plan and health
and other insurance plans), and programs available generally to other employees
of MFS. The percentage such benefits represent of any portfolio managers
compensation depends upon the length of the individuals tenure at MFS and
salary level, as well as other factors.
3.
Optimum Small-Mid Cap
Growth Fund:
CWAM
For services
performed for the 2012 calendar year and generally paid in early 2013, the
portfolio managers, analysts and other key employees of Columbia WAM will
receive all of their compensation in the form of salary and incentive
compensation provided in whole by Ameriprise Financial. Typically, a high
proportion of an analysts or portfolio managers incentive compensation will be
paid in cash with a smaller proportion going into two separate incentive plans.
The first plan is a notional investment based on the performance of certain
Columbia Funds, including the Columbia Acorn Funds. The second plan consists of
Ameriprise Financial restricted stock and/or options. Both plans vest over three
years from the date of issuance.
Portfolio managers and key analysts are
positioned in compensation tiers based on cumulative performance of the
portfolios/stocks that they manage. Portfolio manager performance is measured
versus primary portfolio benchmarks. Analyst performance is measured versus a
custom benchmark for each analyst. One- and three-year performance periods
primarily drive incentive levels. Incentive compensation varies by tier and can
range from between a fraction of base pay to a multiple of base pay, the
objective being to provide very competitive total compensation for high
performing analysts and portfolio managers. Incentives are adjusted up or down
up to 15% based on qualitative performance factors, which include investment
performance impacts not included in benchmarks such as industry (or country)
weighting recommendations, plus adherence to compliance standards, business
building, and citizenship. Other analysts incentives are also based on
performance versus benchmarks, though they are less formulaic in order to
emphasize investment process instead of initial investment results. The
qualitative factors discussed above are also considered. These analysts
participate in an incentive pool which is based on a formula primarily driven by
firm-wide investment performance.
In addition, the incentive amounts
available for the entire pool for 2012 will be adjusted up or down based upon
the increase/decrease in Columbia WAM revenues versus an agreed upon base
revenue amount. Investment performance, however, impacts incentives far more
than revenues. Columbia WAM determines incentive compensation, subject to review
by Ameriprise Financial.
74
Wellington Management
Wellington Management receives a fee based on the assets under
management of the Fund as set forth in the Investment Subadvisory Agreement
between Wellington Management and Optimum Fund Trust on behalf of the Fund.
Wellington Management pays its investment professionals out of its total
revenues, including the advisory fees earned with respect to the Fund. The
following information is as of March 31, 2013.
Wellington Managements compensation
structure is designed to attract and retain high-caliber investment
professionals necessary to deliver high quality investment management services
to its clients. Wellington Managements compensation of the Funds manager
listed in the prospectus who is primarily responsible for the day-to-day
management of the Fund (Portfolio Manager) includes a base salary and
incentive components. The base salary for the Portfolio Manager who is a partner
of Wellington Management is generally a fixed amount that is determined by the
Managing Partners of the firm. The Portfolio Manager is eligible to receive an
incentive payment based on the revenues earned by Wellington Management from the
Fund managed by the Portfolio Manager and generally each other account managed
by such Portfolio Manager. The Portfolio Managers incentive payment relating to
the Fund is linked to the gross pre-tax performance of the portion of the Fund
managed by the Portfolio Manager compared to the benchmark index and/or peer
group identified below over one- and three-year periods, with an emphasis on
three year results. In 2012, Wellington Management began placing increased
emphasis on long-term performance and is phasing in a five-year performance
comparison period. Wellington Management applies similar incentive compensation
structures (although the benchmarks or peer groups, time periods and rates may
differ) to other accounts managed by the Portfolio Manager, including accounts
with performance fees.
Portfolio-based incentives across all
accounts managed by an investment professional can, and typically do, represent
a significant portion of an investment professionals overall compensation;
incentive compensation varies significantly by individual and can vary
significantly from year to year. The Portfolio Manager may also be eligible for
bonus payments based on his overall contribution to Wellington Managements
business operations. Senior management at Wellington Management may reward
individuals as it deems appropriate based on other factors. Each partner of
Wellington Management is eligible to participate in a partner-funded tax
qualified retirement plan, the contributions to which are made pursuant to an
actuarial formula. Mr. Angeli is a partner of the firm.
Fund
|
Benchmark Index and/or Peer Group for Incentive
Period
|
Optimum
Small-Mid Cap Growth Fund
|
Russell
2000
®
Growth Index
|
4. Optimum Small-Mid Cap
Value Fund:
The Delafield Group of
Tocqueville
As of March 31,
2012, each of Messrs. Delafield and Sellecchia receives compensation in
connection with his management of portfolios for which he acts as portfolio
manager and other accounts identified above which includes the following
components: (1) base remuneration and (2) a discretionary annual bonus.
Base Remuneration.
The annual base remuneration can be a fixed or
variable amount. Messrs. Delafield and Sellecchia will receive a variable
amount. The variable amount is calculated using the amount of investment
advisory fees collected by the Advisor each month, in arrears, derived from the
value of the portfolio assets of accounts, for which these individuals are
Portfolio Managers. These Portfolio Managers will receive the balance of any
respective variable amounts remaining as their compensation, after payment of
the fixed salaries to other members of the investment team and certain other
expenses.
75
Bonus.
Each Portfolio
Manager is eligible to receive a discretionary annual bonus in addition to his
base remuneration. The level of the discretionary bonus is determined by the
Advisor based upon a number of factors, including the Advisors profitability,
the expansion of the client account base, the market environment for the
respective period, the portion of Advisor revenue that was generated by the work
and effort of the Portfolio Manager, the involvement of the Portfolio Manager in
the investment management functions of the Advisor, his role in the development
of other investment professionals and his work relationship with support staff,
and his overall contribution to strategic planning and his input in decisions
for the Advisors group of investment managers.
Retirement.
Upon retirement, Messrs. Delafield and Sellecchia
are entitled to receive a continuation of monthly compensation for ten years
calculated in accordance with the formula for the base compensation described
above, based on a declining percentage of the investment advisory fees paid by
their clients who continue to be clients of Tocqueville subsequent to their
retirement.
Killen
Compensation for
portfolio managers includes a fixed salary plus a profit sharing program. Profit
sharing is based upon the profitability of Killen, which is, in part, dependent
upon the value of the total assets under management. Killen offers a 401(k) plan
whereby portfolio managers may elect to contribute up to the legal limit and
contributions are matched up to a fixed limit.
Westwood
Westwood
compensates its portfolio managers for their management of Optimum Small-Mid Cap
Value Fund. Each named portfolio managers compensation consists of a base
salary, cash bonus, and equity-based incentive compensation as well as a full
benefits package. Westwood annually reviews all forms of compensation for all
employees of the company. Base salary levels are maintained at levels that the
compensation committee deems to be commensurate with similar companies in the
asset management industry.
Percentages for each component of
compensation are variable. Cash bonus awards are determined at year-end. The
firm also offers a stock incentive program for all employees throughout the
firm. Equity-based compensation awards, which currently consist of time vested
restricted stock, are granted each February and vest over a four-year period
from the date of grant. As owners, our employees interests are closely aligned
with those of our stockholders and clients; as a result, we all succeed
together. In determining incentive compensation and annual merit-based salary
increases, employees on the investment team are evaluated according to a
combination of quantitative and qualitative factors. A major component of this
evaluation is based upon the performance of individual stock recommendations and
portfolio performance. Health insurance, employer-paid life insurance and
employer-paid short and long-term disability insurance packages, and a 401(k)
plan with employer matching, are provided to all Westwood employees.
5.
Optimum International
Fund:
Mondrian
Mondrian has the
following programs in place to retain key investment staff:
Competitive Salary
. All investment professionals are remunerated
with a competitive base salary.
76
Profit Sharing Bonus Pool
. All Mondrian staff, including portfolio managers and senior officers,
qualify for participation in an annual profit sharing pool determined by the
companys profitability (approximately 30% of profits).
Equity
Ownership
. Mondrian is
100% management owned. A high proportion of senior Mondrian staff (investment
professionals and other support functions) are shareholders in the business.
Equity value is built up over many years with long vesting periods and the value
of any individuals equity is normally paid out in installments over a number of
years post an agreed retirement from the firm. This is a (very) long term
incentive plan directly tied to the long term equity value of the firm
Incentives (Bonus and Equity
Programs) focus on the key areas of a) research quality, b) long-term and
short-term stock performance, c) teamwork, d) client service and e) marketing.
As an individuals ability to influence these factors depends on that
individuals position and seniority within the firm, so the allocation to these
factors and of participation in these programs will reflect this.
At Mondrian, the investment
management of particular portfolios is not star manager based but uses a team
system. This means that Mondrians investment professionals are primarily
assessed on their contribution to the teams effort and results, though with an
important element of their assessment being focused on the quality of their
individual research contribution.
Compensation
Committee
In determining the amount of
bonus and equity awarded, Mondrians Board of Directors consults with the
companys Compensation Committee, who will make recommendations based on a
number of factors including investment research, investment performance
contribution, organization management, team work, client servicing and
marketing.
Defined
Contribution Pension Plan
All portfolio managers are
members of the Mondrian defined contribution pension plan where Mondrian pays a
regular monthly contribution and the member may pay additional voluntary
contributions if they wish. The plan is governed by trustees who have
responsibility for the trust fund and payments of benefits to members. In
addition, the plan provides death benefits for death in service and a spouse's
or dependents pension may also be payable.
Mondrian
remuneration philosophy
The guiding principle of the
companys compensation programs is to enable it to retain and motivate a team of
high quality employees with both attractive shorter term remuneration and
long-term equity incentives that are appropriately competitive, well-structured
and which help align the aspirations of individuals with those of the company
and its clients. Through widespread equity ownership, we believe that Mondrian
as an owner operated business provides an excellent incentive structure that is
highly likely to continue to attract, hold and motivate a talented
team.
Approximately 85 Mondrian
employees are equity owners of the business representing about 50% of the total
staff. In determining whether an employee should become an owner, Mondrian has
to date focused on senior management, investment professionals and senior client
service and operations personnel. The equity owners represent those staff
recognized as either a significant contributor currently or in the future and
awards focus in particular on key investment professionals.
Mondrian believes that this
compensation structure, coupled with the opportunities that exist within a
successful and growing business, should enable us to attract and retain high
caliber employees.
77
BlackRock
BlackRocks financial arrangements with its
portfolio managers, its competitive compensation and its career path emphasis at
all levels reflect the value senior management places on key resources.
Compensation may include a variety of components and may vary from year to year
based on a number of factors. The principal components of compensation include a
base salary, a performance-based discretionary bonus, participation in various
benefits programs and one or more of the incentive compensation programs
established by BlackRock.
Base
compensation.
Generally, portfolio managers receive
base compensation based on their position with the firm.
Discretionary Incentive
Compensation
Generally, discretionary incentive
compensation for Active Equity portfolio managers is based on a formulaic
compensation program. BlackRocks formulaic portfolio manager compensation
program is based on team revenue and pre-tax investment performance relative to
appropriate competitors or benchmarks over 1-, 3- and 5-year performance
periods, as applicable. In most cases, these benchmarks are the same as the
benchmark or benchmarks against which the performance of the Funds or other
accounts managed by the portfolio managers are measured. BlackRocks Chief
Investment Officers determine the benchmarks or rankings against which the
performance of funds and other accounts managed by each portfolio management
team is compared and the period of time over which performance is evaluated.
With respect to these portfolio managers, such benchmarks for the Fund and other
accounts are: Lipper Mid-Cap Core Fund classification, Lipper International
Multi-Cap Core fund classification and Lipper Global/Health/Biotechnology Fund
classification.
A smaller element of portfolio manager
discretionary compensation may include consideration of: financial results,
expense control, profit margins, strategic planning and implementation, quality
of client service, market share, corporate reputation, capital allocation,
compliance and risk control, leadership, technology and innovation. These
factors are considered collectively by BlackRock management and the relevant
Chief Investment Officers.
Distribution of Discretionary
Incentive Compensation
Discretionary incentive compensation is
distributed to portfolio managers in a combination of cash and BlackRock, Inc.
restricted stock units which vest ratably over a number of years. For some
portfolio managers, discretionary incentive compensation is also distributed in
deferred cash awards that notionally track the returns of select BlackRock
investment products they manage and that vest ratably over a number of years.
The BlackRock, Inc. restricted stock units, upon vesting, will be settled in
BlackRock, Inc. common stock. Typically, the cash portion of the discretionary
incentive compensation, when combined with base salary, represents more than 60%
of total compensation for the portfolio managers. Paying a portion of
discretionary incentive compensation in BlackRock stock puts compensation earned
by a portfolio manager for a given year at risk based on BlackRocks ability
to sustain and improve its performance over future periods. Providing a portion
of discretionary incentive compensation in deferred cash awards that notionally
track the BlackRock investment products they manage provides direct alignment
with investment product results.
Long-Term Incentive Plan Awards
From time to time
long-term incentive equity awards are granted to certain key employees to aid in
retention, align their interests with long-term shareholder interests and
motivate performance. Equity awards are generally granted in the form of
BlackRock, Inc. restricted stock units that, once vested, settle in BlackRock,
Inc. common stock. Mr. Hart has unvested long-term incentive
awards.
Deferred Compensation Program
A portion of the
compensation paid to eligible United States-based BlackRock employees may be
voluntarily deferred at their election for defined periods of time into an
account that tracks the performance of certain of the firms investment
products. Any portfolio manager who is either a managing director or director at
BlackRock is eligible to participate in the deferred compensation
program.
78
Other compensation benefits.
In addition to base compensation and
discretionary incentive compensation, portfolio managers may be eligible to
receive or participate in one or more of the following:
Incentive Savings Plans
BlackRock, Inc. has
created a variety of incentive savings plans in which BlackRock employees are
eligible to participate, including a 401(k) plan, the BlackRock Retirement
Savings Plan (RSP), and the BlackRock Employee Stock Purchase Plan (ESPP). The
employer contribution components of the RSP include a company match equal to 50%
of the first 8% of eligible pay contributed to the plan capped at $5,000 per
year, and a company retirement contribution equal to 3-5% of eligible
compensation up to the Internal Revenue Service limit ($255,000 for 2013). The
RSP offers a range of investment options, including registered investment
companies and collective investment funds managed by the firm. BlackRock
contributions follow the investment direction set by participants for their own
contributions or, absent participant investment direction, are invested into a
target date fund that corresponds to, or is closest to, the year in which the
participant attains age 65. The ESPP allows for investment in BlackRock common
stock at a 5% discount on the fair market value of the stock on the purchase
date. Annual participation in the ESPP is limited to the purchase of 1,000
shares of common stock or a dollar value of $25,000 based on its fair market
value on the Purchase Date. All of the eligible portfolio managers are eligible
to participate in these plans.
6.
Optimum Fixed Income
Fund:
The
Manager
Base
Salary:
Each named
portfolio manager receives a fixed base salary. Salaries are determined by a
comparison to industry data prepared by third parties to ensure that portfolio
manager salaries are in line with salaries paid at peer investment advisory
firms.
Bonus:
Each portfolio
manager is eligible to receive an annual cash bonus, which is based on
quantitative and qualitative factors. There is one pool for bonus payments for
the fixed income department. The amount of the pool for bonus payments is
determined by assets managed (including investment companies, insurance
product-related accounts and other separate accounts), management fees and
related expenses (including fund waiver expenses) for registered investment
companies, pooled vehicles, and managed separate accounts. Generally, 60%-75% of
the bonus is quantitatively determined. For more senior portfolio managers, a
higher percentage of the bonus is quantitatively determined. For investment
companies, each manager is compensated according to the Funds Lipper or
Morningstar peer group percentile ranking on a 1-year, 3-year, and 5-year basis,
with longer-term performance more heavily weighted. For managed separate
accounts the portfolio managers are compensated according to the composite
percentile ranking against the Frank Russell and Callan Associates databases (or
similar sources of relative performance data) on a one-year, three-year, and
five-year basis, with longer term performance more heavily weighted. There is no
objective award for a fund that falls below the 50th percentile, but incentives
reach maximum potential at the 25th-30th percentile. There is a sliding scale
for investment companies that are ranked above the 50th percentile. The
remaining 25%-40% portion of the bonus is discretionary as determined by the
Manager and takes into account subjective factors.
For new and recently transitioned
portfolio managers, the compensation may be weighted more heavily towards a
portfolio managers actual contribution and ability to influence performance,
rather than longer-term performance. Management intends to move the compensation
structure towards longer-term performance for these portfolio managers over
time.
79
Portfolio managers participate in retention programs, including the
Delaware Investments Incentive Unit Plan, the Delaware Investments Notional
Investment Plan, and the Macquarie Group Employee Retained Equity Plan, for
alignment of interest purposes.
Delaware Investments
Incentive Unit Plan
- Portfolio managers may be awarded incentive unit awards (Awards)
relating to the underlying shares of common stock of DMHI issuable pursuant to
the terms of the Delaware Investments Incentive Unit Plan (the Plan) adopted
on November 30, 2010.
The Plan was adopted in order to:
assist the Manager in attracting, retaining, and rewarding key employees of the
company; enable such employees to acquire or increase an equity interest in the
company in order to align the interest of such employees and the Manager; and
provide such employees with incentives to expend their maximum efforts. Subject
to the terms of the Plan and applicable award agreements, Awards typically vest
in 25% increments on a four-year schedule, and shares of common stock underlying
the Awards are issued after vesting. The fair market value of the shares of
DMHI, is normally determined as of each March 31, June 30, September 30 and
December 31 by an independent appraiser. Generally, a stockholder may put shares
back to the company during the put period communicated in connection with the
applicable valuation.
Delaware Investments
Notional Investment Plan
A portion of a portfolio managers retained profit share may be
notionally exposed to the return of a portfolio of Delaware Investments Family
of Funds-managed funds pursuant to the terms of the Delaware Investments
Notional Investment Plan. The retained amount will vest in three equal tranches
in each of the first, second and third years following the date upon which the
investment is made.
Macquarie Group Employee
Retained Equity Plan
A portion of a portfolio managers retained profit share may be
invested in the Macquarie Group Employee Retained Equity Plan (MEREP), which
is used to deliver remuneration in the form of Macquarie Group Limited
(Macquarie) equity. The main type of award currently being offered under the
MEREP is units comprising a beneficial interest in a Macquarie share held in a
trust for the employee, subject to the vesting and forfeiture provisions of the
MEREP. Subject to vesting conditions, vesting and release of the shares occurs
in equal tranches two, three, and four years after the date of
investment.
Oth
e
r
Compensation
-
Portfolio managers may also participate in benefit plans and programs available
generally to all employees.
PIMCO
PIMCO has
adopted a Total Compensation Plan for its professional level employees,
including its portfolio managers, that is designed to pay competitive
compensation and reward performance, integrity and teamwork consistent with the
firms mission statement. The Total Compensation Plan includes an incentive
component that rewards high performance standards, work ethic and consistent
individual and team contributions to the firm. The compensation of portfolio
managers consists of a base salary and discretionary performance bonuses, and
may include an equity or long term incentive component.
Certain employees of PIMCO, including
portfolio managers, may elect to defer compensation through PIMCOs deferred
compensation plan. PIMCO also offers its employees a non-contributory defined
contribution plan through which PIMCO makes a contribution based on the
employees compensation. PIMCOs contribution rate increases at a specified
compensation level, which is a level that would include portfolio managers.
80
The Total Compensation Plan consists of three components:
-
Base Salary
- Base salary is determined based on core job
responsibilities, positions/levels, and market factors. Base salary levels are
reviewed annually, when there is a significant change in job
responsibilities
or a
significant change in the market. Base salary is paid in regular installments
throughout the year and payment dates are in line with local practice.
-
Performance Bonus
- Performance bonuses are
designed to reward individual performance. Each professional and his or her
supervisor will agree upon performance objectives to serve as a basis for
performance evaluation during the year. The objectives will outline individual
goals according to pre-established measures of the group or department
success. Achievement against these goals as measured by the employee and
supervisor will be an important, but not exclusive, element of the bonus
decision process. Award amounts are determined at the discretion of the
Compensation Committee (and/or certain senior portfolio managers, as
appropriate) and will also consider firm performance.
-
Equity or Long Term Incentive
Compensation
- Equity allows
key professionals to participate in the long-term growth of the firm. This
program provides mid to senior level employees with the potential to acquire
an equity stake in PIMCO over their careers and to better align employee
incentives with the firms long-term results. These options vest over a number
of years and may convert into PIMCO equity which shares in the profit
distributions of the firm. M Units are non-voting common equity of PIMCO and
provide a mechanism for individuals to build a significant equity stake in
PIMCO over time. Employees who reach a total compensation threshold are
delivered their annual compensation in a mix of cash and option awards. PIMCO
incorporates a progressive allocation of option awards as a percentage of
total compensation which is in line with market practices.
In certain countries with significant
tax implications for employees to participate in the M Unit Option Plan, PIMCO
continues to use the Long Term Incentive Plan (LTIP) in place of the M Unit
Option Plan. The LTIP provides cash awards that appreciate or depreciate based
upon PIMCOs performance over a three-year period. The aggregate amount
available for distribution to participants is based upon PIMCOs profit
growth.
Participation in the M Unit Option Plan
and LTIP is contingent upon continued employment at PIMCO.
In addition, the following non-exclusive
list of qualitative criteria may be considered when specifically determining the
total compensation for portfolio managers:
-
3-year, 2-year and 1-year
dollar-weighted and account-weighted, pre-tax investment performance as judged
against the applicable benchmarks for each account managed by a portfolio
manager (including the Funds) and relative to applicable industry peer
groups;
-
Appropriate risk positioning that
is consistent with PIMCOs investment philosophy and the Investment
Committee/CIO approach to the generation of alpha;
-
Amount and nature of assets managed
by the portfolio manager;
-
Consistency of investment
performance across portfolios of similar mandate and guidelines (reward low
dispersion);
-
Generation and contribution of
investment ideas in the context of PIMCOs secular and cyclical forums,
portfolio strategy meetings, Investment Committee meetings, and on a
day-to-day basis;
-
Absence of defaults and price
defaults for issues in the portfolios managed by the portfolio manager;
-
Contributions to asset retention,
gathering and client satisfaction;
-
Contributions to mentoring,
coaching and/or supervising; and
-
Personal growth and skills
added.
A
portfolio managers compensation is not based directly on the performance of any
Fund or any other account managed by that portfolio manager.
81
Profit Sharing Plan.
Portfolio managers who are Managing Directors of PIMCO receive
compensation from a non-qualified profit sharing plan consisting of a portion of
PIMCOs net profits. Portfolio managers who are Managing Directors receive an
amount determined by the Compensation Committee, based upon an individuals
overall contribution to the firm.
Ownership of
shares
As of March 31, 2013, none of the portfolio managers owned Fund
shares.
TRADING PRACTICES AND
BROKERAGE
|
Portfolio transactions are executed by
the Manager or the respective Sub-Adviser, as appropriate, on behalf of each
Fund in accordance with the standards described below.
The Manager or the respective Sub-Adviser
selects broker/dealers to execute transactions on behalf of the Fund for the
purchase or sale of portfolio securities on the basis of the Managers or the
respective Sub-Advisers, as appropriate, judgment of their professional
capability to provide the service. The primary consideration in selecting
broker/dealers is to seek those broker/dealers who will provide best execution
for the Funds. Best execution refers to many factors, including the price paid
or received for a security, the commission charged, the promptness and
reliability of execution, the confidentiality and placement accorded the order
and other factors affecting the overall benefit obtained by the account on the
transaction. Each Fund pays reasonably competitive brokerage commission rates
based upon the professional knowledge of the Managers or the respective
Sub-Advisers trading department as to rates paid and charged for similar
transactions throughout the securities industry. In some instances, a Fund may
pay a minimal share transaction cost when the transaction presents no
difficulty. Fixed income trades are made on a net basis where securities are
either bought or sold directly from or to a broker/dealer. In these instances,
there is no direct commission charged, but there is a spread (the difference
between the buy and sell price), which is the equivalent of a
commission.
Portfolio transactions for certain of the
Funds may be effected in foreign markets that may not allow negotiation of
commissions or where it is customary to pay fixed rates.
During the last three fiscal years,
the aggregate dollar amounts of brokerage commissions paid by each Fund were as
follows:
Fund
|
2011
|
2012
|
2013
|
Optimum Large Cap
Growth Fund
|
$1,352,282
|
$956,968
|
$1,096,384
|
Optimum Large Cap
Value Fund
|
$708,298
|
$972,949
|
$629,458
|
Optimum Small-Mid Cap
Growth Fund
|
$614,841
|
$705,417
|
$677,018
|
Optimum Small-Mid Cap
Value Fund
|
$281,141
|
$286,828
|
$388,659
|
Optimum International
Fund
|
$514,785
|
$298,194
|
$649,202
|
Optimum Fixed Income
Fund
|
$3,280
|
$13,950
|
$18,687
|
82
The following Sub-Advisers effected Fund
transactions through the affiliated brokers of the Sub-Adviser, Manager or Fund.
For the last three fiscal years, the aggregate amount of all commissions for
transactions effected through affiliated brokers, the percentage such amount
represented of all commissions generated by Sub-Adviser and Manager directed
transactions, and the percentage of all transactions effected through the
affiliated brokers are disclosed below.
2013
|
|
|
|
Percentage
Of
|
|
|
|
|
Aggregate
|
|
|
Aggregate
|
Percentage
Of
|
Amount
Of
|
|
|
Amount
Of
|
Aggregate
|
Transactions
|
|
|
Commissions
|
Commissions
|
Effected
|
|
Name Of
Affiliated
|
Paid To
An
|
Paid To
An
|
Through
|
Fund/Sub-Adviser
|
Broker
|
Affiliated
Broker
|
Affiliated
Broker
|
Affiliated
Broker
|
Optimum Large Cap
|
|
|
|
|
Growth Fund/T. Rowe
|
|
|
|
|
Price
|
Macquarie Equities
|
$109
|
0.20%
|
0.12%
|
Optimum Large Cap
|
Fred Alger &
|
|
|
|
Growth
Fund/Alger
|
Company, Incorporated
|
$270,844
|
35.6%
|
32.3%
|
Optimum Small-Mid
|
|
|
|
|
Cap Growth
|
|
|
|
|
Fund/Wellington
|
Macquarie
|
$1,481
|
0.28%
|
0.14%
|
Optimum Small-Mid
|
Berwyn Financial
|
|
|
|
Cap Value
Fund/Killen
|
Services
|
$31,503
|
25.3%
|
25.0%
|
Optimum International
|
|
|
|
|
Fund/Mondrian
|
Macquarie Equities
|
$223.88
|
0.42%
|
0.22%
|
2012
|
|
|
|
Percentage
Of
|
|
|
|
|
Aggregate
|
|
|
Aggregate
|
Percentage
Of
|
Amount
Of
|
|
|
Amount
Of
|
Aggregate
|
Transactions
|
|
|
Commissions
|
Commissions
|
Effected
|
|
Name Of
Affiliated
|
Paid To
An
|
Paid To
An
|
Through
|
Fund/Sub-Adviser
|
Broker
|
Affiliated
Broker
|
Affiliated
Broker
|
Affiliated
Broker
|
Optimum Large Cap
|
Fred Alger &
|
|
|
|
Growth
Fund/Alger
|
Company, Incorporated
|
$165,006
|
22.2%
|
22.5%
|
Optimum Small-Mid
|
Berwyn Financial
|
|
|
|
Cap Value
Fund/Killen
|
Services
|
$27,409
|
31.9%
|
28.9%
|
Optimum Small-Mid
|
|
|
|
|
Cap Growth
|
|
|
|
|
Fund/Wellington
|
Macquarie
|
$2,336
|
0.46%
|
0.34%
|
Optimum International
|
|
|
|
|
Fund/Mondrian
|
Macquarie
|
$1,466
|
2.77%
|
2.90%
|
83
2011
|
|
|
|
Percentage Of
|
|
|
|
|
Aggregate
|
|
|
Aggregate
|
Percentage Of
|
Amount Of
|
|
|
Amount
Of
|
Aggregate
|
Transactions
|
|
|
Commissions
|
Commissions
|
Effected
|
|
Name Of
Affiliated
|
Paid To
An
|
Paid To
An
|
Through
|
Fund/Sub-Adviser
|
Broker
|
Affiliated Broker
|
Affiliated Broker
|
Affiliated Broker
|
Optimum
Small-Mid
|
Berwyn Financial
|
|
|
|
Cap
Value Fund/Killen
|
Services
|
$29,287
|
30.4%
|
31.1%
|
Optimum Large
Cap
|
|
|
|
|
Growth Fund/T.
Rowe
|
Macquarie
Equities
|
$168
|
0.22%
|
0.14%
|
Price
|
|
|
|
|
Subject to best execution and Rule 12b-1(h) under the 1940 Act, the
Manager or Sub-Advisers may allocate brokerage business to broker/dealers who
provide brokerage and research services. These services may include providing
advice, either directly or through publications or writings, as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities;
furnishing of analyses and reports concerning issuers, securities or industries;
providing information on economic factors and trends; assisting in determining
portfolio strategy; and providing portfolio performance evaluation and technical
market analyses. Such services are used by the manager or a sub-adviser in
connection with its investment decision-making process with respect to one or
more Funds and accounts managed by it, and may not be used, or used exclusively,
with respect to the Fund or account generating the brokerage.
As provided in the 1934 Act, as amended,
and the Management Agreement and Sub-Advisory
Agreements, higher commissions are permitted to be
paid to broker/dealers who provide brokerage and research services than to
broker/dealers who do not provide such services, if such higher commissions are
deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions directed to broker/dealers who provide
such brokerage and research services may result in the Funds paying higher
commissions, the Manager and Sub-Advisers believe that the commissions paid to
such broker/dealers are not, in general, higher than commissions that would be
paid to broker/dealers not providing such services and that such commissions are
reasonable in relation to the value of the brokerage and research services
provided. In some instances, services may be provided to the Manager or a
Sub-Adviser that constitute in some part brokerage and research services used by
the Manager or Sub-Adviser in connection with its investment decision-making
process, and constitute in some part services used by the Manager or Sub-Adviser
in connection with administrative or other functions not related to its
investment decision-making process. In such cases, the Manager or Sub-Adviser
will make a good faith allocation of brokerage and research services and will
pay out of its own resources for services used by the manager or sub-adviser in
connection with administrative or other functions not related to its investment
decision-making process.
84
During the fiscal year ended March 31, 2013, the Funds paid brokerage
commissions in the amounts indicated below to broker/dealers who provided
brokerage and research services:
|
Brokerage
Commissions Directed For
|
Fund
|
Brokerage And
Research Services
|
Optimum Large Cap Value Fund
|
$327,046 (Herndon)
|
|
$65,999 (MFS)
|
Optimum Small-Mid Cap
Growth Fund
|
$30,878 (CWAM)
|
Optimum Small-Mid Cap
Value Fund
|
$157,604
(Delafield)
|
As of March 31, 2013, the following
Funds held securities of their regular broker/dealers, as defined in Rule 10b-1
under the 1940 Act:
Fund
|
Regular
Brokers/Dealers
|
Optimum Large Cap Value
Fund
|
Goldman Sachs & Co.
|
|
JPMorgan Chase &
Co.
|
Combined orders for two or more accounts
or funds engaged in the purchase or sale of the same security may be placed if
the judgment is made that joint execution is in the best interest of each
participant and will result in best execution. Transactions involving commingled
orders are allocated in a manner deemed equitable to each account. When a
combined order is executed in a series of transactions, at different prices,
each account participating in the order may be allocated an average price
obtained from the executing broker. The Manager or Sub-Advisers may randomly
allocate purchases or sales among participating accounts when the amounts
involved are too small to be evenly proportioned in a cost efficient manner. In
performing random allocations, the Manager or Sub-Advisers will consider
consistency of strategy implementation among participating accounts. It is
believed that the ability of the accounts to participate in volume transactions
will generally be beneficial to the accounts. Although it is recognized that, in
some cases, joint execution of orders and/or random allocation of small orders
could adversely affect the price or volume of the security that a particular
account may obtain, the advantages of combined orders or random allocation based
on size may outweigh the possible advantages of separate
transactions.
Consistent with Financial Industry
Regulatory Authority (FINRA) rules, and subject to seeking best execution, the
Manager or Sub-Advisers may place orders with broker/dealers that have agreed to
defray certain Fund expenses, such as custodian fees.
In addition, so long as no fund is
disadvantaged, portfolio transactions that generate commissions or their
equivalent may be allocated to broker/dealers who provide daily portfolio
pricing services to the Trust. Subject to best execution, commissions allocated
to brokers providing such pricing services may or may not be generated by the
funds receiving the pricing service.
Capitalization
The Trust
currently has authorized, and allocated to each Class of each Fund, an unlimited
number of shares of beneficial interest with no par value allocated to each
Class of each Fund. All shares are, when issued in accordance with the Trusts
registration statement (as amended from time to time), governing instruments and
applicable law, fully paid and non-assessable. Shares do not have preemptive
rights. All shares of each Fund represent an undivided proportionate interest in
the assets of such Fund. Shares of the Funds Institutional Class may not vote
on any matter that affects the Fund Classes distribution plans under Rule
12b-1. Similarly, as a general matter, shareholders of the Fund Classes may vote
only on matters affecting their respective Class, including the Fund Classes
Rule 12b-1 Plans that relate to the Class of shares that they hold. However,
Class B shares may vote on any proposal to increase materially the fees to be
paid by a Fund under the Rule 12b-1 Plan relating to such Funds Class A shares.
Except for the foregoing, each share Class has the same voting and other rights
and preferences as the other Classes of each Fund. General expenses of the Funds
will be allocated on a pro-rata basis to the classes according to asset size,
except that expenses of the Fund Classes Rule 12b-1 Plans will be allocated
solely to those classes.
85
Non-cumulative
Voting
The Trusts shares have non-cumulative voting rights, which means that
the holders of more than 50% of the shares of the Trust voting for the election
of Trustees can elect all of the Trustees if they choose to do so, and, in such
event, the holders of the remaining shares will not be able to elect any
Trustees.
As of the close of business on July 31,
2007, the Funds ceased to permit new or subsequent investments, including
investments through automatic investment plans and by qualified retirement plans
(such as 401(k) or 457 plans), in Class B shares in any of the Funds, except
through a reinvestment of dividends or capital gains or permitted exchanges.
Existing shareholders of Class B shares may continue to hold their Class B
shares, reinvest dividends into Class B shares, and exchange their Class B
shares of one Fund for Class B shares of another Fund, as permitted by existing
exchange privileges.
For Class B shares outstanding as of July
31, 2007 and Class B shares acquired upon reinvestment of dividends or capital
gains, all Class B share attributes, including the CDSC schedules, conversion to
Class A schedule, and distribution and service (12b-1) fees, will continue in
their current form. You will be notified via Supplement if there are any changes
to these attributes, sales charges, or fees.
General
Information
Shares of each Fund are offered on a continuous basis by the Distributor
and may be purchased only through a securities dealer or other financial
intermediary that has entered into a Dealers Agreement with the Funds
Distributor (a participating securities dealer or other financial
intermediary). Participating securities dealers and other financial
intermediaries are responsible for transmitting orders promptly. The Trust
reserves the right to suspend sales of a Funds shares, and reject any order for
the purchase of Fund shares if, in the opinion of management, such rejection is
in such Funds best interest.
The minimum initial investment generally
is $2,500 for Class A shares and Class C shares. Subsequent purchases of such
Classes generally must be at least $100. The initial and subsequent investment
minimums for Class A shares will be waived for purchases by officers, Trustees
and employees of the Funds, the Manager or any of the Managers affiliates if
the purchases are made pursuant to a payroll deduction program. Shares purchased
pursuant to the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act
and shares purchased in connection with an automatic investment plan are subject
to a minimum initial purchase of $250 and a minimum subsequent purchase of $25.
There are no minimum purchase requirements for accounts opened under an asset
allocation program established through a participating securities dealer or
other financial intermediary. There are no minimum purchase requirements for the
Institutional Class, but certain eligibility requirements must be
satisfied.
86
For Class C shares, each purchase must be in an amount that is less
than $1 million. The Funds will reject any purchase order for $1 million or more
of Class C shares. An investor should keep in mind that reduced front-end sales
charges apply to investments of $75,000 or more (Optimum Large Cap Growth Fund,
Optimum Large Cap Value Fund, Optimum Small-Mid Cap Growth Fund, Optimum
Small-Mid Cap Value Fund, and Optimum International Fund) or $100,000 or more
(Optimum Fixed Income Fund) in Class A shares, and that Class A shares are
subject to lower annual 12b-1 Plan expenses than Class B and Class C shares and
are not subject to a CDSC. Selling dealers are responsible for transmitting
orders promptly. If a purchase is canceled because your check is returned
unpaid, you are responsible for any loss incurred. Each Fund can redeem shares
from your account(s) to reimburse itself for any loss, and you may be restricted
from making future purchases in any Fund. Each Fund reserves the right to reject
purchase orders paid by third-party checks or checks that are not drawn on a
domestic branch of a United States financial institution. If a check drawn on a
foreign financial institution is accepted, you may be subject to additional bank
charges for clearance and currency conversion.
Each Fund also reserves the right,
following shareholder notification, to charge a service fee on certain accounts
that, as a result of redemption, have remained below the minimum stated account
balance for a period of three or more consecutive months. Holders of such
accounts may be notified of their insufficient account balance and advised that
they have until the end of the current calendar quarter to raise their balance
to the stated minimum. If the account has not reached the minimum balance
requirement by that time, the Funds may charge a $9 fee for that quarter and
each subsequent calendar quarter until the account is brought up to the minimum
balance. The service fee will be deducted from the account during the first week
of each calendar quarter for the previous quarter, and will be used to help
defray the cost of maintaining low-balance accounts. No fees will be charged
without proper notice, and no CDSC will apply to such assessments. Fees will not
be imposed on accounts that are held in certain asset allocation programs
established through a participating securities dealer or other financial
intermediary.
Each Fund also reserves the right, upon
60 days written notice, to involuntarily redeem accounts that remain under the
minimum initial purchase amount as a result of redemptions. An investor making
the minimum initial investment may be subject to involuntary redemption without
the imposition of a CDSC if he or she redeems any portion of his or her account.
Class A, Class B, and Class C shares
represent a proportionate interest in each Funds assets and will receive a
proportionate interest in such Funds income, before application of any expenses
under such Funds Rule 12b-1 Plan.
Certificates representing shares
purchased are not issued. However, an investor will have the same rights of
ownership with respect to such shares as if certificates had been issued.
Accounts of certain omnibus accounts and
managed or asset-allocation programs may maintain balances that are below the
minimum stated account balance without incurring a service fee or being subject
to involuntary redemption.
Alternative Purchase
Arrangements Class A and Class C Shares
The alternative purchase arrangements offered for
the Fund Classes permit investors to choose the method of purchasing shares that
is most suitable for their needs given the amount of their purchase, the length
of time they expect to hold their shares and other relevant circumstances.
Investors should determine whether, given their particular circumstances, it is
more advantageous to purchase Class A shares and incur a front-end sales charge
and annual Rule 12b-1 Plan expenses of up to 0.35% of the average daily net
assets of Class A shares, or to purchase Class C shares and have the entire
initial purchase amount invested in a Fund with the investment thereafter
subject to a CDSC and annual Rule 12b-1 Plan expenses. Class C shares are
subject to annual Rule 12b-1 Plan expenses of up to 1.00% (0.25% of which are
service fees to be paid to the Distributor, participating securities dealers or
other financial intermediaries for providing personal service and/or maintaining
shareholder accounts) of average daily net assets of the respective Class. Class
C shares do not convert to another Class.
87
The
higher Rule 12b-1 Plan expenses on Class C shares will be offset to the extent a
return is realized on the additional money initially invested upon the purchase
of such shares. However, there can be no assurance as to the return, if any,
that will be realized on such additional money. In addition, the effect of any
return earned on such additional money will diminish over time.
For the distribution and related services
provided to, and the expenses borne on behalf of, the Funds, the Distributor and
others will be paid, in the case of Class A shares, from the proceeds of the
front-end sales charge and Rule 12b-1 Plan fees and, in the case of Class C
shares, from the proceeds of the Rule 12b-1 Plan fees and, if applicable, the
CDSC incurred upon redemption. Participating securities dealers or other
financial intermediaries may receive different compensation for selling Class A
and Class C shares. Investors should understand that the purpose and function of
the respective Rule 12b-1 Plans and the CDSC applicable to Class C shares are
the same as those of the Rule 12b-1 Plan and the front-end sales charge
applicable to Class A Shares in that such fees and charges are used to finance
the distribution of the respective Classes. See Plans Under Rule 12b-1 for the
Fund Classes below for more information.
Dividends, if any, paid on the Fund
Classes and Institutional Class shares will be calculated in the same manner, at
the same time and on the same day and will be in the same amount, except that
the amounts of Rule 12b-1 Plan expenses relating to Class A and Class C shares
will be borne exclusively by such shares. See Determining Offering Price and
Net Asset Value below for more information.
Class A Shares:
Purchases of $75,000 or
more (with respect to the Optimum Large Cap Growth Fund, Optimum Large Cap Value
Fund, Optimum Small-Mid Cap Growth Fund, Optimum Small-Mid Cap Value Fund, and
Optimum International Fund) or $100,000 or more (with respect to the Optimum
Fixed Income Fund) of Class A shares at the offering price carry reduced
front-end sales charges as shown in the table in the Fund Classes Prospectus,
and may include a series of purchases over a 13-month period under a letter of
intent signed by the purchaser. See Special Purchase Features -- Class A
Shares below for more information on ways in which investors can avail
themselves of reduced front-end sales charges and other purchase features.
From time to time, the Distributor may
re-allow to participating securities dealers or other financial intermediaries
the full amount of the front-end sales charge. The Distributor should be
contacted for further information on these requirements as well as the basis and
circumstances upon which the additional commission will be paid. Participating
securities dealers may be deemed to have additional responsibilities under the
securities laws. Dealers or other financial intermediaries who receive 90% or
more of the sales charge may be deemed to be underwriters under the 1933 Act.
Class A Broker Exchanges:
Class A shares purchased by
accounts participating in certain programs sponsored by and/or controlled by
financial intermediaries (Programs) may be exchanged by the financial
intermediary on behalf of the shareholder for Institutional Class shares of the
Funds under certain circumstances, including such Programs eligibility to
purchase Institutional Class shares of the Funds. Such exchange will be on the
basis of the net asset values per share, without the imposition of any sales
load, fee or other charge.
If a shareholder of Institutional Class
shares has ceased his or her participation in the Program, the financial
intermediary may exchange all such Institutional Class shares for Class A shares
of a Fund. Such exchange will be on the basis of the relative net asset values
of the shares, without imposition of any sales load, fee or other charge.
Holders of Class A shares that were sold without a front-end sales load but for
which the Distributor has paid a commission to a financial intermediary are
generally not eligible for this exchange privilege until two years after the
purchase of such Class A shares.
88
Exchange of Class A shares for Institutional Class shares of the same
Fund, or the exchange of Institutional Class shares for Class A shares of the
same Fund, under these particular circumstances, will be tax-free for federal
income tax purposes. You should consult with your tax adviser regarding the
state and local tax consequences of such an exchange of Fund shares.
This exchange privilege is subject to
termination and may be amended from time to time.
Class C Broker
Exchanges
Class C shares purchased by accounts participating in certain Programs
may be exchanged by the financial intermediary on behalf of the shareholder for
either Class A shares or Institutional Class shares of a Fund under certain
circumstances, including such Programs eligibility to purchase either Class A
shares or Institutional Class shares of the Fund. Such exchange will be on the
basis of the net asset values per share, without the imposition of any sales
load, fee or other charge.
Holders of Class C shares that are
subject to a CDSC are generally not eligible for this exchange privilege until
the applicable CDSC period has expired. The applicable CDSC period is generally
one year after the purchase of such Class C shares.
If a shareholder of Institutional Class
shares has ceased his or her participation in the Program, the financial
intermediary may exchange all such Institutional Class shares for Class C shares
of a Fund. Such exchange will be on the basis of the relative net asset values
of the shares, without imposition of any sales load, fee or other charge.
Exchanges of Class C shares for Class A
shares or Institutional Class shares of the same Fund, or the exchange of
Institutional Class shares for Class C shares of the same Fund, under these
particular circumstances, will be tax-free for federal income tax purposes. You
should consult with your tax adviser regarding the state and local tax
consequences of such an exchange of Fund shares.
This exchange privilege is subject to
termination and may be amended from time to time.
Dealers Commission
Class A shares
Participating securities dealers or other financial intermediaries may be
eligible for a dealers commission in connection with certain purchases made
under a letter of intent or pursuant to an investors right of accumulation.
Participating securities dealers or other financial intermediaries should
contact the Distributor concerning the applicability and calculation of the
dealers commission in the case of combined purchases.
An exchange from other Funds will not
qualify for payment of the dealers commission, unless a dealers commission or
similar payment has not been previously paid on the assets being exchanged. The
schedule and program for payment of the dealers commission are subject to
change or termination at any time by the Distributor at its discretion.
Contingent Deferred
Sales Charge Alternative Class B and Class C Shares
Proceeds from the CDSC and the annual Rule 12b-1
Plan fees applicable to Class B and C shares are paid to the Distributor and
others for providing distribution and related services, and bearing related
expenses, in connection with the sale of Class B and C shares. These payments
support the compensation paid to participating securities broker/dealers or
other financial intermediaries for selling Class B and C shares. Payments to the
Distributor and others under the Class B and C Rule 12b-1 Plans may be in an
amount equal to no more than 1.00% annually. The combination of the CDSC and the
proceeds of the Rule 12b-1 Plans fees makes it possible for a Fund to sell Class
B shares without deducting a front-end sales charge at the time of
purchase.
89
Holders of Class B and C shares who exercise the exchange privilege
described below will continue to be subject to the CDSC schedule for Class B and
C shares described in this Part B, even after the exchange. See Redemption and
Exchange below.
Automatic Conversion
of Class B Shares
During the seventh year after purchase and, thereafter, until converted
automatically to Class A shares, Class B shares will still be subject to the
annual Rule 12b-1 Plan expenses of up to 1.00% of average daily net assets of
those shares. At the end of eight years after purchase, an investors Class B
shares will be automatically converted to Class A shares of a Fund. Such
conversion will constitute a tax-free exchange for federal income tax purposes.
Investors should consult their tax advisers regarding the state and local tax
consequences of the conversion or exchange of classes of shares. Class A shares
to which Class B shares will convert are subject to ongoing annual Rule 12b-1
Plan expenses of up to 0.30% of average daily net assets of such
shares.
Conversions of Class B shares to Class A
shares will occur only four times in any calendar year, on the 18th day or next
business day of March, June, September and December (each, a Conversion Date).
A business day is any day that the New York Stock Exchange (NYSE) is open for
business (Business Day). If the eighth anniversary after a purchase of Class B
shares falls on a Conversion Date, an investors Class B shares will be
converted on that date. If the eighth anniversary occurs between Conversion
Dates, an investors Class B shares will be converted on the next Conversion
Date after such anniversary. Consequently, if a shareholders eighth anniversary
falls on the day after a Conversion Date, that shareholder will have to hold
Class B shares for as long as three additional months after the eighth
anniversary of purchase before the shares will automatically convert to Class A
shares.
Class B shares acquired through
reinvestment of dividends will convert to Class A shares of a Fund pro rata with
Class B shares of the Fund not acquired through dividend reinvestment.
Plans under Rule 12b-1
for the Fund Classes
Pursuant to Rule 12b-1 under the 1940 Act, each Fund has adopted a
separate plan for the Fund Classes (the Plans). Each Plan permits the relevant
Fund to pay for certain distribution, promotional and related expenses involved
in the marketing of only the Class of shares to which the Plan applies. The
Plans do not apply to Institutional Class shares of the Funds. Institutional
Class shares are not included in calculating the Plans fees, and the Plans are
not used to assist in the distribution and marketing of such shares of the
Funds. Holders of Institutional Class shares of the Funds may not vote on
matters affecting the Plans.
The Plans permit the Funds, pursuant to
their Distribution Agreement, to pay out of the assets of the Fund Classes
monthly fees to the Distributor for its services and expenses in distributing
and promoting sales of shares of such classes. These expenses include, among
other things, preparing and distributing advertisements, sales literature, and
prospectuses and reports used for sales purposes, compensating sales and
marketing personnel, holding special promotions for specified periods of time
and paying distribution and maintenance fees to participating securities
broker/dealers or other financial intermediaries. In connection with the
promotion of shares of the Fund Classes, the Distributor may, from time to time,
pay to participate in dealer-sponsored seminars and conferences, and reimburse
dealers for expenses incurred in connection with pre-approved seminars,
conferences and advertising. The Distributor may pay or allow additional
promotional incentives to dealers as part of pre-approved sales contests and/or
to dealers who provide extra training and information concerning the Fund
Classes and increase sales of the Fund Classes.
In addition, each Fund may make payments
from the Rule 12b-1 Plan fees of its respective Fund Classes directly to others,
such as banks, who aid in the distribution of class shares or provide services
in respect of a Class, pursuant to service agreements with the Trust. The Plan
expenses relating to Class B shares and Class C shares are also used to pay the
Distributor for advancing the commission costs to participating securities
dealers or other financial intermediaries with respect to the initial sale of
such shares.
90
The
maximum aggregate fee payable by the Funds under the Plans, and the Funds
Distribution Agreement, is, on an annual basis, up to 0.35% (0.25% of which are
service fees to be paid to the Distributor, securities dealers or other
financial intermediaries for providing personal service and/or maintaining
shareholder accounts) of each Funds Class A shares average daily net assets
for the year, and up to 1.00% (0.25% of which are service fees to be paid to the
Distributor, securities dealers or other financial intermediaries for providing
personal service and/or maintaining shareholder accounts) of each Funds Class B
shares and Class C shares average daily net assets for the year. The Funds
Distributor may reduce/waive these amounts at any time.
While payments pursuant to the Plans may
not exceed the foregoing amounts, the Plans do not limit fees to amounts
actually expended by the Distributor. It is therefore possible that the
Distributor may realize a profit in any particular year. However, the
Distributor currently expects that its distribution expenses will likely equal
or exceed payments to it under the Plans. The Distributor may, however, incur
such additional expenses and make additional payments to dealers from its own
resources to promote the distribution of shares of the Fund Classes. The monthly
fees paid to the Distributor under the Plans are subject to the review and
approval of the Trusts Independent Trustees, who may reduce the fees or
terminate the Plans at any time.
All of the distribution expenses incurred
by the Distributor and others, such as participating securities dealers or other
financial intermediaries, in excess of the amount paid on behalf of Class A
shares, Class B shares, and Class C shares would be borne by such persons
without any reimbursement from such Fund Classes. Subject to seeking best
execution, the Funds may, from time to time, buy or sell portfolio securities
from or to firms that receive payments under the Plans.
From time to time, the Distributor may
pay additional amounts from its own resources to participating securities
dealers or other financial intermediaries for aid in distribution or for aid in
providing administrative services to shareholders.
The Plans and the Distribution Agreement
have all been approved by the Board, including a majority of the Independent
Trustees who have no direct or indirect financial interest in the Plans and
related Distribution Agreement by vote cast in person at a meeting duly called
for the purpose of voting on the Plans and such Agreement. Continuation of the
Plans and such Distribution Agreement must be approved annually by the Board in
the same manner as specified above.
Each year, the Board must determine
whether continuation of the Plans is in the best interest of shareholders of the
Fund Classes and that there is a reasonable likelihood of each Plan providing a
benefit to its respective Fund Class. The Plans and the Distribution Agreement,
as amended, may be terminated with respect to a Fund Class at any time without
penalty by a majority of Independent Trustees who have no direct or indirect
financial interest in the Plans and the Distribution Agreement, or by a majority
vote of the relevant Fund Class outstanding voting securities. Any amendment
materially increasing the percentage payable under the Plans must likewise be
approved by a majority vote of the relevant Fund Class outstanding voting
securities, as well as by a majority vote of Independent Trustees who have no
direct or indirect financial interest in the Plans or Distribution Agreement.
With respect to each Class A Plan, any material increase in the maximum
percentage payable thereunder must also be approved by a majority of the
outstanding voting securities of a Funds Class B shares. Also, any other
material amendment to the Plans must be approved by a majority vote of the
Trustees, including a majority of Independent Trustees who have no direct or
indirect financial interest in the Plans or Distribution Agreement. In addition,
in order for the Plans to remain effective, the selection and nomination of
Independent Trustees must be effected by the Trustees who are Independent
Trustees and who have no direct or indirect financial interest in the Plans or
Distribution Agreement. Persons authorized to make payments under the Plans must
provide written reports at least quarterly to the Board for their
review.
91
For the fiscal year ended March 31, 2013, Rule 12b-1 Plan payments
from Optimum Large Cap Growth Funds Class A, Class B, and Class C shares were:
$113,979, $23,240, and $1,134,316, respectively. Such amounts were used for the
following purposes:
Optimum Large Cap
Growth Fund
|
Class A
Shares
|
Class B
Shares
|
Class C
Shares
|
Advertising
|
$---
|
$---
|
$---
|
Annual/Semiannual
Reports
|
24
|
---
|
49
|
Broker Sales
Charges
|
---
|
11,987
|
68,050
|
Broker
Trails
|
113,848
|
5,794
|
1,064,434
|
Interest on Broker
Sales Charges
|
---
|
280
|
1,454
|
Promotional-Other
|
---
|
---
|
---
|
Prospectus
Printing
|
107
|
---
|
329
|
Total
|
$113,979
|
$18,061
|
$1,134,316
|
For the fiscal year ended March 31,
2013, Rule 12b-1 Plan payments from Optimum Large Cap Value Funds Class A,
Class B, and Class C shares were $106,913, $22,181, and $1,069,928,
respectively. Such amounts were used for the following purposes:
Optimum Large Cap
Value Fund
|
Class A
Shares
|
Class B
Shares
|
Class C
Shares
|
Advertising
|
$---
|
$---
|
$---
|
Annual/Semiannual
Reports
|
23
|
---
|
47
|
Broker Sales
Charges
|
---
|
11,408
|
67,338
|
Broker
Trails
|
106,789
|
5,530
|
989,701
|
Interest on Broker
Sales Charges
|
---
|
264
|
1,436
|
Promotional-Other
|
---
|
---
|
---
|
Prospectus
Printing
|
101
|
---
|
308
|
Total
|
$106,913
|
$17,202
|
$1,058,830
|
For the fiscal year ended March 31,
2013, Rule 12b-1 Plan payments from Optimum Small-Mid Cap Growth Funds Class A,
Class B, and Class C shares were: $20,318, $3,183, and $197,558, respectively.
Such amounts were used for the following purposes:
Optimum Small-Mid
Cap Growth Fund
|
Class A
Shares
|
Class B
Shares
|
Class C
Shares
|
Advertising
|
$---
|
$---
|
$---
|
Annual/Semiannual
Reports
|
16
|
---
|
20
|
Broker Sales
Charges
|
---
|
2,138
|
11,493
|
Broker
Trails
|
20,268
|
1,035
|
177,809
|
Interest on Broker
Sales Charges
|
---
|
30
|
245
|
Promotional-Other
|
---
|
---
|
---
|
Prospectus
Printing
|
34
|
---
|
73
|
Total
|
$20,318
|
$3,203
|
$189,640
|
92
For the fiscal year ended March, 31, 2013, Rule 12b-1 Plan payments
from Optimum Small-Mid Cap Value Funds Class A, Class B, and Class C shares
were: $18,075, $2,550, and $187,696, respectively. Such amounts were used for
the following purposes:
Optimum Small-Mid Cap Value
Fund
|
Class A Shares
|
Class B Shares
|
Class C Shares
|
Advertising
|
$---
|
$---
|
$---
|
Annual/Semiannual
Reports
|
16
|
---
|
20
|
Broker Sales
Charges
|
---
|
1,843
|
11,611
|
Broker
Trails
|
18,007
|
977
|
169,716
|
Interest on Broker
Sales Charges
|
---
|
19
|
242
|
Promotional-Other
|
---
|
---
|
---
|
Prospectus
Printing
|
52
|
---
|
141
|
Total
|
$18,075
|
$2,839
|
$181,730
|
For the fiscal year ended March 31,
2013, Rule 12b-1 Plan payments from Optimum International Funds Class A, Class
B, and Class C shares were: $31,488, $6,991, and $313,495, respectively. Such
amounts were used for the following purposes:
Optimum
International Fund
|
Class A
Shares
|
Class B
Shares
|
Class C
Shares
|
Advertising
|
$---
|
$---
|
$---
|
Annual/Semiannual
Reports
|
17
|
---
|
23
|
Broker Sales
Charges
|
---
|
4,206
|
21,525
|
Broker
Trails
|
31,337
|
1,742
|
286,745
|
Interest on Broker
Sales Charges
|
---
|
97
|
457
|
Promotional-Other
|
---
|
---
|
---
|
Prospectus
Printing
|
134
|
---
|
378
|
Total
|
$31,488
|
$6,045
|
$309,128
|
For the fiscal year ended March 31,
2013, Rule 12b-1 Plan payments from Optimum Fixed Income Funds Class A, Class
B, and Class C shares were: $145,185, $21,008, and $1,583,666, respectively.
Such amounts were used for the following purposes:
Optimum Fixed
Income Fund
|
Class A
Shares
|
Class B
Shares
|
Class C
Shares
|
Advertising
|
$---
|
$---
|
$---
|
Annual/Semiannual
Reports
|
26
|
---
|
60
|
Broker Sales
Charges
|
---
|
9,240
|
147,870
|
Broker
Trails
|
145,026
|
5,243
|
1,372,238
|
Interest on Broker
Sales Charges
|
---
|
202
|
3,153
|
Promotional-Other
|
---
|
---
|
---
|
Prospectus
Printing
|
133
|
---
|
517
|
Total
|
$145,185
|
$14,685
|
$1,523,838
|
Special Purchase
Features Class A Shares
Letter of intent:
The reduced front-end sales charges described above with respect to
Class A shares are also applicable to the aggregate amount of purchases made by
any such purchaser within a 13-month period pursuant to a written letter of
intent provided by the Distributor and signed by the purchaser, and not legally
binding on the signer or the Trust, which provides for the holding in escrow by
the service agent of 5% of the total amount of Class A shares intended to be
purchased until such purchase is completed within the 13-month period. The Funds
no longer accept retroactive letters of intent. The 13-month period begins on
the date of the earliest purchase. If the intended
investment is not completed, except as noted below, the purchaser will be asked
to pay an amount equal to the difference between the front-end sales charge on
Class A shares purchased at the reduced rate and the front-end sales charge
otherwise applicable to the total shares purchased. If such payment is not made
within 20 days following the expiration of the 13-month period, the service
agent will surrender an appropriate number of the escrowed shares for redemption
in order to realize the difference. Such purchasers may include the values (at
offering price at the level designated in their letter of intent) of all their
shares of the Funds (except shares of any Fund that does not carry a front-end
sales charge or CDSC, unless they were acquired through an exchange from a Fund
that carried a front-end sales charge or CDSC) previously purchased and still
held as of the date of their letter of intent toward the completion of such
letter. For purposes of satisfying an investors obligation under a letter of
intent, Class B shares and Class C shares of the Funds may be aggregated with
Class A shares of the Funds.
93
Combined Purchases Privilege:
In determining the availability of the reduced
front-end sales charge previously set forth with respect to Class A shares,
purchasers may combine the total amount of any combination of Class A shares,
Class B shares and/or Class C shares of the Funds (except shares of any Fund
that does not carry a front-end sales charge or CDSC, unless they were acquired
through an exchange from a Fund that carried a front-end sales charge or CDSC).
The privilege also extends to all
purchases made at one time by an individual; or an individual, his or her spouse
and their children under 21; or a trustee or other fiduciary of trust estates or
fiduciary accounts for the benefit of such family members (including certain
employee benefit programs).
Right of
Accumulation
In determining the
availability of the reduced front-end sales charge previously set forth with
respect to the Class A shares, purchasers may also combine any subsequent
purchases of Class A, Class B, and Class C shares of the Funds (except shares of
any Fund that does not carry a front-end sales charge or CDSC, unless they were
acquired through an exchange from a Fund that carried a front-end sales charge
or CDSC). If, for example, any such purchaser has previously purchased and still
holds Class A shares of Optimum Large Cap Growth Fund and/or shares of any other
of the Classes described in the previous sentence with a value of $70,000 and
subsequently purchases $10,000 at offering price of additional Class A shares of
Optimum Large Cap Growth Fund, the charge applicable to the $10,000 purchase
would currently be 4.75%. For the purpose of this calculation, the shares
presently held shall be valued at the public offering price that would have been
in effect were the shares purchased simultaneously with the current purchase.
Investors should refer to the table of sales charges for Class A shares in the
Fund Classes Prospectus to determine the applicability of the Right of
Accumulation to their particular circumstances.
35-Day Reinvestment
Privilege
Holders of Class A
Shares of the Funds (and of the Institutional Class holding shares that were
acquired through an exchange from another Fund offered with a front-end sales
charge) who redeem such shares have 35 days from the date of redemption to
reinvest all or part of their redemption proceeds in the same Class of the
Funds. In the case of Class A shares, the reinvestment will not be assessed an
additional front-end sales charge. The reinvestment will be subject to
applicable eligibility and minimum purchase requirements and must be in states
where shares of such other Funds may be sold. Persons investing redemption
proceeds from direct investments in a Fund offered without a front-end sales
charge will be required to pay the applicable sales charges when purchasing
Class A shares. The reinvestment privilege does not extend to redemptions of
Class B or Class C shares.
Any such reinvestment cannot exceed the
redemption proceeds (plus any amount necessary to purchase a full share). The
reinvestment will be made at the NAV next determined after receipt of
remittance.
94
Any
reinvestment directed to a Fund in which the investor does not then have an
account will be treated like all other initial purchases of the Funds shares.
Reinvestment
Plan
Unless otherwise
designated by shareholders in writing, dividends from net investment income and
distributions from realized securities profits, if any, will be automatically
reinvested in additional shares of the respective Fund Class in which an
investor has an account (based on the NAV in effect on the reinvestment date)
and will be credited to the shareholders account on that date. All dividends
and distributions of the Institutional Class are reinvested in the accounts of
the holders of such shares (based on the NAV in effect on the reinvestment
date). A confirmation of each dividend payment from net investment income and of
distributions from realized securities profits, if any, will be mailed to
shareholders in the first quarter of the next fiscal year.
Reinvestment of Dividends
in Other Funds
Subject to
applicable eligibility and minimum initial purchase requirements and the
limitations set forth below, holders of the Fund Classes may automatically
reinvest dividends and/or distributions in any of the Funds, in states where
their shares may be sold. Such investments will be at NAV at the close of
business on the reinvestment date without any front-end sales charge. The
service agent must be notified in writing and an account in the Fund into which
the dividends and/or distributions are to be invested must have been
established. Any reinvestment directed to a Fund in which the investor does not
then have an account will be treated like all other initial purchases of the
Funds shares.
Subject to the following limitations,
dividends and/or distributions from one Fund may be invested in shares of
another Fund, provided an account has been established. Dividends from Class A
shares may not be directed to Class B shares or Class C shares. Dividends from
Class B Shares may be directed only to other Class B shares, and dividends from
Class C shares may be directed only to other Class C shares.
Investing by
Exchange
If you have an
investment in one Fund, you may authorize an exchange of part or all of your
investment into shares of another Fund. If you wish to open an account by
exchange, call your participating securities dealer or other financial
intermediary for more information. All exchanges are subject to the eligibility
and minimum purchase requirements and any additional limitations set forth in
the Funds Prospectus. See Redemption and Exchange below for more complete
information concerning your exchange privileges.
Permissible exchanges into Class A shares
of the Funds will be made without a front-end sales charge, except for exchanges
of shares that were not previously subject to a front-end sales charge (unless
such shares were acquired through the reinvestment of dividends). Permissible
exchanges into Class B shares or Class C shares of the Funds will be made
without the imposition of a CDSC by the Fund from which the exchange is being
made at the time of the exchange.
Retirement Accounts for the
Fund Classes
An investment in
the Funds may be suitable for tax-deferred retirement plans, such as an
individual retirement account (IRA), Roth IRA or Coverdell Education Savings
Account. To determine whether the benefits of a tax-sheltered account are
appropriate, you should consult with a tax adviser.
95
Purchases of Class B shares are subject to a maximum purchase limitation
of $100,000 for retirement accounts. Purchases of Class C shares must be in an
amount that is less than $1,000,000 for such accounts. The maximum purchase
limitations apply only to the initial purchase of shares by the retirement plan.
The CDSC may be waived on certain redemptions of Class B shares and Class C
shares. See the Fund Classes Prospectus for a list of the instances in which the
CDSC is waived.
Retirement accounts may be subject to
plan establishment fees, annual maintenance fees and/or other administrative or
trustee fees. Fees may be shared by Delaware Management Trust Company, the
service agent, other affiliates of the Manager, participating securities dealers
or other financial intermediaries (including LPL) and others that provide
services to such Plans.
Certain shareholder investment services
available to non-retirement account shareholders may not be available to
retirement account shareholders. Certain retirement accounts may qualify to
purchase Institutional Class shares. For additional information on any of the
plans and retirement services, contact your participating securities dealer or
other financial intermediary.
It is advisable for an investor
considering any one of the retirement plans described below to consult with an
attorney, accountant or a qualified retirement plan consultant. For further
details, including applications for any of these accounts, contact your
participating securities dealer or other financial intermediary.
DETERMINING OFFERING PRICE AND NET ASSET
VALUE
|
Each Fund has authorized one or more
participating securities dealers or other financial intermediaries to accept
purchase and redemption orders on behalf of the Fund. Such participating
securities dealers or other financial intermediaries are authorized to designate
other intermediaries to accept purchase and redemption orders on behalf of each
Fund. For purposes of pricing, each Fund will be deemed to have received a
purchase or redemption order when a participating securities dealer or other
financial intermediary or, if applicable, its authorized designee, accepts the
order. Investors may be charged a fee when effecting transactions through a
participating securities dealer or other financial intermediary.
Orders for purchases and redemptions of
Class A shares are effected at the offering price next calculated after the
receipt of an order by a Fund, its agent or authorized designee. The offering
price for Class A shares consists of the NAV per share plus any applicable sales
charges. Orders for purchases and redemptions of Class B shares, Class C shares
and Institutional Class shares are effected at the NAV per share next calculated
after the order is placed. Participating securities dealers or other financial
intermediaries are responsible for transmitting orders promptly.
Offering price and NAV are computed as of
the close of regular trading on the NYSE, which is normally 4 p.m., Eastern
time, on days when the NYSE is open for business. The NYSE is scheduled to be
open Monday through Friday throughout the year except for days when the
following holidays are observed: New Years Day, Martin Luther King, Jr.s
Birthday, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving, and Christmas. The time at which transactions and shares are
priced and the time by which orders must be received may be changed in case of
emergency or if regular trading on the NYSE is stopped at a time other than 4:00
p.m. Eastern Time. When the NYSE is closed, the Funds will generally be closed,
pricing calculations will not be made, and purchase and redemption orders will
not be processed. In the event of changes in the NYSEs time of closing, the
Trust reserves the right to price at a different time, to price more often than
once daily or to make the offering price effective at a different time.
96
Each Funds NAV per share for each
Class is calculated by subtracting the liabilities of each class from its total
assets and dividing by the resulting number of the shares outstanding for that
class. Expenses and fees are accrued daily. In determining each Funds total net
assets, portfolio securities primarily listed or traded on a national or foreign
securities exchange, except for bonds, are generally valued at the closing price
on that exchange, unless such closing prices are determined to be not readily
available pursuant to the Funds pricing procedures. Exchange traded options are
valued at the last reported sale price or, if no sales are reported, at the mean
between bid and asked prices. Non-exchange traded options are valued at fair
value using a mathematical model. Futures contracts are valued at their daily
quoted settlement price. Securities not traded on a particular day,
over-the-counter securities, and government and agency securities are valued at
the mean value between bid and asked prices. Debt securities (other than
short-term obligations) are valued on the basis of valuations provided by a
pricing service when such prices are believed to reflect the fair value of such
securities. Foreign securities, currencies and other assets denominated in
foreign currencies are translated into U.S. dollars at the mean between the bid
and offer quotations of such currencies based on rates in effect as of the close
of the NYSE, as provided by an independent pricing service. Use of a pricing
service has been approved by the Board. Prices provided by a pricing service
take into account appropriate factors such as institutional trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics and other market data. Subject to the foregoing,
securities for which market quotations are determined to be not readily
available and other assets are valued at fair value as determined in good faith
and in a method approved by the Board.
Each Class of the Funds will bear, pro
rata, all of the common expenses of the Funds. The NAVs of all outstanding
shares of each Class of the Funds will be computed on a pro rata basis for each
outstanding share based on the proportionate participation in the Funds
represented by the value of shares of that Class. All income earned and expenses
incurred by the Funds will be borne on a pro rata basis by each outstanding
share of a Class, based on each Class percentage in the Funds represented by
the value of shares of such Classes, except that the Fund Classes alone will
bear the Rule 12b-1 Plan expenses payable under their respective Plans. Due to
the specific distribution expenses and other costs that will be allocable to
each Class, the NAV of each Class of each Fund will vary.
General
Information
Shares can be
redeemed or exchanged in a number of different ways that are described below.
Exchanges are subject to the requirements of the Funds, and all exchanges of
shares constitute taxable events. Further, in order for an exchange to be
processed, shares of the Fund being acquired must be registered in the state
where the acquiring shareholder resides. An exchange constitutes, for tax
purposes, the sale of one Fund and the purchase of another. The sale may involve
a capital gain or loss to the shareholder for federal income tax purposes. You
may want to consult your participating securities dealer or other financial
intermediary to discuss which Funds will best meet your changing objectives, and
the consequences of any exchange transaction. Your ability to exchange may be
limited if the purchase side of your exchange order is rejected for any reason.
In such an instance, we will generally honor the redemption order side of your
exchange order.
Shares will be redeemed or exchanged at a
price based on the NAV next determined after a Fund receives your request in
good order, subject, in the case of a redemption, to any applicable CDSC. For
example, redemption or exchange requests received in good order after the time
the offering price and NAV of shares are determined will be processed on the
next Business Day. See the Funds Prospectus for more information. A redemption
request may indicate a specific dollar amount. In the case of such a request,
and in the case of certain redemptions from retirement accounts, a Fund will
redeem the number of shares necessary to deduct the applicable CDSC in the case
of Class B shares and Class C shares and tender to the shareholder the requested
amount, assuming the shareholder holds enough shares in his or her account for
the redemption to be processed in this manner. Otherwise, the amount tendered to
the shareholder upon redemption will be reduced by the amount of the applicable
CDSC. Payment for shares redeemed will ordinarily be mailed the next Business
Day, but in no case later than seven days, after receipt of a redemption request
in good order. Each Fund reserves the right to reject a written or telephone
redemption request or delay payment of redemption proceeds if there has been a
recent change to the shareholders address of record.
97
Except as noted below, for a redemption request to be in good order, it
must provide the account number, account registration and total number of shares
or dollar amount of the transaction. Exchange requests must also provide the
name of the Fund in which the proceeds are to be invested. Exchange instructions
and redemption requests must be signed by the record owner(s) exactly as the
shares are registered. The Fund may suspend, terminate or amend the terms of the
exchange privilege upon 60 days written notice to shareholders.
In case of a suspension of the
determination of the NAV, because the NYSE is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists, as a result
of which disposal by the Funds of securities owned by them is not reasonably
practical, or it is not reasonably practical for the Funds fairly to value their
assets, or in the event that the SEC has provided for such suspension for the
protection of shareholders, the Funds may postpone payment or suspend the right
of redemption or repurchase. In such cases, the shareholder may withdraw the
request for redemption or leave it standing as a request for redemption at the
NAV next determined after the suspension has been terminated.
Payment for shares redeemed may be made
either in cash or in kind, or partly in cash and partly in kind. Any portfolio
securities paid or distributed in kind would be valued as described in
Determining Offering Price and Net Asset Value above. Subsequent sale by an
investor receiving a distribution in kind could result in the payment of
brokerage commissions. However, the Trust has elected to be governed by Rule
18f-1 under the 1940 Act pursuant to which the Funds are obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1.00% of the NAV of such
Fund during any 90-day period for any one shareholder.
The value of each Funds investments is
subject to changing market prices. Thus, a shareholder reselling shares to a
Fund may sustain either a gain or loss, depending upon the price paid and the
price received for such shares.
Except for the applicable CDSC, neither
the Funds nor the Distributor charge a fee for redemptions, but such fees could
be charged at any time in the future.
Holders of Class A shares of a Fund may
exchange all or part of their Class A shares for Class A shares of another Fund,
but may not exchange their Class A shares for Class B shares or Class C shares
of the Funds. Holders of Class B shares of a Fund are permitted to exchange all
or part of their Class B shares only into Class B shares of another Fund.
Similarly, holders of Class C shares of a Fund are permitted to exchange all or
part of their Class C shares only into Class C shares of another Fund. Class B
shares of the Funds and Class C shares of the Funds acquired by exchange will
continue to carry the CDSC and, in the case of Class B shares, the automatic
conversion schedule of the Fund from which the exchange is made. The holding
period of Class B shares of a Fund acquired by exchange will be added to that of
the shares that were exchanged for purposes of determining the time of the
automatic conversion to Class A shares of the Fund.
Holders of Class B or Class C shares of a
Fund that exchange their shares (Original Shares) for shares of another Fund
(in each case, New Shares) in a permitted exchange will not be subject to a
CDSC that might otherwise be due upon redemption of the Original Shares.
However, such shareholders will continue to be subject to the CDSC and, in the
case of Class B shares, the automatic conversion schedule of the Original Shares
as described in this Part B and any CDSC assessed upon redemption will be
charged by the Fund from which the Original Shares were exchanged. In an
exchange of Class B shares from a Fund, the Funds CDSC schedule may be higher
than the CDSC schedule relating to the New Shares acquired as a result of the
exchange. For purposes of computing the CDSC that may be payable upon a
disposition of the New Shares, the period of time that an investor held the
Original Shares is added to the period of time that the investor held the New
Shares.
98
The
Funds also reserve the right to refuse the purchase side of an exchange request
by any person, or group if, in the Managers judgment, the Fund would be unable
to invest effectively in accordance with its investment objectives and policies,
or would otherwise potentially be adversely affected. A shareholders purchase
exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Funds assets.
Systematic Withdrawal Plans.
Shareholders who own or purchase
$5,000 or more of shares at the offering price, or NAV, as applicable, for which
certificates have not been issued may establish a systematic withdrawal plan for
monthly withdrawals of $25 or more, or quarterly withdrawals of $75 or more,
although the Fund does not recommend any specific amount of withdrawal. This is
particularly useful to shareholders living on fixed incomes, since it can
provide them with a stable supplemental amount. This $5,000 minimum does not
apply for the investments made through qualified retirement plans. Shares
purchased with the initial investment and through reinvestment of cash dividends
and realized securities profits distributions will be credited to the
shareholders account and sufficient full and fractional shares will be redeemed
at the NAV calculated on the third Business Day preceding the mailing
date.
Checks are dated either the 1st or the
15th of the month, as selected by the shareholder (unless such date falls on a
holiday or a weekend), and are normally mailed within two Business Days. Both
ordinary income dividends and realized securities profits distributions will be
automatically reinvested in additional shares of the Class at NAV. This plan is
not recommended for all investors and should be started only after careful
consideration of its operation and effect upon the investors savings and
investment program. To the extent that withdrawal payments from the plan exceed
any dividends and/or realized securities profits distributions paid on shares
held under the plan, the withdrawal payments will represent a return of capital,
and the share balance may in time be depleted, particularly in a declining
market. Shareholders should not purchase additional shares while participating
in a systematic withdrawal plan.
The sale of shares for withdrawal
payments constitutes a taxable event and a shareholder may incur a capital gain
or loss for federal income tax purposes. This gain or loss may be long-term or
short-term depending on the holding period for the specific shares liquidated.
Premature withdrawals from retirement plans may have adverse tax
consequences.
Withdrawals under this plan made
concurrently with the purchases of additional shares may be disadvantageous to
the shareholder. Purchases of Class A shares through a periodic investment
program in the Fund must be terminated before a systematic withdrawal plan with
respect to such shares can take effect, except if the shareholder is a
participant in a retirement plan offering Optimum Funds or is investing in
Optimum Funds which do not carry a sales charge. Redemptions of Class A shares
pursuant to a systematic withdrawal plan may be subject to a Limited CDSC if the
purchase was made at NAV and a dealers commission has been paid on that
purchase. The applicable Limited CDSC for Class A shares and CDSC for Class C
shares redeemed via a systematic withdrawal plan will be waived if the annual
amount withdrawn in each year is less than 12% of the account balance on the
date that the Plan is established. If the annual amount withdrawn in any year
exceeds 12% of the account balance on the date that the systematic withdrawal
plan is established, all redemptions under the Plan will be subject to the
applicable CDSC, including an assessment for previously redeemed amounts under
the Plan. Whether a waiver of the CDSC is available or not, the first shares to
be redeemed for each systematic withdrawal plan payment will be those not
subject to a CDSC because they have either satisfied the required holding period
or were acquired through the reinvestment of distributions. See the Prospectus
for more information about the waiver of CDSCs.
An investor wishing to start a
systematic withdrawal plan must complete an authorization form. If the recipient
of systematic withdrawal plan payments is other than the registered shareholder,
the shareholders signature on this authorization must be guaranteed. Each
signature guarantee must be supplied by an eligible guarantor institution. The
Fund reserves the right to reject a signature guarantee supplied by an eligible
institution based on its creditworthiness. This plan may be terminated by the
shareholder or DSC, the Funds the Transfer Agent, at any time by giving written
notice.
99
Systematic withdrawal plan payments are normally made by check. In the
alternative, you may elect to have your payments transferred from your Fund
account to your predesignated bank account through the on demand service. Your
funds will normally be credited to your bank account up to four Business Days
after the payment date. There are no separate fees for this redemption method.
It may take up to four Business Days for the transactions to be completed. You
can initiate this service by completing an Account Services form. If your name
and address are not identical to the name and address on your Fund account, you
must have your signature guaranteed. The Fund does not charge a fee for this
service; however, your bank may charge a fee. This service is not available for
retirement plans.
Shareholders should consult with their
financial advisers to determine whether a Systematic Withdrawal Plan would be
suitable for them.
Written
Redemption
The written
redemption feature is available only if the service agent holds your shares. The
redemption request must be signed by all owners of the account or your
investment dealer of record. For redemptions of more than $100,000, or when the
proceeds are not sent to the shareholder(s) at the address of record, the Funds
require a signature by all owners of the account and a signature guarantee for
each owner. A signature guarantee can be obtained from a commercial bank, a
trust company or a member of a Securities Transfer Association Medallion Program
(STAMP). Each Fund reserves the right to reject a signature guarantee supplied
by an eligible institution based on its creditworthiness. The Funds may require
further documentation from corporations, executors, retirement plans,
administrators, trustees or guardians.
Telephone
Redemption
The telephone
redemption feature is available only if the service agent holds your shares. The
Telephone Redemption Check to Your Address of Record service, which is
described below, is automatically provided unless you notify the Funds in which
you have your account in writing that you do not wish to have such services
available with respect to your account. Each Fund reserves the right to modify,
terminate or suspend the procedure upon 60 days written notice to shareholders.
It may be difficult to reach the Funds by telephone during periods when market
or economic conditions lead to an unusually large volume of telephone requests.
Neither a Fund nor the service agent is
responsible for any shareholder loss incurred in acting upon written or
telephone instructions for redemption of Fund shares that are reasonably
believed to be genuine. With respect to such telephone transactions, the Funds
will follow reasonable procedures to confirm that instructions communicated by
telephone are genuine (including verification of a form of personal
identification) as, if they do not, such Fund or the service agent may be liable
for any losses due to unauthorized or fraudulent transactions. Telephone
instructions received by the Fund Classes are generally tape recorded, and a
written confirmation will be provided for all redemption transactions initiated
by telephone.
Telephone Redemption Check
to Your Address of Record:
The Telephone Redemption feature is a quick and easy method to redeem
shares. You or your investment dealer of record can have redemption proceeds of
$100,000 or less mailed to you at your address of record. Checks will be payable
to the shareholder(s) of record. Payment is normally mailed the next Business
Day after receipt of the redemption request. This service is available only to
individual, joint and individual fiduciary-type accounts.
100
Waivers of Contingent
Deferred Sales Charges
Please see the Fund Classes Prospectus for
instances in which the CDSC applicable to Class B and Class C shares may be
waived.
Distributions
The
following supplements the information in the Prospectus.
The policy of the Trust is to distribute
substantially all of each Funds net investment income and net realized capital
gains, if any, in the amount and at the times that will avoid a Fund incurring
any material amounts of federal income or excise taxes.
Each Class of shares of a Fund will share
proportionately in the investment income and expenses of that Fund, except that
each Fund Class alone will incur distribution fees under its respective Rule
12b-1 Plan.
All dividends and any capital gains
distributions will be automatically reinvested in additional shares of the same
Class of the Fund at NAV, unless otherwise designated in writing that such
dividends and/or distributions be paid in cash. Dividend payments of $1.00 or
less will be automatically reinvested, notwithstanding a shareholders election
to receive dividends in cash. If such a shareholders dividends increase to
greater than $1.00, the shareholder would have to file a new election in order
to begin receiving dividends in cash again.
Any check in payment of dividends or
other distributions which cannot be delivered by the United States Postal
Service or which remains uncashed for a period of more than one year may be
reinvested in the shareholders account at the then-current NAV and the dividend
option may be changed from cash to reinvest. A Fund may deduct from a
shareholders account the costs of the Funds efforts to locate the shareholder
if the shareholders mail is returned by the United States Postal Service or the
Fund is otherwise unable to locate the shareholder or verify the shareholders
mailing address. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for their location
services.
Taxes
The following is a
summary of certain additional tax considerations generally affecting a Fund
(sometimes referred to as the Fund) and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.
This Distributions and Taxes section
is based on the Internal Revenue Code and applicable regulations in effect on
the date of this Statement of Additional Information. Future legislative,
regulatory or administrative changes, including provisions of current law that
sunset and thereafter no longer apply, or court decisions may significantly
change the tax rules applicable to the Fund and its shareholders. Any of these
changes or court decisions may have a retroactive effect.
This is for general
information only and not tax advice. All investors should consult their own tax
advisors as to the federal, state, local and foreign tax provisions applicable
to them.
Taxation of the
Fund
. The Fund has
elected and intends to qualify, or, if newly organized, intends to elect and
qualify, each year as a regulated investment company (sometimes referred to as a
regulated investment company, RIC or fund) under Subchapter M of the
Internal Revenue Code. If the Fund so qualifies, the Fund will not be subject to
federal income tax on the portion of its investment company taxable income (that
is, generally, taxable interest, dividends, net short-term capital gains, and
other taxable ordinary income, net of expenses, without regard to the deduction
for dividends paid) and net capital gain (that is, the excess of net long-term
capital gains over net short-term capital losses) that it distributes to
shareholders.
101
In
order to qualify for treatment as a regulated investment company, the Fund must
satisfy the following requirements:
-
Distribution
Requirement
the
Fund must distribute an amount equal to the sum of at least 90% of its
investment company taxable income and 90% of its net tax-exempt income, if
any, for the tax year (including, for purposes of satisfying this distribution
requirement, certain distributions made by the Fund after the close of its
taxable year that are treated as made during such taxable year).
-
Income Requirement
the Fund must derive at
least 90% of its gross income from dividends, interest, certain 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 or forward contracts) derived from its
business of investing in such stock, securities or currencies and net income
derived from qualified publicly traded partnerships (QPTPs).
-
Asset Diversification
Test
the
Fund must satisfy the following asset diversification test at the close of
each quarter of the Funds tax year: (1) at least 50% of the value of the
Funds assets must consist of cash and cash items, U.S. government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of
the Funds total assets in securities of an issuer and as to which the Fund
does not hold more than 10% of the outstanding voting securities of the
issuer); and (2) no more than 25% of the value of the Funds total assets may
be invested in the securities of any one issuer (other than U.S. government
securities or securities of other regulated investment companies) or of two or
more issuers which the Fund controls and which are engaged in the same or
similar trades or businesses, or, in the securities of one or more QPTPs.
In some circumstances, the character
and timing of income realized by the Fund for purposes of the Income Requirement
or the identification of the issuer for purposes of the Asset Diversification
Test is uncertain under current law with respect to a particular investment, and
an adverse determination or future guidance by the Internal Revenue Service
(IRS) with respect to such type of investment may adversely affect the Funds
ability to satisfy these requirements. See, Tax Treatment of Portfolio
Transactions below with respect to the application of these requirements to
certain types of investments. In other circumstances, the Fund may be required
to sell portfolio holdings in order to meet the Income Requirement, Distribution
Requirement, or Asset Diversification Test, which may have a negative impact on
the Funds income and performance. In lieu of potential disqualification, the
Fund is permitted to pay a tax for certain failures to satisfy the Asset
Diversification Test or Income Requirement, which, in general, are limited to
those due to reasonable cause and not willful neglect.
The Fund may use equalization
accounting (in lieu of making some cash distributions) in determining the
portion of its income and gains that has been distributed. If the Fund uses
equalization accounting, it will allocate a portion of its undistributed
investment company taxable income and net capital gain to redemptions of Fund
shares and will correspondingly reduce the amount of such income and gains that
it distributes in cash. If the IRS determines that the Funds allocation is
improper and that the Fund has under-distributed its income and gain for any
taxable year, the Fund may be liable for federal income and/or excise tax. If,
as a result of such adjustment, the Fund fails to satisfy the Distribution
Requirement, the Fund will not qualify that year as a regulated investment
company the effect of which is described in the following paragraph.
If for any taxable year the Fund does not
qualify as a regulated investment company, all of its taxable income (including
its net capital gain) would be subject to tax at regular corporate rates without
any deduction for dividends paid to shareholders, and the dividends would be
taxable to the shareholders as ordinary income (or possibly as qualified
dividend income) to the extent of the Funds current and accumulated earnings
and profits. Failure to qualify as a regulated investment company would thus
have a negative impact on the Funds income and performance. Subject to savings
provisions for certain failures to satisfy the Income Requirement or Asset
Diversification Test, which, in general, are limited to those due to reasonable
cause and not willful neglect, it is possible that the Fund will not qualify as
a regulated investment company in any given tax year. Even if such savings
provisions apply, the Fund may be subject to a monetary sanction of $50,000 or
more. Moreover, the Board reserves the right not to maintain the qualification
of the Fund as a regulated investment company if it determines such a course of
action to be beneficial to shareholders.
102
Portfolio turnover.
For
investors that hold their Fund shares in a taxable account, a high portfolio
turnover rate may result in higher taxes. This is because a fund with a high
turnover rate is likely to accelerate the recognition of capital gains and more
of such gains are likely to be taxable as short-term rather than long-term
capital gains in contrast to a comparable fund with a low turnover rate. Any
such higher taxes would reduce the Funds after-tax performance. See, Taxation
of Fund Distributions - Distributions of capital gains below. For non-U.S.
investors, any such acceleration of the recognition of capital gains that
results in more short-term and less long-term capital gains being recognized by
the Fund may cause such investors to be subject to increased U.S. withholding
taxes. See, Non-U.S. Investors Capital gain dividends and short-term capital
gain dividends below.
Capital loss
carryovers
. The capital
losses of the Fund, if any, do not flow through to shareholders. Rather, the
Fund may use its capital losses, subject to applicable limitations, to offset
its capital gains without being required to pay taxes on or distribute to
shareholders such gains that are offset by the losses. Under the Regulated
Investment Company Modernization Act of 2010, rules similar to those that apply
to capital loss carryovers of individuals are made applicable to RICs. Thus, if
the Fund has a net capital loss (that is, capital losses in excess of capital
gains) for a taxable year beginning after December 22, 2010, the excess (if any)
of the Funds net short-term capital losses over its net long-term capital gains
is treated as a short-term capital loss arising on the first day of the Funds
next taxable year, and the excess (if any) of the Funds net long-term capital
losses over its net short-term capital gains is treated as a long-term capital
loss arising on the first day of the Funds next taxable year. Any such net
capital losses of the Fund that are not used to offset capital gains may be
carried forward indefinitely to reduce any future capital gains realized by the
Fund in succeeding taxable years. However, for any net capital losses realized
in taxable years of the Fund beginning on or before December 22, 2010, the Fund
is only permitted to carry forward such capital losses for eight years as a
short-term capital loss. Under a transition rule, capital losses arising in a
taxable year beginning after December 22, 2010 must be used before capital
losses realized in a taxable year beginning on or before December 22, 2010. The
amount of capital losses that can be carried forward and used in any single year
is subject to an annual limitation if there is a more than 50% change in
ownership of the Fund. An ownership change generally results when shareholders
owning 5% or more of the Fund increase their aggregate holdings by more than 50%
over a three-year look-back period. An ownership change could result in capital
loss carryovers being used at a slower rate (or, in the case of those realized
in taxable years of the Fund beginning on or before December 22, 2010, to expire
unutilized), thereby reducing the Funds ability to offset capital gains with
those losses. An increase in the amount of taxable gains distributed to the
Funds shareholders could result from an ownership change. The Fund undertakes
no obligation to avoid or prevent an ownership change, which can occur in the
normal course of shareholder purchases and redemptions or as a result of
engaging in a tax-free reorganization with another fund. Moreover, because of
circumstances beyond the Funds control, there can be no assurance that the Fund
will not experience, or has not already experienced, an ownership change.
Additionally, if the Fund engages in a tax-free reorganization with another
Fund, the effect of these and other rules not discussed herein may be to
disallow or postpone the use by the Fund of its capital loss carryovers
(including any current year losses and built-in losses when realized) to offset
its own gains or those of the other Fund, or vice versa, thereby reducing the
tax benefits Fund shareholders would otherwise have enjoyed from use of such
capital loss carryovers.
103
Deferral of late year losses
. The Fund may elect to treat part or all of any qualified late year
loss as if it had been incurred in the succeeding taxable year in determining
the Funds taxable income, net capital gain, net short-term capital gain, and
earnings and profits. The effect of this election is to treat any such
qualified late year loss as if it had been incurred in the succeeding taxable
year in characterizing Fund distributions for any calendar year (see, Taxation
of Fund Distributions - Distributions of capital gains below). A qualified
late year loss includes:
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(i)
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any net
capital loss, net long-term capital loss, or net short-term capital loss
incurred after October 31 of the current taxable year (post-October
losses), and
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(ii)
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the
excess, if any, of (1) the sum of (a) specified losses incurred after
October 31 of the current taxable year, and (b) other ordinary losses
incurred after December 31 of the current taxable year, over (2) the sum
of (a) specified gains incurred after October 31 of the current taxable
year, and (b) other ordinary gains incurred after December 31 of the
current taxable year.
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The terms specified losses and
specified gains mean ordinary losses and gains from the sale, exchange, or
other disposition of property (including the termination of a position with
respect to such property), foreign currency losses and gains, and losses and
gains resulting from holding stock in a passive foreign investment company
(PFIC) for which a mark-to-market election is in effect. The terms ordinary
losses and ordinary gains mean other ordinary losses and gains that are not
described in the preceding sentence.
Undistributed capital
gains
. The Fund may retain or
distribute to shareholders its net capital gain for each taxable year. The Fund
currently intends to distribute net capital gains. If the Fund elects to retain
its net capital gain, the Fund will be taxed thereon (except to the extent of
any available capital loss carryovers) at the highest corporate tax rate
(currently 35%). If the Fund elects to retain its net capital gain, it is
expected that the Fund also will elect to have shareholders treated as if each
received a distribution of its pro rata share of such gain, with the result that
each shareholder will be required to report its pro rata share of such gain on
its tax return as long-term capital gain, will receive a refundable tax credit
for its pro rata share of tax paid by the Fund on the gain, and will increase
the tax basis for its shares by an amount equal to the deemed distribution less
the tax credit.
Federal excise
tax
. To avoid a 4%
non-deductible excise tax, the Fund must distribute by December 31 of each year
an amount equal to at least: (1) 98% of its ordinary income for the calendar
year, (2) 98.2% of capital gain net income (that is, the excess of the gains
from sales or exchanges of capital assets over the losses from such sales or
exchanges) for the one-year period ended on October 31 of such calendar year,
and (3) any prior year undistributed ordinary income and capital gain net
income. The Fund may elect to defer to the following year any net ordinary loss
incurred for the portion of the calendar year which is after the beginning of
the Funds taxable year. Also, the Fund will defer any specified gain or
specified loss which would be properly taken into account for the portion of
the calendar year after October 31. Any net ordinary loss, specified gain, or
specified loss deferred shall be treated as arising on January 1 of the
following calendar year. Generally, the Fund intends to make sufficient
distributions prior to the end of each calendar year to avoid any material
liability for federal income and excise tax, but can give no assurances that all
or a portion of such liability will be avoided. In addition, under certain
circumstances, temporary timing or permanent differences in the realization of
income and expense for book and tax purposes can result in the Fund having to
pay an excise tax.
Foreign income tax
. Investment income received by the Fund from
sources within foreign countries may be subject to foreign income tax withheld
at the source and the amount of tax withheld generally will be treated as an
expense of the Fund. The United States has entered into tax treaties with many
foreign countries, which entitle the Fund to a reduced rate of, or exemption
from, tax on such income. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Funds assets to be invested in
various countries is not known. Under certain circumstances, the Fund may elect
to pass-through foreign tax credits to shareholders, although it reserves the
right not to do so.
104
Taxation of Fund Distributions
.
The Fund anticipates distributing substantially all of its investment
company taxable income and net capital gain for each taxable year. Distributions
by the Fund will be treated in the manner described below regardless of whether
such distributions are paid in cash or reinvested in additional shares of the
Fund (or of another fund). The Fund will send you information annually as to the
federal income tax consequences of distributions made (or deemed made) during
the year.
Distributions of net investment
income
. The Fund receives
ordinary income generally in the form of dividends and/or interest on its
investments. The Fund may also recognize ordinary income from other sources,
including, but not limited to, certain gains on foreign currency-related
transactions. This income, less expenses incurred in the operation of the Fund,
constitutes the Funds net investment income from which dividends may be paid to
you. If you are a taxable investor, distributions of net investment income
generally are taxable as ordinary income to the extent of the Funds earnings
and profits. In the case of a Fund whose strategy includes investing in stocks
of corporations, a portion of the income dividends paid to you may be qualified
dividends eligible to be taxed at reduced rates. See the discussion below under
the headings,
Qualified dividend income for individuals and
Dividends-received deduction for corporations.
Distributions of capital
gains.
The Fund may derive
capital gain and loss in connection with sales or other dispositions of its
portfolio securities. Distributions derived from the excess of net short-term
capital gain over net long-term capital loss will be taxable to you as ordinary
income. Distributions paid from the excess of net long-term capital gain over
net short-term capital loss will be taxable to you as long-term capital gain,
regardless of how long you have held your shares in the Fund. Any net short-term
or long-term capital gain realized by the Fund (net of any capital loss
carryovers) generally will be distributed once each year and may be distributed
more frequently, if necessary, in order to reduce or eliminate federal excise or
income taxes on the Fund.
Returns of capital.
Distributions by the Fund that are not paid from
earnings and profits will be treated as a return of capital to the extent of
(and in reduction of) the shareholders tax basis in his shares; any excess will
be treated as gain from the sale of his shares. Thus, the portion of a
distribution that constitutes a return of capital will decrease the
shareholders tax basis in his Fund shares (but not below zero), and will result
in an increase in the amount of gain (or decrease in the amount of loss) that
will be recognized by the shareholder for tax purposes on the later sale of such
Fund shares. Return of capital distributions can occur for a number of reasons
including, among others, the Fund over-estimates the income to be received from
certain investments such as those classified as partnerships or equity real
estate investment trusts (REITs) (see, Tax Treatment of Portfolio
Transactions
Investments in U.S. REITs below).
Qualified dividend income for
individuals.
Ordinary
income dividends reported by the Fund to shareholders as derived from qualified
dividend income will be taxed in the hands of individuals and other noncorporate
shareholders at the rates applicable to long-term capital gain. Qualified
dividend income means dividends paid to the Fund (a) by domestic corporations,
(b) by foreign corporations that are either (i) incorporated in a possession of
the United States, or (ii) are eligible for benefits under certain income tax
treaties with the United States that include an exchange of information program,
or (c) with respect to stock of a foreign corporation that is readily tradable
on an established securities market in the United States. Both the Fund and the
investor must meet certain holding period requirements to qualify Fund dividends
for this treatment. Specifically, the Fund must hold the stock for at least 61
days during the 121-day period beginning 60 days before the stock becomes
ex-dividend. Similarly, investors must hold their Fund shares for at least 61
days during the 121-day period beginning 60 days before the Fund distribution
goes ex-dividend. Income derived from investments in derivatives, fixed-income
securities, U.S. REITs, PFICs, and income received in lieu of dividends in a
securities lending transaction generally is not eligible for treatment as
qualified dividend income. If the qualifying dividend income received by the
Fund is equal to or greater than 95% of the Funds gross income (exclusive of
net capital gain) in any taxable year, all of the ordinary income dividends paid
by the Fund will be qualifying dividend income.
105
Dividends-received deduction for corporations
. For corporate shareholders, a portion of the dividends paid
by the Fund may qualify for the 70% corporate dividends-received deduction. The
portion of dividends paid by the Fund that so qualifies will be reported by the
Fund to shareholders each year and cannot exceed the gross amount of dividends
received by the Fund from domestic (U.S.) corporations. The availability of the
dividends-received deduction is subject to certain holding period and debt
financing restrictions that apply to both the Fund and the investor.
Specifically, the amount that the Fund may report as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends earned by the Fund were debt-financed or held by the Fund
for less than a minimum period of time, generally 46 days during a 91-day period
beginning 45 days before the stock becomes ex-dividend. Similarly, if your Fund
shares are debt-financed or held by you for less than a 46-day period then the
dividends-received deduction for Fund dividends on your shares may also be
reduced or eliminated. Even if reported as dividends eligible for the
dividends-received deduction, all dividends (including any deducted portion)
must be included in your alternative minimum taxable income
calculation
.
Income derived by the Fund from investments in derivatives, fixed-income
and foreign securities generally is not eligible for this
treatment.
Impact of realized but undistributed income and gains, and net
unrealized appreciation of portfolio securities
. At the time of your purchase of shares (except in a money market fund
that maintains a stable net asset value), the Funds net asset value may reflect
undistributed income, undistributed capital gains, or net unrealized
appreciation of portfolio securities held by the Fund. A subsequent distribution
to you of such amounts, although constituting a return of your investment, would
be taxable, and would be taxed as ordinary income (some portion of which may be
taxed as qualified dividend income), capital gains, or some combination of both,
unless you are investing through a tax-deferred arrangement, such as a 401(k)
plan or an individual retirement account. The Fund may be able to reduce the
amount of such distributions from capital gains by utilizing its capital loss
carryovers, if any.
Pass-through of foreign tax credits
. If more than 50% of the Funds total assets at the end of a fiscal year
is invested in foreign securities, the Fund may elect to pass through to you
your pro rata share of foreign taxes paid by the Fund. If this election is made,
the Fund may report more taxable income to you than it actually distributes. You
will then be entitled either to deduct your share of these taxes in computing
your taxable income, or to claim a foreign tax credit for these taxes against
your U.S. federal income tax (subject to limitations for certain shareholders).
The Fund will provide you with the information necessary to claim this deduction
or credit on your personal income tax return if it makes this election. No
deduction for foreign tax may be claimed by a noncorporate shareholder who does
not itemize deductions or who is subject to the alternative minimum tax.
Shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income tax paid by the Fund due to certain
limitations that may apply. The Fund reserves the right not to pass through to
its shareholders the amount of foreign income taxes paid by the Fund.
Additionally, any foreign tax withheld on payments made in lieu of dividends
or interest will not qualify for the pass-through of foreign tax credits to
shareholders. See, Tax Treatment of Portfolio Transactions Securities
lending below.
Tax credit bonds
. If the Fund
holds, directly or indirectly, one or more tax credit bonds (including build
America bonds, clean renewable energy bonds and qualified tax credit bonds) on
one or more applicable dates during a taxable year, the Fund may elect to permit
its shareholders to claim a tax credit on their income tax returns equal to each
shareholders proportionate share of tax credits from the applicable bonds that
otherwise would be allowed to the Fund. In such a case, shareholders must
include in gross income (as interest) their proportionate share of the income
attributable to their proportionate share of those offsetting tax credits. A
shareholders ability to claim a tax credit associated with one or more tax
credit bonds may be subject to certain limitations imposed by the Internal
Revenue Code. Even if the Fund is eligible to pass through tax credits to
shareholders, the Fund may choose not to do so.
U.S. government securities.
Income earned on certain U.S. government obligations is exempt from state
and local personal income taxes if earned directly by you. States also grant
tax-free status to dividends paid to you from interest earned on direct obligations
of the U.S. government, subject in some states to minimum investment or
reporting requirements that must be met by the Fund. Income on investments by
the Fund in certain other obligations, such as repurchase agreements
collateralized by U.S. government obligations, commercial paper and federal
agency-backed obligations (e.g., GNMA or FNMA obligations), generally does not
qualify for tax-free treatment. The rules on exclusion of this income are
different for corporations.
106
Dividends
declared in December and paid in January
.
Ordinarily, shareholders are required to take distributions by the Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year
in accordance with the guidance that has been provided by the IRS.
Medicare tax
. The recently
enacted Patient Protection and Affordable Care Act of 2010, as amended by the
Health Care and Education Affordability Reconciliation Act of 2010, will impose
a 3.8% Medicare tax on net investment income earned by certain individuals,
estates and trusts for taxable years beginning after December 31, 2012. Net
investment income, for these purposes, means investment income, including
ordinary dividends and capital gain distributions received from the Fund and net
gains from redemptions or other taxable dispositions of Fund shares, reduced by
the deductions properly allocable to such income. In the case of an individual,
the tax will be imposed on the lesser of (1) the shareholders net investment
income or (2) the amount by which the shareholders modified adjusted gross
income exceeds $250,000 (if the shareholder is married and filing jointly or a
surviving spouse), $125,000 (if the shareholder is married and filing
separately) or $200,000 (in any other case). This Medicare tax, if applicable,
is reported by you on, and paid with, your federal income tax return.
Sales, Exchanges and Redemptions of Fund
Shares
.
Sales, exchanges and redemptions
(including redemptions in kind) of Fund shares are taxable transactions for
federal and state income tax purposes. If you redeem your Fund shares, the IRS
requires you to report any gain or loss on your redemption. If you held your
shares as a capital asset, the gain or loss that you realize will be a capital
gain or loss and will be long-term or short-term, generally depending on how
long you have held your shares. Any redemption fees you incur on shares redeemed
will decrease the amount of any capital gain (or increase any capital loss) you
realize on the sale. Capital losses in any year are deductible only to the
extent of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income.
Tax basis information
. The Fund
is required to report to you and the IRS annually on Form 1099-B the cost basis
of shares purchased or acquired on or after January 1, 2012 where the cost basis
of the shares is known by the Fund (referred to as covered shares) and which
are disposed of after that date. However, cost basis reporting is not required
for certain shareholders, including shareholders investing in the Fund through a
tax-advantaged retirement account, such as a 401(k) plan or an individual
retirement account, or shareholders investing in a money market fund that
maintains a stable net asset value.
When required to report cost basis, the Fund will calculate it using the
Funds default method, unless you instruct the Fund to use a different
calculation method. For additional information regarding the Funds available
cost basis reporting methods, including its default method, please contact the
Fund. If you hold your Fund shares through a broker (or other nominee), please
contact that broker (nominee) with respect to reporting of cost basis and
available elections for your account.
The IRS permits the use of several methods to determine the cost basis of
mutual fund shares. The method used will determine which specific shares are
deemed to be sold when there are multiple purchases on different dates at
differing share prices, and the entire position is not sold at one time. The
Fund does not recommend any particular method of determining cost basis, and the
use of other methods may result in more favorable tax consequences for some
shareholders. It is important that you consult with your tax advisor to
determine which method is best for you and then notify the Fund if you intend to
utilize a method other than the Funds default method for covered shares. If you
do not notify the Fund of your elected cost basis method upon the later of
January 1, 2012 or the initial purchase into your account, the default method
will be applied to your covered shares.
107
The Fund will
compute and report the cost basis of your Fund shares sold or exchanged by
taking into account all of the applicable adjustments to cost basis and holding
periods as required by the Internal Revenue Code and Treasury regulations for
purposes of reporting these amounts to you and the IRS. However the Fund is not
required to, and in many cases the Fund does not possess the information to,
take all possible basis, holding period or other adjustments into account in
reporting cost basis information to you. Therefore, shareholders should
carefully review the cost basis information provided by the Fund.
Please refer to the Funds website at delawareinvestments.com for
additional information.
Wash sales
. All or a portion of
any loss that you realize on a redemption of your Fund shares will be disallowed
to the extent that you buy other shares in the Fund (through reinvestment of
dividends or otherwise) within 30 days before or after your share redemption.
Any loss disallowed under these rules will be added to your tax basis in the new
shares.
Redemptions at a loss within six months of purchase
. Any loss incurred on a redemption or exchange of shares held
for six months or less will be treated as long-term capital loss to the extent
of any long-term capital gain distributed to you by the Fund on those shares.
Deferral of basis
. If a
shareholder (a) incurs a sales load in acquiring shares of the Fund, (b)
disposes of such shares less than 91 days after they are acquired, and (c)
subsequently acquires shares of the Fund or another fund by January 31 of the
calendar year following the calendar year in which the disposition of the
original shares occurred at a reduced sales load pursuant to a right to reinvest
at such reduced sales load acquired in connection with the acquisition of the
shares disposed of, then the sales load on the shares disposed of (to the extent
of the reduction in the sales load on the shares subsequently acquired) shall
not be taken into account in determining gain or loss on the shares disposed of,
but shall be treated as incurred on the acquisition of the shares subsequently
acquired. The wash sale rules may also limit the amount of loss that may be
taken into account on disposition after such adjustment.
Conversion of shares into shares of
the
same
Fund.
The conversion or exchange of
shares of one class into another class of the same Fund is not taxable for
federal income tax purposes. Thus, the following transactions generally will be
tax-free for federal income tax purposes:
-
the automatic conversion of Class B shares into
Class A shares of the same Fund at the end of approximately eight years after
purchase,
-
the exchange of
Class A shares for Institutional Class shares of the same Fund by certain
Programs,
-
the exchange of
Class C shares for Class A shares or Institutional Class shares of the same
Fund by certain Programs, and
-
the exchange of
Institutional Class shares for Class A shares or Class C shares of the same
Fund by certain shareholders of Institutional Class shares who cease
participation in a Program.
However, shareholders should consult their tax advisors regarding the
state and local tax consequences of a conversion or exchange of shares.
Reportable transactions.
Under
Treasury regulations, if a shareholder recognizes a loss with respect to the
Funds shares of $2 million or more for an individual shareholder or $10 million
or more for a corporate shareholder (or certain greater amounts
over a combination of years), 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
taxpayers treatment of the loss is proper. Shareholders should consult their
tax advisers to determine the applicability of these regulations in light of
their individual circumstances.
108
Tax
Treatment of Portfolio Transactions
. Set
forth below is a general description of the tax treatment of certain types of
securities, investment techniques and transactions that may apply to a fund and,
in turn, affect the amount, character and timing of dividends and distributions
payable by the fund to its shareholders. This section should be read in
conjunction with the discussion above under Investment Strategies and
Risks
for
a detailed description of the various types of securities and investment
techniques that apply to the Fund.
In general
. In general, gain or
loss recognized by a fund on the sale or other disposition of portfolio
investments will be a capital gain or loss. Such capital gain and loss may be
long-term or short-term depending, in general, upon the length of time a
particular investment position is maintained and, in some cases, upon the nature
of the transaction. Property held for more than one year generally will be
eligible for long-term capital gain or loss treatment. The application of
certain rules described below may serve to alter the manner in which the holding
period for a security is determined or may otherwise affect the characterization
as long-term or short-term, and also the timing of the realization and/or
character, of certain gains or losses.
Certain fixed-income investments
.
Gain recognized on the disposition of a debt obligation purchased by a fund at a
market discount (generally, at a price less than its principal amount) will be
treated as ordinary income to the extent of the portion of the market discount
which accrued during the period of time the fund held the debt obligation unless
the fund made a current inclusion election to accrue market discount into income
as it accrues. If a fund purchases a debt obligation (such as a zero coupon
security or pay-in-kind security) that was originally issued at a discount, the
fund generally is required to include in gross income each year the portion of
the original issue discount which accrues during such year. Therefore, a funds
investment in such securities may cause the fund to recognize income and make
distributions to shareholders before it receives any cash payments on the
securities. To generate cash to satisfy those distribution requirements, a fund
may have to sell portfolio securities that it otherwise might have continued to
hold or to use cash flows from other sources such as the sale of fund shares.
Investments in debt obligations that are at risk of or in default
present tax issues for a fund
. Tax rules are
not entirely clear about issues such as whether and to what extent a fund should
recognize market discount on a debt obligation, when a fund may cease to accrue
interest, original issue discount or market discount, when and to what extent a
fund may take deductions for bad debts or worthless securities and how a fund
should allocate payments received on obligations in default between principal
and income. These and other related issues will be addressed by a fund in order
to ensure that it distributes sufficient income to preserve its status as a
regulated investment company.
Options, futures, forward contracts, swap agreements and hedging
transactions
. In general, option premiums
received by a fund are not immediately included in the income of the fund.
Instead, the premiums are recognized when the option contract expires, the
option is exercised by the holder, or the fund transfers or otherwise terminates
the option (e.g., through a closing transaction). If an option written by a fund
is exercised and the fund sells or delivers the underlying stock, the fund
generally will recognize capital gain or loss equal to (a) the sum of the strike
price and the option premium received by the fund minus (b) the funds basis in
the stock. Such gain or loss generally will be short-term or long-term depending
upon the holding period of the underlying stock. If securities are purchased by
a fund pursuant to the exercise of a put option written by it, the fund
generally will subtract the premium received from its cost basis in the
securities purchased. The gain or loss with respect to any termination of a
funds obligation under an option other than through the exercise of the option
and related sale or delivery of the underlying stock generally will be
short-term gain or loss depending on whether the premium income received by the
fund is greater or less than the amount paid by the fund (if any) in terminating
the transaction. Thus, for example, if an
option written by a fund expires unexercised, the fund generally will recognize
short-term gain equal to the premium received.
109
The tax treatment
of certain futures contracts entered into by a fund as well as listed non-equity
options written or purchased by the fund on U.S. exchanges (including options on
futures contracts, broad-based equity indices and debt securities) may be
governed by section 1256 of the Internal Revenue Code (section 1256
contracts). Gains or losses on section 1256 contracts generally are considered
60% long-term and 40% short-term capital gains or losses (60/40), although
certain foreign currency gains and losses from such contracts may be treated as
ordinary in character. Also, any section 1256 contracts held by a fund at the
end of each taxable year (and, for purposes of the 4% excise tax, on certain
other dates as prescribed under the Internal Revenue Code) are marked to
market with the result that unrealized gains or losses are treated as though
they were realized and the resulting gain or loss is treated as ordinary or
60/40 gain or loss, as applicable. Section 1256 contracts do not include any
interest rate swap, currency swap, basis swap, interest rate cap, interest rate
floor, commodity swap, equity swap, equity index swap, credit default swap, or
similar agreement.
In addition to the special rules described above in respect of options
and futures transactions, a funds transactions in other derivative instruments
(including options, forward contracts and swap agreements) as well as its other
hedging, short sale, or similar transactions, may be subject to one or more
special tax rules (including the constructive sale, notional principal contract,
straddle, wash sale and short sale rules). These rules may affect whether gains
and losses recognized by a fund are treated as ordinary or capital or as
short-term or long-term, accelerate the recognition of income or gains to the
fund, defer losses to the fund, and cause adjustments in the holding periods of
the funds securities. These rules, therefore, could affect the amount, timing
and/or character of distributions to shareholders. Moreover, because the tax
rules applicable to derivative financial instruments are in some cases uncertain
under current law, an adverse determination or future guidance by the IRS with
respect to these rules (which determination or guidance could be retroactive)
may affect whether a fund has made sufficient distributions, and otherwise
satisfied the relevant requirements, to maintain its qualification as a
regulated investment company and avoid a fund-level tax.
Certain of a funds investments in derivatives and foreign
currency-denominated instruments, and the funds transactions in foreign
currencies and hedging activities, may produce a difference between its book
income and its taxable income. If a funds book income is less than the sum of
its taxable income and net tax-exempt income (if any), the fund could be
required to make distributions exceeding book income to qualify as a regulated
investment company. If a funds book income exceeds the sum of its taxable
income and net tax-exempt income (if any), the distribution of any such excess
will be treated as (i) a dividend to the extent of the funds remaining earnings
and profits (including current earnings and profits arising from tax-exempt
income, reduced by related deductions), (ii) thereafter, as a return of capital
to the extent of the recipients basis in the shares, and (iii) thereafter, as
gain from the sale or exchange of a capital asset.
Foreign currency transactions
. A
funds transactions in foreign currencies, foreign currency-denominated debt
obligations and certain foreign currency options, futures contracts and forward
contracts (and similar instruments) may give rise to ordinary income or loss to
the extent such income or loss results from fluctuations in the value of the
foreign currency concerned. This treatment could increase or decrease a funds
ordinary income distributions to you, and may cause some or all of the funds
previously distributed income to be classified as a return of capital. In
certain cases, a fund may make an election to treat such gain or loss as
capital.
PFIC investments
.
A fund may invest in
securities of foreign companies that may be classified under the Internal
Revenue Code as PFICs. In general, a foreign company is classified as a PFIC if
at least one-half of its assets constitute investment-type assets or 75% or more
of its gross income is investment-type income. When investing in PFIC
securities, a fund intends to mark-to-market these securities under certain
provisions of the Internal Revenue Code and recognize any unrealized gains as
ordinary income at the end of the funds fiscal and excise tax years. Deductions
for losses are allowable only to the extent of any current or previously
recognized gains. These gains (reduced by allowable
losses) are treated as ordinary income that a fund is required to distribute,
even though it has not sold or received dividends from these securities. You
should also be aware that the designation of a foreign security as a PFIC
security will cause its income dividends to fall outside of the definition of
qualified foreign corporation dividends. These dividends generally will not
qualify for the reduced rate of taxation on qualified dividends when distributed
to you by a fund. Foreign companies are not required to identify themselves as
PFICs. Due to various complexities in identifying PFICs, a fund can give no
assurances that it will be able to identify portfolio securities in foreign
corporations that are PFICs in time for the fund to make a mark-to-market
election. If a fund is unable to identify an investment as a PFIC and thus does
not make a mark-to-market election, the fund may be subject to U.S. federal
income tax on a portion of any excess distribution or gain from the
disposition of such shares even if such income is distributed as a taxable
dividend by the fund to its shareholders. Additional charges in the nature of
interest may be imposed on a fund in respect of deferred taxes arising from such
distributions or gains.
110
Investments in
U.S. REITs.
A U.S. REIT is not subject to
federal income tax on the income and gains it distributes to shareholders.
Dividends paid by a U.S. REIT, other than capital gain distributions, will be
taxable as ordinary income up to the amount of the U.S. REITs current and
accumulated earnings and profits. Capital gain dividends paid by a U.S. REIT to
a fund will be treated as long term capital gains by the fund and, in turn, may
be distributed by the fund to its shareholders as a capital gain distribution.
Because of certain noncash expenses, such as property depreciation, an equity
U.S. REITs cash flow may exceed its taxable income. The equity U.S. REIT, and
in turn a fund, may distribute this excess cash to shareholders in the form of a
return of capital distribution. However, if a U.S. REIT is operated in a manner
that fails to qualify as a REIT, an investment in the U.S. REIT would become
subject to double taxation, meaning the taxable income of the U.S. REIT would be
subject to federal income tax at regular corporate rates without any deduction
for dividends paid to shareholders and the dividends would be taxable to
shareholders as ordinary income (or possibly as qualified dividend income) to
the extent of the U.S. REITs current and accumulated earnings and profits.
Also, see, Tax Treatment of Portfolio Transactions Investment in taxable mortgage pools
(excess inclusion income) and Non-U.S. Investors Investment in U.S. real property below
with respect to certain other tax aspects of investing in U.S. REITs.
Investment in non-U.S. REITs
.
While non-U.S. REITs often use complex acquisition structures that seek to
minimize taxation in the source country, an investment by a fund in a non-U.S.
REIT may subject the fund, directly or indirectly, to corporate taxes,
withholding taxes, transfer taxes and other indirect taxes in the country in
which the real estate acquired by the non-U.S. REIT is located. A funds pro
rata share of any such taxes will reduce the funds return on its investment. A
funds investment in a non-U.S. REIT may be considered an investment in a PFIC,
as discussed above in PFIC investments. Additionally, foreign withholding
taxes on distributions from the non-U.S. REIT may be reduced or eliminated under
certain tax treaties, as discussed above in Taxation of the Fund Foreign
income tax. Also, a fund in certain limited circumstances may be required to
file an income tax return in the source country and pay tax on any gain realized
from its investment in the non-U.S. REIT under rules similar to those in the
United States, which tax foreign persons on gain realized from dispositions of
interests in U.S. real estate
.
Investment in taxable mortgage pools (excess inclusion
income).
Under a Notice issued by the IRS, the Internal Revenue Code and Treasury
regulations to be issued, a portion of a funds income from a U.S. REIT that is
attributable to the REITs residual interest in a real estate mortgage
investment conduit (REMIC) or equity interests in a taxable mortgage pool
(referred to in the Internal Revenue Code as an excess inclusion) will be
subject to federal income tax in all events. The excess inclusion income of a
regulated investment company, such as a fund, will be allocated to shareholders
of the regulated investment company in proportion to the dividends received by
such shareholders, with the same consequences as if the shareholders held the
related REMIC residual interest or, if applicable, taxable mortgage pool
directly. In general, excess inclusion income allocated to shareholders (i)
cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable
income (UBTI) to entities (including qualified pension plans, individual
retirement accounts, 401(k) plans, Keogh plans or other tax-exempt entities)
subject to tax on UBTI, thereby potentially requiring such an entity that is
allocated excess inclusion income, and otherwise might not be required to file a
tax return, to file a tax return and pay tax on such income, and (iii) in the
case of a foreign stockholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any taxable year a
disqualified organization (which generally includes certain cooperatives,
governmental entities, and tax-exempt organizations not subject to UBTI) is a
record holder of a share in a regulated investment company, then the regulated
investment company will be subject to a tax equal to that portion of its excess
inclusion income for the taxable year that is allocable to the disqualified
organization, multiplied by the highest federal income tax rate imposed on
corporations. The Notice imposes certain reporting requirements upon regulated
investment companies that have excess inclusion income. There can be no
assurance that a fund will not allocate to shareholders excess inclusion
income.
111
These rules are
potentially applicable to a fund with respect to any income it receives from the
equity interests of certain mortgage pooling vehicles, either directly or, as is
more likely, through an investment in a U.S. REIT. It is unlikely that these
rules will apply to a fund that has a non-REIT strategy.
Investments in partnerships and QPTPs
. For purposes of the Income Requirement, income derived by a fund from a
partnership that is
not
a QPTP will be treated as qualifying income only to the
extent such income is attributable to items of income of the partnership that
would be qualifying income if realized directly by the fund. While the rules are
not entirely clear with respect to a fund investing in a partnership outside a
master-feeder structure, for purposes of testing whether a fund satisfies the
Asset Diversification Test, the fund generally is treated as owning a pro rata
share of the underlying assets of a partnership. See, Taxation of the Fund. In
contrast, different rules apply to a partnership that is a QPTP. A QPTP is a
partnership (a) the interests in which are traded on an established securities
market, (b) that is treated as a partnership for federal income tax purposes,
and (c) that derives less than 90% of its income from sources that satisfy the
Income Requirement (e.g., because it invests in commodities). All of the net
income derived by a fund from an interest in a QPTP will be treated as
qualifying income but the fund may not invest more than 25% of its total assets
in one or more QPTPs. However, there can be no assurance that a partnership
classified as a QPTP in one year will qualify as a QPTP in the next year. Any
such failure to annually qualify as a QPTP might, in turn, cause a fund to fail
to qualify as a regulated investment company. Although, in general, the passive
loss rules of the Internal Revenue Code do not apply to RICs, such rules do
apply to a fund with respect to items attributable to an interest in a QPTP.
Fund investments in partnerships, including in QPTPs, may result in the fund
being subject to state, local or foreign income, franchise or withholding tax
liabilities.
Securities lending
. While
securities are loaned out by a fund, the fund generally will receive from the
borrower amounts equal to any dividends or interest paid on the borrowed
securities. For federal income tax purposes, payments made in lieu of
dividends are not considered dividend income. These distributions will neither
qualify for the reduced rate of taxation for individuals on qualified dividends
nor the 70% dividends received deduction for corporations. Also, any foreign tax
withheld on payments made in lieu of dividends or interest will not qualify
for the pass-through of foreign tax credits to shareholders. Additionally, in
the case of a fund with a strategy of investing in tax-exempt securities, any
payments made in lieu of tax-exempt interest will be considered taxable income
to the fund, and thus, to the investors, even though such interest may be
tax-exempt when paid to the borrower.
Investments in convertible securities
. Convertible debt is ordinarily treated as a single property
consisting of a pure debt interest until conversion, after which the investment
becomes an equity interest. If the security is issued at a premium (i.e., for
cash in excess of the face amount payable on retirement), the creditor-holder
may amortize the premium over the life of the bond. If the security is issued
for cash at a price below its face amount, the creditor-holder must accrue
original issue discount in income over the life of the debt. The
creditor-holders exercise of the conversion privilege is treated as a
nontaxable event. Mandatorily convertible debt (e.g., an exchange traded note or
ETN issued in the form of an unsecured obligation that pays a return based on
the performance of a specified market index, exchange currency, or commodity) is
often, but not always, treated as a contract to buy or sell the
reference property rather than debt. Similarly, convertible preferred stock with
a mandatory conversion feature is ordinarily, but not always, treated as equity
rather than debt. Dividends received generally are qualified dividend income and
eligible for the corporate dividends received deduction. In general, conversion
of preferred stock for common stock of the same corporation is tax-free.
Conversion of preferred stock for cash is a taxable redemption. Any redemption
premium for preferred stock that is redeemable by the issuing company might be
required to be amortized under original issue discount (OID) principles.
112
Investments in
securities of uncertain tax character.
A fund
may invest in securities the U.S. federal income tax treatment of which may not
be clear or may be subject to recharacterization by the IRS. To the extent the
tax treatment of such securities or the income from such securities differs from
the tax treatment expected by a fund, it could affect the timing or character of
income recognized by the fund, requiring the fund to purchase or sell
securities, or otherwise change its portfolio, in order to comply with the tax
rules applicable to regulated investment companies under the Internal Revenue
Code.
Backup Withholding
. By law, the Fund may be required to withhold a portion of your taxable
dividends and sales proceeds unless you:
-
provide your correct social security or taxpayer
identification number,
-
certify that this
number is correct,
-
certify that you
are not subject to backup withholding, and
-
certify that you
are a U.S. person (including a U.S. resident alien).
The Fund also must withhold if the IRS instructs it to do so. When
withholding is required, the amount will be 28% of any distributions or proceeds
paid. Backup withholding is not an additional tax. Any amounts withheld may be
credited against the shareholders U.S. federal income tax liability, provided
the appropriate information is furnished to the IRS. Certain payees and payments
are exempt from backup withholding and information reporting. The special U.S.
tax certification requirements applicable to non-U.S. investors to avoid backup
withholding are described under the Non-U.S. Investors heading below.
Non-U.S. Investors
. Non-U.S. investors (shareholders who, as to the United States, are
nonresident alien individuals, foreign trusts or estates, foreign corporations,
or foreign partnerships) may be subject to U.S. withholding and estate tax and
are subject to special U.S. tax certification requirements. Non-U.S. investors
should consult their tax advisors about the applicability of U.S. tax
withholding and the use of the appropriate forms to certify their status.
In general
. The United States
imposes a flat 30% withholding tax (or a withholding tax at a lower treaty rate)
on U.S. source dividends, including on income dividends paid to you by the Fund.
Exemptions from this U.S. withholding tax are provided for capital gain
dividends paid by the Fund from its net long-term capital gains and, with
respect to taxable years of the Fund beginning before January 1, 2014 (unless
such provision is extended or made permanent), interest-related dividends paid
by the Fund from its qualified net interest income from U.S. sources and
short-term capital gain dividends. However, notwithstanding such exemptions from
U.S. withholding at the source, any dividends and distributions of income and
capital gains, including the proceeds from the sale of your Fund shares, will be
subject to backup withholding at a rate of 28% if you fail to properly certify
that you are not a U.S. person.
Capital gain dividends and short-term capital gain
dividends
. In general, (i) a capital gain
dividend reported by the Fund to shareholders as paid from its net long-term
capital gains, or (ii) with respect to taxable years of the Fund beginning
before January 1, 2014 (unless such provision is extended or made permanent), a
short-term capital gain dividend reported by the Fund to shareholders as paid
from its net short-term capital gains, other than long- or short-term capital
gains realized on disposition of U.S. real property interests (see the discussion below), are not subject to U.S.
withholding tax unless you are a nonresident alien individual present in the
United States for a period or periods aggregating 183 days or more during the
calendar year. After such sunset date, short-term capital gains are taxable to
non-U.S. investors as ordinary dividends subject to U.S. withholding tax at a
30% or lower treaty rate.
113
Interest-related dividends.
With
respect to taxable years of the Fund beginning before January 1, 2014 (unless
such provision is extended or made permanent), dividends reported by the Fund to
shareholders as interest-related dividends and paid from its qualified net
interest income from U.S. sources are not subject to U.S. withholding tax.
Qualified interest income includes, in general, U.S. source (1) bank deposit
interest, (2) short-term original discount, (3) interest (including original
issue discount, market discount, or acquisition discount) on an obligation which
is in registered form, unless it is earned on an obligation issued by a
corporation or partnership in which the Fund is a 10-percent shareholder or is
contingent interest, and (4) any interest-related dividend from another
regulated investment company. On any payment date, the amount of an income
dividend that is reported by the Fund to shareholders as an interest-related
dividend may be more or less than the amount that is so qualified. This is
because the reporting is based on an estimate of the Funds qualified net
interest income for its entire fiscal year, which can only be determined with
exactness at fiscal year-end. As a consequence, the Fund may over withhold a
small amount of U.S. tax from a dividend payment. In this case, the non-U.S.
investors only recourse may be to either forgo recovery of the excess
withholding, or to file a United States nonresident income tax return to recover
the excess withholding.
Further limitations on tax reporting for interest-related dividends and
short-term capital gain dividends for non-U.S. investors. It may not be
practical in every case for the Fund to report, and the Fund reserves the right
in these cases to not report, small amounts of interest-related or short-term
capital gain dividends. Additionally, the Funds reporting of interest-related
or short-term capital gain dividends may not be passed through to shareholders
by intermediaries who have assumed tax reporting responsibilities for this
income in managed or omnibus accounts due to systems limitations or operational
constraints.
Net investment income from dividends on stock and foreign source interest
income continue to be subject to withholding tax; foreign tax credits. Ordinary
dividends paid by the Fund to non-U.S. investors on the income earned on
portfolio investments in (i) the stock of domestic and foreign corporations and
(ii) the debt of foreign issuers continue to be subject to U.S. withholding tax.
Foreign shareholders may be subject to U.S. withholding tax at a rate of 30% on
the income resulting from an election to pass-through foreign tax credits to
shareholders, but may not be able to claim a credit or deduction with respect to
the withholding tax for the foreign tax treated as having been paid by them.
Income effectively connected with a U.S. trade or
business
. If the income from the Fund is
effectively connected with a U.S. trade or business carried on by a foreign
shareholder, then ordinary income dividends, capital gain dividends and any
gains realized upon the sale or redemption of shares of the Fund will be subject
to U.S. federal income tax at the rates applicable to U.S. citizens or domestic
corporations and require the filing of a nonresident U.S. income tax return.
Investment in U.S. real property
.
The Fund may invest in equity securities of corporations that invest in U.S.
real property, including U.S. REITs. The sale of a U.S. real property interest
(USRPI) by the Fund or by a U.S. REIT or U.S. real property holding
corporation in which the Fund invests may trigger special tax consequences to
the Funds non-U.S. shareholders.
114
The Foreign
Investment in Real Property Tax Act of 1980 (FIRPTA) makes non-U.S. persons
subject to U.S. tax on disposition of a USRPI as if he or she were a U.S.
person. Such gain is sometimes referred to as FIRPTA gain. The Internal Revenue
Code provides a look-through rule for distributions of FIRPTA gain by a RIC
received from a U.S. REIT or another RIC classified as a U.S. real property
holding corporation or realized by the RIC on a sale of a USRPI (other than a
domestically controlled U.S. REIT or RIC that is classified as a qualified
investment entity) as follows:
-
The RIC is classified as a qualified investment
entity. A RIC is classified as a qualified investment entity with respect to
a distribution attributable directly or indirectly to a sale or exchange of a
USRPI if, in general, 50% or more of the RICs assets consist of interests in
U.S. REITs and U.S. real property holding corporations, and
-
You are a non-U.S.
shareholder that owns more than 5% of a class of Fund shares at any time
during the one-year period ending on the date of the distribution.
-
If these conditions are met, such Fund
distributions to you are treated as gain from the disposition of a USRPI,
causing the distributions to be subject to U.S. withholding tax at a rate of
35% (unless reduced by future regulations), and requiring that you file a
nonresident U.S. income tax return.
-
In addition, even if you do not own more than 5%
of a class of Fund shares, but the Fund is a qualified investment entity, such
Fund distributions to you will be taxable as ordinary dividends (rather than
as a capital gain or short-term capital gain dividend) subject to withholding
at 30% or lower treaty rate.
These rules apply
to dividends paid by the Fund before January 1, 2014 (unless such provision is
extended or made permanent). After such sunset date, Fund distributions from a
U.S. REIT (whether or not domestically controlled) attributable to FIRPTA gain
will continue to be subject to the withholding rules described above provided
the Fund would otherwise be classified as a qualified investment entity.
Because the Fund expects to invest less than 50% of its assets at all
times, directly or indirectly, in U.S. real property interests, the Fund expects
that neither gain on the sale or redemption of Fund shares nor Fund dividends
and distributions would be subject to FIRPTA reporting and tax withholding.
U.S. estate tax
. Transfers by
gift of shares of the Fund by a foreign shareholder who is a nonresident alien
individual will not be subject to U.S. federal gift tax. An individual who, at
the time of death, is a non-U.S. shareholder will nevertheless be subject to
U.S. federal estate tax with respect to Fund shares at the graduated rates
applicable to U.S. citizens and residents, unless a treaty exemption applies. If
a treaty exemption is available, a decedents estate may nonetheless need to
file a U.S. estate tax return to claim the exemption in order to obtain a U.S.
federal transfer certificate. The transfer certificate will identify the
property (i.e., Fund shares) as to which the U.S. federal estate tax lien has
been released. In the absence of a treaty, there is a $13,000 statutory estate
tax credit (equivalent to U.S. situs assets with a value of $60,000). For
estates with U.S. situs assets of not more than $60,000, the Fund may accept, in
lieu of a transfer certificate, an affidavit from an appropriate individual
evidencing that decedents U.S. situs assets are below this threshold
amount.
U.S. tax certification rules
.
Special U.S. tax certification requirements may apply to non-U.S. shareholders
both to avoid U.S. backup withholding imposed at a rate of 28% and to obtain the
benefits of any treaty between the United States and the shareholders country
of residence. In general, a non-U.S. shareholder must provide a Form W-8 BEN (or
other applicable Form W-8) to establish that you are not a U.S. person, to claim
that you are the beneficial owner of the income and, if applicable, to claim a
reduced rate of, or exemption from, withholding as a resident of a country with
which the United States has an income tax treaty. A Form W-8 BEN provided
without a U.S. taxpayer identification number will remain in effect for a period
beginning on the date signed and ending on the last day of the third succeeding
calendar year unless an earlier change of circumstances makes the information on
the form incorrect. Certain payees and payments are exempt from backup
withholding.
The tax consequences to a non-U.S. shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Non-U.S. shareholders are urged to consult their own tax advisors with
respect to the particular tax consequences to them of an investment in the Fund,
including the applicability of foreign tax.
115
Foreign
Account Tax Compliance Act (FATCA).
Under
FATCA, the relevant withholding agent may be required to withhold 30% of: (a)
income dividends paid after December 31, 2013 and (b) certain capital gains
distributions and the proceeds of a sale of shares paid after December 31, 2016
to (i) a foreign financial institution (FFI) unless the FFI becomes a
participating FFI by entering into a U.S. tax compliance agreement with the
IRS under section 1471(b) of the Internal Revenue Code (FFI agreement) and
thereby agrees to verify, report and disclose certain of its U.S. accountholders
and meets certain other specified requirements or (ii) a non-financial foreign
entity that is the beneficial owner of the payment unless such entity certifies
that it does not have any substantial U.S. owners or provides the name, address
and taxpayer identification number of each substantial U.S. owner and such
entity meets certain other specified requirements. The U.S. Treasury has
negotiated intergovernmental agreements with certain countries and is in various
stages of negotiations with a number of other foreign governments with respect
to one or more alternative approaches to implement FATCA, which alter in certain
respects the rules described above. These requirements are different from, and
in addition to, the U.S. tax certification rules described above. Shareholders
are urged to consult their tax advisors regarding the application of these
requirements to their own situation.
Effect of Future Legislation; Local Tax
Considerations
. The foregoing
general discussion of U.S. federal income tax consequences is based on the
Internal Revenue Code and the regulations issued thereunder as in effect on the
date of this Statement of Additional Information. Future legislative or
administrative changes, including provisions of current law that sunset and
thereafter no longer apply, or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein. Rules
of state and local taxation of ordinary income, qualified dividend income and
capital gain dividends may differ from the rules for U.S. federal income
taxation described above. Distributions may also be subject to additional state,
local and foreign taxes depending on each shareholders particular situation.
Non-U.S. shareholders may be subject to U.S. tax rules that differ significantly
from those summarized above. Shareholders are urged to consult their tax
advisors as to the consequences of these and other state and local tax rules
affecting investment in the Fund.
To obtain the Funds most current performance information, please call:
800 914-0278 or visit optimummutualfunds.com.
Performance quotations represent the Funds past performance and should
not be considered representative of future results. The Funds will calculate
their performance in accordance with the requirements of the rules and
regulations under the 1940 Act, or any other applicable U.S. securities law, as
they may be revised from time to time by the SEC.
PricewaterhouseCoopers LLP, which is located at 2001 Market Street,
Philadelphia, Pennsylvania 19103, serves as the independent registered public
accounting firm for the Trust and, in its capacity as such, audits the annual
financial statements contained in each Funds Annual Report. The Funds
Statements of Net Assets, Statements of Assets and Liabilities, Statements of
Operations, Statements of Changes in Net Assets, Financial Highlights, and Notes
to Financial Statements, as well as the reports of PricewaterhouseCoopers LLP,
the independent registered public accounting firm for the fiscal year ended
March 31, 2013, are included in the Funds Annual Report to shareholders. The
financial statement information for fiscal years ended prior to March 31, 2011
was audited by the Trusts prior independent registered public accounting firm.
The financial statements and financial highlights, the notes relating thereto
and the reports of PricewaterhouseCoopers LLP listed above are incorporated by
reference from the Annual Report into this Part B.
116
As of June 30,
2013, the Trust believes that there were no accounts beneficially holding 5% or
more of the outstanding shares of any Class of any Fund other than the accounts
shown below.
|
|
SHAREHOLDER NAME
|
PERCENTAGE OF
|
FUND NAME
|
CLASS
|
AND ADDRESS
|
FUND
|
OPTIMUM FIXED INCOME
|
B
|
C UNDERWOOD
|
|
FUND
|
|
CLAYTON NC
|
5.33%
|
117