STATEMENT OF ADDITIONAL INFORMATION
April 1, 2013
GATEWAY TRUST
GATEWAY INTERNATIONAL FUND
Class A (GAIAX), Class C (GAICX) and Class Y
(GAIYX)
NATIXIS FUNDS TRUST II
ASG GROWTH MARKETS FUND (“Growth Markets Fund”)
Class A (AGMAX), Class
C (AGMCX) and Class Y (AGMYX)
LOOMIS SAYLES CAPITAL INCOME FUND (“Capital Income Fund”)
Class A (LSCAX), Class C (LSCCX) and Class Y (LSCYX)
LOOMIS SAYLES SENIOR FLOATING RATE AND FIXED INCOME FUND (“Senior Floating Rate and Fixed Income Fund”)
Class A (LSFAX), Class C (LSFCX) and Class Y (LSFYX)
VAUGHAN NELSON SELECT FUND
(“Select Fund”)
Class A (VNSAX), Class C (VNSCX) and Class Y (VNSYX)
This Statement of Additional Information (“Statement”) contains specific information which may be useful to investors but which is not included
in the Statutory Prospectuses of the funds listed above (each a “Fund” and together the “Funds”). This Statement is not a prospectus and is authorized for distribution only when accompanied or preceded by each Fund’s Summary
or Statutory Prospectus, each dated April 1, 2013 (each a “Prospectus” and together the “Prospectuses”), as from time to time revised or supplemented. This Statement should be read together with the Prospectuses. Investors
may obtain the Prospectuses without charge from NGAM Distribution, L.P. (the “Distributor”), Prospectus Fulfillment Desk, 399 Boylston Street, Boston, Massachusetts 02116, by calling Natixis Funds at 800-225-5478 or by visiting the
Funds’ website at ngam.natixis.com.
The Funds’ financial statements and accompanying notes that appear in the Funds’ annual
and semiannual reports are incorporated by reference into this Statement. Each Fund’s annual and semiannual reports contain additional performance information and are available upon request and without charge by calling 800-225-5478 or by
visiting the Funds’ website at ngam.natixis.com.
Table of Contents
2
INVESTMENT RESTRICTIONS
The following is a description of restrictions on the investments to be made by the Funds. These restrictions are fundamental policies that may not be
changed without the vote of a majority of the outstanding voting securities of the relevant Fund (as defined in the Investment Company Act of 1940 (the “1940 Act”)). Except in the case of restrictions marked with a dagger (†) below,
the percentages set forth below and the percentage limitations set forth in the Prospectuses apply at the time of the purchase of a security and shall not be considered violated unless an excess or deficiency occurs or exists immediately after and
as a result of a purchase of such security. The Capital Income Fund and the Gateway International Fund have elected to be classified as diversified series of an open-end investment company, while the Growth Markets Fund, the Select Fund and the
Senior Floating Rate and Fixed Income Fund have elected to be classified as non-diversified series of an open-end investment company.
Capital Income Fund
Capital Income Fund
may not:
|
(1)
|
Purchase any security (other than U.S. government securities) if, as a result, 25% or more of the Fund’s total assets (taken at current value) would be invested in
any one industry. For purposes of this restriction, telephone, gas and electric public utilities are each regarded as separate industries, finance companies whose financing activities are related primarily to the activities of their parent companies
are classified in the industry of their parents, finance companies whose financing activities are not related primarily to the activities of their parent companies are classified in the industry the Fund’s adviser believes is the most
applicable to such finance companies, and each foreign country’s government (together with all sub-divisions thereof) will be considered a separate industry. For purposes of this restriction, securities and other obligations of issuers in the
banking industry are considered to be one industry and asset-backed securities are not considered to be bank obligations.
|
|
(2)
|
Make short sales of securities or maintain a short position, except that the Fund may make any short sales or maintain any short positions where the short sales or
short positions would not constitute “senior securities” under the 1940 Act.
|
|
(3)†
|
Borrow money, except to the extent permitted under the 1940 Act.
|
|
(4)
|
Make loans, except that the Fund may purchase or hold debt instruments in accordance with its investment objective and policies, provided however, this restriction does
not apply to repurchase agreements or loans of portfolio securities.
|
|
(5)
|
Act as an underwriter of securities of other issuers except that, in the disposition of portfolio securities, it may be deemed to be an underwriter under the federal
securities laws.
|
|
(6)
|
Purchase or sell real estate, although it may purchase securities of issuers that deal in real estate, securities that are secured by interests in real estate, and
securities that represent interests in real estate, and it may acquire and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of debt obligations secured by real estate or interests therein.
|
|
(7)
|
Issue senior securities, except for permitted borrowings or as otherwise permitted under the 1940 Act.
|
Capital Income Fund
may
:
|
(8)
|
Purchase and sell commodities to the maximum extent permitted by applicable law.
|
Restrictions (2) and (7) shall be interpreted based upon no-action letters and other pronouncements of the staff of the Securities and Exchange Commission (“SEC”).
3
Gateway International Fund
Gateway International Fund may not:
|
(1)
|
Purchase any security (other than U.S. government securities) if, as a result, 25% or more of the Fund’s total assets (taken at current value) would be invested in
any one industry. For purposes of this restriction, telephone, gas and electric public utilities are each regarded as separate industries, finance companies whose financing activities are related primarily to the activities of their parent companies
are classified in the industry of their parents, finance companies whose financing activities are not related primarily to the activities of their parent companies are classified in the industry the Fund’s adviser believes is the most
applicable to such finance companies, and each foreign country’s government (together with all sub-divisions thereof) will be considered a separate industry. For purposes of this restriction, securities and other obligations of issuers in the
banking industry are considered to be one industry and asset-backed securities are not considered to be bank obligations.
|
|
(2)
|
Make short sales of securities or maintain a short position or purchase securities on margin, except that the Fund may obtain short-term credits as necessary for the
clearance of security transactions, and the Fund may make any short sales or maintain any short positions where the short sales or short positions would not constitute “senior securities” under the 1940 Act.
|
|
(3)†
|
Borrow money, except to the extent permitted under the 1940 Act.
|
|
(4)
|
Make loans, except that the Fund may purchase or hold debt instruments in accordance with its investment objectives and policies, provided however, this restriction
does not apply to repurchase agreements or loans of portfolio securities.
|
|
(5)
|
Act as an underwriter of securities of other issuers except that, in the disposition of portfolio securities, it may be deemed to be an underwriter under the federal
securities laws.
|
|
(6)
|
Purchase or sell real estate, although it may purchase securities of issuers which deal in real estate, securities which are secured by interests in real estate, and
securities which represent interests in real estate, and it may acquire and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of debt obligations secured by real estate or interests therein.
|
|
(7)
|
Issue senior securities, except for permitted borrowings or as otherwise permitted under the 1940 Act.
|
Gateway International Fund
may
:
|
(8)
|
Purchase and sell commodities to the maximum extent permitted by applicable law.
|
Restrictions (2) and (7) shall be interpreted based upon no-action letters and other pronouncements of the staff of the SEC.
Growth Markets Fund
Growth Markets Fund may not:
|
(1)
|
Purchase any security (other than U.S. government securities) if, as a result, 25% or more of the Fund’s total assets (taken at current value)
would be invested in any one industry. For purposes of this restriction, telephone, gas and electric public utilities are each regarded as separate industries and finance companies whose financing activities are related primarily to the activities
of their parent companies are classified in the industry of their parents. For purposes of this restriction, asset-backed securities are not considered to be bank obligations. For purposes of this restriction, different commodities are considered to
be separate industries (
e.g.
, oil futures would be in the “oil industry,” and an exchange-traded fund that invests in gold bullion would be in the “gold industry”), and investments in companies whose returns are
related to the returns of one or more commodities (
e.g.
, mining companies) are considered to be in different industries from the underlying commodities (
e.g.
, mining companies are not considered to be in the oil, gas or gold
industries). Therefore, for purposes of determining whether the Fund has invested 25% or more of its
|
4
|
|
assets in any one industry, commodity investments would not be aggregated with investments in companies whose returns are related to the returns of one or more commodities (
i.e.
, an
oil company would not be aggregated with oil futures).
|
|
(2)
|
Make short sales of securities or maintain a short position, except that the Fund may make any short sales or maintain any short positions where the short sales or
short positions would not constitute “senior securities” under the 1940 Act.
|
|
(3)†
|
Borrow money, except to the extent permitted under the 1940 Act.
|
|
(4)
|
Make loans, except that the Fund may purchase or hold debt instruments in accordance with its investment objectives and policies, provided, however, this restriction
does not apply to repurchase agreements or loans of portfolio securities.
|
|
(5)
|
Act as an underwriter of securities of other issuers except that, in the disposition of portfolio securities, it may be deemed to be an underwriter under the federal
securities laws.
|
|
(6)
|
Purchase or sell real estate, although it may purchase securities of issuers which deal in real estate, securities which are secured by interests in real estate, and
securities which represent interests in real estate, and it may acquire and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of debt obligations secured by real estate or interests therein.
|
|
(7)
|
Issue senior securities, except for permitted borrowings or as otherwise permitted under the 1940 Act.
|
Growth Markets Fund
may
:
|
(8)
|
Purchase and sell commodities to the maximum extent permitted by applicable law.
|
Restrictions (2) and (7) shall be interpreted based upon no-action letters and other pronouncements of the staff of the SEC.
Select Fund
Select Fund may not:
|
(1)
|
Purchase any security (other than U.S. government securities) if, as a result, more than 25% of the Fund’s total assets (taken at current value) would be invested
in any one industry. For purposes of this restriction, telephone, gas and electric public utilities are each regarded as separate industries, finance companies whose financing activities are related primarily to the activities of their parent
companies are classified in the industry of their parents and each foreign country’s government (together with all subdivisions thereof) will be considered to be a separate industry. For purposes of this restriction, securities and other
obligations of issuers in the banking industry are considered to be one industry, and asset-backed securities are not considered to be bank obligations.
|
|
(2)†
|
Borrow money except to the extent permitted under the 1940 Act.
|
|
(3)
|
Make loans, except that the Fund may purchase or hold debt instruments in accordance with its investment objectives and policies, provided however, this restriction
does not apply to repurchase agreements or loans of portfolio securities.
|
|
(4)
|
Act as underwriter of securities of other issuers except that, in the disposition of portfolio securities, it may be deemed to be an underwriter under the federal
securities laws.
|
|
(5)
|
Purchase or sell real estate, although it may purchase securities of issuers which deal in real estate, securities which are secured by interests in real estate, and
securities which represent interests in real estate, and it may acquire and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of debt obligations secured by real estate or interests therein.
|
5
|
(6)
|
Issue senior securities, except for permitted borrowings or as otherwise permitted under the 1940 Act.
|
Select Fund
may
:
|
(7)
|
Purchase and sell commodities to the maximum extent permitted by applicable law.
|
Restriction (7) shall be interpreted based upon no-action letters and other pronouncements of the staff of the SEC.
Senior Floating Rate and Fixed Income Fund
Senior Floating Rate and Fixed Income Fund may
not:
|
(1)
|
Purchase any security (other than U.S. government securities) if, as a result, 25% or more of the Fund’s total assets (taken at current value) would be invested in
any one industry. For purposes of this restriction, telephone, gas and electric public utilities are each regarded as separate industries and finance companies whose financing activities are related primarily to the activities of their parent
companies are classified in the industry of their parents. For purposes of this restriction, asset-backed securities are not considered to be bank obligations. For purposes of this restriction, the Fund takes the position that asset-backed
securities do not represent investments in any industry or group of industries. For purposes of this restriction, different commodities are considered to be separate industries (
e.g.
, oil futures would be in the “oil industry,” and
an exchange-traded fund that invests in gold bullion would be in the “gold industry”), and investments in companies whose returns are related to the returns of one or more commodities (
e.g.
, mining companies) are considered to
be in different industries from the underlying commodities (
e.g.
, mining companies are not considered to be in the oil, gas or gold industries). Therefore, for purposes of determining whether the Fund has invested 25% or more of its
assets in any one industry, commodity investments would not be aggregated with investments in companies whose returns are related to the returns of one or more commodities (
i.e.
, an oil company would not be aggregated with oil futures).
|
|
(2)
|
Make short sales of securities or maintain a short position, except that the Fund may make any short sales or maintain any short positions where the short sales or
short positions would not constitute “senior securities” under the 1940 Act.
|
|
(3)†
|
Borrow money, except to the extent permitted under the 1940 Act.
|
|
(4)
|
Make loans, except that the Fund may purchase or hold debt instruments in accordance with its investment objective and policies, provided, however, this restriction
does not apply to repurchase agreements or loans of portfolio securities.
|
|
(5)
|
Act as an underwriter of securities of other issuers except that, in the disposition of portfolio securities, it may be deemed to be an underwriter under the federal
securities laws.
|
|
(6)
|
Purchase or sell real estate, although it may purchase securities of issuers that deal in real estate, securities that are secured by interests in real estate, and
securities that represent interests in real estate, and it may acquire and dispose of real estate or interests in real estate acquired through the exercise of its rights as a holder of debt obligations secured by real estate or interests therein.
|
|
(7)
|
Issue senior securities, except for permitted borrowings or as otherwise permitted under the 1940 Act.
|
Senior Floating Rate and Fixed Income Fund
may
:
|
(8)
|
Purchase and sell commodities to the maximum extent permitted by applicable law.
|
Restrictions (2) and (7) shall be interpreted based upon no-action letters and other pronouncements of the staff of the SEC.
6
General Notes on Investment Restrictions
In addition to temporary borrowing, and subject to any stricter restrictions on borrowing applicable to any particular fund, a fund may borrow from any bank, provided that immediately after any such
borrowing there is an asset coverage of at least 300% for all borrowings by a fund and provided further, that in the event that such asset coverage shall at any time fall below 300%, a fund shall, within three days (not including Sundays and
holidays) thereafter or such longer period as the SEC may prescribe by rules and regulations, reduce the amount of its borrowings to such an extent that the asset coverage of such borrowing shall be at least 300%. With respect to restrictions on
borrowing, the 1940 Act limits a fund’s ability to borrow money on a non-temporary basis if such borrowings constitute “senior securities.” The Funds may also borrow money or engage in economically similar transactions if those
transactions do not constitute “senior securities” under the 1940 Act.
Under current pronouncements, certain positions
(
e.g.
, reverse repurchase agreements) are excluded from the definition of “senior security” so long as a Fund maintains adequate cover, segregation of assets or otherwise. Similarly, a short sale will not be considered a senior
security if a Fund takes certain steps contemplated by SEC staff pronouncements, such as ensuring the short sale transaction is adequately covered.
A Fund may not purchase any illiquid security if, as a result, more than 15% of the Fund’s net assets (based on current value) would then be invested in such securities. This policy may be changed
without a shareholder vote. The staff of the SEC is presently of the view that repurchase agreements maturing in more than seven days are subject to this restriction. Until that position is revised, modified or rescinded, the Fund will conduct its
operations in a manner consistent with this view. This limitation on investment in illiquid securities does not apply to certain securities which might otherwise be considered illiquid, including securities issued pursuant to Rule 144A under the
Securities Act of 1933 (the “Securities Act”) and certain commercial paper, which a Fund’s adviser or subadviser has determined to be liquid under procedures approved by the Board of Trustees (the “Board”).
For purposes of the foregoing restrictions, the Funds do not consider a swap or other derivative contract on one or more commodities, securities,
indices, currencies or interest rates to be a commodity or a commodity contract.
FUND CHARGES AND
EXPENSES
Advisory Fees
Pursuant to an investment advisory agreement, AlphaSimplex Group, LLC (“AlphaSimplex”) has agreed to manage the investment and reinvestment of the assets of the Growth Markets Fund subject to
the supervision of the Board of Trustees of Natixis Funds Trust II. For the services described in the advisory agreement, the Growth Markets Fund has agreed to pay AlphaSimplex an advisory fee at the annual rate of 1.20% based on the average daily
net assets of the Growth Markets Fund (less the average daily net assets of the Growth Markets Fund’s wholly-owned subsidiary) reduced by the amount of any subadvisory fees payable directly by the Growth Markets Fund to Reich & Tang
Asset Management, LLC (“Reich & Tang”) and Westpeak Global Advisors, LLC (“Westpeak”) (each a “Subadviser” and collectively, the “Subadvisers”) pursuant to the subadvisory agreements.
In addition, pursuant to a separate advisory agreement, the Growth Markets Fund’s wholly-owned subsidiary has agreed to pay AlphaSimplex an advisory
fee at the annual rate of 1.20% of the subsidiary’s average daily net assets.
Pursuant to an investment advisory agreement, Gateway
Investment Advisers, LLC (“Gateway”) has agreed to manage the investment and reinvestment of the assets of the Gateway International Fund, subject to the supervision of the Board of Trustees of Gateway Trust. For the services described in
the advisory agreement, the Gateway International Fund has agreed to pay Gateway an advisory fee at the annual rate of 0.75% of the average daily net assets.
Pursuant to separate investment advisory agreements, Loomis, Sayles & Company, L.P. (“Loomis Sayles”) has agreed to manage the investment and reinvestment of the assets of the Capital
Income Fund, subject to the supervision of the Board of Trustees of Natixis Funds Trust II. For the services described in the advisory agreement, the Capital Income Fund has agreed to pay Loomis Sayles an advisory fee at the annual rate of 0.60% of
the average daily net assets.
7
Pursuant to an investment advisory agreement, Loomis Sayles has agreed to manage the investment and
reinvestment of the assets of the Senior Floating Rate and Fixed Income Fund, subject to the supervision of the Board of Trustees of Natixis Funds Trust II. For the services described in the advisory agreement, the Senior Floating Rate and Fixed
Income Fund has agreed to pay Loomis Sayles an advisory fee at the annual rate of 0.60% of the average daily managed assets. “Average daily managed assets” means the average daily value of the total assets of the Senior Floating Rate and
Fixed Income Fund, less all accrued liabilities of the Senior Floating Rate and Fixed Income Fund (other than the aggregate amount of any outstanding borrowings constituting financial leverage).
Because the management fees paid to Loomis Sayles by the Senior Floating Rate and Fixed Income Fund are calculated on the basis of the Fund’s
average daily managed assets, which include the proceeds of leverage, the dollar amount of the fees paid by the Fund to Loomis Sayles will be higher (and Loomis Sayles will be benefited to that extent) when leverage is utilized. “Average daily
managed assets” means the average daily value of the total assets of the Senior Floating Rate and Fixed Income Fund, less all accrued liabilities of the Senior Floating Rate and Fixed Income Fund (other than the aggregate amount of any
outstanding borrowings constituting financial leverage). Loomis Sayles will utilize leverage only if it believes such action would result in a net benefit to the Fund’s shareholders after taking into account the higher fees and expenses
associated with leverage (including higher management fees).
Pursuant to an investment advisory agreement, NGAM Advisors, L.P., (“NGAM
Advisors”) has agreed to manage the investment and reinvestment of the assets of the Select Fund, subject to the supervision of the Board of Trustees of Natixis Funds Trust II. For the services described in the advisory agreement, the Select
Fund has agreed to pay NGAM Advisors an advisory fee at the annual rate of 0.85% of the average daily net assets reduced by the amount of any subadvisory fees payable directly by the Select Fund to Vaughan Nelson Investment Management, L.P.
(“Vaughan Nelson”) (a “Subadviser”) pursuant to the subadvisory agreement.
AlphaSimplex, Gateway, Loomis Sayles and NGAM
Advisors (each an “Adviser”) have each given a binding contractual undertaking to all classes of the applicable Fund to waive its advisory fee and, if necessary, to reimburse certain expenses related to operating the Funds (including
expenses related to a wholly-owned subsidiary organized under the laws of a non-U.S. jurisdiction, if applicable) in order to limit the Funds’ expenses, exclusive of acquired fund fees and expenses, brokerage expenses, interest expense, taxes,
organizational and extraordinary expenses, such as litigation and indemnification expenses, to the annual rates indicated below. The undertakings are in effect until March 31, 2014 for the Funds and may be terminated before then only with the
consent of the Board of Trustees of the Trusts (the “Board”). The undertakings will be reevaluated on an annual basis thereafter, subject to the obligation of the Funds to repay such advisory fees waived and/or expenses reimbursed in later
periods to the extent that the class’s expenses fall below the expense limit; provided, however, that the Funds are not obligated to repay such waived/reimbursed fees and expenses more than one year after the end of the fiscal year in which the
fees or expenses were waived/reimbursed.
|
|
|
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|
|
|
|
|
|
|
Fund
|
|
Expense Limit
|
|
|
Date of Undertaking
|
|
|
Capital Income Fund
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
1.20
|
%
|
|
|
April 1, 2013
|
|
|
Class C
|
|
|
1.95
|
%
|
|
|
April 1, 2013
|
|
|
Class Y
|
|
|
0.95
|
%
|
|
|
April 1, 2013
|
|
|
|
|
|
|
Gateway International Fund
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
1.35
|
%
|
|
|
April 1, 2013
|
|
|
Class C
|
|
|
2.10
|
%
|
|
|
April 1, 2013
|
|
|
Class Y
|
|
|
1.10
|
%
|
|
|
April 1, 2013
|
|
|
|
|
|
|
Growth Markets Fund
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
1.70
|
%
|
|
|
April 1, 2013
|
|
|
Class C
|
|
|
2.45
|
%
|
|
|
April 1, 2013
|
|
|
Class Y
|
|
|
1.45
|
%
|
|
|
April 1, 2013
|
|
|
|
|
|
|
Select Fund
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
1.40
|
%
|
|
|
June 29, 2012
|
|
|
Class C
|
|
|
2.15
|
%
|
|
|
June 29, 2012
|
|
|
Class Y
|
|
|
1.15
|
%
|
|
|
June 29, 2012
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Fund
|
|
Expense Limit
|
|
|
Date of Undertaking
|
|
|
Senior Floating Rate and Fixed Income Fund
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
1.10
|
%
|
|
|
April 1, 2013
|
|
|
Class C
|
|
|
1.85
|
%
|
|
|
April 1, 2013
|
|
|
Class Y
|
|
|
0.85
|
%
|
|
|
April 1, 2013
|
|
Subadvisory Fees
The investment advisory agreement between AlphaSimplex and the Growth Markets Fund provides that AlphaSimplex may delegate its responsibilities thereunder to other parties. Pursuant to the subadvisory
agreements, AlphaSimplex has delegated some of its portfolio management responsibilities to Reich & Tang, which manages the portion of the Fund’s assets that are invested in money market and other short-term, high-quality securities
(the “Money Market Portion”) and to Westpeak, which manages the emerging markets equity portion of the portfolio. For the services described in the subadvisory agreements, the Growth Markets Fund has agreed to pay Reich & Tang and
Westpeak a subadvisory fee at the annual rates of 0.05% and 0.10%, respectively, of the average daily net assets of the Growth Markets Fund that are allocated by the Adviser to be managed by the Subadvisers, subject to a minimum annual subadvisory
fee of $50,000 each.
The investment advisory agreement between NGAM Advisors and the Select Fund provides that NGAM Advisors may delegate its
responsibilities thereunder to other parties. Pursuant to the subadvisory agreements, NGAM Advisors has delegated its portfolio management responsibilities to Vaughan Nelson, which manages the investment and reinvestment of the assets of the Select
Fund. For the services described in the subadvisory agreement, the Select Fund has agreed to pay Vaughan Nelson a subadvisory fee at the annual rate of 0.53%, of the average daily net assets of the Select Fund.
The following table shows the total advisory fees (including subadvisory fees) paid by the Funds for the last three fiscal years, as applicable:
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|
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|
CAPITAL INCOME FUND
|
|
|
|
|
|
|
Period
3/30/12
1
– 11/30/12
|
|
|
Total Advisory Fee
|
|
|
|
$
|
70,161
|
|
|
Fees Waived
|
|
|
|
$
|
67,819
|
|
|
Total Paid
|
|
|
|
$
|
2,342
|
|
|
|
|
|
|
|
|
|
|
GATEWAY INTERNATIONAL FUND
|
|
|
|
|
|
|
Period
3/30/12
1
– 11/30/12
|
|
|
Total Advisory Fee
|
|
|
|
$
|
121,064
|
|
|
Fees Waived
|
|
|
|
$
|
121,064
|
|
|
Total Paid
|
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
GROWTH MARKETS FUND
|
|
|
|
|
Period
10/21/11
1
– 11/30/11
|
|
|
Fiscal
Year
Ended 11/30/12
|
|
|
Total Advisory Fee*
|
|
$
|
33,327
|
|
|
$
|
309,333
|
|
|
AlphaSimplex
|
|
|
|
|
|
|
|
|
|
Fees
|
|
$
|
22,305
|
|
|
$
|
209,333
|
|
|
Fees Waived
|
|
$
|
22,305
|
|
|
$
|
209,333
|
|
|
Total Paid
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Reich & Tang
|
|
|
|
|
|
|
|
|
|
Fees
|
|
$
|
5,511
|
|
|
$
|
50,000
|
|
|
Fees Waived
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Total Paid
|
|
$
|
5,511
|
|
|
$
|
50,000
|
|
|
Westpeak
|
|
|
|
|
|
|
|
|
|
Fees
|
|
$
|
5,511
|
|
|
$
|
50,000
|
|
|
Fees Waived
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Total Paid
|
|
$
|
5,511
|
|
|
$
|
50,000
|
|
9
|
|
|
|
|
|
|
|
|
SELECT FUND
|
|
|
|
|
|
|
Period
6/29/12
1
– 11/30/12
|
|
|
Total Advisory Fee
|
|
|
|
$
|
27,462
|
|
|
NGAM Advisors
|
|
|
|
|
|
|
|
Fees
|
|
|
|
$
|
10,339
|
|
|
Fees Waived
|
|
|
|
$
|
10,339
|
|
|
Total Paid
|
|
|
|
$
|
0
|
|
|
Vaughan Nelson
|
|
|
|
|
|
|
|
Fees
|
|
|
|
$
|
17,123
|
|
|
Fees Waived
|
|
|
|
$
|
17,123
|
|
|
Total Paid
|
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
SENIOR FLOATING RATE AND FIXED INCOME FUND
|
|
|
|
|
|
|
|
|
Period
9/16/11
1
– 11/30/11
|
|
|
Fiscal Year
Ended
11/30/12
|
|
|
Total Advisory Fee
|
|
$
|
49,471
|
|
|
$
|
385,751
|
|
|
Fees Waived
|
|
$
|
49,471
|
|
|
$
|
301,670
|
|
|
Total Paid
|
|
$
|
0
|
|
|
$
|
84,081
|
|
|
1
|
Commencement of
operations.
|
|
*
|
Includes advisory fees of the Commodity Subsidiary.
|
The table below shows the expenses of the Funds that were reimbursed for the last three fiscal years, as applicable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL INCOME FUND
|
|
|
|
|
|
|
|
|
|
Period
3/30/12
1
– 11/30/12
|
|
|
|
|
|
|
|
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
GATEWAY INTERNATIONAL FUND
|
|
|
|
|
|
|
|
|
|
Period
3/30/12
1
– 11/30/12
|
|
|
|
|
|
|
|
|
|
|
$
|
75,177
|
|
|
|
|
|
|
|
|
GROWTH MARKETS FUND
|
|
|
|
|
Period
10/21/11
1
–11/30/11
|
|
|
|
|
Fiscal Year
Ended
11/30/12
|
|
|
|
|
$
|
109,736
|
*
|
|
|
|
$
|
12,546
|
*
|
|
|
|
|
|
|
|
SELECT FUND
|
|
|
|
|
|
|
|
|
|
Period
6/29/12
1
– 11/30/12
|
|
|
|
|
|
|
|
|
|
|
$
|
44,340
|
|
|
|
|
|
|
|
|
SENIOR FLOATING RATE AND FIXED INCOME FUND
|
|
|
|
|
Period
9/16/11
1
– 11/30/11
|
|
|
|
|
Fiscal Year
Ended
11/30/12
|
|
|
|
|
$
|
165,317
|
|
|
|
|
$
|
0
|
|
|
1
|
Commencement of
operations.
|
|
*
|
In addition to waiving its advisory fee, AlphaSimplex reimbursed the Fund for subadvisory fees paid to Reich & Tang in the amount of $5,511 and $50,000 and
Westpeak in the amount of $5,511 and $50,000, for the period October 21, 2011 to November 30, 2011 and the fiscal year ended November 30, 2012, respectively.
|
Brokerage Commissions
Set forth below are the amounts each Fund paid in brokerage
commissions and the amount of brokerage transactions allocated to brokers providing research services during the last three fiscal years, as applicable.
10
For a description of how transactions in portfolio securities are effected and how the Funds’ Advisers
or Subadvisers select brokers, see the section entitled “Portfolio Transactions and Brokerage” in this Statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
3/30/12
1
– 11/30/12
|
|
|
Capital Income Fund
|
|
|
|
|
|
|
|
|
|
Brokerage Transactions
|
|
|
|
|
|
|
|
|
|
Allocated to Brokers Providing Research Services
|
|
|
|
|
|
$
|
3,654,102
|
|
|
Brokerage Commissions
|
|
|
|
|
|
|
|
|
|
Total Brokerage Commissions Paid
|
|
|
|
|
|
$
|
9,293
|
|
|
Commissions Paid to Brokers Providing Research Services
|
|
|
|
|
|
$
|
1,348
|
|
|
|
|
|
|
|
|
|
|
|
Period
3/30/12
1
– 11/30/12
|
|
|
Gateway International Fund
|
|
|
|
|
|
|
|
|
|
Brokerage Transactions
|
|
|
|
|
|
|
|
|
|
Allocated to Brokers Providing Research Services
|
|
|
|
|
|
$
|
0
|
|
|
Brokerage Commissions
|
|
|
|
|
|
|
|
|
|
Total Brokerage Commissions Paid
|
|
|
|
|
|
$
|
26,018
|
|
|
Commissions Paid to Brokers Providing Research Services
|
|
|
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
Period
10/21/11
1
– 11/30/11
|
|
|
Period
12/1/11 –
11/30/12
|
|
|
Growth Markets Fund
|
|
|
|
|
|
|
|
|
|
Brokerage Transactions
|
|
|
|
|
|
|
|
|
|
Allocated to Brokers Providing Research Services
|
|
$
|
0
|
|
|
$
|
3,929,254
|
|
|
Brokerage Commissions
|
|
|
|
|
|
|
|
|
|
Total Brokerage Commissions Paid
|
|
$
|
11,566
|
|
|
$
|
32,002
|
|
|
Commissions Paid to Brokers Providing Research Services
|
|
$
|
0
|
|
|
$
|
4,412
|
|
|
|
|
|
|
|
|
|
|
|
Period
6/29/12
1
– 11/30/12
|
|
|
Select Fund
|
|
|
|
|
|
|
|
|
|
Brokerage Transactions
|
|
|
|
|
|
|
|
|
|
Allocated to Brokers Providing Research Services
|
|
|
|
|
|
$
|
6,112,689
|
|
|
Brokerage Commissions
|
|
|
|
|
|
|
|
|
|
Total Brokerage Commissions Paid
|
|
|
|
|
|
$
|
5,211
|
|
|
Commissions Paid to Brokers Providing Research Services
|
|
|
|
|
|
$
|
4,209
|
|
|
|
|
|
|
|
|
Period
9/16/11
1
– 11/30/11
|
|
|
Period
12/1/11 –
11/30/12
|
|
|
Senior Floating Rate and Fixed Income Fund
|
|
|
|
|
|
|
|
|
|
Brokerage Transactions
|
|
|
|
|
|
|
|
|
|
Allocated to Brokers Providing Research Services
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Brokerage Commissions
|
|
|
|
|
|
|
|
|
|
Total Brokerage Commissions Paid
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Commissions Paid to Brokers Providing Research Services
|
|
$
|
0
|
|
|
$
|
0
|
|
|
1
|
Commencement of
operations.
|
Regular Broker-Dealers
The table below contains the aggregate value of securities of the Funds’ “regular broker-dealers”* (or the parent of the regular broker-dealers) held by each Fund, if any, as of the fiscal
year ended November 30, 2012.
11
|
|
|
|
|
|
|
|
|
Fund
|
|
Regular Broker-Dealer*
|
|
Aggregate Value of Securities of
Each Regular Broker or Dealer
(or its Parent)
Held by Fund
|
|
|
Capital Income Fund
1
|
|
JP Morgan Chase Securities
|
|
$
|
415,647
|
|
|
|
|
Jefferies Group, Inc.
|
|
$
|
198,063
|
|
|
|
|
Morgan Stanley & Co., Inc.
|
|
$
|
114,836
|
|
|
|
|
|
|
Gateway International Fund
2
|
|
UBS Securities, LLC
|
|
$
|
222,992
|
|
|
1
|
The Capital Income
Fund commenced operations on March 30, 2012.
|
|
2
|
The Gateway
International Fund commenced operations on March 30, 2012.
|
|
*
|
“Regular Broker-Dealers” are defined by the SEC as: (a) one of the ten brokers or dealers that received the greatest dollar amount of brokerage
commissions by virtue of direct or indirect participation in the company’s portfolio transactions during the company’s most recent fiscal year; (b) one of the ten brokers or dealers that engaged as principal in the largest dollar
amount of portfolio transactions of the investment company during the company’s most recent fiscal year; or (c) one of the ten brokers or dealers that sold the largest dollar amount of securities of the investment company during the
company’s most recent fiscal year.
|
Sales Charges and Distribution and Service (12b-1) Fees
As explained in this Statement, the Class A and Class C shares of each Fund pay the Distributor fees under plans adopted pursuant to Rule 12b-1 under
the 1940 Act (the “Plans”). The following table shows the amounts of Rule 12b-1 fees paid by the Funds under the Plans during the last three fiscal years, as applicable. The anticipated benefits to the Funds of the Plans include the
ability to attract and maintain assets. See “Distribution Agreements and Rule 12b-1 Plans” for more information.
|
|
|
|
|
|
|
|
|
|
|
Fund
|
|
|
|
|
Period
3/30/12
1
– 11/30/12
|
|
|
Capital Income Fund
|
|
|
|
|
|
|
|
|
|
(Class A)
|
|
|
|
|
|
$
|
3,032
|
|
|
(Class C)
|
|
|
|
|
|
$
|
387
|
|
|
|
|
|
|
Fund
|
|
|
|
|
Period
3/30/12
1
– 11/30/12
|
|
|
Gateway International Fund
|
|
|
|
|
|
|
|
|
|
(Class A)
|
|
|
|
|
|
$
|
6,563
|
|
|
(Class C)
|
|
|
|
|
|
$
|
756
|
|
|
|
|
|
|
Fund
|
|
Period
10/21/11
1
– 11/30/11
|
|
|
Period
12/1/11 –
11/30/12
|
|
|
Growth Markets Fund
|
|
|
|
|
|
|
|
|
|
(Class A)
|
|
$
|
3
|
|
|
$
|
879
|
|
|
(Class C)
|
|
$
|
1
|
|
|
$
|
204
|
|
|
|
|
|
|
Fund
|
|
|
|
|
Period
6/29/12
1
– 11/30/12
|
|
|
Select Fund
|
|
|
|
|
|
|
|
|
|
(Class A)
|
|
|
|
|
|
$
|
1,990
|
|
|
(Class C)
|
|
|
|
|
|
$
|
280
|
|
|
|
|
|
|
Fund
|
|
Period
9/30/11
1
– 11/30/11
|
|
|
Period
12/1/11 –
11/30/12
|
|
|
Senior Floating Rate and Fixed Income Fund
|
|
|
|
|
|
|
|
|
|
(Class A)
|
|
$
|
41
|
|
|
$
|
42,967
|
|
|
(Class C)
|
|
$
|
2
|
|
|
$
|
54,573
|
|
|
1
|
Commencement of
operations.
|
12
For the fiscal period ended November 30, 2012, the Distributor used the Rule 12b-1 fees paid by the
Funds under the Plans as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund
|
|
Compensation to
Broker-Dealers
|
|
|
Retained
by
Distributor
|
|
|
Total
|
|
|
Capital Income Fund
1
|
|
$
|
3,419
|
|
|
$
|
0
|
|
|
$
|
3,419
|
|
|
Gateway International Fund
2
|
|
$
|
7,319
|
|
|
$
|
0
|
|
|
$
|
7,319
|
|
|
Growth Markets Fund
|
|
$
|
1,083
|
|
|
$
|
0
|
|
|
$
|
1,083
|
|
|
Select Fund
3
|
|
$
|
2,270
|
|
|
$
|
0
|
|
|
$
|
2,270
|
|
|
Senior Floating Rate and Fixed Income Fund
|
|
$
|
97,540
|
|
|
$
|
0
|
|
|
$
|
97,540
|
|
|
1
|
The Capital Income
Fund commenced operations on March 30, 2012.
|
|
2
|
The Gateway
International Fund commenced operations on March 30, 2012.
|
|
3
|
The Select Fund commenced operations on June 29, 2012.
|
OWNERSHIP OF FUND SHARES
As of
March 1, 2013, to the Trusts’ knowledge, the following persons owned of record or beneficially 5% or more of the outstanding shares of the indicated classes of the Funds set forth below.
1
|
|
|
|
|
|
|
|
|
FUND
|
|
SHAREHOLDER
|
|
PERCENTAGE
|
|
|
Capital Income Fund
2,3
|
|
|
|
|
|
Class A
|
|
CHARLES SCHWAB & CO INC
SAN FRANCISCO CA 94104-4151
|
|
|
95.59
|
%
|
|
|
|
|
|
Class C
|
|
LPL FINANCIAL
SAN DIEGO CA
92121-1968
|
|
|
35.50
|
%
|
|
|
|
|
|
|
|
NFS LLC
JAMESTOWN NC
27282-8624
|
|
|
12.21
|
%
|
|
|
|
|
|
|
|
RBC CAPITAL MARKETS LLC
MINNEAPOLIS MN 55402-1110
|
|
|
11.57
|
%
|
|
|
|
|
|
|
|
NFS LLC
BLUE ASH OH
45241-3372
|
|
|
9.55
|
%
|
|
|
|
|
|
|
|
AMERITRADE INC
OMAHA NE
68103-2226
|
|
|
6.63
|
%
|
|
|
|
|
|
|
|
AMERITRADE INC
OMAHA NE
68103-2226
|
|
|
6.53
|
%
|
|
|
|
|
|
Class Y
|
|
NATIXIS GLOBAL ASSET MANGEMENT, L.P.
BOSTON MA 02116-3368
|
|
|
62.20
|
%
|
|
|
|
|
|
|
|
DINGLE & CO
DETROIT
MI
|
|
|
32.08
|
%
|
|
|
|
|
Gateway International Fund
4
|
|
|
|
|
|
Class A
|
|
CHARLES SCHWAB & CO INC
SAN FRANCISCO CA 94104-4151
|
|
|
65.15
|
%
|
|
|
|
|
|
|
|
LPL FINANCIAL
SAN DIEGO CA
92121-1968
|
|
|
15.33
|
%
|
|
|
|
|
|
Class C
|
|
ROBERT W BAIRD & CO INC
MILWAUKEE WI 53202-5391
|
|
|
9.89
|
%
|
13
|
|
|
|
|
|
|
|
|
|
|
ROBERT W BAIRD & CO INC
MILWAUKEE WI 53202-5391
|
|
|
7.25
|
%
|
|
|
|
|
|
|
|
ROBERT W BAIRD & CO INC
MILWAUKEE WI 53202-5391
|
|
|
7.07
|
%
|
|
|
|
|
|
|
|
ROBERT W BAIRD & CO INC
MILWAUKEE WI 53202-5391
|
|
|
6.96
|
%
|
|
|
|
|
|
|
|
ROBERT W BAIRD & CO INC
MILWAUKEE WI 53202-5391
|
|
|
5.99
|
%
|
|
|
|
|
|
|
|
RAYMOND JAMES
ST PETERSBURG
FL 33716-1100
|
|
|
5.44
|
%
|
|
|
|
|
|
Class Y
|
|
NATIXIS GLOBAL ASSET MANGEMENT, L.P.
BOSTON MA 02116-3368
|
|
|
68.86
|
%
|
|
|
|
|
|
|
|
GATEWAY INVESTMENT ADVISERS LLC
CINCINNATI OH 45202-4026
|
|
|
22.95
|
%
|
|
|
|
|
Growth Markets Fund
5
|
|
|
|
|
|
Class A
|
|
LPL FINANCIAL
SAN DIEGO CA
92121-1968
|
|
|
88.88
|
%
|
|
|
|
|
|
|
|
PERSHING LLC
JERSEY CITY NJ
07399-0001
|
|
|
9.01
|
%
|
|
|
|
|
|
Class C
|
|
UBS WM USA
JERSEY CITY NJ
07310-2055
|
|
|
89.12
|
%
|
|
|
|
|
|
|
|
NFS LLC
HENDERSONVILLE, TN
37075-3140
|
|
|
7.24
|
%
|
|
|
|
|
|
Class Y
|
|
NATIXIS GLOBAL ASSET MANGEMENT, L.P.
BOSTON MA 02116-3368
|
|
|
97.33
|
%
|
|
|
|
|
Senior Floating Rate and Fixed Income
Fund
6
|
|
|
|
|
|
Class A
|
|
UBS WM USA
JERSEY CITY NJ
07310-2055
|
|
|
52.44
|
%
|
|
|
|
|
|
|
|
PERSHING LLC
JERSEY CITY NJ
07399-0001
|
|
|
11.61
|
%
|
|
|
|
|
|
|
|
LPL FINANCIAL
SAN DIEGO CA
92121-1968
|
|
|
9.97
|
%
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO INC
SAN FRANCISCO CA 94104-4151
|
|
|
9.55
|
%
|
|
|
|
|
|
Class C
|
|
UBS WM USA
JERSEY CITY NJ
07310-2055
|
|
|
40.14
|
%
|
|
|
|
|
|
|
|
LPL FINANCIAL
SAN DIEGO CA
92121-1968
|
|
|
15.98
|
%
|
|
|
|
|
|
|
|
MERRILL LYNCH PIERCE FENNER & SMITH INC.
JACKSONVILLE FL 32246-6484
|
|
|
13.68
|
%
|
14
|
|
|
|
|
|
|
|
|
|
|
RAYMOND JAMES
ST PETERSBURG
FL 33716-1100
|
|
|
9.72
|
%
|
|
|
|
|
|
|
|
RBC CAPITAL MARKETS LLC
MINNEAPOLIS MN 55402-1110
|
|
|
6.83
|
%
|
|
|
|
|
|
Class Y
|
|
MERRILL LYNCH PIERCE FENNER & SMITH INC.
JACKSONVILLE FL 32246-6484
|
|
|
24.97
|
%
|
|
|
|
|
|
|
|
LPL FINANCIAL
SAN DIEGO CA
92121-1968
|
|
|
17.01
|
%
|
|
|
|
|
|
|
|
RBC CAPITAL MARKETS LLC
MINNEAPOLIS MN 55402-1110
|
|
|
13.10
|
%
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO INC
SAN FRANCISCO CA 94104-4151
|
|
|
11.85
|
%
|
|
|
|
|
|
|
|
RAYMOND JAMES
ST PETERSBURG
FL 33716-1100
|
|
|
6.05
|
%
|
|
|
|
|
Vaughan Nelson Select Fund
7,8
|
|
|
|
|
|
Class A
|
|
UBS WM USA
JERSEY CITY NJ
07310-2055
|
|
|
51.62
|
%
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO INC
SAN FRANCISCO CA 94104-4151
|
|
|
30.96
|
%
|
|
|
|
|
|
Class C
|
|
RAYMOND JAMES
ST PETERSBURG
FL 33716-1100
|
|
|
80.90
|
%
|
|
|
|
|
|
|
|
NFS LLC
JACKSONVILLE FL
32259-5268
|
|
|
16.03
|
%
|
|
|
|
|
|
Class Y
|
|
NATIXIS GLOBAL ASSET MANGEMENT, L.P.
BOSTON MA 02116-3368
|
|
|
46.99
|
%
|
|
|
|
|
|
|
|
STATE STREET BANK
OAKS PA
19456-9989
|
|
|
34.29
|
%
|
|
|
|
|
|
|
|
CHARLES SCHWAB & CO INC
SAN FRANCISCO CA 94104-4151
|
|
|
8.99
|
%
|
|
1
|
Such ownership may be beneficially held by individuals or entities other than the owner listed. To the extent that any listed shareholder beneficially
owns more than 25% of a Fund, it may be deemed to “control” the Fund within the meaning of the 1940 Act. The effect of such control may be to reduce the ability of other shareholders of the Fund to take actions requiring the affirmative
vote of holders of a plurality or majority of the Fund’s shares without the approval of the controlling shareholder.
|
|
2
|
As of March 1, 2013, Natixis Global Asset Management, L.P., Boston, MA 02116-3368, owned 52.85% of the Capital Income Fund and therefore may be
presumed to “control” the Fund, as that term is defined in the 1940 Act. However, such ownership may be beneficially held by individuals or entities other than Natixis Global Asset Management, L.P.
|
|
3
|
As of March 1, 2013, Dingle & Co., Detroit, MI, owned 27.08% of the Capital Income Fund and therefore may be presumed to
“control” the Fund, as that term is defined in the 1940 Act. However, such ownership may be beneficially held by individuals or entities other than Dingle & Co.
|
|
4
|
As of March 1, 2013, Natixis Global Asset Management, L.P., Boston, MA 02116-3368, owned 50.53% of the Gateway International Fund and therefore
may be presumed to “control” the Fund, as that term is defined in the 1940 Act. However, such ownership may be beneficially held by individuals or entities other than Natixis Global Asset Management, L.P.
|
|
5
|
As of March 1, 2013, Natixis Global Asset Management, L.P., Boston, MA 02116-3368, owned 95.36% of the Growth Markets Fund and therefore may be
presumed to “control” the Fund, as that term is defined in the 1940 Act. However, such ownership may be beneficially held by individuals or entities other than Natixis Global Asset Management, L.P.
|
15
|
6
|
As of March 1, 2013, UBS WM USA, Jersey City, NJ 07310-2055, owned 29.92% of the Loomis Sayles Senior Floating Rate and Fixed Income Fund and
therefore may be presumed to “control” the Fund, as that term is defined in the 1940 Act. However, such ownership may be beneficially held by individuals or entities other than UBS WM USA.
|
|
7
|
As of March 1, 2013, Natixis Global Asset Management, L.P., Boston, MA 02116-3368, owned 39.50% of the Select Fund and therefore may be presumed
to “control” the Fund, as that term is defined in the 1940 Act. However, such ownership may be beneficially held by individuals or entities other than Natixis Global Asset Management, L.P.
|
|
8
|
As of March 1, 2013, State Street Bank, Oaks, PA 19456-9989, owned 25.01% of the Select Fund and therefore may be presumed to “control”
the Fund, as that term is defined in the 1940 Act. However, such ownership may be beneficially held by individuals or entities other than State Street Bank.
|
A Fund may experience large redemptions or investments due to transactions in Fund shares by funds of funds, other large shareholders or similarly managed accounts. While it is impossible to predict the
overall effect of these transactions over time, there could be an adverse impact on a Fund’s performance. In the event of such redemptions or investments, a Fund could be required to sell securities or to invest cash at a time when it may not
otherwise desire to do so. Such transactions may increase a Fund’s brokerage and/or other transaction costs. In addition, when funds of funds or other investors own a substantial portion of a Fund’s shares, a large redemption by a fund of
funds could cause actual expenses to increase, or could result in the Fund’s current expenses being allocated over a smaller asset base, leading to an increase in the Fund’s expense ratio. Redemptions of fund shares could also accelerate
the realization of taxable capital gains in the Fund if sales of securities result in capital gains. The impact of these transactions is likely to be greater when a fund of funds or other significant investor purchases, redeems, or owns a
substantial portion of the Fund’s shares. When possible, a Fund’s Adviser will consider how to minimize these potential adverse effects, and may take such actions as it deems appropriate to address potential adverse effects, including
redemption of shares in-kind rather than in cash or carrying out the transactions over a period of time, although there can be no assurance that such actions will be successful.
THE TRUSTS
Natixis Funds Trust II and Gateway Trust (each, a “Trust” and together, the “Trusts”) are each registered with the SEC as an open-end management investment company. Natixis Funds Trust
II is organized as a Massachusetts business trust under the laws of Massachusetts pursuant to a Declaration of Trust (a “Declaration of Trust”) dated May 6, 1931, as last amended and restated on June 2, 2005, and consisted of a
single Fund (now the Harris Associates Large Cap Value Fund) until January 1989, when the Trust was reorganized as a “series” company as described in Section 18(f)(2) of the 1940 Act. Each series (with the exception of Growth Markets
Fund, Loomis Sayles Absolute Strategies Fund, Loomis Sayles Multi-Asset Real Return Fund, Select Fund and Senior Floating Rate and Fixed Income Fund) of Natixis Funds Trust II is diversified. The name of Natixis Funds Trust II has changed several
times since its organization as noted below:
|
|
|
|
|
Name of Trust
|
|
Date
|
|
Investment Trust of Boston
|
|
May 1931 to November 1988
|
|
Investment Trust of Boston Funds
|
|
December 1988 to April 1992
|
|
TNE Funds Trust
|
|
April 1992 to March 1994
|
|
New England Funds Trust II
|
|
April 1994 to January 2000
|
|
Nvest Funds Trust II
|
|
January 2000 to April 2001
|
|
CDC Nvest Funds Trust II
|
|
May 2001 to April 2005
|
|
IXIS Advisor Funds Trust II
|
|
April 2005 to August 2007
|
|
Natixis Funds Trust II
|
|
August 2007 to present
|
The Gateway Trust is organized as a Massachusetts business trust under the laws of Massachusetts by an Agreement and
Declaration of Trust (a “Declaration of Trust”) dated May 29, 2007, and is a “series” company as described in Section 18(f)(2) of the 1940 Act. Gateway Trust has two series: the Gateway International Fund and the
Gateway Fund. Each series of Gateway Trust is diversified.
In a transaction that closed February 19, 2008 (the
“Reorganization”), the Gateway Fund acquired the assets and liabilities of the Gateway Fund (the “Gateway Predecessor Fund”), a series of the Gateway Trust (the “Predecessor Trust”), an Ohio business trust. After the
closing of the Reorganization, the Gateway Fund became the successor to the Gateway Predecessor Fund, which had several prior names. The Predecessor Trust had one portfolio, the
16
Gateway Predecessor Fund. Gateway Option Income Fund, Inc., the predecessor to the Predecessor Trust, was organized in 1977 as a Maryland corporation. It was reorganized to become The Gateway
Trust, effective as of May 2, 1986, with the Gateway Option Income Fund as its sole initial fund. As a result of the transaction, shareholders of the corporation on May 2, 1986, became shareholders of the Option Income Fund. The Option
Income Fund was later renamed the Gateway Fund.
INVESTMENT STRATEGIES AND RISKS
Investment Strategies
The
following is a list of certain investment strategies, including particular types of securities or instruments or specific practices that may be used by the Adviser or Subadvisers in managing a Fund. Because of the Growth Markets Fund’s, the
Senior Floating Rate and Fixed Income Fund’s and the Gateway International Fund’s extensive use of derivative instruments, these Funds are subject to many of the risks below indirectly through their derivative transactions as well as
directly through investment in the actual securities themselves. For example, to the extent the Growth Markets Fund enters into a futures contract on an equity index, the Growth Markets Fund is subject to “equity securities” risk.
Each Fund’s principal strategies are described in its Prospectus. This Statement describes some of the non-principal strategies the
Funds may use, in addition to providing additional information, including related risks, about their principal strategies.
The list of
securities or other instruments under each category below is not intended to be an exclusive list of securities for investment and unless a strategy, practice or security is specifically prohibited by the investment restrictions listed in the
Prospectuses, in the section “Investment Restrictions” in this Statement or under applicable law, the Funds may engage in strategies and invest in securities and instruments in addition to those listed below. The Advisers or the
Subadvisers may invest in a general category listed below and, where applicable, with particular emphasis on a certain type of security, but investment is not limited to the categories listed below or the securities specifically enumerated under
each category. The Advisers or the Subadvisers may invest in any security that falls under the specific category, including securities that are not listed below. Reich & Tang will invest the Growth Markets Fund’s Money Market Portion
only in money market and similar short-term instruments. The Prospectuses and/or this Statement will be updated if the Funds begin to engage in investment practices that are not described in the Prospectuses and/or this Statement.
Adjustable Rate Mortgage (“ARM”) Security
The Senior Floating Rate and Fixed Income Fund may invest in ARMs. An ARM, like a traditional mortgage security, is an interest in a pool of mortgage loans that provides investors with payments consisting
of both principal and interest as mortgage loans in the underlying mortgage pool are paid off by the borrowers. ARMs have interest rates that are reset at periodic intervals, usually by reference to some interest rate index or market interest rate.
Although the rate adjustment feature may act as a buffer to reduce sharp changes in the value of adjustable rate securities, these securities are still subject to changes in value based on changes in market interest rates or changes in the
issuer’s creditworthiness. Since the interest rates are reset only periodically, changes in the interest rate on ARMs may lag behind changes in prevailing market interest rates. In addition, some ARMs (or the underlying mortgages) are subject
to caps or floors that limit the maximum change in interest rate during a specified period or over the life of the security. As a result, changes in the interest rate on an ARM may not fully reflect changes in prevailing market interest rates during
certain periods. Because of the resetting of interest rates, ARMs are less likely than non-adjustable rate securities of comparable quality and maturity to increase significantly in value when market interest rates fall. In addition, a Fund will not
benefit from increases in interest rates to the extent that interest rates rise to the point where they cause the current coupon of the underlying ARM to exceed a cap rate for a particular mortgage. See “Mortgage-Related Securities” for
more information on the risks involved in ARMs.
Asset-Backed Securities
Certain Funds may invest in asset-backed securities, which are securities that represent a participation in, or are secured by and payable from, a stream of payments generated by particular assets, most
often a pool or pools of similar assets (e.g., trade receivables). The credit quality of these securities depends primarily upon the quality of the underlying assets and the level of credit support and/or enhancement provided. Mortgage-backed
securities are a
17
type of asset-backed security. The securitization techniques used to develop mortgage securities are being applied to a broad range of other assets. Through the use of trusts and special purpose
vehicles, assets, such as automobile and credit card receivables, are being securitized in pass-through structures similar to mortgage pass-through structures or in a pay-through structure similar to a collateralized mortgage obligation
(“CMO”) structure (described herein). Generally, the issuers of asset-backed bonds, notes or pass-through certificates are special purpose entities and do not have any significant assets other than the receivables securing such
obligations. In general, the collateral supporting asset-backed securities is of shorter maturity than mortgage loans. Instruments backed by pools of receivables are similar to mortgage-backed securities in that they are subject to unscheduled
prepayments of principal prior to maturity. When the obligations are prepaid, a Fund will ordinarily reinvest the prepaid amounts in securities, the yields of which reflect interest rates prevailing at the time. Therefore, a Fund’s ability to
maintain a portfolio that includes high-yielding asset-backed securities will be adversely affected to the extent that prepayments of principal must be reinvested in securities that have lower yields than the prepaid obligations. Moreover,
prepayments of securities purchased at a premium could result in a realized loss. In addition, the value of some mortgage-backed or asset-backed securities in which a Fund invests may be particularly sensitive to changes in prevailing interest
rates, and the ability of a Fund to successfully utilize these instruments may depend in part upon the ability of the Adviser to forecast interest rates and other economic factors correctly. The market for mortgage-backed and asset-backed securities
has recently experienced high volatility and a lack of liquidity. As a result, the value of many of these securities has significantly declined. There can be no assurance that these markets will become more liquid or less volatile, and it is
possible that the value of these securities could decline further. Asset-backed securities involve risks similar to those described in the section “Mortgage-Related Securities.”
Certain Funds may also gain exposure to asset-backed securities through entering into credit default swaps or other derivative instruments related to this asset class. For example, a Fund may enter into
credit default swaps on ABX, which are indices made up of tranches of asset-backed securities, each with different credit ratings. Utilizing ABX, one can either gain synthetic risk exposure to a portfolio of such securities by “selling
protection” or take a short position by “buying protection.” The protection buyer pays a monthly premium to the protection seller, and the seller agrees to cover any principal losses and interest shortfalls of the referenced
underlying asset-backed securities. Credit default swaps and other derivative instruments related to asset-backed securities are subject to the risks associated with asset-backed securities generally, as well as the risks of derivative transactions.
See the section “Derivative Instruments” below.
Investments in Banks
Certain Funds may invest a portion of their assets in certificates of deposit (certificates representing the obligation of a bank to repay funds deposited
with it for a specified period of time), time deposits (non-negotiable deposits maintained in a bank for a specified period of time up to seven days at a stated interest rate), bankers’ acceptances (credit instruments evidencing the obligation
of a bank to pay a draft drawn on it by a customer) and other securities and instruments issued by domestic banks, foreign branches of domestic banks, foreign subsidiaries of domestic banks and domestic and foreign branches of foreign banks. Banks
are also expected to serve as counterparties on some of the Funds’ derivative contracts.
Investments by the Money Market Portion of the
Growth Markets Fund in obligations of domestic banks, foreign branches of domestic banks and foreign subsidiaries of domestic banks generally will be limited to banks having total assets in excess of $1 billion or the equivalent in other currencies.
Investments by the Money Market Portion in obligations of domestic and foreign branches of foreign banks generally will be limited to dollar-denominated obligations of such banks which at the time of investment have more than $5 billion, or the
equivalent in other currencies, in total assets. The Money Market Portion will only invest in either securities which have been rated (or whose issuers have been rated) in the two highest short-term rating categories by nationally recognized
statistical rating organizations, or are unrated securities but which have been determined by Reich & Tang to be of comparable quality. The total assets of a bank will not be the sole factor determining Reich & Tang’s
investment decisions.
The Growth Markets Fund may also purchase U.S. dollar-denominated obligations issued by foreign branches of domestic
banks or foreign branches of foreign banks (“Eurodollar” obligations) and domestic branches of foreign banks (“Yankee dollar” obligations).
Eurodollar and other foreign obligations involve special investment risks, including the possibility that (i) liquidity could be impaired because of future political and economic developments,
(ii) the obligations may be less
18
marketable than comparable domestic obligations of domestic issuers, (iii) a foreign jurisdiction might impose withholding taxes on interest income payable on those obligations,
(iv) deposits may be seized or nationalized, (v) foreign governmental restrictions such as exchange controls may be adopted which might adversely affect the payment of principal and interest on those obligations, (vi) the selection of
foreign obligations may be more difficult because there may be less information publicly available concerning foreign issuers, (vii) there may be difficulties in enforcing a judgment against a foreign issuer, or (viii) the accounting,
auditing and financial reporting standards, practices and requirements applicable to foreign issuers may differ from those applicable to domestic issuers. In addition, foreign banks are not subject to examination by U.S. government agencies or
instrumentalities.
The restrictions in this section will not apply to any investments that are not part of the Money Market Portion. For
example, these restrictions will not limit which banks may serve as counterparties for a Fund’s derivative instruments.
Borrowing
The Senior Floating Rate and Fixed Income Fund can borrow up to one-third of the Fund’s assets (including the amount borrowed) and
use other techniques to purchase investments, to manage its cash flow or to redeem shares, a technique called “leverage.” In addition to borrowing money from banks, the Fund may engage in certain other investment transactions that may be
viewed as forms of financial leverage – for example, using mortgage dollar rolls, entering into when-issued, delayed-delivery or forward commitment transactions or using derivatives such as futures contracts, warrants, structured notes, foreign
currency transactions, credit default swaps, options contracts, swap transactions and forward currency contracts. Because the Fund either (1) sets aside cash (or other liquid assets) on its books in respect of such transactions during the
period in which the transactions are open or (2) otherwise “covers” its obligations under the transactions, such as by holding offsetting investments, the Fund does not consider these transactions to be borrowings for purposes of its
investment restrictions or “senior securities” for purposes of the 1940 Act. Borrowing will increase the Fund’s exposure to fluctuations in the prices of its assets and, therefore, the volatility of its share price, exaggerating any
increase or decrease in the net asset value (the “NAV”) of the Fund. In addition, the interest that the Fund pays on borrowed money, together with any other costs of borrowing, are additional costs borne by the Fund and could reduce or
eliminate any net investment profits. Unless profits on assets acquired with borrowed funds exceed the costs of borrowing, the use of borrowing will diminish the investment performance of the Fund compared with what it would have been without
borrowing. When the Fund borrows money it must comply with certain asset coverage requirements, which at times may require the Fund to dispose of some of its holdings at unfavorable times or prices.
The Senior Floating Rate and Fixed Income Fund has entered into a committed, secured line of credit with a bank under which it expects to borrow for
investment purposes. In connection with its borrowings under this agreement, the Fund will be required to maintain specified asset coverage with respect to such borrowings by both the 1940 Act and the terms of its credit facility with the bank. The
terms of the credit facility will require the Fund to maintain asset coverage levels that may be more restrictive than the provisions of the 1940 Act in connection with borrowings and to pay a commitment or other fee to maintain the line of credit.
In the event of a default under the credit facility, the bank may have the right to cause a liquidation of the collateral (
i.e.
, sell
Fund assets). In addition, in the event of a default, the Fund may delay the payment of redemption requests to the extent permitted under the 1940 Act. In certain limited, extreme circumstances, a default might also prevent the Fund from making
distributions to shareholders sufficient to eliminate income or excise tax at the Fund level, or to be eligible to be treated as a “regulated investment company” (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as
amended (the “Code”). If the Fund were ineligible to be treated as a RIC and if the Fund were unable to cure such failure, the Fund would be subject to tax on its taxable income at corporate rates, and all distributions from earnings and
profits, including any distributions of net long-term capital gain, would generally be treated as ordinary income in the hands of shareholders.
Collateralized Mortgage Obligations (“CMOs”)
The Senior Floating Rate and Fixed Income Fund may invest in CMOs. CMOs are securities backed by a portfolio of mortgages or mortgage securities held under indentures. CMOs may be issued either by U.S.
government instrumentalities or by non-governmental entities. CMOs are not direct obligations of the U.S. government. The issuer’s obligation to make interest and principal payments is secured by the underlying portfolio of mortgages or
19
mortgage securities. CMOs are issued with a number of classes or series, which have different maturities and which may represent interests in some or all of the interest or principal on the
underlying collateral or a combination thereof. CMOs of different classes are generally retired in sequence as the underlying mortgage loans in the mortgage pool are repaid. In the event of sufficient early prepayments on such mortgages, the class
or series of CMO first to mature generally will be retired prior to its maturity. Thus, the early retirement of a particular class or series of CMO held by a Fund would have the same effect as the prepayment of mortgages underlying a mortgage
pass-through security. CMOs and other asset-backed and mortgage-backed securities may be considered derivative securities. CMOs involve risks similar to those described under “Mortgage-Related Securities” below.
Commodities – General
Commodities
are assets that have tangible properties, such as oil, metals, livestock or agricultural products. Historically, commodity investments have had a relatively high correlation with changes in inflation and a relatively low correlation to stock
and bond returns. Commodity-related securities and other instruments provide exposure, which may include long and/or short exposure, to the investment returns of physical commodities that trade in commodities markets, without investing directly in
physical commodities. A Fund may invest in commodity-related securities and other instruments, such as structured notes, swap agreements, options, futures and options on futures that derive value from the price movement of commodities, or some other
readily measurable economic variable dependent upon changes in the value of commodities or the commodities markets. However, investments in commodity-linked instruments do not generally provide a claim on the underlying commodity. In addition,
the ability of a Fund to invest directly in commodities and in certain commodity-related securities and other instruments is subject to significant limitations in order to enable a Fund to maintain its status as a RIC under the Code. See
“Taxes” below for more information.
The value of commodity-related instruments may be affected by changes in overall market
movements, volatility of the underlying benchmark, changes in interest rates or factors affecting a particular industry or commodity, such as droughts, floods, weather, livestock disease, embargoes, tariffs and international economic, political and
regulatory developments. The value of commodity-related instruments will rise or fall in response to changes in the underlying commodity or related index. Investments in commodity-related instruments may be subject to greater volatility than
non-commodity-based investments. A highly liquid secondary market may not exist for certain commodity-related instruments, and there can be no assurance that one will develop. Commodity-related instruments are also subject to credit and interest
rate risks that in general affect the values of debt securities. A Fund may lose money on its commodity investments.
Commodities –
Wholly-Owned Subsidiary
The Growth Markets Fund has established a wholly-owned non-U.S. subsidiary to gain indirect exposure to the
investment returns of the commodities markets within the limitations of the federal tax law requirements applicable to RICs. The subsidiary may invest principally in commodity-linked investments, including futures, options and possibly swap
contracts, as well as certain fixed-income investments intended to serve as margin or collateral for the subsidiary’s derivatives positions. The subsidiary must, however, comply with the Fund’s policies with respect to asset coverage of
derivatives. See the section “Asset Segregation and Coverage” herein. By investing in such a subsidiary, the Growth Markets Fund will be exposed to the risks associated with its subsidiary’s commodity-related investments. The Fund
requested a private letter ruling from the IRS to the effect that income of the subsidiary that is attributed to the Fund constitutes qualifying income to the Fund for purposes of the 90% gross income requirement for RIC qualification (see
“Taxes” below). However, the IRS has not resumed its former practice of issuing private letter rulings of this type. In the absence of such a ruling or any published guidance issued by the IRS to the same or similar effect, the Fund uses
other means of ensuring that this requirement is met.
Convertible Securities
Certain Funds may invest in convertible securities. Convertible securities include corporate bonds, notes or preferred stocks of U.S. or foreign issuers
that can be converted into (exchanged for) common stocks or other equity securities. Convertible securities also include other securities, such as warrants, that provide an opportunity for equity participation. Since convertible securities may be
converted into equity securities, their values will normally vary in some proportion with those of the underlying equity securities. Convertible securities usually provide a higher yield than the underlying equity, however, so that the price decline
of a convertible security may sometimes
20
be less substantial than that of the underlying equity security. Convertible securities are generally subject to the same risks as non-convertible fixed-income securities, but usually provide a
lower yield than comparable fixed-income securities. Many convertible securities are relatively illiquid.
Corporate Reorganizations
Certain Funds 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 Adviser or Subadviser, there is a reasonable prospect of capital appreciation significantly greater than the brokerage and other
transaction expenses involved. 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 a Fund.
In general, securities which 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 Adviser or Subadviser which must appraise not only the value of the issuer and its component businesses, but also the financial resources and business motivation of the offer or
proposal as well as the dynamics of the business climate when the offer or proposal is in process.
Debt-Linked and Equity-Linked
Securities
The Capital Income Fund and the Senior Floating Rate and Fixed Income Fund may invest in debt-linked and equity-linked
securities. The investment results of such instruments are intended to correspond generally to the performance of one or more specified equity or debt securities, or of a specific index or analogous “basket” of equity or debt securities.
Therefore, investing in these instruments involves risks similar to the risks of investing in the underlying stocks or bonds directly. In addition, a Fund bears the risk that the issuer of an equity- or debt-linked security may default on its
obligations under the instrument. Equity- and debt-linked securities are often used for many of the same purposes as, and share many of the same risks with, other derivative instruments as well as structured notes. See the sections “Derivative
Instruments” and “Structured Notes” below. Like many derivatives and structured notes, equity- and debt-linked securities may be considered illiquid, potentially limiting a Fund’s ability to dispose of them.
Debt Securities
Certain Funds may
invest in debt securities. Debt securities are used by issuers to borrow money. The issuer usually pays a fixed, variable or floating rate of interest and must repay the amount borrowed at the maturity of the security. Some debt securities, such as
zero-coupon securities, do not pay interest but are sold at a discount from their face values. Debt securities include corporate bonds, government securities and mortgage- and other asset-backed securities. Debt securities include a broad array of
short-, medium- and long-term obligations issued by the U.S. or foreign governments, government or international agencies and instrumentalities, and corporate issuers of various types. Some debt securities represent uncollateralized obligations of
their issuers; in other cases, the securities may be backed by specific assets (such as mortgages or other receivables) that have been set aside as collateral for the issuer’s obligation. Debt securities generally involve an obligation of the
issuer to pay interest or dividends on either a current basis or at the maturity of the securities, as well as the obligation to repay the principal amount of the security at maturity.
Risks.
Debt securities are subject to market risk and credit risk. Credit risk relates to the ability of the issuer to make payments of principal and interest and includes the risk of default.
Sometimes, an issuer may make these payments from money raised through a variety of sources, including, with respect to issuers of municipal securities, (i) the issuer’s general taxing power, (ii) a specific type of tax, such as a
property tax or (iii) a particular facility or project
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such as a highway. The ability of an issuer to make these payments could be affected by general economic conditions, issues specific to the issuer, litigation, legislation or other political
events, the bankruptcy of the issuer, war, natural disasters, terrorism or other major events. U.S. government securities are not generally perceived to involve credit risks to the same extent as investments in other types of fixed-income
securities; as a result, the yields available from U.S. government securities are generally lower than the yields available from corporate and municipal debt securities. Market risk is the risk that the value of the security will fall because of
changes in market rates of interest. Generally, the value of debt securities falls when market rates of interest are rising. Some debt securities also involve prepayment or call risk. This is the risk that the issuer will repay a Fund the principal
on the security before it is due, thus depriving the Fund of a favorable stream of future interest payments.
Because interest rates vary, it
is impossible to predict the income of a Fund that invests in debt securities for any particular period. Fluctuations in the value of a Fund’s investments in debt securities will cause the Fund’s NAV to increase or decrease.
Depositary Receipts
The Capital Income
Fund, the Gateway International Fund and the Growth Markets Fund may invest in foreign equity securities by purchasing “depositary receipts.” Depositary receipts are instruments issued by banks that represent an interest in equity
securities held by arrangement with the bank. Depositary receipts can be either “sponsored” or “unsponsored.” Sponsored depositary receipts are issued by banks in cooperation with the issuer of the underlying equity securities.
Unsponsored depositary receipts are arranged without involvement by the issuer of the underlying equity securities and, therefore, less information about the issuer of the underlying equity securities may be available and the price may be more
volatile than in the case of sponsored depositary receipts. American Depositary Receipts (“ADRs”) are depositary receipts that are bought and sold in the United States and are typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities by a foreign corporation.
All depositary receipts, including those denominated in U.S. dollars, will be
subject to foreign currency risk. European Depositary Receipts (“EDRs”) and Global Depositary Receipts (“GDRs”) are depositary receipts that are typically issued by foreign banks or trust companies which evidence ownership of
underlying securities issued by either a foreign or U.S. corporation. All depositary receipts, including those denominated in U.S. dollars, will be subject to foreign currency risk. The effect of changes in the dollar value of a foreign currency on
the dollar value of a Fund’s assets and on the net investment income available for distribution may be favorable or unfavorable. A Fund may incur costs in connection with conversions between various currencies. In addition, a Fund may be
required to liquidate portfolio assets, or may incur increased currency conversion costs, to compensate for a decline in the dollar value of a foreign currency occurring between the time when the Fund declares and pays a dividend, or between the
time when the Fund accrues and pays an operating expense in U.S. dollars.
Because certain Funds may invest in depositary receipts, changes in
foreign economies and political climates are more likely to affect the Funds than a mutual fund that invests exclusively in U.S. companies. There may also be less government supervision of foreign markets, resulting in non-uniform accounting
practices and less publicly available information. If a Fund’s portfolio is over-weighted in a certain geographic region, any negative development affecting that region will have a greater impact on the Fund than a fund that is not
over-weighted in that region.
Derivative Instruments
Certain Funds expect to use a number of derivative instruments for risk management purposes or as part of their investment strategies. Generally, derivatives are financial contracts whose value depends
upon, or is derived from, the value of an underlying asset, reference rate or index, and may relate to stocks, bonds, interest rates, currencies or currency exchange rates, commodities and related indices and other assets. For additional information
about the use of derivatives in connection with foreign currency transactions, see the section “Foreign Currency Transactions.” The Adviser may decide not to employ any of these strategies and there is no assurance that any derivatives
strategy used by a Fund will succeed. In addition, suitable derivative transactions may not be available in all circumstances and there can be no assurance that a Fund will engage in these transactions to reduce exposure to other risks when that
would be beneficial. Examples of derivative instruments that a Fund may use include (but are not limited to) futures contracts, warrants, structured notes, foreign currency transactions, credit default swaps, options contracts, swap transactions and
forward currency contracts.
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Derivatives involve special risks, including possible default by the other party to the transaction,
illiquidity, difficulties in valuation, leverage risk and, to the extent the Adviser’s or Subadviser’s view as to certain market movements is incorrect, the risk that the use of derivatives could result in significantly greater losses or
lower income or gains than if they had not been used. Recently, several broker-dealers and other financial institutions have experienced extreme financial difficulty, sometimes resulting in the bankruptcy of the institution. Although the Adviser
and/or Subadviser monitor the creditworthiness of the Funds’ counterparties, there can be no assurance that a Fund’s counterparties will not experience similar difficulties, possibly resulting in losses to that Fund. Losses resulting from
the use of derivatives will reduce a Fund’s NAV, and possibly income, and the losses may be significantly greater than if derivatives had not been used. The degree of a Fund’s use of derivatives may be limited by certain provisions of the
Code. When used, derivatives may increase the amount and affect the timing and character of taxes payable by shareholders. See the section “Additional Risks of Derivative Instruments” below for additional information about the risks
relating to derivatives instruments.
Several types of derivative instruments in which a Fund may invest are described in more detail below.
However, the Funds are not limited to investments in these instruments.
Futures Contracts
Certain Funds may transact in futures. Futures transactions involve a Fund’s buying or selling futures contracts. A futures contract is an agreement
between two parties to buy and sell a particular security, commodity, currency or other asset, or group or index of securities, commodities, currencies or other assets for a specified price on a specified future date. A futures contract creates an
obligation by the seller to deliver and the buyer to take delivery of the type of instrument or cash (depending on whether the contract calls for physical delivery or cash settlement) at the time and in the amount specified in the contract. In the
case of futures on an index, the seller and buyer agree to settle in cash, at a future date, based on the difference in value of the contract between the date it is opened and the settlement date. The value of each contract is equal to the value of
the index from time to time multiplied by a specified dollar amount. For example, S&P 500 Index futures may trade in contracts with a value equal to $250 multiplied by the S&P 500 Index.
When a trader, such as a Fund, enters into a futures contract, it is required to deposit with (or for the benefit of) its broker as “initial
margin” an amount of cash or short-term, high-quality/liquid securities (such as U.S. Treasury bills or high-quality tax-exempt bonds acceptable to the broker) equal to approximately 2% to 5% of the delivery or settlement price of the contract
(depending on applicable exchange rules). Initial margin is held to secure the performance of the holder of the futures contract. As the value of the contract changes, the value of futures contract positions increases or declines. At the end of each
trading day, the amount of such increase and decline is received and paid respectively by and to the holders of these positions. The amount received or paid is known as “variation margin.”
Gain or loss on a futures position is equal to the net variation margin received or paid over the time the position is held, plus or minus the amount
received or paid when the position is closed, minus brokerage commissions and other transaction costs.
Although many futures contracts call
for the delivery (or acceptance) of the specified instrument, futures are usually closed out before the settlement date through the purchase (or sale) of a comparable contract. If the price of the sale of the futures contract by a Fund is less than
the price of the offsetting purchase, the Fund will realize a loss. A futures sale is closed by purchasing a futures contract for the same aggregate amount of the specific type of financial instrument or commodity and with the same delivery date.
Similarly, a futures purchase is closed by the purchaser selling an offsetting futures contract.
Commodity Futures Contracts
The Growth Markets Fund may invest in commodity futures contracts. There are additional risks associated with transactions in
commodity futures contracts including, but not limited to the following:
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Storage
. Unlike the financial futures markets, in the commodity futures markets there are costs of
physical storage associated with purchasing the underlying commodity. The price of the commodity futures contract will reflect the storage costs of purchasing the physical commodity, including the time value of money invested in the physical
commodity. To the extent that the storage costs for an underlying commodity change while a Fund is invested in futures contracts on that commodity, the value of the futures contract may also change.
Reinvestment
. In the commodity futures markets, producers of the underlying commodity may decide to hedge the price risk of selling the commodity
by selling futures contracts today to lock in the price of the commodity at delivery tomorrow. In order to induce speculators to purchase the other side of the same futures contract, the commodity producer generally must sell the futures contract at
a lower price than the expected future spot price. Conversely, if most hedgers in the futures market are purchasing futures contracts to hedge against a rise in prices, then speculators will only sell the other side of the futures contract at a
higher futures price than the expected future spot price of the commodity. The changing positions and views of the participants in the commodity markets will influence whether futures prices are above or below the expected future spot price, which
can have significant implications for a Fund. If the positions and views of the participants in futures markets have shifted when it is time for a Fund to reinvest the proceeds of a maturing contract in a new futures contract, a Fund might reinvest
at higher or lower futures prices, or choose to pursue other investments.
Asset Segregation and Coverage
Each Fund will segregate with its custodian or otherwise designate on its records liquid assets in an amount the Fund believes to be adequate to ensure
that it has sufficient liquid assets to meet its obligations under its derivatives contracts, or the Fund may engage in other measures to “cover” its obligations with respect to such transactions. The amounts that are segregated or
designated may be based on the notional value of the derivative or on the daily mark-to-market obligation under the derivatives contract and may be reduced by amounts on deposit with the applicable broker or counterparty to the derivatives
transaction. A Fund may segregate amounts in addition to the amounts described above. In certain circumstances, a Fund may enter into an offsetting position rather than segregating or designating liquid assets (e.g., a Fund may cover a written put
option with a purchased put option with the same or higher exercise price). Although a Fund’s Adviser or Subadviser will attempt to ensure that the Fund has sufficient liquid assets to cover its obligations under its derivatives contracts, it
is possible that the Fund’s liquid assets may be insufficient to support such obligations under its derivatives positions. A Fund may modify its asset segregation policies from time to time.
Options and Warrants
Options
transactions may involve a Fund’s buying or writing (selling) options on securities, securities indices or currencies. A Fund may engage in these transactions either to enhance investment return or to hedge against changes in the value of other
assets that it owns or intends to acquire.
Options can generally be classified as either “call” or “put” options. There
are two parties to a typical options transaction: the “writer” (seller) and the “buyer.” A call option gives the buyer the right to buy a security or other asset (such as an amount of currency or a futures contract) from, and a
put option gives the buyer the right to sell a security or other asset to, the option writer at a specified price, on or before a specified date. The buyer of an option pays a premium when purchasing the option, which reduces the return on the
underlying security or other asset if the option is exercised, and results in a loss if the option expires unexercised. The writer of an option receives a premium from writing an option, which may increase its return if the option expires or is
closed out at a profit. An “American-style” option allows exercise of the option at any time during the term of the option. A “European-style” option allows an option to be exercised only at a specific time or times, such as the
end of its term. Options may be traded on or off an established securities or options exchange.
If the holder (writer) of an option wishes to
terminate its position, it may seek to effect a closing sale transaction by selling (buying) an option identical to the option previously purchased. The effect of the purchase is that the previous option position will be canceled. A Fund will
realize a profit from closing out an option if the price received for selling the offsetting position is more than the premium paid to purchase the option; a Fund will realize a loss from closing out an option transaction if the price received for
selling the offsetting option is less than the premium paid to purchase the option. Since premiums on options having an exercise price close to the value of the
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underlying securities or futures contracts usually have a time value component (
i.e.
, a value that diminishes as the time within which the option can be exercised grows shorter), the value
of an options contract may change as a result of the lapse of time even though the value of the futures contract or security underlying the option (and of the security or other asset deliverable under the futures contract) has not changed.
As an alternative to purchasing call and put options on index futures, a Fund may purchase or sell call or put options on the underlying
indices themselves. Such options would be used in a manner similar to the use of options on index futures.
Warrants and Rights
Certain Funds may invest in warrants and rights. A warrant is an instrument that gives the holder a right to purchase a given number
of shares of a particular security at a specified price until a stated expiration date. Buying a warrant generally can provide a greater potential for profit or loss than an investment of equivalent amounts in the underlying common stock. The market
value of a warrant does not necessarily move with the value of the underlying securities. If a holder does not sell the warrant, it risks the loss of its entire investment if the market price of the underlying security does not, before the
expiration date, exceed the exercise price of the warrant. Investment in warrants is a speculative activity. Warrants pay no dividends and confer no rights (other than the right to purchase the underlying securities) with respect to the assets of
the issuer. A right is a privilege granted to existing shareholders of a corporation to subscribe for shares of a new issue of common stock before it is issued. Rights normally have a short life, usually two to four weeks, are freely transferable
and entitle the holder to buy the new common stock at a lower price than the public offering price.
Options on Foreign Currencies
Certain Funds may buy and write options on foreign currencies in a manner similar to that in which futures or forward contracts on
foreign currencies will be utilized, as described in the Prospectuses. In addition, options on foreign currencies may be used to hedge against adverse changes in foreign currency conversion rates. For example, a decline in the U.S. dollar value of a
foreign currency in which portfolio securities are denominated will reduce the U.S. 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 the
portfolio securities, a Fund may buy put options on the foreign currency. If the value of the currency declines, a Fund will have the right to sell such currency for a fixed amount in U.S. dollars, thereby offsetting, in whole or in part, the
adverse effect on its portfolio.
Conversely, when a rise in the U.S. 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 buy call options on the foreign currency. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates. As
in the case of other types of options, however, the benefit to a Fund from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, if currency exchange rates do not move in the
direction or to the extent desired, a Fund could sustain losses on transactions in foreign currency options that would require a Fund to forego a portion or all of the benefits of advantageous changes in those rates.
Certain Funds may also write options on foreign currencies. For example, to hedge against a potential decline in the U.S. dollar due to adverse
fluctuations in exchange rates, a Fund could, instead of purchasing a put option, write a call option on the relevant currency. If the decline expected by a Fund occurs, the option will most likely not be exercised and the diminution in value of
portfolio securities will be offset at least in part by the amount of the premium received. Similarly, instead of purchasing a call option to hedge against a potential increase in the U.S. dollar cost of securities to be acquired, a Fund could write
a put option on the relevant currency which, if rates move in the manner projected by a Fund, will expire unexercised and allow a Fund to hedge the increased cost up to the amount of the premium. If exchange rates do not move in the expected
direction, the option may be exercised and a Fund would be required to buy or sell the underlying currency at a loss, which may not be fully offset by the amount of the premium. Through the writing of options on foreign currencies, a Fund also may
lose all or a portion of the benefits that might otherwise have been obtained from favorable movements in exchange rates.
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Options on Indices
Certain Funds may transact in options on indices (“index options”). Put and call index options are similar to puts and calls on securities or futures contracts except that all settlements are in
cash and gain or loss at expiration depends on changes in the index in question rather than on price movements in individual securities or futures contracts. When a Fund writes an index call option, it receives a premium and undertakes the
obligation that, prior to the expiration date (or, upon the expiration date for European-style options), the purchaser of the call, upon exercise of the call, will receive from the Fund an amount of cash if the exercise settlement value of the
relevant index is greater than the exercise price of the call. The manner of determining “exercise settlement value” for a particular option series is fixed by the options market on which the series is traded. S&P 500 Index options,
for example, have a settlement value that is calculated using the opening sales price in the primary market of each component security on the last business day (usually a Friday) before the expiration date. The amount of cash is equal to the
difference between the exercise settlement value of the index and the exercise price of the call times a specified multiple (“multiplier”). When a Fund buys an index call option, it pays a premium and has the same rights as to such call as
are indicated above. When a Fund buys an index put option, it pays a premium and has the right, prior to the expiration date (or, upon the expiration date for European-style options), to collect, upon the Fund’s exercise of the put, an amount
of cash equal to the difference between the exercise price of the option and the exercise settlement value of the index, times a multiplier, similar to that described above for calls, if the exercise settlement value is less than the exercise price.
When a Fund writes an index put option, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require a Fund to deliver to it an amount of cash equal to the difference between the exercise settlement
value of the index and exercise price times the multiplier, if the closing level is less than the exercise price.
Exchange-Traded and
Over-the-Counter Options
Certain Funds may purchase or write both exchange-traded and over-the-counter (“OTC”) options. OTC
options differ from exchange-traded options in that they are two-party contracts, with price and other terms negotiated between buyer and seller, and generally do not have as much market liquidity as exchange-traded options.
An exchange-traded option may be closed out only on an exchange that generally provides a liquid secondary market for an option of the same series. If a
liquid secondary market for an exchange-traded option does not exist, it might not be possible to effect a closing transaction with respect to a particular option, with the result that a Fund would have to exercise the option in order to consummate
the transaction. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; (iv) unusual or unforeseen circumstances
may interrupt normal operations on an exchange; (v) the facilities of an exchange or the Options Clearing Corporation or other clearing organization may not at all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or
series of options) would cease to exist, although outstanding options on that exchange that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms.
An OTC option (an option not traded on an established exchange) may be closed out only by agreement with the other party to the original
option transaction. With OTC options, a Fund is at risk that the other party to the transaction will default on its obligations or will not permit the Fund to terminate the transaction before its scheduled maturity. While a Fund will seek to enter
into OTC options only with dealers who agree to or are expected to be capable of entering into closing transactions with the Fund, there can be no assurance that the Fund will be able to liquidate an OTC option at a favorable price at any time prior
to its expiration. OTC options are not subject to the protections afforded purchasers of listed options by the Options Clearing Corporation or other clearing organizations.
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Index Warrants
Certain Funds may purchase put warrants and call warrants whose values vary depending on the change in the value of one or more specified securities indices (“index warrants”). Index warrants
are generally issued by banks or other financial institutions and give the holder the right, at any time during the term of the warrant, to receive upon exercise of the warrant a cash payment from the issuer based on the value of the underlying
index at the time of exercise. In general, if the value of the underlying index rises above the exercise price of the index warrant, the holder of a call warrant will be entitled to receive a cash payment from the issuer upon exercise based on the
difference between the value of the index and the exercise price of the warrant; if the value of the underlying index falls, the holder of a put warrant will be entitled to receive a cash payment from the issuer upon exercise based on the difference
between the exercise price of the warrant and the value of the index. The holder of a warrant would not be entitled to any payments from the issuer at a time when, in the case of a call warrant, the exercise price is more than the value of the
underlying index, or in the case of a put warrant, the exercise price is less than the value of the underlying index. If a Fund were not to exercise an index warrant prior to its expiration, then the Fund would lose the amount of the purchase price
paid by it for the warrant. A Fund will normally use index warrants in a manner similar to its use of options on securities indices.
Forward Contracts
As described in the
section “Foreign Currency Transactions” below, certain Funds may invest in forward contracts. Forward contracts are transactions involving a Fund’s obligation to purchase or sell a specific currency or other asset at a future date at
a specified price. For example, forward contracts may be used when an Adviser anticipates that particular foreign currencies will appreciate or depreciate in value or to take advantage of the expected relationships between various currencies,
regardless of whether securities denominated in such currencies are held in a Fund’s investment portfolio. Forward contracts may also be used by a Fund for hedging purposes to protect against uncertainty in the level of future foreign currency
exchange rates, such as when a Fund anticipates purchasing or selling a foreign security. This technique would allow a Fund to “lock in” the U.S. dollar price of the investment. Forward contracts also may be used to attempt to protect the
value of a Fund’s existing holdings of foreign securities. There may be, however, imperfect correlation between a Fund’s foreign securities holdings and the forward contracts entered into with respect to such holdings. The cost to a Fund
of engaging in forward contracts varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing.
Swap Transactions
A swap transaction is an unregulated, individually negotiated agreement
(typically with a bank, a brokerage firm or other financial institution as counterparty) to exchange two streams of payments (for example, an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal).
Certain Funds may enter into interest rate, currency, index, total return and other swap transactions. For example, a Fund may enter into interest rate or currency swap transactions to preserve a return or spread on a particular investment or
portion of its portfolio, to gain exposure to one or more securities, currencies, commodities, or interest rates, to protect against currency fluctuations, to manage duration, to protect against any increase in the price of securities a Fund
anticipates purchasing at a later date and to take advantage of perceived mispricing in the securities markets. Interest rate swaps involve the exchange by a Fund with another party of their respective commitments to pay or receive interest (for
example, an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal). A currency swap is an agreement to exchange cash flows on a notional amount based on changes in the relative values of the
specified currencies. An index swap is an agreement to make or receive payments based on the different returns that would be achieved if a notional amount were invested in a specified basket of securities (such as the S&P 500 Index) or in some
other investment (such as U.S. Treasury securities or commodities). A total return swap is an agreement to make payments of the total return from a specified asset or instrument (or a basket of such instruments) during the specified period, in
return for payments equal to a fixed or floating rate of interest or the total return from another specified asset or instrument. Alternatively, a total return swap can be structured so that one party will make payments to the other party if the
value of the relevant asset or instrument increases, but receive payments from the other party if the value of that asset or instrument decreases.
Under most swap agreements, payments by the parties will be exchanged on a “net basis,” and a party will receive or pay, as the case may be, only the net amount of the two payments.
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Certain Funds may also enter into options on swaps. A Fund may engage in swap options for hedging purposes
or to manage and mitigate credit and interest rate risk. A Fund may write (sell) and purchase put and call swap options. The use of swap options involves risks, including, among others, (i) imperfect correlation between movements of the price
of the swap options and the price of the securities, indices or other assets serving as reference instruments for the swap option, reducing the effectiveness of the instrument for hedging or investment purposes, (ii) there may not be a
liquid market to sell a swap option, which could result in difficulty closing a position, (iii) swap options can magnify the extent of losses incurred due to changes in the market value of the securities to which they relate, and
(iv) counterparty risk. Swap agreements are sophisticated financial instruments that typically involve a small investment of cash relative to the magnitude of risks assumed. Swaps can be highly volatile and may have a considerable impact on a
Fund’s performance, as the potential gain or loss on any swap transaction is not subject to any fixed limit. A Fund’s successful use of swap agreements will depend on the Adviser’s ability to predict correctly whether certain types of
investments are likely to produce greater returns than other investments. Even though swap markets in which swap transactions are traded have grown significantly in recent years, swap agreements are typically not traded on exchanges and are subject
to liquidity risk. As a result, a Fund bears the risk of loss of the amount expected to be received pursuant to a swap agreement in the event of the default or bankruptcy of the counterparty, and the value of a swap agreement in general depends on
the creditworthiness of the counterparty. A Fund may also suffer losses if it is unable to terminate (or terminate at the time and price desired) outstanding swap agreements (either by assignment or other disposition) or reduce its exposure through
offsetting transactions.
Credit Default Swaps
Certain Funds may enter into credit default swap agreements, which may have as reference obligations one or more debt securities or an index of such securities. In a credit default swap, one party (the
“protection buyer”) is obligated to pay the other party (the “protection seller”) a stream of payments over the term of the contract, provided that no credit event, such as a default or a downgrade in credit rating, occurs on the
reference obligation. If a credit event occurs, the protection seller must generally pay the protection buyer the “par value” (the agreed-upon notional value) of the referenced debt obligation in exchange for an equal face amount of
deliverable reference obligations or a specified amount of cash, depending upon the terms of the swap.
A Fund may be either the protection
buyer or protection seller in a credit default swap. If a Fund is a protection buyer, such Fund would pay the counterparty a periodic stream of payments over the term of the contract and would not recover any of those payments if no credit event
were to occur. However, if a credit event occurs, a Fund that is a protection buyer has the right to deliver the referenced debt obligations or a specified amount of cash, depending upon the terms of the swap, and receive the par value of such debt
obligations from the counterparty protection seller. As a protection seller, a Fund would receive fixed payments throughout the term of the contract if no credit event occurs. If a credit event occurs, however, the value of the obligation received
by a Fund (
e.g.
, bonds which defaulted), plus the periodic payments previously received, may be less than the par value of the obligation, or cash received, resulting in a loss to the protection seller. Furthermore, a Fund that is a
protection seller would effectively add leverage to its portfolio because such Fund will have investment exposure to the notional amount of the swap.
Credit default swap agreements are subject to greater risk than a direct investment in the reference obligation. Like all swap agreements, credit default swaps are subject to liquidity, credit and
counterparty risks. In addition, collateral posting requirements are individually negotiated and there is no regulatory requirement that a counterparty post collateral to secure its obligations or a specified amount of cash, depending upon the terms
of the swap, under a credit default swap. Furthermore, there is no requirement that a party be informed in advance when a credit default swap agreement is sold. Accordingly, a Fund may have difficulty identifying the party responsible for payment of
its claims. The notional value of credit default swaps with respect to a particular investment is often larger than the total par value of such investment outstanding and, in event of a default, there may be difficulties in making the required
deliveries of the reference investments, possibly delaying payments.
The market for credit default swaps has become more volatile recently as
the creditworthiness of certain counterparties has been questioned and/or downgraded. If a counterparty’s credit becomes significantly impaired, multiple requests for collateral posting in a short period of time could increase the risk that a
Fund may not receive adequate collateral. There is no readily available market for trading credit default swaps. A Fund generally may exit its obligations under a credit default swap only by terminating the contract and paying applicable breakage
fees, or by entering into an offsetting credit default swap position, which may cause a Fund to incur more losses.
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Loan Based Derivatives
The Senior Floating Rate and Fixed Income Fund may invest in derivative instruments that provide exposure to one or more credit default swaps. For example, a Fund may invest in a derivative instrument
known as the Loan-Only Credit Default Swap Index (“LCDX”), a tradable index with 100 equally-weighted underlying single-name loan-only credit default swaps (“LCDS”). Each underlying LCDS references an issuer whose loans trade in
the secondary leveraged loan market. A Fund can either buy the index (take on credit exposure) or sell the index (pass credit exposure to a counterparty). While investing in these types of derivatives will increase the universe of debt securities to
which a Fund is exposed, such investments entail additional risks, such as those discussed below, that are not typically associated with investments in other debt securities. Credit default swaps and other derivative instruments related to loans are
subject to the risks associated with loans generally, as well as the risks of derivative transactions.
Investment Pools of Swap Contracts
In addition, certain Funds may invest in publicly or privately issued interests in investment pools whose underlying assets are credit
default, credit-linked, interest rate, currency exchange, equity-linked or other types of swap contracts and related underlying securities or securities loan agreements. The pools’ investment results may be designed to correspond generally to
the performance of a specified securities index or “basket” of securities, or sometimes a single security. These types of pools are often used to gain exposure to multiple securities with less of an investment than would be required to
invest directly in the individual securities. They may also be used to gain exposure to foreign securities markets without investing in the foreign securities themselves and/or the relevant foreign market. To the extent that a Fund invests in pools
of swap contracts and related underlying securities or securities loan agreements whose performance corresponds to the performance of a foreign securities index or one or more foreign securities, investing in such pools will involve risks similar to
the risks of investing in foreign securities. See “Foreign Securities” below. In addition to the risks associated with investing in swaps generally, an investing Fund bears the risks and costs generally associated with investing in pooled
investment vehicles, such as paying the fees and expenses of the pool and the risk that the pool or the operator of the pool may default on its obligations to the holder of interests in the pool, such as a Fund. Interests in privately offered
investment pools of swap contracts may be considered illiquid and, except to the extent that such interests are deemed liquid under the Funds’ policies, subject to a Fund’s restrictions on investments in illiquid securities.
Contracts for Differences
The Senior
Floating Rate and Fixed Income Fund may enter into contracts for differences. “Contracts for differences” are swap arrangements in which the Senior Floating Rate and Fixed Income Fund may agree with a counterparty that its return (or loss)
will be based on the relative performance of two different groups or “baskets” of securities. For example, as to one of the baskets, the Senior Floating Rate and Fixed Income Fund’s return is based on theoretical long futures
positions in the securities comprising that basket, and as to the other basket, the Senior Floating Rate and Fixed Income Fund’s return is based on theoretical short futures positions in the securities comprising that other basket. The notional
sizes of the baskets will not necessarily be the same, which can give rise to investment leverage. The Senior Floating Rate and Fixed Income Fund may also use actual long and short futures positions to achieve the market exposure(s) as contracts for
differences. The Senior Floating Rate and Fixed Income Fund may enter into swaps and contracts for differences for investment return, hedging, risk management and for investment leverage.
Interest Rate Caps, Floors and Collars
The Senior Floating Rate and Fixed Income Fund may
use interest rate caps, floors and collars for the same purposes or similar purposes as for which it uses interest rate futures contracts and related options. Interest rate caps, floors and collars are similar to interest rate swap contracts because
the payment obligations are measured by changes in interest rates as applied to a notional amount and because they are generally individually negotiated with a specific counterparty. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specific index exceeds a specified interest rate, to receive payments of interest on a notional principal amount from the party selling the interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below specified interest rates, to receive payments of interest on a notional principal amount from the party selling the interest rate floor. The purchase of an interest rate collar entitles the purchaser, to the
extent that a
29
specified index exceeds or falls below a specified interest rate, to receive payments of interest on a notional principal amount from the party selling the interest rate collar.
Hybrid Instruments
A hybrid instrument
is a type of derivative that combines a traditional stock or bond with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or interest rate of a hybrid is tied (positively or negatively) to the
price of some currency or securities index or another interest rate or some other economic factor (each a “benchmark”). The interest rate or (unlike most fixed-income securities) the principal amount payable at maturity of a hybrid
security may be increased or decreased, depending on changes in the value of the benchmark. An example of a hybrid could be a bond issued by an oil company that pays a small base level of interest with additional interest that accrues in correlation
to the extent to which oil prices exceed a certain predetermined level. Such a hybrid instrument would be economically similar to a combination of a bond and a call option on oil.
Hybrids can be used as an efficient means of pursuing a variety of investment goals, including currency hedging, duration management and increased total return. Hybrids may not bear interest or pay
dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political
events, such as currency devaluations, which cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that
are not associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes the Senior Floating Rate and Fixed
Income Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations in the NAV of the Senior Floating Rate and Fixed Income Fund.
Certain hybrid instruments may provide exposure to the commodities markets. These are derivative securities with one or more commodity-linked components that have payment features similar to commodity
futures contracts, commodity options or similar instruments. Commodity-linked hybrid instruments may be either equity or debt securities, leveraged or unleveraged, and are considered hybrid instruments because they have both security and
commodity-like characteristics. A portion of the value of these instruments may be derived from the value of a commodity, futures contract, index or other economic variable and therefore are subject to many of the same risks as investments in those
underlying securities, instruments or commodities. For more information, see the sections “Commodities” and “Structured Notes.”
Certain issuers of structured products such as hybrid instruments may be deemed to be investment companies as defined in the 1940 Act. As a result, the Senior Floating Rate and Fixed Income Fund’s
investments in these products may be subject to limits applicable to investments in investment companies and may be subject to restrictions contained in the 1940 Act.
Additional Risks of Derivative Instruments
As described in the prospectus, certain
Funds intend to use derivative instruments, including several of the instruments described above, as part of their investment practices as well as for risk management purposes. Although an Adviser may seek to use these transactions to achieve a
Fund’s investment goals, no assurance can be given that the use of these transactions will achieve this result. Any or all of these investment techniques may be used at any time. The ability of a Fund to utilize these derivative instruments
successfully will depend on the Adviser’s ability to predict pertinent market movements, which cannot be assured. Furthermore, a Fund’s use of certain derivatives may in some cases involve forms of financial leverage, which involves risk
and may increase the volatility of a Fund’s NAV. Leveraging may cause a Fund to liquidate portfolio positions to satisfy its obligations or to meet segregation requirements when it may not be advantageous to do so. To the extent that a Fund is
not able to close out a leveraged position because of market illiquidity, its liquidity may be impaired to the extent that it has a substantial portion of liquid assets segregated or earmarked to cover obligations. Each Fund will comply with
applicable regulatory requirements when implementing these strategies, techniques and instruments. Use of derivatives for other than hedging purposes may be considered a speculative activity, involving greater risks than are involved in hedging. A
short exposure through a derivative may present additional risks. If the value of the asset, asset class or index on which a Fund has obtained a short exposure increases, the Fund will incur a loss. Moreover,
30
the potential loss from a short exposure is theoretically unlimited.
The value of some
derivative instruments in which a Fund invests may be particularly sensitive to changes in prevailing interest rates or other economic factors and the ability of a Fund to successfully utilize these instruments may depend in part upon the ability of
an Adviser to forecast interest rates and other economic factors correctly. If the Adviser incorrectly forecasts such factors and has taken positions in derivative instruments contrary to prevailing market trends, a Fund could be exposed to the risk
of loss. If the Adviser incorrectly forecasts interest rates, market values or other economic factors in using a derivatives strategy for a Fund, a Fund might have been in a better position if it had not entered into the transaction at all. Also,
suitable derivative transactions may not be available in all circumstances. The use of these strategies involves certain special risks, including a possible imperfect correlation, or even no correlation, between price movements of derivative
instruments and price movements of related investments. While some strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price
movements in related investments or otherwise, due to the possible inability of a Fund to purchase or sell a portfolio security at a time that otherwise would be favorable or the possible need to sell a portfolio security at a disadvantageous time
because a Fund is required to maintain asset coverage or offsetting positions in connection with transactions in derivative instruments, and the possible inability of a Fund to close out or to liquidate its derivatives positions. In addition, a
Fund’s use of such instruments may cause a Fund to realize higher amounts of short-term capital gains (generally taxed at ordinary income tax rates) than if it had not used such instruments. To the extent that a Fund gains exposure to an asset
class using derivative instruments backed by a collateral portfolio of other securities, changes in the value of those other securities may result in greater or lesser exposure to that asset class than would have resulted from a direct investment in
securities comprising that asset class. A Fund may invest in derivative instruments linked to the returns of one or more hedge funds or groups of hedge funds. To the extent that a Fund invests in such instruments, in addition to the risks associated
with investments in derivative instruments generally, a Fund will be subject to the risks associated with investments in hedge funds.
The
correlation between the price movement of the derivatives contract and the hedged security may be distorted due to differences in the nature of the relevant markets. For example, if the price of the futures contract moves more than the price of the
hedged security, a Fund would experience either a loss or a gain on the derivative that is not completely offset by movements in the price of the hedged securities. For example, in an attempt to compensate for imperfect price movement correlations,
a Fund may purchase or sell futures contracts in a greater dollar amount than the hedged securities if the price movement volatility of the hedged securities is historically greater than the volatility of the futures contract. Conversely, a Fund may
purchase or sell futures contracts in a smaller dollar amount than the hedged securities if the volatility of the price of hedged securities is historically less than that of the futures contracts.
The price of index futures may not correlate perfectly with movement in the relevant index due to certain market distortions. One such distortion stems
from the fact that all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions,
which could distort the normal relationship between the index and futures markets. Another market distortion results from the deposit requirements in the futures market being less onerous than margin requirements in the securities market, and as a
result the futures market may attract more speculators than does the securities market. A third distortion is caused by the fact that trading hours for foreign stock index futures may not correspond perfectly to hours of trading on the foreign
exchange to which a particular foreign stock index futures contract relates. This may result in a disparity between the price of index futures and the value of the relevant index due to the lack of continuous arbitrage between the index futures
price and the value of the underlying index. Finally, hedging transactions using stock indices involve the risk that movements in the price of the index may not correlate with price movements of the particular portfolio securities being hedged.
Price movement correlation in derivative transactions also may be distorted by the illiquidity of the derivatives markets and the
participation of speculators in such markets. If an insufficient number of contracts are traded, commercial users may not deal in derivatives because they do not want to assume the risk that they may not be able to close out their positions within a
reasonable amount of time. In such instances, derivatives market prices may be driven by different forces than those driving the market in the underlying securities, and price spreads between these markets may widen. The participation of speculators
in the market enhances its liquidity. Nonetheless, speculators
31
trading spreads between futures markets may create temporary price distortions unrelated to the market in the underlying securities.
Positions in futures contracts and options on futures contracts may be established or closed out only on an exchange or board of trade. There is no assurance that a liquid market on an exchange or board
of trade will exist for any particular contract or at any particular time. The liquidity of markets in futures contracts and options on futures contracts may be adversely affected by “daily price fluctuation limits” established by
commodity exchanges that limit the amount of fluctuation in a futures or options price during a single trading day. Once the daily limit has been reached in a contract, no trades may be entered into at a price beyond the limit, which may prevent the
liquidation of open futures or options positions. Prices have in the past exceeded the daily limit on a number of consecutive trading days. If there is not a liquid market at a particular time, it may not be possible to close a futures or options
position at such time, and, in the event of adverse price movements, a Fund would continue to be required to make daily cash payments of variation margin. However, if futures or options are used to hedge portfolio securities, an increase in the
price of the securities, if any, may partially or completely offset losses on the futures contract.
Income earned by a Fund from its options
activities will be treated as capital gain and, if not offset by net recognized capital losses incurred by a Fund, will be distributed to shareholders in taxable distributions. Although gain from options transactions may hedge against a decline in
the value of a Fund’s portfolio securities, that gain, to the extent not offset by losses, will be distributed in light of certain tax considerations and will constitute a distribution of that portion of the value preserved against decline.
The value of a Fund’s derivative instruments may fluctuate based on a variety of market and economic factors. In some cases, the
fluctuations may offset (or be offset by) changes in the value of securities or derivatives held in a Fund’s portfolio. All transactions in derivatives involve the possible risk of loss to a Fund of all or a significant part of the value of its
investment. In some cases, the risk of loss may exceed the amount of a Fund’s investment. When a Fund writes a call option or sells a futures contract without holding the underlying securities, currencies or futures contracts, its potential
loss is unlimited.
The risks of a Fund’s use of index warrants are generally similar to those relating to its use of index options.
Unlike most index options, however, index warrants are issued in limited amounts and are not obligations of a regulated clearing agency, but are backed only by the credit of the bank or other institution which issues the warrant. Also, index
warrants generally have longer terms than index options. Although a Fund will normally invest only in exchange-listed warrants, index warrants are not likely to be as liquid as certain index options backed by a recognized clearing agency. In
addition, the terms of index warrants may limit a Fund’s ability to exercise the warrants at such time, or in such quantities, as a Fund would otherwise wish to do.
In the case of options that are not traded on an exchange (OTC options), a Fund is at risk that the other party to the transaction will default on its obligations, or will not permit a Fund to terminate
the transaction before its scheduled maturity.
The derivatives markets of foreign countries are small compared to those of the United States
and consequently are characterized in most cases by less liquidity than U.S. markets. In addition, derivatives that are traded on foreign exchanges may not be regulated as effectively as similar transactions in the United States, may not involve a
clearing mechanism and related guarantees, may be subject to less detailed reporting requirements, and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities. The value of such positions also could
be adversely affected by (i) other complex foreign political, legal and economic factors, (ii) lesser availability than in the United States of data on which to make trading decisions, (iii) delays in a Fund’s ability to act upon
economic events occurring in foreign markets during non-business hours in the United States, (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States, and (v) lesser
trading volume. Furthermore, investments in options in foreign markets are subject to many of the same risks as other foreign investments. See the section “Foreign Securities.”
Forward contracts are subject to many of the same risks as options, warrants and futures contracts described above. As described in the section “Foreign Currency Transactions” below, forward
contracts 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. In addition, the effect of changes in the dollar value of a foreign currency on the dollar
value of a Fund’s
32
assets and on the net investment income available for distribution may be favorable or unfavorable. A Fund may incur costs in connection with conversions between various currencies, and a Fund
will be subject to increased illiquidity and counterparty risk because forward contracts are not traded on an exchange and often are not standardized. A Fund may also be required to liquidate portfolio assets, or may incur increased currency
conversion costs, to compensate for a decline in the dollar value of a foreign currency occurring between the time when a Fund declares and pays a dividend, or between the time when a Fund accrues and pays an operating expense in U.S. dollars.
Risk of Potential Government Regulation of Derivatives
It is possible that government regulation of various types of derivative instruments, including futures and swap agreements, may limit or prevent a Fund from using such instruments as part of its
investment strategy, and could ultimately prevent a Fund from being able to achieve its investment goals. It is impossible to fully predict the effects of legislation and regulation in this area, but the effects could be substantial and adverse. It
is possible that legislative and regulatory activity could limit or completely restrict the ability of a Fund to use these instruments as a part of its investment strategy, increase the costs of using these instruments or make them less effective.
Limits or restrictions applicable to the counterparties with which a Fund engages in derivative transactions could also prevent a Fund from using these instruments or affect the pricing or other factors relating to these instruments, or may change
the availability of certain investments.
There is a possibility of future regulatory changes altering, perhaps to a material extent, the
nature of an investment in the Funds or the ability of the Funds to continue to implement their investment strategies. The futures markets are subject to comprehensive statutes, regulations, and margin requirements. The SEC, U.S. Commodity Futures
Trading Commission (“CFTC”) and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the implementation or reduction of speculative position limits, the implementation of
higher margin requirements, the establishment of daily price limits and the suspension of trading.
In particular, the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank Act”) (which was passed into law in July 2010) sets forth a new legislative framework for OTC derivatives, including financial instruments, such as swaps, in which the Funds may invest.
Title VII of the Dodd-Frank Act makes broad changes to the OTC derivatives market, grants significant new authority to the SEC and the CFTC to regulate OTC derivatives and market participants, and will require clearing and exchange trading of many
OTC derivatives transactions. Provisions in the Dodd-Frank Act include new capital and margin requirements and the mandatory use of clearinghouse mechanisms for many OTC derivative transactions. Other provisions would expand entity registration
requirements, impose business conduct requirements on dealers that enter into swaps with a pension plan, endowment, retirement plan or government entity, and could require banks to move some derivatives trading units to a non-guaranteed affiliate
separate from the deposit-taking bank or divest them altogether. The CFTC, SEC and other federal regulators have been tasked with developing the rules and regulations enacting the provisions of the Dodd-Frank Act. Because there is a prescribed
phase-in period during which many provisions of the Dodd-Frank Act must be implemented, it is not possible at this time to gauge the exact nature and scope of the impact of the Dodd-Frank Act on any of the Funds. However, it is expected that swap
dealers, major market participants and swap counterparties will experience new and/or additional regulations, requirements, compliance burdens and associated costs. The new law and the rules to be promulgated may negatively impact a Fund’s
ability to meet its investment objective either through limits or requirements imposed on it or upon its counterparties. In particular, new position limits imposed on a Fund or its counterparties may impact that Fund’s ability to invest in
futures, options and swaps in a manner that efficiently meets its investment objective. New requirements, including capital and mandatory clearing, may increase the cost of a Fund’s investments and cost of doing business, which could adversely
affect investors.
Other Derivatives; Future Developments
The above discussion relates to the Funds’ proposed use of certain types of derivatives currently available. However, the Funds are not limited to the transactions described above. In addition, the
relevant markets and related regulations are constantly changing and, in the future, the Funds may use derivatives not currently available or widely in use.
The Growth Markets Fund is registered as a commodity pool (the “Pool”) under the Commodity Exchange Act (the “CEA”) and AlphaSimplex is registered as a commodity pool operator (a
“CPO”) under the CEA with respect to the
33
Pool. As a result, additional CFTC-mandated disclosure, reporting and recordkeeping obligations will apply with respect to the Pool once the CFTC proposal that seeks to “harmonize”
these obligations with overlapping SEC regulations is finalized. Until the CFTC’s and SEC’s overlapping regulations are harmonized, the nature and extent of the impact of the new CFTC requirements on the Pool is uncertain. Compliance with
the CFTC’s new regulatory requirements could increase the Pool’s expenses, adversely affecting the Pool’s total return.
The
Gateway International Fund, Capital Income Fund, Senior Floating Rate Fund and Select Fund (the “Excluded Funds”) are operated by a person who has claimed an exclusion from the definition of the term CPO under the CEA pursuant to Rule 4.5
under the CEA (the “exclusion”) promulgated by the CFTC. Accordingly, neither the Excluded Funds nor the Adviser (with respect to the Excluded Funds) is subject to registration or regulation as a CPO under the CEA. To remain eligible for
the exclusion, each of the Excluded Funds will be limited in its ability to use certain financial instruments regulated under the CEA (“commodity interests”), including futures and options on futures and certain swaps transactions. In the
event that an Excluded Fund’s investments in commodity interests are not within the thresholds set forth in the exclusion, the Adviser may be required to register as a CPO and/or “commodity trading advisor” with the CFTC with respect
to that Fund. The Adviser’s eligibility to claim the exclusion with respect to a Fund will be based upon, among other things, the level and scope of a Fund’s investment in commodity interests, the purposes of such investments and the
manner in which the Fund holds out its use of commodity interests. Each Excluded Fund’s ability to invest in commodity interests (including, but not limited to, futures and swaps on broad-based securities indexes and interest rates) is limited
by the Adviser’s intention to operate the Excluded Fund in a manner that would permit the Adviser to continue to claim the exclusion under Rule 4.5, which may adversely affect such Fund’s total return. In the event the Adviser becomes
unable to rely on the exclusion in Rule 4.5 and is required to register with the CFTC as a CPO with respect to an Excluded Fund, such Fund’s expenses may increase, adversely affecting that Fund’s total return. In addition, the amendments
are currently the subject of a pending legal challenge seeking to invalidate the CFTC’s rulemaking. The outcome of the suit, and any resulting effect on the Funds, is uncertain at this time.
Emerging Markets
Investments in foreign
securities may include investments in emerging or developing countries whose economies or securities markets are not yet highly developed. The same or similar risks are seen in investments in companies that are located in developed markets but
derive substantial revenues from emerging markets. As noted in the section “Foreign Securities” herein, the risks associated with investing in foreign securities are often heightened for investments in emerging market countries. These
heightened risks include (i) greater risks of expropriation, confiscatory taxation, nationalization, and less social, political and economic stability; (ii) the small size of the markets for securities of emerging market issuers and the
oftentimes low or nonexistent volume of trading, resulting in lack of liquidity and in price volatility; (iii) certain national policies that may restrict a Fund’s investment opportunities, including restrictions on investing in issuers or
industries deemed sensitive to relevant national interests or currency transfer restrictions; (iv) an economy’s dependence on revenues from particular commodities or on international aid or development assistance; and (v) the absence
of developed legal structures governing private or foreign investment and private property and/or less developed custodial and deposit systems and delays and disruptions in securities settlement procedures. A Fund’s purchase and sale of
portfolio securities in certain emerging market countries may be constrained by limitations as to daily changes in the prices of listed securities, periodic trading or settlement volume and/or limitations on aggregate holdings of foreign investors.
In certain cases, such limitations may be computed based upon the aggregate trading by or holdings of a Fund, its Adviser or Subadviser and their affiliates, and their respective clients and other service providers. A Fund may not be able to sell
securities in circumstances where price, trading or settlement volume limitations have been reached. These limitations may have a negative impact on a Fund’s performance and may adversely affect the liquidity of a Fund’s investment to the
extent that it invests in certain emerging market countries. In addition, some emerging market countries may have fixed or managed currencies that are not free-floating against the U.S. dollar. Further, certain emerging market countries’
currencies may not be internationally traded. Certain of these currencies have experienced a steady devaluation relative to the U.S. dollar. If a Fund does not hedge the U.S. dollar value of securities it owns denominated in currencies that are
devalued, the Fund’s NAV will be adversely affected. Many emerging market countries have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have
had and may continue to have adverse effects on the economies and securities markets of certain of these countries.
In determining whether to
invest in securities of foreign issuers, an Adviser may consider the likely effects of foreign taxes on the net yield available to a Fund and its shareholders. Compliance with foreign tax laws may reduce
34
a Fund’s net income available for distribution to shareholders.
Equity
Securities
Certain Funds may invest in equity securities. Common stocks, preferred stocks, warrants, securities convertible into common or
preferred stocks and similar securities, together called “equity securities,” are generally volatile and more risky than some other forms of investment. Equity securities of companies with relatively small market capitalizations may be
more volatile than the securities of larger, more established companies and than the broad equity market indices generally. Common stock and other equity securities may take the form of stock in corporations, partnership interests, interests in
limited liability companies and other direct or indirect interests in business organizations.
Equity securities are securities that represent
an ownership interest (or the right to acquire such an interest) in a company and may include common and preferred stocks, securities exercisable for, or convertible into, common or preferred stocks, such as warrants, convertible debt securities and
convertible preferred stock, and other equity-like interests in an entity. Equity securities may take the form of stock in a corporation, limited partnership interests, interests in limited liability companies, depositary receipts, real estate
investment trusts (“REITs”) or other trusts and other similar securities. Common stocks represent an equity or ownership interest in an issuer. Preferred stocks represent an equity or ownership interest in an issuer that pays dividends at
a specified rate and that has precedence over common stock in the payment of dividends. In the event that an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and other debt securities take precedence over holders of
preferred stock, whose claims take precedence over the claims of those who own common stock.
While offering greater potential for long-term
growth, equity securities generally are more volatile and more risky than some other forms of investment, particularly debt securities. The value of your investment in a fund that invests in equity securities may decrease, potentially by a
significant amount. A Fund may invest in equity securities of companies with relatively small market capitalizations. Securities of such companies may be more volatile than the securities of larger, more established companies and the broad equity
market indices. See the section “Market Capitalizations.” A Fund’s investments may include securities traded OTC as well as those traded on a securities exchange. Some securities, particularly OTC securities, may be more difficult to
sell under some market conditions.
Stocks of companies that the Adviser believes have earnings that will grow faster than the economy as a
whole are known as growth stocks. Growth stocks typically trade at higher multiples of current earnings than other stocks. As a result, the values of growth stocks may be more sensitive to changes in current or expected earnings than the values of
other stocks. If the Adviser’s assessment of the prospects for a company’s earnings growth is wrong, or if its judgment of how other investors will value the company’s earnings growth is wrong, then the price of that company’s
stock may fall or may not approach the value that the Adviser has placed on it.
Stocks of companies that are not expected to experience
significant earnings growth, but whose stocks the Adviser believes are undervalued compared to their true worth, are known as value stocks. These companies may have experienced adverse business developments or may be subject to special risks that
have caused their stocks to be out of favor. If the Adviser’s assessment of a company’s prospects is wrong, or if other investors do not eventually recognize the value of the company, then the price of the company’s stock may fall or
may not approach the value that the Adviser has placed on it.
Many stocks may have both “growth” and “value”
characteristics, and for some stocks it may be unclear which category, if any, it fits into.
Event-Linked Bonds
The Senior Floating Rate and Fixed Income Fund may invest in “event-linked” bonds, which sometimes are referred to as
“insurance-linked” or “catastrophe” bonds. Event-linked bonds are debt obligations for which the return of principal and the payment of interest are contingent on the non-occurrence of a pre-defined “trigger” event,
such as a hurricane or an earthquake of a specific magnitude. For some event-linked bonds, the trigger event’s magnitude may be based on losses to a company or industry, index-portfolio losses, industry indices or readings of scientific
instruments rather than specified actual losses. If a trigger event, as defined within the terms of an event-linked bond, involves losses or other metrics exceeding a specific magnitude in the geographic region and time period specified therein, the
Fund may lose a portion or all of its accrued interest and/or principal invested in such event-
35
linked bond. The Fund will be entitled to receive principal and interest payments so long as no trigger event occurs of the description and magnitude specified by the instrument.
Event-linked bonds may be issued by government agencies, insurance companies, reinsurers, special purpose corporations or other on-shore or off-shore
entities. In addition to the specified trigger events, event-linked bonds also may expose the Fund to other risks, including but not limited to issuer (credit) default, adverse regulatory or jurisdictional interpretations and adverse tax
consequences. Event-linked bonds are subject to the risk that the model used to calculate the probability of a trigger event was not accurate and underestimated the likelihood of a trigger event. This may result in more frequent and greater than
expected loss of principal and/or interest, which would adversely impact the Fund’s total returns. Further, to the extent there are events that involve losses or other metrics, as applicable, that are at, or near, the threshold for a trigger
event, there may be some delay in the return of principal and/or interest until it is determined whether a trigger event has occurred. Finally, to the extent there is a dispute concerning the definition of the trigger event relative to the specific
manifestation of a catastrophe, there may be losses or delays in the payment of principal and/or interest on the event-linked bond. As a relatively new type of financial instrument, there is limited trading history for these securities, and there
can be no assurance that a liquid market in these instruments will develop. Lack of a liquid market may impose the risk of higher transactions costs and the possibility that the Fund may be forced to liquidate positions when it would not be
advantageous to do so. Most event-linked bonds are rated below investment-grade, but event-linked bonds also may be unrated.
Event-linked
bonds typically are restricted to qualified institutional buyers and, therefore, are not subject to registration with the SEC or any state securities commission and are not listed on any national securities exchange. The amount of public information
available with respect to event-linked bonds is generally less extensive than that available for issuers of registered or exchange listed securities. Event-linked bonds may be subject to the risks of adverse regulatory or jurisdictional
determinations. There can be no assurance that future regulatory determinations will not adversely affect the overall market for event-linked bonds.
Event-Linked Swaps
The Senior Floating Rate and Fixed Income Fund may obtain event-linked
exposure by investing in event-linked swaps. Similar to an event-linked bond, the occurrence of trigger events causes a party to lose some or all of the amount invested in the swap. For example, if a trigger event occurs, the Fund may lose the
swap’s notional amount. Trigger events include hurricanes, earthquakes and weather-related phenomena. As derivative instruments, event-linked swaps are subject to risks in addition to the risks of investing in event-linked bonds, including
counterparty risk and leverage risk.
Exchange-Traded Notes
The Select Fund may invest in exchange-traded notes (“ETNs”). ETNs are generally, unsecured debt securities whose returns are linked to the performance of a particular market benchmark or
strategy minus applicable fees. ETNs are traded on an exchange (
e.g
., the New York Stock Exchange) during normal trading hours. However, investors can also hold the ETN until maturity. At maturity, the issuer pays to the investor a cash
amount equal to the principal amount, adjusted to reflect the performance of the relevant benchmark or strategy factor(s). ETNs generally do not make periodic coupon payments or provide principal protection. ETNs are subject to credit risk, and the
value of the ETN may drop due to a downgrade in the issuer’s credit rating, notwithstanding the performance of the underlying market benchmark or strategy. The value of an ETN may also be influenced by time to maturity, level of supply and
demand for the ETN, volatility and lack of liquidity in underlying assets, changes in the applicable interest rates, changes in the issuer’s credit rating, and economic, legal, political, or geographic events that affect the referenced
underlying benchmark or strategy. When the Select Fund invests in ETNs it will bear its proportionate share of any fees and expenses borne by the ETN. These fees and expenses generally reduce the return realized at maturity or upon redemption from
an investment in an ETN; therefore, the value of the index underlying the ETN must increase in order for an investor in an ETN to receive at least the principal amount of the investment at maturity or upon redemption. The Select Fund’s decision
to sell its ETN holdings may be limited by the availability of a secondary market.
The market price and return of the ETN may not correspond
with that of the underlying benchmark or strategy. As a result, there may be times when an ETN share trades at a premium or discount to its market benchmark or strategy. This difference in price may be due to the fact that the supply and demand in
the market for ETN shares at any point in time is not always identical to the supply and demand in the market for the securities or other components
36
underlying the market benchmark or strategy that the ETN seeks to track. An ETN that is tied to a specific market benchmark or strategy may not be able to replicate and maintain exactly the
composition and relative weighting of securities, commodities or other components in the applicable market benchmark or strategy.
The
returns of some ETNs may be leveraged. Leveraged ETNs are subject to the same risk as other instruments that use leverage in any form. ETNs can, at times, be relatively illiquid, and thus they may be difficult to purchase or sell at an advantageous
price. ETNs are also subject to tax risk. No assurance can be given that the IRS will accept, or a court will uphold, how the Select Fund characterizes and treats ETNs for tax purposes. Further, the IRS and Congress are considering proposals that
would change the timing and character of income and gains from ETNs.
Fixed-Income Securities
Certain Funds may invest in fixed-income securities. Fixed-income securities pay a specified rate of interest or dividends, or a rate that is adjusted
periodically by reference to some specified index or market rate. Fixed-income securities include securities issued by federal, state, local and foreign governments and related agencies, and by a wide range of private or corporate issuers.
Fixed-income securities include, among others, bonds, debentures, notes, bills and commercial paper. Because interest rates vary, it is impossible to predict the income of a Fund for any particular period. In addition, the prices of fixed-income
securities generally vary inversely with changes in interest rates. Prices of fixed-income securities may also be affected by items related to a particular issue or to the debt markets generally. The NAV of a Fund’s shares will vary as a result
of changes in the value of the securities in the Fund’s portfolio.
Investment-Grade Fixed-Income Securities
. To be
considered investment-grade quality, at least one of the three major rating agencies (Fitch Investor Services, Inc. (“Fitch”), Moody’s Investors Service, Inc. (“Moody’s”) or Standard & Poor’s Ratings Group
(“S&P”)) must have rated the security in one of its respective top four rating categories at the time a Fund acquires the security or, if the security is unrated, the Adviser must have determined it to be of comparable quality.
Below Investment-Grade Fixed-Income Securities
. Below investment-grade fixed-income securities (commonly referred to as “junk
bonds”) are rated below investment-grade quality. To be considered below investment-grade quality, none of the three major rating agencies (Fitch, Moody’s and S&P) must have rated the security in one of its respective top four rating
categories at the time a Fund acquires the security or, if the security is unrated, an Adviser must have determined it to be of comparable quality.
Below investment-grade fixed-income securities are subject to greater credit risk and market risk than higher-quality fixed-income securities. Below investment-grade fixed-income securities are considered
predominantly speculative with respect to the ability of the issuer to make timely principal and interest payments. If a Fund invests in below investment-grade fixed-income securities, a Fund’s achievement of its objective may be more dependent
on the Adviser’s own credit analysis than is the case with funds that invest in higher-quality fixed-income securities. The market for below investment-grade fixed-income securities may be more severely affected than some other financial
markets by economic recession or substantial interest rate increases, by changing public perceptions of this market, or by legislation that limits the ability of certain categories of financial institutions to invest in these securities. In
addition, the secondary market may be less liquid for below investment-grade fixed-income securities. This lack of liquidity at certain times may affect the values of these securities and may make the evaluation and sale of these securities more
difficult. Below investment-grade fixed-income securities may be in poor standing or in default and typically have speculative characteristics.
For more information about the ratings services’ descriptions of the various ratings categories, see Appendix A. A Fund may continue to hold
fixed-income securities that are downgraded in quality subsequent to their purchase if the Adviser believes it would be advantageous to do so.
Foreign Currency Transactions
Certain
Funds may engage in foreign currency transactions for both hedging and investment purposes. Many foreign securities in a Fund’s portfolio will be denominated in foreign currencies or traded in securities markets in which settlements are made in
foreign currencies. Any income on such securities is generally paid to a Fund in foreign currencies. The value of these foreign currencies relative to the U.S. dollar varies continually, causing changes in the dollar value of a Fund’s portfolio
investments (even if the local market price of the investments is unchanged) and
37
changes in the dollar value of a Fund’s income available for distribution to its shareholders. The effect of changes in the dollar value of a foreign currency on the dollar value of a
Fund’s assets and on the net investment income available for distribution may be favorable or unfavorable.
To protect against a change
in the foreign currency exchange rate between the date on which a Fund contracts to purchase or sell a security and the settlement date for the purchase or sale, to gain exposure to one or more foreign currencies or to “lock in” the
equivalent of a dividend or interest payment in another currency, a Fund might purchase or sell a foreign currency on a spot (
i.e.
, cash) basis at the prevailing spot rate or may enter into futures contracts on an exchange.
If conditions warrant, a Fund may also enter into contracts with banks or broker-dealers to purchase or sell foreign currencies at a future date
(“forward contracts”), as described above in the section “Derivative Instruments.”
Forward contracts are subject to many
of the same risks as derivatives described in the section “Derivative Instruments.” Forward contracts 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. In addition, the effect of changes in the dollar value of a foreign currency on the dollar value of a Fund’s assets and on the net investment income available for distribution may be favorable or unfavorable. A Fund may incur costs
in connection with conversions between various currencies, and the Fund will be subject to increased illiquidity and counterparty risk because forward contracts are not traded on an exchange and often are not standardized. A Fund may also be
required to liquidate portfolio assets, or may incur increased currency conversion costs, to compensate for a decline in the dollar value of a foreign currency occurring between the time when the Fund declares and pays a dividend, or between the
time when the Fund accrues and pays an operating expense in U.S. dollars.
In addition, some Funds may buy and write options on foreign
currencies in a manner similar to that in which futures or forward contracts on foreign currencies will be utilized. A Fund may use options on foreign currencies to hedge against adverse changes in foreign currency conversion rates. For example, a
decline in the U.S. dollar value of a foreign currency in which portfolio securities are denominated will reduce the U.S. 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 the portfolio securities, a Fund may buy put options on the foreign currency. If the value of the currency declines, a Fund will have the right to sell such currency for a fixed amount in U.S. dollars, thereby offsetting,
in whole or in part, the adverse effect on its portfolio.
Conversely, when a rise in the U.S. 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 buy call options on the foreign currency. The purchase of such options could offset, at least partially, the effects of the adverse movements in
exchange rates. As in the case of other types of options, however, the benefit to a Fund from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, if currency exchange rates
do not move in the direction or to the extent desired, a Fund could sustain losses or lesser gains on transactions in foreign currency options that would require the Fund to forego a portion or all of the benefits of advantageous changes in those
rates.
Certain Funds may also write options on foreign currencies. For example, to hedge against a potential decline in the U.S. dollar due
to adverse fluctuations in exchange rates, a Fund could, instead of purchasing a put option, write a call option on the relevant currency. If the decline expected by a Fund occurs, the option will most likely not be exercised and the diminution in
value of portfolio securities be offset at least in part by the amount of the premium received. Similarly, instead of purchasing a call option to hedge against a potential increase in the U.S. dollar cost of securities to be acquired, a Fund could
write a put option on the relevant currency which, if rates move in the manner projected by the Fund, will expire unexercised and allow the Fund to hedge the increased cost up to the amount of the premium. If exchange rates do not move in the
expected direction, the option may be exercised and the Fund would be required to buy or sell the underlying currency at a loss, which may not be fully offset by the amount of the premium. Through the writing of options on foreign currencies, a Fund
also may lose all or a portion of the benefits that might otherwise have been obtained from favorable movements in exchange rates.
An Adviser
may decide not to engage in currency transactions, and there is no assurance that any currency strategy used by a Fund will succeed. In addition, suitable currency transactions may not be available in all circumstances and there can be no assurance
that a Fund will engage in these transactions when they would be beneficial. The
38
foreign currency transactions in which a Fund may engage involve risks similar to those described in the section “Derivative Instruments.”
A Fund’s use of currency transactions may be limited by tax considerations. Transactions in foreign currencies, foreign currency denominated debt
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 and may affect the timing or amount of distributions to shareholders.
Transactions in non-U.S. currencies are also subject to many
of the risks of investing in non-U.S. securities described in the section “Foreign Securities.” Because a Fund may invest in foreign securities and foreign currencies, changes in foreign economies and political climates are more likely to
affect a Fund than a mutual fund that invests exclusively in U.S. companies. There may also be less government supervision of foreign markets, resulting in non-uniform accounting practices and less publicly available information. If a Fund’s
portfolio is over-weighted in a certain geographic region, any negative development affecting that region will have a greater impact on a Fund than a fund that is not over-weighted in that region.
Foreign Securities
Certain Funds
may invest in foreign securities. Foreign securities may include, among other things, securities of issuers organized or headquartered outside the U.S. as well as obligations of supranational entities. In addition to the risks associated with
investing in securities generally, such investments present additional risks not typically associated with investments in comparable securities of U.S. issuers. Investments in emerging markets may be subject to these risks to a greater extent than
those in more developed markets, as described more fully in the section “Emerging Markets.” The non-U.S. securities in which a Fund may invest, all or a portion of which may be non-U.S. dollar-denominated, may include, among other
investments: (a) debt obligations issued or guaranteed by non-U.S. national, provincial, state, municipal or other governments or by their agencies or instrumentalities, including “Brady Bonds;” (b) debt obligations of
supranational entities; (c) debt obligations of the U.S. government issued in non-dollar securities; (d) debt obligations and other fixed-income securities of foreign corporate issuers; (e) non-U.S. dollar-denominated securities of
U.S. corporate issuers; and (f) equity securities issued by foreign corporations or other business organizations.
There may be less
information publicly available about a foreign corporate or government issuer than about a U.S. issuer, and foreign corporate issuers are not generally subject to accounting, auditing and financial reporting standards and practices comparable to
those in the United States. The securities of some foreign issuers are less liquid and at times more volatile than securities of comparable U.S. issuers. Foreign brokerage commissions and securities custody costs are often higher than those in the
United States, and judgments against foreign entities may be more difficult to obtain and enforce. With respect to certain foreign countries, there is a possibility of governmental expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments that could affect the value of investments in those countries. If a Fund’s portfolio is over-weighted in a certain geographic region, any negative development affecting that region will have a
greater impact on a Fund than a fund that is not over-weighted in that region. The receipt of interest on foreign government securities may depend on the availability of tax or other revenues to satisfy the issuer’s obligations.
Since most foreign securities are denominated in foreign currencies or traded primarily in securities markets in which settlements are made in foreign
currencies, the value of these investments and the net investment income available for distribution to shareholders of a Fund may be affected favorably or unfavorably by changes in currency exchange rates or exchange control regulations. To the
extent a Fund may purchase securities denominated in foreign currencies, a change in the value of any such currency against the U.S. dollar will result in a change in the U.S. dollar value of the Fund’s assets and the Fund’s income
available for distribution.
Although a Fund’s income may be received or realized in foreign currencies, the Fund will be required to
compute and distribute its income in U.S. dollars. Therefore, if the value of a currency relative to the U.S. dollar declines after a Fund’s income has been earned in that currency, translated into U.S. dollars and declared as a dividend, but
before payment of such dividend, the Fund could be required to liquidate portfolio securities to pay such dividend. Similarly, if the value of a currency relative to the U.S. dollar declines between the time a Fund incurs expenses or other
obligations in U.S. dollars and the time such expenses or obligations are paid, the amount of such currency required to be converted into U.S. dollars in order to pay such expenses in U.S. dollars will be greater than the
39
equivalent amount in such currency of such expenses at the time they were incurred.
In addition, because the Funds may invest in foreign securities traded primarily on markets that close prior to the time each Fund determines its NAV, the
risks posed by frequent trading may have a greater potential to dilute the value of Fund shares held by long-term shareholders than a fund investing in U.S. securities. In instances where a significant event that affects the value of one or more
foreign securities held by a Fund takes place after the close of the primary foreign market, but before the time that the Fund determines its NAV, certain investors may seek to take advantage of the fact that there will be a delay in the adjustment
of the market price for a security caused by this event until the foreign market reopens (sometimes referred to as “price” or “time zone” arbitrage). Shareholders who attempt this type of arbitrage may dilute the value of a
Fund’s shares by virtue of their transaction, if those prices reflect the fair value of the foreign securities. Although each Fund has procedures designed to determine the fair value of foreign securities for purposes of calculating its NAV
when such an event has occurred, fair value pricing, because it involves judgments which are inherently subjective, may not always eliminate the risk of price arbitrage. The Funds’ securities may change in price on days on which the U.S.
markets are closed and the Funds do not calculate their NAVs or sell or redeem their shares. For more information on how the Funds use fair value pricing, see the section “Net Asset Value.”
Foreign withholding or other taxes imposed on a Fund’s investments in foreign securities will reduce the Fund’s return on those securities. In
certain circumstances, a Fund may be able to elect to permit shareholders to claim a credit or deduction on their income tax returns with respect to foreign taxes paid by the Fund. See the section “Taxes.”
A portion of the Gateway International Fund will be invested in certain securities which are denominated and traded in the euro, the official currency of
the eurozone. The Fund may hedge its positions in these securities by writing index call options and purchasing index put options also denominated in the euro. The recent global economic crisis has caused many European countries to experience
serious fiscal difficulties, including bankruptcy, public budget deficits, recession, sovereign default, restructuring of government debt, credit rating downgrades and an overall weakening of the banking and financial sectors. In addition, some
European economies may depend on others for assistance, and the inability of such economies to achieve the reforms or objectives upon which that assistance is conditioned may result in a deeper and/or longer global financial downturn. These recent
events in the eurozone have called into question the long-term viability of the euro as a shared currency among the eurozone nations. Moreover, the strict fiscal and monetary controls of the European Economic and Monetary Union as well as any new
requirements it may impose on member countries may significantly impact such countries and limit them from implementing their own economic policies to some degree. As the result of economic, political, regulatory or other actions taken in response
to this crisis, including the discontinuation of the euro as the shared currency among the eurozone nations, the Fund’s euro-denominated investments may become difficult to value, the Fund’s ability to operate its strategy in connection
with euro-denominated securities may be significantly impaired and the value of the Fund’s euro-denominated investments may decline significantly and unpredictably.
Canadian Investments
Some of the Funds may invest in securities of Canadian issuers to a
significant extent. The Canadian and U.S. economies are closely integrated, and U.S. market conditions, including consumer spending, can have a significant impact on the Canadian economy such that an investment in Canadian securities may not have
the same diversifying affect as investments in other countries. In addition, Canada is a major producer of commodities, such as forest products, metals, agricultural products and energy-related products like oil, gas and hydroelectricity. As a
result, the Canadian economy is very dependent on the demand for, and supply and price of, natural resources and the Canadian market is relatively concentrated in issuers involved in the production and distribution of natural resources.
Canada’s economic growth may be significantly affected by fluctuations in currency and global demand for such commodities. Investments in Canadian securities may be in Canadian dollars; see the section “Foreign Currency Transactions”
for more information.
Funding Agreements
The Senior Floating Rate and Fixed Income Fund may invest in Guaranteed Investment Contracts (“GICs”) and similar funding agreements. In connection with these investments, a Fund makes cash
contributions to a deposit fund of an insurance company’s general account. The insurance company then credits to a Fund on a monthly basis guaranteed interest, which is based on an index (such as LIBOR). The funding agreements provide that this
40
guaranteed interest will not be less than a certain minimum rate. The purchase price paid for a funding agreement becomes part of the general assets of the insurance company. GICs are considered
illiquid securities and will be subject to any limitations on such investments described elsewhere in this Statement, unless there is an active and substantial secondary market for the particular instrument and market quotations are readily
available. Generally, funding agreements are not assignable or transferable without the permission of the issuing company, and an active secondary market in some funding agreements does not currently exist. Investments in GICs are subject to the
risks associated with fixed-income instruments generally, and are specifically subject to the credit risk associated with an investment in the issuing insurance company.
Illiquid Securities
Certain Funds may purchase illiquid securities. Illiquid securities
are those that are not readily resalable. Securities whose disposition is restricted by federal securities laws may be considered illiquid. Securities will generally be considered “illiquid” if such securities cannot be disposed of within
seven days in the ordinary course of business at approximately the price at which a Fund has valued the securities. Investment in illiquid securities involves the risk that a Fund may be unable to sell such a security at the desired time or at the
price at which the Fund values the security. Also, a Fund may incur expenses, losses or delays in the process of registering restricted securities prior to resale. Rule 144A securities and Section 4(2) commercial paper are treated as illiquid,
unless an Adviser or Subadviser has determined, under guidelines established by the Board, that the particular issue is liquid. See the section “Rule 144A Securities and Section 4(2) Commercial Paper” for additional information on
these instruments.
Inflation-Linked and Inflation-Indexed Securities
Certain Funds may invest in inflation-linked securities. Inflation-linked securities are fixed-income securities the principal value of which are adjusted periodically according to the rate of inflation.
The principal amount of these securities increases with increases in the price index used as a reference value for the securities. In addition, the amounts payable as coupon interest payments increase when the price index increases because the
interest amount is calculated by multiplying the principal amount (as adjusted) by a fixed coupon rate.
Although inflation-linked
securities protect their holders from long-term inflationary trends, short-term increases in inflation may result in a decline in value. The values of inflation-linked securities generally fluctuate in response to changes to real interest rates,
which are in turn tied to the relationship between nominal interest rates and the rate of inflation. If inflation were to rise at a rate faster than nominal interest rates, real interest rates might decline, leading to an increase in value of the
inflation-linked securities. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in the value of inflation-linked securities. If inflation is lower than expected
during a period the Fund holds inflation-linked securities, the Fund may earn less on such securities than on a conventional security. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange
rates), investors in inflation-linked securities may not be protected to the extent that the increase is not reflected in the price index used as a reference for the securities. There can be no assurance that the price index used for an
inflation-linked security will accurately measure the real rate of inflation in the prices of goods and services. Inflation-linked and inflation-indexed securities include Treasury Inflation-Protected Securities issued by the U.S. government (see
the section “U.S. Government Securities” for additional information), but also may include securities issued by state, local and non-U.S. governments and corporations and supranational entities.
A Fund’s investments in inflation-indexed securities can cause the Fund to accrue income for U.S. federal income tax purposes without a
corresponding receipt of cash; the Fund may be required to dispose of portfolio securities (including when not otherwise advantageous to do so) in order to obtain sufficient cash to meet its distribution requirements for qualification as a RIC under
the Code.
Initial Public Offerings
The Capital Income Fund and the Senior Floating Rate and Fixed Income Fund may purchase securities of companies that are offered pursuant to an initial public offering (“IPO”). An IPO is a
company’s first offering of stock to the public in the primary market, typically to raise additional capital. A Fund may purchase a “hot” IPO (also known as a “hot issue”), which is an IPO that is oversubscribed and, as a
result, is an investment opportunity of
41
limited availability. As a consequence, the price at which these IPO shares open in the secondary market may be significantly higher than the original IPO price. IPO securities tend to involve
greater risk due, in part, to public perception and the lack of publicly available information and trading history. There is the possibility of losses resulting from the difference between the issue price and potential diminished value of the stock
once traded in the secondary market. A Fund’s investment in IPO securities may have a significant impact on the Fund’s performance and may result in significant capital gains.
Investment Companies
Certain Funds may invest in other investment
companies. Investment companies, including exchange-traded funds such as “iShares,” “SPDRs” and “VIPERs,” are essentially pools of securities. Investing in other investment companies involves substantially the
same risks as investing directly in the underlying securities, but may involve additional expenses at the investment company level, such as investment advisory fees and operating expenses. In some cases, investing in an investment company may
involve the payment of a premium over the value of the assets held in that investment company’s portfolio. In other circumstances, the market value of an investment company’s shares may be less than the NAV per share of the investment
company. As an investor in another investment company, a Fund will bear its ratable share of the investment company’s expenses, including advisory fees, and the Fund’s shareholders will bear such expenses indirectly, in addition to similar
fees and expenses of the Fund.
Despite the possibility of greater fees and expenses, investment in other investment companies may be
attractive nonetheless for several reasons, especially in connection with foreign investments. Because of restrictions on direct investment by U.S. entities in certain countries, investing indirectly in such countries (by purchasing shares of
another fund that is permitted to invest in such countries) may be the most practical and efficient way for a Fund to invest in such countries. In other cases, when a Fund’s Adviser desires to make only a relatively small investment in a
particular country, investing through another fund that holds a diversified portfolio in that country may be more effective than investing directly in issuers in that country. In addition, it may be efficient for a Fund to gain exposure to
particular market segments by investing in shares of one or more investment companies.
Exchange-Traded Funds.
Certain Funds may invest
in shares of exchange-traded funds (“ETFs”). An ETF is an investment company that is generally registered under the 1940 Act that holds a portfolio of securities designed to track the performance of a particular index. The index may be
actively managed. ETFs sell and redeem their shares at NAV in large blocks (typically 50,000 of its shares or more) called “creation units.” Shares representing fractional interests in these creation units are listed for trading on
national securities exchanges and can be purchased and sold in the secondary market in lots of any size at any time during the trading day. ETFs sometimes also refer to entities that are not registered under the 1940 Act that invest directly in
commodities or other assets (
e.g.
, gold bullion). Investments in ETFs involve certain inherent risks generally associated with investments in a broadly-based portfolio of securities, including risks that the general level of stock prices may
decline, thereby adversely affecting the value of each unit of the ETF or other instrument. In addition, an ETF may not fully replicate the performance of its benchmark index because of the temporary unavailability of certain index securities
in the secondary market or discrepancies between the ETF and the index with respect to the weighting of securities or number of stocks held.
Market Capitalizations
Certain Funds
may invest in companies with small, medium or large market capitalizations. Large capitalization companies are generally large companies that have been in existence for a number of years and are well established in their market. Middle market
capitalization companies are generally medium-sized companies that are not as established as large capitalization companies, may be more volatile and are subject to many of the same risks as smaller capitalization companies. Some Funds may invest in
companies with relatively small market capitalizations. Such investments may involve greater risk than is usually associated with more established companies. These companies often have sales and earnings growth rates that exceed those of companies
with larger market capitalization. Such growth rates may in turn be reflected in more rapid share price appreciation. However, companies with smaller market capitalization often have limited product lines, markets or financial resources and may be
dependent upon a relatively small management group. These securities may have limited marketability and may be subject to more abrupt or erratic movements in price than securities of companies with larger market capitalization or market averages in
general. To the extent that a Fund invests in companies with relatively small market capitalizations, the value of its stock portfolio may fluctuate more widely than broad market averages.
42
Master Limited Partnerships
Certain Funds may invest in master limited partnerships (“MLPs”), which are limited partnerships the ownership units of which are publicly traded. MLPs may be treated as qualified publicly
traded partnerships for U.S. federal income tax purposes, as described in “Taxes” herein. MLPs often own or own interests in properties or businesses that are related to oil and gas industries, including pipelines, although MLPs may invest
in other types of investments, including credit-related investments. Generally, an MLP is operated under the supervision of one or more managing general partners. Limited partners (like a Fund when it invests in an MLP) are not involved in the
day-to-day management of the partnership. Certain Funds also may invest in companies that serve (or the affiliates of which serve) as the general partner of an MLP.
Investments in MLPs are generally subject to many of the risks that apply to partnerships. For example, holders of the units of MLPs will generally have limited control and limited voting rights on
matters affecting the partnership. There may be fewer corporate protections afforded investors in an MLP than investors in a corporation. Conflicts of interest may exist among unit holders, subordinated unit holders and the general partner of an
MLP, including those arising from incentive distribution payments. The general partner of an MLP may have limited call rights that may require the Fund to sell its units of such MLP at a time or price that is not advantageous, which may lower the
Fund’s return or result in a loss. A Fund may also be required to repay to an MLP distributions that are incorrectly distributed to the Fund and in certain circumstances holders of MLP units may be responsible for the obligations of the MLP. In
addition, should an MLP fail to meet the current legal requirements for treatment as a partnership, or if there are changes to the tax law, an MLP could be treated as a corporation for U.S. federal income tax purposes. In that case, the MLP would be
obligated to pay tax at the entity level, and distributions to the Fund would be taxed as dividend income. This could result in a significant reduction in the income to the Fund from an investment in an MLP. MLPs that concentrate in a particular
industry or region are subject to risks associated with such industry or region. MLPs holding credit-related investments are subject to interest rate risk and the risk of default on payment obligations by debt issuers. Investments held by MLPs may
be illiquid and are subject to equity risk. MLP units 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 Funds’ investments in MLPs can bear on or be limited by a Fund’s intention to qualify as a RIC.
Certain Funds may also hold investments in limited liability companies that have many of the same characteristics and are subject to many of the same
risks as MLPs.
Money Market Instruments
Each Fund may invest in money market instruments and, as described in its Prospectus, the Growth Markets Fund will invest a significant portion of its assets in money market instruments. Money market
instruments are high-quality, short-term securities. A Fund’s money market investments at the time of purchase (other than U.S. government securities (defined below) and repurchase agreements relating thereto) generally will be rated at the
time of purchase in the two highest short-term rating categories as rated by a major credit agency or, if unrated, will be of comparable quality as determined by the Subadviser. A Fund may invest in instruments of lesser quality and does not have
any minimum credit quality restriction. Money market instruments maturing in less than one year may yield less than obligations of comparable quality having longer maturities.
Although changes in interest rates can change the market value of a security, a Fund expects those changes to be minimal with respect to these securities, which may be purchased by some Funds for
defensive purposes. A Fund’s money market investments may be issued by U.S. banks, foreign banks (including their U.S. branches) or foreign branches and subsidiaries of U.S. banks. Obligations of foreign banks may be subject to foreign
economic, political and legal risks. Such risks include foreign economic and political developments, foreign governmental restrictions that may adversely affect payment of principal and interest on the obligations, foreign withholding and other
taxes on interest income, difficulties in obtaining and enforcing a judgment against a foreign obligor, exchange control regulations (including currency blockage) and the expropriation or nationalization of assets or deposits. Foreign branches of
U.S. banks and foreign banks are not necessarily subject to the same or similar regulatory requirements that apply to domestic banks. For instance, such branches and banks may not be subject to the types of requirements imposed on domestic banks
with respect to mandatory reserves, loan limitations, examinations, accounting, auditing, record keeping and the public availability of information. Obligations of such branches or banks will be purchased
43
only when the Subadviser believes the risks are minimal. In addition, recently, many money market instruments previously thought to be highly liquid have become illiquid. If a Fund’s money
market instruments become illiquid, the Fund may be unable to satisfy certain of its obligations or may only be able to do so by selling other securities at prices or times that may be disadvantageous to do so.
Certain Funds may invest in U.S. government securities that include all securities issued or guaranteed by the U.S. government or its agencies,
authorities or instrumentalities (“U.S. government securities”). Some U.S. government securities are backed by the full faith and credit of the United States. U.S. government securities that are not backed by the full faith and credit of
the United States are considered riskier than those that are.
The Growth Markets Fund expects that the assets invested in the Money Market
Portion by Reich & Tang will be invested principally in short-term money market obligations with maturities of 397 days or less, including bank certificates of deposit, time deposits, bankers’ acceptances, high-quality commercial
paper, loan participation interests, securities issued or guaranteed by the U.S. government, state agencies or instrumentalities, and repurchase agreements calling for resale in 397 days or less backed by the foregoing securities. The maturities of
variable rate demand instruments held in the Fund’s portfolio will be deemed to be the longer of the period required before the Fund is entitled to receive payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated maturities may be in excess of 397 days. The Growth Markets Fund, consistent with its investment objective, attempts to maximize yields by engaging in portfolio trading and by
buying and selling portfolio investments in anticipation of, or in response to, changing economic and money market conditions and trends. The Growth Markets Fund may also seek to take advantage of what are believed to be temporary disparities in the
yields of the different segments or among particular instruments within the same segment of the market. These policies, as well as the relatively short maturity of obligations to be purchased by a Fund, may result in frequent changes in the
portfolio composition of a Fund. There are usually no brokerage commissions paid by a Fund in connection with the purchase of money market instruments. See the sections “Portfolio Transactions and Brokerage” and “Investment
Restrictions.”
Although the Growth Markets Fund will usually invest a portion of its assets in money market instruments and other Funds
may also invest in money market instruments, they are not money market funds and therefore are not subject to the portfolio quality, maturity and NAV requirements applicable to money market funds. The Funds will not seek to maintain a stable NAV.
The Funds also will not be required to comply with the rating restrictions applicable to money market funds, and will not necessarily sell an investment in cases where a security’s rating has been downgraded.
Considerations of liquidity, safety and preservation of capital may preclude a Fund from investing in money market instruments paying the highest
available yield at a particular time. In addition, a Fund’s ability to trade money market securities may be constrained by the collateral and asset coverage requirements related to the Fund’s other investments. As a result, the Fund may
need to buy or sell money market instruments at inopportune times. In addition, even though money market instruments are generally considered to be high-quality and a low-risk investment, recently a number of issuers of money market and money
market-type instruments have experienced financial difficulties, leading in some cases to rating downgrades and decreases in the value of their securities. In addition, recently, many money market instruments previously thought to be highly liquid
have become illiquid. If a Fund’s money market instruments become illiquid, the Fund may be unable to satisfy certain of its obligations or may only be able to do so by selling other securities at prices or times that may be disadvantageous to
do so.
Mortgage Dollar Rolls
Certain Funds may enter into mortgage dollar rolls. A dollar roll involves the sale of a security by a Fund and its agreement to repurchase the instrument
at a specified time and price, and may be considered a form of borrowing for some purposes. A Fund will designate on its records or segregate with its custodian bank assets determined to be liquid in an amount sufficient to meet its obligations
under the transactions. A dollar roll involves potential risks of loss that are different from those related to the securities underlying the transactions. A Fund may be required to purchase securities at a higher price than may otherwise be
available on the open market. Since the counterparty in the transaction is required to deliver a similar, but not identical, security to the Fund, the security that the Fund is required to buy under the dollar roll may be worth less than an
identical security. There is no assurance that a Fund’s use of the cash that it receives from a dollar roll will provide a return that exceeds borrowing costs.
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Mortgage-Related Securities
Certain Funds may invest in mortgage-related securities, such as Government National Mortgage Association (“GNMA”) or Federal National Mortgage Association (“FNMA”) certificates, which
differ from traditional debt securities. Among the major differences are that interest and principal payments are made more frequently, usually monthly, and that principal may be prepaid at any time because the underlying mortgage loans generally
may be prepaid at any time. As a result, if a Fund purchases these assets at a premium, a faster-than-expected prepayment rate will tend to reduce yield to maturity, and a slower-than-expected prepayment rate may have the opposite effect of
increasing yield to maturity. If a Fund purchases mortgage-related securities at a discount, faster-than-expected prepayments will tend to increase, and slower-than-expected prepayments will tend to reduce, yield to maturity. Prepayments, and
resulting amounts available for reinvestment by the Fund, are likely to be greater during a period of declining interest rates and, as a result, are likely to be reinvested at lower interest rates. Accelerated prepayments on securities purchased at
a premium may result in a loss of principal if the premium has not been fully amortized at the time of prepayment. Although these securities will decrease in value as a result of increases in interest rates generally, they are likely to appreciate
less than other fixed-income securities when interest rates decline because of the risk of prepayments. In addition, an increase in interest rates would increase the inherent volatility of a Fund by increasing the average life of the Fund’s
portfolio securities.
The value of some mortgage-backed or asset-backed securities in which a Fund invests may be particularly sensitive to
changes in prevailing interest rates, and the ability of a Fund to successfully utilize these instruments may depend in part upon the ability of an Adviser to forecast interest rates and other economic factors correctly. The market for
mortgage-backed, mortgage-related and asset-backed securities has recently experienced high volatility and a lack of liquidity. As a result, the value of many of these securities has significantly declined. There can be no assurance that these
markets will become more liquid or less volatile, and it is possible that the value of these securities could decline further. The risk of non-payment is greater for mortgage-related securities that are backed by mortgage pools that contain
“subprime” or “Alt-A” loans (loans made to borrowers with weakened credit histories, less documentation or with a lower capacity to make timely payments on their loans), but a level of risk exists for all loans. Market factors
adversely affecting mortgage loan repayments may include a general economic downturn, high unemployment, a general slowdown in the real estate market, a drop in the market prices of real estate, or an increase in interest rates resulting in higher
mortgage payments by holders of adjustable-rate mortgages. Securities issued by the GNMA and the FNMA and similar issuers also may be exposed to risks described under “U.S. Government Securities.”
A Fund also may gain exposure to mortgage-related securities through entering into credit default swaps or other derivative instruments related to this
asset class. For example, a Fund may enter into credit default swaps on CMBX, which are indices made up of tranches of commercial mortgage-backed securities, each with different credit ratings. Utilizing CMBX, one can either gain synthetic risk
exposure to a portfolio of such securities by “selling protection” or take a short position by “buying protection.” The protection buyer pays a monthly premium to the protection seller, and the seller agrees to cover any
principal losses and interest shortfalls of the referenced underlying mortgage-backed securities. Credit default swaps and other derivative instruments related to mortgage-related securities are subject to the risks associated with mortgage-related
securities generally, as well as the risks of derivative transactions. See the section “Derivative Instruments.”
Municipal
Obligations
The Capital Income Fund and the Senior Floating Rate and Fixed Income Fund may purchase municipal obligations. The term
“municipal obligations” generally is understood to include debt obligations issued by municipalities to obtain funds for various public purposes, the income from which is, in the opinion of bond counsel to the issuer, excluded from gross
income for U.S. federal income tax purposes. In addition, if the proceeds from private activity bonds are used for the construction, repair or improvement of privately operated industrial or commercial facilities, the interest paid on such bonds may
be excluded from gross income for U.S. federal income tax purposes, although current federal tax laws place substantial limitations on the size of these issues. The Fund’s distributions of any interest it earns on municipal obligations will be
taxable to shareholders as ordinary income.
The two principal classifications of municipal obligations are “general obligation” and
“revenue” bonds. General obligation bonds are secured by the issuer’s pledge of its faith, credit, and taxing power for the payment of principal and interest. Revenue bonds are payable from the revenues derived from a particular
facility or class of facilities or,
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in some cases, from the proceeds of a special excise or other specific revenue source, but not from the general taxing power. Private activity bonds are revenue bonds that are issued by
municipalities and other public authorities to finance development of industrial or other facilities for use by private enterprise. The private enterprise (and/or any guarantor) pays the principal and interest on the bond; the user does not pledge
its faith, credit and taxing power for repayment. The credit and quality of private activity bonds are usually tied to the credit of the corporate user of the facilities. Sizable investments in these obligations could involve an increased risk to
the Fund should any of the related facilities experience financial difficulties. Private activity bonds are in most cases revenue bonds and do not generally carry the pledge of the credit of the issuing municipality. There are, of course, variations
in the security of municipal obligations, both within a particular classification and between classifications.
Municipal securities can be
significantly affected by political changes as well as uncertainties in the municipal market related to taxation, legislative changes, or the rights of municipal security holders. Because many municipal securities are issued to finance similar
projects, especially those relating to education, health care, transportation and utilities, conditions in those sectors can affect the overall municipal market. In addition, changes in the financial condition of an individual municipal insurer can
affect the overall municipal market.
Original Issue Discount Securities
Certain Funds may invest in Original Issue Discount (“OID”) securities. OID securities are securities that have OID as defined in section 1273 of the Code and that generate OID inclusions
in the holder’s taxable income under section 1272 of the Code. Generally, OID is the excess of a security’s stated redemption price at maturity over the issue price. OID securities generally include any securities issued with a
term exceeding one year at a discount to redemption price, including but not limited to pay-in-kind securities and zero coupon securities. In general, for tax purposes, the amount of the OID is treated as interest income and is included in the
Fund’s income over the term of the debt security, even though payment of that amount is not received until a later time, upon partial or full repayment or disposition of the debt security. In order to satisfy a requirement for
qualification for treatment as a RIC under the Code, a Fund must distribute each year at least 90% of its net investment income, including the OID accrued on OID securities. Because a Fund will not, on a current basis, receive cash payments from the
issuer of an OID security in respect of accrued OID, in some years a Fund may have to distribute cash obtained from other sources in order to satisfy the 90% distribution requirement under the Code and, further, to eliminate tax at the fund level.
Such cash might be obtained from selling other portfolio holdings of a Fund. In some circumstances, such sales might be necessary in order to satisfy cash distribution requirements even though investment considerations might otherwise make it
undesirable for a Fund to sell such securities at such time.
Pay-in-Kind Securities
The Senior Floating Rate and Fixed Income Fund may invest in pay-in-kind securities. Pay-in-kind securities pay dividends or interest in the form of
additional securities of the issuer, rather than in cash. These securities are usually issued and traded at a discount from their face amounts. The amount of the discount varies depending on various factors, such as the time remaining until maturity
of the securities, prevailing interest rates, the liquidity of the security and the perceived credit quality of the issuer. The market prices of pay-in-kind securities generally are more volatile than the market prices of securities that pay
interest periodically and are likely to respond to changes in interest rates to a greater degree than are other types of securities having similar maturities and credit quality. The Fund would be required to distribute the income on these
instruments as it accrues, even though the Fund will not receive the income on a current basis or in cash. Thus, the Fund may have to sell other investments, including when it may not be advisable to do so, to make income distributions to its
shareholders. The Fund would be required to distribute income on these instruments as they accrue, even though the Fund will not receive the income on a current basis or in cash. Thus, the Fund may have to sell other investments, including when it
may not be advisable to do so, to make income distributions to its shareholders.
Preferred Stock
Certain Funds may invest in preferred stock. Preferred stock pays dividends at a specified rate and generally has preference over common stock in the
payment of dividends and the liquidation of the issuer’s assets, but is junior to the debt securities of the issuer in those same respects. Unlike interest payments on debt securities, dividends on preferred stock are generally payable at the
discretion of the issuer’s board of directors. Shareholders may suffer a loss of value if dividends are not paid. The market prices of preferred stocks are subject to changes in interest rates and are more sensitive to changes in the
issuer’s creditworthiness than are the prices of debt securities. Under
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normal circumstances, preferred stock does not carry voting rights.
Private
Placements
Certain Funds may invest in securities that are purchased in private placements. While private placements may offer
opportunities for investment that are not otherwise available on the open market, these securities may be subject to restrictions on resale as a matter of contract or under federal securities laws. Because there may be relatively few potential
purchasers for these securities, especially under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, a Fund could find it more difficult to sell the securities when the Adviser or
Subadviser believes that it is advisable to do so, or may be able to sell the securities only at prices lower than if the securities were more widely held. At times, it also may be more difficult to determine the fair value of the securities for
purposes of computing a Fund’s NAV.
The absence of a trading market can make it difficult to ascertain a market value for illiquid
investments such as private placements. Disposing of illiquid investments may involve time-consuming negotiation and legal expenses, and it may be difficult or impossible for a Fund to sell the illiquid securities promptly at an acceptable price. A
Fund may have to bear the extra expense of registering the securities for resale and the risk of substantial delay in effecting the registration. In addition, market quotations are typically less readily available for these securities. The judgment
of an Adviser or Subadviser may at times play a greater role in valuing these securities than in the case of unrestricted securities.
A
Fund may be deemed to be an underwriter for purposes of the Securities Act when reselling privately-issued securities to the public. As such, a Fund may be liable to purchasers of the securities if the registration statement prepared by the issuer,
or the prospectus forming a part of the registration statement, is materially inaccurate or misleading.
Privatizations
The Senior Floating Rate and Fixed Income Fund may participate in privatizations. In a number of countries around the world, governments
have undertaken to sell to investors interests in enterprises that the government has historically owned or controlled. These transactions are known as “privatizations” and may in some cases represent opportunities for significant capital
appreciation. In some cases, the ability of U.S. investors, such as the Fund, to participate in privatizations may be limited by local law, and the terms of participation for U.S. investors may be less advantageous than those for local investors. In
addition, there is no assurance that privatized enterprises will be successful, or that an investment in such an enterprise will retain its value or appreciate in value.
REITs
Certain Funds may invest in REITs. REITs are pooled investment vehicles that invest
primarily in either real estate or real estate-related loans. REITs involve certain unique risks in addition to those risks associated with investing in the real estate industry in general (such as possible declines in the value of real estate, lack
of availability of mortgage funds, or extended vacancies of property). 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 and
changes in interest rates. REITs whose underlying assets are concentrated in properties used by a particular industry, such as health care, are also subject to risks associated with such industry. REITs are dependent upon management skills, are not
diversified, and are subject to heavy cash flow dependency, risks of default by borrowers, and self-liquidation. REITs are also subject to the possibilities of failing to qualify for tax-free pass-through of income under the Code, and failing to
maintain their exemptions from registration under the 1940 Act.
REITs (especially mortgage REITs) are also subject to interest rate risks,
including prepayment risk. When interest rates decline, the value of a REIT’s investment in fixed rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REIT’s investment in fixed rate obligations
can be expected to decline. If the REIT invests in adjustable rate mortgage loans the interest rates on which are reset periodically, yields on a REIT’s investments in such loans will gradually align themselves to reflect changes in market
interest rates. This causes 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 more widely held securities.
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A Fund’s investment in a REIT may result in a Fund making distributions that constitute a return of
capital to Fund shareholders for federal income tax purposes, or may require a Fund to accrue and distribute income not yet received. In addition, distributions by a Fund from REITs will not qualify for the corporate dividends-received deduction,
or, generally, for treatment as qualified dividend income.
Real Estate Securities
Certain Funds may invest in securities of companies in the real estate industry, including REITs, and are, therefore, subject to the special risks
associated with the real estate market and the real estate industry in general. Companies in the real estate industry are considered to be those that (i) have principal activity involving the development, ownership, construction, management or
sale of real estate; (ii) have significant real estate holdings, such as hospitality companies, supermarkets and mining, lumber and paper companies; and/or (iii) provide products or services related to the real estate industry, such as
financial institutions that make and/or service mortgage loans and manufacturers or distributors of building supplies. Securities of companies in the real estate industry are sensitive to factors such as changes in real estate values, property
taxes, interest rates, cash flow of underlying real estate assets, occupancy rates, government regulations affecting zoning, land use and rents, and the management skill and creditworthiness of the issuer. Companies in the real estate industry may
also be subject to liabilities under environmental and hazardous waste laws.
Repurchase Agreements
Certain Funds may enter into repurchase agreements, by which a Fund purchases a security and obtains a simultaneous commitment from the seller (a bank or,
to the extent permitted by the 1940 Act, a recognized securities dealer) to repurchase the security at an agreed-upon price and date (usually seven days or less from the date of original purchase). The resale price is in excess of the purchase price
and reflects an agreed-upon market interest rate unrelated to the coupon rate on the purchased security. Repurchase agreements are economically similar to collateralized loans by a Fund. Such transactions afford a Fund the opportunity to earn a
return on temporarily available cash at relatively low market risk. A Fund does not have percentage limitations on how much of its total assets may be invested in repurchase agreements. In addition to using repurchase agreements as a principal
investment strategy in connection with the Money Market Portion of the Growth Markets Fund, a Fund may also use repurchase agreements for cash management and temporary defensive purposes. A Fund may invest in a repurchase agreement that does not
produce a positive return to the Fund if the Adviser or Subadviser believes it is appropriate to do so under the circumstances (for example, to help protect the Fund’s uninvested cash against the risk of loss during periods of market turmoil).
While the underlying security may be a bill, certificate of indebtedness, note or bond issued by an agency, authority or instrumentality of the U.S. government, the obligation of the seller is not guaranteed by the U.S. government and there is a
risk that the seller may fail to repurchase the underlying security. In such event, a Fund would attempt to exercise rights with respect to the underlying security, including possible disposition in the market. However, a Fund may be subject to
various delays and risks of loss, including (i) possible declines in the value of the underlying security during the period while a Fund seeks to enforce its rights thereto, (ii) possible reduced levels of income and lack of access to
income during this period, and (iii) inability to enforce rights and the expenses involved in the attempted enforcement, for example, against a counterparty undergoing financial distress.
Reverse Repurchase Agreements and Other Borrowings
Certain Funds may enter into reverse repurchase agreements. In a reverse repurchase agreement a Fund transfers possession of a portfolio instrument to another person, such as a financial institution,
broker or dealer, in return for cash, and agrees that on a stipulated date in the future the Fund will repurchase the portfolio instrument by remitting the original consideration plus interest at an agreed-upon rate. The ability to use reverse
repurchase agreements may enable, but does not ensure the ability of, a Fund to avoid selling portfolio instruments at a time when a sale may be deemed to be disadvantageous. When effecting reverse repurchase agreements, assets of a Fund in a dollar
amount sufficient to make payment of the obligations to be purchased are segregated on the Fund’s records at the trade date and maintained until the transaction is settled. Reverse repurchase agreements are economically similar to secured
borrowings by a Fund.
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Royalty Trusts
The Select Fund may invest in publicly-traded royalty trusts. Royalty trusts are special purpose investment vehicles that own the right to royalties on the production and sale of a natural resource, such
as coal, oil, gas, minerals or timber. Royalty trusts usually have no employees and no physical operations. A royalty trust will generally pay the majority of the cash it receives from its royalties out to unitholders, such as the Select Fund. The
value of a royalty trust may fluctuate in accordance with changes in the financial condition of the royalty trust, the condition of equity markets, commodity prices, production levels, demand for the resource(s) in which a royalty trust is invested,
certain expenses, deductions and costs and the distribution policies adopted by the trust. Such fluctuations could diminish the distributions paid to the Select Fund, which may lower the Select Fund’s return or result in a loss. There can be no
assurance that the royalty trusts in which the Select Fund may invest will pay distributions on their securities. Royalty trusts are subject to many of the same risks as MLPs. The Select Fund will have only limited control of a royalty trust in
which it has invested, and limited ability to remove or replace the trustee. To the extent that a royalty trust is concentrated in a single industry or region, the Select Fund will be exposed to the risks of investing in such industry or region, as
well as to risks related to the energy sector more generally. Rising interest rates, which would create the possibility for more competitive investments, could also adversely impact the performance of the Fund’s investments in royalty trusts.
The Select Fund will bear a proportionate share of the royalty trusts’ operating expenses.
Rule 144A Securities and Section 4(2)
Commercial Paper
Rule 144A securities are privately offered securities that can be resold only to certain qualified institutional buyers
pursuant to Rule 144A under the Securities Act. A Fund may also purchase commercial paper issued under Section 4(2) of the Securities Act or similar debt obligations. Commercial paper is generally considered to be short-term unsecured debt of
corporations. Investing in Rule 144A securities and Section 4(2) commercial paper could have the effect of increasing the level of a Fund’s illiquidity to the extent that qualified institutional buyers become, for a time, uninterested in
purchasing these securities. As noted above, Rule 144A securities and Section 4(2) commercial paper are treated as illiquid unless an Adviser or Subadviser has determined, under guidelines established by the Board, that the particular issue is
liquid. Under the guidelines, an Adviser or Subadviser considers such factors as: (1) the frequency of the trades and quotes for a security; (2) the number of dealers willing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security; and (4) the nature of the security and the nature of the marketplace trades in the security.
Senior Loans, Loan Participations and Assignments
Certain Funds may invest in senior
loans, which include both secured and unsecured loans made by banks and other financial institutions to corporate customers. Senior loans typically hold the most senior position in a borrower’s capital structure, may be secured by the
borrower’s assets and have interest rates that reset frequently. Senior loans can include term loans, revolving credit facility loans and second lien loans. The proceeds of senior loans primarily are used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, dividends, and, to a lesser extent, to finance internal growth and for other corporate purposes. These loans may not be rated investment-grade by the rating agencies. Although secured
loans are secured by collateral of the borrower, there is no assurance that the liquidation of collateral from a secured loan would satisfy the borrower’s obligation, or that the collateral can be liquidated. Economic downturns generally lead
to higher non-payment and default rates and a senior loan could lose a substantial part of its value prior to a default. Some senior loans are subject to the risk that a court, pursuant to fraudulent conveyance or other similar laws, could
subordinate such senior loans to presently existing or future indebtedness of the borrower or take other action detrimental to the holders of senior loans including, in certain circumstances, invalidating such senior loans or causing interest
previously paid to be refunded to the borrower.
A Fund’s investments in loans are subject to credit risk and liquidity risk.
Indebtedness of borrowers whose creditworthiness is poor involves substantially greater risks, and may be highly speculative. The interest rates on many senior loans reset frequently, and thus senior loans are subject to interest rate risk. Most
senior loans are not traded on any national securities exchange. Senior loans generally have less liquidity than investment-grade bonds and there may be less public information available about them.
49
Large loans to corporations or governments may be shared or syndicated among several lenders, usually
including (but often not limited to) banks. A Fund may participate in the primary syndicate for a loan or it may also purchase loans from other lenders (sometimes referred to as loan assignments), in either case becoming a direct lender. A Fund also
may acquire a participation interest in another lender’s portion of the loan. Participation interests involve special types of risk, including liquidity risk and the risks of being a lender. Loans and loan participations may be transferable
among financial institutions; however, they may not have the liquidity of conventional debt securities and because they may be subject to restrictions on resale, they are potentially illiquid. The purchase or sale of loans may require the consent of
a third party or of the borrower, and although such consent is rarely withheld in practice, the consent requirement could delay a purchase or affect a Fund’s ability to dispose of its investments in loans in a timely fashion. Although the
market for loans and loan participations has become increasingly liquid over time, this market is still developing, and there can be no assurance that adverse developments with respect to this market or particular borrowers will not prevent a Fund
from selling these loans at their market values at a desirable time or price. To the extent a senior loan has been deemed illiquid, it will be subject to a Fund’s restrictions on investment in illiquid securities. When investing in a loan
participation, a Fund typically will have the right to receive payments only from the lender to the extent the lender receives payments from the borrower, and not from the borrower itself. Likewise, a Fund typically will be able to enforce its
rights only through the lender, and not directly against the borrower. As a result, a Fund will assume the credit risk of both the borrower and the lender that is selling the participation.
Investments in loans through direct assignment of a financial institution’s interests with respect to a loan may involve additional risks to the Funds. For example, if the loan is foreclosed, a Fund
could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral. In addition, it is conceivable that under emerging legal theories of lender liability, a Fund could be held
liable as a co-lender. Loans and other debt instruments that are not in the form of securities may offer less legal protection to a Fund in the event of fraud or misrepresentation.
A loan is often administered by a bank or other financial institution that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. Unless, under the
terms of the loan or other indebtedness, a Fund has direct recourse against the borrower, it may have to rely on the agent to pursue appropriate credit remedies against a borrower. In addition, holders of the loans, such as the Funds, may be
required to indemnify the agent bank in certain circumstances.
In addition to investing in senior secured loans, a Fund may invest in other
loans, such as second lien loans and other secured loans, as well as unsecured loans. Second lien loans and other secured loans are subject to the same risks associated with investment in senior loans and below investment-grade bonds. However, such
loans may rank lower in right of payment than senior secured loans, and are subject to additional risk that the cash flow of the borrower and any property securing the loan may be insufficient to meet scheduled payments after giving effect to the
higher ranking secured obligations of the borrower. Second lien loans and other secured loans are expected to have greater price volatility than more senior loans and may be less liquid. There is also a possibility that originators will not be able
to sell participations in lower ranking loans, which would create greater credit risk exposure. Each of these risks may be increased in the case of unsecured loans, which are not backed by a security interest in any specific collateral.
Each Fund may also gain exposure to loan investments through the use of derivatives. See the section “Derivative Instruments.”
Short Sales
The Select Fund may enter
into short sales of securities. To sell a security short, the Select Fund must borrow that security from a lender, such as a prime broker, and deliver it to the short sale counterparty. If the Select Fund is unable to borrow the security it wishes
to sell short at an advantageous time or price, the Select Fund’s ability to pursue its short sale strategy may be adversely affected. When closing out a short position, the Select Fund will have to purchase the security it originally sold
short. The Select Fund will realize a profit from closing out a short position if the price of the security sold short has declined since the short position was opened; the Select Fund will realize a loss from closing out a short position if the
value of the shorted security has risen since the short position was opened. Because there is no upper limit on the price to which a security can rise, short selling exposes the Select Fund to potentially unlimited losses if it does not hold the
security sold short.
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While short sales can be used to further the Select Fund’s investment objective, under certain market
conditions, they can increase the volatility of the Select Fund and decrease the liquidity of the Select Fund. Under adverse market conditions, the Select Fund may have difficulty purchasing the securities required to meet its short sale delivery
obligations, and may have to sell portfolio securities at a disadvantageous time or price to raise the funds necessary to meet its short sale obligations. If a request to return the borrowed securities occurs at a time when other short sellers of
those same securities are receiving similar requests, a “short squeeze” can occur, and the Select Fund may be forced to replace the borrowed securities with purchases on the open market at a disadvantageous time, potentially at a cost that
significantly exceeds the original short sale proceeds originally received in selling the securities short. It is possible that the value of the Select Fund’s long positions will decrease at the same time that the value of its short positions
increases, which could increase losses to the Select Fund.
The Select Fund intends to cover its short sale transactions either by segregating
or earmarking liquid assets, such that the segregated/earmarked amount, combined with any amount deposited with a broker as margin, equals the current market value of the securities underlying the short sale or by purchasing the securities
underlying the short sale transaction or call options on those securities with a strike price no higher than the price at which the security was sold. Ordinarily, the Select Fund will incur a fee or pay a premium to borrow securities, may also be
required to pay interest and other charges, and will have to repay the lender any dividends or interest that accrue on the security while the loan is outstanding. The amount of the premium, dividends, interest and other expenses the Select Fund pays
in connection with the short sale will decrease the amount of any gain from a short sale and increase the amount of any loss.
Short sales
may protect a Fund against the risk of losses in the value of its portfolio securities because any unrealized losses with respect to such portfolio securities should be wholly or partially offset by a corresponding gain in the short position.
However, any potential gains in such portfolio securities should be wholly or partially offset by a corresponding loss in the short position. The extent to which such gains or losses are offset will depend on the amount of securities sold short
relative to the amount the Fund owns, either directly or indirectly, and, in the case where the Fund owns convertible securities, changes in the conversion premium.
Short sale transactions involve certain risks. If the price of the security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss, and if the price declines during this period, the Fund will realize a short-term capital gain. Any realized short-term capital gain will be decreased, and any incurred loss increased, by the amount of transaction costs and any premium,
dividend or interest which the Fund may have to pay in connection with such short sale. Certain provisions of the Code may limit the degree to which a Fund is able to enter into short sales. There is no limitation on the amount of each Fund’s
assets that, in the aggregate, may be deposited as collateral for the obligation to replace securities borrowed to effect short sales and allocated to segregated accounts in connection with short sales.
Short-Term Trading
Certain Funds may,
consistent with their investment objectives, engage in portfolio trading in anticipation of, or in response to, changing economic or market conditions and trends. These policies may result in higher turnover rates in each Fund’s portfolio,
which may produce higher transaction costs and a higher level of taxable capital gains. Portfolio turnover considerations will not limit an Adviser’s or Subadviser’s investment discretion in managing a Fund’s assets. Each Fund
anticipates that its portfolio turnover rates will vary significantly from time to time depending on the volatility of economic and market conditions.
Step-Coupon Securities
Certain Funds may invest in step-coupon securities. Step-coupon
securities trade at a discount from their face value and pay coupon interest. The coupon rate is low for an initial period and then increases to a higher coupon rate thereafter. Market values of these types of securities generally fluctuate in
response to changes in interest rates to a greater degree than conventional interest-paying securities of comparable term and quality. Under many market conditions, investments in such securities may be illiquid, making it difficult for a Fund to
dispose of them or determine their current value.
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“Stripped” Securities
Certain Funds may invest in stripped securities, which are usually structured with two or more classes that receive different proportions of the interest and principal distribution on a pool of U.S.
government or foreign government securities or mortgage assets. In some cases, 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). Stripped securities commonly have greater market volatility than other types of fixed-income securities. In the case of stripped mortgage securities, if the underlying mortgage assets experience greater than anticipated
prepayments of principal, a Fund may fail to recoup fully its investments in IOs. Stripped securities may be illiquid. Stripped mortgage securities may be considered derivative securities. See the section “Derivative Instruments.”
Structured Notes
Certain
Funds may invest in a broad category of instruments known as “structured notes.” These instruments are debt obligations issued by industrial corporations, financial institutions or governmental or international agencies. Traditional debt
obligations typically obligate the issuer to repay the principal plus a specified rate of interest. Structured notes, by contrast, obligate the issuer to pay amounts of principal or interest that are determined by reference to changes in some
external factor or factors, or the principal and interest rate may vary from the stated rate because of changes in these factors. For example, the issuer’s obligations could be determined by reference to changes in the value of a commodity
(such as gold or oil) or commodity index, a foreign currency, an index of securities (such as the S&P 500 Index) or an interest rate (such as the U.S. Treasury bill rate). In some cases, the issuer’s obligations are determined by reference
to changes over time in the difference (or “spread”) between two or more external factors (such as the U.S. prime lending rate and the total return of the stock market in a particular country, as measured by a stock index). In some cases,
the issuer’s obligations may fluctuate inversely with changes in an external factor or factors (for example, if the U.S. prime lending rate goes up, the issuer’s interest payment obligations are reduced). In some cases, the issuer’s
obligations may be determined by some multiple of the change in an external factor or factors (for example, three times the change in the U.S. Treasury bill rate). In some cases, the issuer’s obligations remain fixed (as with a traditional debt
instrument) so long as an external factor or factors do not change by more than the specified amount (for example, if the value of a stock index does not exceed some specified maximum), but if the external factor or factors change by more than the
specified amount, the issuer’s obligations may be sharply reduced.
Structured notes can serve many different purposes in the management
of a Fund. For example, they can be used to increase a Fund’s exposure to changes in the value of assets that the Fund would not ordinarily purchase directly (such as commodities or stocks traded in a market that is not open to U.S. investors).
They can also be used to hedge the risks associated with other investments a Fund holds. For example, if a structured note has an interest rate that fluctuates inversely with general changes in a country’s stock market index, the value of the
structured note would generally move in the opposite direction to the value of holdings of stocks in that market, thus moderating the effect of stock market movements on the value of a Fund’s portfolio as a whole.
Risks.
Structured notes involve special risks. As with any debt obligation, structured notes involve the risk that the issuer will become
insolvent or otherwise default on its payment obligations. This risk is in addition to the risk that the issuer’s obligations (and thus the value of a Fund’s investment) will be reduced because of adverse changes in the external factor or
factors to which the obligations are linked. The value of structured notes will in many cases be more volatile (that is, will change more rapidly or severely) than the value of traditional debt instruments. Volatility will be especially high if the
issuer’s obligations are determined by reference to some multiple of the change in the external factor or factors. Many structured notes have limited or no liquidity, so that a Fund would be unable to dispose of the investment prior to
maturity. As with all investments, successful use of structured notes depends in significant part on the accuracy of the Adviser’s analysis of the issuer’s creditworthiness and financial prospects, and of an Adviser’s forecast as to
changes in relevant economic and financial market conditions and factors. In instances where the issuer of a structured note is a foreign entity, the usual risks associated with investments in foreign securities (described above) apply. Structured
notes may be considered derivative securities.
52
Supranational Entities
Certain Funds may invest in securities issued by supranational entities, such as the International Bank for Reconstruction and Development (commonly called the “World Bank”), the Asian
Development Bank and the Inter-American Development Bank. The governmental members of these supranational entities are “stockholders” that typically make capital contributions to support or promote such entities’ economic
reconstruction or development activities and may be committed to make additional capital contributions if the entity is unable to repay its borrowings. A supranational entity’s lending activities may be limited to a percentage of its total
capital, reserves and net income. There can be no assurance that the constituent governments will be able or willing to honor their commitments to those entities, with the result that the entity may be unable to pay interest or repay principal on
its debt securities, and a Fund may lose money on such investments. Obligations of a supranational entity that are denominated in foreign currencies will also be subject to the risks associated with investments in foreign currencies, as described
above in the section “Foreign Currency Transactions.”
Synthetic Securities
The Senior Floating Rate and Fixed Income Fund may invest in synthetic securities. Incidental to other transactions in fixed-income securities and/or for
investment purposes, a Fund also may combine options on securities with cash, cash equivalent investments or other fixed-income securities in order to create “synthetic” securities which approximate desired risk and return profiles. This
may be done where a “non-synthetic” security having the desired risk/return profile either is unavailable (
e.g.
, short-term securities of certain non-U.S. governments) or possesses undesirable characteristics (
e.g.
, interest
payments on the security would be subject to non-U.S. withholding taxes). A Fund also may purchase forward non-U.S. exchange contracts in conjunction with U.S. dollar-denominated securities in order to create a synthetic non-U.S. currency
denominated security which approximates desired risk and return characteristics where the non-synthetic securities either are not available in non-U.S. markets or possess undesirable characteristics. The use of synthetic bonds and other synthetic
securities may involve risks different from, or potentially greater than, risks associated with direct investments in securities and other assets. Synthetic securities may increase other Fund risks, including market risk, liquidity risk, and credit
risk, and their value may or may not correlate with the value of the relevant underlying asset.
Trust Preferred Securities
The Senior Floating Rate and Fixed Income Fund may also purchase trust preferred securities, which have characteristics of both subordinated debt and
preferred stock. Trust preferred securities are issued by a special purpose trust subsidiary backed by subordinated debt of a corporate parent. These securities generally have a final stated maturity date and a fixed schedule for periodic payments.
In addition, these securities have provisions that afford preference over common and preferred stock upon liquidation, although the securities are subordinated to other, more senior debt securities of the same issuer. The issuers of these securities
often have the right to defer interest payments for a period of time.
Holders of trust preferred securities have limited voting rights to
control the activities of the trust, and no voting rights with respect to the parent company. 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 Securities Act or otherwise 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. If the
parent company defaults on interest payments to the trust, the trust will not be able to make dividend payments to holders of its securities.
U.S. Government Securities
Certain
Funds may invest in some or all of the following U.S. government securities:
U.S. Treasury Bills
– Direct
obligations of the U.S. Treasury that are issued in maturities of one year or less. No interest is paid on Treasury bills; instead, they are issued at a discount and repaid at full face value when they mature. They are backed by the full faith and
credit of the U.S. government.
U.S. Treasury Notes and Bonds
– Direct obligations of the U.S. Treasury issued in
maturities that vary between one and thirty years, with interest normally payable every six months. These obligations are backed by the full faith and credit of the U.S. government.
53
Treasury Inflation-Protected Securities
(“TIPS”) – Fixed-income
securities whose principal value is periodically adjusted according to the rate of inflation. The interest rate on TIPS is fixed at issuance, but over the life of the bond this interest may be paid on an increasing or decreasing principal value that
has been adjusted for inflation. Although repayment of the original bond principal upon maturity is guaranteed, the market value of TIPS is not guaranteed, and will fluctuate.
“Ginnie Maes”
– Debt securities issued by a mortgage banker or other mortgagee that represent an interest in a pool of mortgages insured by the Federal Housing Administration or the
Rural Housing Service or guaranteed by the Veterans Administration. The GNMA guarantees the timely payment of principal and interest when such payments are due, whether or not these amounts are collected by the issuer of these certificates on the
underlying mortgages. It is generally understood that a guarantee by GNMA is backed by the full faith and credit of the United States. Mortgages included in single family or multi-family residential mortgage pools backing an issue of Ginnie Maes
have a maximum maturity of 30 years. Scheduled payments of principal and interest are made to the registered holders of Ginnie Maes (such as the Funds) each month. Unscheduled prepayments may be made by homeowners, or as a result of a default.
Prepayments are passed through to the registered holder (such as the Funds, which reinvest any prepayments) of Ginnie Maes along with regular monthly payments of principal and interest.
“Fannie Maes”
– The FNMA is a government-sponsored corporation owned entirely by private stockholders that purchases
residential mortgages from a list of approved seller/servicers, including state and federally chartered savings and loan associations, mutual funds savings banks, commercial banks, credit unions and mortgage banks. Fannie Maes are pass-through
securities issued by FNMA that are guaranteed as to timely payment of principal and interest by FNMA, but these obligations are not backed by the full faith and credit of the U.S. government.
“Freddie Macs”
– The Federal Home Loan Mortgage Corporation (“FHLMC”) is a corporate instrumentality of
the U.S. government. Freddie Macs are participation certificates issued by FHLMC that represent an interest in residential mortgages from FHLMC’s National Portfolio. FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but these obligations are not backed by the full faith and credit of the U.S. government.
Risks.
U.S. government securities
generally do not involve the credit risks associated with investments in other types of fixed-income securities, although, as a result, the yields available from U.S. government securities are generally lower than the yields available from corporate
fixed-income securities. Like other debt securities, however, the values of U.S. government securities change as interest rates fluctuate. Fluctuations in the value of portfolio securities will not affect interest income on existing portfolio
securities but will be reflected in a Fund’s NAV. Because the magnitude of these fluctuations will generally be greater at times when a Fund’s average maturity is longer, under certain market conditions a Fund may, for temporary defensive
purposes, accept lower current income from short-term investments rather than investing in higher yielding long-term securities. Securities such as those issued by Fannie Mae and Freddie Mac are guaranteed as to the payment of principal and interest
by the relevant entity (
e.g.
, FNMA or FHLMC) but have not been backed by the full faith and credit of the U.S. government. Instead, they have been supported only by the discretionary authority of the U.S. government to purchase the
agency’s obligations. An event affecting the guaranteeing entity could adversely affect the payment of principal or interest or both on the security, and therefore, these types of securities should be considered to be riskier than U.S.
government securities.
S&P downgraded its long-term sovereign credit rating on the United States from “AAA” to “AA+”
on August 5, 2011. Although the complete impact of the downgrade is uncertain as of the date of this Statement, it may result in increased volatility or liquidity risk, higher interest rates and lower prices for U.S. government securities and
increased costs for all kinds of debt. In addition, there can be no assurance that S&P will not decide to further lower this rating in the future. The value of the Funds’ shares may be adversely affected by S&P’s downgrade or any
future downgrades of the U.S. government’s credit rating given that the Funds may invest in U.S. government securities.
In September
2008, the U.S. Treasury Department placed FNMA and FHLMC into conservatorship. The companies remain in conservatorship, and the effect that this conservatorship will have on the companies’ debt and equity securities is unclear. Although the
U.S. government has recently provided financial support to FNMA and FHLMC,
54
there can be no assurance that it will support these or other government-sponsored enterprises in the future. In addition, any such government support may benefit the holders of only certain
classes of an issuer’s securities.
The values of TIPS generally fluctuate in response to changes in real interest rates, which are in
turn tied to the relationship between nominal interest rates and the rate of inflation. If inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of TIPS. In contrast,
if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of TIPS. If inflation is lower than expected during the period a Fund holds TIPS, the Fund may earn less on the TIPS
than on a conventional bond. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in TIPS may not be protected to the extent that the increase is not reflected in the
bonds’ inflation measure. There can be no assurance that the inflation index for TIPS will accurately measure the real rate of inflation in the prices of goods and services.
See the section “Mortgage-Related Securities” for additional information on these securities.
Variable and Floating Rate Instruments
Certain Funds may purchase variable and floating
rate instruments (including senior loans, which are discussed in the section “Senior Loans, Loan Participations and Assignments” above). These instruments may include variable amount master demand notes, which are unsecured demand notes
that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. These instruments may also include leveraged inverse floating rate debt instruments, or “inverse floaters”. The
interest rate of an inverse floater resets in the opposite direction from the market rate of interest on a security or interest to which it is related. An inverse floater may be considered to be leveraged to the extent that its interest rate varies
by a magnitude that exceeds the magnitude of the change in the index rate of interest, and is subject to many of the same risks as derivatives. The higher degree of leverage inherent in inverse floaters is associated with greater volatility in their
market values. Certain of these investments may be illiquid. The absence of an active secondary market with respect to these investments could make it difficult for a Fund to dispose of a variable or floating rate note if the issuer defaulted on its
payment obligation or during periods that a Fund is not entitled to exercise its demand rights, and a Fund could, for these or other reasons, suffer a loss with respect to such instruments.
When-Issued, Delayed Delivery and Forward Commitment Securities
To reduce the risk of
changes in interest rates and securities prices, certain Funds may purchase securities on a forward commitment or when-issued or delayed delivery basis, which means delivery and payment take place a number of days after the date of the commitment to
purchase. The payment obligation and the interest rate receivable with respect to such purchases are fixed when a Fund enters into the commitment, but a Fund does not make payment until it receives delivery from the counterparty. An Adviser will
commit to purchase such securities only with the intention of actually acquiring the securities, but the Adviser may sell these securities before the settlement date if it is deemed advisable.
Securities purchased on a forward commitment or when-issued or delayed delivery basis are subject to changes in value, generally changing in the same
way,
i.e.
, appreciating when interest rates decline and depreciating when interest rates rise, based upon the public’s perception of the creditworthiness of the issuer and changes, real or anticipated, in the level of interest rates.
Securities so purchased may expose a Fund to risks because they may experience such fluctuations prior to their actual delivery. Purchasing securities on a when-issued or delayed delivery basis can involve the additional risk that the yield
available in the market when the delivery takes place actually may be higher than that obtained in the transaction itself. Purchasing securities on a forward commitment or when-issued or delayed delivery basis when the Adviser is fully or almost
fully invested may result in greater potential fluctuation in the value of a Fund’s net assets. In addition, there is a risk that securities purchased on a when-issued or delayed delivery basis may not be delivered and that the purchaser of
securities sold by a Fund on a forward commitment basis will not honor its purchase obligation. In such cases, a Fund may incur a loss.
Zero-Coupon Securities
Certain
Funds may invest in zero-coupon securities. Zero-coupon securities are debt obligations that do not entitle the holder to any periodic payments of interest either for the entire life of the obligation or for an initial period after the issuance of
the obligations; the holder generally is entitled to receive the par value of the security at maturity.
55
These securities are issued and traded at a discount from their face amounts. The amount of the discount varies depending on such factors as the time remaining until maturity of the securities,
prevailing interest rates, the liquidity of the security and the perceived credit quality of the issuer. The market prices of zero-coupon securities generally are more volatile than the market prices of securities that pay interest periodically and
are likely to respond to changes in interest rates to a greater degree than are other types of securities having similar maturities and credit quality. A Fund’s investment in zero-coupon securities will require the Fund to accrue income without
a corresponding receipt of cash. In order to satisfy a requirement for treatment as a “regulated investment company” under the Code, a Fund must distribute each year at least 90% of its net investment income, including the original issue
discount accrued on zero-coupon bonds. Because a Fund investing in zero-coupon bonds will not, on a current basis, receive cash payments from the issuer in respect of accrued original issue discount, the Fund may have to distribute cash obtained
from other sources in order to satisfy the 90% distribution requirement for treatment as a RIC under the Code and to eliminate Fund-level tax. Such cash might be obtained from selling other portfolio holdings of a Fund, including at a time when it
is not otherwise advantageous to do so. In some circumstances, such sales might be necessary in order to satisfy cash distribution requirements even though investment considerations might otherwise make it undesirable for a Fund to sell such
securities at such time.
TEMPORARY DEFENSIVE POSITIONS
Each Fund has the flexibility to respond promptly to changes in market and economic conditions. In the interest of preserving shareholders’ capital,
each Adviser or Subadviser may employ a temporary defensive strategy if it determines such a strategy to be warranted. Pursuant to such a defensive strategy, a Fund temporarily may hold cash (U.S. dollars, foreign currencies, or multinational
currency units) and/or invest up to 100% of its assets in cash, high-quality debt securities or money market instruments of U.S. or foreign issuers. It is impossible to predict whether, when or for how long a Fund will employ temporary defensive
strategies. The use of temporary defensive strategies may prevent a Fund from achieving its goal.
In addition, pending investment of proceeds
from new sales of Fund shares or to meet ordinary daily cash needs, a Fund may temporarily hold cash and may invest any portion of its assets in money market or other short-term high-quality instruments.
PORTFOLIO TURNOVER
Each Fund’s portfolio turnover rate for a fiscal year is calculated by dividing the lesser of purchases or sales of portfolio securities for the fiscal year by the monthly average of the value of the
portfolio securities owned by each Fund during the fiscal year, in each case excluding securities having maturity dates at acquisition of one year or less. High portfolio turnover involves correspondingly greater brokerage commissions and other
transaction costs, which will be borne directly by each Fund, thereby decreasing each Fund’s total return. High portfolio turnover also may give rise to additional taxable income for the Fund’s shareholders, including through the
realization of short term capital gains which are typically taxed to shareholders at ordinary income tax rates, and therefore can result in higher taxes for shareholders that hold their shares in taxable accounts. It is impossible to predict with
certainty whether future portfolio turnover rates will be higher or lower than those experienced during past periods.
While it is
impossible to predict with certainty, the Senior Floating Rate and Fixed Income Fund expects to have significant portfolio turnover. The rate of portfolio turnover will depend upon market and other conditions, and it will not be a limiting factor
when Loomis Sayles believes that portfolio changes are appropriate.
Generally, the Capital Income Fund, the Gateway International Fund, the
Select Fund and the Growth Markets Fund intend to invest for long-term purposes. However, the rate of portfolio turnover will depend upon market and other conditions, and it will not be a limiting factor when each Fund’s Adviser believes that
portfolio changes are appropriate.
PORTFOLIO HOLDINGS INFORMATION
The Board has adopted policies to limit the disclosure of confidential portfolio holdings information and to ensure equal access to such information,
except in certain circumstances as approved by the Board. These policies are summarized below. Generally, portfolio holdings information will not be disclosed until it is first posted on the Funds’ website at ngam.natixis.com. Generally, full
portfolio holdings information will not be posted until it is aged for at least 15 days for the Growth Markets Fund and the Select Fund and 30 days for the Capital Income Fund,
56
Gateway International Fund and Senior Floating Rate and Fixed Income Fund. A list of the Capital Income Fund, the Select Fund and the Senior Floating Rate and Fixed Income Fund’s top 10
holdings will generally be available on a monthly basis within 7 business days after month end. A list of the Growth Markets Fund’s top 10 holdings will generally be available on the 15
th
calendar day after month end. Any holdings information that is released must clearly indicate the date of the
information, and must state that due to active management, the Funds may or may not still invest in the securities listed. Portfolio characteristics, such as industry/sector breakdown, current yield, quality breakdown, duration, average
price-earnings ratio and other similar information may be provided on a current basis. However, portfolio characteristics do not include references to specific portfolio holdings.
The Board has approved exceptions to the general policy on the sharing of portfolio holdings information as in the best interests of the Funds:
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(1)
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Disclosure of portfolio holdings posted on the Funds’ website, provided that information is shared no sooner than the next day following the day on which the
information is posted;
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(2)
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Disclosure to firms offering industry-wide services, provided that the firm has agreed in writing to maintain the confidentiality of the Funds’ portfolio holdings.
Entities that receive information pursuant to this exception include Lipper (monthly disclosure of full portfolio holdings, provided 6 days after month-end) (Capital Income Fund, Growth Markets Fund, Select Fund and Senior Floating Rate and Fixed
Income Fund only); and FactSet (daily disclosure of full portfolio holdings, provided the next business day);
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(3)
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Disclosure (subject to a written confidentiality provision) to Broadridge Financial Solutions, Inc. as part of the proxy voting recordkeeping services provided to the
Funds, and to Institutional Shareholder Services Inc. (“ISS”) (ASG Growth Markets Fund, Gateway International Fund, Capital Income Fund and Senior Floating Rate and Fixed Income Fund only) and Glass Lewis & Co., LLC (Capital
Income Fund and Senior Floating Rate and Fixed Income Fund only) as part of the proxy voting administration and research services, respectively, provided to the Advisers (votable portfolio holdings of issuers as of record date for shareholder
meetings);
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(4)
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Disclosure to employees of each Adviser, Subadviser, principal underwriter, administrator, custodian, financial printer, Fund accounting agent, independent registered
public accountants, Fund counsel and Independent Trustees’ counsel, as well as to broker-dealers executing portfolio transactions for the Funds, provided that such disclosure is made for bona fide business purposes;
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(5)
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Disclosure to Natixis Global Asset Management (“NGAM”), in its capacity as the seed capital investor for the Funds, in order to satisfy certain reporting
obligations to its parent company and for its own risk management purposes; provided that NGAM agrees to maintain its seed capital in the Funds for a set period and does not effect a redemption of Fund shares while in possession of information that
is not publicly available to other investors in the Fund. NGAM and its parent utilize a third-party service provider, Aptimum Formation Développement (“Aptimum”), to assist with their analysis of risk. Any sharing of holdings
information with Aptimum is subject to a confidentiality agreement; and
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(6)
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Other disclosures made for non-investment purposes, but only if approved in writing in advance by an officer of the Funds. Such exceptions will be reported to the
Board.
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With respect to items (2) through (5) above, disclosure is made pursuant to procedures that have been approved
by the Board, and may be made by employees of each Fund’s Adviser, Subadviser, administrator or custodian. With respect to (6) above, approval will be granted only when the officer determines that the Funds have a legitimate business
reason for sharing the portfolio holdings information and the recipients are subject to a duty of confidentiality, including a duty not to trade on the information. As of the date of this Statement, the only entities that receive information
pursuant to this exception are RR Donnelley (quarterly, or more frequently as needed, disclosure of full portfolio holdings) for the purposes of performing certain functions related to the production of the Funds’ semiannual financial
statements, quarterly Form N-Q filings and other related items; Securities Class Action Services, LLC (daily disclosure of full portfolio holdings provided the next business day) for the purpose of monitoring and processing any applicable class
action lawsuits for Capital Income Fund and Senior Floating Rate and Fixed Income Fund; Ernst & Young LLP (annually, or more frequently as needed, disclosure of foreign equity securities) for the purpose of performing certain functions
related to the production of the Funds’ federal income and
57
excise tax returns; Electra Information Systems, Inc. (daily disclosure of full portfolio holdings) for the purpose of performing certain electronic reconciliations of portfolio holdings of the
Capital Income Fund and the Senior Floating Rate and Fixed Income Fund; Barclays Capital (periodic disclosure of full portfolio holdings) for the purpose of performing analytics and scenario analysis with respect to the Capital Income Fund and the
Senior Floating Rate and Fixed Income Fund; Yield Book (periodic disclosure of full portfolio holdings) for the purpose of performing certain portfolio analytics for the Adviser with respect to the Capital Income Fund and the Senior Floating Rate
and Fixed Income Fund; Bloomberg (daily disclosure of full portfolio holdings, provided next business day) for the purpose of performing attribution analysis for the Capital Income Fund; tax agent in Taiwan (daily disclosure of securities trades of
Taiwan-based issuers, provided the next business day) for the purpose of performing certain duties for compliance with Taiwan’s tax laws with respect to the Growth Markets Fund; Thomson Reuters (daily disclosure of full portfolio holdings) for
the purpose of performing certain electronic reconciliations of portfolio holdings for the Growth Markets Fund; the Board of Directors of the Growth Markets Fund’s wholly-owned commodity subsidiary (the “Commodity Subsidiary”)
(quarterly disclosure of full Commodity Subsidiary portfolio holdings) for the purpose of its oversight of the Commodity Subsidiary; Advent Software, Inc. (daily disclosure of full portfolio holdings) for the purpose of performing certain electronic
reconciliations for the Select Fund; and Interactive Data Pricing and Reference Data, Inc. (daily disclosure of portfolio holdings, provided the same business day) for the purpose of performing valuation services for the Gateway International Fund.
Although the Trusts may enter into written confidentiality agreements, in other circumstances, such as those described in (4) above, the obligation to keep information confidential may be based on common law, professional or statutory duties of
confidentiality. Common law, professional or statutory duties of confidentiality, including the duty not to trade on the information, may not be as clearly delineated and may be more difficult to enforce than contractual duties. The Funds’
officers determine on a case-by-case basis whether it is appropriate for the Funds to rely on such common law, professional or statutory duties. The Board exercises oversight of the disclosure of portfolio holdings by, among other things, receiving
and reviewing reports from the Funds’ chief compliance officer regarding any material issues concerning the Funds’ disclosure of portfolio holdings or from officers of the Funds in connection with proposed new exceptions or new disclosures
pursuant to item (6) above. Notwithstanding the above, there is no assurance that the Funds’ policies on the sharing of portfolio holdings information will protect the Funds from the potential misuse of holdings by individuals or firms in
possession of that information.
Other registered investment companies that are advised or sub-advised by the Funds’ Advisers or
Subadvisers may be subject to different portfolio holdings disclosure policies, and neither the Advisers nor the Board exercises control over such policies or disclosure. In addition, separate account clients of the Advisers have access to their
portfolio holdings and are not subject to the Funds’ portfolio holdings disclosure policies. Some of the Funds that are advised or sub-advised by the Advisers and some of the separate accounts managed by the Advisers have investment objectives
and strategies that are substantially similar to the Funds’, and therefore, in certain cases, nearly identical, portfolio holdings as the Funds.
In addition, any disclosures of portfolio holdings information by a Fund or its Adviser or Subadvisers must be consistent with the anti-fraud provisions of the federal securities laws, the Fund’s and
the Adviser’s fiduciary duty to shareholders, and the Fund’s code of ethics. Each Fund’s policies expressly prohibit the sharing of portfolio holdings information if the Fund, its Adviser, or any other affiliated party receives
compensation or other consideration in connection with such arrangement. The term “consideration” includes any agreement to maintain assets in a Fund or in other funds or accounts managed by the Fund’s Adviser and/or Subadviser or by
any affiliated person of the Adviser and/or Subadviser.
MANAGEMENT OF THE TRUSTS
Each Trust is governed by the Board, which is responsible for generally overseeing the conduct of Fund business and for protecting the interests of the
shareholders. The Trustees meet periodically throughout the year to oversee the Funds’ activities, review contractual arrangements with companies that provide services to the Funds and review the Funds’ performance.
Trustees and Officers
The table below
provides certain information regarding the Trustees and officers of the Trusts. For the purposes of this table and for purposes of this Statement, the term “Independent Trustee” means those Trustees who are not “interested
persons,” as defined in the 1940 Act, of the Trusts. In certain circumstances, trustees are also required to have no direct or indirect financial interest in the approval of a matter being voted on in order to be considered
58
“independent” for the purposes of the requisite approval. For purposes of this Statement, the term “Interested Trustee” means those Trustees who are “interested
persons,” as defined in the 1940 Act, of the Trusts. The following table provides information about the members of the Board, including information about their principal occupations during the past five years, information about other
directorships held at public companies, and a summary of the experience, qualifications, attributes or skills that led to the conclusion that the Trustee should serve as such. Unless otherwise indicated, the address of all persons below is 399
Boylston Street, Boston, MA 02116.
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Name and Year of
Birth
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Position(s) Held
with the Trusts,
Length of Time
Served and Term
of Office
1
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Principal
Occupation(s)
During Past 5
Years
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Number of
Portfolios in Fund
Complex Overseen
2
and Other
Directorships Held
During Past 5
Years
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Experience,
Qualifications,
Attributes, Skills
for Board
Membership
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INDEPENDENT TRUSTEES
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Charles D. Baker
(1956)
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Trustee
From 2005 to 2009 and since 2011 for Natixis Funds Trust II and from 2007 to 2009 and since 2011 for Gateway Trust
Contract Review and Governance Committee
Member
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Executive in Residence at General Catalyst Partners (venture capital and growth equity firm); formerly, President and Chief Executive Officer, Harvard Pilgrim Health
Care (health care organization)
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Director, Athenahealth, Inc. (software company)
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Significant experience on the Board; executive experience (including president and chief executive officer of a health care organization and executive officer of a
venture capital and growth equity firm)
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Daniel M. Cain
(1945)
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Trustee
Since 1996 for Natixis Funds Trust II and since 2007 for Gateway Trust
Chairman of the Contract Review and Governance
Committee
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Chairman (formerly, President and Chief Executive Officer) of Cain Brothers & Company, Incorporated (investment banking)
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Director, Sheridan Healthcare Inc. (physician practice management)
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Significant experience on the Board and on the board of other business organizations (including at a health care organization); experience in the financial industry
(including roles as chairman and former chief executive officer of an investment banking firm)
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Name and Year of
Birth
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Position(s) Held
with the Trusts,
Length of Time
Served and Term
of Office
1
|
|
Principal
Occupation(s)
During Past 5
Years
|
|
Number of
Portfolios in Fund
Complex Overseen
2
and Other
Directorships Held
During Past 5
Years
|
|
Experience,
Qualifications,
Attributes, Skills
for Board
Membership
|
|
Kenneth A. Drucker
(1945)
|
|
Trustee
Since 2008 for Natixis Funds Trust II and Gateway Trust
Chairman of the Audit Committee
|
|
Retired
|
|
44
Formerly, Director, M Fund, Inc. (investment company); Director, Gateway Trust (investment company)
|
|
Significant experience on the Board and on the board of other business organizations (including at investment companies); executive experience (including as treasurer
of an aerospace, automotive, and metal manufacturing corporation)
|
|
|
|
|
|
|
|
Edmond J. English
3
(1953)
|
|
Trustee
Since 2013 for Natixis Funds Trust II and Gateway Trust
Contract Review and Governance Committee
Member
|
|
Chief Executive Officer of Bob’s Discount Furniture (retail)
|
|
44
Formerly, Director, BJ’s Wholesale Club (retail); formerly, Director, Citizens Financial Group (bank)
|
|
Significant experience on the board of other business organizations (including at a retail company and a bank); executive experience (including at a retail
company)
|
|
|
|
|
|
|
|
Wendell J. Knox
(1948)
|
|
Trustee
Since 2009 for Natixis Funds Trust II and Gateway Trust
Audit Committee Member
|
|
Director (formerly, President and Chief Executive Officer) of Abt Associates Inc. (research and consulting)
|
|
44
Director, Eastern Bank (commercial bank); Director, The Hanover Insurance Group (property and casualty insurance)
|
|
Significant experience on the Board and on the board of other business organizations (including at a commercial bank and at a property and casualty insurance firm);
executive experience (including roles as president and chief executive officer of a consulting company)
|
60
|
|
|
|
|
|
|
|
|
|
|
Name and Year of
Birth
|
|
Position(s) Held
with the Trusts,
Length of Time
Served and Term
of Office
1
|
|
Principal
Occupation(s)
During Past 5
Years
|
|
Number of
Portfolios in Fund
Complex Overseen
2
and Other
Directorships Held
During Past 5
Years
|
|
Experience,
Qualifications,
Attributes, Skills
for Board
Membership
|
|
Martin T.
Meehan
4
(1956)
|
|
Trustee
Since 2012 for Natixis Funds Trust II and Gateway Trust
Contract Review and Governance Committee
Member
|
|
Chancellor and faculty member, University of Massachusetts Lowell
|
|
44
None
|
|
Experience as Chancellor of the University of Massachusetts Lowell; experience on the board of other business organizations; government experience (including as a
member of the U.S. House of Representatives); academic experience
|
|
|
|
|
|
|
|
Sandra O. Moose
(1942)
|
|
Chairperson of the Board since November 2005
Trustee
Since 1993 for Natixis Funds Trust II and since 2007 for
Gateway Trust
Ex officio
member of the
Audit Committee and Contract Review and Governance Committee
|
|
President, Strategic Advisory Services (management consulting)
|
|
44
Director, Verizon Communications; Director, AES Corporation (international power company); formerly, Director, Rohm and Haas Company
(specialty chemicals)
|
|
Significant experience on the Board and on the board of other business organizations (including at an international power company and a specialty chemicals
corporation); executive experience (including at a management consulting company)
|
|
|
|
|
|
|
|
Erik R. Sirri
(1958)
|
|
Trustee
Since 2009 for Natixis Funds Trust II and Gateway Trust
Audit Committee
Member
|
|
Professor of Finance at Babson College; formerly, Director of the Division of Trading and Markets at the Securities and Exchange Commission
|
|
44
None
|
|
Experience on the Board; experience as Director of the Division of Trading and Markets at the Securities and Exchange Commission; academic experience; training as an
economist
|
61
|
|
|
|
|
|
|
|
|
|
|
Name and Year of
Birth
|
|
Position(s) Held
with the Trusts,
Length of Time
Served and Term
of Office
1
|
|
Principal
Occupation(s)
During Past 5
Years
|
|
Number of
Portfolios in Fund
Complex Overseen
2
and Other
Directorships Held
During Past 5
Years
|
|
Experience,
Qualifications,
Attributes, Skills
for Board
Membership
|
|
Peter J. Smail
(1952)
|
|
Trustee
Since 2009 for Natixis Funds Trust II and Gateway Trust
Contract Review and Governance Committee
Member
|
|
Retired; formerly, President and Chief Executive Officer of Pyramis Global Advisors (investment management)
|
|
44
None
|
|
Experience on the Board; mutual fund industry and executive experience (including roles as president and chief executive officer for an investment
adviser)
|
|
|
|
|
|
|
|
Cynthia L. Walker
(1956)
|
|
Trustee
Since 2005 for Natixis Funds Trust II and since 2007 for Gateway Trust
Audit Committee Member
|
|
Deputy Dean for Finance and Administration, Yale University School of Medicine; formerly, Executive Dean for Administration, Harvard Medical School
|
|
44
None
|
|
Significant experience on the Board; executive experience in a variety of academic organizations (including roles as dean for finance and
administration)
|
|
|
|
|
|
|
INTERESTED TRUSTEES
|
|
|
|
|
|
|
|
Robert J. Blanding
5
(1947)
555 California Street
San Francisco, CA 94104
|
|
Trustee
Since 2003 for Natixis Funds Trust II and since 2007 for Gateway Trust
|
|
President, Chairman, Director and Chief Executive Officer, Loomis, Sayles & Company, L.P.
|
|
44
None
|
|
Significant experience on the Board; continuing service as President, Chairman, and Chief Executive Officer of Loomis, Sayles & Company, L.P.
|
|
|
|
|
|
|
|
David L. Giunta
6
(1965)
|
|
Trustee
Since 2011 for Natixis Funds Trust II and Gateway Trust
President and Chief Executive Officer of Natixis Funds
Trust II and Gateway Trust since 2008
|
|
President and Chief Executive Officer, NGAM Distribution Corporation, NGAM Advisors, L.P. and NGAM Distribution, L.P.; formerly President, Fidelity Charitable Gift
Fund; and formerly, Senior Vice President, Fidelity Brokerage Company
|
|
44
None
|
|
Experience on the Board; continuing experience as President and Chief Executive Officer of NGAM Advisors, L.P.
|
62
|
|
|
|
|
|
|
|
|
|
|
Name and Year of
Birth
|
|
Position(s) Held
with the Trusts,
Length of Time
Served and Term
of Office
1
|
|
Principal
Occupation(s)
During Past 5
Years
|
|
Number of
Portfolios in Fund
Complex Overseen
2
and Other
Directorships Held
During Past 5
Years
|
|
Experience,
Qualifications,
Attributes, Skills
for Board
Membership
|
|
John T.
Hailer
7
(1960)
|
|
Trustee
Since 2000 for Natixis Funds Trust II and since 2007 for Gateway Trust
|
|
President and Chief Executive Officer – U.S. and Asia, Natixis Global Asset Management, L.P.; formerly, President and Chief Executive Officer, NGAM Distribution
Corporation, NGAM Advisors L.P. and NGAM Distribution, L.P.
|
|
44
None
|
|
Significant experience on the Board; continuing experience as Chief Executive Officer – U.S. and Asia, Natixis Global Asset Management, L.P.
|
|
1
|
Each trustee serves until retirement, resignation or removal from the Board. The current retirement age is 72. The position of Chairperson of the Board
is appointed for a two-year term. Ms. Moose was appointed to serve an additional two-year term as the Chairperson of the Board on November 18, 2011.
|
|
2
|
The trustees of the Trusts serve as trustees of a fund complex that includes all series of the Natixis Funds Trust I, Natixis Funds Trust II, Natixis
Funds Trust IV and Gateway Trust (collectively, the “Natixis Funds Trusts”), Loomis Sayles Funds I and Loomis Sayles Funds II (collectively, the “Loomis Sayles Funds Trusts”), and Hansberger International Series (collectively,
the “Fund Complex”).
|
|
3
|
Mr. English was appointed as a trustee effective January 1, 2013.
|
|
4
|
Mr. Meehan was appointed as a trustee effective July 1, 2012.
|
|
5
|
Mr. Blanding is deemed an “interested person” of the Trusts because he holds the following positions with an affiliated person of the
Trusts: President, Chairman, Director and Chief Executive Officer of Loomis, Sayles & Company, L.P.
|
|
6
|
Mr. Giunta is deemed an “interested person” of the Trusts because he holds the following positions with an affiliated person of the
Trusts: President and Chief Executive Officer of NGAM Distribution Corporation, NGAM Advisors, L.P. and NGAM Distribution, L.P.
|
|
7
|
Mr. Hailer is deemed an “interested person” of the Trusts because he holds the following positions with an affiliated person of the
Trusts: President and Chief Executive Officer – U.S. and Asia, Natixis Global Asset Management, L.P.
|
|
|
|
|
|
|
|
|
|
Name and Year of Birth
|
|
Position(s) Held with the
Trusts
|
|
Term of Office
1
and
Length of Time Served
|
|
Principal Occupation(s)
During Past 5 Years
2
|
|
OFFICERS OF THE TRUST
|
|
|
|
|
|
Coleen Downs Dinneen
(1960)
|
|
Secretary, Clerk and Chief Legal Officer
|
|
Since September 2004
|
|
Executive Vice President, General Counsel, Secretary and Clerk (formerly, Senior Vice President, Deputy General Counsel, Assistant Secretary and Assistant Clerk),
NGAM Distribution Corporation, NGAM Advisors, L.P. and NGAM Distribution, L.P.
|
|
|
|
|
|
|
Russell L. Kane
(1969)
|
|
Chief Compliance Officer,
Assistant Secretary and Anti-Money Laundering Officer
|
|
Chief Compliance Officer, since May 2006; Assistant Secretary since June 2004; and Anti-Money Laundering Officer since April 2007
|
|
Chief Compliance Officer for Mutual Funds, Senior Vice President, Deputy General Counsel, Assistant Secretary and Assistant Clerk, NGAM Distribution Corporation, NGAM
Advisors, L.P. and NGAM Distribution, L.P.
|
|
|
|
|
|
|
Michael C. Kardok
(1959)
|
|
Treasurer, Principal Financial and Accounting Officer
|
|
Since October 2004
|
|
Senior Vice President, NGAM Advisors, L.P. and NGAM Distribution, L.P.
|
63
|
1
|
Each officer of the Trusts serves for an indefinite term in accordance with the Trusts’ current by-laws until the date his or her successor is
elected and qualified, or until he or she sooner dies, retires, is removed or becomes disqualified.
|
|
2
|
Each person listed above holds the same position(s) with the Fund Complex. Previous positions during the past five years with NGAM Distribution, L.P.,
NGAM Advisors, L.P. or Loomis, Sayles & Company, L.P. are omitted, if not materially different from a trustee’s or officer’s current position with such entity.
|
Qualifications of Trustees
The
preceding tables provide an overview of the considerations that led the Board to conclude that each individual serving as a Trustee of the Trusts should so serve. The current members of the Board have joined the Board at different points in
time. Generally, no one factor was determinative in the original selection of an individual to join the Board. Among the factors the Board considered when concluding that an individual should serve on the Board were the following:
(i) the individual’s knowledge in matters relating to the mutual fund industry; (ii) any experience possessed by the individual as a director or senior officer of other public companies; (iii) the individual’s educational
background; (iv) the individual’s reputation for high ethical standards and personal and professional integrity; (v) any specific financial, technical or other expertise possessed by the individual, and the extent to which such
expertise would complement the Board’s existing mix of skills and qualifications; (vi) the individual’s perceived ability to contribute to the ongoing functions of the Board, including the individual’s ability and commitment to
attend meetings regularly and work collaboratively with other members of the Board; (vii) the individual’s ability to qualify as an Independent Trustee for purposes of applicable regulations; and (viii) such other factors as the Board
determined to be relevant in light of the existing composition of the Board and any anticipated vacancies or other transitions. Each Trustee’s professional experience and additional considerations that contributed to the Board’s conclusion
that an individual should serve on the Board are summarized in the tables above.
Leadership and Structure of the Board
The Board is led by the Chairperson of the Board, who is an Independent Trustee. The Board of Trustees of Gateway Trust currently consists of thirteen
trustees, ten of whom are Independent Trustees. The Board of Trustees of Natixis Funds Trust II currently consists of thirteen trustees, ten of whom are Independent Trustees. The Trustees have delegated significant oversight authority to the two
standing committees of the Trusts, the Audit Committee and Contract Review and Governance Committee, both of which consist solely of Independent Trustees. These committees meet separately and at times jointly, with the joint meetings intended to
educate and involve all Independent Trustees in significant committee-level topics. As well as handling matters directly, the committees raise matters to the Board for consideration. In addition to the oversight performed by the committees and the
Board, the Chairperson of the Board and the chairpersons of each committee interact frequently with management regarding topics to be considered at Board and committee meetings as well as items arising between meetings. At least once a year the
Board reviews its governance structure. The Board believes its leadership structure is appropriate and effective in that it allows for oversight at the committee or board level, as the case may be, while facilitating communications among the
Trustees and between the Board and Fund management.
The Contract Review and Governance Committee of the Trusts
consists solely of Trustees who are not employees, officers or directors of NGAM Advisors, the Distributor or their affiliates and considers matters relating to advisory, subadvisory and distribution arrangements, potential conflicts of interest
between a Fund’s Adviser and the Trusts, and governance matters relating to the Trusts. During the fiscal year ended November 30, 2012, this committee held five meetings. The Contract Review and Governance Committee also makes nominations
for Independent Trustee membership on the Board when necessary and considers recommendations from shareholders of the Funds that are submitted in accordance with the procedures by which shareholders may communicate with the Board. Pursuant to those
procedures, shareholders must submit a recommendation for nomination in a signed writing addressed to the attention of the Board, c/o Secretary of the Funds, NGAM Advisors, L.P., 399 Boylston Street, 12
th
Floor, Boston, MA 02116. This written communication must (i) be
signed by the shareholder, (ii) include the name and address of the shareholder, (iii) identify the Fund(s) to which the communication relates, and (iv) identify the account number, class and number of shares held by the shareholder
as of a recent date or the intermediary through which the shares are held. The recommendation must be received in a timely manner (and in any event no later than the date specified for receipt of shareholder proposals in any applicable proxy
statement with respect to the Funds). A recommendation for trustee nomination shall be kept on file and considered by the Board for six (6) months from the date of receipt, after which the recommendation shall be considered stale and discarded.
The recommendation must contain sufficient background information concerning the trustee candidate to enable a proper judgment to be made as to the candidate’s qualifications.
64
The Contract Review and Governance Committee has not established specific, minimum qualifications that must
be met by an individual to be recommended for nomination as an Independent Trustee. When identifying an individual to potentially fill a vacancy on a Fund’s Board, the Contract Review and Governance Committee may seek referrals from a variety
of sources, including current Trustees, management of the Trusts, Fund counsel, and counsel to the Trustees, as well as shareholders of the Funds in accordance with the procedures described above. In evaluating candidates for a position on the
Board, the Contract Review and Governance Committee may consider a variety of factors, including (i) the nominee’s knowledge of the mutual fund industry; (ii) any experience possessed by the nominee as a director or senior officer of
a financial services company or a public company; (iii) the nominee’s educational background; (iv) the nominee’s reputation for high ethical standards and personal and professional integrity; (v) any specific financial,
technical or other expertise possessed by the nominee, and the extent to which such expertise would complement the Board’s existing mix of skills and qualifications; (vi) the nominee’s perceived ability to contribute to the ongoing
functions of the Board, including the nominee’s ability and commitment to attend meetings regularly and work collaboratively with other members of the Board; (vii) the nominee’s ability to qualify as an Independent Trustee for
purposes of applicable regulations; and (viii) such other factors as the Committee may request in light of the existing composition of the Board and any anticipated vacancies or other transitions.
The Audit Committee of the Trusts consists solely of Independent Trustees and considers matters relating to the scope and results of the Trusts’
audits and serves as a forum in which the independent registered public accounting firm can raise any issues or problems identified in an audit with the Board. The Audit Committee also reviews and monitors compliance with stated investment
objectives and policies, SEC regulations as well as operational issues relating to the transfer agent, administrator, sub-administrator and custodian. In addition, the Audit Committee implements procedures for receipt, retention and treatment of
complaints received by the Fund regarding its accounting, internal accounting controls and the confidential, anonymous submission by officers of the Fund or employees of certain service providers of concerns related to such matters. During the
fiscal year ended November 30, 2012, this Committee held four meetings.
The current membership of each committee is as follows:
|
|
|
|
|
Audit Committee
|
|
Contract Review and Governance Committee
|
|
Kenneth A. Drucker – Chairman
|
|
Daniel M. Cain – Chairman
|
|
Wendell J. Knox
|
|
Charles D. Baker
|
|
Erik R. Sirri
|
|
Edmond J. English
|
|
Cynthia L. Walker
|
|
Martin T. Meehan
|
|
|
|
Peter J. Smail
|
As chairperson of the Board, Ms. Moose is an
ex officio
member of both committees.
The Board’s Role in Risk Oversight of the Funds
The Board’s role is one of oversight of the practices and processes of the Funds and their service providers, rather than active management of the Trusts, including in matters relating to risk
management. The Board seeks to understand the key risks facing the Funds, including those involving conflicts of interest; how Fund management identifies and monitors these risks on an ongoing basis; how Fund management develops and implements
controls to mitigate these risks; and how Fund management tests the effectiveness of those controls. The Board cannot foresee, know, or guard against all risks, nor are the Trustees guarantors against risk.
Because the Commodity Subsidiary is wholly-owned by the Growth Markets Fund, the Board has oversight responsibility for the Growth Markets Fund’s
investment in the Commodity Subsidiary and the role of the Growth Markets Fund as the sole shareholder of the Commodity Subsidiary. Like the Growth Markets Fund, the Commodity Subsidiary may retain service providers to conduct the Commodity
Subsidiary’s administrative and various other activities. As it is a sole shareholder of its wholly-owned Commodity Subsidiary, the Growth Markets Fund (and, thus indirectly, the Board) may indirectly cause certain service providers to be
selected for such Commodity Subsidiary.
Periodically, Fund officers provide the full Board with an overview of the enterprise risk assessment
program in place at NGAM Advisors and the Distributor, which serve as the administrator of and principal underwriter to the Funds, respectively. Fund officers on a quarterly and annual basis also provide the Board (or one of its standing
65
committees) with written and oral reports on regulatory and compliance matters, operational and service provider matters, organizational developments, product proposals, Fund and internal audit
results, and insurance and fidelity bond coverage, along with a discussion of the risks and controls associated with these matters, and periodically make presentations to management on risk issues and industry best practices. Fund service providers,
including Advisers, Subadvisers, transfer agents and the custodian, periodically provide Fund management and/or the Board with information about their risk assessment programs and/or the risks arising out of their activities. The scope and frequency
of these reports vary. Fund officers also communicate with the Trustees between meetings regarding material exceptions and other items germane to the Board’s risk oversight function.
Pursuant to Rule 38a-1 under the 1940 Act, the Board has appointed a Chief Compliance Officer (“CCO”) who is responsible for administering the Funds’ compliance program, including
monitoring and enforcing compliance by the Funds and their service providers with the federal securities laws. The CCO has an active role in daily Fund operations and maintains a working relationship with all relevant advisory, compliance,
operations and administration personnel for the Funds’ service providers. On at least a quarterly basis, the CCO reports to the Independent Trustees on significant compliance program developments, including material compliance matters, and on
an annual basis, the CCO provides the full Board with a written report that summarizes his review and assessment of the adequacy of the compliance programs of the Funds and their service providers. The CCO also periodically communicates with the
Audit Committee members between its scheduled meetings.
Fund Securities Owned by the Trustees
As of December 31, 2012, the Trustees had the following ownership in the following Funds:
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Range
of Fund
Shares
1
|
|
Charles
D. Baker
|
|
Daniel
M. Cain
2
|
|
Kenneth A.
Drucker
|
|
Edmond J.
English
3
|
|
Wendell J.
Knox
2
|
|
Martin T.
Meehan
|
|
Sandra O.
Moose
|
|
Erik R.
Sirri
|
|
Peter J.
Smail
|
|
Cynthia
L.
Walker
2
|
|
Capital Income Fund
4
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gateway International Fund
5
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth Markets Fund
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Select Fund
6
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Floating Rate and Fixed Income Fund
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Dollar Range of Fund Shares in All Funds Overseen by Trustee in the Fund Complex
|
|
D
|
|
E
|
|
E
|
|
E
|
|
E
|
|
C
|
|
E
|
|
E
|
|
E
|
|
E
|
B.
$1 – 10,000
C. $10,001 – $50,000
D. $50,001 – $100,000
E. over $100,000
|
2
|
Amounts include economic value of notional investments held through the deferred compensation plan.
|
|
3
|
Mr. English was appointed a trustee effective January 1, 2013.
|
|
4
|
The Capital Income Fund commenced operations on March 30, 2012.
|
|
5
|
The Gateway International Fund commenced operations on March 30, 2012.
|
|
6
|
The Select Fund commenced operations on June 29, 2012.
|
Interested Trustees
66
|
|
|
|
|
|
|
|
|
Dollar Range of Fund
Shares
1
|
|
Robert J. Blanding
|
|
David L. Giunta
|
|
John T. Hailer
|
|
Capital Income Fund
2
|
|
A
|
|
A
|
|
A
|
|
|
|
|
|
|
Gateway International Fund
3
|
|
A
|
|
A
|
|
A
|
|
|
|
|
|
|
Growth Markets Fund
|
|
A
|
|
A
|
|
A
|
|
|
|
|
|
|
Select Fund
4
|
|
A
|
|
A
|
|
A
|
|
|
|
|
|
|
Senior Floating Rate and Fixed Income Fund
|
|
A
|
|
A
|
|
A
|
|
|
|
|
|
|
Aggregate Dollar Range of Fund Shares in Funds Overseen by Trustee in the Trusts
|
|
E
|
|
E
|
|
E
|
B.
$1 – 10,000
C. $10,001 – $50,000
D. $50,001 – $100,000
E. over $100,000
|
2
|
The Capital Income Fund commenced operations on March 30, 2012.
|
|
3
|
The Gateway International Fund commenced operations on March 30, 2012.
|
|
4
|
The Select Fund commenced operations on June 29, 2012.
|
Trustee Fees
The Trusts pay no compensation to their officers or to Trustees who are
employees, officers or directors of NGAM Advisors, the Distributor, or their affiliates.
The Chairperson of the Board receives a retainer fee
at the annual rate of $285,000. The Chairperson does not receive any meeting attendance fees for Board of Trustees meetings or committee meetings that she attends. Each Trustee who is not an employee, officer or director of NGAM Advisors, the
Distributor or their affiliates (other than the Chairperson) receives, in the aggregate, a retainer fee at the annual rate of $115,000. Each Trustee who is not an employee, officer or director of NGAM Advisors, the Distributor or their affiliates
also receives a meeting attendance fee of $10,000 for each meeting of the Board that he or she attends in person and $5,000 for each meeting of the Board that he or she attends telephonically. In addition, each committee chairman receives an
additional retainer fee at the annual rate of $17,500. Each Contract Review and Governance Committee and Audit Committee member is compensated $6,000 for each Committee meeting that he or she attends in person and $3,000 for each committee meeting
that he or she attends telephonically. These fees are allocated among the mutual fund portfolios in the Natixis Funds Trusts, Loomis Sayles Funds Trusts, Hansberger International Series and Gateway Trust based on a formula that takes into account,
among other factors, the relative net assets of each mutual fund portfolio.
The table below shows the amounts received by the Trustees for
serving as a Trustee of the Trusts, and also for serving as Trustees of the Natixis Funds Trusts, Loomis Sayles Funds Trusts and Hansberger International Series during the fiscal year ended November 30, 2012. The table also sets forth, as
applicable, pension or retirement benefits accrued as part of fund expenses, as well as estimated annual retirement benefits:
Compensation Table
For the Fiscal Year Ended November 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
Compensation
from Natixis
Funds Trust II
1
|
|
|
Aggregate
Compensation
from Gateway
Trust
2
|
|
|
Pension or
Retirement
Benefits
Accrued as
Part of Fund
Expenses
|
|
|
Estimated
Annual
Benefits Upon
Retirement
|
|
|
Total
Compensation
from
the
Fund
Complex
3
|
|
|
INDEPENDENT TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graham T. Allison, Jr.
4
|
|
$
|
22,388
|
|
|
$
|
10,494
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
164,000
|
|
|
Charles D. Baker
|
|
$
|
24,364
|
|
|
$
|
11,672
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
180,000
|
|
|
Edward A. Benjamin
5
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Daniel M. Cain
|
|
$
|
26,220
|
|
|
$
|
12,695
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
195,000
|
|
|
Kenneth A Drucker
|
|
$
|
25,185
|
|
|
$
|
12,749
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
193,000
|
|
|
Edmond J. English
6
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
Compensation
from Natixis
Funds Trust II
1
|
|
|
Aggregate
Compensation
from Gateway
Trust
2
|
|
|
Pension or
Retirement
Benefits
Accrued as
Part of Fund
Expenses
|
|
|
Estimated
Annual
Benefits Upon
Retirement
|
|
|
Total
Compensation
from
the
Fund
Complex
3
|
|
|
Wendell J. Knox
|
|
$
|
25,106
|
|
|
$
|
12,081
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
186,000
|
|
|
Martin T. Meehan
7
|
|
$
|
10,012
|
|
|
$
|
5,833
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
79,500
|
|
|
Sandra O. Moose
|
|
$
|
13,183
|
|
|
$
|
23,048
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
265,000
|
|
|
Erik R. Sirri
|
|
$
|
24,364
|
|
|
$
|
11,672
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
180,000
|
|
|
Peter J. Smail
|
|
$
|
24,364
|
|
|
$
|
11,672
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
180,000
|
|
|
Cynthia L. Walker
|
|
$
|
25,106
|
|
|
$
|
12,081
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
186,000
|
|
|
|
|
|
|
|
|
|
INTERESTED TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert J. Blanding
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
David L. Giunta
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
John T. Hailer
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
1
|
Amounts include payments deferred by Trustees for the fiscal year ended November 30, 2012, with respect to the Trusts. The total amount of
deferred compensation accrued for Natixis Funds Trust II as of November 30, 2012 for the Trustees is as follows: Allison ($280,386), Cain ($73,856), Knox ($67,122), Meehan ($5,032), Sirri ($61,916) and Walker ($83,399).
|
|
2
|
Amounts include payments deferred by Trustees for the fiscal year ended November 30, 2012, with respect to the Trusts. The total amount of
deferred compensation accrued for Gateway Trust as of November 30, 2012 for the Trustees is as follows: Allison ($53,234), Cain ($14,239), Knox ($38,074), Meehan ($2,930), Sirri ($33,273) and Walker ($55,103).
|
|
3
|
Total Compensation represents amounts paid during the fiscal year ended November 30, 2012 to a Trustee for serving on the Board of seven
(7) trusts with a total of forty-five (45) funds as of November 30, 2012.
|
|
4
|
Mr. Allison retired from the Board of Trustees effective December 31, 2012.
|
|
5
|
Mr. Benjamin retired from the Board of Trustees effective December 31, 2011.
|
|
6
|
Mr. English was appointed as a trustee effective January 1, 2013.
|
|
7
|
Mr. Meehan was appointed as a trustee effective July 1, 2012.
|
The Natixis Funds Trusts and Loomis Sayles Funds Trusts do not provide pension or retirement benefits to Trustees, but have adopted a deferred payment
arrangement under which each Trustee may elect not to receive fees from the funds on a current basis but to receive in a subsequent period an amount equal to the value that such fees would have had if they had been invested in a fund or funds
selected by the Trustee on the normal payment date for such fees.
Management Ownership
As of March 1, 2013 the officers and Trustees of the Trusts collectively owned less than 1% of the then outstanding shares of each Fund and each
Trust.
Code of Ethics
The Trusts, their Advisers and Subadvisers, and the Distributor each have adopted a code of ethics under Rule 17j-1 of the 1940 Act. These codes of ethics permit the personnel of these entities to invest
in securities, including securities that the Funds may purchase or hold. The codes of ethics are on public file with, and are available from the SEC’s EDGAR database which can be accessed through www.sec.gov.
Proxy Voting Policies
The Board
of the Funds has adopted Proxy Voting Policy and Guidelines (the “Guidelines”) for the voting of proxies for securities held by the Funds. Under the Guidelines, decisions regarding the voting of proxies are to be made solely in the
interest of the Funds and their shareholders.
Information regarding how the Funds voted proxies related to their portfolio securities during
the 12-month period ending June 30, 2012 is available without charge (i) by calling toll-free at 800-225-5478, (ii) through the Funds’ website, ngam.natixis.com and (iii) on the SEC’s website at www.sec.gov.
NGAM Advisors.
Generally, proxy voting responsibilities and authority are delegated to the Select Fund’s Subadviser.
68
AlphaSimplex, Reich & Tang and Westpeak
Reich & Tang is responsible for voting proxies with respect to securities in the Money Market Portion of the Growth Markets Fund’s
portfolio. Westpeak is responsible for voting proxies with respect to securities in the equity portion of the Growth Markets Fund’s portfolio. AlphaSimplex is responsible for voting proxies with respect to securities other than those in the
equity portion and the Money Market Portion of the Growth Markets Fund’s portfolio. Each of Reich & Tang, Westpeak and AlphaSimplex is responsible for maintaining certain records and reporting to the Audit Committee of Natixis Funds
Trust II in connection with the voting of proxies.
AlphaSimplex.
AlphaSimplex believes that proxy voting is an important right of
shareholders and reasonable care and diligence must be undertaken to ensure that such rights are properly and timely exercised. However, AlphaSimplex expects that the securities in which it will invest on behalf of the Fund (
e.g.
, futures and
forwards) will not have voting rights, and therefore, AlphaSimplex does not expect to vote proxies for securities held by the Fund. If AlphaSimplex does vote proxies with respect to the Fund’s investments, it will vote in a manner that is
consistent with what it believes to be the best interests of the Fund.
Reich & Tang.
Reich & Tang has adopted Proxy
Voting Policies and Procedures that are designed to ensure that Reich & Tang votes proxies in the best interests of its clients. These policies and procedures also require that Reich & Tang identify and address any conflicts of
interest between the firm and its clients. If a material conflict of interest exists, then Reich & Tang will determine whether voting in accordance with the guidelines set forth in the policies and procedures is in the best interests of the
clients and, if not, it will take other appropriate action. Reich & Tang generally votes in favor of routine corporate housekeeping proposals, including the election of directors (where no corporate governance issues are implicated), and
against proposals that primarily benefit management. Generally, Reich & Tang will vote against proposals that make it more difficult to replace members of a board of directors.
Westpeak.
Westpeak’s proxy voting activities are carried out under the direction of its Proxy Committee, which consists of at least two Westpeak officers. Westpeak has engaged an independent
third-party service provider, Institutional Shareholder Services Inc. (“ISS”), as its proxy voting agent. The Proxy Committee has determined that, except as set forth below, proxies will be voted in accordance with the voting
recommendations contained in the applicable U.S. or International ISS Proxy Voting Guidelines (“the Proxy Voting Guidelines”). These guidelines identify proposals commonly presented to shareholders and are formulated by ISS based on input
from its institutional clients. The Proxy Voting Guidelines include a summary of the rationale for each guideline. On an annual basis, the Proxy Committee reviews a summary of the Proxy Voting Guidelines or policy updates in order to provide
reasonable assurance that the ISS recommendations continue to reflect the best interest of Westpeak’s clients.
The voting agent analyzes
each proxy issue using the Proxy Voting Guidelines. Since issues affecting the exercise of voting rights are not normally addressed in Westpeak’s quantitative investment process, the Proxy Committee generally determines to vote all shares in
accordance with the Proxy Voting Guidelines. The Proxy Committee may determine to vote shares contrary to the Proxy Voting Guidelines, but will only do so at a client’s specific direction or if it believes that voting in such manner is in the
best interest of Westpeak’s clients.
It is possible that actual or apparent conflicts may arise between Westpeak’s interests and
those of Westpeak’s clients in connection with the voting of proxies. To help ensure that all proxies are voted in the best interest of Westpeak’s clients, Westpeak’s Chief Compliance Officer reviews each case where the Proxy
Committee exercises discretion on a case-by-case basis (
e.g
., where the Proxy Committee determines to vote contrary to the Proxy Voting Guidelines) for material conflicts of interest. To facilitate this process, in the rare case in which the
Proxy Committee exercises discretion on a case-by-case basis, the Proxy Committee members with voting authority are directed to disclose to the Chief Compliance Officer if they have knowledge of any actual or apparent conflict of interest involving
Westpeak, or its officers or employees, in connection with such proxy.
If Westpeak’s Chief Compliance Officer determines that a material
conflict of interest exists with respect to a proxy, Westpeak may (i) notify the affected client of the conflict and seek such client’s proxy voting directions on the matter, (ii) seek voting instructions from an independent third
party, or (iii) vote the proxies without seeking instructions from the client or an independent third party, provided that the basis for Westpeak’s conclusion that the proxies were voted in the best interest of the client is documented in
writing.
69
Gateway
. Under the Guidelines, the responsibility for voting proxies generally is delegated to
Gateway. Under the Guidelines, decisions regarding the voting of proxies are to be made solely in the interest of the Fund and its shareholders. Gateway shall exercise its fiduciary responsibilities to vote proxies with respect to the Fund’s
investments that are managed by Gateway in a prudent manner in accordance with the Guidelines and the proxy voting policies of Gateway. Proposals that, in the opinion of Gateway, are in the best interests of shareholders are generally voted
“for” and proposals that, in the judgment of Gateway, are not in the best interests of shareholders are generally voted “against.” Gateway is responsible for maintaining certain records and reporting to the Audit Committee of the
Trusts in connection with the voting of proxies. Gateway shall make available to the Fund and the Fund’s administrator the records and information maintained by Gateway under the Guidelines.
Gateway has formally adopted ISS Governance Services (“ISS”) proxy voting guidelines to determine how each issue on proxy ballots is to be
voted and has appointed ISS (a subsidiary of RiskMetrics Group) as its proxy agent to recommend how to vote each proxy as well as administer the voting of proxies on behalf of Gateway. The Trustees review these proxy policies and voting procedures
on an annual basis. ISS has developed its US and International Proxy Voting Manual, which provides guidelines for proxy voting that are designed to serve the best interests of investors. These guidelines outline the rationale for determining how
particular issues should be voted. Gateway has instructed ISS to vote in accordance with the guidelines unless the following conditions apply:
|
|
•
|
|
Gateway’s portfolio management team has decided to override the ISS’s vote recommendation for the Fund based on its own determination that
the Fund’s shareholders would best be served with a vote contrary to the ISS recommendation. Such decision(s) are documented by Gateway and communicated to ISS and to the Board;
|
|
|
•
|
|
ISS does not give a vote recommendation, in which case Gateway will independently determine how a particular issue should be voted. In these instances,
Gateway, through its portfolio management team, documents the reason(s) used in determining a vote and communicates Gateway’s voting instruction to ISS. Gateway will generally seek to vote in accordance with ISS’s guidelines; or
|
|
|
•
|
|
If voting on any particular security compromises Gateway’s ability to later transact in such security or if, in Gateway’s judgment, the
expected cost associated with the vote exceeds the expected benefits of the vote (
e.g.
, non-U.S. security restrictions), then Gateway will abstain from voting on a particular security. For example, in some non-U.S. jurisdictions, the sale of
securities voted may be prohibited for some period of time, usually between the record and meeting dates (“share blocking”), and Gateway may determine that the loss of investment flexibility resulting from share blocking outweighs the
benefit to be gained voting.
|
Loomis Sayles. The Board of the Funds has adopted the Proxy Voting Policy and Procedures
(the “Procedures”) for the voting of proxies for securities held by the Funds advised by Loomis Sayles. Under the Procedures, the responsibility for voting proxies generally is delegated to Loomis Sayles, the investment adviser. Decisions
regarding the voting of proxies shall be made solely in the interest of such Funds and their shareholders. Loomis Sayles shall exercise its fiduciary responsibilities to vote proxies with respect to a Fund’s investments that are managed by
Loomis Sayles in a prudent manner in accordance with the Procedures and the proxy voting policies of Loomis Sayles. Proposals that, in the opinion of Loomis Sayles, are in the best interests of shareholders are generally voted “for” and
proposals that, in the judgment of Loomis Sayles, are not in the best interests of shareholders are generally voted “against.” Loomis Sayles is responsible for maintaining certain records and reporting to the Audit Committee of the Trusts
in connection with the voting of proxies. Upon request for reasonable periodic review as well as annual reporting to the SEC, Loomis Sayles shall make available to each such Fund, or NGAM Advisors, each such Fund’s administrator, the records
and information maintained by Loomis Sayles under the Procedures.
Loomis Sayles uses the services of third parties (“Proxy Voting
Service(s)”), to research and administer the vote on proxies for those accounts and funds for which Loomis Sayles has voting authority. One of Loomis Sayles’ Proxy Voting Services, Glass, Lewis & Company (“Glass Lewis”)
provides vote recommendations and/or analysis to Loomis Sayles based on Glass Lewis’ own research. Loomis Sayles will generally follow its express policy with input from Glass Lewis unless Loomis Sayles’ Proxy Committee (the “Proxy
Committee”) determines that the client’s best interests are served by voting otherwise.
All issues presented for shareholder
vote will be considered under the oversight of the Proxy Committee. All non-routine issues will be directly considered by the Proxy Committee and, when necessary, the equity analyst following the company and/or the portfolio manager of a Fund
advised by Loomis Sayles holding the security, and will be voted in the best investment interests of the Fund. All routine issues will be voted according to Loomis Sayles’
70
policy approved by the Proxy Committee unless special factors require that they be considered by the Proxy Committee and, when necessary, the equity analyst following the company and/or the
portfolio manager of a Fund holding the security. Loomis Sayles’ Proxy Committee has established these routine policies in what it believes are the best investment interests of Loomis Sayles’ clients.
The specific responsibilities of the Proxy Committee include (1) developing, authorizing, implementing and updating Loomis Sayles’ Procedures,
including an annual review of the Procedures, existing voting guidelines and the proxy voting process in general, (2) oversight of the proxy voting process including oversight of the vote on proposals according to the predetermined policies in
the voting guidelines, directing the vote on proposals where there is reason not to vote according to the predetermined policies in the voting guidelines or where proposals require special consideration, and consultation with the portfolio managers
and analysts for the Fund(s) advised by Loomis Sayles holding the security when necessary or appropriate and, (3) engagement and oversight of third-party vendors, including Proxy Voting Services.
Loomis Sayles has established several policies to ensure that proxy votes are voted in its clients’ best interest and are not affected by any
possible conflicts of interest. First, except in certain limited instances, Loomis Sayles votes in accordance with its pre-determined policies set forth in the Procedures. Second, where these Procedures allow for discretion, Loomis Sayles will
generally consider the recommendations of Glass Lewis in making its voting decisions. However, if the Proxy Committee determines that Glass Lewis’ recommendation is not in the best interest of its clients, then the Proxy Committee may use its
discretion to vote against Glass Lewis’ recommendation, but only after taking the following steps: (1) conducting a review for any material conflict of interest Loomis Sayles may have and, (2) if any material conflict is found to
exist, excluding anyone at Loomis Sayles who is subject to that conflict of interest from participating in the voting decision in any way. However, if deemed necessary or appropriate by the Proxy Committee after full prior disclosure of any
conflict, that person may provide information, opinions or recommendations on any proposal to the Proxy Committee. In such event the Proxy Committee will make reasonable efforts to obtain and consider, prior to directing any vote information,
opinions or recommendations from or about the opposing position on any proposal.
Information regarding how the Funds voted proxies
related to their respective portfolio securities during the 12-month period ended June 30, 2012 is available without charge through the Funds’ website ngam.natixis.com and www.loomissayles.com and on the SEC’s website at ww.sec.gov.
Vaughan Nelson.
Vaughan Nelson utilizes the services of a Proxy Service Provider to assist in voting proxies. Vaughan Nelson
undertakes to vote all client proxies in a manner reasonably expected to ensure the client’s best interest is upheld and in a manner that does not subrogate the client’s best interest to that of Vaughan Nelson’s in instances where a
material conflict exists. Vaughan Nelson has created a Proxy Voting Guideline (“Guideline”) believed to be in the best interest of clients relating to common and recurring issues found within proxy voting material. The Guideline is the
work product of Vaughan Nelson’s Investment Committee and it considers the nature of the firm’s business, the types of securities being managed and other sources of information including, but not limited to, research provided by an
independent research firm, internal research, published information on corporate governance and experience. The Guideline helps to ensure voting consistency on issues common amongst issuers and to serve as evidence that a vote was not the product of
a conflict of interest but rather a vote in accordance with a pre-determined policy. However, in many recurring and common proxy issues a “blanket voting approach” cannot be applied. In these instances the Guideline indicates that such
issues will be addressed on a case-by-case basis in consultation with a portfolio manager to determine how to vote the issue in the client’s best interest.
In executing its duty to vote proxies for the client, a material conflict of interest may arise. Vaughan Nelson does not envision a large number of situations where a conflict of interest would exist, if
any, between it and the client given the nature of its business, client base, relationships and the types of securities managed. Notwithstanding, if a conflict of interest arises Vaughan Nelson will undertake to vote the proxy or proxy issue in the
client’s continued best interest. This will be accomplished by either casting the vote in accordance with the Guideline, if the application of such policy to the issue at hand involves little discretion on Vaughan Nelson’s part, or casting
the vote as indicated by the independent third-party research firm.
Finally, there may be circumstances or situations that may preclude or
limit the manner in which a proxy is voted. These may include: 1) mutual funds – whereby voting may be controlled by restrictions within the fund or the actions of authorized persons, 2) international securities – whereby the perceived
benefit of voting an international
71
proxy does not outweigh the anticipated costs of doing so, 3) new accounts – instances where security holdings assumed will be sold in the near term thereby limiting any benefit to be
obtained by a vote of proxy material, 4) small combined holdings/unsupervised securities – where the firm does not have a significant holding or basis on which to offer advice, or 5) a security is out on loan.
INVESTMENT ADVISORY AND OTHER SERVICES
Information About the Organization and Ownership of the Advisers and Subadvisers
NGAM Advisors
, formed in 1995, is a limited partnership owned by Natixis Global Asset Management, L.P. (“Natixis US”).
Natixis US
is part of Natixis Global Asset Management, an international asset management group based in Paris, France, that is in turn owned by
Natixis, a French investment banking and financial services firm. Natixis is owned by BPCE, France’s second largest banking group. BPCE is owned by banks comprising two autonomous and complementary retail banking networks consisting of the
Caisse d’Epargne regional savings banks and the Banque Populaire regional cooperative banks. The registered address of Natixis is 30, avenue Pierre Mendès France, 75013 Paris, France. The registered address of BPCE is 50, avenue Pierre
Mendès France, 75013 Paris, France.
The 13 principal subsidiary or affiliated asset management firms of Natixis US collectively had
$353 billion in assets under management or administration as of December 31, 2012.
AlphaSimplex Group, LLC,
located at One
Cambridge Center, Cambridge, Massachusetts 02142, serves as investment adviser to the Growth Markets Fund. The Adviser, a Delaware limited liability company founded in 1999, served as investment manager, adviser, or subadviser with respect to assets
of $2.41 billion as of December 31, 2012. The Adviser currently acts as investment manager or subadviser of five registered investment companies and two privately-offered funds. AlphaSimplex, a registered investment adviser, is a subsidiary of
Natixis US.
Gateway Investment Advisers, LLC,
located at 312 Walnut Street, 35
th
Floor, Cincinnati, Ohio 45202, serves as Adviser to the Gateway
International Fund. The Adviser is a subsidiary of Natixis US. The Adviser is the successor in interest to Gateway Investment Advisers, L.P., which is in turn the successor in interest to an investment adviser organized in 1977. The Adviser had
approximately $10.5 billion in assets under management as of December 31, 2012. The Adviser makes investment decisions for the Gateway International Fund.
Loomis, Sayles & Company, L.P.,
located at One Financial Center, Boston, Massachusetts, 02111, serves as Adviser to the Capital Income Fund and the Senior Floating Rate and Fixed Income
Fund and is a subsidiary of Natixis US. Loomis Sayles is a registered investment adviser whose origins date back to 1926. An important feature of the Loomis Sayles investment approach is its emphasis on investment research. Recommendations and
reports of the Loomis Sayles research department are circulated throughout the Loomis Sayles organization and are available to the individuals in the Loomis Sayles organization who are responsible for making investment decisions for each of the
Capital Income Fund and the Senior Floating Rate and Fixed Income Fund portfolios as well as numerous other institutional and individual clients to which Loomis Sayles provides investment advice. Loomis Sayles is one of the oldest investment
advisory firms in the United States with over $186.1 billion in assets under management as of December 31, 2012.
Reich & Tang Asset Management, LLC,
located at 1411 Broadway, 28
th
Floor, New York, New York 10018, serves as Subadviser to the Growth
Markets Fund. The Subadviser, a Delaware limited liability company founded in 1970, served as investment manager, adviser, or subadviser with respect to assets aggregating approximately $11.9 billion as of December 31, 2012, and currently acts
as investment manager or subadviser of eleven registered investment companies of which it acts as administrator for five. Reich & Tang, a registered investment adviser, is also a subsidiary of Natixis US.
Vaughan Nelson Investment Management, Inc.,
was formed in 1970 and provides investment advisory services to foundations, university endowments,
corporate retirement plans and individuals. Vaughan Nelson is a limited partnership whose sole general partner, Vaughan Nelson Investment Management, Inc., is a wholly-owned subsidiary of Natixis US. Natixis US owns the entire limited partnership
interest in Vaughan Nelson. Vaughan Nelson had approximately $8.1 billion in assets under management as of December 31, 2012.
72
Westpeak Global Advisors, LLC,
located at 2575 Park Lane, Lafayette, Colorado 80026, serves as
Subadviser to the Growth Markets Fund. Westpeak had $104 million in assets under management as of December 31, 2012. Westpeak, a registered investment adviser, is principally owned and controlled by Khalid Ghayur, Ronan G. Heaney and Stephen C.
Platt, all executives of Westpeak.
Advisory and Subadvisory Agreements
Each Fund’s advisory agreement with its Adviser provides that the Adviser will furnish or pay the expenses of the applicable Fund for office space,
facilities and equipment, services of executive and other personnel of the Trusts and certain administrative services. The Adviser may delegate certain administrative services to its affiliates. The Adviser is responsible for obtaining and
evaluating such economic, statistical and financial data and information and performing such additional research as is necessary to manage the applicable Fund’s assets in accordance with its investment objectives and policies. In addition, the
Growth Markets Fund’s wholly-owned subsidiary has entered into a separate advisory agreement with the applicable Adviser that provides that the Adviser will be responsible for providing portfolio management services to the Growth Markets
Fund’s wholly-owned subsidiary, which the Adviser may delegate to one or more Subadvisers.
The Funds or their wholly-owned subsidiaries,
as the case may be, pay all expenses not borne by the Adviser or Subadviser including, but not limited to, the charges and expenses of custodian and transfer agents, independent registered public accountants and legal counsel for the Funds, their
wholly-owned subsidiaries and the Trusts’ Independent Trustees, 12b-1 fees, all brokerage commissions and transfer taxes in connection with portfolio transactions, all taxes and filing fees, the fees and expenses for registration or
qualification of their shares under federal and state securities laws, all expenses of shareholders’ and trustees’ meetings and of preparing, printing and mailing reports to shareholders and the compensation of trustees who are not
directors, officers or employees of the Adviser, Subadviser or their affiliates, other than affiliated registered investment companies. Certain expenses may be allocated differently among the Fund’s Class A and Class C shares, on the one
hand, and Class Y shares, on the other hand. See the section “Description of the Trusts” below.
The advisory agreements and
subadvisory agreements of the applicable Fund and the advisory agreements and subadvisory agreements of the applicable Fund’s wholly-owned subsidiary, respectively, provide that they will continue in effect for two years from the date of
execution and thereafter from year to year if their respective continuance is approved at least annually (i) by the Board or by vote of a majority of the outstanding voting securities of the Fund and (ii) by vote of a majority of the
Independent Trustees, cast in person at a meeting called for the purpose of voting on such approval.
The advisory agreements and subadvisory
agreement of the applicable Fund and the advisory agreement and subadvisory agreement of the applicable Fund’s wholly-owned subsidiary, respectively, may be terminated without penalty by vote of the Board or by vote of a majority of the
outstanding voting securities of the Fund, upon 60 days’ written notice, or by the Adviser upon 90 days’ written notice, and each terminates automatically in the event of its assignment (as defined in the 1940 Act). The subadvisory
agreement also may be terminated by the Subadviser upon 90 days’ notice, and automatically terminates upon termination of the advisory agreement.
The advisory agreement and subadvisory agreement of the applicable Fund and the advisory agreement and subadvisory agreement of the applicable Fund’s wholly-owned subsidiary, respectively, provide
that the Adviser or Subadviser shall not be subject to any liability in connection with the performance of their respective services thereunder in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of their
obligations and duties.
The Adviser oversees the portfolio management services provided to the applicable Fund and to the applicable
Fund’s wholly-owned subsidiary, respectively, by the Subadvisers. Subject to the review of the Board, the Adviser monitors the Subadvisers to assure that the Subadvisers are managing the applicable portions of the assets of the Growth Markets
Fund and its wholly-owned subsidiary consistently with the Fund’s investment objective and restrictions and applicable laws and guidelines, including, but not limited to, compliance with the diversification requirements set forth in the 1940
Act and Subchapter M of the Code. The Adviser will provide, or cause the Fund’s custodian and the custodian of its wholly-owned subsidiary to provide, information to the Subadviser regarding the composition of assets of the Growth Markets Fund
and the assets of its wholly-owned subsidiary and the assets to be invested and reinvested by the Subadviser. The Adviser does not determine which securities will be purchased or sold for the Growth Markets Fund or for its wholly-owned subsidiary
with respect to the Money Market Portion or
73
the emerging markets equity securities portion of the portfolio of the Growth Markets Fund or portion of the portfolio of its wholly-owned subsidiary, overseen by the Subadvisers.
The Adviser may terminate any subadvisory agreement without shareholder approval. In such case, the Adviser will either manage the Fund’s assets
itself or, subject to the receipt of any necessary shareholder approvals, retain one or more Subadvisers to manage some or all of the Fund’s assets.
Distribution Agreements and Rule 12b-1 Plans
Under a separate agreement with each
Fund, the Distributor serves as the principal distributor of each class of shares of the Funds. The Distributor’s principal business address is 399 Boylston Street, Boston, Massachusetts 02116. Under these agreements (the “Distribution
Agreements”), the Distributor conducts a continuous offering and is not obligated to sell a specific number of shares. The Distributor bears the cost of making information about the Funds available through advertising and other means and the
cost of printing and mailing Prospectuses to persons other than shareholders. The Funds pay the cost of registering and qualifying their shares under state and federal securities laws and distributing Prospectuses to existing shareholders.
The Distributor is paid by each Fund the service and distribution fees described in the Prospectuses. The Distributor may, at its discretion,
reallow the entire sales charge imposed on the sale of Class A and Class C shares of the Funds to investment dealers from time to time. The SEC is of the view that dealers receiving all or substantially all of the sales charge may be deemed
underwriters of each Fund’s shares.
Each of the Funds has adopted Rule 12b-1 plans (the “Plans”) for its Class A and
Class C shares which, among other things, permit it to pay the Distributor monthly fees out of its net assets. These fees consist of a service fee and a distribution fee. Any such fees that are paid by a distributor to securities dealers are known
as “trail commissions.” Pursuant to Rule 12b-1 under the 1940 Act, each Plan was approved by the shareholders of each Fund, and (together with the related Distribution Agreement) by the Board, including a majority of the Independent
Trustees of the Trusts.
Under the Plans, each Fund pays the Distributor a monthly service fee at an annual rate not to exceed 0.25% of each
Fund’s average daily net assets attributable to the Class A and Class C shares. In the case of Class C shares, the Distributor retains the first year’s service fee of 0.25% assessed against such shares. For Class A and, after the
first year, for Class C shares, the Distributor may pay up to the entire amount of this fee to securities dealers who are dealers of record with respect to each Fund’s shares, on a quarterly basis, unless other arrangements are made between the
Distributor and the securities dealer, for providing personal services to investors in shares of each Fund and/or the maintenance of shareholder accounts. This service fee will accrue to securities dealers of record immediately with respect to
reinvested income dividends and capital gain distributions of each Fund’s Class A shares.
The service fee on Class A shares
may be paid only to reimburse the Distributor for expenses of providing personal services to investors, including, but not limited to, (i) expenses (including overhead expenses) of the Distributor for providing personal services to investors in
connection with the maintenance of shareholder accounts and (ii) payments made by the Distributor to any securities dealer or other organization (including, but not limited to, any affiliate of the Distributor) with which the Distributor has
entered into a written agreement for this purpose, for providing personal services to investors and/or the maintenance of shareholder accounts, which payments to any such organization may be in amounts in excess of the cost incurred by such
organization in connection therewith.
Each Fund’s Class C shares also pay the Distributor a monthly distribution fee at an annual rate
of 0.75% of the average net assets of each Fund’s Class C shares. The Distributor retains the 0.75% distribution fee assessed against Class C shares during the first year of investment. After the first year for Class C shares, the Distributor
may pay up to the entire amount of this fee to securities dealers who are dealers of record with respect to each Fund’s shares, as distribution fees in connection with the sale of the Fund’s shares on a quarterly basis, unless other
arrangements are made between the Distributor and the securities dealer. As stated in the Prospectuses, investors will not be permitted to purchase $1,000,000 or more of Class C shares as a single investment per account.
Each Plan may be terminated by vote of a majority of the Independent Trustees, or by vote of a majority of the outstanding voting securities of the
relevant class of shares of the relevant Fund. Each Plan may be amended by vote of the relevant Trustees, including a majority of the relevant Independent Trustees, cast in person at a meeting
74
called for that purpose. Any change in any Plan that would materially increase the fees payable thereunder by the relevant class of shares of the relevant Fund requires approval by a vote of the
holders of a majority of such shares outstanding. The Trusts’ Trustees review quarterly a written report of such costs and the purposes for which such costs have been incurred. For so long as a Plan is in effect, selection and nomination of
those Trustees who are Independent Trustees of the Trusts shall be committed to the discretion of such Trustees.
Fees paid by Class A or
Class C shares of any Fund may indirectly support sales and servicing efforts relating to shares of the other series of the Natixis Funds Trusts or the Loomis Sayles Funds Trusts. In reporting its expenses to the Trustees, the Distributor itemizes
expenses that relate to the distribution and/or servicing of a single fund’s shares, and allocates other expenses among the relevant funds based on their relative net assets. Expenses allocated to each fund are further allocated among its
classes of shares annually based on the relative sales of each class, except for any expenses that relate only to the sale or servicing of a single class.
The Distributor has entered into selling agreements with investment dealers, including affiliates of the Distributor, for the sale of the Funds’ shares. As described in more detail below, the
Distributor, the Adviser and their affiliates may, at their expense, pay additional amounts to dealers who have selling agreements with the Distributor. Class Y shares of the Funds may be offered by registered representatives of certain affiliates
who are also employees of Natixis US and may receive compensation from the Adviser with respect to sales of Class Y shares.
The Distribution
Agreements may be terminated at any time on 60 days’ notice to the Distributor without payment of any penalty, by either vote of a majority of the outstanding voting securities or by vote of a majority of the Independent Trustees. The
Distribution Agreements may be terminated at any time on 90 days’, written notice to the Trusts, without payment of any penalty.
The
Distribution Agreements and the Plans will continue in effect for successive one-year periods, provided that each such continuance is specifically approved (i) by the vote of a majority of the Independent Trustees cast in person at a meeting
called for that purpose and (ii) by the vote of the Board or by a vote of a majority of the outstanding securities of a Fund (or the relevant class, in the case of the Plans).
With the exception of the Distributor, its affiliated companies and those Trustees that are not Independent Trustees, no interested person of the Trusts or any Trustee of the Trusts had any direct or
indirect financial interest in the operation of the Plans or any related agreement. Benefits to the Funds and their shareholders resulting from the Plans are believed to include (1) enhanced shareholder service, (2) asset retention, and
(3) enhanced portfolio management opportunities and bargaining position with third-party service providers and economies of scale arising from having asset levels higher than they would be if the Plans were not in place.
The Distributor also acts as principal distributor for Natixis Funds Trust I, Natixis Funds Trust IV, Loomis Sayles Funds I, Loomis Sayles Funds II and
Hansberger International Series. The address of the Distributor is 399 Boylston Street, Boston, Massachusetts 02116.
The portion of the
various fees and expenses for Class A and Class C shares that are paid (reallowed) to securities dealers are shown below:
Capital
Income Fund, Gateway International Fund, Growth Markets Fund and Select Fund
Class A
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Investment
|
|
Maximum Sales
Charge Paid by
Investors
(% of offering price)
|
|
|
Maximum
Reallowance or
Commission
(% of offering price)
|
|
|
Maximum First Year
Service Fee
(% of net investment)
|
|
|
Maximum First
Year Compensation
(% of offering price)
|
|
|
Less than $50,000
|
|
|
5.75
|
%
|
|
|
5.00
|
%
|
|
|
0.25
|
%
|
|
|
5.25
|
%
|
|
$50,000 – $99,999
|
|
|
4.50
|
%
|
|
|
4.00
|
%
|
|
|
0.25
|
%
|
|
|
4.25
|
%
|
|
$100,000 – $249,999
|
|
|
3.50
|
%
|
|
|
3.00
|
%
|
|
|
0.25
|
%
|
|
|
3.25
|
%
|
|
$250,000 – $499,999
|
|
|
2.50
|
%
|
|
|
2.15
|
%
|
|
|
0.25
|
%
|
|
|
2.40
|
%
|
|
$500,000 – $999,999
|
|
|
2.00
|
%
|
|
|
1.70
|
%
|
|
|
0.25
|
%
|
|
|
1.95
|
%
|
|
|
|
Investments of $1 Million or More
(1)
|
|
|
First $3 million
|
|
|
None
|
|
|
|
1.00
|
%
|
|
|
0.25
|
%
|
|
|
1.25
|
%
|
|
Excess over $3 million
|
|
|
None
|
|
|
|
0.50
|
%
|
|
|
0.25
|
%
|
|
|
0.75
|
%
|
|
|
|
|
|
|
|
Investments with No Sales Charge
(2)
|
|
|
None
|
|
|
|
0.00
|
%
|
|
|
0.25
|
%
|
|
|
0.25
|
%
|
|
(1)
|
Commissions are based on cumulative investments over the life of the account with no adjustment for redemptions, transfers or market declines. For example, if a
shareholder has accumulated investments in excess of $3 million and subsequently redeems all or a portion of the account(s), purchases following the redemption will generate a dealer commission of 0.50%.
|
|
(2)
|
Refers to any investments made by investors not subject to a sales charge as described in the Prospectus in the section “How Sales Charges Are Calculated.”
|
Class C
Class
C service fees are payable regardless of the amount of the Distributor’s related expenses. The portion of the various fees and expenses for Class C shares of the Fund that are paid to securities dealers are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
Maximum Front-
End Sales Charge
Paid by
Investors
(% of offering price)
|
|
|
Maximum
Reallowance or
Commission
(% of offering price)
|
|
|
Maximum First Year
Service Fee
(% of net investment)
|
|
|
Maximum First
Year Compensation
(% of offering price)
|
|
|
All amounts for Class C
|
|
|
None
|
|
|
|
1.00
|
%
|
|
|
0.00
|
%
|
|
|
1.00
|
%
|
Senior Floating Rate and Fixed Income Fund
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
Maximum Sales
Charge Paid by
Investors
(% of offering price)
|
|
|
Maximum
Reallowance or
Commission
(% of offering price)
|
|
|
Maximum
First Year
Service Fee
(% of net investment)
|
|
|
Maximum First
Year Compensation
(% of offering price)
|
|
|
Less than $100,000
|
|
|
3.50
|
%
|
|
|
3.00
|
%
|
|
|
0.25
|
%
|
|
|
3.25
|
%
|
|
$100,000 – $249,999
|
|
|
3.00
|
%
|
|
|
2.70
|
%
|
|
|
0.25
|
%
|
|
|
2.95
|
%
|
|
$250,000 – $499,999
|
|
|
2.25
|
%
|
|
|
1.95
|
%
|
|
|
0.25
|
%
|
|
|
2.20
|
%
|
|
$500,000 – $999,999
|
|
|
1.75
|
%
|
|
|
1.45
|
%
|
|
|
0.25
|
%
|
|
|
1.70
|
%
|
|
|
|
Investments of $1 million or more
(1)
|
|
|
First $3 million
|
|
|
None
|
|
|
|
1.00
|
%
|
|
|
0.25
|
%
|
|
|
1.25
|
%
|
|
Excess over $3 million
|
|
|
None
|
|
|
|
0.50
|
%
|
|
|
0.25
|
%
|
|
|
0.75
|
%
|
|
|
|
|
|
|
|
Investments with No Sales Charge
(2)
|
|
|
None
|
|
|
|
0.00
|
%
|
|
|
0.25
|
%
|
|
|
0.25
|
%
|
|
(1)
|
Commissions are based on cumulative investments over the life of the account with no adjustment for redemptions, transfers or market declines. For example, if a
shareholder has accumulated investments in excess of $3 million and subsequently redeems all or a portion of the account(s), purchases following the redemption will generate a dealer commission of 0.50%.
|
|
(2)
|
Refers to any investments made by investors not subject to a sales charge as described in the Prospectus in the section “How Sales Charges Are Calculated.”
|
Class C
76
Class C service fees are payable regardless of the amount of the Distributor’s related expenses. The
portion of the various fees and expenses for Class C shares of the Fund that are paid to securities dealers are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
Maximum Front-
End Sales Charge
Paid by
Investors
(% of offering price)
|
|
|
Maximum
Reallowance or
Commission
(% of offering price)
|
|
|
Maximum First Year
Service Fee
(% of net investment)
|
|
|
Maximum First
Year Compensation
(% of offering price)
|
|
|
All amounts for Class C
|
|
|
None
|
|
|
|
1.00
|
%
|
|
|
0.00
|
%
|
|
|
1.00
|
%
|
As described in the Prospectus, each purchase or sale of shares is effected at the NAV next determined after an order is
received, less any applicable sales charge. The sales charge is allocated between the investment dealer and the Distributor, as indicated in the tables above. The Distributor receives the contingent deferred sales charge (the “CDSC”).
Proceeds from the CDSC on Class A and C shares are paid to the Distributor and are used by the Distributor to defray the expenses for services the Distributor provides the Trusts. The Distributor may, at its discretion, pay (reallow) the entire
sales charge imposed on the sale of Class A shares to investment dealers from time to time.
For new amounts invested at NAV by an
eligible governmental authority, the Distributor may, at its expense, pay investment dealers a commission of 0.025% of the average daily net assets of an account at the end of each calendar quarter for up to one year. These commissions are not
payable if the purchase represents the reinvestment of redemption proceeds from any other Natixis Fund or if the account is registered in street name.
The Funds may pay fees to intermediaries such as banks, broker-dealers, financial advisors or other financial institutions for sub-administration, sub-transfer agency and other services, including, but
not limited to, recordkeeping, shareholder or participant reporting or shareholder or participant recordkeeping (“recordkeeping and processing-related services”) associated with shareholders whose shares are held of record in omnibus,
other group accounts (for example, 401(k) plans) or accounts traded through registered securities clearing agents. These fees are paid directly or indirectly by the Funds in light of the fact that other costs may be avoided by the Funds where the
intermediary, not the Funds’ service providers, provides shareholder services to Fund shareholders. The intermediary may impose other account or service charges directly on account holders or participants. In addition, depending on the
arrangements, the Funds’ Advisers and/or Distributor or their affiliates may, out of their own resources, compensate such financial intermediaries or their agents directly or indirectly for such recordkeeping and processing-related services.
The services provided and related payments vary from firm to firm.
The Distributor, each Adviser and their affiliates may out of their own
resources make additional payments to financial intermediaries who sell shares of the Funds. Such payments and compensation are in addition to any fees paid or reimbursed by the Funds. These payments may include: (i) full reallowance of the
sales charge of Class A shares, (ii) additional compensation with respect to the sale and/or servicing of Class A, C and Y shares, (iii) payments based upon various factors, as described below, and (iv) financial assistance
programs to firms who sell or arrange for the sale of Fund shares including, but not limited to, marketing and sales fees, expenses related to advertising or promotional activity and events, and shareholder record keeping, sub-transfer agency or
miscellaneous administrative services. From its own profits and resources, the Distributor may, from time to time, make payments to qualified wholesalers, registered financial institutions and third-party marketers for marketing support services
and/or retention of assets. Among others, the Distributor has agreed to make such payments for marketing support services to AXA Advisors, LLC. In addition to marketing and/or financial support payments described above, payment for travel, lodging
and related expenses may be provided for attendance at Fund seminars and conferences,
e.g.
, due diligence meetings held for training and educational purposes. The Distributor intends that the payment of these concessions and any other
compensation offered will conform with state and federal laws and the rules of any self-regulatory organization, such as the Financial Industry Regulatory Authority (“FINRA”). The participation of such firms in financial assistance
programs is at the discretion of the firm and the Distributor. The payments described in (iii) above may be based on sales (generally ranging from 0.05% to 0.25% of gross sales) and/or the amount of assets a financial intermediary’s
clients have invested in the Funds (at annual rates generally ranging from 0.05% to 0.35% of the value of the clients’ shares). The actual payment rates to a financial intermediary will depend upon how the particular arrangement is structured
(
e.g.
, solely asset-based fees, solely sales-based fees or a combination of both) and other factors such as the length of time assets have remained invested in the Fund, redemption rates and the willingness of the financial intermediary to
provide access to its
77
representatives for educational and marketing purposes. The payments to financial intermediaries described in this section and elsewhere in this Statement, which may be significant to the
financial intermediaries, may create an incentive for a financial intermediary or its representatives to recommend or sell shares of the Funds or particular share class over other mutual funds or share classes. Additionally, these payments may
result in the Funds’ inclusion on a sales list, including a preferred or select sales list, or in other sales programs. Investors should contact their financial representative for details about the payment the financial intermediaries may
receive.
From time to time, the Funds’ service providers, or any of their affiliates, may also pay non-cash compensation to the sales
representatives of financial intermediaries in the form of (i) occasional gifts; (ii) occasional meals, tickets or other entertainment; and/or (iii) sponsorship support of regional events of intermediaries.
Dealers may charge their customers a processing fee or service fee in connection with the purchase or redemption of fund shares. The amount and
applicability of such a fee is determined and disclosed by each individual dealer to its customers. Processing or service fees typically are fixed, nominal dollar amounts and are in addition to the sales and other charges described in the
Funds’ Prospectuses and this Statement. Customers will be provided with specific information about any processing or service fees charged by their dealer.
The commissions and sales charges for the fiscal period ended November 30, 2012 were allocated as follows:
|
|
|
|
|
|
|
NATIXIS FUNDS TRUST II
1
|
|
|
|
|
|
Total commissions on sales of Class A shares
|
|
$
|
113,761
|
|
|
Amount reallowed to other securities dealers
|
|
$
|
99,612
|
|
|
Amount retained by Distributor
|
|
$
|
14,149
|
|
|
|
|
|
Total CDSCs on redemptions of Classes A and C shares
|
|
$
|
877
|
|
|
Amount retained by Distributor
|
|
$
|
877
|
|
|
1
|
See the section “Other Arrangements” for information about amounts received by the Distributor from the Trusts’ investment advisers and
subadvisers or the Funds directly for providing certain administrative services relating to the Trusts.
|
|
|
|
|
|
|
|
GATEWAY TRUST
1
|
|
|
|
|
|
Total commissions on sales of Class A shares
|
|
$
|
2,303
|
|
|
Amount reallowed to other securities dealers
|
|
$
|
2,000
|
|
|
Amount retained by Distributor
|
|
$
|
303
|
|
|
|
|
|
Total CDSCs on redemptions of Classes A and C shares
|
|
$
|
0
|
|
|
Amount retained by Distributor
|
|
$
|
0
|
|
|
1
|
See the section “Other Arrangements” for information about amounts received by the Distributor from the Trusts’ investment advisers and
subadvisers or the Funds directly for providing certain administrative services relating to the Trusts.
|
OTHER ARRANGEMENTS
Administrative Services
NGAM Advisors performs certain accounting and administrative services for
the Funds, pursuant to an Administrative Services Agreement dated January 1, 2005, as amended from time to time (the “Administrative Agreement”). Under the Administrative Agreement, NGAM Advisors provides the following services to the
Funds: (i) personnel that perform bookkeeping, accounting, internal auditing and financial reporting functions and clerical functions relating to the Funds, (ii) services required in connection with the preparation of registration
statements and prospectuses, registration of shares in various states, shareholder reports and notices, proxy solicitation material furnished to shareholders of the Funds or regulatory authorities and reports and questionnaires for SEC compliance,
(iii) the various registrations and filings required by various regulatory authorities, and (iv) consultation and legal advice on Fund-related matters. NGAM Advisors also provides certain administrative services to the wholly-owned
subsidiary of the Growth Markets Fund.
For these services, NGAM Advisors received the following fees from the Funds for the fiscal year ended
November 30, 2012:
78
|
|
|
|
|
|
|
Fund
|
|
2012 Fees
|
|
|
Capital Income Fund
1
|
|
$
|
5,255
|
|
|
Gateway International Fund
2
|
|
$
|
7,253
|
|
|
Growth Markets Fund
|
|
$
|
11,694
|
*
|
|
Select Fund
3
|
|
$
|
1,446
|
|
|
Senior Floating Rate and Fixed Income Fund
|
|
$
|
28,979
|
|
|
1
|
The Capital Income
Fund commenced operations on March 30, 2012.
|
|
2
|
The Gateway
International Fund commenced operations on March 30, 2012.
|
|
3
|
The Select Fund commenced operations on June 29, 2012.
|
|
*
|
Includes administrative services fees of the Commodity Subsidiary.
|
Custodial Arrangements
State Street Bank and Trust Company (“State Street Bank”), One Lincoln Street, Boston, Massachusetts 02111, serves as the custodian for the Trusts. As such,
State Street Bank holds in safekeeping certificated securities and cash belonging to the Funds and, in such capacity, is the registered owner of securities in book-entry form belonging to the Funds. Upon instruction, State Street Bank receives and
delivers cash and securities of the Funds in connection with Fund transactions and collects all dividends and other distributions made with respect to Fund portfolio securities. State Street Bank also maintains certain accounts and records of the
Trusts and calculates the total NAV, total net income and NAV per share of the Funds on a daily basis. The wholly-owned subsidiary of the Growth Markets Fund also custodies its assets with State Street Bank. State Street Cayman Trust Company, Ltd.
provides transfer agent and certain sub-administrative services to the wholly-owned subsidiary of the Growth Markets Fund.
Agent for
Service of Process for Wholly-Owned Subsidiary
ASG Growth Markets Cayman Fund Ltd. (a wholly-owned subsidiary of Growth Markets Fund) has appointed CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011, as agent in
the United States for service of process in any suit, action or proceeding before the SEC or any appropriate court.
Transfer Agency
Services
Pursuant to a contract between the Trusts, on behalf of the Funds, and Boston Financial Data Services, Inc. (“Boston Financial” or the “Transfer Agent”), whose principal business address is 2000 Crown Colony
Drive, Quincy, Massachusetts 02169, Boston Financial acts as shareholder servicing and transfer agent for the Funds and is responsible for services in connection with the establishment, maintenance and recording of shareholder accounts, including
all related tax and other reporting requirements and the implementation of investment and redemption arrangements offered in connection with the sale of the Funds’ shares.
From time to time, the Funds, directly or indirectly through arrangements with the Adviser or Transfer Agent, may pay amounts to third parties that provide recordkeeping and other administrative services
relating to a Fund to persons who beneficially own interests in the Fund, such as shareholders whose shares are held of record in omnibus, other group accounts (for example, 401(k) plans) or accounts traded through registered securities clearing
agents. See the section “Distribution Agreements and Rule 12b-1 Plans.”
Independent Registered Public Accounting
Firm
The Trusts’ independent registered public accounting firm is PricewaterhouseCoopers LLP, located at 125 High Street, Boston, MA 02110. The independent registered public accounting firm assists in the review of federal and state
income tax returns, consults with the Trusts as to matters of accounting and federal and state income taxation and will conduct an annual audit of the Funds’ financial statements.
Counsel to the Funds
Ropes & Gray LLP, located at Prudential Tower, 800 Boylston Street, Boston, Massachusetts 02199, serves as counsel to the Funds.
PORTFOLIO MANAGEMENT INFORMATION
Portfolio Managers’ Management of Other Accounts
As of November 30, 2012, the
portfolio managers of the Funds managed other accounts in addition to managing one or more of the Funds. The following table provides information on the other accounts managed by each portfolio manager.
79
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Registered Investment Companies
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Other Pooled Investment Vehicles
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Other Accounts
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Other Accounts
Managed
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Advisory Fee
is Based on
Performance
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Other Accounts
Managed
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Advisory Fee is
Based on
Performance
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Other Accounts
Managed
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Advisory Fee is
Based on
Performance
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Name of Portfolio Manager
|
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# of
Accts
|
|
|
Total
Assets
|
|
# of
Accts
|
|
|
Total
Assets
|
|
|
# of
Accts
|
|
|
Total
Assets
|
|
# of
Accts
|
|
|
Total
Assets
|
|
# of
Accts
|
|
|
Total
Assets
|
|
# of
Accts
|
|
|
Total
Assets
|
|
Dennis G. Alff
|
|
|
2
|
|
|
$203
million
|
|
|
0
|
|
|
|
$0
|
|
|
|
1
|
|
|
$83
million
|
|
|
0
|
|
|
$0
|
|
|
63
|
|
|
$790
million
|
|
|
0
|
|
|
$0
|
|
Arthur J. Barry
|
|
|
5
|
|
|
$1.8
billion
|
|
|
0
|
|
|
|
$0
|
|
|
|
1
|
|
|
$162.9
million
|
|
|
0
|
|
|
$0
|
|
|
125
|
|
|
$3.0
billion
|
|
|
0
|
|
|
$0
|
|
John R. Bell
|
|
|
1
|
|
|
$144.2
million
|
|
|
0
|
|
|
|
$0
|
|
|
|
5
|
|
|
$3.1
billion
|
|
|
0
|
|
|
$0
|
|
|
62
|
|
|
$1.6
billion
|
|
|
2
|
|
|
$719.5
million
|
|
Michael T. Buckius
|
|
|
4
|
|
|
$7.8
billion
|
|
|
0
|
|
|
|
$0
|
|
|
|
1
|
|
|
$18
million
|
|
|
0
|
|
|
$0
|
|
|
15
|
|
|
$1,084
million
|
|
|
0
|
|
|
$0
|
|
Jeremiah H. Chafkin
|
|
|
4
|
|
|
$2.4
billion
|
|
|
0
|
|
|
|
$0
|
|
|
|
2
|
|
|
$139
million
|
|
|
2
|
|
|
$139
million
|
|
|
5
|
|
|
$701
million
2
|
|
|
0
|
|
|
$0
|
|
Daniel J. Fuss
|
|
|
15
|
|
|
$55.5
billion
|
|
|
0
|
|
|
|
$0
|
|
|
|
7
|
|
|
$2.3
billion
|
|
|
0
|
|
|
$0
|
|
|
184
|
|
|
$22.3
billion
|
|
|
2
|
|
|
$370
million
|
|
Khalid Ghayur
1
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
|
$0
|
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
$0
|
|
|
1
|
|
|
$85.3
million
|
|
|
0
|
|
|
$0
|
|
Alexander D. Healy
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
|
$0
|
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
$0
|
|
|
5
|
|
|
$701
million
2
|
|
|
0
|
|
|
$0
|
|
Warren N. Koontz
|
|
|
7
|
|
|
$2.8
billion
|
|
|
0
|
|
|
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$0
|
|
|
|
3
|
|
|
$193.2
million
|
|
|
1
|
|
|
$24.4
million
|
|
|
123
|
|
|
$3.0
billion
|
|
|
0
|
|
|
$0
|
|
Andrew W. Lo
|
|
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4
|
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$2.4
billion
|
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0
|
|
|
|
$0
|
|
|
|
2
|
|
|
$139
million
|
|
|
2
|
|
|
$139
million
|
|
|
5
|
|
|
$701
million
2
|
|
|
0
|
|
|
$0
|
|
Kevin J. Perry
|
|
|
1
|
|
|
$144.2
million
|
|
|
0
|
|
|
|
$0
|
|
|
|
5
|
|
|
$3.1
billion
|
|
|
0
|
|
|
$0
|
|
|
65
|
|
|
$1.6
billion
|
|
|
2
|
|
|
$719.5
million
|
|
Stephen C. Platt
1
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
|
$0
|
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
$0
|
|
|
1
|
|
|
$85.3
million
|
|
|
0
|
|
|
$0
|
|
Robert S. Rickard
|
|
|
11
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|
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$12
billion
|
|
|
0
|
|
|
|
$0
|
|
|
|
4
|
|
|
$950
million
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
$0
|
|
Kenneth H. Toft
|
|
|
2
|
|
|
$1.2
billion
|
|
|
$0
|
|
|
|
0
|
|
|
|
0
|
|
|
$0
|
|
|
0
|
|
|
$0
|
|
|
9
|
|
|
$245
million
|
|
|
0
|
|
|
$0
|
|
Chris D. Wallis
|
|
|
9
|
|
|
$1.2
billion
|
|
|
0
|
|
|
|
$0
|
|
|
|
4
|
|
|
$110
million
|
|
|
0
|
|
|
$0
|
|
|
249
|
|
|
$3.7
billion
|
|
|
1
|
|
|
$305
million
|
|
Scott J. Weber
|
|
|
9
|
|
|
$1.2
billion
|
|
|
0
|
|
|
|
$0
|
|
|
|
4
|
|
|
$110
million
|
|
|
0
|
|
|
$0
|
|
|
249
|
|
|
$3.7
billion
|
|
|
1
|
|
|
$305
million
|
|
1
|
All portfolios are managed on a team basis.
|
|
2
|
Includes notional value.
|
Material Conflicts of Interest
Conflicts of interest may arise in the allocation of investment opportunities and the allocation of aggregated orders among the Funds and other accounts
managed by a portfolio manager. A portfolio manager potentially could give favorable treatment to some accounts for a variety of reasons, including favoring larger accounts, accounts that pay higher fees, accounts that pay performance-based
fees, accounts of affiliated companies and accounts in which the portfolio manager has an interest. Such favorable treatment could lead to more favorable investment opportunities or allocations for some accounts. Each Adviser and
Subadviser has adopted policies and procedures to mitigate the effects of these conflicts. For more information on how each Adviser and Subadviser allocates investment opportunities between the Funds and their other clients, see the section
“Allocation of Investment Opportunity Among the Funds and Other Investments Managed by the Advisers and/or Subadvisers” in this Statement. Conflicts of interest also may arise to the extent a portfolio manager short sells a stock in one
client account but holds that stock long in other accounts, including the Funds, or sells a stock for some accounts while buying the stock for others, and through the use of “soft dollar arrangements,” which are discussed in the section
“Portfolio Transactions and Brokerage.”
Portfolio Managers’ Compensation
The following describes the structure of, and the method used to determine, the compensation of each of the above-listed portfolio managers as of
November 30, 2012:
80
AlphaSimplex.
All AlphaSimplex investment professionals, including portfolio managers, may receive
compensation in three ways: salary, year-end bonuses, and supplemental bonuses. The bonus amounts are decided by the AlphaSimplex Compensation Committee. As a retention tool, AlphaSimplex has implemented a three-year deferral of 30% of bonus amounts
for senior professionals.
Gateway.
The compensation of the portfolio managers consists of a fixed salary, incentive compensation
related to the financial performance of Gateway (but not based on the investment performance of any of the Funds or any other managed account, either absolutely or in relation to any benchmark), retention incentives and a retirement plan. The
portfolio managers are parties to employment agreements that provide for automatic renewals for successive one-calendar-year periods and, among other things, a specified base salary, retention incentives, and certain undertakings not to compete with
the Adviser or solicit its clients. For Messrs. Buckius and Toft, the non-competition and non-solicitation undertakings will expire the later of one year from the termination of employment, or one year after the period during which severance
payments are made pursuant to the agreement. The incentive compensation plan applicable to the portfolio managers, provides for both a long-term incentive pool and a short-term incentive pool, the sizes of which are determined based on
profitability of Gateway.
Loomis Sayles.
Loomis Sayles believes that portfolio manager compensation should be driven primarily by the
delivery of consistent and superior long-term performance for its clients. Portfolio manager compensation is made up primarily of three main components: base salary, variable compensation and a long-term incentive program. Although portfolio manager
compensation is not directly tied to assets under management, a portfolio manager’s base salary and/or variable compensation potential may reflect the amount of assets for which the manager is responsible relative to other portfolio managers.
Loomis Sayles also offers a profit sharing plan. Base salary is a fixed amount based on a combination of factors, including industry experience, firm experience, job performance and market considerations. Variable compensation is an incentive-based
component and generally represents a significant multiple of base salary. Variable compensation is based on four factors: investment performance, profit growth of the firm, profit growth of the manager’s business unit and team commitment.
Investment performance is the primary component of total variable compensation and generally represents at least 60% of the total for fixed income managers and 70% for equity managers. The other three factors are used to determine the remainder of
variable compensation, subject to the discretion of the Chief Investment Officer (“CIO”) and senior management. The CIO and senior management evaluate these other factors annually.
Reich & Tang.
Mr. Rickard’s compensation includes a fixed, annual base salary and an incentive bonus. Base salary amounts are
determined by the compensation committee of the Subadviser (the “Compensation Committee”) based upon a number of factors, including the portfolio manager’s experience, overall performance, responsibilities and the competitive market
place. Mr. Rickard receives a cash-based annual incentive bonus that is determined solely at the discretion of the Subadviser and approved by the Compensation Committee.
Vaughan Nelson
. The compensation program at Vaughan Nelson is designed to align the interests of portfolio management professionals with the interests of clients and Vaughan Nelson by retaining
top-performing employees and creating incentives to enhance Vaughan Nelson’s long-term success.
Compensation of portfolio management
professionals includes a fixed base salary, a variable bonus and deferral plan and a contribution to the firm’s retirement plan.
All
portfolio management professionals (at the discretion of the Compensation Committee of the Vaughan Nelson Board) participate in the variable bonus and deferral plan component which, as a whole, is based upon a percentage of Vaughan Nelson’s net
profit. Each portfolio management professional’s participation in the variable bonus and deferral plan is based upon many factors, including but not limited to:
|
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•
|
|
Performance of the strategy managed (both absolute and relative to peers);
|
|
|
•
|
|
Amount of revenue derived from the strategy managed;
|
|
|
•
|
|
Contribution to the development and execution of the firm’s investment philosophy and process; and
|
|
|
•
|
|
Participation and effectiveness in performing client service activities and marketing initiatives.
|
The degree to which any one factor influences participation in the bonus pool will vary between individuals and over time. A portion of the variable
bonus is subject to deferral and each participant has the option to invest the deferral into Vaughan Nelson managed product(s) while it vests. Each year’s deferral is paid out over a period of three years. Payments are conditioned upon
compliance with non-compete and non-solicitation arrangements.
81
The contribution to the firm’s retirement plan is based on a percentage (at the discretion of the
Vaughan Nelson Board) of total cash compensation (subject to the Internal Revenue Service (the “IRS”) limits) and such percentage is the same for all firm personnel. Compensation at Vaughan Nelson is determined by the Compensation
Committee at the recommendation of the Chief Executive Officer.
There is no distinction for purposes of compensation between the Select Fund
and any other accounts managed.
Westpeak.
Each portfolio manager receives a base salary and has the potential for profit sharing. Base
salary is based on the portfolio manager’s job performance and contribution to meeting firm objectives, as determined by the Board of Managers on an annual basis. Profit sharing is based on the profitability of the firm during the year.
Portfolio manager compensation is tied to job performance, and is not tied directly to the portfolio performance achieved in the management of client assets. There is no distinction between compensation with respect to the Growth Markets Fund and
other accounts.
Portfolio Managers’ Ownership of Fund Shares
As of November 30, 2012, the portfolio managers had the following ownership in the Funds:
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Name of Portfolio Manager
|
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Fund(s) Managed
|
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Dollar Range of Equity
Securities Invested*
|
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Dennis G. Alff
|
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Select Fund
|
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A
|
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Arthur J. Barry
|
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Capital Income Fund
|
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E
|
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John R. Bell
|
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Senior Floating Rate and Fixed Income Fund
|
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A
|
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Michael T. Buckius
|
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Gateway International Fund
|
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A
|
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Jeremiah H. Chafkin
|
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Growth Markets Fund
|
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D
|
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Daniel J. Fuss
|
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Capital Income Fund
|
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A
|
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Khalid Ghayur
|
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Growth Markets Fund
|
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A
|
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Alexander D. Healy
|
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Growth Markets Fund
|
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C
|
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Warren N. Koontz
|
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Capital Income Fund
|
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E
|
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Andrew W. Lo
|
|
Growth Markets Fund
|
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E
|
|
Kevin J. Perry
|
|
Senior Floating Rate and Fixed Income Fund
|
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A
|
|
Stephen C. Platt
|
|
Growth Markets Fund
|
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A
|
|
Robert S. Rickard
|
|
Growth Markets Fund
|
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A
|
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Kenneth H. Toft
|
|
Gateway International Fund
|
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E
|
|
Chris D. Wallis
|
|
Select Fund
|
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C
|
|
Scott J. Weber
|
|
Select Fund
|
|
D
|
B. $1 – 10,000
C. $10,001 – $50,000
D. $50,001 – $100,000
E. $100,001 – $500,000
F. $500,001 – $1,000,000
G. over $1,000,000
There are various reasons why a portfolio manager may not own shares of the
Funds in the future. One reason is that the Funds’ respective investment objective and strategies may not match those of the portfolio manager’s personal investment objective. Also, the portfolio manager may invest in other funds or pooled
investment vehicles or separate accounts managed by the portfolio manager in a similar style to the Funds.
Allocation of Investment
Opportunity Among the Funds and Other Investments Managed by the Advisers and/or Subadvisers; Cross Relationships of Officers and Trustees
AlphaSimplex.
AlphaSimplex manages other accounts using investment strategies that may or may not be similar to that of the Growth Markets Fund. A
conflict of interest may exist in connection with AlphaSimplex’s management of the Growth Markets Fund, on the one hand, and AlphaSimplex’s management of other accounts, on the other hand. AlphaSimplex makes investment decisions for each
account based on the client’s investment objectives, policies, practices, cash flows, and other relevant investment considerations. Consequently,
82
AlphaSimplex may purchase or sell securities or other instruments for one account and not for another account, and the performance of securities or other instruments purchased for one account may
vary from the performance of securities or other instruments purchased for other accounts. Another conflict of interest may arise because accounts other than the Fund may have fee structures, such as performance-based fees, that differ from those of
the Growth Markets Fund. In addition, a potential conflict of interest may arise as a result of the Portfolio Managers’ day-to-day management of the Growth Markets Fund. Because of their roles in managing the Growth Markets Fund,
AlphaSimplex’s Portfolio Managers know the size, timing and possible market impact of Fund trades and this information could in theory be used to the detriment of the Growth Markets Fund. AlphaSimplex has adopted policies and procedures
reasonably designed to allocate investment opportunities on a fair and equitable basis over time and to address conflicts of interest relating to the management of multiple accounts. Finally, AlphaSimplex has adopted trade allocation procedures that
require equitable allocation of trade orders for a particular security among participating accounts. The implementation of these procedures is monitored by AlphaSimplex’s Chief Compliance Officer.
Gateway.
Gateway may in the future manage other accounts using investment strategies similar to that of the Gateway International Fund. A conflict
of interest may exist if Gateway identifies a limited investment opportunity that may be appropriate for more than one account, but the Gateway International Fund is not able to take full advantage of that opportunity due to the need to allocate
that opportunity among multiple accounts. In addition, Gateway may execute transactions for another account that may adversely impact the value of securities held by the Gateway International Fund. However, Gateway believes that these risks are
mitigated by the fact that accounts with like investment strategies managed by Gateway are generally managed in a similar fashion, subject to exceptions, such as those resulting from different cash availability and/or liquidity requirements,
investment restrictions or policies, the time competing accounts have had funds available for investment or have had investments available for sale, an account’s participation in other opportunities, tax considerations and the relative size of
portfolio holdings of the same or comparable securities. In addition, Gateway has adopted trade allocation procedures that require equitable allocation of trade orders for a particular security among participating accounts.
Loomis Sayles.
Loomis Sayles has organized its business into two investment groups: the Fixed Income Group and the Equity Group. The Fixed Income
Group and the Equity Group make investment decisions for the funds managed by Loomis Sayles. The groups make investment decisions independently of one another. These groups also have responsibility for the management of other client portfolios. The
other investment companies and clients served by Loomis Sayles’ investment platforms sometimes invest in securities in which the funds (or segments thereof) advised or subadvised by Loomis Sayles also invest. If one of these funds and such
other clients advised or subadvised by the same investment group of Loomis Sayles desire to buy or sell the same portfolio securities at or about the same time, the respective group allocates purchases and sales, to the extent practicable, on a pro
rata basis in proportion to the amount desired to be purchased or sold for each fund or client advised or subadvised by that investment group. It is recognized that in some cases the practices described in this paragraph could have a detrimental
effect on the price or amount of the securities which each of the funds purchases or sells. In other cases, however, it is believed that these practices may benefit such funds.
Reich & Tang.
Certain officers and employees of the Subadviser have responsibility for portfolio management of other advisory accounts and clients of the Subadviser (including other
registered investment companies and accounts of affiliates of Reich & Tang) that may invest in securities in which the Growth Markets Fund also invests. If the Subadviser determines that an investment purchase or sale opportunity is
appropriate and desirable for more than one advisory account, purchase and sale orders may be executed separately or may be combined and, to the extent practicable, allocated by Reich & Tang to the participating accounts. Where advisory
accounts have competing interests in a limited investment opportunity, the Subadviser will allocate investment opportunities based on a number of considerations, including cash availability and/or liquidity requirements, including time the competing
accounts have had funds available for investment or have had securities available for sale, investment objectives and restrictions, an account’s participation in other opportunities, tax considerations and relative size of portfolio holdings of
the same or comparable securities. It is Reich & Tang’s policy to allocate over a period of time, to the extent practicable, investment opportunities to each client on a fair and equitable basis relative to its other clients. The
Trustees are of the view that the benefits of retaining Reich & Tang as Subadviser to the Growth Markets Fund outweigh the disadvantages, if any, that may result from participating in such transactions.
Vaughan Nelson.
In addition to managing the Select Fund, Vaughan Nelson serves as investment adviser to foundations, university endowments,
corporate retirement plans and family/individual funds. Portfolio transactions for each client account are either completed independently, or, when decisions are made to purchase or sell the same
83
securities for a number of client accounts simultaneously, through a “blocked order.” Investments decisions are typically implemented across all accounts managed within a particular
strategy. Blocked orders are averaged as to price and are generally allocated on a pro rata basis based upon the actual purchase or sell orders placed for each security. Block orders are undertaken when possible to facilitate best execution, as well
as for the purpose of negotiating more favorable brokerage commissions.
Westpeak.
Westpeak has responsibility for portfolio management
for other clients, some of which may invest in securities in which any of Westpeak’s subadvised funds also may invest. When these funds and other clients desire to purchase or sell the same security at or about the same time, the purchase
and sale orders may be executed separately or may be combined and, to the extent practicable, allocated on a pro rata basis in proportion to the amounts desired to be purchased or sold for each. It is believed that the ability of those clients
to participate in larger volume transactions will in some cases produce better executions for these subadvised funds. However, in some cases this procedure could have a detrimental effect on the price and amount of a security available to the
funds, or the price at which a security may be sold.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In placing orders for the purchase and sale of equity securities, each Adviser or Subadviser selects only brokers that it believes are
financially responsible, will provide efficient and effective services in executing, clearing and settling an order and will charge commission rates that, when combined with the quality of the foregoing services, will produce the best price and
execution for the transaction. This does not necessarily mean that the lowest available brokerage commission, if any, will be paid. However, the commissions charged are believed to be competitive with generally prevailing rates. Each Adviser or
Subadviser will use its best efforts to obtain information as to the general level of commission rates being charged by the brokerage community from time to time and will evaluate the overall reasonableness of brokerage commissions, if any, paid on
transactions by reference to such data. In making such evaluation, factors affecting liquidity and execution of the order, as well as the amount of the capital commitment by the broker in connection with the order, are taken into account. The
Adviser or Subadviser may place orders for the Funds which, combined with orders for the Adviser’s/Subadviser’s other clients, may impact the price of the relevant security. This could cause the Funds to obtain a worse price on the
transaction than would otherwise be the case if the orders were placed in smaller amounts or spread out over a longer period of time.
Subject
to the overriding objective of obtaining the best possible execution of orders, the Adviser or Subadviser may allocate brokerage transactions to affiliated brokers. Any such transactions will comply with Rule 17e-1 under the 1940 Act. In order for
the affiliated broker to effect portfolio transactions for the Funds, the commissions, fees or other remuneration received by the affiliated broker must be reasonable and fair compared to the commissions, fees and other remuneration paid to other
brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period. Furthermore, the Board, including a majority of the Independent Trustees, has adopted
procedures that are reasonably designed to provide that any commissions, fees or other remuneration paid to an affiliated broker are consistent with the foregoing standard.
Transactions on stock, option, and futures exchanges involve the payment of negotiated brokerage commissions. In the case of securities traded in the OTC market, there is generally no stated commission
but the price usually includes an undisclosed commission or mark-up.
AlphaSimplex
In arranging for the purchase and sale of clients’ portfolio securities, AlphaSimplex takes numerous factors into consideration. These include any
legal restrictions, such as those imposed under the securities laws and the Employee Retirement Income Security Act of 1974, and any client-imposed restrictions. Within these constraints, AlphaSimplex will employ or deal with members of the
securities exchanges and other brokers and dealers as may in its judgment implement the policy of seeking best execution (
i.e.
, prompt and reliable execution at the most favorable prices obtainable under the prevailing market conditions) of
portfolio transactions. It is not AlphaSimplex’s current practice to enter into “soft dollar” arrangements but AlphaSimplex does consider all services when executing transactions with a broker. As such, AlphaSimplex may utilize
research and other products that provide lawful and appropriate assistance to AlphaSimplex in carrying out its investment-making responsibilities, as permitted under the safe harbor of Section 28(e) of the Securities and Exchange Act of 1934.
As long as it is lawful and appropriate to do so, AlphaSimplex may use this research and data in its investment advisory
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capacities with other clients. Clients may obtain other services from brokers in connection with investment transactions with brokers. Such services will be limited to services that would
otherwise be a client expense.
In determining the abilities of a broker or dealer to obtain best execution of portfolio transactions, while
the lowest price may be one factor, AlphaSimplex will consider all relevant factors, including the execution capabilities required by the transactions; the ability and willingness of the broker or dealer to facilitate the accounts’ portfolio
transactions by participating therein for its own account; the importance to the account of speed, efficiency, and confidentiality; the broker’s or dealer’s apparent familiarity with sources from or to whom particular securities might be
purchased or sold; the reputation and perceived soundness of the broker or dealer; and other matters relevant to the selection of a broker or dealer for portfolio transactions for any account. AlphaSimplex will not adhere to any rigid formula in
making the selection of the applicable broker or dealer for portfolio transactions, but will weigh a combination of the preceding factors.
AlphaSimplex has no duty or obligation to seek in advance competitive bidding for the most favorable commission rate applicable to any particular
portfolio transaction or to select any broker on the basis of its purported or “posted” commission rate, but will endeavor to be aware of the current level of the charges of eligible brokers and to minimize the expense incurred for
effecting portfolio transactions to the extent consistent with the interests and policies of the accounts. Although AlphaSimplex generally seeks competitive commission rates, it will not necessarily pay the lowest commission or commission
equivalent. Transactions may involve specialized services on the part of the broker or dealer involved and thereby entail higher commissions or their equivalents than would be the case with other transactions requiring more routine services.
Certain customers of AlphaSimplex may also be customers of broker-dealers through which AlphaSimplex may utilize executing and/or clearing
brokerage services. Although AlphaSimplex may execute or clear through these broker-dealers, AlphaSimplex is under no obligation to do so.
Portfolio transactions for each client account are generally completed independently, except when AlphaSimplex is in the position of buying or selling
the same security for a number of its clients under the same conditions (
e.g.
, limit prices) at approximately the same time. Because of market fluctuations, the prices obtained on such transactions within a single day may vary substantially.
In such a case, some clients would receive the benefit of the more-favorable prices while others would not. In order to more equitably allocate the effects of such market fluctuations, AlphaSimplex has adopted the following aggregation procedures.
For purposes of aggregating client orders for futures contracts and forward contracts for all clients, each client that participates in an aggregated order will participate in that order based on the price received and the inception date of the
client’s account. The account with the oldest inception date will always receive the highest fill prices and the account with the most recent inception date will receive the lowest fill prices. Any advantages the oldest accounts may receive on
the sell orders are theoretically offset by the disadvantages on the buy orders. For purposes of aggregating client orders for all other securities for all clients, each client that participates in an aggregated order will participate at the average
price for all AlphaSimplex’s transactions in that security on a given business day and transaction costs will be shared pro rata based on each client’s participation in the transaction. If the aggregated order is partially filled, it will
be allocated among clients pro rata.
Gateway
As discussed in more detail below, Gateway’s receipt of brokerage and research products may sometimes be a factor in Gateway’s selection of a broker or dealer to execute transactions for the
Fund where Gateway believes that the broker or dealer will provide the best execution of the transactions. Such brokerage and research services may be paid for with Gateway’s own assets or may, in connection with transactions in securities
effected for client accounts for which Gateway exercises investment discretion, be paid for with client commissions (the latter sometimes referred to as “Soft Dollars”).
In effecting portfolio transactions for the Fund, Gateway is obligated to seek best execution, which is to execute the Fund’s transactions where the most favorable combination of price and execution
services are available (“best execution”), except to the extent that it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In seeking best execution, Gateway, in the Fund’s
best interest, considers all relevant factors, including:
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the amount of commission;
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the timing of the transaction taking into account market prices and trends;
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the reputation, experience and financial stability of the broker-dealer involved;
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the quality of service rendered by the broker-dealer in other transactions.
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The Adviser may not consider sales of shares of the Fund as a factor in the selection of broker-dealers to execute securities transactions for it, nor may the Fund or Gateway enter into any agreement or
understanding under which the Fund directs brokerage transactions or revenues generated by those transactions to brokers to pay for distribution of Fund shares. Nevertheless, the Fund or Gateway may place portfolio transactions with brokers or
dealers who promote or sell Fund shares so long as such placements are made pursuant to policies approved by the Fund’s Board that are designed to ensure that the selection is based on the quality of the broker’s execution and not on its
sales efforts. Closing option transactions are usually effected through the same broker-dealer that executed the opening transaction.
The
Trust has no obligation to deal with any broker or dealer in the execution of its transactions. Transactions in the OTC market can be placed directly with market makers who act as principals for their own account and include mark-ups in the prices
charged for OTC securities. Transactions in the OTC market can also be placed with broker-dealers who act as agents and charge brokerage commissions for effecting OTC transactions. The Trust may place its OTC transactions either directly with
principal market makers, or with broker-dealers if that is consistent with Gateway’s obligation to obtain best qualitative execution.
While Gateway does not intend to limit the placement of orders to any particular broker or dealer, Gateway generally gives preference to those brokers or
dealers who are believed to give best execution at the most favorable prices and who also provide research, statistical or other services to Gateway and/or the Trust. These research services include not only a wide variety of reports on such matters
as economic and political developments, industries, companies, securities, portfolio strategy, account performance, daily prices of securities, stock and bond market conditions and projections, asset allocation and portfolio structure, but also
meetings with management representatives of issuers and with other analysts and specialists. Commissions charged by brokers who provide these services may be higher than commissions charged by those who do not provide them. Higher commissions are
paid only if Gateway determines that they are reasonable in relation to the value of the services provided. The availability of such services was taken into account in establishing the advisory fee. Specific research services furnished by brokers
through whom the Trust effects securities transactions may be used by Gateway in servicing all of its accounts and may not be used with respect to the Fund. Similarly, specific research services furnished by brokers who execute transactions for
other Adviser clients may be used by Gateway for the benefit of the Trust.
Loomis Sayles
Investments in Fixed-Income Securities
In placing orders for the purchase and sale of fixed-income securities for a Fund, Loomis Sayles always seeks the best price and execution. Some of the
Funds’ portfolio transactions are placed with brokers and dealers that provide Loomis Sayles with supplementary investment and statistical information or furnish market quotations to the Funds, or other investment companies advised by Loomis
Sayles. The business would not be so placed if the Fund would not thereby obtain the best price and execution. Although it is not possible to assign an exact dollar value to these services, they may, to the extent used, tend to reduce the expenses
of Loomis Sayles. The services may also be used by Loomis Sayles in connection with its other advisory accounts, and in some cases may not be used with respect to the Funds.
Investments in Equity Securities
In placing orders for the purchase and sale of equity
securities for the Funds, Loomis Sayles selects only brokers that it believes are financially responsible, will provide efficient and effective services in executing, clearing and settling an order and will charge commission rates that, when
combined with the quality of the foregoing services, will produce the best price and execution for the transaction. This does not necessarily mean that the lowest available brokerage commission will be paid. However, the commissions are believed to
be competitive with generally prevailing rates. The Adviser will use its best efforts to obtain information as to the general level of commission
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rates being charged by the brokerage community from time to time and will evaluate the overall reasonableness of brokerage commissions paid on transactions by reference to such data. In making
such evaluation, all factors affecting liquidity and execution of the order, as well as the amount of the capital commitment by the broker in connection with the order, are taken into account. Loomis Sayles may place orders for a Fund which,
combined with orders for its other clients, may impact the price of the relevant security. This could cause the Fund to obtain a worse price on the transaction than would otherwise be the case if the orders were placed in smaller amounts or spread
out over a longer period of time.
Subject to the overriding objective of obtaining the best possible execution of orders, the Adviser may
allocate brokerage transactions to affiliated brokers. Any such transactions will comply with Rule 17e-1 under the 1940 Act. In order for the affiliated broker to effect portfolio transactions for the Funds, the commissions, fees or other
remuneration received by the affiliated broker must be reasonable and fair compared to the commissions, fees and other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold
on a securities exchange during a comparable period. Furthermore, the Board, including a majority of the Independent Trustees, has adopted procedures that are reasonably designed to provide that any commissions, fees or other remuneration paid to an
affiliated broker are consistent with the foregoing standard.
Generally, Loomis Sayles seeks to obtain quality executions at favorable
security prices and at competitive commission rates, where applicable, through brokers and dealers who, in Loomis Sayles’ opinion, can provide the best overall net results for its clients. Transactions in equity securities are frequently
executed through a primary market maker, but may also be executed on an Electronic Communication Network (ECN), Alternative Trading System (ATS), or other execution system. Fixed-income securities generally are purchased from the issuer or a primary
market maker acting as principal on a net basis with no brokerage commission paid by the client. Such securities, as well as equity securities, may also be purchased from underwriters at prices which include underwriting fees.
Commissions and Other Factors in Broker or Dealer Selection
Loomis Sayles uses its best efforts to obtain information as to the general level of commission rates being charged by the brokerage community from time to time and to evaluate the overall reasonableness
of brokerage commissions paid on client portfolio transactions by reference to such data. In making this evaluation, all factors affecting liquidity and execution of the order, as well as the amount of the capital commitment by the broker or dealer,
are taken into account. Other relevant factors may include, without limitation: (a) the execution capabilities of the brokers or dealers, (b) research and other products or services (as described in the section “Soft Dollars”)
provided by such brokers or dealers that are expected to enhance Loomis Sayles’ general portfolio management capabilities, (c) the size of the transaction, (d) the difficulty of execution, (e) the operations facilities of the
brokers or dealers involved, (f) the risk in positioning a block of securities, and (g) the quality of the overall brokerage and research services provided by the broker or dealer.
Soft Dollars
Loomis Sayles’ receipt of brokerage and research products or
services are factors in Loomis Sayles’ selection of a broker-dealer to execute transactions for the Funds where Loomis Sayles believes that the broker or dealer will provide best execution of the transactions. Such brokerage and research
products or services may be paid for with Loomis Sayles’ own assets or may, in connection with transactions in equity securities effected for client accounts for which Loomis Sayles exercises investment discretion, be paid for with client
commissions (
i.e.,
“soft dollars”).
Loomis Sayles will only acquire research and brokerage products and services that are
deemed to qualify as eligible products and services under the safe harbor of Section 28(e) of the Securities Exchange Act of 1934 (the “1934 Act”). Eligible research services and products that may be acquired by Loomis Sayles are
those products and services that provide advice, analysis or reports that will aid Loomis Sayles in carrying out its investment decision-making responsibilities. Eligible research must reflect the expression of reasoning or knowledge (having
inherently intangible and non-physical attributes) and may include the following research items: traditional research reports; discussions with research analysts and corporate executives; seminars or conferences; financial and economic publications
that are not targeted to a wide public audience; software that provides analysis of securities portfolios; market research including pre-trade and post-trade analytics; and market data. Eligible brokerage services and products that may be acquired
by Loomis Sayles are those services or products that (i) are required to effect securities transactions; (ii) perform functions incidental to securities transactions; or (iii) are required by an
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applicable self-regulatory organization or SEC rule(s). The brokerage and research products or services provided to Loomis Sayles by a particular broker or dealer may include both
(a) products and services created by such broker or dealer and (b) products and services created by a third party.
If Loomis Sayles
receives a particular product or service that both aids it in carrying out its investment decision-making responsibilities (
i.e.
, a “research use”) and provides non-research related uses, Loomis Sayles will make a good faith
determination as to the allocation of the cost of such “mixed-use item” between the research and non-research uses and will only use soft dollars to pay for the portion of the cost relating to its research use.
In connection with Loomis Sayles’ use of soft dollars, the Capital Income Fund and the Senior Floating Rate and Fixed Income Fund may pay a
broker-dealer an amount of commission for effecting a transaction for the Capital Income Fund and the Senior Floating Rate and Fixed Income Fund in excess of the amount of commission another broker-dealer would have charged for effecting that
transaction if Loomis Sayles determines in good faith that the amount of commission is reasonable in relation to the value of the brokerage and research products or services received, either in terms of the particular transaction or Loomis
Sayles’ overall responsibility to discretionary accounts.
Loomis Sayles may use soft dollars to acquire brokerage or research products
and services that have potential application to all client accounts, including the Capital Income Fund and the Senior Floating Rate and Fixed Income Fund, or to acquire brokerage or research products and services that will be applied in the
management of a certain group of client accounts and, in some cases, may not be used with respect to the Capital Income Fund and the Senior Floating Rate and Fixed Income Fund. The products or services may not be used in connection with the
management of some of the accounts, including the Capital Income Fund and the Senior Floating Rate and Fixed Income Fund, that paid commissions to the broker or dealer providing the products or services and may be used in connection with the
management of other accounts.
Loomis Sayles’ use of soft dollars to acquire brokerage and research products and services benefits Loomis
Sayles by allowing it to obtain such products and services without having to purchase them with its own assets. Loomis Sayles believes that its use of soft dollars also benefits the Capital Income Fund and the Senior Floating Rate and Fixed Income
Fund, as described above. However, conflicts may arise between the Capital Income Fund’s and the Senior Floating Rate and Fixed Income Fund’s interest in paying the lowest commission rates available and Loomis Sayles’ interest in
receiving brokerage and research products and services from particular brokers and dealers without having to purchase such products and services with Loomis Sayles’ own assets.
For purposes of this soft dollars discussion, the term “commission” may include (to the extent applicable) both commissions paid to brokers in connection with transactions effected on an agency
basis and markups, markdowns, commission equivalents or other fees paid to dealers in connection with certain transactions to the extent consistent with relevant SEC interpretations. Loomis Sayles does not generate “soft dollars” on
fixed-income transactions.
Client Commission Arrangements
Loomis Sayles has entered into client commission arrangements (“CCAs”) (also known as commission sharing arrangements) with some of its key broker-dealer relationships. At the same time, Loomis
Sayles has significantly reduced the number of brokers with which it will trade. In a CCA, subject to best execution, Loomis Sayles will allocate a higher portion of its clients’ equity trading with broker-dealers who have agreed to unbundle
their commission rates in order to enable Loomis Sayles to separately negotiate rates for execution and research and research services. The execution rates Loomis Sayles has negotiated with such firms vary depending on the difficulty of the orders
Loomis Sayles has asked the CCAs to execute.
Pursuant to the CCAs Loomis Sayles has with these broker-dealers, each firm will pool the
research commissions accumulated during a calendar quarter and then, at the direction of Loomis Sayles, pay various broker-dealers from this pool for the research and research services such firms have provided to Loomis Sayles.
The CCAs enable Loomis Sayles to strengthen its relationships with its key broker-dealers, and limit the broker-dealers with whom it trades to those with
whom it has an electronic interface, while still maintaining the research relationships with broker-dealers that provide Loomis Sayles with research and research services. In addition, the ability to unbundle the execution and research components of
commissions enables Loomis Sayles to manage commissions more efficiently and to provide greater transparency to its clients in their commission reports.
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These CCAs are deemed to be soft dollar arrangements and Loomis Sayles and each CCA intends to comply with
the applicable requirements of Section 28(e) of the 1934 Act as well as the Commission Guidance Regarding Client Commission Practices under Section 28(e) in the SEC Release No. 34-54165 dated July 18, 2006.
In addition to trading with the CCA broker-dealers discussed above, Loomis Sayles continues to trade with full service broker-dealers and ECNs and ATSs.
Reich & Tang
With
respect to the portion of the Growth Market Fund’s assets managed by Reich & Tang, the purchases and sales of portfolio securities are usually principal transactions. Portfolio securities are generally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market maker for the securities. There are usually no brokerage commissions paid for such purchases and the Fund does not currently anticipate paying brokerage commissions.
Should the Fund pay a brokerage commission on a particular transaction, the Fund would seek to effect the transaction at the most favorable available combination of best execution and lowest commission. Purchases from underwriters of portfolio
securities include a commission or concession paid by the issuer to the underwriter, and purchases from dealers serving as market makers include the spread between the bid and ask price.
No portfolio transactions are executed with Reich & Tang or its affiliates acting as principal. In addition, the Fund will not buy bankers’ acceptances, certificates of deposit or commercial
paper from Reich & Tang or its affiliates. Reich & Tang does not earn “soft dollars” when trading in fixed-income securities. When trading equity securities, Reich & Tang may earn soft dollars through its regular
trading. Reich & Tang’s receipt of brokerage and research products may be a factor in its selection of a broker or dealer to execute transactions for the Fund where Reich & Tang believes that the broker or dealer will provide
the best execution of the transactions. Such brokerage and research services may be paid for with Reich & Tang’s own assets or may, in connection with transactions in securities effected for client accounts for which Reich &
Tang exercises investment discretion, be paid for with client commissions.
The frequency of transactions and their allocation to various
dealers is determined by Reich & Tang in its best judgment and in a manner deemed to be in the best interest of shareholders of the Fund. The primary consideration is prompt execution of orders in an effective manner at the most favorable
price.
Investment decisions for the Fund will be made independently from those for any other accounts or investment companies that may be or
become managed by Reich & Tang or its affiliates. If, however, the Fund and other investment companies or accounts managed by Reich & Tang are contemporaneously engaged in the purchase or sale of the same security, the transactions
may be averaged as to price and allocated equitably to each account. In some cases, this policy might adversely affect the price paid or received by the Fund or the size of the position obtainable for the Fund. In addition, when purchases or sales
of the same security for the Fund and for other investment companies managed by Reich & Tang occur contemporaneously, the purchase or sale orders may be aggregated in order to obtain any price advantages available to large denomination
purchasers or sellers.
Vaughan Nelson
In placing orders for the purchase and sale of securities for the Select Fund, Vaughan Nelson selects only brokers or dealers that it believes are financially responsible and will provide efficient and
effective services in executing, clearing and settling an order. Vaughan Nelson will use its best efforts to obtain information as to the general level of commission rates being charged by the brokerage community from time to time and will evaluate
the overall reasonableness of brokerage commissions paid on transactions by reference to such data. In making such evaluation, all factors affecting liquidity and execution of the order, as well as the amount of the capital commitment by the broker
in connection with the order, are taken into account. Transactions in unlisted securities are carried out through broker-dealers who make the primary market for such securities unless, in the judgment of Vaughan Nelson, a more favorable price can be
obtained by carrying out such transactions through other brokers or dealers.
Receipt of research services from brokers is one factor used in
selecting a broker that Vaughan Nelson believes will provide best execution for a transaction. These research services include not only a wide variety of reports on such matters as economic and political developments, industries, companies,
securities, portfolio strategy, account performance, daily prices of securities, stock and bond market conditions and projections, asset allocation and
89
portfolio structure, but also meetings with management representatives of issuers and with other analysts and specialists. Although it is not possible to assign an exact dollar value to these
services, they may, to the extent used, tend to reduce Vaughan Nelson’s expenses. Such services may be used by Vaughan Nelson in servicing other client accounts and in some cases may not be used with respect to the Fund. Receipt of services or
products other than research from brokers is not a factor in the selection of brokers.
In placing orders for the purchase and sale of
securities for the Select Fund, Vaughan Nelson may cause the Select Fund to pay a broker-dealer that provides the brokerage and research services to Vaughan Nelson an amount of commission for effecting a securities transaction for the Select Fund in
excess of the amount another broker-dealer would have charged for effecting that transaction. Vaughan Nelson must determine in good faith that such greater commission is reasonable in relation to the value of the brokerage and research services
provided by the executing broker-dealer viewed in terms of that particular transaction or Vaughan Nelson’s overall responsibilities to Natixis Funds Trust II and its other clients. Vaughan Nelson’s authority to cause the Select Fund to pay
such greater commissions is also subject to such policies as the trustees of Natixis Funds Trust II may adopt from time to time.
Westpeak
In placing orders for the purchase and sale of securities, Westpeak always seeks best execution. Westpeak selects only brokers or dealers
that it believes are financially responsible, will provide efficient and effective services in executing, clearing and settling an order and will charge commission rates that, when combined with the quality of the foregoing services, will produce
best price and execution. This does not necessarily mean that the lowest available brokerage commission will be paid. Westpeak will use its best efforts to obtain information as to the general level of commission rates being charged by the brokerage
community from time to time and will evaluate the overall reasonableness of brokerage commissions paid on transactions by reference to such data. In making such evaluation, all factors affecting liquidity and execution of the order, as well as the
amount of the capital commitment by the broker in connection with the order, are taken into account. Westpeak may cause the Growth Markets Fund to pay a broker-dealer that provides brokerage and research services to Westpeak an amount of commission
for effecting a securities transaction for the Fund in excess of the amount another broker-dealer would have charged for effecting that transaction. Westpeak must determine in good faith that such greater commission is reasonable in relation to the
value of the brokerage and research services provided by the executing broker-dealer viewed in terms of that particular transaction or Westpeak’s overall responsibilities to the Fund and its other clients. Westpeak’s authority to cause a
Fund it manages to pay such greater commissions is also subject to such policies as the trustees of Natixis Funds Trust II may adopt from time to time.
General
Subject to procedures adopted by the Board, the Funds’ brokerage
transactions may be executed by brokers that are affiliated with Natixis US or the Advisers or Subadvisers. Any such transactions will comply with Rule 17e-1 under the 1940 Act, or other applicable restrictions as permitted by the SEC pursuant to
exemptive relief or otherwise.
Under the 1940 Act, persons affiliated with the Trusts are prohibited from dealing with the Trusts’ funds
as a principal in the purchase and sale of securities. Since transactions in the OTC market usually involve transactions with dealers acting as principals for their own accounts, affiliated persons of the Trusts may not serve as the Funds’
dealer in connection with such transactions.
To the extent permitted by applicable law, and in all instances subject to the foregoing policy
of best execution, each Adviser may allocate brokerage transactions to broker-dealers (including affiliates of the Distributor) that have entered into arrangements in which the broker-dealer allocates a portion of the commissions paid by the Funds
toward the reduction of the Funds’ expenses.
It is expected that the portfolio transactions in fixed-income securities will generally be
with issuers or dealers on a net basis without a stated commission. Securities firms may receive brokerage commissions on transactions involving options, futures and options on futures and the purchase and sale of underlying securities upon exercise
of options. The brokerage commissions associated with buying and selling options may be proportionately higher than those associated with general securities transactions.
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DESCRIPTION OF THE TRUSTS
The Declarations of Trust of Natixis Funds Trust II and Gateway Trust permit the Trustees to issue an unlimited number of full and fractional shares of
each series. Each share of the Funds represents an equal proportionate interest in the Funds with each other share of the Funds and is entitled to a proportionate interest in the dividends and distributions from the Funds. The Declarations of Trust
further permit the Board to divide the shares of each series into any number of separate classes, each having such rights and preferences relative to other classes of the same series as the Board may determine. When you invest in a Fund, you acquire
freely transferable shares of beneficial interest that entitle you to receive dividends as determined by the Board and to cast a vote for each share you own at shareholder meetings. The shares of the Funds do not have any preemptive rights. Upon
termination of the Funds, whether pursuant to liquidation of a Trust or otherwise, shareholders of each class of the Funds are entitled to share pro rata in the net assets attributable to that class of shares of the Funds available for distribution
to shareholders. The Declarations of Trust also permit the applicable Board to charge shareholders directly for custodial, transfer agency and servicing expenses.
The shares of the Funds are divided into three classes: Class A, Class C and Class Y. As described in its Prospectuses, Class Y shares are available for purchase only by certain eligible investors
and have higher minimum purchase requirements than Class A and Class C shares. All expenses of the Funds (including advisory fees) are borne by its Class A, Class C and Class Y shares on a
pro rata
basis, except for 12b-1 fees,
which are borne only by Class A and Class C and may be charged at a separate rate to each such class. The multiple class structure could be terminated should certain IRS rulings or SEC regulatory positions be rescinded or modified.
The assets received by each class of the Funds for the issue or sale of its shares and all income, earnings, profits, losses and proceeds therefrom,
subject only to the rights of the creditors, are allocated to, and constitute the underlying assets of, that class of a Fund. The underlying assets of each class of a Fund are segregated and are charged with the expenses with respect to that class
of a Fund and with a share of the general expenses of a Fund and Trust. Any general expenses of the Trusts that are not readily identifiable as belonging to a particular class of the Funds are allocated by or under the direction of the Trustees in
such manner as the Trustees determine to be fair and equitable. While the expenses of the Trusts are allocated to the separate books of account of each series of the Trusts, certain expenses may be legally chargeable against the assets of all of the
series in a Trust.
The Declarations of Trust also permit the Board, without shareholder approval, to subdivide the Funds or series or class
of shares into various sub-series or sub-classes with such dividend preferences and other rights as the Trustees may designate. The Board may also, without shareholder approval, establish one or more additional series or classes or, with shareholder
approval, merge two or more existing series or classes. Shareholders’ investments in such an additional or merged series would be evidenced by a separate series of shares (
i.e.
, a new “fund”).
The Declarations of Trust provide for the perpetual existence of the Trusts. The Trusts or the Funds, however, may be terminated at any time by vote of
at least two-thirds of each series of the Trust entitled to vote. In addition, the Funds may be terminated at any time by vote of at least two-thirds of the outstanding shares of the Funds. Similarly, any class within a Fund may be terminated by
vote of at least two-thirds of the outstanding shares of such class. The Declarations of Trust further provide that the Board may also without shareholder approval terminate the Trusts or Funds upon written notice to their shareholders.
VOTING RIGHTS
Shareholders of all Funds are entitled to one vote for each full share held (with fractional votes for each fractional share held) and may vote (to the extent provided therein) on the election of Trustees
and the termination of a Trust and on other matters submitted to the vote of shareholders.
Shareholders of Natixis Funds Trust II and Gateway
Trust have identical voting rights to each other. All classes of shares of each Fund have identical voting rights, except that each class of shares has exclusive voting rights on any matter submitted to shareholders that relates solely to that
class, and has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of any other class. On any matters submitted to a vote of shareholders, all shares of the Trusts then
entitled to vote shall, except as otherwise provided in each Trust’s by-laws, be voted in the aggregate as a single class without regard to series or class of shares, except (1) when required by the 1940 Act, or when the Trustees shall
have determined that the matter affects one or more series or class of shares materially differently, shares shall be voted by individual series or class and (2) when the matter affects only the interest of one or more series or classes, only
shareholders of such series or class shall be entitled to vote thereon. Consistent with the current position of the SEC, shareholders of all series and
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classes vote together, irrespective of series or class, on the election of Trustees and the selection of the Trusts’ independent registered public accounting firm, but shareholders of each
series vote separately on most other matters requiring shareholder approval, such as certain changes in investment policies of that series or the approval of the investment advisory and subadvisory agreement relating to that series, and shareholders
of each class within a series vote separately as to the Rule 12b-1 plan (if any) relating to that class.
There will normally be no meetings
of shareholders for the purpose of electing trustees except that, in accordance with the 1940 Act, (i) a Trust will hold a shareholders’ meeting for the election of trustees at such time as less than a majority of the Trustees holding
office have been elected by shareholders, and (ii) if there is a vacancy on a Board, such vacancy may be filled only by a vote of the shareholders unless, after filling such vacancy by other means, at least two-thirds of the Trustees holding
office shall have been elected by the shareholders. In addition, Trustees may be removed from office by a written consent signed by the holders of two-thirds of the outstanding shares and filed with a Trust’s custodian or by a vote of the
holders of two-thirds of the outstanding shares at a meeting duly called for that purpose.
Upon written request by a minimum of ten holders
of shares having held their shares for a minimum of six months and having an NAV of at least $25,000 or constituting at least 1% of the outstanding shares, whichever is less, stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a meeting to consider removal of a trustee, the Trusts have undertaken to provide a list of shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders).
Except as set forth above, the Trustees shall continue to hold office and may appoint successor trustees.
Shareholder voting rights are not cumulative.
The affirmative vote of a majority of shares of the Trusts voted (assuming a quorum is present
in person or by proxy) is required to amend a Declaration of Trust if such amendment (1) affects the power of shareholders to vote, (2) amends the section of the Declaration of Trust governing amendments, (3) is one for which a vote
is required by law or by the Trusts’ registration statement, or (4) is submitted to the shareholders by the Trustees. If one or more new series of a Trust is established and designated by the Trustees, the shareholders having beneficial
interests in the funds shall not be entitled to vote on matters exclusively affecting such new series, such matters including, without limitation, the adoption of or any change in the investment objectives, policies or restrictions of the new series
and the approval of the investment advisory contracts of the new series. Similarly, the shareholders of the new series shall not be entitled to vote on any such matters as they affect the other funds.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of a Trust. However, the Declarations of Trust disclaim shareholder liability for
acts or obligations of a Trust and require that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by a Trust or the Trustees. The Declarations of Trust provide for indemnification out of each
Fund’s property for all loss and expense of any shareholder held personally liable for the obligations of the Fund by reason of owning shares of such Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder
liability is considered remote since it is limited to circumstances in which the disclaimer is inoperative and a Fund itself would be unable to meet its obligations.
The Declarations of Trust further provide that the Board will not be liable for errors of judgment or mistakes of fact or law. However, nothing in the Declarations of Trust protects a trustee against any
liability to which the trustee would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. The by-laws of each Trust provide for
indemnification by the Trust of Trustees and officers of the relevant Trust, except with respect to any matter as to which any such person did not act in good faith in the reasonable belief that his or her action was in the best interests of the
Trust. Such persons may not be indemnified against any liability to the Trust or the Trust’s shareholders to whom he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office. Each Trust offers only its own Fund’s or Funds’ shares for sale, but it is possible that a Trust might become liable for any misstatements in a prospectus that relate to another Trust.
The Trustees of the Trusts have considered this possible liability and approved the use of the combined prospectus for Funds of the Trusts.
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HOW TO BUY SHARES
The procedures for purchasing shares of the Funds are summarized in the Prospectuses. All purchases made by check should be in U.S. dollars and made
payable to Natixis Funds.
Shares may also be purchased either in writing, by phone, by wire, by electronic funds transfer using Automated
Clearing House (“ACH”) or by exchange, as described in the Prospectuses, or through firms that are members of FINRA and that have selling agreements with the Distributor. For purchase of Fund shares by mail, the trade date is the day of
receipt of the check in good order by the transfer agent so long as it is received by the close of regular trading of the New York Stock Exchange (the “NYSE”) on a day when the NYSE is open. For purchases through the ACH system, the
shareholder’s bank or credit union must be a member of the ACH system and the shareholder must have approved banking information on file. With respect to shares purchased by wire or through the ACH system, shareholders should bear in mind that
the transactions may take two or more days to complete. Banks may charge a fee for transmitting funds by wire.
You may also use Natixis Funds
Personal Access Line® (800-225-5478, press 1) or Natixis Funds website (ngam.natixis.com) to purchase Fund shares. For more information, see the section “Shareholder Services” in this Statement.
At the discretion of the Distributor, bank trust departments or trust companies may also be eligible for investment in Class Y shares at a reduced
minimum, subject to certain conditions including a requirement to meet the minimum investment balance within a specified time period. Please contact the Distributor at 800-225-5478 for more information. At the discretion of the Distributor, clients
of NGAM Advisors may purchase, at NAV, Class A shares of Natixis Funds that do not offer Class Y shares.
Shareholders of the Funds in
Class Y may be permitted to open an account without an initial investment and then wire funds into the account once established. These shareholders will still be subject to the investment minimums as detailed in the Prospectus of the relevant Fund.
REDEMPTIONS
The procedures for redemption of shares of a Fund are summarized in its Prospectus. As described in the Prospectuses, a CDSC may be imposed on certain redemptions of Class A and C shares. For
purposes of the CDSC, an exchange of shares from one Fund to another Fund is not considered a redemption or a purchase. For federal income tax purposes, however, such an exchange is considered a sale and a purchase and, therefore, would be
considered a taxable event on which you may recognize a gain or loss. In determining whether a CDSC is applicable to a redemption of Class A or Class C shares, the calculation will be determined in the manner that results in the lowest rate
being charged. The charge will not be applied to dollar amounts representing an increase in the NAV of shares since the time of purchase or reinvested distributions associated with such shares. Unless you request otherwise at the time of redemption,
the CDSC is deducted from the redemption, not the amount remaining in the account.
The Funds will only accept medallion signature guarantees
bearing the STAMP2000 Medallion imprint. However, a medallion signature guarantee may not be required if the proceeds of the redemption do not exceed $100,000 and the proceeds check is made payable to the registered owner(s) and mailed to the record
address, or if the proceeds are going to a bank on file. Please contact the Funds at 800-225-5478 with any questions regarding when a medallion signature guarantee is required.
If you select the telephone redemption service in the manner described in the next paragraph, shares of the Funds may be redeemed by calling toll-free 800-225-5478. A wire fee may be deducted from the
proceeds if you elect to receive the funds wired to your bank on record. Telephone redemption requests must be received by the close of regular trading on the NYSE. Requests made after that time or on a day when the NYSE is closed will receive the
next business day’s closing price. The proceeds of a telephone withdrawal will normally be sent within three business days following receipt of a proper redemption request, although it may take longer.
A shareholder automatically receives access to the ability to redeem shares by telephone following the completion of the Fund application, which is
available at ngam.natixis.com or from your investment dealer. When selecting the service, a shareholder may have the withdrawal proceeds sent to his or her bank, in which case the shareholder must
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designate a bank account on his or her application or Service Options Form to which the redemption proceeds should be sent as well as provide a check marked “VOID” and/or a deposit slip
that includes the routing number of his or her bank. Any change in the bank account so designated may be made by furnishing to Boston Financial or your investment dealer a completed Service Options Form, which may require a medallion signature
guarantee or a Signature Validation Program Stamp. Telephone redemptions by ACH or wire may only be made if the designated bank is a member of the Federal Reserve System or has a correspondent bank that is a member of the System. If the account is
with a savings bank, it must have only one correspondent bank that is a member of the System. The Funds, the Distributor, Boston Financial (the Funds’ transfer agent) and State Street Bank (the Funds’ custodian) are not responsible for the
authenticity of withdrawal instructions received by telephone, although they will apply established verification procedures. Boston Financial, as agreed to with the Funds, will employ reasonable procedures to confirm that your telephone instructions
are genuine, and if it does not, it may be liable for any losses due to unauthorized or fraudulent instructions. Such verification procedures include, but are not limited to, requiring a form of personal identification prior to acting on an
investor’s telephone instructions and recording an investor’s instructions.
Shares purchased by check or through ACH may not be
available immediately for redemption to the extent the check or ACH transaction has not cleared. The Funds may withhold redemption proceeds for ten days when redemptions are made within ten calendar days of purchase by check or through ACH.
The redemption price will be the NAV per share (less any applicable CDSC) next determined after the redemption request and any necessary
special documentation is received by the transfer agent or your investment dealer in proper form. Payment normally will be made by the Funds within seven days thereafter. However, in the event of a request to redeem shares for which a Fund has not
yet received good payment, the Fund reserves the right to withhold payments of redemption proceeds if the purchase of shares was made by a check which was deposited within ten calendar days prior to the redemption request (unless the Fund is aware
that the check has cleared).
The CDSC may be waived on redemptions made from IRA accounts due to attainment of age 59 1/2 for IRA
shareholders who established accounts prior to January 3, 1995. The CDSC may also be waived on redemptions made from IRA accounts due to death, disability, return of excess contribution, required minimum distributions at age 70 1/2 (waivers
apply only to amounts necessary to meet the required minimum amount based on assets held within the Funds), certain withdrawals pursuant to a systematic withdrawal plan, not to exceed 10% annually of the value of the account, and redemptions made
from the account to pay custodial fees. The CDSC may also be waived on redemptions within one year following the death of (i) the sole shareholder of an individual account, (ii) a joint tenant where the surviving joint tenant is the
deceased’s spouse or (iii) the beneficiary of a Uniform Gifts to Minors Act, Uniform Transfer to Minors Act or other custodial account. If the account is transferred to an account registered in the name of the deceased’s estate, the
CDSC will be waived on any redemption occurring within one year of death. If shares are not redeemed within one year of the death, they will remain subject to the applicable CDSC when redeemed from the transferee’s account. If the account is
transferred to a new registration and then a redemption is requested, the applicable CDSC will be charged.
The CDSC may be waived on
redemptions made from 403(b)(7) custodial accounts due to attainment of age 59 1/2 for shareholders who established custodial accounts prior to January 3, 1995. The CDSC may also be waived on redemptions made from 403(b)(7) custodial accounts
due to death or disability.
The CDSC may also be waived on redemptions necessary to pay plan participants or beneficiaries from qualified
retirement plans under Section 401 of the Code, including profit sharing plans, money purchase plans, 401(k) and custodial accounts under Section 403(b)(7) of the Code. Distributions necessary to pay plan participants and beneficiaries
include payment made due to death, disability, separation from service, normal or early retirement as defined in the plan document, loans from the plan and hardship withdrawals, return of excess contributions, required minimum distributions at age
70 1/2 (waivers only apply to amounts necessary to meet the required minimum amount), certain withdrawals pursuant to a systematic withdrawal plan, not to exceed 10% annually of the value of your account, and redemptions made from qualified
retirement accounts or Section 403(b)(7) custodial accounts necessary to pay custodial fees.
A CDSC will apply in the event of plan
level transfers, including transfers due to changes in investment where assets are transferred outside of Natixis Funds, including IRA and 403(b)(7) participant-directed transfers of assets to other custodians (except for the reasons given above) or
qualified transfers of assets due to trustee-directed movement of plan assets due to merger, acquisition or addition of additional funds to the plan.
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In order to redeem shares electronically through the ACH system, a shareholder’s bank or credit union
must be a member of the ACH system and the shareholder must have a completed, approved ACH application on file. In addition, the telephone or online request must be received no later than the close of the NYSE. Upon receipt of the required
information, the appropriate number of shares will be redeemed and the monies forwarded to the bank designated on the shareholder’s application through the ACH system. The redemption will be processed the day the telephone call or online
request is made and the monies generally will arrive at the shareholder’s bank within three business days. The availability of these monies will depend on the individual bank’s rules.
Each Fund will normally redeem shares for cash; however, each Fund reserves the right to pay the redemption price wholly or partly in kind, if NGAM
Advisors determines it to be advisable and in the interest of the remaining shareholders of a Fund. The redemptions in kind will be selected by each Adviser in light of the Fund’s objective and will not generally represent a pro rata
distribution of each security held in the Fund’s portfolio. If portfolio securities are distributed in lieu of cash, the shareholder will normally incur brokerage commissions upon subsequent disposition of any such securities. However, the
Funds have elected to be governed by Rule 18f-1 under the 1940 Act, pursuant to which each Fund is obligated to redeem shares solely in cash for any shareholder during any 90-day period up to the lesser of $250,000 or 1% of the total NAV of each
Fund at the beginning of such period.
The Funds do not currently impose any redemption charge other than the CDSC imposed by the Funds’
distributor, as described in the Prospectuses. The Board reserves the right to impose additional charges at any time. A redemption constitutes a sale of shares for U.S. federal income tax purposes on which the investor may realize a long- or
short-term capital gain or loss. See also the section “Taxes.”
The Funds reserve the right to suspend account services or refuse
transaction requests if a Fund receives notice of a dispute between registered owners or of the death of a registered owner or a Fund suspects a fraudulent act. If a Fund refuses a transaction request because it receives notice of a dispute, the
transaction will be processed at the NAV next determined after a Fund receives notice that the dispute has been settled or a court order has been entered adjudicating the dispute. If a Fund determines that its suspicion of fraud or belief that a
dispute existed was mistaken, the transaction will be processed as of the NAV next determined after the transaction request was first received in good order.
Reinstatement Privilege (Class A Shares Only)
The Prospectuses describe redeeming
shareholders’ reinstatement privileges for Class A shares. In order to exercise the reinstatement privilege, you must provide a new investment check made payable to Natixis Funds and written notice to Natixis Funds (directly or through
your financial representative) within 120 days of your redemption. The reinstatement or exchange will be made at NAV next determined after receipt of the notice and the new investment check in good order and will be limited to the amount of the
redemption proceeds.
Even though an account is reinstated, the redemption will constitute a sale for U.S. federal income tax purposes.
Investors who reinstate their accounts by purchasing shares of the Funds should consult with their tax advisers with respect to the effect of the “wash sale” rule if a loss is realized at the time of the redemption.
SHAREHOLDER SERVICES
Open Accounts
A shareholder’s investment is automatically credited to an open account
maintained for the shareholder by Boston Financial. Following each additional investment or redemption from the account initiated by an investor (with the exception of systematic investment plans), a shareholder will receive a confirmation statement
disclosing the current balance of shares owned and the details of recent transactions in the account. After the close of each calendar year, the Funds will send each shareholder a statement providing account information which may include federal tax
information on dividends and distributions paid to the shareholder during the year. This statement should be retained as a permanent record.
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The open account system provides for full and fractional shares expressed to three decimal places and, by
making the issuance and delivery of stock certificates unnecessary, eliminates problems of handling and safekeeping, and the cost and inconvenience of replacing lost, stolen, mutilated or destroyed certificates. Certificates will not be issued or
honored for any class of shares.
The costs of maintaining the open account system are paid by the Funds and no direct charges are made to
shareholders. Although the Funds have no present intention of making such direct charges to shareholders, they each reserve the right to do so. Shareholders will receive prior notice before any such charges are made.
Minimum Balance Policy
The Funds’
minimum balance policy is described in the Prospectuses.
Automatic Investment Plans
Subject to each Fund’s investor eligibility requirements, investors may automatically invest in additional shares of a Fund on a monthly basis by
authorizing the Distributor to draw checks on an investor’s bank account. The checks are drawn under the Investment Builder Program, a program designed to facilitate such periodic payments, and are forwarded to Boston Financial for investment
in the Fund. A plan in Class A and Class C shares may be opened with an initial investment of $1,000 or the fund minimum for Class Y shares or more and thereafter regular monthly checks of $50 or more will be drawn on the investor’s
account. (Shareholders with accounts participating in Natixis Funds’ Investment Builder Program prior to May 1, 2005 may continue to make subsequent purchases of $25 or more into those accounts). The reduced minimum initial investment
pursuant to an automatic investment plan for Class A and Class C shares is referred to in the Prospectuses. A Service Options Form must be completed to open an automatic investment plan and may be obtained by calling the Funds at 800-225-5478
or your investment dealer or by visiting the Funds’ website at ngam.natixis.com.
This program is voluntary and may be terminated at any
time by Boston Financial upon notice to existing plan participants. The Investment Builder Program plan may be discontinued at any time by the investor by written notice to Boston Financial, which must be received at least five business days prior
to any payment date. The plan may be discontinued by State Street Bank at any time without prior notice if any check is not paid upon presentation or by written notice to the shareholder at least thirty days prior to any payment date. The Funds are
under no obligation to notify shareholders as to the nonpayment of any check.
Retirement Plans and Other Plans Offering Tax Benefits
The federal tax laws provide for a variety of retirement plans offering tax benefits. These plans may be funded with shares of the Funds
or with certain other investments. The plans include H.R. 10 (Keogh) plans for self-employed individuals and partnerships, individual retirement accounts (IRAs), corporate pension trust and profit sharing plans, including 401(k) plans and retirement
plans for public school systems and certain tax-exempt organizations.
The minimum initial investment available to retirement plans and other
plans offering tax benefits is referred to in the Prospectuses. For these plans, initial investments in a Fund for Class A and Class C shares must be at least $1,000 for IRAs and Keogh plans using the Natixis Funds prototype document and $500
for Coverdell Education Savings Accounts and at least $100 for any subsequent investments. There is no initial or subsequent investment minimum for SIMPLE IRAs using the Natixis Funds prototype documents. Income dividends and capital gain
distributions must be reinvested (unless the investor is over age 59 1/2 or disabled). These types of accounts may be subject to fees. Plan documents and further information can be obtained from the Distributor.
Certain retirement plans may also be eligible to purchase Class Y shares. See the Prospectuses relating to Class Y shares.
Systematic Withdrawal Plans (All Classes)
An investor owning a Fund’s shares having a value of $10,000 or more at the current public offering price may establish a Systematic Withdrawal Plan
(a “Plan”) providing for periodic payments of a fixed or variable amount.
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An investor may terminate the plan at any time. A form for use in establishing such a plan is available from Boston Financial or your investment dealer. Withdrawals may be paid to a person other
than the shareholder if a Medallion signature guarantee is provided. Please consult your investment dealer or the Funds.
A shareholder under
a Plan may elect to receive payments monthly, quarterly, semiannually or annually for a fixed amount of not less than $50 or a variable amount based on (1) the market value of a stated number of shares, (2) a specified percentage of the
account’s market value or (3) for Natixis sponsored IRA accounts only, a specified number of years for liquidating the account (
e.g.
, a 20-year program of 240 monthly payments would be liquidated at a monthly rate of 1/240, 1/239,
1/238, etc.). The initial payment under a variable payment option may be $50 or more.
In the case of shares subject to a CDSC, the amount or
percentage you specify may not, on an annualized basis, exceed 10% of the value, as of the time you make the election, of your account with the Fund with respect to which you are electing the Plan. No CDSC applies to redemptions pursuant to the
Plan.
Income dividends and capital gain distributions will be reinvested (without a sales charge in the case of Class A shares) based
upon the NAV determined as of the close of regular trading on the NYSE on the ex-dividend date.
Since withdrawal payments represent proceeds
from the liquidation of shares, withdrawals may reduce and possibly exhaust the value of the account, particularly in the event of a decline in NAV. Accordingly, a shareholder should consider whether a Plan and the specified amounts to be withdrawn
are appropriate under the circumstances. The Funds and the Distributor make no recommendations or representations in this regard. It may be appropriate for a shareholder to consult a tax adviser before establishing such a plan. See the sections
“Redemptions” and “Taxes” for certain information as to U.S. federal income taxes.
It may be disadvantageous for a
shareholder to purchase on a regular basis additional Fund shares with a sales charge while redeeming shares under a Plan. Accordingly, the Funds and the Distributor do not recommend additional investments in Class A shares by a shareholder who
has a withdrawal plan in effect and who would be subject to a sales load on such additional investments. Natixis Funds may modify or terminate this program at any time.
Because of statutory restrictions this Plan may not be available to pension or profit-sharing plans and IRA plans that have State Street Bank as trustee. Different documentation may be required.
Dividend Diversification Program
You may also establish a Dividend Diversification Program, which allows you to have all dividends and any other distributions automatically invested in shares of the same class of another Natixis Fund,
subject to the investor eligibility requirements of that other Fund and to state securities law requirements. Shares will be purchased based upon the selected Fund’s NAV (without a sales charge or CDSC) determined as of the close of regular
trading on the NYSE on the ex-dividend date for each dividend or distribution. A dividend diversification account must be registered to the same shareholder as the distributing Fund account and, if a new account in the purchased Fund is being
established, the purchased Fund’s minimum investment requirements must be met. Before establishing a Dividend Diversification Program into any other Natixis Fund, you must obtain and carefully read a copy of that Fund’s Prospectus.
Exchange Privilege
A
shareholder may exchange Class A, Class C and Class Y shares of the Funds for shares of the same class of a Natixis Fund or series of Loomis Sayles Funds I or Loomis Sayles Funds II that offers that class (subject to the investor eligibility
requirements, if any, of the fund into which the exchange is being made and any other limits on the sales of or exchanges into that fund) on the basis of relative NAVs at the time of the exchange without any sales charge. An exchange of shares in
one fund for shares of another fund is a taxable event on which gain or loss may be recognized. When an exchange is made from the Class A or Class C shares of the Funds to the same class of shares of another fund, the shares received by the
shareholder in the exchange will have the same age characteristics as the shares exchanged. The age of the shares determines the expiration of the CDSC. If you own Class Y shares, you may exchange those shares for Class Y shares of other funds, for
Institutional Class shares of any series of
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Loomis Sayles Funds I or Loomis Sayles Funds II that offers Institutional Class shares. Shareholders who hold their shares through certain financial intermediaries may not be eligible to convert
their Class A shares to Class Y shares. These options are summarized in the Funds’ Prospectuses. An exchange may be effected, provided that neither the registered name nor address of the accounts is different by (1) a telephone
request to the Funds at 800-225-5478, (2) a written exchange request to the Natixis Funds, P.O. Box 219579, Kansas City, MO 64121-9579 or (3) visiting our website at ngam.natixis.com. You must acknowledge receipt of a current Prospectus
for the Funds before an exchange for the Funds can be effected. The minimum amount for an exchange is the minimum amount to open an account or the total NAV of your account, whichever is less.
Accounts participating in or moving into wrap-fee programs or held through a registered investment adviser may exchange Class A shares of a fund for
Class Y shares of the same fund and may also exchange Class C shares of a fund for Class A shares or Class Y shares of the same fund. Any account with an outstanding contingent deferred sales charge (“CDSC”) liability will be assessed
the CDSC before converting to either Class A or Class Y shares. Accounts converting from Class C shares to Class A shares will not be subject to any Class A sales charges as a result of the initial conversion or any subsequent
purchases of Class A shares in such accounts. In order to exchange shares, a representative of the wrap-fee program or registered investment adviser must follow the procedures set forth by the Distributor.
Class A shares of a fund acquired by Trustees, former Trustees, employees of affiliates of the Natixis Funds, individuals who are affiliated with
any Natixis Fund (including spouses, parents, children, siblings, grandparents, grandchildren and in-laws of those mentioned) and Natixis affiliate employee benefit plans (collectively, “Natixis affiliated shareholders”) may be exchanged
for Class Y shares of the same fund without payment of a CDSC. An exchange of shares for shares of a different class in the same fund generally should not be a taxable event for the exchanging shareholder.
In certain limited circumstances, accounts participating in wrap fee programs or held through a registered investment adviser may exchange Class Y shares
of a Fund for Class A shares of the same Fund. Class Y shares may be converted to Class A shares of the same Fund if the Class Y shares are held in an investment option or program that no longer permits the use of Class Y shares in that
option or program or if the shareholder otherwise becomes ineligible to participate in Class Y shares. Exchanges from Class Y shares to Class A shares will not be subject to an initial sales charge; however, future purchases may be subject to a
sales charge, if applicable. A representative of the wrap fee program or a registered investment adviser must provide a completed cross-share exchange form and written notice to the Distributor indicating that a Class Y shareholder is eligible for
conversion to Class A shares prior to any such exchange. An exchange of shares for shares of a different class in the same fund generally should not be a taxable event for the exchanging shareholder.
Due to operational limitations at your financial intermediary, your ability to exchange between shares classes of the same fund may be limited. Please
consult your financial representative for more information.
All exchanges are subject to the eligibility requirements of the
Fund into which you are exchanging and any other limits on sales of or exchanges into that Fund. The exchange privilege may be exercised only in those states where shares of such Funds may be legally sold. Each Fund reserves the right to
suspend or change the terms of exchanging shares. Each Fund and the Distributor reserve the right to refuse or limit any exchange order for any reason, including if the transaction is deemed not to be in the best interests of the Fund’s other
shareholders or possibly disruptive to the management of the Fund.
Before requesting an exchange into any other Natixis Fund or series of
Loomis Sayles Funds I or Loomis Sayles Funds II, please read its prospectus carefully. Subject to the applicable rules of the SEC, the Board reserves the right to modify the exchange privilege at any time. Except as otherwise permitted by SEC rule,
shareholders will receive at least 60 days’ advance notice of any material change to the exchange privilege.
Automatic Exchange Plan
As described in the Prospectuses, a shareholder may establish an Automatic Exchange Plan under which shares of a Fund are automatically
exchanged each month for shares of the same class of one or more of the other Funds. Registration on all accounts must be identical. The Fund minimum of the new fund must be met in connection with each investment. The two dates each month on which
exchanges may be made are the 15th and 28th (or the first business day thereafter if either the 15th or the 28th is not a business day) until the account is exhausted or until
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Boston Financial is notified in writing to terminate the plan. Exchanges may be made in amounts of $100 or more. The Service Options Form may be used to establish an Automatic Exchange Plan and
is available from Boston Financial, your financial representative or by visiting our website at ngam.natixis.com.
Restrictions on Buying,
Selling and Exchanging Shares
As stated in each Fund’s Prospectuses, each Fund and the Distributor reserve the right to reject any
purchase or exchange order for any reason. When a purchase or exchange order is rejected, the Fund or the Distributor will send notice to the prospective investor or the investor’s financial intermediary promptly after receipt of the rejected
order.
Broker Trading Privileges
The Distributor may, from time to time, enter into agreements with one or more brokers or other intermediaries to accept purchase and redemption orders for Fund shares until the close of regular trading
on the NYSE (normally, 4:00 p.m., Eastern time on each day that the NYSE is open for trading); such purchase and redemption orders will be deemed to have been received by a Fund when the authorized broker or intermediary accepts such orders; and
such orders will be priced using that Fund’s NAV next computed after the orders are placed with and accepted by such brokers or intermediaries. Any purchase and redemption orders received by a broker or intermediary under these agreements will
be transmitted daily to the Fund no later than the time specified in such agreement; but, in any event, no later than market open, Eastern time, following the day that such purchase or redemption orders are received by the broker or intermediary.
Transcript Requests
Transcripts of account transactions will be provided, free of charge, at the shareholder’s request.
Self-Servicing Your Account with Natixis Funds Personal Access Line® and Website
Natixis Funds shareholders may access account information, including share balances and recent account activity online, by visiting our website at ngam.natixis.com. Transactions may also be processed
online for certain accounts (restrictions may apply). Such transactions include purchases, redemptions and exchanges, and shareholders are automatically eligible for these features. Natixis Funds has taken measures to ensure the security of
shareholder accounts, including the encryption of data and the use of personal identification (PIN) numbers. In addition, you may restrict these privileges from your account by calling Natixis Funds at 800-225-5478, or writing to us at P.O. Box
219579, Kansas City, MO 64121-9579. More information regarding these features may be found on our website at ngam.natixis.com.
Investor activities through these mediums are subject to the terms and conditions outlined in the following
Natixis Funds Online and Telephonic Customer Agreement
. This agreement is also posted on
our website. The initiation of any activity through the Natixis Funds Personal Access Line
®
or website at
ngam.natixis.com by an investor shall indicate agreement with the following terms and conditions:
Natixis Funds Online and Telephonic
Customer Agreement
NOTE: ACCESSING OR REQUESTING ACCOUNT INFORMATION OR TRANSACTIONS THROUGH THIS SITE CONSTITUTES AND SHALL BE DEEMED
TO BE AN ACCEPTANCE OF THE FOLLOWING TERMS AND CONDITIONS.
The accuracy, completeness and timeliness of all mutual fund information
provided is the sole responsibility of the mutual fund company that provides the information. No party that provides a connection between this website and a mutual fund or its transfer agency system can verify or ensure the receipt of any
information transmitted to or from a mutual fund or its transfer agent, or the acceptance by, or completion of any transaction with, a mutual fund.
The online acknowledgments or other messages that appear on your screen for transactions entered do not mean that the transactions have been received, accepted or rejected by the mutual fund. These
acknowledgments are only an indication that the transactional information entered by you has either been transmitted to the mutual fund, or that it cannot be transmitted. It is the responsibility of the mutual fund to confirm to you that it has
received the information and accepted or rejected a transaction. It is the responsibility of the mutual fund to deliver to you a
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current prospectus, confirmation statement and any other documents or information required by applicable law.
NO TRANSACTION SHALL BE DEEMED ACCEPTED UNTIL YOU RECEIVE A WRITTEN CONFIRMATION FROM THE NATIXIS FUNDS.
You are responsible for reviewing all mutual fund account statements received by you in the mail in order to verify the accuracy of all mutual fund account information provided in the statement and
transactions entered through this site. You are also responsible for promptly notifying the mutual fund of any errors or inaccuracies relating to information contained in, or omitted from, your mutual fund account statements, including errors or
inaccuracies arising from the transactions conducted through this site.
TRANSACTIONS ARE SUBJECT TO ALL REQUIREMENTS, RESTRICTIONS AND
FEES AS SET FORTH IN THE PROSPECTUS OF THE SELECTED FUND.
THE CONDITIONS SET FORTH IN THIS AGREEMENT EXTEND NOT
ONLY TO TRANSACTIONS TRANSMITTED VIA THE INTERNET BUT TO TELEPHONIC TRANSACTIONS INITIATED THROUGH THE NATIXIS FUNDS PERSONAL ACCESS LINE
®
.
You are responsible for the confidentiality and
use of your personal identification numbers, account numbers, social security numbers and any other personal information required to access the site or transmit telephonically. Any individual that possesses the information required to pass through
all security measures will be presumed to be you. All transactions submitted by an individual presumed to be you will be solely your responsibility.
You agree that Natixis Funds does not have the responsibility to inquire as to the legitimacy or propriety of any instructions received from you or any person believed to be you, and is not responsible or
liable for any losses that may occur from acting on such instructions.
Natixis Funds is not responsible for incorrect data received via the
internet or telephonically from you or any person believed to be you. Transactions submitted over the internet and telephonically are solely your responsibility and Natixis Funds makes no warranty as to the correctness, completeness or accuracy of
any transmission. Similarly, Natixis Funds bears no responsibility for the performance of any computer hardware, software or the performance of any ancillary equipment and services such as telephone lines, modems or internet service providers.
The processing of transactions over this site or telephonically will involve the transmission of personal data including social security
numbers, account numbers and personal identification numbers. While Natixis Funds has taken reasonable security precautions including data encryption designed to protect the integrity of data transmitted to and from the areas of our website that
relate to the processing of transactions, we disclaim any liability for the interception of such data.
You agree to immediately notify
Natixis Funds if any of the following occurs:
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You do not receive confirmation of a transaction submitted via the internet or telephonically within five (5) business days.
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2.
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You receive confirmation of a transaction of which you have no knowledge and which was not initiated or authorized by you.
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You transmit a transaction for which you do not receive a confirmation number.
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4.
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You have reason to believe that others may have gained access to your personal identification number (PIN) or other personal data.
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5.
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You notice an unexplained discrepancy in account balances or other changes to your account, including address changes, and banking instructions on any confirmations or
statements.
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Any costs incurred in connection with the use of the Natixis Funds Personal Access Line
®
or the Natixis Funds internet site including telephone line costs and internet service provider costs are solely
your responsibility.
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Similarly, Natixis Funds makes no warranties concerning the availability of internet services or network
availability.
Natixis Funds reserves the right to suspend, terminate or modify the internet capabilities offered to shareholders without
notice.
YOU HAVE THE ABILITY TO RESTRICT INTERNET AND TELEPHONIC ACCESS TO YOUR ACCOUNTS BY NOTIFYING NATIXIS FUNDS OF YOUR DESIRE TO DO
SO.
Written notifications to Natixis Funds should be sent to:
All account types excluding SIMPLE IRAs:
Natixis Funds
P. O. Box 219579
Kansas City, MO 64121-9579
Notification may also be made by calling 800-225-5478 during normal business hours.
Simple IRA shareholders please use:
Natixis Funds
P. O. Box 8705
Boston, MA 02266-8705
Notification may also be made by calling 800-813-4127 during normal business hours.
NET ASSET VALUE
The method for determining the public offering price and NAV per share is summarized in the Prospectuses.
The total NAV of each class of shares of a Fund (the excess of the assets of such Fund attributable to such class over the liabilities attributable to such class) is determined at the close of regular
trading (normally 4:00 p.m., Eastern Time) on each day that the NYSE is open for trading. Each Fund will not price its shares on the following holidays: New Year’s Day, Martin Luther King Day, Presidents’ Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Equity securities, including closed-end investment companies and exchange-traded funds, for which market quotations are readily available are valued at market value, as reported by
independent pricing services recommended by the applicable Adviser or Subadviser and approved by the Board. Such independent pricing services generally use the security’s last sale price on the exchange or market where the security is primarily
traded or, if there is no reported sale during the day, the closing bid price. Securities traded on the NASDAQ Global Select Market, NASDAQ Global Market and NASDAQ Capital Market are valued at the NASDAQ Official Closing Price (“NOCP”),
or if lacking an NOCP, at the most recent bid quotations on the applicable NASDAQ Market. Debt securities (other than short-term obligations purchased with an original or remaining maturity of sixty days or less) and unlisted equity securities for
which market quotations are not readily available are generally valued on the basis of evaluated bids furnished to each Fund by an independent pricing service recommended by the applicable Adviser or Subadviser and approved by the Board, which
service determines valuations for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by
institutional traders. Senior loans are priced at bid prices supplied by an independent pricing service, if available. Broker-dealer bid quotations may also be used to value debt and equity securities and senior loans where an independent pricing
service does not price a security or where an independent pricing service does not provide a reliable price for the security. Domestic exchange-traded single equity option contracts (including options on exchange-traded funds) are valued at the mean
of the National Best Bid and Offer quotations. Options on futures contracts are valued using the current settlement price. International exchange-traded index options are valued at the settlement price. Other exchange-traded options (
i.e.
,
options on domestic indices, foreign securities, currencies and other financial contracts) are valued at the average of the closing bid and ask quotations. OTC international index options are valued at the most recent settlement prices supplied by
an independent pricing service as of the close of the local market. Swaptions are valued based on mid prices (between the bid price and the ask price) supplied by an independent pricing service. Currency options are priced at the mid price (between
the bid price and the ask price) supplied by an independent pricing service, if available. Other OTC options contracts (including currency options and swaptions not priced through an independent pricing service) are valued based on quotations
obtained from broker-dealers. These quotations will be either the bid for a long transaction or the ask for a short transaction.
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Futures are valued at the most recent settlement price. Interest rate swaps are valued based on prices supplied by an independent pricing service, if available, or quotations obtained from
broker-dealers. Credit default swaps are valued based on mid prices (between the bid price and the ask price) supplied by an independent pricing service, if available, or quotations obtained from broker-dealers. Commodity index total return swaps
are valued based on the closing price of the reference asset that is supplied by an independent pricing service, if available, or quotations from a broker-dealer. Forward foreign currency contracts are valued at interpolated prices determined from
information provided by an independent pricing service. Investments in other open-end investment companies are valued at their reported NAV each day. Short-term obligations purchased with an original or a remaining maturity of sixty days or less are
valued at amortized cost, which approximates market value. Securities and other instruments for which current market quotations are not readily available and all other assets are valued at fair value as determined in good faith by the applicable
Adviser or Subadviser using consistently applied procedures under the general supervision of the Board.
Generally, trading in foreign
government securities and other fixed-income securities, as well as trading in equity securities or other instruments in markets outside the United States, is substantially completed each day at various times prior to the close of the NYSE.
Securities or other instruments traded on a foreign exchange will be valued at their market price on the non-U.S. exchange except for securities traded on the London Stock Exchange (“British Equities”). British Equities will be valued at
the official close of the London Stock Exchange. The value of other securities or other instruments principally traded outside the United States will be computed as of the completion of substantial trading for the day on the markets on which such
securities or other instruments principally trade. Securities or other instruments principally traded outside the United States will generally be valued several hours before the close of regular trading on the NYSE, generally 4:00 p.m., Eastern
Time, when each Fund computes the NAV of its shares. Occasionally, events affecting the value of securities or other instruments principally traded outside the United States may occur between the completion of substantial trading of such securities
or other instruments for the day and the close of the NYSE, which events will not be reflected in the computation of a Fund’s NAV. If it is determined pursuant to procedures adopted by the Board that events materially affecting the value of a
Fund’s securities or other instruments have occurred during such period, then these securities or other instruments may be fair valued at the time a Fund determines its NAV by or pursuant to procedures adopted by the Board. When fair valuing
its securities or other instruments, each Fund may, among other things, use modeling tools or other processes that may take into account factors such as securities or other instruments market activity and/or significant events that occur after the
close of the foreign market and before the time a Fund’s NAV is calculated.
Because of fair value pricing, securities or other
instruments may not be priced on the basis of quotations from the primary market in which they are traded but rather may be priced by another method that the Board believes is more likely to result in a price that reflects fair value. Each Fund may
also value securities or other instruments at fair value or estimate its value pursuant to procedures adopted by the Board in other circumstances such as when extraordinary events occur after the close of the relevant market but prior to the close
of the NYSE. This may include situations relating to a single issuer (such as a declaration of bankruptcy or a delisting of the issuer’s securities or other instruments from the primary market on which it has traded) as well as events affecting
the securities markets in general (such as market disruptions or closings and significant fluctuations in U.S. and/or foreign markets).
Trading in some of the portfolio securities or other instruments of some of the Funds takes place in various markets outside the United States on days
and at times other than when the NYSE is open for trading. Therefore, the calculation of these Funds’ NAV does not take place at the same time as the prices of many of its portfolio securities or other instruments are determined, and the value
of these Funds’ portfolios may change on days when these Funds are not open for business and their shares may not be purchased or redeemed.
The per share NAV of a class of each Fund’s shares is computed by dividing the number of shares outstanding into the total NAV attributable to such class. The public offering price of a Class A
share of a Fund is the NAV per share plus a sales charge as set forth in each Fund’s Prospectus.
REDUCED SALES CHARGES
The following special purchase plans are summarized in the Prospectuses and are described in greater detail
below. Investors should note that in many cases, the broker, and not the Funds, is responsible for ensuring that the investor receives current discounts.
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If you invest in Class A shares through a financial intermediary, it is the responsibility of the
financial intermediary to ensure you obtain the proper “breakpoint” discount. In order to reduce your sales charge, it will be necessary at the time of purchase to inform the Distributor and your financial intermediary, in writing, of the
existence of other accounts in which there are holdings eligible to be aggregated to meet sales load breakpoints. If the Distributor is not notified that you are eligible for a reduced sales charge, the Distributor will be unable to ensure that the
reduction is applied to the investor’s account. You may be required to provide certain records and information, such as account statements, with respect to all of your accounts which hold Fund shares, including accounts with other financial
intermediaries, and your family members’ and other related parties’ accounts, in order to verify your eligibility for the reduced sales charge.
Cumulative Purchase Discount
A Fund shareholder may make an initial or an additional
purchase of Class A shares and be entitled to a discount on the sales charge payable on that purchase. This discount will be available if the shareholder’s “total investment” in the Fund reaches the breakpoint for a reduced sales
charge in the table in the section “How Sales Charges Are Calculated – Class A Shares” in the Prospectus. The total investment is determined by adding the amount of the additional purchase, including sales charges, to the current
public offering price of all series and classes of shares of the Natixis Funds held by the shareholder in one or more accounts. Certain shares held through Loomis Sayles Distributors, L.P. may not be eligible for this privilege. If the total
investment exceeds the breakpoint, the lower sales charge applies to the entire additional investment even though some portion of that additional investment is below the breakpoint to which a reduced sales charge applies.
Letter of Intent
A Letter of Intent (a
“Letter”), which can be effected at any time, is a privilege available to investors that reduces the sales charge on investments in Class A shares. Ordinarily, reduced sales charges are available for single purchases of Class A
shares only when they reach certain breakpoints (
e.g.,
$25,000, $100,000, etc.). By signing a Letter, a shareholder indicates an intention to invest enough money in Class A shares within 13 months to reach a breakpoint. If the
shareholder’s intended aggregate purchases of all series and classes of the Trusts and other Natixis Funds over a defined 13-month period will be large enough to qualify for a reduced sales charge, the shareholder may invest the smaller
individual amounts at the public offering price calculated using the sales load applicable to the 13-month aggregate investment. Certain shares held though Loomis Sayles Distributors, L.P. may not be eligible for this privilege.
A Letter is a non-binding commitment, the amount of which may be increased, decreased or canceled at any time. The effective date of a Letter is the date
it is received in good order by the Funds’ transfer agency.
A reduced sales charge is available pursuant to a written Letter effected
within 90 days after any purchase of Class A shares. In the event the account was established prior to 90 days before the effective date of the Letter, the account will be credited with the Rights of Accumulation (“ROA”) towards the
breakpoint level that will be reached upon the completion of the 13 months’ purchases. The ROA credit is the value of all shares held as of the effective date of the Letter based on the “public offering price computed on such date.”
The cumulative purchase discount, described above, permits the aggregate value at the current public offering price of Class A shares of
any accounts with the Trusts held by a shareholder to be added to the dollar amount of the intended investment under a Letter, provided the shareholder lists them on the account application.
The Funds’ transfer agent will hold in escrow shares with a value at the current public offering price of 5% of the aggregate amount of the intended investment. The amount in escrow will be released
when the commitment stated in the Letter is completed. If the shareholder does not purchase shares in the amount indicated in the Letter, the shareholder agrees to remit to the Funds’ transfer agent the difference between the sales charge
actually paid and that which would have been paid had the Letter not been in effect, and authorizes the Funds’ transfer agent to redeem escrowed shares in the amount necessary to make up the difference in sales charges. Reinvested dividends and
distributions are not included in determining whether the Letter has been completed.
Combining Accounts
For purposes of determining the sales charge applicable to a given purchase, a shareholder may elect to combine the
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purchase and the shareholder’s total investment (calculated at the current public offering price) in all series and classes of the Natixis Funds with the purchases and total investment of
the shareholder’s spouse, parents, children, siblings, grandparents, grandchildren and in-laws of those previously mentioned, single trust estates, individual fiduciary accounts and sole proprietorships or any other group of individuals
acceptable to the Distributor. If the combined value of the purchases and total investments exceeds a sales charge breakpoint as disclosed in the Prospectuses, the lower sales charge applies to the entire amount of the purchase, even though some
portion of that investment is below the breakpoint to which a reduced sales charge applies. Certain shares held though Loomis Sayles Distributors, L.P. may not be eligible for this privilege.
For certain retirement plans, the Distributor may, in its discretion, combine the purchases and total investment of all qualified participants in the same retirement plan for purposes of determining the
availability of a reduced sales charge.
Purchases and total investments of individuals may not be combined with purchases and total
investments of the retirement plan accounts described in the preceding paragraph for the purpose of determining the availability of a reduced sales charge. Only the purchases and total investments in tax-qualified retirement plans or other employee
benefit plans in which the shareholder is the sole participant may be combined with individual accounts for purposes of determining the availability of a reduced sales charge.
Clients of the Advisers
Investment advisory clients of NGAM Advisors and each Adviser may
invest in Class Y shares of the Funds below the minimums stated in the Class Y Prospectus. No front-end sales charge or CDSC applies to investments of $25,000 or more in Class A shares of the Fund by (1) clients of an Adviser to any series
of the Trusts or another Natixis Fund; any director, officer or partner of a client of an Adviser to any series of the Trusts or another Natixis Fund; or the spouse, parents, children, siblings, in-laws, grandparents or grandchildren of the
foregoing; (2) any individual who is a participant in a Keogh or IRA Plan under a prototype of an Adviser to any series of the Trusts or another Natixis Fund if at least one participant in the plan qualifies under category (1) above; and
(3) an individual who invests through an IRA and is a participant in an employee benefit plan that is a client of an Adviser to any series of the Trusts or another Natixis Fund. Any investor eligible for this arrangement should so indicate in
writing at the time of the purchase. In addition, the front-end sales charge or CDSC may be waived for investments in Class A shares, for Funds that do not offer Class Y shares, by clients of an Adviser to any series of the Trusts or another
Natixis Fund.
Eligible Governmental Authorities
There is no sales charge or CDSC related to investments in Class A shares by any state, county or city or any instrumentality, department, authority or agency thereof that has determined that a Fund
is a legally permissible investment and that is prohibited by applicable investment laws from paying a sales charge or commission in connection with the purchase of shares of any registered investment company.
Investment Advisory Accounts
Class A shares of any Fund may be purchased at NAV by investment advisers, financial planners or other intermediaries who place trades for their own
accounts or the accounts of their clients and who charge a management, consulting or other fee for their services; clients of such investment advisers, financial planners or other intermediaries who place trades for their own accounts if the
accounts are linked to the master account of such investment adviser, financial planner or other intermediary on the books and records of the broker or agent; and retirement and deferred compensation plans and trusts used to fund those plans,
including, but not limited to, those defined in Sections 401(a), 403(b), 401(k) and 457 of the Code and “rabbi trusts.” Investors may be charged a fee if they effect transactions through a broker or agent.
Certain Broker-Dealers and Financial Services Organizations
Class A shares of any Fund also may be purchased at NAV through certain broker-dealers or financial services organizations without any transaction fee. Such organizations may also receive
compensation paid by NGAM Advisors, or its affiliates out of their own assets (as described in the section “Distribution Agreements and Rule 12b-1 Plans”), or be paid indirectly by the Fund in the form of servicing, distribution or
transfer agent fees.
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Certain Retirement Plans
Class A shares of the Funds are available at NAV for investments by participants in certain employer-sponsored retirement plans. The availability of this pricing may depend upon the policies and
procedures of your specific intermediary; consult your financial adviser.
Bank Trust Departments or Trust Companies
Class A shares of the Funds are available at NAV for investments by non-discretionary and non-retirement accounts of bank trust departments or trust
companies, but are unavailable if the trust department or institution is part of an organization not principally engaged in banking or trust activities.
The reduction or elimination of the sales charges in connection with special purchase plans described above reflects the absence or reduction of expenses associated with such sales.
DISTRIBUTIONS
As described in the Prospectuses, it is the policy of each Fund to pay shareholders at least annually according to the schedule specified in each Fund’s Prospectus, as dividends, all or substantially
all of its net investment income and to distribute annually all or substantially all of its net realized long-term capital gains, if any, after offsetting any capital loss carryovers.
Ordinary income dividends and capital gain distributions are reinvested based upon the NAV determined as of the close of the NYSE on the ex-dividend date for each dividend or distribution. Shareholders,
however, may elect to receive their ordinary income dividends or capital gain distributions, or both, in cash. The election may be made at any time by submitting a written request directly to Natixis Funds, contacting Natixis Funds at 1-800-225-5478
or visiting ngam.natixis.com to change your distribution option. In order for a change to be in effect for any dividend or distribution, it must be received by the Funds on or before the record date for such dividend or distribution.
If you elect to receive your dividends in cash and the dividend checks sent to you are returned as “undeliverable” to the Funds, your cash
election will automatically be changed and your future dividends will be reinvested. No interest will accrue on amounts represented by uncashed dividend or redemption checks.
As required by federal law, federal tax information regarding Fund distributions will be furnished to each shareholder for each calendar year early in the succeeding year.
TAXES
The following discussion of U.S. federal income tax consequences of investment in the Funds is based on the Code, U.S. Treasury regulations, and other applicable authorities, all as of the date of this
Statement. These authorities are subject to change by legislative or administrative action, possibly with retroactive effect. The following discussion is only a summary of some of the important U.S. federal tax considerations generally applicable to
investments in the Funds. There may be other tax considerations applicable to particular shareholders. Shareholders should consult their own tax advisers regarding their particular situations and the possible application of foreign, state and local
tax laws.
Taxation of the Funds
Each Fund has elected or intends to elect and to qualify each year for the special tax treatment accorded to RICs under Subchapter M of the Code. In order to so qualify, a Fund must, among other things:
(i) derive at least 90% of its gross income in each taxable year from (a) dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies, and (b) net income derived from interests in “qualified
publicly traded partnerships” (“QPTPs”); (ii) diversify its holdings so that at the end of each quarter of the Fund’s taxable year (a) at least 50% of the market value of each Fund’s total assets consists of cash
and cash items, U.S. government securities, securities of other RICs, and other securities limited generally, with respect to any one issuer, to no more than 5% of the value
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of the Fund’s total assets and 10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the value of the Fund’s total assets is invested (1) in
the securities (other than those of the U.S. government or other RICs) of any one issuer or of two or more issuers that the Fund controls and that are engaged in the same, similar or related trades or businesses, or (2) in the securities of one
or more QPTPs; and (iii) distribute with respect to each taxable year at least 90% of the sum of its investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paid — generally
taxable ordinary income and the excess, if any, of net short-term capital gains over net long-term capital losses) and net tax-exempt interest income, if any, for such year.
In general, for purposes of the 90% of gross income requirement described in (i) above, income derived by the Funds from a partnership will be treated as qualifying income only to the extent such
income is attributable to items of income of the partnership that would be qualifying income if realized by the Funds. However, 100% of the net income derived from an interest in a QPTP (a partnership (a) interests in which are traded on an
established securities market or are readily tradable on a secondary market or the substantial equivalent thereof, and (b) that derives less than 90% of its income from the qualifying income described in (i)(a) above) will be treated as
qualifying income. In general, such entities will be treated as partnerships for federal income tax purposes because they meet the passive income requirement under Code section 7704(c)(2). MLPs in which a Fund invests may qualify as QPTPs. In
addition, although in general the passive loss rules of the Code do not apply to regulated investment companies, such rules do apply to a RIC with respect to items attributable to an interest in a QPTP.
The 90% of gross income requirement significantly limits the manner and extent to which the Funds invest directly in commodities and certain
commodity-related instruments and may affect a Fund’s ability to pursue its investment strategies. The Growth Markets Fund invests in a wholly-owned non-U.S. subsidiary that in turn makes commodity and commodity-related investments. The Fund
has requested a private letter ruling from the IRS to the effect that income of the subsidiary that is attributed to the Fund will be qualifying income for purposes of the 90% gross income requirement. However, the IRS has not resumed its former
practice of issuing private letter rulings of this type. In the absence of such a ruling or any published guidance issued by the IRS to the same or similar effect, the Fund uses other means of ensuring that this requirement is satisfied.
For purposes of the diversification requirements set forth in (ii) above, the term “outstanding voting securities of an issuer” includes
the equity securities of a QPTP. Also for purposes of the diversification requirements in (ii) above, identification of the issuer (or, in some cases, issuers) of a particular Fund investment can depend on the terms and conditions of that
investment. In some cases, identification of the issuer (or issuers) is uncertain under current law, and an adverse determination or future guidance by the IRS with respect to identification of the issuer for a particular type of investment may
adversely affect the Fund’s ability to satisfy the diversification requirements.
Assuming that it qualifies for treatment as a RIC,
each Fund will not be subject to federal income tax on income that is distributed to its shareholders in a timely manner in the form of dividends (including Capital Gain Dividends, defined below). If a Fund were to fail to satisfy the income,
diversification or distribution requirements described above, the Fund could in some cases cure such failure, including by paying a fund-level tax or interest, disposing of certain assets or making additional distributions. If a Fund were ineligible
to or did not cure such a failure for any year, or if a Fund otherwise were to fail to qualify as a RIC accorded special tax treatment for such year, the Fund would be subject to tax on its taxable income at corporate rates, and all distributions
from earnings and profits, including any distributions of net long-term capital gains, would be taxable to shareholders as ordinary income. Some portions of such distributions may be eligible for the dividends-received deduction in the case of
corporate shareholders and may be eligible to be treated as qualified dividend income in the case of shareholders taxed as individuals, provided in both cases that the shareholder meets certain holding period and other requirements in respect of the
Funds’ shares (as described below). In addition, a Fund could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before requalifying for the special tax treatment accorded to RICs
under the Code.
Each Fund intends to distribute at least annually to its shareholders all or substantially all of its investment company
taxable income (computed without regard to the dividends-paid deduction). If a Fund retains any investment company taxable income, it will be subject to tax at regular corporate rates on the amount retained. Each Fund also intends to distribute
annually all or substantially all of its net capital gain. If a Fund retains any net capital gain, it will be subject to tax at regular corporate rates on the amount retained, but may designate the retained amount as undistributed capital gains in a
timely notice to its shareholders who then in turn (i) will be required to include in income for federal income tax purposes, as long-term capital gains, their respective shares of such undistributed
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amount, and (ii) will be entitled to credit their proportionate shares of the tax paid by the Fund on such undistributed amount against their federal income tax liabilities, if any, and to
claim refunds on properly-filed U.S. federal income tax returns to the extent the credit exceeds such liabilities. In this event, for federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be increased by an
amount equal to the difference between the amount of undistributed capital gains included in the shareholder’s gross income under clause (i) of the preceding sentence and the tax deemed paid by the shareholder under clause (ii) of the
preceding sentence. The Funds are not required to, and there can be no assurance that any Fund will, make this designation if it retains all or a portion of its net capital gain in a taxable year.
In determining its net capital gain, including in connection with determining the amount available to support a Capital Gain Dividend, its taxable income
and its earnings and profits, a RIC may elect to treat any post-October capital loss (defined as the greatest of net capital loss, net long-term capital loss, or net short-term capital loss, in each case attributable to the portion of the taxable
year after October 31 (or November 30, if the Fund so elects)) and certain late-year ordinary losses (generally, (i) net ordinary losses from the sale, exchange or other taxable disposition of property attributable to the portion of
the taxable year after October 31 (or November 30, if the Fund makes the election referred to above), plus (ii) other net ordinary losses attributable to the portion of the taxable year, if any, after December 31) as if incurred
in the succeeding taxable year.
Capital losses in excess of capital gains (“net capital losses”) are not permitted to be deducted
against a Fund’s net investment income. Instead, potentially subject to certain limitations, a Fund may carry net capital losses from any taxable year forward to offset capital gains in future years, thereby reducing the amount the Fund would
otherwise be required to distribute in such future years to qualify for the special tax treatment accorded regulated investment companies and avoid a fund-level tax. Each Fund is permitted to carry forward net capital losses it incurs without
expiration. Any such carryforward losses will retain their character as short-term or long-term. A Fund’s annual shareholder report will describe available capital loss carryovers (if any).
If a Fund fails to distribute in a calendar year at least an amount equal to the sum of 98% of its ordinary income for such year and 98.2% of its capital
gain net income for the one-year period ending October 31 of such year (or November 30 of that year if the Fund so elects) plus any retained amount from the prior year, a Fund will be subject to a nondeductible 4% excise tax on the
undistributed amounts. For purposes of the required excise tax distribution, ordinary gains and losses from the sale, exchange or other taxable disposition of property that would be taken into account after October 31 (or November 30, if
the Fund makes the election referred to above) are treated as arising on January 1 of the following calendar year. Also for purposes of the excise tax, a Fund will be treated as having distributed any amount on which it has been subject to
corporate income tax in the taxable year ending within the calendar year. Each Fund generally intends to make distributions sufficient to avoid imposition of the 4% excise tax, although there can be no assurance that it will be able to do so.
Taxation of Fund Distributions
Distributions of investment income are generally taxable as ordinary income to the extent of a Fund’s earnings and profits. Taxes on distributions of capital gains are determined by how long a Fund
owned the investments that generated them, rather than how long a shareholder has owned his or her shares. In general, the Fund will recognize long-term capital gain or loss on assets it has owned (or is deemed to have owned) for more than one year,
and short-term capital gain or loss on investments it has owned (or is deemed to have owned) for one year or less. Distributions of net capital gain (that is, the excess of net long-term capital gains over net short-term capital losses) that are
properly reported by a Fund as capital gain dividends (“Capital Gain Dividends”) will generally be treated as long-term capital gain includible in a shareholder’s net capital gain and taxed to individuals at reduced rates.
Distributions of the excess of net short-term capital gain over net long-term capital loss will generally be taxable to a shareholder receiving such distributions as ordinary income. Distributions from capital gains are generally made after applying
any available capital loss carryovers.
Distributions are taxable to shareholders even if they are paid from income or gains earned by a
Fund before a shareholder’s investment (and thus were included in the price the shareholder paid for his or her shares). Distributions are taxable whether shareholders receive them in cash or in additional shares.
Distributions declared and payable by a Fund during October, November or December to shareholders of record on a date in any such month and paid by the
Fund during the following January generally will be treated for federal income tax purposes as paid by a Fund and received by shareholders on December 31 of the year in which
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distributions are declared rather than the calendar year in which they are received.
“Qualified dividend income” received by an individual will be taxed at the rates applicable to long-term capital gain. In order for some portion
of the dividends received by a Fund shareholder to be qualified dividend income, the Fund must meet holding period and other requirements with respect to some portion of the dividend-paying stocks in its portfolio and the shareholder must meet
holding period and other requirements with respect to that Fund’s shares. A dividend will not be treated as qualified dividend income (at either a Fund or shareholder level) (1) if the dividend is received with respect to any share of
stock held for fewer than 61 days during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days during the
181-day period beginning 90 days before such date), (2) to the extent that the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or
related property, (3) if the recipient elects to have the dividend income treated as investment income for purposes of the limitation on deductibility of investment interest, or (4) if the dividend is received from a foreign corporation
that is (a) not eligible for the benefits of a comprehensive income tax treaty with the U.S. (with the exception of dividends paid on stock of such a foreign corporation that is readily tradable on an established securities market in the U.S.)
or (b) treated as a PFIC (as defined below). Income derived from investments in derivatives, fixed-income securities and REITs generally is not eligible for treatment as qualified dividend income.
In general, distributions of investment income properly reported by a Fund as derived from qualified dividend income will be treated as qualified
dividend income in the hands of a shareholder taxed as an individual provided the shareholder meets the holding period and other requirements described above with respect to a Fund’s shares. If the aggregate qualified dividends received by a
Fund during any taxable year are 95% or more of its gross income (excluding net long-term capital gain over net short-term capital loss), then 100% of the Fund’s dividends (other than properly reported Capital Gain Dividends) will be eligible
to be treated as qualified dividend income. The Senior Floating Rate and Fixed Income Fund does not expect a significant portion of its distribution to be derived from qualified dividend income.
Dividends of net investment income received by corporate shareholders of a Fund will generally qualify for the 70% dividends-received deduction available
to corporations to the extent they are properly reported as being attributable to the amount of eligible dividends received by a Fund from domestic corporations for the taxable year. A dividend received by a Fund will not be treated as an eligible
dividend (1) if it has been received with respect to any share of stock that a Fund has held for less than 46 days during the 91-day period beginning on the date which is 45 days before the date on which such share becomes ex-dividend with
respect to such dividend (less than 91 days during the 181-day period beginning 90 days before such date in the case of certain preferred stock) or (2) to the extent that a Fund is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar or related property. Moreover, the dividends-received deduction may be disallowed or reduced (1) if the corporate shareholder fails to satisfy the foregoing requirements
with respect to its shares of a Fund or (2) otherwise by application of the Code (for example, the dividends-received deduction is reduced in the case of a dividend received on debt-financed portfolio stock — generally stock acquired with
borrowed funds). The Senior Floating Rate and Fixed Income Fund generally does not expect that a significant portion of its distributions will be eligible for corporate dividends-received deduction.
Any distribution of income that is attributable to (i) income received by a Fund in lieu of dividends with respect to securities on loan pursuant to
a securities lending transaction or (ii) dividend income received by a Fund on securities it temporarily purchased from a counterparty pursuant to a repurchase agreement that, for federal tax purposes, is treated as a loan by the Fund, will
generally not constitute qualified dividend income to individual shareholders or be eligible for the dividends-received deduction for corporate shareholders.
For taxable years beginning on or after January 1, 2013, Section 1411 of the Code generally imposes a 3.8% Medicare contribution tax on the net investment income of certain individuals whose
income exceeds certain threshold amounts, and of certain trusts and estates under similar rules. The details of the implementation of this tax and of the calculation of net investment income, among other issues, are currently unclear and remain
subject to future guidance. For these purposes, “net investment income” generally includes, among other things, (i) distributions paid by a Fund of net investment income and capital gains as described above, and (ii) any net gain
from the sale, exchange or other taxable disposition of Fund shares. Shareholders are advised to consult their tax advisers regarding the possible implications of this additional tax on their investment in a Fund.
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If a Fund makes a distribution in excess of its current and accumulated “earnings and profits” in
any taxable year, the excess distribution will be treated as a return of capital to the extent of a shareholder’s tax basis in his or her shares, and thereafter as capital gain. A return of capital is not taxable, but it reduces a
shareholder’s basis in his or her shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition by the shareholder of such shares.
Sale, Exchange or Redemption of Shares
A sale, exchange or redemption of Fund shares will
generally give rise to a gain or loss. In general, any gain or loss realized upon a taxable disposition of shares will be treated as long-term capital gain or loss if the shares have been held for more than 12 months. Otherwise, the gain or loss on
the taxable disposition of Fund shares will generally be treated as short-term capital gain or loss. However, any loss realized upon a taxable disposition of shares held for six months or less will be treated as long-term, rather than short-term, to
the extent of any Capital Gain Dividends received (or deemed received) by the shareholder with respect to the shares. All or a portion of any loss realized upon a taxable disposition of Fund shares will be disallowed under the Code’s “wash
sale” rules if other substantially identical shares of a Fund are purchased within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
Upon the redemption or exchange of Fund shares, the Fund or, in the case of shares purchased through a financial intermediary, the financial intermediary
may be required to provide you and the IRS with cost basis and certain other related tax information about the Fund shares you redeemed or exchanged. See the Funds’ Prospectus for more information.
Foreign Taxation
Income received by a
Fund from investments in securities of foreign issuers may be subject to foreign withholding and other taxes. This will decrease the Fund’s yield on securities subject to such taxes. Tax treaties between certain countries and the U.S. may
reduce or eliminate such taxes. If more than 50% of a Fund’s assets at year end consists of the securities of foreign corporations, the Fund may elect to permit shareholders to claim a credit or deduction on their income tax returns for their
pro rata portions of qualified taxes paid by the Fund to foreign countries in respect of foreign securities that the Fund has held for at least the minimum period specified in the Code. A shareholder’s ability to claim an offsetting foreign tax
credit or deduction in respect of foreign taxes paid by the Fund is subject to certain limitations imposed by the Code, which may result in the shareholder’s not receiving a full credit or deduction (if any) for the amount of such taxes.
Shareholders who do not itemize on their U.S. federal income tax returns may claim a credit (but not a deduction) for such foreign taxes. Shareholders that are not subject to U.S. federal income tax, and those who invest in the Fund through
tax-exempt shareholders (including those who invest in the Fund through IRAs or other tax-advantaged retirement plans), generally will receive no benefit from any tax credit or deduction passed through by the Fund. Even if a Fund were eligible to
make such an election for a given year, it may determine not to do so.
Gateway International Fund expects to be eligible to and to make such
an election, although there can be no assurance that the Fund will do so.
Tax Implications of Certain Fund Investments
Options, Futures, Forward Contracts, Swap Agreements and Hedging Transactions.
The tax treatment of certain contracts (including regulated futures
contracts) that may be entered into by a Fund as well as listed non-equity options that may be written or purchased by a Fund on U.S. exchanges (including options on futures contracts, broad-based equity indices and debt securities) will be governed
by Section 1256 of the 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” gains or losses) although
certain foreign currency gains and losses from such contracts may be treated as ordinary in character, as described below. 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 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 60/40 or ordinary gain or
loss, as applicable.
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
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transfers or otherwise terminates the option (
e.g.
, through a closing transaction). If a call 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 Fund’s 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, that Fund generally will subtract the premium received for purposes of computing its
cost basis in the securities purchased. Gain or loss arising in respect of a termination of a Fund’s obligation under an option other than through the exercise of the option and related sale or delivery of the underlying stock will be
short-term gain or loss depending on whether the premium income received by that 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,
that Fund generally will recognize short-term gain equal to the premium received.
Certain covered call writing activities of a Fund may
trigger the U.S. federal income tax straddle rules of Section 1092 of the Code, requiring that losses be deferred and holding periods be tolled on offsetting positions in options and stocks deemed to constitute substantially similar or related
property. Options on single stocks that are not “deep in the money” may constitute qualified covered calls, which generally are not subject to the straddle rules; the holding period on stock underlying qualified covered calls that are
“in the money” although not “deep in the money” will be suspended during the period that such calls are outstanding. Thus, the straddle rules and the rules governing qualified covered calls could cause gains that would otherwise
constitute long-term capital gains to be treated as short-term capital gains, and distributions that would otherwise constitute “qualified dividend income” or qualify for the dividends-received deduction to fail to satisfy the holding
period requirements and therefore to be taxed as ordinary income or to fail to qualify for the 70% dividends-received deduction, as the case may be.
A Fund’s investments in futures contracts, forward contracts, options, straddles, swap agreements, and options on swaps and foreign currencies, derivatives, as well as any of its other hedging, short
sale, securities loan or similar transactions, may be subject to one or more special tax rules (including the mark-to-market, constructive sale, notional principal contract, straddle, wash sale and short sale rules). These rules may affect whether
gains and losses recognized by the Fund are treated as ordinary or capital or as short-term or long-term, accelerate the recognition of income to a Fund, defer losses to a Fund, or cause adjustments in the holding periods of a Fund’s
securities. These rules, therefore, could affect the amount, timing and/or character of distributions to shareholders. Moreover, because the tax rules applicable to these types of transactions 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 RIC and avoid a fund-level tax.
Commodity-Linked Derivatives.
A Fund’s use of
commodity-linked derivatives can bear on or be limited by the Fund’s intention to qualify as a RIC. Income and gains from certain commodity-linked derivatives does not constitute qualifying income to a RIC for purposes of the 90% gross income
test described above. The tax treatment of certain other commodity-linked derivative instruments in which the Fund might invest is not certain, in particular with respect to whether income or gains from such instruments constitute qualifying income
to a RIC. If the Fund were to treat income or gain from a particular instrument as qualifying income and the income or gain were later determined not to constitute qualifying income and, together with any other nonqualifying income, caused the
Fund’s nonqualifying income to exceed 10% of its gross income in any taxable year, the Fund would fail to qualify as a RIC unless it were eligible to and did pay a tax at the Fund level on the excess, to “cure” such failure.
Certain of a Fund’s investments in derivative instruments, foreign currency denominated instruments, and any of a Fund’s
transactions in foreign currencies and hedging activities, may produce a difference between its book income and its taxable income. If a Fund’s book income is less than the sum of its taxable income and net tax-exempt income (if any), a Fund
could be required to make distributions exceeding book income to qualify as a RIC that is accorded special tax treatment and avoid a fund-level tax. If a Fund’s book income exceeds the sum of its taxable income, including net realized capital
gains, and net tax-exempt income (if any), the distribution (if any) of such excess will be treated as (i) a dividend to the extent of a Fund’s remaining earnings and profits (including earnings and profits arising from tax-exempt income,
if any), (ii) thereafter, as a return of capital to the extent of the recipient’s basis in the shares, and (iii) thereafter, as gain from the sale or exchange of a capital asset.
Certain Foreign Currency Tax Issues. 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
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the foreign currency concerned. Any such net gains could require a larger dividend toward the end of the calendar year. Any such net losses will generally reduce and potentially require the
recharacterization of prior ordinary income distributions. Such ordinary income treatment may accelerate Fund distributions to shareholders and increase the distributions taxed to shareholders as ordinary income. Any net ordinary losses so created
cannot be carried forward by a Fund to offset income or gains earned in subsequent taxable years.
A Fund’s forward contracts may qualify
as Section 1256 contracts under the Code if the underlying currencies are currencies for which there are futures contracts that are traded on and subject to the rules of a qualified board or exchange. However, a forward currency contract that
is a Section 1256 contract would, absent an election out of Section 988 of the Code as described in the preceding paragraph, be subject to Section 988. Accordingly, although such a forward currency contract would be marked-to-market
annually like other Section 1256 contracts, the resulting gain or loss would be ordinary. If a Fund were to elect out of Section 988 with respect to forward currency contracts that qualify as Section 1256 contracts, the tax treatment
generally applicable to Section 1256 contracts, as described above, would apply to those forward currency contracts: that is, the contracts would be marked-to-market annually and gains and losses with respect to the contracts would be treated
as 60/40 gain or loss. If a Fund were to elect out of Section 988 with respect to any of its forward currency contracts that do not qualify as Section 1256 contracts, such contracts will not be marked to market annually and the Fund will
recognize short-term or long-term capital gain or loss depending on the Fund’s holding period therein. A Fund may elect out of Section 988 with respect to all, some or none of its forward currency contracts.
Certain Investments in REITs, REMICs and TMPs.
An investment by a Fund in REIT equity securities may result in the Fund receiving cash in excess
of the REIT’s earnings; if a Fund distributes these amounts, such distributions could constitute a return of capital to Fund shareholders for federal income tax purposes. Investments in REIT equity securities may require a Fund to accrue and
distribute income not yet received. To generate sufficient cash to make the required distributions, a Fund may be required to sell securities in its portfolio (including when it is not advantageous to do so) that it otherwise would have continued to
hold. Dividends received by a Fund from a REIT will not qualify for the corporate dividends-received deduction and generally will not constitute qualified dividend income.
A Fund may invest directly or indirectly (including through a REIT) in residual interests in real estate mortgage investment conduits (“REMICs”) (including by investing in residual interests in
CMOs with respect to which an election to be treated as a REMIC is in effect) or equity interests in taxable mortgage pools (“TMPs”). Under a notice issued by the IRS in October 2006 and Treasury regulations that have yet to be issued but
may apply retroactively, a portion of a Fund’s income (including income allocated to a Fund from a REIT or other pass-through entity) that is attributable to a residual interest in a REMIC or an equity interest in a TMP (referred to in the Code
as an “excess inclusion”) will be subject to federal income tax in all events. This notice also provides, and the regulations are expected to provide, that excess inclusion income of a RIC will generally be allocated to shareholders of the
RIC in proportion to the dividends received by such shareholders, with the same consequences as if the shareholders held the related interest directly. As a result, to the extent a Fund invests in such interests, it may not be a suitable investment
for charitable remainder trusts (“CRTs”), as noted below.
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 a qualified pension plan, an
individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity) 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 non-U.S. shareholder, will not qualify for any reduction in U.S. federal withholding tax. See “Tax-Exempt Shareholders” below for a discussion of the
special tax consequences that may result where a tax-exempt entity invests in a RIC that recognizes excess inclusion income. A shareholder will be subject to U.S. federal income tax on such inclusions notwithstanding any exemption from such income
tax otherwise available under the Code.
Investments in Other RICs
. If a Fund receives dividends from another investment company
that qualifies as a RIC, and the investment company reports such dividends as qualified dividend income, then the Fund is permitted in turn to report a portion of its distributions as qualified dividend income, provided the Fund meets holding period
and other requirements with respect to shares of the investment company.
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If a Fund receives dividends from another investment company that qualifies as a RIC and the investment
company reports such dividends as eligible for the dividends-received deduction, then the Fund is permitted in turn to report its distributions derived from those dividends as eligible for the dividends-received deduction as well, provided the Fund
meets holding period and other requirements with respect to shares of the investment company.
Partnerships and other pass-through
structures.
To the extent a Fund invests in entities that are treated as partnerships (other than QPTPs, as defined above), trusts, or other pass-through structures for U.S. federal income tax purposes, all or a portion of any income and gains
from such entities could constitute non-qualifying income to a Fund for purposes of the 90% gross income requirement described above. For example, income that a Fund derives from indirect investments, through such entities, in certain
commodity-linked instruments generally will not or may not be considered qualifying income for the purposes of the 90% gross income requirement. In such cases, a Fund’s investments in such entities could be limited by its intention to qualify
as a RIC, and could bear on its ability to so qualify. Income from such entities may be allocated to a Fund on a gross, rather than net, basis, for purposes of the 90% gross income requirement.
Master Limited Partnerships.
As noted above, the MLPs in which a Fund may invest are generally expected to qualify as QPTPs. In such cases, the
net income derived from such investments will constitute qualifying income for purposes of the 90% gross income requirement described earlier for qualification as a RIC. If, however, such a vehicle were to fail to qualify as a QPTP in a particular
year, a portion of the gross income derived from it in such year could constitute non-qualifying income to the Fund for purposes of the 90% gross income requirement and thus could adversely affect a Fund’s ability to qualify as a RIC for a
particular year. In addition, as described above, the diversification requirement for RIC qualification limits a Fund’s investments in one or more qualified publicly traded partnerships to 25% of the Fund’s total assets as of the end of
each quarter of the Fund’s taxable year.
Special Rules for Debt Obligations
. Some debt obligations with a fixed maturity date of
more than one year from the date of issuance (and zero-coupon debt obligations with a fixed maturity date of more than one year from the date of issuance) that are acquired by a Fund will be treated as debt obligations that are issued originally at
a discount. Generally, the amount of the OID is treated as interest income and is included in a Fund’s income (and required to be distributed by that Fund) over the term of the debt security, even though payment of that amount is not received
until a later time, upon partial or full repayment or disposition of the debt security. In addition, payment-in-kind securities will give rise to income which is required to be distributed and is taxable even though the Fund holding the security
receives no interest payment in cash on the security during the year.
Some debt obligations with a fixed maturity date of more than one year
from the date of issuance that are acquired by a Fund in the secondary market may be treated as having “market discount.” Very generally, market discount is the excess of the stated redemption price of a debt obligation (or in the case of
an obligation issued with OID, its “revised issue price”) over the purchase price of such obligation. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt security having market discount is
treated as ordinary income to the extent the gain, or principal payment, does not exceed the “accrued market discount” on such debt security. Alternatively, a Fund may elect to accrue market discount currently, in which case the Fund will
be required to include the accrued market discount in the Fund’s income (as ordinary income) and thus distribute it over the term of the debt security, even though payment of that amount is not received until a later time, upon partial or full
repayment or disposition of the debt security. The rate at which the market discount accrues, and thus is included in a Fund’s income, will depend upon which of the permitted accrual methods the Fund elects.
Some debt obligations with a fixed maturity date of one year or less from the date of issuance that are acquired by a Fund may be treated as having OID
or, in certain cases, “acquisition discount” (very generally, the excess of the stated redemption price over the purchase price). That Fund will be required to include the OID or acquisition discount in income (as ordinary income) and thus
distribute it over the term of the debt security, even though payment of that amount is not received until a later time, upon partial or full repayment or disposition of the debt security. The rate at which OID or acquisition discount accrues, and
thus is included in a Fund’s income, will depend upon which of the permitted accrual methods the Fund elects.
If a Fund holds the
foregoing kinds of securities, it may be required to pay out as an income distribution each year an amount which is greater than the total amount of cash interest the Fund actually received. Such distributions may be made from the cash assets of a
Fund or, if necessary, by disposition of portfolio securities including at a time when it may not be advantageous to do so. These dispositions may cause a Fund to realize higher amounts of short-term capital gains (generally taxed to shareholders at
ordinary income tax rates) and, in the event a Fund realizes net
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capital gains from such transactions, its shareholders may receive a larger Capital Gain Dividend than if the Fund had not held such securities.
Securities Purchased at a Premium
. Very generally, where a Fund purchases a bond at a price that exceeds the redemption price at maturity –
that is, at a premium – the premium is amortizable over the remaining term of the bond. In the case of a taxable bond, if a Fund makes an election applicable to all such bonds it purchases, which election is irrevocable without consent of the
IRS, the Fund reduces the current taxable income from the bond by the amortized premium and reduces its tax basis in the bond by the amount of such offset; upon the disposition or maturity of such bonds acquired on or after January 4, 2013, the
Fund is permitted to deduct any remaining premium allocable to a prior period. In the case of a tax-exempt bond, tax rules require a Fund to reduce its tax basis by the amount of amortized premium.
Certain High-Yield Discount Obligations.
A portion of the interest paid or accrued on certain high-yield discount obligations in which a Fund may
invest may be treated as a dividend for purposes of the corporate dividends-received deduction. In such cases, if the issuer of the high-yield discount obligations is a domestic corporation, dividend payments by a Fund to corporate shareholders may
be eligible for the dividends-received deduction to the extent of the deemed dividend portion of such accrued interest.
Higher-Risk
Securities.
A Fund may invest in below investment-grade fixed-income securities, including debt obligations of issuers not currently paying interest or that are in default. Investments in debt obligations that are at risk of, or in default,
present special 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 such 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 when, as and if it invests in such securities, in order to seek to ensure that it distributes sufficient income to preserve its status as a RIC and does not become subject to U.S. federal income or excise tax.
Passive Foreign Investment Companies.
An equity investment by a Fund in certain passive foreign investment companies
(“PFICs”) could potentially subject the Fund to U.S. federal income tax (including interest charges) on distributions received from the PFIC or on proceeds received from a disposition of shares in the PFIC. This tax cannot be eliminated by
making distributions to Fund shareholders. However, a Fund may make certain elections to avoid the imposition of that tax. For example, a Fund may elect to mark the gains (and to a limited extent losses) in its holdings in a PFIC “to the
market” as though the Fund had sold and repurchased its holdings in the PFIC on the last day of a Fund’s taxable year. Such gains and losses are treated as ordinary income and loss. A Fund also may in certain cases elect to treat a PFIC as
a “qualified electing fund” (
i.e.,
make a “QEF election”), in which case the Fund will be required to include in its income annually its share of the PFIC’s income and net capital gains, regardless of whether it
receives any distribution from the PFIC.
The mark-to-market and QEF elections may accelerate the recognition of income (without the receipt
of cash) and increase the amount required to be distributed by a Fund to avoid taxation. Making either of these elections therefore may require a Fund to liquidate investments (including when it is not advantageous to do so) to meet its distribution
requirements, which also may accelerate the recognition of gain and affect a Fund’s total return. Because it is not always possible to identify a foreign corporation as a PFIC, a Fund may incur the tax and interest charges described above in
some instances. Dividends paid by PFICs generally will not be eligible to be treated as “qualified dividend income.”
Tax-Exempt
Shareholders
Income of a RIC that would be UBTI if earned directly by a tax-exempt entity will not generally be treated as UBTI in the
hands of a tax-exempt shareholder of that RIC. Notwithstanding this “blocking” effect, a tax-exempt shareholder may realize UBTI by virtue of its investments in a Fund if shares in the Fund constitute debt-financed property in the hands of
the tax-exempt shareholder within the meaning of Code Section 514(b).
A tax-exempt shareholder may also recognize UBTI if a Fund
recognizes excess inclusion income derived from direct or indirect investments in residual interests in REMICs or equity interests in TMPs, as described above, if the amount of such income recognized by a Fund exceeds that Fund’s investment
company taxable income (after taking into account deductions for dividends paid by the Fund). Furthermore, any investment in residual interests of a
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CMO that has elected to be treated as a REMIC can create complex tax consequences, especially if a Fund has state or local governments or other tax-exempt organizations as shareholders.
In addition, special tax consequences apply when CRTs invest in RICs that invest directly or indirectly in residual interests in REMICs or
equity interests in TMPs. Under legislation enacted in December 2006, if a CRT (defined in Section 664 of the Code) realizes any UBTI for a taxable year, a 100% excise tax is imposed on such UBTI. Under IRS guidance issued in October 2006, a
CRT will not recognize UBTI as a result of investing in a fund that recognizes excess inclusion income. Rather, if at any time during any taxable year a CRT (or one of certain other tax-exempt shareholders, such as the United States, a state or
political subdivision, or an agency or instrumentality thereof, and certain energy cooperatives) is a record holder of a share in a fund that recognizes excess inclusion income, then the fund will be subject to a tax on the portion of its excess
inclusion income for the taxable year that is allocable to such shareholders at the highest federal corporate income tax rate. To the extent permitted under the 1940 Act, a Fund may elect to specially allocate any such tax to the applicable CRT (or
other shareholder), and thus reduce such shareholder’s distributions for the year by the amount of the tax that relates to such shareholder’s interest in a Fund. The extent to which this IRS guidance remains applicable in light of the
December 2006 legislation is unclear. CRTs and other tax-exempt investors are urged to consult their tax advisers concerning the consequences of investing in a Fund.
Backup Withholding
A Fund generally is required to withhold and remit to the U.S.
Treasury a percentage of the taxable distributions and redemption proceeds paid to any individual shareholder who fails to properly furnish a Fund with a correct taxpayer identification number (“TIN”), who has under-reported dividend or
interest income, or who fails to certify to a Fund that he or she is not subject to such withholding. The backup withholding tax rate is 28%.
Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder’s U.S. federal income tax liability, provided the appropriate information is furnished to the
IRS.
Non-U.S. Shareholders
Capital Gain Dividends generally will not be subject to withholding of U.S. federal income tax. Dividends (other than Capital Gain Dividends) paid by a
Fund to a shareholder that is not a “United States person” within the meaning of the Code (a “Foreign Person”) generally are subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate)
even if they are funded by income or gains (such as portfolio interest, short-term capital gains, or foreign-source dividend and interest income) that, if paid to a Foreign Person directly, would not be subject to withholding.
Effective for taxable years of a Fund beginning before January 1, 2014, in general and subject to certain limitations, a Fund is not required to
withhold any amounts (i) with respect to distributions attributable to U.S. source interest income of types similar to those that would not be subject to U.S. federal income tax if earned directly by an individual Foreign Person, to the extent
such distributions are properly reported by a Fund as “interest-related dividends,” and (ii) with respect to distributions of net short-term capital gains in excess of net long-term capital losses, to the extent such distributions are
properly reported by a Fund as “short-term capital gain dividends.” These exemptions from withholding for interest-related and short-term capital gain dividends will expire for taxable years of a Fund beginning on or after January 1,
2014, unless Congress enacts legislation providing otherwise. A Fund may choose not to report potentially eligible distributions as interest-related or short-term capital gain dividends and/or treat such dividends, in whole or in part, as ineligible
for these exemptions from withholding.
In the case of shares held through an intermediary, the intermediary may withhold even if a Fund
reports all or a portion of a payment as an interest-related or short-term capital gain dividend to shareholders. Foreign Persons should contact their intermediaries regarding the application of these rules to their accounts.
If a beneficial holder of Fund shares who or which is a Foreign Person has a trade or business in the United States, and Fund dividends received by such
holder are effectively connected with the conduct of such trade or business, the dividends will be subject to U.S. federal net income taxation at regular income tax rates.
A beneficial holder of Fund shares who or which is a Foreign Person is not, in general, subject to U.S. federal income tax on gains (and is not allowed a deduction for losses) realized on a sale or
redemption of shares of a Fund
114
or on Capital Gain Dividends unless (i) such gain or Capital Gain Dividend is effectively connected with the conduct of a trade or business carried on by such holder within the United
States, (ii) in the case of an individual holder, the holder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale, redemption or Capital Gain Dividend, and certain other conditions are
met or (iii) the special rules relating to gain attributable to the sale or exchange of “U.S. real property interests” (“USRPIs”) apply to the foreign shareholder’s sale of shares of the Fund or to the Capital Gain
Dividend the foreign shareholder received (as described below).
Special rules would apply if a Fund were either a “U.S. real property
holding corporation” (“USRPHC”) or would be a USRPHC but for the operation of certain exceptions to the definition thereof. Very generally, a USRPHC is a domestic corporation that holds USRPIs the fair market value of which equals or
exceeds 50% of the sum of the fair market values of the corporation’s USRPIs, interests in real property located outside the United States, and other trade or business assets. USRPIs are generally defined as any interest in U.S. real property
and any interest (other than solely as a creditor) in a USRPHC or former USRPHC.
If a Fund were a USRPHC or would be a USRPHC but for the
exceptions referred to above, under a special “look-through” rule, any distributions by the Fund to a Foreign Person (including, in certain cases, distributions made by the Fund in redemption of its shares) attributable to gains realized
by the Fund on the disposition of USRPIs or to distributions received by the Fund from a lower-tier RIC or REIT that the Fund is required to treat as USRPI gain in its hands, generally would be subject to U.S. tax withholding. In addition, such
distributions could result in the foreign shareholder being required to file a U.S. tax return and pay tax on the distributions at regular U.S. federal income tax rates. The consequences to a Foreign Person, including the rate of such withholding
and character of such distributions (
e.g.,
as ordinary income or USRPI gain), would vary depending upon the extent of the foreign shareholder’s current and past ownership of the Fund. On and after January 1, 2014, the special
“look-through” rule described above for distributions by the Fund (which applies only if the Fund is either a USRPHC or would be a USRPHC but for the operation of the exceptions referred to above) applies only to those distributions that,
in turn, are attributable directly or indirectly to distributions received by the Fund from a lower-tier REIT, unless Congress enacts legislation providing otherwise.
In addition, if the Fund were a USRPHC or former USRPHC, it could be required to withhold U.S. tax on the proceeds of a share redemption by a greater-than-5% shareholder that is a Foreign Person, in which
case such Foreign Person generally would also be required to file U.S. tax returns and pay any additional taxes due in connection with the redemption.
The Funds generally do not expect that they will be USRPHCs or would be USRPHCs but for the operation of certain of the special exceptions referred to above.
Foreign Persons should consult their tax advisers concerning the tax consequences of ownership of shares of a Fund, including the certification and
filing requirements imposed on foreign investors in order to qualify for an exemption from the backup withholding tax described above or a reduced rate of withholding provided by treaty.
Certain Additional Reporting and Withholding Requirements
The Foreign Account Tax
Compliance Act (“FATCA”) generally requires a Fund to obtain information sufficient to identify the status of each of its shareholders under FATCA. If a shareholder fails to provide this information or otherwise fails to comply with FATCA,
the Fund may be required to withhold under FATCA at a rate of 30% with respect to that shareholder: (i) on or after January 1, 2014, on dividends (other than Capital Gain Dividends and short-term capital gain dividends, each as defined
above), and (ii) on or after January 1, 2017, on Capital Gain Dividends, short-term capital gain dividends, and the proceeds of the sale, redemption or exchange of Fund shares. If a payment by the Fund is subject to FATCA withholding, the
Fund is required to withhold even if such payment would otherwise be exempt from withholding under the rules applicable to Foreign Persons described above (e.g., Capital Gain Dividends and short-term capital gain and interest-related dividends).
Other Tax Matters
Special tax rules apply to investments through defined contribution plans and other tax-qualified plans. Shareholders should consult their tax advisers to
determine the suitability of shares of a Fund as an investment
115
through such plans and the precise effect of such an investment on their particular tax situations.
Fund dividends and distributions and gains from the sale of Fund shares may be subject to state, local and foreign taxes. Shareholders are urged to consult their tax advisers regarding specific questions
as to federal, state, local and, where applicable, foreign taxes.
If a shareholder recognizes a loss with respect to a Fund’s shares of
$2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted
from this reporting requirement, but under current guidance, shareholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all RICs. The fact that a loss is
reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of
their individual circumstances.
PERFORMANCE INFORMATION
Yield and Total Return
Each Fund
may advertise the yield and total return of each class of its shares. Each Fund’s yield and total return will vary from time to time depending upon market conditions, the composition of its portfolio and operating expenses of the relevant Trust
allocated to each Fund. These factors, possible differences in the methods used in calculating yield and total return and the tax-exempt status of distributions should be considered when comparing a Fund’s yield and total return to yields and
total returns published for other investment companies and other investment vehicles. Yield and total return should also be considered relative to changes in the value of the Fund’s shares and to the relative risks associated with the
investment objectives and policies of the Fund. Yields and total returns do not take into account any applicable sales charges or CDSC. Yield and total return may be stated with or without giving effect to any expense limitations in effect for a
Fund. For those funds that present yields and total returns reflecting an expense limitation or waiver, the yield would have been lower if no limitation or waiver were in effect. Yields and total returns will generally be higher for Class A
shares than for Class C shares, because of the higher levels of expenses borne by the Class C shares. Because of its lower operating expenses, Class Y shares of each Fund can be expected to achieve a higher yield and total return than the same
Fund’s Class A and Class C shares.
Each Fund may also present one or more distribution rates for each class in its sales
literature. These rates will be determined by annualizing the class’s distributions from net investment income and net short-term capital gain over a recent 12-month, 3-month or 30-day period and dividing that amount by the maximum offering
price or the NAV. If the NAV, rather than the maximum offering price, is used to calculate the distribution rate, the rate will be higher.
At
any time in the future, yield and total return may be higher or lower than past yields or total return, and there can be no assurance that any historical results will continue.
Investors in the Funds are specifically advised that share prices, expressed as the NAVs per share, will vary just as yield and total return will vary. An investor’s focus on the yield of a Fund to
the exclusion of the consideration of the share price of that Fund may result in the investor’s misunderstanding the total return he or she may derive from the Fund.
Benchmark Comparisons
Performance information for each Fund with over one calendar
year of performance history will be included in the Prospectuses (in the section “Risk/Return Bar Chart and Table” in each Fund’s Fund Summary), along with the performance of an appropriate benchmark index. Because index comparisons
are generally calculated as of the end of each month, index performance information under the “Since Inception,” “Life of Fund” or “Life of Class” headings in the Prospectuses for Funds with less than ten years of
performance history may not be coincident with the inception date of the Fund (or class, as applicable). In such instances, index performance is generally presented from the month-end nearest to the inception date of the Fund (or class, as
applicable).
THIRD-PARTY INFORMATION
116
This document may contain references to third-party copyrights, indexes, and trademarks, each of which is
the property of its respective owner. Such owner is not affiliated with Natixis Global Asset Management or any of its related or affiliated companies (collectively “NGAM”) and does not sponsor, endorse or participate in the provision of
any NGAM services, funds or other financial products.
The index information contained herein is derived from third parties and is provided on
an “as is” basis. The user of this information assumes the entire risk of use of this information. Each of the third-party entities involved in compiling, computing or creating index information, disclaims all warranties (including,
without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to such information.
FINANCIAL STATEMENTS
The financial statements, financial highlights and the report of PricewaterhouseCoopers, LLP, the independent registered public accounting firm for the Funds, included in the Funds’ annual report
dated November 30, 2012, are incorporated herein by reference to such report. Certain information reflects financial results for a single share of a Fund. The Funds’ annual and semiannual reports will be available upon request and without
charge. The Funds will send a single copy of their annual and semiannual report to an address at which more than one shareholder of record with the same last name has indicated that mail is to be delivered. Shareholders may request additional copies
of any annual or semiannual report by telephone at 800-225-5478 or by writing to the Funds at: 399 Boylston Street, Boston, Massachusetts 02116 or by visiting the Fund’s website at ngam.natixis.com. The annual and semiannual reports will also
be available on-line at the SEC’s website at www.sec.gov.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
Standard & Poor’s
—A brief description of the applicable rating symbols of Standard & Poor’s and their meanings (as published by Standard & Poor’s)
follows:
Issue Credit Rating Definitions
A Standard & Poor’s issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial
obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the
obligation and takes into account the currency in which the obligation is denominated. The opinion reflects Standard & Poor’s view of the obligor’s capacity and willingness to meet its financial commitments as they come due, and
may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered
short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 days — including commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual rating, in which the short-term rating addresses the put feature, in addition to the usual long-term rating. Medium-term notes are assigned long-term ratings.
Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on Standard & Poor’s analysis of the following considerations:
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Likelihood of payment—capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of
the obligation;
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Nature of and provisions of the obligation;
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Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors’ rights.
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Issue ratings are an assessment of default
risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such
differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
AAA
An obligation rated “AAA” has the highest rating assigned by
Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.
AA
An obligation rated “AA” differs from the highest-rated obligations only to a small degree. The obligor’s
capacity to meet its financial commitment on the obligation is very strong.
A
An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions
than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.
BBB
A-1
An obligation rated “BBB” exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, and C
Obligations rated “BB”, “B”,
“CCC”, “CC”, and “C” are regarded as having significant speculative characteristics. “BB” indicates the least degree of speculation and “C” the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB
An obligation rated “BB” is less vulnerable to nonpayment than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.
B
An obligation rated
“B” is more vulnerable to nonpayment than obligations rated “BB”, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.
CCC
An obligation rated “CCC” is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the
obligation.
CC
An obligation rated “CC” is currently highly vulnerable to nonpayment.
C
A “C” rating is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that
have payment arrearages allowed by the terms of the documents, or obligations of an issuer that is the subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the “C” rating may be
assigned to subordinated debt, preferred stock or other obligations on which cash payments have been suspended in accordance with the instrument’s terms or when preferred stock is the subject of a distressed exchange offer, whereby some or all
of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
D
An obligation rated “D” is in payment default. The “D” rating category is used when payments on an
obligation are not made on the date due, unless Standard & Poor’s believes that such payments will be made within five days, irrespective of any grace period. The “D” rating also will be used upon the filing of a bankruptcy
petition or the taking of similar action if payments on an obligation are jeopardized. An obligation’s rating is lowered to “D” upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for
an amount of cash or replaced by other instruments having a total value that is less than par.
Plus (+) or minus
(–)
A-2
The ratings from “AA” to “CCC” may be modified by the addition of a plus
(+) or minus (–) sign to show relative standing within the major rating categories.
NR
This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that
Standard & Poor’s does not rate a particular obligation as a matter of policy.
Short-Term Issue Credit Ratings
A-1
A
short-term obligation rated “A-1” is rated in the highest category by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.
A-2
A short-term obligation rated “A-2” is somewhat more
susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.
A-3
A short-term
obligation rated “A-3” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
B
A short-term obligation rated “B” is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it
faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet its financial commitments.
C
A short-term obligation rated “C” is currently vulnerable to nonpayment and is dependent upon favorable
business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D
A short-term obligation rated “D” is in payment default. The “D” rating category is used when payments on an
obligation are not made on the date due, unless Standard & Poor’s believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business
days. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
SPUR (Standard & Poor’s Underlying Rating)
This is a rating
of a stand-alone capacity of an issue to pay debt service on a credit-enhanced debt issue, without giving effect to the enhancement that applies to it. These ratings are published only at the request of the debt issuer/obligor with the designation
SPUR to distinguish them from the credit-enhanced rating that applies to the debt issue. Standard & Poor’s maintains surveillance of an issue with a published SPUR.
Municipal Short-Term Note Ratings Definitions
A Standard &
Poor’s U.S. municipal note rating reflects Standard & Poor’s opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes
A-3
with an original maturity of more than three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, Standard & Poor’s
analysis will review the following considerations:
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Amortization schedule—the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
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Source of payment—the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
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Note rating symbols are as follows:
SP-1
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus
(+) designation.
SP-2
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3
Speculative capacity to pay principal and interest.
Dual Ratings
Standard & Poor’s assigns “dual”
ratings to all debt issues that have a put option or demand feature as part of their structure. The first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addresses only the demand feature. The
long-term rating symbols are used for bonds to denote the long-term maturity and the short-term rating symbols for the put option (for example, “AAA/A-1+”). With U.S. municipal short-term demand debt, note rating symbols are used with the
short-term issue credit rating symbols (for example “SP-1+/A-1+”).
Active Qualifiers (Currently applied and/or
outstanding)
i
This suffix is used for issues in which the credit factors, terms, or both, that determine the likelihood of receipt of payment of interest are different from the credit factors, terms or both that
determine the likelihood of receipt of principal on the obligation. The “i” suffix indicates that the rating addresses the interest portion of the obligation only. The “i” suffix will always be used in conjunction with the
“p” suffix, which addresses likelihood of receipt of principal. For example, a rated obligation could be assigned ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and the interest portion of
the obligation is not rated.
L
Ratings qualified with “L” apply only to amounts invested up to federal deposit insurance limits.
p
This suffix is used for issues in which the credit factors,
the terms, or both, that determine the likelihood of receipt of payment of principal are different from the credit factors, terms or both that determine the likelihood of receipt of interest on the obligation. The “p” suffix indicates that
the rating addresses the principal portion of the obligation only. The “p” suffix will always be used in conjunction with the “i” suffix, which addresses likelihood of receipt of interest. For example, a rated obligation could be
assigned ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and the interest portion of the obligation is not rated.
A-4
pi
Ratings with a “pi” suffix are based on an analysis of an issuer’s published financial information, as well as additional information in the public domain. They do not, however, reflect
in-depth meetings with an issuer’s management and therefore may be based on less comprehensive information than ratings without a “pi” suffix. Ratings with a “pi” suffix are reviewed annually based on a new year’s
financial statements, but may be reviewed on an interim basis if a major event occurs that may affect the issuer’s credit quality.
preliminary
Preliminary
ratings, with the ‘prelim’ qualifier, may be assigned to obligors or obligations, including financial programs, in the circumstances described below. Assignment of a final rating is conditional on the receipt by Standard &
Poor’s of appropriate documentation. Standard & Poor’s reserves the right not to issue a final rating. Moreover, if a final rating is issued, it may differ from the preliminary rating.
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Preliminary ratings may be assigned to obligations, most commonly structured and project finance issues, pending receipt of final documentation and
legal opinions.
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Preliminary ratings are assigned to Rule 415 Shelf Registrations. As specific issues, with defined terms, are offered from the master registration, a
final rating may be assigned to them in accordance with Standard & Poor’s policies.
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Preliminary ratings may be assigned to obligations that will likely be issued upon the obligor’s emergence from bankruptcy or similar
reorganization, based on late-stage reorganization plans, documentation and discussions with the obligor. Preliminary ratings may also be assigned to the obligors. These ratings consider the anticipated general credit quality of the reorganized or
postbankruptcy issuer as well as attributes of the anticipated obligation(s).
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Preliminary ratings may be assigned to entities that are being formed or that are in the process of being independently established when, in
Standard & Poor’s opinion, documentation is close to final. Preliminary ratings may also be assigned to these entities’ obligations.
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Preliminary ratings may be assigned when a previously unrated entity is undergoing a well-formulated restructuring, recapitalization, significant
financing or other transformative event, generally at the point that investor or lender commitments are invited. The preliminary rating may be assigned to the entity and to its proposed obligation(s). These preliminary ratings consider the
anticipated general credit quality of the obligor, as well as attributes of the anticipated obligation(s), assuming successful completion of the transformative event. Should the transformative event not occur, Standard & Poor’s would
likely withdraw these preliminary ratings.
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A preliminary recovery rating may be assigned to an obligation that has a preliminary issue credit rating.
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sf
The (sf)
suffix is assigned to all issues and issuers to which a regulation, such as the European Union Regulation on Credit Rating Agencies, requires the assignment of an additional symbol which distinguishes a structured finance instrument or obligor (as
defined in the regulation) from any other instrument or obligor. The addition of this suffix to a credit rating does not change the definition of that rating or our opinion about the issue’s or issuer’s creditworthiness.
t
This symbol
indicates termination structures that are designed to honor their contracts to full maturity or, should certain events occur, to terminate and cash settle all their contracts before their final maturity date.
unsolicited
A-5
Unsolicited ratings are those credit ratings assigned at the initiative of
Standard & Poor’s and not at the request of the issuer or its agents.
Inactive Qualifiers (No longer applied or outstanding)
This symbol indicated
continuance of the ratings is contingent upon Standard & Poor’s receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows. Discontinued use in August 1998.
c
This qualifier
was used to provide additional information to investors that the bank may terminate its obligation to purchase tendered bonds if the long-term credit rating of the issuer is below an investment-grade level and/or the issuer’s bonds are deemed
taxable. Discontinued use in January 2001.
pr
The letters “pr” indicate that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of or
the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.
q
A
“q” suffix indicates that the rating is based solely on quantitative analysis of publicly available information. Discontinued use in April 2001.
r
The “r” modifier was assigned to securities containing
extraordinary risks, particularly market risks, which are not covered in the credit rating. The absence of an “r” modifier should not be taken as an indication that an obligation will not exhibit extraordinary non-credit related risks.
Standard & Poor’s discontinued the use of the “r” modifier for most obligations in June 2000 and for the balance of obligations (mainly structured finance transactions) in November 2002.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor’s analysis for credit ratings on any issuer or issue. Currency of repayment is a key factor in this analysis. An
obligor’s capacity to repay foreign currency obligations may be lower than its capacity to repay obligations in its local currency due to the sovereign government’s own relatively lower capacity to repay external versus domestic debt.
These sovereign risk considerations are incorporated in the debt ratings assigned to specific issues. Foreign currency issuer ratings are also distinguished from local currency issuer ratings to identify those instances where sovereign risks make
them different for the same issuer.
The ratings and other credit related opinions of Standard & Poor’s and
its affiliates are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or make any investment decisions. Standard & Poor’s assumes no
obligation to update any information following publication. Users of ratings or other analyses should not rely on them in making any investment decision. Standard & Poor’s opinions and analyses do not address the suitability of any
security. Standard & Poor’s does not act as a fiduciary or an investment advisor except where registered as such. While Standard & Poor’s has obtained information from sources it believes to be reliable,
Standard & Poor’s does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Ratings and other opinions may be changed, suspended, or withdrawn at any time.
A-6
Moody’s Investors Service, Inc.
—A brief description of the applicable
Moody’s Investors Service, Inc. (“Moody’s”) rating symbols and their meanings (as published by Moody’s) follows:
Long-Term Obligation Ratings
Moody’s long-term ratings are opinions of the relative credit risk of financial obligations with an original maturity of one year or more. They address the possibility that a financial obligation
will not be honored as promised. Such ratings use Moody’s Global Scale and reflect both the likelihood of default and any financial loss suffered in the event of default.
Moody’s Long-Term Rating Definitions:
Aaa
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa
Obligations
rated Aa are judged to be of high quality and are subject to very low credit risk.
A
Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa
Obligations
rated Baa are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics.
Ba
Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B
Obligations
rated B are considered speculative and are subject to high credit risk.
Caa
Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca
Obligations
rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of
principal or interest.
Note
: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that
generic rating category.
Long-Term Issuer Ratings
Long-Term Issuer Ratings are opinions of the ability of entities to honor long-term senior unsecured financial obligations and contracts. Moody’s expresses Long-Term Issuer Ratings on its long-term
global scale.
A-7
Hybrid Indicator (hyb)
The hybrid indicator (hyb) is appended to all long-term ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms. By their terms, hybrid securities allow for the
omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in
impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
Medium-Term Note Program Ratings
Moody’s assigns ratings to
medium-term note (MTN) programs and to the individual debt securities issued from them (referred to as drawdowns or notes). These ratings may be expressed on Moody’s general long-term or short-term rating scale, depending upon the intended
tenor of the notes to be issued under the program.
MTN program ratings are intended to reflect the ratings likely to be
assigned to drawdowns issued from the program with the specified priority of claim (
e.g.,
senior or subordinated). However, the rating assigned to a drawdown from a rated MTN program may differ from the program rating if the drawdown is
exposed to additional credit risks besides the issuer’s default, such as links to the defaults of other issuers, or has other structural features that warrant a different rating. In some circumstances, no rating may be assigned to a drawdown.
Market participants must determine whether any particular note is rated, and if so, at what rating level. Moody’s
encourages market participants to contact Moody’s Ratings Desks or visit www.moodys.com directly if they have questions regarding ratings for specific notes issued under a medium-term note program. Unrated notes issued under an MTN program may
be assigned an NR (not rated) symbol.
Short-Term Obligation Ratings
Moody’s short-term ratings are opinions of the ability of issuers to honor short-term financial obligations. Ratings may be assigned
to issuers, short-term programs or to individual short-term debt instruments. Such obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted.
Moody’s employs the following designations to indicate the relative repayment ability of rated issuers:
P-1
Issuers (or
supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3
Issuers (or
supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
Note
: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the senior-most long-term rating of the issuer, its guarantor or
support-provider.
Short-Term Issuer Ratings
Short-Term Issuer Ratings are opinions of the ability of entities to honor short-term senior unsecured financial obligations and contracts. Moody’s expresses Short-Term Issuer Ratings on its
short-term obligations ratings scale.
Fitch Investor Services, Inc.
—A brief description of the applicable rating
symbols of Fitch Investor Services, Inc. (“Fitch”) and their meanings (as published by Fitch) follows:
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Credit Rating Scales
Fitch Ratings’ credit ratings provide an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or
counterparty obligations. Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested. The agency’s credit ratings cover the global spectrum of
corporate, sovereign (including supranational and sub-national), financial, bank, insurance, municipal and other public finance entities and the securities or other obligations they issue, as well as structured finance securities backed by
receivables or other financial assets.
The terms “investment grade” and “speculative grade” have
established themselves over time as shorthand to describe the categories ‘AAA’ to ‘BBB’ (investment grade) and ‘BB’ to ‘D’ (speculative grade). The terms “investment grade” and “speculative
grade” are market conventions, and do not imply any recommendation or endorsement of a specific security for investment purposes. “Investment grade” categories indicate relatively low to moderate credit risk, while ratings in the
“speculative” categories either signal a higher level of credit risk or that a default has already occurred.
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designation of “Not Rated” or “NR” is used to denote securities not rated by Fitch where Fitch has rated some, but not all, securities comprising an issuance capital structure.
Credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a
specific frequency of default or loss.
Fitch Ratings’ credit ratings do not directly address any risk other than credit
risk. In particular, ratings do not deal with the risk of a market value loss on a rated security due to changes in interest rates, liquidity and other market considerations. However, in terms of payment obligation on the rated liability, market
risk may be considered to the extent that it influences the
ability
of an issuer to pay upon a commitment. Ratings nonetheless do not reflect market risk to the extent that they influence the size or other conditionality of the
obligation
to pay upon a commitment (for example, in the case of index-linked bonds).
In the default components of ratings assigned
to individual obligations or instruments, the agency typically rates to the likelihood of non-payment or default in accordance with the terms of that instrument’s documentation. In limited cases, Fitch Ratings may include additional
considerations (
i.e.,
rate to a higher or lower standard than that implied in the obligation’s documentation). In such cases, the agency will make clear the assumptions underlying the agency’s opinion in the accompanying rating
commentary.
Long-Term Credit Rating Scales
Issuer Credit Rating Scales
Rated entities in a number of sectors,
including financial and non-financial corporations, sovereigns and insurance companies, are generally assigned Issuer Default Ratings (IDRs). IDRs opine on an entity’s relative vulnerability to default on financial obligations. The
“threshold” default risk addressed by the IDR is generally that of the financial obligations whose non-payment would best reflect the uncured failure of that entity. As such, IDRs also address relative vulnerability to bankruptcy,
administrative receivership or similar concepts, although the agency recognizes that issuers may also make pre-emptive and therefore voluntary use of such mechanisms.
In aggregate, IDRs provide an ordinal ranking of issuers based on the agency’s view of their relative vulnerability to default, rather than a prediction of a specific percentage likelihood of
default. For historical information on the default experience of Fitch-rated issuers, please consult the transition and default performance studies available from the Fitch Ratings website.
AAA
Highest credit quality. ‘AAA’ ratings denote the lowest expectation of default risk. They are assigned only in cases of
exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
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AA
Very high credit quality. ‘AA’ ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
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High credit quality. ‘A’ ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more
vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBB
Good credit quality. ‘BBB’ ratings indicate that expectations of default risk are currently low. The capacity for payment of
financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
BB
Speculative. ‘BB’ ratings indicate an elevated vulnerability
to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists which supports the servicing of financial commitments.
B
Highly speculative. ‘B’ ratings indicate that material default risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.
CCC
Substantial credit risk. Default is a real possibility.
CC
Very high levels of
credit risk. Default of some kind appears probable.
C
Exceptionally high levels of credit risk. Default is imminent or inevitable, or the issuer is in standstill. Conditions that are
indicative of a ‘C’ category rating for an issuer include:
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the issuer has entered into a grace or cure period following non-payment of a material financial obligation;
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the issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation; or
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Fitch Ratings otherwise believes a condition of ‘RD’ or ‘D’ to be imminent or inevitable, including through the formal announcement
of a distressed debt exchange.
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RD
Restricted default. ‘RD’ ratings indicate an issuer that in Fitch Ratings’ opinion has experienced an uncured payment
default on a bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased operating. This
would include:
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the selective payment default on a specific class or currency of debt;
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the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital
markets security or other material financial obligation;
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the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in
parallel; or
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execution of a distressed debt exchange on one or more material financial obligations.
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D
Default. ‘D’ ratings indicate an issuer that in Fitch Ratings’ opinion has entered into bankruptcy filings, administration,
receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business.
Default ratings
are not assigned prospectively to entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will generally not be considered a default until after the expiration of the deferral
or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a distressed debt exchange.
“Imminent” default typically refers to the occasion where a payment default has been intimated by the issuer, and is all but inevitable. This may, for example, be where an issuer has missed a
scheduled payment, but (as is typical) has a grace period during which it may cure the payment default. Another alternative would be where an issuer has formally announced a distressed debt exchange, but the date of the exchange still lies several
days or weeks in the immediate future.
In all cases, the assignment of a default rating reflects the agency’s
opinion as to the most appropriate rating category consistent with the rest of its universe of ratings, and may differ from the definition of default under the terms of an issuer’s financial obligations or local commercial practice.
Note:
The modifiers “+” or
“–” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the ‘AAA’ Long-Term IDR category, or to Long-Term IDR categories below ‘B’.
Limitations of the Issuer Credit Rating Scale
Specific limitations relevant to the issuer credit rating scale include:
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The ratings do not predict a specific percentage of default likelihood over any given time period.
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The ratings do not opine on the market value of any issuer’s securities or stock, or the likelihood that this value may change.
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The ratings do not opine on the liquidity of the issuer’s securities or stock.
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The ratings do not opine on the possible loss severity on an obligation should an issuer default.
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The ratings do not opine on the suitability of an issuer as counterparty to trade credit.
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The ratings do not opine on any quality related to an issuer’s business, operational or financial profile other than the agency’s opinion on
its relative vulnerability to default.
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Ratings assigned by Fitch Ratings articulate an opinion on discrete and specific
areas of risk. The above list is not exhaustive, and is provided for the reader’s convenience. Readers are requested to review the section
Understanding Credit Ratings—Limitations and Usage
for further information on the limitations
of the agency’s ratings.
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Short-Term Ratings
Short-Term Ratings Assigned to Issuers or Obligations in Corporate, Public and Structured Finance
A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity or security stream, and relates to the capacity to meet financial obligations
in accordance with the documentation governing the relevant obligation. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as “short term” based on market convention. Typically, this means up to 13 months for
corporate, sovereign and structured obligations, and up to 36 months for obligations in U.S. public finance markets.
F1
Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an
added “+” to denote any exceptionally strong credit feature.
F2
Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments.
F3
Fair
short-term credit quality. The intrinsic capacity for timely payment of financial commitments is adequate.
B
Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened
vulnerability to near term adverse changes in financial and economic conditions.
C
High short-term default risk. Default is a real possibility.
RD
Restricted default. Indicates an entity that has defaulted on one or
more of its financial commitments, although it continues to meet other financial obligations. Applicable to entity ratings only.
D
Default. Indicates a broad-based default event for an entity, or the
default of a short-term obligation.
Limitations of the Short-Term Ratings Scale
Specific limitations relevant to the Short-Term Ratings scale include:
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The ratings do not predict a specific percentage of default likelihood over any given time period.
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The ratings do not opine on the market value of any issuer’s securities or stock, or the likelihood that this value may change.
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The ratings do not opine on the liquidity of the issuer’s securities or stock.
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The ratings do not opine on the possible loss severity on an obligation should an obligation default.
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The ratings do not opine on any quality related to an issuer or transaction’s profile other than the agency’s opinion on the relative
vulnerability to default of the rated issuer or obligation.
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Ratings assigned by Fitch Ratings articulate an opinion on
discrete and specific areas of risk. The above list is not exhaustive, and is provided for the reader’s convenience. Readers are requested to review the section
Understanding Credit Ratings—Limitations and Usage
for further
information on the limitations of the agency’s ratings.
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Standard Rating Actions
Affirmed*
The rating has been reviewed and no change has been deemed necessary.
Confirmed
Action taken in
response to an external request or change in terms. Rating has been reviewed in either context, and no rating change has been deemed necessary. For servicer ratings, action taken in response to change in financial condition or IDR of servicer where
servicer rating is reviewed in that context exclusively, and no rating action has been deemed necessary.
Downgrade*
The rating has been lowered in the scale.
Matured*/Paid-In-Full
a. ‘Matured’ – This action is used when an
issue has reached the end of its repayment term and rating coverage is discontinued. Denoted as ‘NR’.
b.
‘Paid-In-Full’ – This action indicates that the issue has been paid in full. As the issue no longer exists, it is therefore no longer rated. Denoted as ‘PIF’.
Publish*
Initial public announcement of rating on the agency’s website, although not
necessarily the first rating assigned. This action denotes when a previously private rating is published.
Rating Watch Maintained*
The issue or issuer has been reviewed and remains on active Rating Watch status.
Rating Watch On*
The issue or issuer has been placed on active Rating Watch status.
Revision Enhancement
Some form of the credit support affecting the rating opinion has been added or removed. .
Revision Implication Watch*
Rating Watch status has changed.
Revision Outlook
Rating Outlook status
has changed independent of a full review of the underlying rating.
Upgrade*
The rating has been raised in the scale.
Withdrawn*
The rating has been withdrawn and the issue or issuer is no longer rated by Fitch Ratings. Indicated in rating databases with the symbol “WD.”
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A rating action must be recorded for each rating in a required cycle to be considered compliant with Fitch policy concerning aging of ratings. Not all Ratings or
Data Actions, or changes in rating modifiers, will meet this requirement. Actions that meet this requirement are noted with an * in the above definitions.
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XAL33-0413
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Registration Nos. 333-144744
811-22099
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