It is proposed that this filing
will become effective (check appropriate box)
Explanatory Note: This Post-Effective Amendment No. 16 to the Registration Statement of PRIMECAP Odyssey Funds is being filed to add the audited
financial statements and certain related financial information for the fiscal period ended October 31, 2013.
STATEMENT OF ADDITIONAL INFORMATION
February 28, 2014
PRIMECAP ODYSSEY STOCK FUND (POSKX)
PRIMECAP ODYSSEY GROWTH FUND (POGRX)
PRIMECAP ODYSSEY AGGRESSIVE GROWTH FUND (POAGX)
PRIMECAP Odyssey Funds (the Trust) is a professionally managed,
open-end,
management investment company
with multiple funds available for investment. Its investment advisor is PRIMECAP Management Company (the Advisor or PRIMECAP Management Company). This Statement of Additional Information (SAI) contains information
about the shares of all three of the Trusts investment portfolios (each a Fund and collectively the Funds).
This SAI is
not a prospectus. You should read this SAI in conjunction with the Prospectus dated February 28, 2014. All terms defined in the Prospectus have the same meanings in this SAI. You can order copies of the Prospectus without charge by writing
to the Funds c/o U.S. Bancorp Fund Services, LLC, P.O. Box 701, Milwaukee, Wisconsin 53201-0701 or by calling the Funds transfer agent at
1-800-729-2307.
The audited financial statements for the Trust for the fiscal period ended October 31, 2013 are
incorporated by reference to the Trusts October 31, 2013 Annual Report.
TABLE OF CONTENTS
2
THE TRUST
PRIMECAP Odyssey Funds (the Trust) is a professionally managed,
open-end,
management investment company
with multiple funds available for investment and is registered under the Investment Company Act of 1940, as amended (the 1940 Act or Investment Company Act). The Trust was organized as a statutory trust under the laws of
Delaware on June 8, 2004 and may issue an unlimited number of shares of beneficial interest or classes of shares in one or more separate series. Currently, the Trust offers shares of the three series described in the Prospectus and this SAI.
The Board may authorize the issuance of shares of additional series or classes of shares of beneficial interest if it deems it desirable.
INVESTMENT RESTRICTIONS
Each Funds investment objective of capital appreciation is a fundamental policy and may not be changed without approval by a vote of the holders of a
majority of the Funds outstanding voting securities, as described under General Information Shares of the Funds. No assurance exists that any of the Funds will achieve its investment objective.
The investment restrictions described below also apply to the Funds. The restrictions designated as fundamental policies may not be changed without approval
by the shareholders of a majority of the relevant Funds outstanding shares. If the Trusts Board of Trustees determines, however, that a Funds investment objective can best be achieved by a substantive change in a
non-fundamental
investment policy or strategy, the Trusts Board may make such change without shareholder approval and will disclose any such material change in the
then-current
Prospectus. Any policy that is not specified in the Funds Prospectus or in the SAI as being fundamental is non-fundamental.
If a percentage limitation described below is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in
the value of a Funds portfolio securities or resulting from reorganizations, consolidations, payments out of assets of the Fund, or redemptions of shares will not constitute a violation of such limitation, except for investment restriction
(2) below.
Fundamental Investment Restrictions
As a matter of fundamental policy, each Fund is diversified. This means at least 75% of the value of the Funds total assets must be represented by cash
and cash items (including receivables), U.S. Government securities, securities of other investment companies, and securities of issuers (each of which represents no more than 5% of the value of the Portfolios total assets and no more than 10%
of the issuers outstanding voting securities).
The Fund has adopted the fundamental investment restrictions below. These restrictions may not be
changed without the majority approval of the shareholders. As a matter of fundamental policy, no Fund may do any of the following:
(1) Purchase the
securities of issuers conducting their principal business activities in the same industry if, immediately after the purchase and as a result thereof, the value of the Funds investments in that industry would be 25% or more of the current value
of the Funds total assets, provided that there is no limitation with respect to investments in U.S. Government obligations and repurchase agreements secured by such obligations.
3
(2) Borrow money or issue senior securities as defined in the 1940 Act, except (a) with regard to senior
securities, as permitted pursuant to an order or a rule issued by the Securities and Exchange Commission (the Commission); (b) that each Fund may borrow from banks up to 15% of the current value of its net assets for temporary
purposes only in order to meet redemptions, and these borrowings may be secured by the pledge of up to 15% of the current value of its net assets (but investments may not be purchased while any such outstanding borrowing in excess of 5% of its net
assets exists); (c) a Fund may make short sales of securities; and (d) a Fund may enter into reverse repurchase agreements.
(3) Purchase or sell
real estate (other than securities issued by companies that invest in real estate or interests therein).
(4) Purchase commodities or commodity contracts,
except that each Fund may enter into forward currency exchange transactions and futures contracts and may write call options and purchase call and put options on futures contracts, in accordance with its investment objective and policies.
(5) Purchase securities on margin (except for
short-term
credits necessary for the clearance of transactions and except
for margin payments in connection with options, futures, and options on futures).
(6) Underwrite securities of other issuers, except to the extent that
the purchase of permitted investments directly from the issuer or from an underwriter for an issuer and the later disposition of such securities in accordance with a Funds investment program may be deemed to be an underwriting.
(7) Make investments for the purpose of exercising control or management. Investments by a Fund in wholly-owned investment entities created under the laws of
certain countries will not be deemed the making of investments for the purpose of exercising control or management.
(8) Lend money or portfolio
securities, except that each Fund may lend portfolio securities to or enter into repurchase agreements with certain brokers, dealers, and financial institutions aggregating up to
33-1/3%
of the current value
of the lending Funds total assets.
(9) Pledge, mortgage, or hypothecate more than 15% of its net assets.
ADDITIONAL INFORMATION ON FUND INVESTMENTS AND RISKS
Common Stock
Each Fund mainly invests in common stock.
Common stock represents an equity or ownership interest in an issuer. Common stock typically entitles the owner to vote on the election of directors and other important matters as well as to receive dividends on such stock. If an issuer is
liquidated or declares bankruptcy, the claims of owners of bonds, other debt holders, and owners of preferred stock take precedence over the claims of those who own common stock. Common stock is subject to the market and other risks described in the
Prospectus.
Preferred Stock
Each Fund may invest in
preferred stock, which is a class of capital stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Although the dividend is set at a fixed annual rate, in
some circumstances it can be changed or omitted by the issuer. Dividends on some preferred stock may be cumulative (requiring all or a portion
4
of prior unpaid dividends to be paid before dividends are paid on the issuers common stock),
non-cumulative,
participating, or auction rate. If
interest rates rise, the fixed dividend on preferred stock may be less attractive, causing the price of the preferred stock to decline. Preferred stock may have mandatory sinking fund provisions, as well as call/redemption provisions prior to
maturity, a negative feature when interest rates decline. Preferred stock does not ordinarily carry voting rights. The rights of preferred stock on the distribution of a corporations assets in the event of a liquidation are generally
subordinate to the rights associated with the corporations debt securities.
Warrants and Convertible Securities
Each Fund may invest in warrants. A warrant gives the holder the right to subscribe by a specified date to a stated number of shares of stock of the issuer at
a fixed price. The price of a warrant tends to be more volatile than the price of the underlying stock, and if at a warrants expiration date the stock is trading at a price below the price set in the warrant, the warrant will expire worthless.
Conversely, if at the expiration date the stock is trading at a price higher than the price set in the warrant, the holder can acquire the stock at a price below its market value. As a result of speculation or other factors, the prices of warrants
do not necessarily correlate with the prices of the underlying securities. A Fund may only purchase warrants on securities in which the Fund may invest directly.
Each Fund may invest in convertible securities. A convertible security may be a fixed income debt security or preferred stock, and may be converted at a
stated price or stated rate within a specified period of time into a certain quantity of the common stock of the same or another issuer. A convertible security, while usually subordinated to nonconvertible debt securities of the same issuer, is
senior to common stock in an issuers capital structure. Convertible securities may offer more flexibility by providing the investor with a steady income stream (generally yielding a lower amount than nonconvertible securities of the same
issuer and a higher amount than common stocks) as well as the opportunity to take advantage of increases in the price of the issuers common stock through the conversion feature. Convertible security prices tend to be influenced by changes in
the market value of the issuers common stock as well as changes in interest rates. As the market price of the underlying common stock declines, convertible securities tend to trade increasingly on a yield basis and thus may not experience
market value declines to the same extent as the underlying common stock. Convertible securities are purchased by the Funds primarily for their equity characteristics and are not subject to rating criteria.
Foreign Securities
Each Fund may invest in foreign
securities directly through securities traded on a foreign exchange, through securities of foreign companies traded on a U.S. stock exchange, or in the form of American Depositary Receipts (ADRs), European Depositary Receipts
(EDRs), Global Depositary Receipts (GDRs), or other Depositary Receipts (which, together with ADRs, GDRs and EDRs, are hereinafter collectively referred to as Depositary Receipts) to the extent such Depositary
Receipts become available.
Depositary Receipts
. ADRs are publicly traded on exchanges or over-the-counter (OTC) in the United
States. GDRs, EDRs, and other types of Depositary Receipts are typically issued by foreign depositaries, although they may also be issued by U.S. depositaries, and evidence ownership interests in a security or pool of securities issued by either a
U.S. or foreign corporation. Depositary Receipts may be sponsored or unsponsored. In a sponsored arrangement, the foreign issuer assumes the obligation to pay some or all of the depositarys transaction fees. In an
unsponsored arrangement, the foreign issuer assumes no obligation and the depositarys transaction fees are paid by the holders of the Depositary Receipts. Foreign issuers, whose securities underlie unsponsored Depositary Receipts, are not
necessarily obligated
5
to disclose material information in the markets in which the unsponsored Depositary Receipts are traded, and the market value of the Depositary Receipts may not be correlated with such
information and may be more volatile than the market for sponsored Depositary Receipts.
General Risks of Investing in Foreign Securities
.
Investing on an international basis involves certain risks not involved in domestic investments, including fluctuations in foreign exchange rates, future political and economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. In addition, with respect to certain foreign countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability, or diplomatic developments which could
affect investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross national product, rates of inflation, capital reinvestment, resources,
self-sufficiency,
and balance of payments position. Certain foreign investments may also be subject to foreign withholding taxes.
The financial problems in global economies over the past several years, including the European sovereign debt crisis, may continue to cause high volatility in
global financial markets. In addition, global economies are increasingly interconnected, which increases the possibilities that conditions in one country or region might adversely impact a different country or region. The severity or duration of
these conditions may also be affected if one or more countries leave the euro currency or by other policy changes made by governments or quasi-governmental organizations.
Lack of Information.
Some of the foreign securities held by the Funds may not be registered with the Commission, nor will the issuers thereof be
subject to the Commissions reporting requirements. Accordingly, there may be less publicly available information about a foreign company than about a U.S. company, and such foreign companies may not be subject to accounting, auditing, and
financial reporting standards and requirements comparable to those to which U.S. companies are subject. As a result, traditional investment measurements, such as price/earnings ratios, as used in the United States, may not be applicable to certain
smaller capital markets. Foreign companies are not generally subject to uniform accounting, auditing, and financial reporting standards or to practices and requirements comparable to those applicable to domestic companies.
Foreign Stock Markets
. Foreign markets have different settlement and clearance procedures than U.S. markets, and in certain foreign markets settlements
have at times failed to keep pace with the volumes of securities transactions, making it difficult to conduct such transactions. For example, delays in settlement could result in temporary periods when assets of a Fund are uninvested and no return
is earned on those assets. The inability of a Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. The inability to dispose of a portfolio security due to settlement
problems could result either in losses to a Fund due to subsequent declines in the value of such portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser.
Brokerage commissions and other transaction costs on foreign securities exchanges are generally higher than in the United States. There is generally less
government supervision and regulation of exchanges, brokers, and issuers in foreign countries than in the United States. These risks are often heightened for investments in smaller capital markets and developing countries.
Foreign Currencies
. Each Fund may invest in securities denominated or quoted in currencies other than the U.S. dollar. Accordingly, changes in foreign
currency exchange rates will affect the values of those securities in a Funds portfolio and the unrealized appreciation or depreciation of investments insofar as U.S. investors are concerned. A Fund may also hold foreign currency in connection
with the purchase
6
and sale of foreign securities. To the extent a Fund holds foreign currency, there may be a risk due to foreign currency exchange rate fluctuations. Currency exchange rates generally are
determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries as viewed from an international perspective. Currency exchange rates can also be affected unpredictably by
intervention by U.S. or foreign governments or central banks or by currency controls or political developments in the United States or abroad. Such foreign currency will be held with the Funds custodian bank or by an approved foreign
subcustodian.
Investing in Countries with Smaller
Capital Markets. Each Fund may invest in securities of companies located in developing
countries. The securities markets of developing countries are not as large as the U.S. securities markets and have substantially less trading volume, resulting in a lack of liquidity and high price volatility. Certain markets, such as those of
China, are in only the earliest stages of development. There may also be a high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of
investors and financial intermediaries. Many such markets also may be affected by developments with respect to more established markets in their region, such as in Japan. Developing country brokers typically are fewer in number and less capitalized
than brokers in the United States.
Political and social uncertainties exist for some developing countries. In addition, the governments of many such
countries have heavy roles in regulating and supervising their respective economies. The political history of certain of those countries has also been characterized by political uncertainty, intervention by the military in civilian and economic
spheres, and political corruption. Another risk common to most such countries is that the economies are heavily export oriented and, accordingly, dependent upon international trade. The existence of overburdened infrastructure and obsolete financial
systems also presents risks in certain countries, as do environmental problems. Certain economies also depend to a significant degree upon exports of primary commodities and, therefore, are vulnerable to changes in commodity prices which, in turn,
may be affected by a variety of factors.
Archaic legal systems in certain developing countries also may have an adverse impact on a Fund investing in
developing countries. For example, while the potential liability of a shareholder in a U.S. corporation with respect to the acts of the corporation is generally limited to the amount of the shareholders investment, the notion of limited
liability is less clear in certain developing countries. Similarly, the rights of investors in developing countries may be more limited than those of shareholders of U.S. corporations.
Some of the currencies of developing countries have experienced devaluations relative to the U.S. dollar, and major adjustments have been made periodically in
certain of such currencies.
Some developing countries prohibit or impose substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Funds. For example, certain countries may require governmental approval prior to investments by foreign persons, limit the amount of investment by foreign persons in a particular company, or
limit investment by foreign persons to only a specific class of securities of a company which may have less advantageous terms (including price) than securities of the company available for purchase by nationals. Certain countries may restrict
investment opportunities in issuers or industries deemed important to national interests.
The manner in which foreign investors may invest in companies
in certain developing countries, as well as limitations on such investments, also may have an adverse impact on the operations of each Fund. For example, a Fund may be required in certain of such countries to invest initially through a local broker
or other entity and then have the shares that were purchased reregistered in the name of the Fund. Re-
7
registration may in some instances not be able to occur on a timely basis, resulting in a delay during which the Fund may be denied certain of its rights as an investor, including rights as to
dividends or to be made aware of certain corporate actions. There also may be instances where a Fund places a purchase order but is subsequently informed, at the time of re-registration, that the permissible allocation of the investment to foreign
investors has been filled, depriving the Fund of the ability to make its desired investment at that time.
Substantial limitations may exist in certain
countries with respect to a Funds ability to repatriate investment income, capital, or the proceeds of sales of securities by foreign investors. The Fund could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application to the Fund of any restrictions on investments. In addition, even where there is no outright restriction on repatriation of capital, the mechanics of repatriation may
affect certain aspects of the operations of the Fund. For example, funds may be withdrawn from China only in U.S. or Hong Kong dollars and only at an exchange rate established by the government once each week.
A number of publicly traded closed-end investment companies have been organized to facilitate indirect foreign investment in developing countries, and certain
of such countries have specifically authorized such funds. There also are investment opportunities in certain of such countries in pooled vehicles that resemble
open-end
investment companies. A Funds
investment in these companies will be subject to certain percentage limitations of the 1940 Act. Shares of certain investment companies may at times be acquired only at market prices representing premiums to their net asset values.
In certain countries, banks or other financial institutions may be among the leading companies to have actively traded securities. The 1940 Act restricts each
Funds investments in any equity securities of an issuer which, in its most recent fiscal year, derived more than 15% of its revenues from securities-related activities, as defined by the rules thereunder. These provisions may
restrict the Funds investments in certain foreign banks and other financial institutions.
Inflation accounting rules in some developing countries
require a company that keeps tax and accounting records in the local currency to restate certain assets and liabilities on the companys balance sheet in order to express items in terms of currency of constant purchasing power. This inflation
accounting may indirectly generate losses or profits for certain companies in developing countries.
Satisfactory custodial services for investment
securities may not be available in some developing countries, which may result in a Fund incurring additional costs and delays in providing transportation and custody services for such securities outside such countries.
Options, Futures, and Other Derivatives
Each Fund may
use a variety of derivative financial instruments to hedge its investments and to enhance its income or manage its cash flow (derivatives). A derivative financial instrument is generally defined as an instrument whose value is derived
from, or based upon, some underlying index, reference rate (such as an interest rate or currency exchange rate), security, commodity, or other asset. In addition to the derivatives briefly described below, PRIMECAP Management Company may discover
additional opportunities in connection with options, futures contracts, foreign currency forward contracts, and other hedging techniques. These new opportunities may become available as PRIMECAP Management Company develops new techniques, as
regulatory authorities broaden the range of permitted transactions, and as new options, futures contracts, foreign currency forward contracts, or other techniques are developed. PRIMECAP Management Company may utilize these opportunities with any of
the Funds to the extent that they are consistent with the Funds investment objectives and permitted by the Funds investment limitations and applicable regulatory authorities. The Prospectus and this SAI will be supplemented to the extent
that new products or techniques involve materially different risks than those described below or in the Prospectus.
8
Options on Equity Securities
. A call option is a short-term contract pursuant to which the
purchaser of the option, in return for a premium, has the right to buy the security underlying the option at a specified price at any time during the term of the option. The writer of the call option, who receives the premium, has the obligation,
upon exercise of the option during the option term, to deliver the underlying security against payment of the exercise price. A put option is a similar contract that gives its purchaser, in return for a premium, the right to sell the underlying
security at a specified price during the option term. The writer of the put option, who receives the premium, has the obligation, upon exercise of the option during the option term, to buy the underlying security at the exercise price.
Options on Securities Indexes
. A securities index assigns relative values to the securities included in the index and fluctuates with changes in
the market values of those securities. A securities index option operates in the same way as a stock option, except that exercise of a securities index option is effected with cash payment and does not involve delivery of securities. Thus, upon
exercise of a securities index option, the purchaser will realize, and the writer will pay, an amount based on the difference between the exercise price and the closing price of the securities index.
Foreign Currency Options
. A put or call option on a foreign currency gives the purchaser of the option the right to sell or purchase a foreign
currency at the exercise price until the option expires. Each Fund may use foreign currency options separately or in combination to control currency volatility. Among the strategies that may be employed to control currency volatility is an option
collar. An option collar involves the purchase of a put option and the simultaneous sale of a call option on the same currency with the same expiration date but with different exercise (or strike) prices. Generally the put option will
have an
out-of-the-money
strike price, while the call option will have either an
at-the-money
strike price or an
in-the-money
strike price.
Futures Contracts
. Each Fund may enter into futures contracts. In general, futures contracts provide for the future sale by one party and
purchase by another party of a specified amount of a specific security at a specified future time at a specified price.
Stock Index Futures
Contracts
. A stock index futures contract is a bilateral agreement pursuant to which one party agrees to accept, and the other party agrees to make, delivery of an amount of cash equal to a specified dollar amount times the difference between
the stock index value at the close of trading of the contract and the price at which the futures contract is originally struck. No physical delivery of the stocks comprising the index is made. Generally, contracts are closed out prior to the
expiration date of the contract.
Options on Futures Contracts
. Put and call options on futures contracts give the purchaser the right (but not the
obligation), for a specified price, to sell or to purchase the underlying futures contract, respectively, upon exercise of the option, at any time during the option period.
Forward Contracts on Foreign Currencies
. A forward contract on a foreign currency is an obligation to purchase or sell a specific currency at a
future date, which may be any number of days agreed upon by the parties from the date of the contract at a price set on the date of the contract.
9
Swap Agreements.
Each Fund may enter into equity, index, currency rate, total return, and other
types of swap agreements. The transactions are entered into in an attempt to obtain a particular return without the need to actually purchase the reference asset. Swap agreements can be individually negotiated and structured to include exposure to a
variety of different types of investments or market factors. Depending on their structure, swap agreements may increase or decrease the Funds exposure to foreign currency values or other factors such as security prices, baskets of securities,
or inflation rates.
Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to
more than a year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest
factor. The gross returns to be exchanged or swapped between the parties are generally calculated with respect to a notional amount,
e.g.
, the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a basket of securities representing a particular index.
Swap agreements
tend to shift investment exposure from one type of investment to another. For example, if a Fund agrees to exchange payments in dollars for payments in foreign currency, the swap agreement would tend to decrease the Funds exposure to U.S.
interest rates and increase its exposure to foreign currency and interest rates. Depending on how they are used, swap agreements may increase or decrease the overall volatility of a Funds portfolio.
Most swap agreements entered into by a Fund will require the calculation of the obligations of the parties to the agreements on a net basis.
Consequently, the Funds current obligations (or rights) under a swap agreement generally will be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the
agreement (the net amount). The risk of loss with respect to swaps is limited to the net amount of payments that the Fund is contractually obligated to make with each counterparty. If the other party to a swap defaults, the Funds
risk of loss consists of the net amount of payments that the Fund contractually is entitled to receive. If a swap agreement calls for payments by the Fund, it must be prepared to make such payments when due. In addition, if the counterpartys
creditworthiness were to decline, the value of a swap agreement would be likely to decline, potentially resulting in losses to the Fund.
Hedging
Strategies
. Hedging strategies can be broadly categorized as short hedges and long hedges. A short hedge is a purchase or sale of a derivative intended partially or fully to offset potential declines in the value of one or more investments
held by a Fund. Thus, in a short hedge, a Fund takes a position in a derivative whose price is expected to move in the opposite direction of the price of the investment being hedged. For example, a Fund might purchase a put option on a security to
hedge against a potential decline in the value of that security. If the price of the security declines below the exercise price of the put, the Fund could exercise the put and thus limit its loss below the exercise price to the premium paid plus
transaction costs. Alternatively, because the value of the put option can be expected to increase as the value of the underlying security declines, the Fund might be able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a purchase or sale of a derivative intended partially or fully to offset potential increases in the
acquisition cost of one or more investments that a Fund intends to acquire. Thus, in a long hedge, a Fund takes a position in a derivative whose price is expected to move in the same direction as the price of the prospective investment being hedged.
For example, a Fund might purchase a call option on a security it intends to purchase in order to hedge against an increase in the cost of the security. If the price of the security increases above the exercise price of the call, the Fund could
exercise the call and thus limit its acquisition cost to the exercise price plus the premium paid and transaction costs. Alternatively, the Fund might be able to offset the price increase by closing out an appreciated call option and realizing a
gain.
10
Derivatives on securities generally are used to hedge against price movements in one or more particular
securities positions that a Fund owns or intends to acquire. Derivatives on stock indices, in contrast, generally are used to hedge against price movements in broad equity market sectors in which a Fund has invested or expects to invest. Derivatives
on debt securities may be used to hedge either individual securities or broad fixed income market sectors.
The use of derivatives is subject to
applicable regulations of the Commission, the several options and futures exchanges upon which they are traded, and the Commodity Futures Trading Commission (CFTC). In addition, a Funds ability to use derivatives will be limited by
tax considerations. See Federal Tax Information. Recent legislation calls for new regulation of the derivatives markets. The extent and impact of this regulation is not yet fully known. Any new regulation could adversely affect the
value, availability, and performance of derivatives, make them more costly, and limit or restrict their use by the Funds.
Special Risks of Options,
Futures, and Other Derivatives
. The use of derivatives involves special considerations and risks, including those described below.
Successful use
of most derivatives depends in part upon the Advisors ability to forecast correctly future market trends and other financial or economic factors or the value of the underlying securities, currency, or interest rate, which requires different
skills than predicting changes in the price of individual securities. There can be no assurance that any particular hedging strategy adopted will succeed.
There might be imperfect correlation, or even no correlation, between the price or price movements of a derivative and the price or price movements of the
investments being hedged. For example, if the value of a derivative used in a short hedge increased by less than the decline in value of the hedged investment, the hedge would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which derivatives are traded. The effectiveness of any hedge using derivatives on an index will depend on the degree of
correlation between price movements in the index and price movements in the securities being hedged.
Hedging strategies, if successful, can reduce risk
of loss by wholly or partially offsetting the negative effect of unfavorable price movements in the investments being hedged. However, hedging strategies can also reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short hedge because the Advisor projected a decline in the price of a security held by the Fund, and the price of that security increased instead, the gain from that increase
might be wholly or partially offset by a decline in the price of the derivative. Moreover, if the price of the derivative declined by more than the increase in the price of the security, the Fund could suffer a loss. In either such case, the Fund
would have been in a better position had it not hedged at all.
Certain derivatives transactions involve the risk of loss resulting from the insolvency or
bankruptcy of the counterparty or the failure by the counterparty to make required payments or otherwise comply with the terms of the contract. In the event of a default by a counterparty, a Fund may have contractual remedies pursuant to the
agreements related to the transaction, which may be limited by applicable law in
11
the case of bankruptcy. A Fund will not enter into any such transactions unless, to the extent required by law, it (1) owns an offsetting covered position in securities or other options or
futures contracts; or (2) segregates liquid assets with a value sufficient at all times to cover its potential obligations to the extent not covered as provided in (1) above. Each Fund will comply with Commission guidelines regarding cover
for hedging transactions.
Assets used as cover or held in a segregated account cannot be sold while the position in the corresponding derivative is open,
unless they are replaced with similar assets. As a result, the commitment of a large portion of a Funds assets to cover or to segregated accounts could impede the Funds portfolio management or its ability to meet redemption requests or
other current obligations.
Furthermore, if a Fund were unable to close out its positions in such derivatives, it might be required to continue to
maintain such assets or accounts or make margin payments until the position expired or matured. These requirements might impair the Funds ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable
to do so, or require that the Fund sell a portfolio security at a disadvantageous time. A Funds ability to close out a position in a derivative prior to expiration or maturity depends on the existence of a liquid secondary market or, in the
absence of such a market, the ability and willingness of a contra party to enter into a transaction closing out the position. Therefore, there is no assurance that any hedging position can be closed out at a time and price that is favorable to the
Fund.
Derivatives may be purchased on established exchanges (exchange-traded derivatives) or through privately negotiated transactions
(over-the-counter derivatives). Exchange-traded derivatives generally are guaranteed by the clearing agency which is the issuer or counterparty to such derivatives. This guarantee usually is supported by a daily payment system operated
by the clearing agency in order to reduce overall credit risk. As a result, unless the clearing agency defaults, there is relatively little counterparty credit risk associated with derivatives purchased on an exchange. By contrast, no clearing
agency guarantees over-the-counter derivatives. Therefore, each party to an over-the-counter derivative transaction bears the risk that the counterparty will default. Accordingly, PRIMECAP Management Company will consider the creditworthiness of
counterparties to over-the-counter derivative transactions in the same manner as it would review the credit quality of a security to be purchased by the Fund. Over-the-counter derivatives are less liquid than exchange-traded derivatives since the
other party to the transaction may be the only investor with sufficient understanding of the derivative to be interested in bidding for it.
Derivatives
may be difficult to value or may be valued subjectively. Inaccurate valuations can result in increased payment requirements to counterparties or a loss of value to a Fund.
Derivatives used for non-hedging purposes may result in losses which would not be offset by increases in the value or portfolio securities or declines in the
cost of securities to be acquired. If a Fund enters into a derivatives transaction as an alternative to purchase or selling other investments, the Fund will be exposed to the same risks that are incurred in purchasing or selling the other
investments directly as well as the risks of the derivatives transaction itself.
Derivatives transactions conducted outside the United States may not be
conducted in the same manner as those entered into on U.S. exchanges and may be subject to different margin, exercise, settlement, or expiration procedures.
12
Foreign Currency Transactions
Foreign Currency Hedging Strategies Special Considerations
. Each Fund may use options and futures on foreign currencies, and foreign
currency forward contracts as described below, to hedge against movements in the values of the foreign currencies in which the Funds securities are denominated. Such currency hedges can protect against price movements in a security that a Fund
owns or intends to acquire that are attributable to changes in the value of the currency in which it is denominated. Such hedges do not, however, protect against price movements in the securities that are attributable to other causes.
A Fund might seek to hedge against changes in the value of a particular currency when no derivatives on that currency are available or such
derivatives are more expensive than certain other derivatives. In such cases, the Fund may hedge against price movements in that currency by entering into transactions using derivatives on other currencies, the values of which PRIMECAP Management
Company believes will have a high degree of positive correlation to the value of the currency being hedged. The risk that movements in the price of the derivative will not correlate perfectly with movements in the price of the currency being hedged
is magnified when this strategy is used.
The values of derivatives on foreign currencies depend on the values of the underlying currencies relative to
the U.S. dollar. Because foreign currency transactions occurring in the interbank market might involve substantially larger amounts than those involved in the use of such derivatives, a Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign currencies or any regulatory requirement that quotations available through dealers or
other market sources be firm or revised on a timely basis. Quotation information generally is representative of very large transactions in the interbank market and thus might not reflect odd lot transactions where rates might be less favorable. The
interbank market in foreign currencies is a global, round the clock market. To the extent the U.S. options or futures markets are closed while the markets for the underlying currencies remain open, significant price and rate movements might take
place in the underlying markets that cannot be reflected in the U.S. markets for the derivatives until they reopen.
Settlement of hedging transactions
involving foreign currencies might be required to take place within the country issuing the underlying currency. Thus, a Fund might be required to accept or make delivery of the underlying foreign currency in accordance with any U.S. or foreign
regulations regarding the maintenance of foreign banking arrangements by U.S. residents and might be required to pay fees, taxes, and charges associated with such delivery assessed in the issuing country.
Foreign Currency Forward Contracts
. Each Fund may enter into foreign currency forward contracts to purchase or sell foreign currencies for a
fixed amount of U.S. dollars or another foreign currency. Each Fund also may use foreign currency forward contracts for cross hedging. Under this strategy, a Fund would increase its exposure to foreign currencies that the Advisor believes might rise
in value relative to the U.S. dollar, or shift its exposure to foreign currency fluctuations from one country to another. For example, if a Fund owned securities denominated in a foreign currency and the Advisor believed that currency would decline
relative to another currency, it might enter into a forward contract to sell an appropriate amount of the first foreign currency, with payment to be made in the second foreign currency.
13
The cost to a Fund from engaging in foreign currency forward contracts varies with factors such as the currency
involved, the length of the contract period, and the market conditions then prevailing. Because foreign currency forward contracts are usually entered into on a principal basis, no fees or commissions are involved. When a Fund enters into a foreign
currency forward contract, it relies on the other party to the transaction to make or take delivery of the underlying currency at the maturity of the contract. Failure by the other party to do so would result in the loss of any expected benefit of
the transaction.
As is the case with futures contracts, holders and writers of foreign currency forward contracts can enter into offsetting closing
transactions, similar to closing transactions on futures, by selling or purchasing, respectively, an instrument identical to the instrument held or written. Secondary markets generally do not exist for foreign currency forward contracts, with the
result that closing transactions generally can be made for foreign currency forward contracts only by negotiating directly with the other party. Thus, there can be no assurance that a Fund will in fact be able to close out a foreign currency forward
contract at a favorable price prior to maturity. In addition, in the event of insolvency of the other party, a Fund might be unable to close out a foreign currency forward contract at any time prior to maturity. In either event, the Fund would
continue to be subject to market risk with respect to the position and would continue to be required to maintain a position in securities denominated in the foreign currency or to maintain cash or securities in a segregated account.
The precise matching of foreign currency forward contract amounts and the value of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the foreign currency forward contract has been established. Thus, a Fund might need to purchase or sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short term currency market movements is extremely difficult, and the successful execution of a short term hedging strategy is highly uncertain.
Limitations on the Use of Foreign Currency Forward Contracts
. A Fund may enter into foreign currency forward contracts or maintain a net
exposure to such contracts only if (1) completion of the contracts would not obligate the Fund to deliver an amount of foreign currency in excess of the value of its portfolio securities or other assets denominated in that currency; or
(2) the Fund maintains cash, U.S. Government securities, or liquid debt or equity securities in a segregated account in an amount not less than the value of its total assets committed to the consummation of the contract and not covered as
provided in (1) above, as marked to market daily. Under normal circumstances, consideration of currency fluctuations will be incorporated into the longer term investment decisions made with regard to overall diversification strategies. However,
the Advisor believes that it is important to have the flexibility to enter into such forward contracts when it determines that the best interests of a Fund will be served.
Other Investment Companies
Each Fund may also invest in
securities issued by other investment companies, including (to the extent permitted by the 1940 Act or Commission rules) other investment companies managed by PRIMECAP Management Company. A Fund may also invest in securities issued by other
investment companies by purchasing the securities of certain foreign investment funds or trusts called passive foreign investment companies.
A
Funds investment in other investment companies may include shares of exchange traded funds (collectively, ETFs). ETFs are not actively managed. Rather, an ETFs objective is to track the performance of a specified index.
Therefore, securities may be purchased, retained, and sold by ETFs at
14
times when an actively managed fund would not do so. As a result, there is a greater risk of loss (and a correspondingly greater prospect of gain) from changes in the value of the securities that
are heavily weighted in the index than would be the case if the ETF were not fully invested in such securities. Because of this, an ETFs price can be volatile, and a Fund may sustain sudden, and sometimes substantial, fluctuations in the value
of its investment in such ETF. In addition, the results of an ETF will not match the performance of the specified index due to reductions in the ETFs performance attributable to transaction and other expenses, including fees paid by the ETF to
service providers.
The Funds limit their investments in securities issued by other investment companies in accordance with the 1940 Act and Commission
rules. Under the 1940 Act, a Fund may invest its assets in any investment company as long as the Fund and its affiliated persons own no more than 3% of the outstanding voting stock of the acquired investment company. This restriction will not apply
to the Funds investments in money market mutual funds if the Funds investments fall within the exceptions set forth under Commission rules. From time to time, the Funds may invest in other investment companies beyond the limits
prescribed by Section 12(d)(1)(A) pursuant to section 12(d)(1)(F) of the 1940 Act.
In addition to the advisory and operational fees a Fund bears
directly in connection with its own operation, a Fund also bears its pro rata portion of the advisory and operational expenses of each other investment company in which it invests.
Repurchase Agreements
Each Fund may enter into
repurchase agreements. Pursuant to a repurchase agreement, which may be viewed as a type of secured lending, the seller of a security to a Fund agrees to repurchase that security from the Fund at a mutually agreed upon time and price. The period of
maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. A Fund may enter into repurchase agreements only with respect to obligations that could otherwise be purchased by the Fund. All
repurchase agreements will be fully secured by collateral in the possession of the Funds custodian based on values that are marked to market daily. The Fund will enter into repurchase agreements only with financial institutions that, in the
judgment of PRIMECAP Management Company, present minimal risk of bankruptcy during the term of the agreement. If the seller defaults and the value of the underlying securities has declined, the Fund may incur a loss. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security, the Funds disposition of the security may be delayed or limited. Repurchase agreements maturing in more than seven days are considered illiquid securities.
Illiquid Securities
Each Fund may invest in illiquid
securities. Illiquid securities include securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (the 1933 Act), securities which are otherwise
not readily marketable, and repurchase agreements having a maturity of longer than seven days. However, no Fund will purchase illiquid securities, including time deposits and repurchase agreements maturing in more than seven days if, as a result of
the purchase, more than 15% of the Funds net assets valued at the time of the transaction are invested in such securities. If otherwise consistent with its investment objective and policies, any of the Funds may purchase securities which are
not registered under the 1933 Act but which can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act. Any such security will not be considered illiquid so long as PRIMECAP Management Company, acting
under guidelines and procedures that are developed, established, and monitored by the Board of Trustees, determines that an adequate trading market exists for that security. This investment practice could have the effect of increasing the level of
illiquidity in a Fund during any period that qualified institutional buyers become uninterested in purchasing these restricted securities.
15
The staff of the Commission has taken the position that purchased OTC options and the assets used as cover for
written OTC options should generally be treated as illiquid securities. However, if a dealer recognized by the Federal Reserve Bank as a primary dealer in U.S. Government securities is the other party to an option contract written by a Fund, and the
Fund has the absolute right to repurchase the option from the dealer at a formula price established in a contract with the dealer, the Commission staff has agreed that the Fund needs to treat as illiquid only that amount of the cover assets equal to
the formula price less the amount by which the market value of the security subject to the option exceeds the exercise price of the option (the amounts by which the option is
in-the-money).
Borrowings
Each Fund may borrow from banks up to 15% of the current value of its net assets for temporary purposes only in order to meet redemptions, and these borrowings
may be secured by the pledge of up to 15% of the current value of its net assets (but investments may not be purchased while such outstanding borrowings in excess of 5% of its net assets exist). Under the provisions of the 1940 Act, a fund is
required to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed. If the Funds asset coverage for borrowings falls below 300% of the amount
borrowed, the Fund will take prompt action to reduce its borrowings. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, the Fund may be required to sell portfolio securities to reduce the debt and restore
the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time.
Borrowing for investment
purposes is generally known as leveraging. Leveraging may exaggerate the effect on net asset value of any increase or decrease in the market value of the Funds portfolio. Money borrowed for leveraging will be subject to interest
costs which may or may not be recovered by appreciation of the securities purchased. In addition, a Fund may be required to maintain minimum average balances in connection with such borrowing or pay a commitment fee to maintain a line of credit,
which would increase the cost of borrowing over the stated interest rate.
Each Fund may borrow funds for temporary purposes by entering into reverse
repurchase agreements, which are considered to be borrowings under the 1940 Act. At the time a Fund enters into a reverse repurchase agreement (an agreement under which the Fund sells portfolio securities and agrees to repurchase them at an
agreed-upon
date and price), it will place in a segregated custodial account cash or liquid assets having a value equal to or greater than the repurchase price (including accrued interest) and will subsequently
monitor the account so that such value is maintained. Reverse repurchase agreements involve the risk that the market value of the securities sold by a Fund may decline below the price of the securities it is obligated to repurchase. The Funds would
pay interest on amounts obtained pursuant to a reverse repurchase agreement.
Loans of Portfolio Securities
Each Fund may lend securities from its portfolio to brokers, dealers, and financial institutions (but not individuals) if liquid assets equal to the current
market value of the securities loaned (including accrued interest thereon) plus the interest payable to the Fund with respect to the loan are maintained with the Fund. In determining whether to lend a security to a particular broker, dealer, or
financial institution, the Advisor will consider all relevant facts and circumstances, including the creditworthiness of the broker, dealer, or financial institution. While no Fund currently lends its portfolio securities, or has any present
intention to
16
lend portfolio securities having an aggregate value in excess of 10% of the current value of the Funds total assets, each Fund reserves the right to lend portfolio securities having an
aggregate value of up to 33 1/3% of the current value of the Funds total assets. Any loans of portfolio securities will be fully collateralized based on values that are marked to market daily. Any securities that a Fund may receive as
collateral will not become part of the Funds portfolio at the time of the loan and, in the event of a default by the borrower, the Fund will, if permitted by law, dispose of such collateral except for such part thereof that is a security in
which such Fund may invest. During the time securities are on loan, the borrower will pay the Fund any accrued income on those securities, and the Fund may invest the cash collateral and earn additional income or receive an
agreed-upon
fee from a borrower that had delivered cash-equivalent collateral. Loans of securities by a Fund will be subject to termination at the Funds or the borrowers option. The Funds may pay
reasonable administrative and custodial fees in connection with a securities loan and may pay a negotiated portion of the interest or fee earned with respect to the collateral to the borrower or the placing broker. Borrowers and placing brokers may
not be affiliated, directly or indirectly, with the Funds or the Advisor.
Short Sales
Each Fund may engage in short sales against-the-box. This technique involves selling either a security that a Fund owns or a security equivalent in
kind and amount to the security sold short that the Fund has the right to obtain, for delivery at a specified date in the future. A Fund may enter into a short sale against-the-box to hedge against anticipated declines in the market price of
portfolio securities. If the value of the securities sold short increases prior to the scheduled delivery date, the Fund loses the opportunity to participate in the gain.
Temporary Investments
Each Fund may take temporary
defensive measures that are inconsistent with the Funds normal fundamental or non fundamental investment policies and strategies in response to adverse market, economic, political, or other conditions as determined by the Advisor. Such
measures could include, but are not limited to, investments in (1) highly liquid short-term fixed income securities issued by or on behalf of municipal or corporate issuers, obligations of the U.S. Government and its agencies, commercial paper,
and bank certificates of deposit; (2) shares of other investment companies which have investment objectives consistent with those of the Fund; (3) repurchase agreements involving any such securities; and (4) other money market
instruments. There is no limit on the extent to which a Fund may take temporary defensive measures. In taking such measures, a Fund may fail to achieve its investment objective.
When Issued Securities and Forward Commitments
Each Fund
may purchase securities on a when issued basis and may also purchase or sell securities on a forward commitment basis. These transactions, which involve a commitment by a Fund to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months later), permit a Fund to lock in a price or yield on a security it owns or intends to purchase, regardless of future changes in interest rates. When issued and forward
commitment transactions involve the risk, however, that the price obtained in a transaction may be less favorable than the price available in the market when the securities delivery takes place. No Fund intends to engage in when issued purchases and
forward commitments for speculative purposes.
17
No Fund will start earning interest or dividends on when issued securities until they are received. The value of
the securities underlying a when issued purchase or a forward commitment to purchase securities, and any subsequent fluctuations in their value, is taken into account when determining the net asset value of a Fund starting on the date such Fund
agrees to purchase the securities. Each Fund will segregate liquid assets in an amount at least equal in value to such Funds commitment to purchase securities on a when issued or forward commitment basis. If the value of these assets declines,
the Fund will segregate additional liquid assets in the account on a daily basis so that the value of the assets in the account is equal to the amount of such commitments.
MANAGEMENT
The
Trustees are responsible for the overall management of the Trust, including establishing the Funds policies and general supervision and review of their investment activities. The Trusts officers, who administer the Funds daily
operations, are appointed by the Board of Trustees.
Officers and Trustees
Executive Officers
.
The table below sets forth certain information about each of the Trusts executive officers.
|
|
|
|
|
|
|
Name
Address
Age
|
|
Position(s) Held
with Trust
|
|
Term of Office; Length
of Time Served
|
|
Principal Occupation(s)
During Past 5 Years
|
Theo A. Kolokotrones
225 South Lake
Ave.,
Suite 400, Pasadena, CA
91101-3005
Age: 68
|
|
Co-Chief Executive Officer
|
|
Indefinite; Since 9/04
|
|
Vice Chairman, Director, Portfolio Manager, and Principal, PRIMECAP Management Company
|
|
|
|
|
Joel P. Fried
225 South Lake Ave.,
Suite 400, Pasadena, CA
91101-3005
Age: 52
|
|
Co-Chief Executive Officer and Trustee
|
|
Indefinite; Since 9/04
|
|
President, Director, Portfolio Manager, and Principal, PRIMECAP Management Company
|
|
|
|
|
Alfred W. Mordecai
225 South Lake
Ave.,
Suite 400, Pasadena, CA
91101-3005
Age: 46
|
|
Co-Chief Executive Officer
|
|
Indefinite; Since 10/12
|
|
Executive Vice President, Director, Portfolio Manager, and Principal, PRIMECAP Management Company
|
|
|
|
|
Michael J. Ricks
225 South Lake
Ave.,
Suite 400, Pasadena, CA
91101-3005
Age: 36
|
|
Chief Financial Officer, Secretary, and Chief Administrative Officer
|
|
Indefinite; Since 3/11
|
|
Director of Fund Administration, PRIMECAP Management Company (since 2011); Vice President, Fund Administration and Compliance, U.S. Bancorp Fund Services, LLC (2001- 2011)
|
18
|
|
|
|
|
|
|
Name
Address
Age
|
|
Position(s) Held
with Trust
|
|
Term of Office; Length
of Time Served
|
|
Principal Occupation(s)
During Past 5 Years
|
Karen Chen
225 South Lake Ave.,
Suite 400, Pasadena, CA
91101-3005
Age: 41
|
|
Vice President of Compliance, Chief Compliance Officer, and AML Officer
|
|
Indefinite; Since 10/04
|
|
Chief Compliance Officer, Director of Compliance and Reporting, PRIMECAP Management Company
|
Independent Trustees
.
The table below sets forth certain information about
each of the Trustees of the Trust who is not an interested person of the Trust as defined in the 1940 Act (Independent Trustees).
|
|
|
|
|
|
|
|
|
|
|
Name
Address
Age
|
|
Position(s)
Held with
Trust
|
|
Term of
Office;
Length of
Time
Served
|
|
Principal
Occupation(s)
During Past
5 Years
|
|
Number of
Portfolios in
Fund
Complex
Overseen by
Trustee
1
|
|
Other
Directorships
Held
by
Trustee During
Past 5 Years
|
Benjamin F. Hammon
225 South Lake
Ave.,
Suite 400, Pasadena,
CA 91101-3005
Age: 78
|
|
Chairman of the Board and Trustee
|
|
Indefinite; Since 9/04
|
|
Retired; private investor
|
|
3
|
|
None
|
|
|
|
|
|
|
Wayne H. Smith
225 South Lake Ave.,
Suite 400, Pasadena,
CA 91101-3005
Age: 72
|
|
Chairman of the Audit Committee and Trustee
|
|
Indefinite; Since 9/04
|
|
Retired; private investor
|
|
3
|
|
None
|
|
|
|
|
|
|
Joseph G. Uzelac
225 South Lake
Ave.,
Suite 400, Pasadena,
CA 91101-3005
Age: 70
|
|
Trustee
|
|
Indefinite; Since 10/07
|
|
Retired; private investor
|
|
3
|
|
None
|
|
|
|
|
|
|
Elizabeth D. Obershaw
225
South Lake Ave.,
Suite 400, Pasadena,
CA 91101-3005
Age: 54
|
|
Trustee
|
|
Indefinite; Since 6/08
|
|
Managing Director, Horsley Bridge Partners, an investment advisor (2007-Present)
|
|
3
|
|
None
|
1
|
Fund Complex includes any funds, series of funds, or trusts that share the same advisor or that hold themselves out to investors as related companies.
|
19
Interested Trustee
.
The table below sets forth certain information about the
Trustee of the Trust who is an interested person of the Trust as defined by the 1940 Act.
|
|
|
|
|
|
|
|
|
|
|
Name
Address
Age
|
|
Position(s)
Held with
Trust
|
|
Term of
Office;
Length of
Time
Served
|
|
Principal
Occupation(s)
During Past 5
Years
|
|
Number of
Portfolios in
Fund
Complex
Overseen by
Trustee
2
|
|
Other
Directorships
Held by
Trustee
|
Joel P. Fried
1
225 South Lake
Ave., Suite 400,
Pasadena, CA
91101-3005
Age: 52
|
|
Co-Chief Executive Officer and Trustee
|
|
Indefinite; Since 9/04
|
|
President, Director, Portfolio Manager, and Principal, PRIMECAP Management Company
|
|
3
|
|
None
|
1
|
Mr. Fried is an interested person of the Trust, as defined by the 1940 Act, because of his employment with PRIMECAP Management Company, the investment advisor to the Trust.
|
2
|
Fund Complex includes any funds, series of funds, or trusts that share the same advisor or that hold themselves out to investors as related companies.
|
The Board of Trustees
The Board of Trustees has
responsibility for the overall management and operations of the Trust. The Board establishes the Trusts policies and meets regularly to review the activities of the officers, who are responsible for day-to-day operations of the Trust.
The current Trustees were selected with a view towards establishing a Board that would have the broad experience needed to oversee a registered investment
company comprised of multiple series. As a group, the Board has extensive experience in many different aspects of the financial services and asset management industries.
The Trustees were selected to join the Board based upon the following factors, among others: character and integrity; willingness to serve and willingness and
ability to commit the time necessary to perform the duties of a Trustee; as to each Trustee other than Mr. Fried, satisfying the criteria for not being classified as an interested person of the Trust as defined in the 1940 Act; and,
as to Mr. Fried, his position with PRIMECAP Management Company, the investment advisor to the Trust. In addition, the following specific experience, qualifications, attributes, and/or skills apply as to each Trustee: Mr. Hammon, executive
experience with Salomon Smith Barney, an investment bank and brokerage firm (1963 1998); Mr. Smith, executive and financial officer experience with Avery Dennison Corporation, a publicly traded operating company (1979 2002);
Mr. Uzelac, executive experience with Lehman Brothers Global Investment Bank, an investment bank and brokerage firm (1988 2007); Ms. Obershaw, senior executive experience with Horsley Bridge Partners, an investment advisor (2007
present), and experience as chief investment officer of Hewlett-Packard Company, a publicly traded operating company (1991 2007); and Mr. Fried, investment management experience as an executive and portfolio manager with PRIMECAP
Management Company (1986 present).
In its periodic self-assessment of the effectiveness of the Board, the Board considers the complementary
individual skills and experience of the individual Trustees primarily in the broader context of the Boards overall composition, seeking to ensure that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and
experience to oversee the business of the series of the Trust. The summaries set forth above as to the qualifications, attributes, and skills of the Trustees are required by
20
the registration form adopted by the Commission, do not constitute holding out the Board or any Trustee as having any special expertise or experience, and do not impose any greater responsibility
or liability on any such person or on the Board as a whole than would otherwise be the case.
The Independent Trustees comprise 80% of the Board, and
Benjamin Hammon, an Independent Trustee, serves as Chairman of the Board. The Chairman serves as a key point person for dealings between the Trusts management and the other Independent Trustees. As noted below, through the committees of the
Board, the Independent Trustees consider and address important matters involving each Fund, including those presenting conflicts or potential conflicts of interest. The Independent Trustees also regularly meet outside the presence of management. The
Board has determined that its organization and leadership structure are appropriate in light of its fiduciary and oversight obligations and the special obligations of the Independent Trustees. The Board believes that its structure facilitates the
orderly and efficient flow of information to the Independent Trustees from management.
Board Committees
Audit Committee.
The Board of Trustees has an Audit Committee which oversees the Trusts accounting and financial reporting policies and practices
and its internal controls, and the quality and objectivity of the Trusts financial statements and the audit thereof. The Committee also acts as the Trusts qualified legal compliance committee. The Audit Committee currently
consists of each of the Independent Trustees. The Audit Committee met twice during the Funds fiscal year ended October 31, 2013.
Nominating
Committee.
The Board of Trustees has a Nominating Committee which is responsible for seeking and reviewing candidates for consideration as nominees for Trustees as is considered necessary from time to time. The Nominating Committee is comprised
of each of the Independent Trustees. The Nominating Committee meets as needed and did not meet during the Funds fiscal year ended October 31, 2013.
The Board has adopted the following procedures by which shareholders may recommend nominees to the Board of Trustees. While the Nominating Committee normally
is able to identify from its own resources an ample number of qualified candidates, it will consider shareholder suggestions of persons to be considered as nominees to fill future vacancies on the Board, so long as the shareholder or shareholder
group submitting a proposed nominee (1) beneficially owns more than 5% of the Trusts voting shares; (2) has held such shares continuously for two years; and (3) is not an adverse holder (
i.e.
, the shareholder or
shareholder group has acquired such shares in the ordinary course of business and not with the purpose nor with the effect of changing or influencing the control of the Trust). Such suggestions must be sent in writing to the Trusts
Secretary and must be accompanied by the shareholders contact information, the nominees contact information and number of Fund shares owned by the nominee, all information regarding the nominee that would be required to be disclosed in
solicitations of proxies for elections of directors required under the Securities Exchange Act of 1934, as amended, and a notarized letter from the nominee stating his or her intention to serve as a nominee and be named in the Trusts proxy
statement, if so designated by the Nominating Committee and the Board of Trustees.
Risk Management.
Consistent with its responsibility for
oversight of the Trust in the interests of shareholders, the Board among other things oversees risk management of the Funds investment programs and business affairs directly and through the Audit Committee. The Board has emphasized to PRIMECAP
Management Company the importance of maintaining vigorous risk management programs and procedures.
21
The Trust faces a number of risks, such as investment risk, valuation risk, reputational risk, risk of
operational failure or lack of business continuity, and legal, compliance, and regulatory risk. Risk management seeks to identify and address risks,
i.e.,
events or circumstances that could have material adverse effects on the business,
operations, shareholder services, investment performance, or reputation of the Trust or a Fund. Under the overall supervision of the Board, PRIMECAP Management Company and other service providers to the Trust employ a variety of processes,
procedures, and controls to identify various of those possible events or circumstances, to ensure such risks are appropriate, and where appropriate to lessen the probability of their occurrence and/or to mitigate the effects of such events or
circumstances if they do occur. Different processes, procedures, and controls are employed with respect to different types of risks. Various personnel, including the Trusts CCO, management of PRIMECAP Management Company, and other service
providers (such as the Trusts independent registered public accounting firm) make periodic reports to the Board or to the Audit Committee with respect to various aspects of risk management. The Board recognizes that not all risks that may
affect the Trust can be identified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the Funds investment
objectives, and that the processes, procedures, and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant
information. As a result of the foregoing and other factors, the Boards risk management oversight is subject to substantial limitations.
Trustee Compensation
. Effective June 17, 2013, the trustees of the Trust who are not officers or employees of the Trust or PRIMECAP
Management Company are entitled to receive from the Trust an annual retainer of $40,000 paid in four equal installments. For their service to the Funds, the Board Chairman and the Audit Committee Chairman receive an additional $20,000 and $10,000,
respectively, on an annual basis. All Trustees are reimbursed for all reasonable out-of-pocket expenses relating to attendance at meetings. No other compensation or retirement benefits are received by any Trustee or officer from the Funds. The
following table represents compensation paid to Trustees during the fiscal year ending October 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name, Position
|
|
Aggregate
Compensation
from the
PRIMECAP
Odyssey
Stock Fund
|
|
|
Aggregate
Compensation
from the
PRIMECAP
Odyssey
Growth Fund
|
|
|
Aggregate
Compensation
from the
PRIMECAP
Odyssey
Aggressive
Growth Fund
|
|
|
Total
Compensation
from Trust
and Fund
Complex
1
Paid
to
Trustees
|
|
Benjamin F. Hammon,
Independent Trustee
|
|
$
|
16,666
|
|
|
$
|
16,667
|
|
|
$
|
16,667
|
|
|
$
|
50,000
|
|
Wayne H. Smith,
Independent Trustee
|
|
$
|
14,166
|
|
|
$
|
14,667
|
|
|
$
|
14,667
|
|
|
$
|
44,000
|
|
Joseph G. Uzelac,
Independent Trustee
|
|
$
|
11,666
|
|
|
$
|
11,667
|
|
|
$
|
11,667
|
|
|
$
|
35,000
|
|
Elizabeth D. Obershaw
Independent Trustee
|
|
$
|
11,666
|
|
|
$
|
11,667
|
|
|
$
|
11,667
|
|
|
$
|
35,000
|
|
Joel P. Fried,
Interested Trustee and Co-Chief Executive Officer
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
1
|
Fund Complex includes two or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services or have a common investment advisor or have
an investment advisor that is an affiliated person of the investment advisor of any of the other registered investment companies.
|
22
Trustee Ownership of Securities
. The table below sets forth the extent of each Trustees
beneficial interest in shares of the Funds as of December 31, 2013. For purposes of this table, beneficial interest includes any direct or indirect pecuniary interest in securities issued by the Trust and includes shares of any of the Funds
held by members of a Trustees immediate family.
|
|
|
|
|
|
|
|
|
|
|
Ownership of Securities
|
|
Joel P.
Fried
Interested
Trustee
|
|
Benjamin F.
Hammon
Independent
Trustee
|
|
Wayne H.
Smith
Independent
Trustee
|
|
Joseph G.
Uzelac
Independent
Trustee
|
|
Elizabeth D.
Obershaw
Independent
Trustee
|
PRIMECAP Odyssey Stock Fund
|
|
e
|
|
e
|
|
b
|
|
c
|
|
c
|
PRIMECAP Odyssey Growth Fund
|
|
e
|
|
e
|
|
c
|
|
c
|
|
a
|
PRIMECAP Odyssey Aggressive Growth Fund
|
|
e
|
|
e
|
|
c
|
|
c
|
|
a
|
Aggregate Dollar Range of Equity Securities In All Registered Investment Companies Overseen by the Trustee in the Family of Investment
Companies
|
|
e
|
|
e
|
|
c
|
|
d
|
|
c
|
Note:
a = None b = $1 - $10,000 c = $10,001 -
$50,000 d = $50,001 - $100,000 e = Over $100,000
As of January 31, 2014, Trustees and officers
of the Trust as a group beneficially owned less than one percent of the outstanding shares of each of the PRIMECAP Odyssey Stock Fund, the PRIMECAP Odyssey Growth Fund, and the PRIMECAP Odyssey Aggressive Growth Fund.
Investment Advisor
Pursuant to an Investment Advisory
Agreement (the Advisory Agreement), each Fund is managed by PRIMECAP Management Company, located at 225 South Lake Avenue, Suite 400, Pasadena, California 91101, an investment advisor registered with the Commission. PRIMECAP Management
Company is controlled by Mitchell J. Milias, Theo A. Kolokotrones, and Joel P. Fried, who also serve as directors of the firm. Alfred W. Mordecai holds an ownership stake in the Advisor and also serves as a director. Mr. Milias serves as its
Chairman and Treasurer, Mr. Kolokotrones as its Vice Chairman, Mr. Fried as its President, and Mr. Mordecai as its Executive Vice President and Chief Administrative Officer.
Subject to the supervision of the Board of Trustees, PRIMECAP Management Company provides a continuous investment program for the Funds, including investment
research and management with respect to all securities and investments and cash equivalents in the Funds. PRIMECAP Management Company provides services under the Advisory Agreement in accordance with each Funds investment objectives, policies,
and restrictions.
For its services to the Funds, the Advisor receives a fee paid monthly at the annual rate of 0.60% of the first $100 million of
each Funds average daily net assets and 0.55% of each Funds average daily net assets in excess of $100 million. Advisory fees paid by the Funds to the Advisor for the last three fiscal years were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory Fees
|
|
Fiscal Year Ended
October 31, 2013
|
|
|
Fiscal Year Ended
October 31, 2012
|
|
|
Fiscal Year Ended
October 31, 2011
|
|
PRIMECAP Odyssey Stock Fund
|
|
$
|
9,351,918
|
|
|
$
|
6,987,965
|
|
|
$
|
4,366,379
|
|
PRIMECAP Odyssey Growth Fund
|
|
$
|
15,622,337
|
|
|
$
|
11,438,016
|
|
|
$
|
9,831,335
|
|
PRIMECAP Odyssey Aggressive Growth Fund
|
|
$
|
15,254,773
|
|
|
$
|
7,240,088
|
|
|
$
|
5,754,978
|
|
23
The Advisory Agreement provides that PRIMECAP Management Company will not be liable for any error of judgment or
mistake of law or for any loss suffered by the Funds in connection with the performance of the Advisory Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting
from willful misfeasance, bad faith, or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations and duties under the Advisory Agreement.
The Advisory Agreement will continue in effect with respect to each Fund provided the continuance is approved annually (1) by the holders of a majority
of the Funds outstanding voting securities or by the Trusts Board of Trustees; and (2) by a majority of the Trustees of the Trust who are not parties to the Advisory Agreement or interested persons (as defined in the
1940 Act) of any such party. The Advisory Agreement may be terminated with respect to any Fund on 60 days written notice by either party and will terminate automatically if assigned (as defined in the 1940 Act).
Portfolio Managers
Theo A. Kolokotrones, Joel P.
Fried, Alfred W. Mordecai, and M. Mohsin Ansari jointly manage the PRIMECAP Odyssey Stock Fund, the PRIMECAP Odyssey Growth Fund, and the PRIMECAP Odyssey Aggressive Growth Fund. These four portfolio managers collectively have more than 100 years of
investment experience.
|
|
|
|
|
Name
|
|
Years of
Experience
|
|
Theo A. Kolokotrones
|
|
|
44
|
|
Joel P. Fried
|
|
|
29
|
|
Alfred W. Mordecai
|
|
|
17
|
|
M. Mohsin Ansari
|
|
|
14
|
|
The table below illustrates other accounts for which each of the above-mentioned four portfolio managers has
significant day-to-day management responsibilities as of October 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category of Account
|
|
Total Number of
Accounts
Managed
|
|
|
Total Assets in
Accounts
Managed
|
|
|
Number of Accounts
for which Advisory
Fee is Based on
Performance
|
|
|
Assets in
Accounts for
which Advisory
Fee is Based on
Performance
|
|
Theo A. Kolokotrones
|
|
Other Registered Investment Companies
|
|
|
4
|
|
|
$
|
55.3 billion
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Pooled Investment Vehicles
|
|
|
1
|
|
|
$
|
1.8 billion
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Accounts
|
|
|
35
|
|
|
$
|
16.2 billion
|
|
|
|
0
|
|
|
$
|
0
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joel P. Fried
|
|
Other Registered Investment Companies
|
|
|
4
|
|
|
$
|
55.3 billion
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Pooled Investment Vehicles
|
|
|
1
|
|
|
$
|
1.8 billion
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Accounts
|
|
|
32
|
|
|
$
|
16.2 billion
|
|
|
|
0
|
|
|
$
|
0
|
|
Alfred W. Mordecai
|
|
Other Registered Investment Companies
|
|
|
4
|
|
|
$
|
55.3 billion
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Pooled Investment Vehicles
|
|
|
1
|
|
|
$
|
1.8 billion
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Accounts
|
|
|
27
|
|
|
$
|
16.2 billion
|
|
|
|
0
|
|
|
$
|
0
|
|
M. Mohsin Ansari
|
|
Other Registered Investment Companies
|
|
|
4
|
|
|
$
|
55.3 billion
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Pooled Investment Vehicles
|
|
|
1
|
|
|
$
|
1.8 billion
|
|
|
|
0
|
|
|
$
|
0
|
|
Other Accounts
|
|
|
26
|
|
|
$
|
16.2 billion
|
|
|
|
0
|
|
|
$
|
0
|
|
Portfolio Manager Compensation
.
Compensation is paid solely by the Advisor. Each portfolio manager
receives a fixed salary that is in part based on industry experience as well as contribution to the firm. On an annual basis, each portfolio managers compensation may be adjusted according to market conditions and/or to reflect his past
performance.
In addition, each portfolio manager may receive a bonus partially based on the Funds pre-tax return and the total value of assets
managed by that portfolio manager. Performance is measured on a relative basis using the S&P 500
®
Index as the benchmark, and the bonuses are earned only when performance exceeds that of
the S&P 500
®
Index. The value of assets managed by PRIMECAP Management Company is not a factor in determination of a portfolio managers bonus. Bonuses earned are accrued and paid
ratably according to the following schedule over rolling three year periods: 50% in year one, 33% in year two, and 17% in year three. Although the bonus is determined by pre-tax returns, each portfolio manager considers tax consequences in taxable
accounts as part of his decision-making process.
The portfolio managers do not receive deferred compensation but participate in a profit-sharing plan
available to all employees of the Advisor; amounts are determined as a percentage of the employees eligible compensation for a calendar year based on IRS limitations.
Each portfolio manager is a principal of the Advisor and receives quarterly dividends based on his equity in the company.
Conflicts of Interest
.
PRIMECAP Management Company employs a multi-manager approach to managing its clients portfolios. In addition
to mutual funds, the manager may also manage separate accounts for institutional clients. Conflicts of interest may arise with aggregation or allocation of securities trades amongst the Funds and other accounts. The investment objectives of the
Funds and the strategies used to manage the Funds may differ from other accounts, and the performance may be
25
impacted as well. Portfolio managers generally have day-to-day management responsibilities with respect to more than one Fund or other account and may be presented with several potential or
actual conflicts of interest. For example, the management of multiple Funds and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of each Fund and/or other account. If a portfolio manager
identifies a limited investment opportunity which may be suitable for more than one Fund or other account, a Fund may not be able to take full advantage of that opportunity due to an allocation of filled purchase or sale orders across all eligible
Funds and other accounts managed by the portfolio managers. The Advisor has adopted best execution and trade allocation policies and procedures to prevent potential conflicts of interest that may arise between mutual funds and separate accounts
whereby a client or clients may be disadvantaged by trades executed in other clients portfolios in the same security. These policies and procedures are strictly monitored and are reviewed by the Advisor.
The following table indicates the dollar range of beneficial ownership of shares by each portfolio manager as of October 31, 2013:
|
|
|
|
|
|
|
|
|
Dollar Range of Equity Securities in the Fund Beneficially Owned
(None, $1-$10,000, $10,001-$50,000, $50,001-$100,000,
$100,001-$500,000,
$500,001-$1,000,000, Over $1,000,000)
|
Name of Portfolio Manager
|
|
PRIMECAP Odyssey
Stock Fund
|
|
PRIMECAP Odyssey
Growth Fund
|
|
PRIMECAP Odyssey
Aggressive Growth
Fund
|
Theo A. Kolokotrones
|
|
Over $1,000,000
|
|
Over $1,000,000
|
|
Over $1,000,000
|
Joel P. Fried
|
|
Over $1,000,000
|
|
Over $1,000,000
|
|
Over $1,000,000
|
Alfred W. Mordecai
|
|
Over $1,000,000
|
|
Over $1,000,000
|
|
Over $1,000,000
|
M. Mohsin Ansari
|
|
$100,001 - $500,000
|
|
$100,001 - $500,000
|
|
$100,001 - $500,000
|
Administrator and Distributor
Under its Fund Administration Agreement with the Trust, U.S. Bancorp Fund Services, LLC (Administrator) furnishes the Trust with office facilities,
together with those ordinary clerical and bookkeeping services that are not being furnished by PRIMECAP Management Company.
The Fund Administration
Agreement contains provisions limiting the liability of the Administrator similar to those in the Advisory Agreement and requires the Trust to indemnify the Fund Administrator against any loss suffered by the Administrator in connection with the
performance of the Administration Agreement, except for a loss resulting from willful misconduct, bad faith, or negligence on the Administrators part in the performance of its duties or from reckless disregard of its obligations and duties
under the Fund Administration Agreement.
The Trust has also retained the Administrator to provide the Trust with certain fund accounting services
pursuant to a Fund Accounting Agreement. The term of the Fund Accounting Agreement, and its provisions regarding termination, limitation of liability, and indemnification are similar to those of the Trusts Fund Administration Agreement.
26
Administration fees for the Funds for the last three fiscal years ended October 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Administration Fees
|
|
Fiscal Year Ended
October 31, 2013
1
|
|
|
Fiscal Year Ended
October 31, 2012
|
|
|
Fiscal Year Ended
October 31, 2011
|
|
PRIMECAP Odyssey Stock Fund
|
|
$
|
401,322
|
|
|
$
|
387,788
|
|
|
$
|
253,663
|
|
PRIMECAP Odyssey Growth Fund
|
|
$
|
671,739
|
|
|
$
|
630,766
|
|
|
$
|
581,374
|
|
PRIMECAP Odyssey Aggressive Growth Fund
|
|
$
|
643,199
|
|
|
$
|
400,904
|
|
|
$
|
332,293
|
|
1
|
After April 1, 2013, the Funds paid a unified fee to the Administrator for fund administration and fund accounting services.
|
Quasar Distributors, LLC (Distributor), 615 East Michigan Street, Milwaukee, WI 53202, an affiliate of the Administrator, has entered into a
Distribution Agreement with the Trust pursuant to which it engages in a continuous distribution of shares of the Funds. The Distributor receives a customary fee for its services from PRIMECAP Management Company.
Pursuant to the Distribution Agreement, the Trust has agreed to indemnify the Distributor, under certain conditions, for any loss or liability that may arise
out of claims based upon the disclosures made in the Trusts Prospectus, SAI, Annual or Semiannual Report to shareholders, or in any advertisements or sales literature prepared by the Trust or its agent, or based on the Trusts failure to
comply with the terms of the Distribution Agreement or applicable law, unless such losses arise from statements or omissions made by the Distributor in writing for inclusion in such materials. Under the 1940 Act, the Trust may not indemnify the
Distributor for any loss or liability resulting from the Distributors willful misfeasance, bad faith, gross negligence, or the reckless disregard of its obligations under the Distribution Agreement.
Transfer Agent
U.S. Bancorp Fund Services, LLC, 615 East
Michigan Street, Milwaukee, Wisconsin 53202, serves as transfer agent for each Fund, for which it receives customary fees.
Sub-Transfer Agent
The Funds enter into agreements with certain financial intermediaries under which these intermediaries provide the shareholder servicing functions that
might otherwise be provided by the Transfer Agent. For these services, the intermediaries may be paid on a per account basis as compensation for the shareholder services provided. These services may include, but are not limited to, producing
shareholder statements, transaction processing reporting, tax reporting, maintenance of a call center to facilitate shareholder transactions and other services, and maintenance of a website providing shareholder access to account information. The
following intermediaries were compensated for their services to the Funds during the fiscal year ended October 31, 2013:
Firm Name
Charles Schwab & Co., Inc.
Fidelity
Institutional Operations Co.
Financial Data Services, Inc.
GWFS Equities Inc.
Hewitt Associates LLC
ING
JP Morgan Chase & Co.
National Financial Services, LLC
NYLIFE Distributors, LLC
Pershing LLC
PNC Global Investment Servicing
27
Raymond James & Associates, Inc.
TIAA-CREF
Vanguard Brokerage Services
Wells Fargo
All payments are subject to the oversight of
the Advisor and are disclosed to the Board of Trustees.
Retirement Plan Recordkeepers
One or more of the Funds may be an option for participants in a qualified defined contribution employee benefit plan. Certain financial intermediaries act as
recordkeepers for these plans and also provide some or all of the shareholder services classified under Sub-Transfer Agents. The Funds may compensate these recordkeepers in an appropriate manner, subject to the supervision of the Advisor
and the Board of Trustees. The Advisor may also reimburse the Funds for all or a portion of the recordkeeping fees charged by financial intermediaries.
Codes of Ethics
The Board of Trustees of the Trust has
adopted a Code of Ethics under Rule 17j-1 of the Investment Company Act (the Code of Ethics). The Code of Ethics restricts the investing activities of certain Fund officers, Trustees, and advisory persons and, as described below, imposes
certain restrictions on Fund investment personnel, except to the extent that those persons are employees of the Advisor or other service providers to the Trust who are covered by other codes of ethics approved by the Trustees.
All persons covered by the Code of Ethics are required to pre-clear any personal securities investment (with limited exceptions, such as investment in
government securities) and must comply with ongoing requirements concerning recordkeeping and disclosure of personal securities investments. The pre-clearance requirement and associated procedures are designed to identify any prohibition or
limitation applicable to a proposed investment. In addition, each person covered by the Code of Ethics is prohibited from purchasing or selling any security which, to such persons knowledge, is being purchased or sold (as the case may be), or
is being considered for purchase or sale, by a Fund. Investment personnel are subject to additional restrictions such as a ban on acquiring securities in an initial public offering, blackout periods which prohibit trading by investment
personnel of a Fund within periods of trading by the Fund in the same security, and a ban on short-term trading in securities.
In addition, the Advisor
has adopted a Code of Ethics as required by Rule 17j-1 of the Investment Company Act, which has been approved by the Board of Trustees of the Trust and is similarly designed to prevent affiliated persons of the Advisor from engaging in deceptive,
manipulative, or fraudulent activities in connection with securities held or to be acquired by the Funds.
The Trust has adopted a Supplemental Code of
Ethics for Principal Officers and Senior Financial Officers (Supplemental Code). The Supplemental Code is intended to deter wrongdoing and promote (1) honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships; (2) full, fair, accurate, timely, and understandable disclosure in reports and documents filed with the Commission and in other public communications by the Trust;
(3) compliance with applicable laws; (4) prompt internal reporting of violations of the Supplemental Code; and (5) accountability for adherence to the Supplemental Code.
28
Portfolio Holdings
The Trust publishes the Funds complete portfolio schedules at the end of the second and fourth fiscal quarters in its Semiannual and Annual Reports
within 60 days of the end of the quarter, and in filings of such Reports with the Commission on Form N-CSR within ten days of mailing of such reports to shareholders. The Trust files the Funds complete portfolio schedules as of the end of the
first and third fiscal quarters with the Commission on Form N-Q within 60 days of the end of the quarter. In addition, the Funds may disclose their calendar quarter-end holdings and certain other portfolio characteristics on the Funds website
at www.odysseyfunds.com approximately 30 calendar days after each calendar quarter-end. The calendar quarter-end holdings for the Funds will remain posted on the website at least until the date of the next required regulatory filing with the
Commission. Portfolio holdings information posted on the Funds website may be separately provided to any person commencing the day after it is first published on the website. Additionally, the Funds may choose to disclose end-of-month holdings
approximately 30 calendar days after the month-end.
The Board of Trustees has adopted a Policy on Disclosure of Portfolio Holdings, pursuant to which the
securities activities engaged in or contemplated for the Funds or the securities held by the Funds may not be disclosed to any person except for the following disclosures: (1) to persons providing services to the Trust who have a need to know
such information in order to fulfill their obligations to the Trust, such as portfolio managers, administrators, custodians, and the Board of Trustees; (2) in connection with periodic reports that are available to shareholders and the public;
(3) pursuant to a regulatory request or as otherwise required by law; or (4) to persons approved in writing by the Chief Compliance Officer (the CCO) of the Trust. Any disclosure made pursuant to item (4) above is subject
to confidentiality requirements, may only be made for legitimate business purposes, and will be reported to the Board of Trustees at its next quarterly meeting.
The release of all non-public information by the Trust is subject to confidentiality requirements. With respect to persons providing services to the Trust,
information related to the Trust is required to be kept confidential pursuant to the Trusts agreements with such service providers. The Trusts independent registered public accounting firm and attorneys engaged by the Trust maintain the
confidentiality of such information pursuant to their respective professional ethical obligations. The Trust provides portfolio holdings information to mutual fund rating agencies only after such information is filed with the Commission on Form
N-CSR or Form N-Q, as applicable.
As of October 31, 2013, the Trust has ongoing business arrangements with the following entities which involve
making non-public portfolio holdings information available to such entities as an incidental part of the business services they provide to the Trust: (1) U.S. Bancorp Fund Services, LLC, the Administrator; (2) The Bank of New York Mellon
(the Custodian) pursuant to agreements with such entities under which the Trusts portfolio holdings information is provided daily on a real-time basis; (3) PricewaterhouseCoopers LLP, the Trusts independent registered
public accounting firm; and (4) Bingham McCutchen LLP, attorneys engaged by the Trust to whom the Trust provides portfolio holdings information as needed with no lag times after the date of the information. In addition, the Funds
portfolio holdings are disclosed to FactSet Research Systems and Glass, Lewis & Co. on a daily basis as part of ongoing arrangements that serve legitimate business purposes.
Neither the Trust, the Advisor, nor any other person receives compensation or any other consideration in connection with such arrangements (other than the
compensation paid by the Trust to such entities for the services provided by them to the Trust). In the event of a conflict between the interests of Fund shareholders and those of the Advisor, the Trusts principal underwriter, or any
affiliated person of the Trust, the Advisor, or the Trusts principal underwriter, the CCO will make a determination in the best interests of the Funds shareholders and will report such determination to the Board of Trustees at the end of
the quarter in which such determination was made.
29
Proxy Voting
The Trusts Board of Trustees has delegated the responsibility for voting proxies relating to portfolio securities held by the Funds to the Advisor as a
part of the Advisors general management of the Funds, subject to the Boards continuing oversight.
A conflict of interest may be deemed to
occur when the Advisor or one of its affiliated persons has a financial interest in a matter presented by a proxy to be voted on behalf of a Fund, which may compromise the Advisors independence of judgment and action in judging the proxy. If
such a conflict occurs, the Advisor is required to submit a report to the Board of Trustees indicating the nature of the conflict of interest and how it was resolved. The Advisor will resolve such conflicts as follows: (1) to the extent that
the Advisor has little or no discretion to deviate from the proxy policies with respect to the proposal in question, the Advisor will vote in accordance with such pre-determined voting policy; and (2) to the extent that the Advisor has
discretion to deviate from the proxy policies with respect to the proposal in question, the Advisor will disclose the conflict to the Board of Trustees and obtain their consent to the proposed vote before voting the securities.
The Advisors proxy voting policies and procedures (the Proxy Policies) require the Advisor to vote proxies received in a manner consistent
with the best interests of its clients, including the Funds. The Proxy Policies also require the Advisor to vote proxies in a prudent and diligent manner intended to enhance the economic value of the assets of the Funds. However, the Proxy Policies
permit the Advisor to abstain from voting proxies in the event that a Funds economic interest in the matter being voted upon is limited relative to the Funds overall portfolio or the impact of the Funds vote will not have an effect
on its outcome or on the Funds economic interests.
Certain of the voting guidelines set forth in the Proxy Policies are summarized below:
(1) The Advisor generally votes for: uncontested director nominees recommended by management; the election of auditors recommended by
management, unless a dispute exists over policies; limiting directors liability; eliminating preemptive rights; approving employee stock purchase plans; and establishing employee benefit plans.
(2) The Advisor generally votes against: entrenching the board or adopting anti-takeover measures; adopting cumulative voting rights; and
adopting or endorsing social issues.
Although many proxy proposals can be voted in accordance with these proxy voting guidelines, some proposals will
require special consideration. The Advisor will make a decision on a case-by-case basis in these situations, including proposals to eliminate director mandatory retirement policies, rotate annual meeting locations and dates, grant options and stock
to management and directors, and indemnify directors and/or officers.
Information on how the Funds voted proxies relating to portfolio securities during
the 12-month period ended June 30 of each year will be available (1) without charge, upon request, by calling 1-800-729-2307; and (2) on the Securities and Exchange Commissions website at www.sec.gov.
30
DETERMINATION OF NET ASSET VALUE
Net asset value per share for each Fund is determined on each day that the New York Stock Exchange (the NYSE) is open for trading and any other
day (other than a day on which no shares of that Fund are tendered for redemption and no order to purchase shares is received) during which there is sufficient trading in the Funds portfolio securities that the Funds net asset value per
share might be materially affected. The NYSE is closed on the following holidays: New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Securities traded on a national securities exchange are valued at the last reported sales price at the close of regular trading on each day the exchanges
are open for trading. Securities traded on the National Association of Securities Dealers Automated Quotations (NASDAQ) are valued at the NASDAQ Official Closing Price. Over-the-counter securities that are not traded on NASDAQ are valued
at the last sale price in the over-the-counter market. In the absence of any sale of such securities on the valuation date, the valuations are based on the mean between the bid and asked prices. Quotations of foreign securities in a foreign currency
are valued daily in U.S. dollars on the basis of the foreign currency exchange rates prevailing at the time such valuation is determined. Foreign currency contracts are valued based on the applicable exchange rate as of the close of the NYSE,
generally 4:00 p.m. Eastern time. Debt securities are valued by using an evaluated mean price provided by a Pricing Service. Short-term securities and other debt securities maturing in 60 days or less are valued at amortized cost. Options listed on
a national exchange are valued at the composite price using the National Best Bid and Offer quotes (NBBO). NBBO consists of the highest bid price and lowest ask price across any of the exchanges on which an option is quoted. If there
were no trades for the option on a given business day, composite option pricing calculates the mean of the highest bid and lowest ask price across the exchanges were the option is traded. Futures contracts, rights, and warrants listed on a national
exchange are valued at the last sale price on the exchange on which they are traded at the time a Fund calculates its net asset value. Investments in other funds are valued at their respective net asset values as determined by those funds, in
accordance with the 1940 Act.
Because trading in securities on most foreign exchanges is normally completed before the close of the NYSE, the value of
non-U.S. securities can change by the time a Fund calculates its NAV. To address these changes, the Funds may utilize adjustment factors provided by an independent pricing service to systematically price non-U.S. securities at fair value. These
adjustment factors are based on movements and changes in securities indices, specific security prices, and exchange rates in foreign markets.
All other
securities and other assets of the Funds for which current market quotations are not readily available are valued at fair value as determined in good faith by PRIMECAP Management Company in accordance with procedures adopted by the Trustees. These
procedures delegate such determinations to a valuation committee (the Committee) comprised of officers of PRIMECAP Management Company and other officers of the Trust, subject to ratification by the Board of Trustees at their next regular
meeting (or more frequently if there is a significant valuation issue). The procedures require PRIMECAP Management Company to determine an appropriate methodology for determining the fair value of such a security, subject to approval and regular
monitoring by the Committee. Such methodologies may include, among other things, the cost of the security to a Fund; traditional valuation methods such as earnings multiples and discounts of similar freely tradable securities; and assessments of
matters such as the issuers fundamental condition, market conditions, valuations of companies in the same or similar industries, values used by other holders and analysts, size of the Funds position, recent trades of the same type or
class of the issuers securities, outstanding offers to purchase the securities, and prospects for registration of restricted securities. Fair value pricing involves subjective judgments, and there is no
31
single standard for determining a securitys fair value. As a result, different mutual funds could reasonably arrive at a different fair value for the same security. It is possible that the
fair value determined for a security is materially different from the value that could be realized upon the sale of that security or from the values that other mutual fund may determine.
PURCHASE AND REDEMPTION OF SHARES
See Purchasing and Adding to Your Shares in the Prospectus for certain information regarding the purchase of Fund shares.
Each Fund may, at the sole discretion of the Advisor, accept securities in exchange for shares of the Fund. Securities which may be accepted in exchange for
shares of any Fund must: (1) meet the investment objectives and policies of the Fund; (2) be acquired for investment and not for resale; (3) be liquid securities which are not restricted as to transfer either by law or liquidity of
market, as determined by reference to the liquidity and pricing policies established by the Board of Trustees; and (4) have a value which is readily ascertainable as evidenced by, for example, a listing on a recognized stock exchange or market
quotations by third party broker-dealers.
The Trust intends to pay in cash for all shares of a Fund redeemed but reserves the right to make payment
wholly or partly in shares of readily marketable investment securities. In such cases, a shareholder may incur brokerage costs in converting such securities to cash.
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any broker-dealer or group of broker-dealers to execute transactions in its portfolio securities. In connection with
its duties to arrange for the purchase and sale of each Funds portfolio securities, PRIMECAP Management Company selects such broker-dealers
(Broker-Dealers)
that will, in its judgment,
implement the policy of the Trust to achieve quality execution at favorable prices through responsible Broker-Dealers, and in the case of agency transactions, at competitive commission rates. PRIMECAP Management Company may also deal directly with
the selling or purchasing principal or market maker. In most cases, in dealing with a Broker-Dealer acting as principal or agent, the Trust pays a commission.
In allocating transactions to Broker-Dealers, PRIMECAP Management Company is authorized to consider, in determining whether a particular Broker-Dealer will
provide best execution, the Broker-Dealers reliability, integrity, financial condition, and risk in positioning the securities involved, as well as the difficulty of the transaction in question. The Trust need not pay the lowest spread or
commission when PRIMECAP Management Company believes that another Broker-Dealer would offer greater reliability or provide a better price or execution. In addition, although a higher commission is generally not paid to brokers who supply brokerage
and research services, PRIMECAP Management Company has adopted a brokerage allocation policy in reliance on Section 28(e) of the Securities and Exchange Act of 1934, permitting it to cause a Fund to pay commission rates in excess of those
another Broker-Dealer would have charged if PRIMECAP Management Company determines in good faith that the amount of commission is reasonable in relation to the value of the brokerage and research services provided by the Broker-Dealer, viewed either
in terms of the particular transaction or PRIMECAP Management Companys overall responsibilities as to the accounts over which it exercises investment discretion.
Research may be in written form or through direct contact with individuals and may include quotations on portfolio securities and information on particular
issuers and industries, as well as on market, economic, or institutional activities. In addition, services and equipment which facilitate the execution
32
and monitoring of securities transactions may be provided by Broker-Dealers by providing rapid communications with financial markets and Broker-Dealers, or by providing real-time tracking of
orders, settlements, investment positions, and relevant investment criteria and restrictions applicable to the execution of securities transactions. In some cases, brokerage services are generated by third parties but are provided to PRIMECAP
Management Company by or through Broker-Dealers. The Funds did not pay any firms for research, statistical, or other services provided.
The table below
sets forth the amount of brokerage commissions paid by the Advisor for each Fund for the last three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage Commissions
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
PRIMECAP Odyssey Stock Fund
|
|
$
|
464,607
|
|
|
$
|
668,390
|
|
|
$
|
598,107
|
|
PRIMECAP Odyssey Growth Fund
|
|
$
|
610,786
|
|
|
$
|
662,910
|
|
|
$
|
916,384
|
|
PRIMECAP Odyssey Aggressive Growth Fund
|
|
$
|
2,586,325
|
|
|
$
|
627,154
|
|
|
$
|
608,588
|
|
The decrease in brokerage commission for the PRIMECAP Odyssey Stock Fund from the 2012 fiscal year to the 2013 fiscal
year is due to a decrease in the number of shares traded.
The increase in brokerage commission for the PRIMECAP Odyssey Aggressive Growth Fund from the
2012 fiscal year to the 2013 fiscal year is due to an increase in the number of shares traded.
The decrease in brokerage commissions for the
PRIMECAP Odyssey Growth Fund from the 2011 fiscal year to the 2012 fiscal year is due to a combination of fewer shares traded and decreased average commission rates.
PRIMECAP Management Company seeks to execute trades with brokers who it believes can best execute the trades, with primary emphasis on obtaining the most
favorable prices for the securities being sold.
PRIMECAP Management Company does not have soft dollar arrangements with any brokerage firm. PRIMECAP
Management Company intends to pay competitive institutional commission rates to ensure that it is shown available opportunities early in the broker call cycle. However, it is PRIMECAP Management Companys policy not to pay broker commissions in
excess of those which other brokers might have charged for effecting the same transaction in recognition of the nature of research services provided by the executing broker.
In instances where several brokers meet this criterion, PRIMECAP Management Company may select brokers who also furnish value-added research services to
PRIMECAP Management Company. By allocating brokerage business to brokers who provide such services, PRIMECAP Management Company may be able to supplement its research and analysis and to use the views and information of other research organizations
in arriving at its investment decisions. Research services furnished by brokers through whom securities transactions are effected may be used in servicing all of PRIMECAP Management Companys accounts, but not all such services may be used in
connection with the account which paid commissions to the broker providing such services. It is not generally possible to determine the specific value, if any, of such information. However, senior executives of PRIMECAP Management Company
periodically analyze the quality of execution obtained from the brokers with whom it does business, as well as the value of any research services provided by such brokers.
33
PRIMECAP Management Company aggregates orders for purchases and sales of securities of the same issuer on the
same day among the Funds and its other managed accounts, and the price paid to or received by the Funds and those accounts is the average obtained in those orders. In some cases, such aggregation and allocation procedures may affect adversely the
price paid or received by the Funds or the size of the position purchased or sold by the Funds.
As of October 31, 2013, the Funds did not own
any securities of their regular broker-dealers.
Portfolio Turnover
As a result of its investment policies, each Fund may engage in a substantial number of portfolio transactions. While portfolio turnover is impossible to
predict, each Fund anticipates that its annual portfolio turnover will be less than 50%. A high turnover rate for a Funds portfolio involves correspondingly greater transaction costs in the form of brokerage commissions and dealer spreads,
which are borne directly by the Fund. The portfolio turnover rate will not be a limiting factor when PRIMECAP Management Company deems portfolio changes appropriate. The portfolio turnover rates for the Funds for the previous two fiscal years were:
|
|
|
|
|
|
|
|
|
Portfolio Turnover
|
|
Fiscal Years Ended
October 31,
|
|
|
|
2013
|
|
|
2012
|
|
PRIMECAP Odyssey Stock Fund
|
|
|
15
|
%
|
|
|
11
|
%
|
PRIMECAP Odyssey Growth Fund
|
|
|
10
|
%
|
|
|
12
|
%
|
PRIMECAP Odyssey Aggressive Growth Fund
|
|
|
11
|
%
|
|
|
14
|
%
|
FEDERAL TAX INFORMATION
The following is a summary of certain material U.S. federal (and, where noted, state and local) income tax considerations affecting each Fund and its
shareholders. The discussion is very general. Current and prospective shareholders are therefore urged to consult their own tax advisors with respect to the specific federal, state, local, and foreign tax consequences of investing in a Fund. The
summary is based on the laws in effect on the date of this SAI and existing judicial and administrative interpretations thereof, all of which are subject to change, possibly with retroactive effect.
Federal Income Tax Consequences
Each Fund has
qualified and intends to continue to qualify for treatment as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, (the Code), for each taxable year by complying with all applicable
requirements regarding the source of its income, the diversification of its assets, and the timing of its distributions. Qualification by a Fund as a regulated investment company under the Code generally requires, among other things,
that (1) at least 90% of the Funds annual gross income be derived from interest, payments with respect to securities loans, dividends, gains from the sale or other disposition of securities or options thereon, and certain related income;
and (2) the Fund diversifies its holdings so that, at the end of each quarter of the taxable year, (a) at least 50% of the market value of the Funds assets is represented by cash, U.S. Government securities, securities of other
regulated investment companies, and other securities limited in respect of any one issuer to an amount not greater than 5% of the Funds assets and 10% of the outstanding voting securities of such issuer; and (b) not more than 25% of the
value of the Funds assets is invested in the securities of any one issuer (other than U.S. Government securities and the securities of other regulated investment companies), or of two or more issuers which the Fund controls (i.e., owns,
directly or indirectly, 20% of the voting stock) and which are determined to be engaged in the same or similar trades or businesses or
34
related trades or businesses. As regulated investment companies, the Funds will not be subject to federal income tax on their net investment income and net capital gains distributed to their
shareholders, provided that they distribute to their shareholders at least 90% of their net investment income and
tax-exempt
income earned in each year. If a Fund fails to qualify as a regulated investment
company under Subchapter M for any reason, the Fund would be subject to federal taxes, and possibly other taxes, on the income and gains. Distributions to shareholders would be taxed as dividend income to the extent of the Funds earnings and
profits. Under certain circumstances, a Fund may cure a failure to qualify as a regulated investment company, but in order to do so the Fund may incur certain taxes or may be required to dispose of certain assets.
A 4% nondeductible excise tax will be imposed on a Fund to the extent it does not meet certain minimum distribution requirements on a calendar year basis. For
this purpose, any income or gain retained by a Fund that is subject to a Fund-level income tax will be considered to have been distributed by year-end. Each Fund intends to distribute substantially all of its net investment income and net capital
gains and thus expects not to be subject to the excise tax.
A Funds transactions in zero coupon securities, foreign currencies, forward
contracts, options and futures contracts (including options and futures contracts on foreign currencies), if any, will be subject to special provisions of the Code (including provisions relating to hedging transactions and
straddles) that, among other things, may affect the character of gains and losses realized by the Fund (
i.e.,
may affect whether gains or losses are ordinary or capital), accelerate recognition of income to the Fund, and defer
Fund losses. These rules could therefore affect the character, amount, and timing of distributions to shareholders. These provisions also (1) may require a Fund to mark to market certain positions in its portfolio (
i.e
.,
treat them as if they were closed out at the end of each year); and (2) may cause a Fund to recognize income prior to the receipt of cash with which to pay dividends or make distributions in amounts necessary to satisfy the distribution
requirements for avoiding income and excise taxes. In order to distribute this income and avoid a tax on the applicable Fund, that Fund might be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially
resulting in additional taxable gain or loss. Each Fund will monitor its transactions, will make the appropriate tax elections, and will make the appropriate entries in its books and records when it acquires any zero coupon securities, foreign
currency, forward contract, option, futures contract, or hedged investment in order to mitigate the effect of these rules and prevent disqualification of the Fund as a regulated investment company.
A Funds investments in so-called section 1256 contracts, such as regulated futures contracts, most foreign currency forward contracts traded
in the interbank market, and options on most stock indices, are subject to special tax rules. All section 1256 contracts held by a Fund at the end of its taxable year are required to be marked to their market value, and any unrealized gain or loss
on those positions will be included in the Funds income as if each position had been sold for its fair market value at the end of the taxable year. The resulting gain or loss will be combined with any gain or loss realized by the Fund from
positions in section 1256 contracts closed during the taxable year. Provided such positions were held as capital assets and were not part of a hedging transaction or part of a straddle, 60% of the resulting net gain or loss
will be treated as long-term capital gain or loss, and 40% of such net gain or loss will be treated as short-term capital gain or loss, regardless of the period of time the positions were actually held by the Fund.
In general, gain or loss on a short sale is recognized when a Fund closes the sale by delivering the borrowed property to the lender, not when the borrowed
property is sold. Gain or loss from a short sale is generally considered as capital gain or loss to the extent that the property used to close the short sale constitutes a capital asset in the Funds hands. Except with respect to certain
situations where the property used by a Fund to close a short sale has a long-term holding period on the date of the short sale,
35
special rules would generally treat the gains on short sales as short-term capital gains. These rules may also terminate the running of the holding period of substantially identical
property held by a Fund. Moreover, a loss on a short sale will be treated as a long-term capital loss if, on the date of the short sale, substantially identical property has been held by a Fund for more than one year. In general, a
Fund will not be permitted to deduct payments made to reimburse the lender of securities for dividends paid on borrowed stock if the short sale is closed on or before the 45th day after the short sale is entered into.
As a result of entering into swap contracts, a Fund may make or receive periodic net payments. A Fund may also make or receive a payment when a swap is
terminated prior to maturity through an assignment of the swap or other closing transaction. Periodic net payments will generally constitute ordinary income or deductions, while termination of a swap will generally result in capital gain or loss
(which will be a long-term capital gain or loss if the Fund has been a party to the swap for more than one year).
If a Fund is the holder of record of
any stock on the record date for any dividends payable with respect to such stock, such dividends will be included in the Funds gross income not as of the date received but as of the later of (1) the date such stock became ex-dividend
with respect to such dividends (
i.e.
, the date on which a buyer of the stock would not be entitled to receive the declared, but unpaid, dividends); or (2) the date the Fund acquired such stock. Accordingly, in order to satisfy its income
distribution requirements, a Fund may be required to pay dividends based on anticipated earnings, and shareholders may receive dividends in an earlier year than would otherwise be the case.
A Fund may be required to treat amounts as taxable income or gain, subject to the distribution requirements referred to above, even though no corresponding
amounts of cash are received concurrently, as a result of (1) mark-to-market rules, constructive sale rules or rules applicable to PFICs (as defined below) or partnerships or trusts in which the Fund invests or to certain options, futures or
forward contracts, or appreciated financial positions; or (2) the inability to obtain cash distributions or other amounts due to currency controls or restrictions on repatriation imposed by a foreign country with respect to the
Funds investments (including through depositary receipts) in issuers in such country; or (3) tax rules applicable to debt obligations acquired with original issue discount, including zero-coupon or deferred payment bonds and
pay-in-kind debt obligations, or to market discount if an election is made with respect to such market discount. In order to distribute this income and avoid a tax on the applicable Fund, that Fund might be required to liquidate portfolio securities
that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss. A Fund might also meet the distribution requirements by borrowing the necessary cash, thereby incurring interest expenses.
If a Fund owns shares in certain foreign investment entities, referred to as passive foreign investment companies or PFICs, the Fund
will generally be subject to one of the following special tax regimes: (1) the Fund may be liable for U.S. federal income tax, and an additional interest charge, on a portion of any excess distribution from such foreign entity or
any gain from the disposition of such shares, even if the entire distribution or gain is paid out by the Fund as a dividend to its shareholders: (2) if the Fund were able and elected to treat a PFIC as a qualifying electing fund or
QEF, the Fund would be required each year to include in income, and distribute to shareholders in accordance with the distribution requirements set forth above, the Funds pro rata share of the ordinary earnings and net capital
gains of the passive foreign investment company, whether or not such earnings or gains are distributed to the Fund; or (3) the Fund may be entitled to mark to market annually shares of the PFIC, whether or not any distributions are made to the
Fund, and in such event would be required to distribute to shareholders any such mark-to-market gains in accordance with the distribution requirements set forth above.
36
Currency transactions may be subject to Section 988 of the Code, under which foreign currency gains or
losses would generally be computed separately and treated as ordinary income or losses. The Funds will attempt to monitor Section 988 transactions to avoid an adverse tax impact.
Income and dividends received by any of the Funds from sources within foreign countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. None of the Funds expects to be eligible to pass through foreign taxes to its shareholders for purposes of claiming a foreign
tax credit with respect to such taxes.
Taxation of U.S. Shareholders
Dividends and other distributions by a Fund are generally treated under the Code as received by the shareholders at the time the dividend or distribution is
made. However, if any dividend or distribution is declared by a Fund in October, November, or December of any calendar year and payable to shareholders of record on a specified date in such a month but is actually paid during the following January,
such dividend or distribution will be deemed to have been received by each shareholder on December 31 of the year in which the dividend was declared.
Each Fund intends to distribute annually to its shareholders substantially all of its investment company taxable income (computed without regard to any
deduction for dividends paid) and any net realized long-term capital gains in excess of net realized short-term capital losses (including any capital loss carryovers). However, if a Fund retains for investment an amount equal to all or a portion of
its net long-term capital gains in excess of its net short-term capital losses (including any capital loss carryovers), it will be subject to a corporate tax (currently at a maximum rate of 35%) on the amount retained. In that event, the Fund will
report such retained amounts as undistributed capital gains in a notice to its shareholders who (1) will be required to include in income for U.S. federal income tax purposes, as long-term capital gains, their proportionate shares of the
undistributed amount; (2) will be entitled to credit their proportionate shares of the 35% tax paid by the Fund on the undistributed amount against their U.S. federal income tax liabilities, if any, and to claim refunds to the extent their
credits exceed their liabilities, if any; and (3) will be entitled to increase their tax basis, for U.S. federal income tax purposes, in their shares by an amount equal to 65% of the amount of undistributed capital gains included in the
shareholders income. Organizations or persons not subject to U.S. federal income tax on such capital gains will be entitled to a refund of their pro rata share of such taxes paid by the Fund upon timely filing appropriate returns or claims for
refund with the IRS.
Dividends of taxable net investment income and distributions of net realized short-term capital gains are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or in shares. Distributions of net realized long-term capital gains, if any, that a Fund reports as capital gain dividends are taxable as long-term capital gains, whether paid in cash or in
shares, and regardless of how long a shareholder has held shares of the Fund.
Special rules apply to dividends reported by a Fund as qualified
dividend income, when paid to noncorporate shareholders. Such dividends are subject to tax at the rates generally applicable to long-term capital gains provided that the shareholder satisfies certain holding period and other requirements.
Qualified dividend income is not actually treated as capital gain, however, and thus generally cannot be offset by capital losses. A Fund may report as qualified dividend income: (1) 100% of the dividends paid by the Fund in a particular
taxable year if 95% or more of the Funds gross income (ignoring gains attributable to the sale of stocks and securities except to the extent net short-term capital gain from such sales exceeds net long-term capital loss from such sales) in
that taxable year is attributable to qualified
37
dividend income received by the Fund; or (2) the portion of the dividends paid by the Fund in a particular taxable year that is attributable to qualified dividend income received by the Fund
in that taxable year if such qualified dividend income accounts for less than 95% of the Funds gross income (ignoring gains attributable to the sale of stocks and securities except to the extent net short-term capital gain from such sales
exceeds net long-term capital loss from such sales) for that taxable year. For this purpose, qualified dividend income generally means income from dividends received by a Fund from U.S. corporations and qualified foreign corporations,
provided that the Fund satisfies certain holding period requirements in respect of the stock of such corporations and has not hedged its position in the stock in certain ways. Qualified foreign corporations are foreign corporations that are
incorporated in a possession of the United States or that are eligible for benefits under certain U.S. income tax treaties. Certain other dividends received from foreign corporations may be treated as qualified dividends if the stock with respect to
which the dividends are paid is readily tradable on an established securities market in the United States. Qualified dividend income does not include any dividends received from tax-exempt corporations. Also, dividends received by the Fund from a
REIT or from another RIC generally are qualified dividend income only to the extent the dividend distributions are made out of qualified dividend income received by such REIT or RIC. In the case of securities lending transactions, payments in lieu
of dividends are not qualified dividend income.
If an individual receives a dividend qualifying for the long-term capital gains rates that
constitutes an extraordinary dividend and the individual subsequently recognizes a loss on the sale or exchange of stock in respect of which the extraordinary dividend was paid, then the loss will be long-term capital loss to the extent
of such extraordinary dividend. An extraordinary dividend for this purpose is generally a dividend (1) in an amount greater than or equal to 10% of the taxpayers tax basis (or trading value) in a share of stock, aggregating dividends with
ex-dividend dates within an 85-day period; or (2) in an amount greater than 20% of the taxpayers tax basis (or trading value) in a share of stock, aggregating dividends with ex-dividend dates within a 365-day period.
Dividends paid by the Fund that are attributable to dividends received by the Fund from domestic corporations may qualify for the dividends-received deduction
for corporations.
Distributions in excess of a Funds current and accumulated earnings and profits will, as to each shareholder, be treated as a
tax-free return of capital to the extent of a shareholders basis in his or her shares of the Fund, and as a capital gain thereafter (if the shareholder holds his or her shares of the Fund as capital assets). Shareholders receiving dividends or
distributions in the form of additional shares should be treated for U.S. federal income tax purposes as receiving a distribution in an amount equal to the amount of money that the shareholders receiving cash dividends or distributions will receive
and should have a cost basis in the shares received equal to such amount.
Dividends and distributions from a Fund and gains realized on the sale or
exchange of Fund shares will normally be taken into account in determining a shareholders net investment income for purposes of the 3.8% Medicare contribution tax applicable to individuals, estates, and trusts with income exceeding
certain thresholds.
Investors considering buying shares just prior to a dividend or capital gain distribution should be aware that, although the price of
shares purchased at that time may reflect the amount of the forthcoming distribution, such dividend or distribution may nevertheless be taxable to them.
Any loss realized on a redemption or exchange of shares of a Fund will be disallowed to the extent shares are reacquired within the 61-day period beginning 30
days before and ending 30 days after the shares are disposed of.
38
If a shareholder recognizes a loss with respect to a Funds 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 regulated investment company are not excepted. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayers treatment of the loss is
proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.
Capital Loss Carry-Forwards
Each Fund is permitted to
carry forward its net capital losses incurred in tax years that began on or before December 22, 2010 to offset its capital gains, if any, realized during the eight taxable years following the year of the loss. Each Fund is permitted to
carry forward indefinitely its net capital losses incurred in taxable years that began after December 22, 2010 to offset future capital gains of the Fund. Net capital losses incurred in taxable years of a Fund beginning on or before
December 22, 2010 may not, however, be used to offset the Funds future capital gains until all net capital losses incurred in taxable years of the Fund beginning after December 22, 2010 have been utilized. As a result, certain
net capital losses incurred in taxable years of a Fund beginning on or before December 22, 2010 may expire unutilized, even while future, unrestricted capital losses may be required to be utilized first against capital gains in future years.
A Funds capital loss carry-forward is treated as a capital loss in the year to which it is carried. Accordingly, the Funds do not expect
to distribute such capital gains. The Funds cannot carry back or carry forward any ordinary losses.
Notices
Shareholders who hold Fund shares through direct accounts will receive, if appropriate, various written notices after the close of a Funds taxable year
regarding the U.S. federal income tax status of certain dividends, distributions and redemption proceeds that were paid (or that are treated as having been paid) by the Fund to its shareholders during the preceding taxable year.
For sales or exchanges of shares acquired (including through the reinvestment of dividends and capital gains distributions) on or after January 1, 2012,
each Fund will report to shareholders and the IRS the cost basis and holding period of the shares and the amount of gain or loss on the sale or exchange. If a shareholder has a different basis for different shares of the Fund in the same account
(
e.g.
, if a shareholder purchased Fund shares in the same account at different prices per share), the Fund will calculate the basis of the shares sold using its default method unless the shareholder has properly elected to use a different
method. For purposes of calculating and reporting basis, shares acquired on or after January 1, 2012 will be treated as held in a separate account from shares acquired prior to January 1, 2012.
Each Funds default method for calculating basis will be the average basis method under which the basis of each Fund share in an account is the average
of the bases of all of the shareholders fund shares in the account. A shareholder may elect to use a method other than the average basis method, on an account by account basis, by following procedures established by the Fund. If such an
election is made on or prior
39
to the date of the first sale, exchange, or redemption of shares in the account (including redemptions resulting from a small account fee or other applicable fee), the new election will generally
apply as if the average basis method had never been in effect for such account. If the election is made after shares have been sold, exchanged, or redeemed, the shares in the account at the time of the election will retain their averaged bases.
Shareholders should contact their own tax advisors concerning the consequences of applying the default method or choosing another method of bases calculation.
If you invest through a financial intermediary, the method of calculating basis may differ from that selected by the Funds. Please contact your salesperson or
visit your financial intermediarys website for more information.
Other Taxes
Distributions also may be subject to additional state, local, and foreign taxes, depending on each shareholders particular situation. Shareholders are
advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the Funds.
Non-U.S. Shareholders
Ordinary dividends and certain other payments made by a Fund to non-U.S. shareholders are generally subject to withholding tax at a 30% rate (or such
lower rate as may be determined in accordance with any applicable treaty). In order to obtain a reduced rate of withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN certifying its entitlement to benefits under a treaty.
The withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who provides a Form W-8ECI, certifying that the dividends are effectively connected with the non-U.S. shareholders conduct of a trade or business within the
United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S. corporation receiving effectively connected dividends may also be subject to
additional branch profits tax imposed at a rate of 30% (or a lower treaty rate). A non-U.S. shareholder who fails to provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the applicable rate.
The 30% withholding tax generally will not apply to distributions of the excess of net long-term capital gains over net short-term capital losses or to
redemption proceeds.
For Fund taxable years beginning on or before December 31, 2013, the 30% withholding tax also will not apply to dividends that
a Fund reports as (1) interest-related dividends, to the extent such dividends are derived from a Funds qualified net interest income; or (2) short-term capital gain dividends, to the extent such dividends are derived
from a Funds qualified short-term gain. Qualified net interest income is a Funds net income derived from U.S.-source interest and original issue discount, subject to certain exceptions and limitations.
Qualified short-term gain generally means the excess of the net short-term capital gain of a Fund for the taxable year over its net long-term capital loss, if any. In order to qualify for this exemption from withholding, a non-U.S.
shareholder will need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form
W-8BEN
or substitute Form).
Distributions payable after June 30, 2014 (or, in certain cases, after later dates) and redemptions and certain capital gain dividends payable after
December 31, 2016 to a shareholder that is a foreign financial institution as defined in Section 1471 of the Code and that does not meet the requirements imposed on foreign financial institutions will generally be subject to
withholding tax at the rate of 30% notwithstanding the status of any such amounts as capital gain dividends, short-term capital gain
40
dividends, or interest-related dividends. Distributions and redemption payments paid after such dates to a non-U.S. shareholder that is not a foreign financial institution will generally be
subject to such withholding tax if the shareholder fails to make certain required certifications. The extent, if any, to which such withholding tax may be reduced or eliminated by an applicable tax treaty is unclear. A non-U.S. shareholder may be
exempt from the withholding described in this paragraph under an applicable intergovernmental agreement between the U.S. and a foreign government, provided that both the shareholder and the applicable foreign government comply with the terms of such
agreement.
The foregoing is only a summary of certain material U.S. federal income tax consequences (and, where noted, state and local tax
consequences) affecting the Funds and their shareholders. Prospective shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in a Fund.
CALCULATION OF TOTAL RETURN
Average Annual Total Return
Average annual total return
quotations used in the Funds Prospectus are computed by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value according to the following formula:
P(1 + T)(n) = ERV
Where:
P represents a hypothetical initial investment of $1,000; T represents average annual total return; n represents the number of years; and ERV represents the ending redeemable value at the end of the
period of a hypothetical $1,000 payment made at the beginning of the period. Dividends and other distributions are assumed to be reinvested in shares at the prices in effect on the reinvestment dates. ERV will be adjusted to reflect the effect of
any absorption of Fund expenses by the Advisor.
Under the foregoing formula, the time periods used in the Prospectus will be based on rolling calendar
quarters.
Average Annual Total Return (after taxes on distributions)
The Funds quotations of average annual total returns (after taxes on distributions) reflect the average annual compounded rate of return on an assumed
investment of $1,000 that equates the initial amount invested to the value of the investment after taxes on distributions according to the following formula:
P(1 + T)(n) = ATV(D)
Where:
P represents a hypothetical initial investment of $1,000; T represents average annual total return (after taxes on distributions); n represents the number of years; and ATV(D) represents the ending
value of the hypothetical initial investment after taxes on distributions, not after taxes on redemption. Dividends and other distributions are assumed to be reinvested in shares at the prices in effect on the reinvestment dates. ATV(D) will be
adjusted to reflect the effect of any absorption of Fund expenses by the Advisor.
41
Average Annual Total Return (after taxes on distributions and redemption)
The Funds quotations of average annual total returns (after taxes on distributions and redemption) reflect the average annual compounded rate of return
on an assumed investment of $1,000 that equates the initial amount invested to the ending redeemable value after taxes on distributions and redemptions according to the following formula:
P (1+ T)(n) = ATV(DR)
Where:
P represents a hypothetical initial investment of $1,000; T represents average annual total return (after taxes on distributions and redemption); n represents the number of years; and ATV(DR)
represents the ending redeemable value of the hypothetical initial investment after taxes on distributions and redemption. Dividends and other distributions are assumed to be reinvested in shares at the prices in effect on the reinvestment dates.
ATV(DR) will be adjusted to reflect the effect of any absorption of Fund expenses by the Advisor.
Other Information
Performance data of the Funds quoted in advertising and other promotional materials represents past performance and are not intended to predict or indicate
future results. The return and principal value of an investment in a Fund will fluctuate, and an investors redemption proceeds may be more or less than the original investment amount. In advertising and promotional materials, the Funds may
compare their performance with data published by Lipper, Inc., Thomson Financial Investor Relations, Morningstar, Inc., and others. The Funds also may refer in such materials to mutual fund performance rankings and other data, such as comparative
asset, expense and fee levels, published by Lipper, CDA, Morningstar, and others. Advertising and promotional materials also may refer to discussions of the Funds and comparative mutual fund data and ratings reported in independent periodicals
including, but not limited to, The Wall Street Journal, Money Magazine, Forbes, Business Week, Financial World, and Barrons.
GENERAL INFORMATION
Each Trustee serves until the next meeting of shareholders, if any, called for the purpose of electing trustees and until the
election and qualification of his or her successor or until death, resignation, declaration of bankruptcy or incompetence by a court of competent jurisdiction, or removal by a majority vote of the shares entitled to vote (as described below) or of a
majority of the Trustees. In accordance with the 1940 Act, (1) the Trust will hold a shareholder meeting for the election of trustees when less than a majority of the trustees have been elected by shareholders; and (2) if, as a result of a
vacancy in the Board, less than two-thirds of the trustees have been elected by the shareholders, that vacancy will be filled only by a vote of the shareholders.
Shares of the Funds
Each share of a class of a Fund
represents an equal proportional interest in that Fund with each other share of the same class and is entitled to such dividends and distributions out of the income earned on the assets belonging to that Fund as are declared in the discretion of the
Trustees. The Agreement and Declaration of Trust of the Trust (the Declaration) specifically authorizes the Board to terminate the Trust (or any of its series) by notice to the shareholders without shareholder approval. In the event of
the liquidation or
42
dissolution of a Fund or the Trust, shareholders of the Fund are entitled to receive the assets attributable to that Fund that are available for distribution, and a distribution of any general
assets not attributable to a particular Fund that are available for distribution, in such manner and on such basis as the Trustees in their sole discretion may determine. Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid and non-assessable by the Trust.
The Trust is generally not required to hold shareholder meetings. However, as provided in the
Declaration and the Bylaws of the Trust, shareholder meetings may be called by the Trustees for the purpose as may be prescribed by law, the Declaration, or the Bylaws, or for the purpose of taking action upon any other matter deemed by the Trustees
to be necessary or desirable, including changing fundamental policies, electing or removing Trustees, and approving or amending an investment advisory agreement. In addition, a Trustee may be removed by shareholders at a special meeting called upon
written request of shareholders owning in the aggregate at least 10% of the outstanding shares of the Trust.
The Declaration provides that one-third of
the shares entitled to vote shall be a quorum for the transaction of business at a shareholders meeting, except when a larger quorum is required by applicable law, by the Bylaws, or by the Declaration. Any lesser number will be sufficient for
adjournments. Any adjourned session or sessions may be held within a reasonable time after the date set for the original meeting without the necessity of further notice.
When certain matters affect one series or class but not another, the shareholders will vote as a series or class regarding such matters. Subject to the
foregoing, on any matter submitted to a vote of shareholders, all shares then entitled to vote will be voted in the aggregate unless otherwise required by the 1940 Act. For example, a change in a Funds fundamental investment policies would be
voted upon only by shareholders of the Fund involved. Additionally, approval of the advisory agreement is a matter to be determined separately by Fund. Approval by the shareholders of one Fund is effective as to that Fund whether or not sufficient
votes are received from the shareholders of the other Funds to approve the proposal as to those Funds.
As used in the Prospectus and in this SAI, the
term majority, when referring to approvals to be obtained from shareholders of a Fund, means the vote of the lesser of (1) 67% of the shares of the Fund represented at a meeting if the holders of more than 50% of the outstanding
shares of the Fund are present in person or by proxy; or (2) more than 50% of the outstanding shares of the Fund. The term majority, when referring to the approvals to be obtained from shareholders of the Trust as a whole means the
vote of the lesser of (1) 67% of the Trusts shares represented at a meeting if the holders of more than 50% of the Trusts outstanding shares are present in person or by proxy; or (2) more than 50% of the Trusts
outstanding shares. Shareholders are entitled to one vote for each full share held and fractional votes for fractional shares held.
43
Control Persons and Principal Shareholders
A principal shareholder is any person who owns of record or beneficially 5% or more of the outstanding shares of a Fund. A control person is one who owns
beneficially or through controlled companies more than 25% of the voting securities of a Fund or acknowledges the existence of control. The following table lists principal shareholders and control persons of the Funds as of January 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Holders of the PRIMECAP Odyssey
Stock Fund
|
|
Name and Address
|
|
%
Ownership
|
|
|
Type of
Ownership
|
|
|
Control
Person
|
|
National Financial
200 Liberty St.
New York, NY 10281
|
|
|
22.68
|
%
|
|
|
Record
|
|
|
|
No
|
|
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303
|
|
|
10.80
|
%
|
|
|
Record
|
|
|
|
No
|
|
Charles Schwab Co.
101 Montgomery Street
San Francisco, CA 94104
|
|
|
8.35
|
%
|
|
|
Record
|
|
|
|
No
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Holders of the PRIMECAP Odyssey
Growth Fund
|
|
Name and Address
|
|
%
Ownership
|
|
|
Type of
Ownership
|
|
|
Control
Person
|
|
National Financial
200 Liberty St.
New York, NY 10281
|
|
|
25.32
|
%
|
|
|
Record
|
|
|
|
Yes
|
|
Charles Schwab Co.
101 Montgomery Street
San Francisco, CA 94104
|
|
|
24.40
|
%
|
|
|
Record
|
|
|
|
No
|
|
Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303
|
|
|
6.63
|
%
|
|
|
Record
|
|
|
|
No
|
|
BNY Mellon I.S. Trust Company
760 Moore Rd.
King of Prussia, PA 19406
|
|
|
5.69
|
%
|
|
|
Record
|
|
|
|
No
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Holders of the PRIMECAP Odyssey
Aggressive Growth Fund
|
|
Name and Address
|
|
%
Ownership
|
|
|
Type of
Ownership
|
|
|
Control
Person
|
|
National Financial
200 Liberty St.
New York, NY 10281
|
|
|
23.73
|
%
|
|
|
Record
|
|
|
|
No
|
|
Charles Schwab Co.
101 Montgomery Street
San Francisco, CA 94104
|
|
|
21.26
|
%
|
|
|
Record
|
|
|
|
No
|
|
Vanguard Marketing Corporation
100 Vanguard Boulevard
Malvern, PA 19355
|
|
|
13.14
|
%
|
|
|
Record
|
|
|
|
No
|
|
44
Custodian
The Bank of New York Mellon serves as custodian for the Funds. The Custodians address is One Wall Street, New York, New York 10286. With regard to each
Fund, the Custodian, among other things, maintains a custody account or accounts in the name of the Fund, receives and delivers all assets for the Fund upon purchase and upon sale or maturity, collects and receives all income and other payments and
distributions on account of the assets of the Fund, and pays all expenses of the Fund. For its services, the Custodian receives a customary fee.
Independent Registered Public Accounting Firm and Counsel
PricewaterhouseCoopers LLP serves as the independent registered public accounting firm for the Trust. PricewaterhouseCoopers LLP provides audit services, tax
return preparation and assistance, and consultation in connection with certain Commission filings. Its office is located at 3 Embarcadero Center, San Francisco, California 94111.
Bingham McCutchen LLP serves as legal counsel for the Trust and the Advisor. Its office is located at 355 South Grand Avenue, Suite 4400, Los Angeles,
California 90071.
Anti-Money Laundering Program
The
Trust has established an Anti-Money Laundering Compliance Program (the AML Program) as required by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA
PATRIOT Act). In order to ensure compliance with this law, the Trusts AML Program provides for the development and implementation of internal practices, procedures and controls, designation of anti-money laundering compliance officers,
an ongoing training program, and an independent audit function to determine the effectiveness of the AML Program.
Procedures to implement the AML Program
include, but are not limited to, determining that the Funds distributor and transfer agent have established proper anti-money laundering procedures, reporting suspicious and/or fraudulent activity, checking shareholder names against designated
government lists (including lists maintained by the Office of Foreign Assets Control), and a complete and thorough review of all new opening account applications. The Trust will not transact business with any person or entity whose identity cannot
be adequately verified under the provisions of the USA PATRIOT Act.
Financial Statements
The Annual Report to shareholders for the Funds for the fiscal year ended October 31, 2013 is a separate document supplied upon request, and the financial
statements, accompanying notes, and report of the independent registered public accounting firm appearing therein are incorporated by reference in this SAI.
45
PRIMECAP ODYSSEY FUNDS