Note 1 – Securities Valuation
The Scharf Fund and the Scharf Balanced Opportunity Fund (the “Funds”) investments in securities are carried at their fair value. Equity securities, including common stocks and exchange-traded funds, that are primarily traded on a national securities exchange shall be valued at the last sales price on the exchange on which they are primarily traded on the day of valuation or, if there has been no sale price on such day, at the mean between the bid and asked prices. Securities primarily traded in the NASDAQ Global Market System for which market quotations are readily available shall be valued using the NASDAQ Official Closing Price (“NOCP”). If the NOCP is not available, such securities shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices. Over-the-counter securities which are not traded in the NASDAQ Global Market System shall be valued at the most recent sales price. Investments in open-end mutual funds are valued at their net asset value per share. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized in level 1 of the fair value hierarchy.
Debt securities, such as corporate bonds, asset backed securities, municipal bonds, and U.S. government agency issues are valued at market on the basis of valuations furnished by an independent pricing service which utilizes both dealer-supplied valuations and formula-based techniques. The pricing service may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, and fundamental data relating to the issuer. In addition, the model may incorporate market observable data such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued principally using dealer quotations. These securities will generally be classified in level 2 of the fair value hierarchy.
Exchange-traded options are valued at the composite price, using the National Best Bid and Offer quotes. Specifically, composite pricing looks at the last trades on the exchanges where the options are traded. If there are no trades for the option on a given business day, composite option pricing calculates the mean of the highest bid price and the lowest ask price across the exchanges where the option is traded. Exchange-traded options that are actively traded are categorized in level 1 of the fair value hierarchy.
Short-term securities having a maturity of 60 days or less are valued at their amortized cost, which approximates market value. To the extent the inputs are observable and timely, these securities would be classified in level 2 of the fair value hierarchy.
The Board has delegated day-to-day valuation issues to a Valuation Committee which is comprised of representatives from U.S. Bancorp Fund Services, LLC, the Funds’ administrator. The function of the Valuation Committee is to value securities where current and reliable market quotations are not readily available or the closing price does not represent fair value by following procedures approved by the Board. These procedures consider many factors, including the type of security, size of holding, trading volume and news events. All actions taken by the Valuation Committee are reviewed and ratified by the Board.
Depending on the relative significance of the valuation inputs, fair valued securities may be classified in either level 2 or level 3 of the fair value hierarchy.
The Funds have adopted authoritative fair value accounting standards which establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value, a discussion in changes in valuation techniques and related inputs during the period and expanded disclosure of valuation levels for majority security types. These inputs are summarized in the three broad levels listed below:
|
·
|
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Funds have the ability to access.
|
|
·
|
Level 2 - Observable inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
|
|
·
|
Level 3 - Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Funds’ own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available.
|
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following is a summary of the inputs used to value the Funds’ securities as of December 31, 2013:
Scharf Fund
|
Assets:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Common Stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Discretionary
|
|
$
|
7,866,110
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,866,110
|
|
|
Consumer Staples
|
|
|
3,869,718
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,869,718
|
|
|
Energy
|
|
|
10,338,221
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,338,221
|
|
|
Finance and Insurance
|
|
|
8,952,120
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,952,120
|
|
|
Healthcare
|
|
|
15,742,207
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,742,207
|
|
|
Industrial
|
|
|
1,969,581
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,969,581
|
|
|
Information Technology
|
|
|
30,374,070
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,374,070
|
|
|
Manufacturing
|
|
|
5,202,276
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,202,276
|
|
|
Mining
|
|
|
4,041,157
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,041,157
|
|
|
Retail Trade
|
|
|
3,394,508
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,394,508
|
|
|
Total Common Stocks
|
|
|
91,749,968
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91,749,968
|
|
|
Short-Term Investments
|
|
|
5,131,375
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,131,375
|
|
|
Total Assets
|
|
$
|
96,881,343
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
96,881,343
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Written
|
|
$
|
60,240
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
60,240
|
|
|
Total Liabilities
|
|
$
|
60,240
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
60,240
|
|
Scharf Balanced Opportunity Fund
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Common Stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Discretionary
|
|
$
|
1,128,150
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,128,150
|
|
|
Consumer Staples
|
|
|
610,134
|
|
|
|
-
|
|
|
|
-
|
|
|
|
610,134
|
|
|
Energy
|
|
|
1,398,277
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,398,277
|
|
|
Finance and Insurance
|
|
|
1,416,574
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,416,574
|
|
|
Healthcare
|
|
|
2,277,985
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,277,985
|
|
|
Industrial
|
|
|
322,614
|
|
|
|
-
|
|
|
|
-
|
|
|
|
322,614
|
|
|
Information Technology
|
|
|
4,651,946
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,651,946
|
|
|
Manufacturing
|
|
|
573,143
|
|
|
|
-
|
|
|
|
-
|
|
|
|
573,143
|
|
|
Mining
|
|
|
532,227
|
|
|
|
-
|
|
|
|
-
|
|
|
|
532,227
|
|
|
Retail Trade
|
|
|
485,516
|
|
|
|
-
|
|
|
|
-
|
|
|
|
485,516
|
|
|
Total Common Stocks
|
|
|
13,396,566
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,396,566
|
|
|
Preferred Stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-End Funds
|
|
|
835,594
|
|
|
|
57,179
|
|
|
|
-
|
|
|
|
892,773
|
|
|
Finance and Insurance
|
|
|
538,349
|
|
|
|
-
|
|
|
|
-
|
|
|
|
538,349
|
|
|
Utilities
|
|
|
36,880
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,880
|
|
|
Total Preferred Stocks
|
|
|
1,410,823
|
|
|
|
57,179
|
|
|
|
-
|
|
|
|
1,468,002
|
|
|
Royalty Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mining
|
|
|
317,580
|
|
|
|
-
|
|
|
|
-
|
|
|
|
317,580
|
|
|
Total Royalty Trust
|
|
|
317,580
|
|
|
|
-
|
|
|
|
-
|
|
|
|
317,580
|
|
|
Exchange-Traded Funds
|
|
|
441,545
|
|
|
|
-
|
|
|
|
-
|
|
|
|
441,545
|
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
|
-
|
|
|
|
398,409
|
|
|
|
-
|
|
|
|
398,409
|
|
|
Municipal Bonds
|
|
|
-
|
|
|
|
1,030,003
|
|
|
|
-
|
|
|
|
1,030,003
|
|
|
Total Fixed Income
|
|
|
-
|
|
|
|
1,428,412
|
|
|
|
-
|
|
|
|
1,428,412
|
|
|
Short-Term Investments
|
|
|
2,822,288
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,822,288
|
|
|
Total Investments in Securities
|
|
$
|
18,388,802
|
|
|
$
|
1,485,591
|
|
|
$
|
-
|
|
|
$
|
19,874,393
|
|
Refer to the Funds’ Schedule of Investments for a detailed break-out of securities by industry classification. Transfers between levels are recognized at December 31, 2013, the end of the reporting period. The Funds recognized no transfers to/from Level 1 or Level 2. There were no Level 3 securities held in the Funds during the period ended December 31, 2013.
Note 2 – Derivative Transactions
The Funds have adopted the financial accounting reporting rules as required by the Derivatives and Hedging Topic of the FASB Accounting Standards Codification. The Funds are required to include enhanced disclosure that enables investors to understand how and why an entity uses derivatives, how derivatives are accounted for, and how derivative instruments affect an entity’s results of operations and financial position.
The Funds may utilize options for hedging purposes as well as direct investment. Some options strategies, including buying puts, tend to hedge the Funds’ investments against price fluctuations. Other strategies, such as writing puts and calls and buying calls, tend to increase market exposure. Options contracts may be combined with each other in order to adjust the risk and return characteristics of each Fund’s overall strategy in a manner deemed appropriate to the Adviser and consistent with each Fund’s investment objective and policies. When a call or put option is written, an amount equal to the premium received is recorded as a liability. The liability is marked-to-market daily to reflect the current fair value of the written option. When a written option expires, a gain is realized in the amount of the premium originally received. If a closing purchase contract is entered into, a gain or loss is realized in the amount of the original premium less the cost of the closing transaction. If a written call option is exercised, a gain or loss is realized from the sale of the underlying security, and the proceeds from such sale are increased by the premium originally received. If a written option is exercised, the amount of the premium originally received reduces the cost of the security which is purchased upon the exercise of the option.
With options, there is minimal counterparty credit risk to the Funds since the options are covered or secured, which means that the Funds will own the underlying security or, to the extent they do not hold such a portfolio, will maintain a segregated account with the Funds’ custodian consisting of high quality liquid debt obligations equal to the market value of the option, marked to market daily.
Options purchased are recorded as investments and marked-to-market daily to reflect the current fair value of the option contract. If an option purchased expires, a loss is realized in the amount of the cost of the option contract. If a closing transaction is entered into, a gain or loss is realized to the extent that the proceeds from the sale are greater or less than the cost of the option. If a purchase put option is exercised, a gain or loss is realized from the sale of the underlying security by adjusting the proceeds from such sale by the amount of the premium originally paid. If a purchased call option is exercised, the cost of the security purchased upon exercise is increased by the premium originally paid.
The Scharf Balanced Opportunity Fund did not invest in derivative instruments during the period ended December 31, 2013.
As of December 31, 2013, the location of derivatives in the statements of assets and liabilities and the value of the derivative instruments categorized by risk exposure for the Scharf Fund is as follows:
|
|
|
Liabilities
|
|
Derivatives not accounted for as
hedging instruments under ASC 815
|
|
Location
|
|
Fair
Value
|
|
Equity Contracts
|
|
Options Written,
at fair value
|
|
$
|
60,240
|
Average Balance Information
The average monthly market values of written options during the period ended December 31, 2013, for the Scharf Fund was $55,307.
Transactions in written options contracts for the period ended December 31, 2013, are as follows:
|
|
Scharf Fund
|
|
|
|
|
|
Contracts
|
|
|
Premiums Received
|
|
|
|
Beginning Balance
|
|
|
(8
|
)
|
|
$
|
(84,170
|
)
|
|
|
Options written
|
|
|
0
|
|
|
|
0
|
|
|
|
Options closed
|
|
|
0
|
|
|
|
0
|
|
|
|
Outstanding at December 31, 2013
|
|
|
(8
|
)
|
|
$
|
(84,170
|
)
|
Note 3 – Federal Income Taxes
The cost basis of investments for federal income tax purposes at December 31, 2013, was as follows*:
Scharf Fund
|
|
Cost of investments
|
|
$
|
79,194,736
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
|
18,127,379
|
|
|
|
Gross unrealized depreciation
|
|
|
(440,772
|
)
|
|
|
Net unrealized appreciation
|
|
$
|
17,686,607
|
|
Scharf Balanced Opportunity Fund
|
|
Cost of investments
|
|
$
|
16,752,970
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
|
3,342,557
|
|
|
|
Gross unrealized depreciation
|
|
|
(221,134
|
)
|
|
|
Net unrealized appreciation
|
|
$
|
3,121,423
|
|
* Because tax adjustments are calculated annually, the above table reflects the tax adjustments outstanding at the Fund’s previous fiscal year end. For the previous fiscal year's federal income tax information, please refer to the Notes to Financial Statements section in the Fund’s most recent annual report.