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.
Listed options that are actively traded are valued based on quoted prices from the exchange and 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.
Securities for which market quotations are not readily available or if the closing price does not represent fair value, are valued following procedures approved by the Board of Trustees (“Board”). These procedures consider many factors, including the type of security, size of holding, trading volume and news events. Depending on the relative significance of the valuation inputs, these securities may be classified in either Level 2 or Level 3 of the fair value hierarchy.
The Board has delegated day-to-day valuation issues to a Valuation Committee which is comprised of one or more trustees and 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. All actions taken by the Valuation Committee are reviewed and ratified by the Board.
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, 2012:
Scharf Fund
|
Assets:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Common Stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accommodation and Food
Services
|
|
$
|
453,223
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
453,223
|
|
|
Finance and Insurance
|
|
|
3,676,586
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,676,586
|
|
|
Information
|
|
|
4,924,191
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,924,191
|
|
|
Manufacturing
|
|
|
14,297,699
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,297,699
|
|
|
Mining, Quarrying, and Oil
and Gas Extraction
|
|
|
5,278,613
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,278,613
|
|
|
Retail Trade
|
|
|
5,307,579
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,307,579
|
|
|
Transportation and
Warehousing
|
|
|
1,015,286
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,015,286
|
|
|
Total Common Stocks
|
|
|
34,953,177
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,953,177
|
|
|
Exchange-Traded Funds
|
|
|
695,293
|
|
|
|
-
|
|
|
|
-
|
|
|
|
695,293
|
|
|
Miscellaneous Investments
|
|
|
1,347,555
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,347,555
|
|
|
Short-Term Investments
|
|
|
4,931,242
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,931,242
|
|
|
Total Assets in
Securities
|
|
$
|
41,927,267
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
41,927,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Written
|
|
$
|
80,280
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
80,280
|
|
|
Total Liabilities
|
|
$
|
80,280
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
80,280
|
|
Scharf Balanced Opportunity Fund
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Common Stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accommodation and Food
Services
|
|
$
|
152,603
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
152,603
|
|
|
Finance and Insurance
|
|
|
790,630
|
|
|
|
-
|
|
|
|
-
|
|
|
|
790,630
|
|
|
Information
|
|
|
610,462
|
|
|
|
-
|
|
|
|
-
|
|
|
|
610,462
|
|
|
Manufacturing
|
|
|
1,952,933
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,952,933
|
|
|
Mining, Quarrying, and Oil
and Gas Extraction
|
|
|
590,790
|
|
|
|
-
|
|
|
|
-
|
|
|
|
590,790
|
|
|
Retail Trade
|
|
|
780,615
|
|
|
|
-
|
|
|
|
-
|
|
|
|
780,615
|
|
|
Transportation and W
arehousing
|
|
|
131,293
|
|
|
|
-
|
|
|
|
-
|
|
|
|
131,293
|
|
|
Total Common Stocks
|
|
|
5,009,326
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,009,326
|
|
|
Exchange-Traded Funds
|
|
|
81,136
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81,136
|
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
|
-
|
|
|
|
31,350
|
|
|
|
-
|
|
|
|
31,350
|
|
|
Total Fixed Income
|
|
|
-
|
|
|
|
31,350
|
|
|
|
-
|
|
|
|
31,350
|
|
|
Short-Term Investments
|
|
|
1,946,588
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,946,588
|
|
|
Total Investments in
Securities
|
|
$
|
7,037,050
|
|
|
$
|
31,350
|
|
|
$
|
-
|
|
|
$
|
7,068,400
|
|
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, 2012, 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, 2012.
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 invest in a wide range of derivatives, including call and put options, futures, credit default swaps, equity swaps and forward contracts, for hedging purposes as well as direct investment. There are risks involved in the use of options and futures, including the risk that the prices of the hedging vehicles may not correlate perfectly with the securities held by Funds. This may cause the futures or options to react differently from the Funds’ securities to market changes. In addition, the Adviser could be incorrect in its expectations for the direction or extent of market movements. In these events, the Funds could lose money on the options of futures contracts. It is also not certain that a secondary market for positions in options or futures contracts will exist at all times in which event the Funds will not be able to liquidate their positions without potentially incurring significant transactions costs. The Funds may enter into forward currency contracts. A forward currency contract is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. For example, the Funds might purchase a particular currency or enter into a forward currency contract to preserve the U.S. dollar price of securities it intends to or has contracted to purchase. Alternatively, it might sell a particular currency on either a spot or forward basis to hedge against an anticipated decline in the dollar value of securities it intends to or has contracted to sell. Although this strategy could minimize the risk of loss due to a decline in the value of the hedged currency, it could also limit any potential gain from an increase in the value of the currency.
Average Balance Information
The average monthly market values of purchased and written options during the period ended December 31, 2012 for the Scharf Fund was $14,419 and $26,760, respectively.
Transactions in written options contracts for the period ended December 31, 2012, are as follows:
|
Scharf Fund
|
|
|
|
|
Contracts
|
|
|
Premiums Received
|
|
|
Beginning Balance
|
|
|
-
|
|
|
$
|
-
|
|
|
Options written
|
|
|
(8
|
)
|
|
|
(84,170
|
)
|
|
Outstanding at December 31, 2012
|
|
|
(8
|
)
|
|
$
|
(84,170
|
)
|
Values of Derivative Instruments as of December 31, 2012 for the Scharf Fund:
|
|
|
Assets
|
|
Liabilities
|
|
Derivatives not accounted for
as hedging instruments under ASC 815
|
|
Location
|
|
Fair Value
|
|
Location
|
|
Fair Value
|
|
Equity Contracts - Options
|
|
Investments,
at fair value
|
|
$
|
4,644
|
|
Options Written,
at fair value
|
|
$
|
80,280
|
|
Total
|
|
$
|
4,644
|
|
Total
|
|
$
|
80,280
|
Note 3 – Federal Income Taxes
The cost basis of investments for federal income tax purposes at December 31, 2012 was as follows*:
Scharf Fund
|
Cost of investments
|
|
$
|
39,833,709
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
|
2,749,904
|
|
|
Gross unrealized depreciation
|
|
|
(656,346
|
)
|
|
Net unrealized depreciation
|
|
$
|
2,093,558
|
|
* 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.
The cost basis of investments for federal income tax purposes at December 31, 2012 was as follows**:
Scharf Balanced Opportunity Fund
|
Cost of investments
|
|
$
|
6,117,892
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation
|
|
$
|
1,034,158
|
|
|
Gross unrealized depreciation
|
|
|
(83,650
|
)
|
|
Net unrealized appreciation
|
|
$
|
950,508
|
|
** Because tax adjustments are calculated annually, the above table does not include tax adjustments.