The Portfolio
is a series of Two Roads Shared Trust, a Delaware statutory trust organized on June 8, 2012 (the “Trust”). The Trust
is registered as an open-end management investment company currently consisting of twenty-one separate active portfolios. The Trust
is governed by its Board of Trustees (the “Board” or “Trustees”). The Portfolio may issue an unlimited
number of shares of beneficial interest. All shares of the Portfolio have equal rights and privileges. Each share of the Portfolio
is entitled to one vote on all matters as to which shares are entitled to vote. In addition, each share of the Portfolio is entitled
to participate equally with other shares (i) in dividends and distributions declared by the Portfolio and (ii) on liquidation to
its proportionate share of the assets remaining after satisfaction of outstanding liabilities. Shares of the Portfolio are fully
paid, non-assessable and fully transferable when issued and have no pre-emptive, conversion or exchange rights. Fractional shares
have proportionately the same rights, including voting rights, as are provided for a full share.
The Portfolio
is a “diversified” series of the Trust, meaning that the Portfolio is subject to the diversification requirements of
the Investment Company Act of 1940 (the “1940 Act”), which generally limit investments, as to 75% of a fund’s
total assets, to no more than 5% in securities in a single issuer and 10% of an issuer’s voting securities. The Portfolio
consists of Class I and Class N shares. The Portfolio’s investment objective, restrictions and policies are more fully described
herein and in the Portfolio’s prospectus. The Board may launch other series and offer shares of a new fund under the Trust
at any time.
Under the Trust’s
Agreement and Declaration of Trust, each Trustee will continue in office until the termination of the Trust or his/her earlier
death, incapacity, resignation or removal. Shareholders can remove a Trustee to the extent provided by the Investment Company Act
of 1940, as amended (the “1940 Act”) and the rules and regulations promulgated thereunder. Vacancies may be filled
by a majority of the remaining Trustees, except insofar as the 1940 Act may require the election by shareholders. As a result,
normally no annual or regular meetings of shareholders will be held unless matters arise requiring a vote of shareholders under
the Agreement and Declaration of Trust or the 1940 Act.
TYPES
OF INVESTMENTS, STRATEGIES AND RELATED RISKS
The investment
objective of the Portfolio and a description of its principal investment strategies are set forth under “Additional Information
About Principal Investment Strategies and Related Risks” in the Portfolio’s Prospectus. The Portfolio’s investment
objective is not a fundamental policy and may be changed without the approval of a majority of the outstanding voting securities
of the Trust.
The following
pages contain more detailed information about the types of instruments in which the Portfolio may invest, strategies the Adviser
may employ in pursuit of the Portfolio’s investment objective and a summary of related risks. The Portfolio may invest in
securities of other investment companies (“underlying funds”). The Portfolio may be subject to the risks of the securities
and other instruments described below through its own direct investments and indirectly through investments in the underlying funds.
Securities
of Other Investment Companies
The Portfolio
may invest in securities of other investment companies. As a result, the Portfolio may be subject to the risks of the securities
and other instruments described below indirectly through investment in the underlying funds. In addition, the Portfolio’s
investments in an underlying portfolio of exchange-traded funds (“ETFs”), mutual funds and closed-end funds involve
certain additional expenses and certain tax results, which would not be present in a direct investment in the underlying funds.
Open-End
Investment Companies
The Portfolio
may invest in shares of open-end investment companies. The Portfolio and any “affiliated persons,” as defined by the
1940 Act, may purchase in the aggregate only up to 3% of the total outstanding securities of any underlying fund unless: (i) the
underlying investment company and/or the Portfolio has received an order for exemptive relief from such limitations from the SEC;
and (ii) the underlying investment company and the Portfolio take appropriate steps to comply with any conditions in such order.
Accordingly, when affiliated persons hold shares of any of the underlying funds, the Portfolio’s ability to invest fully
in shares of those funds is restricted, and the Adviser must then, in some instances, select alternative investments that would
not have been its first preference. The 1940 Act also provides that an underlying fund whose shares are purchased by the Portfolio
will be obligated to redeem shares held by the Portfolio only in an amount up to 1% of the underlying fund’s outstanding
securities during any period of less than 30 days. Shares held by the Portfolio in excess of 1% of an underlying fund’s outstanding
securities therefore, will be considered not readily marketable securities, which, together with other such securities, may not
exceed 15% of the Portfolio’s total assets. Under certain circumstances an underlying fund may determine to make payment
of a redemption by the Portfolio wholly or partly by a
distribution
in kind of securities from its portfolio, in lieu of cash, in conformity with the rules of the SEC. In such cases, the Portfolio
may hold securities distributed by an underlying fund until the Adviser determines that it is appropriate to dispose of such securities.
Investment
decisions by the investment advisers of the underlying funds are made independently of the Portfolio and its Adviser. Therefore,
the investment adviser of one underlying fund may be purchasing shares of the same issuer whose shares are being sold by the Portfolio’s
Adviser. The result would be an indirect expense to the Portfolio without accomplishing any investment purpose.
Exchange
Traded Funds
ETFs are typically
passively managed funds that track their related index and have the flexibility of trading like a security. They are managed by
professionals and provide the investor with diversification, cost and tax efficiency, liquidity, marginability, are useful for
hedging, have the ability to go long and short, and some provide quarterly dividends. Additionally, some ETFs are unit investment
trusts (UITs) that have two markets. The primary market is where institutions swap “creation units” in block-multiples
of 50,000 shares for in-kind securities and cash in the form of dividends. The secondary market is where individual investors can
trade as little as a single share during trading hours on the exchange. This is different from open-ended mutual funds that are
traded after hours once the net asset value (NAV) is calculated.
Closed-End
Investment Companies
The Portfolio
may invest its assets in “closed-end” investment companies (or “closed-end funds”), subject to the investment
restrictions set forth below. The Portfolio may purchase in the aggregate only up to 3% of the total outstanding voting stock of
any closed-end fund. Shares of closed-end funds are typically offered to the public in a one-time initial public offering by a
group of underwriters who retain a spread or underwriting commission of between 4% or 6% of the initial public offering price.
Such securities are then listed for trading on the New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers Automated Quotation System (commonly known as “NASDAQ”) and, in some cases, may be traded in
other over-the-counter (“OTC”) markets. Because the shares of closed-end funds cannot be redeemed upon demand to the
issuer like the shares of an open-end investment company (such as the Portfolio), investors seek to buy and sell shares of closed-end
funds in the secondary market.
The Portfolio
generally will purchase shares of closed-end funds only in the secondary market. The Portfolio will incur normal brokerage costs
on such purchases similar to the expenses the Portfolio would incur for the purchase of securities of any other type of issuer
in the secondary market. The Portfolio may, however, also purchase securities of a closed-end fund in an initial public offering
when, in the opinion of the Adviser, based on a consideration of the nature of the closed-end fund’s proposed investments,
the prevailing market conditions and the level of demand for such securities, they represent an attractive opportunity for growth
of capital. The initial offering price typically will include a dealer spread, which may be higher than the applicable brokerage
cost if the Portfolio purchased such securities in the secondary market.
The shares
of many closed-end funds, after their initial public offering, frequently trade at a price per share, which is less than the net
asset value per share, the difference representing the “market discount” of such shares. This market discount may be
due in part to the investment objective of long-term appreciation, which is sought by many closed-end funds, as well as to the
fact that the shares of closed-end funds are not redeemable by the holder upon demand to the issuer at the next determined net
asset value but rather are subject to the principles of supply and demand in the secondary market. A relative lack of secondary
market purchasers of closed-end fund shares also may contribute to such shares trading at a discount to their net asset value.
The Portfolio
may invest in shares of closed-end funds that are trading at a discount to net asset value or at a premium to net asset value.
There can be no assurance that the market discount on shares of any closed-end fund purchased by the Portfolio will ever decrease.
In fact, it is possible that this market discount may increase and the Portfolio may suffer realized or unrealized capital losses
due to further decline in the market price of the securities of such closed-end funds, thereby adversely affecting the net asset
value of the Portfolio’s shares. Similarly, there can be no assurance that any shares of a closed-end fund purchased by the
Portfolio at a premium will continue to trade at a premium or that the premium will not decrease subsequent to a purchase of such
shares by the Portfolio.
Closed-end
funds may issue senior securities (including preferred stock and debt obligations) for the purpose of leveraging the closed-end
fund’s common shares in an attempt to enhance the current return to such closed-end fund’s common shareholders. The
Portfolio’s investment in the common shares of closed-end funds that are financially leveraged may create an opportunity
for greater total return on its investment, but at the same time may be expected to exhibit more volatility in market price and
net asset value than an investment in shares of investment companies without a leveraged capital structure.
Business
Development Companies
Business development
companies (“BDCs”) are regulated under the 1940 Act and are taxed as regulated investment companies (“RICs”)
under the Internal Revenue Code of 1986, as amended (the “Code”). BDCs typically operate as publicly traded private
equity firms that invest in early stage to mature private companies and small public companies. BDCs realize operating income when
their investments are sold off, and therefore maintain complex organizational, operational, tax and compliance requirements, and
must distribute at least 90% of their taxable earnings as dividends. Additionally, a BDC’s expenses are not direct expenses
paid by Portfolio shareholders and are not used to calculate the Portfolio’s net asset value.
Borrowing
While the Portfolio does not anticipate
doing so, other than for cash management, the Portfolio may borrow money for investment purposes. Borrowing for investment purposes
is one form of leverage. Leveraging investments, by purchasing securities with borrowed money, is a speculative technique that
increases investment risk, but also increases investment opportunity. Because substantially all of the Portfolio’s assets
will fluctuate in value, whereas the interest obligations on borrowings may be fixed, the NAV per share of the Portfolio will increase
more when the Portfolio’s portfolio assets increase in value and decrease more when the Portfolio’s portfolio assets
decrease in value than would otherwise be the case. Moreover, interest costs on borrowings may fluctuate with changing market rates
of interest and may partially offset or exceed the returns on the borrowed funds. Under adverse conditions, the Portfolio might
have to sell portfolio securities to meet interest or principal payments at a time when investment considerations would not favor
such sales. The Portfolio may use leverage during periods when the Adviser believes that the Portfolio’s investment objective
would be furthered.
The Portfolio may also borrow money
to facilitate management of the Portfolio’s portfolio by enabling the Portfolio to meet redemption requests when the liquidation
of portfolio instruments would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will be repaid
by the Portfolio promptly. As required by the 1940 Act, the Portfolio must maintain continuous asset coverage (total assets, including
assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If, at any time,
the value of the Portfolio’s assets should fail to meet this 300% coverage test, the Portfolio, within three days (not including
Sundays and holidays), will reduce the amount of the Portfolio’s borrowings to the extent necessary to meet this 300% coverage
requirement. Maintenance of this percentage limitation may result in the sale of portfolio securities at a time when investment
considerations otherwise indicate that it would be disadvantageous to do so.
In addition to the foregoing, the Portfolio
is authorized to borrow money as a temporary measure for extraordinary or emergency purposes in amounts not in excess of 5% of
the value of the Portfolio’s total assets. Borrowings for extraordinary or emergency purposes are not subject to the foregoing
300% asset coverage requirement.
Certificates
of Deposit and Bankers’ Acceptances
The
Portfolio may invest in certificates of deposit and bankers’ acceptances, which are considered to be short-term money market
instruments.
Certificates
of deposit are receipts issued by a depository institution in exchange for the deposit of funds. The issuer agrees to pay the amount
deposited plus interest to the bearer of the receipt on the date specified on the certificate. The certificate usually can be traded
in the secondary market prior to maturity. Bankers’ acceptances typically arise from short-term credit arrangements designed
to enable businesses to obtain funds to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank
by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then “accepted”
by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance
may then be held by the accepting bank as an earning asset or it may be sold in the secondary market at the going rate of discount
for a specific maturity. Although maturities for acceptances can be as long as 270 days, most acceptances have maturities
of six months or less.
Commercial
Paper
The
Portfolio may purchase commercial paper. Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory
notes issued by corporations in order to finance their current operations. See Appendix B for more information on ratings
assigned to commercial paper. It may be secured by letters of credit, a surety bond or other forms of collateral. Commercial paper
is usually repaid at maturity by the issuer from the proceeds of the issuance of new commercial paper. As a result, investment
in commercial paper is subject to the risk the issuer cannot issue enough new commercial paper to satisfy its outstanding commercial
paper, also known as rollover risk. Commercial paper may become illiquid or may suffer from reduced liquidity in certain circumstances.
Like all fixed
income
securities, commercial paper prices are susceptible to fluctuations in interest rates. If interest rates rise, commercial paper
prices will decline. The short-term nature of a commercial paper investment makes it less susceptible to interest rate risk than
many other fixed income securities because interest rate risk typically increases as maturity lengths increase. Commercial paper
tends to yield smaller returns than longer-term corporate debt because securities with shorter maturities typically have lower
effective yields than those with longer maturities. As with all fixed income securities, there is a chance that the issuer will
default on its commercial paper obligation.
Convertible
Securities
Convertible
securities include fixed income securities that may be exchanged or converted into a predetermined number of shares of the issuer’s
underlying common stock at the option of the holder during a specified period. Convertible securities may take the form of convertible
preferred stock, convertible bonds or debentures, units consisting of “usable” bonds and warrants or a combination
of the features of several of these securities. Convertible securities are senior to common stocks in an issuer’s capital
structure, but are usually subordinated to non-convertible fixed income securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that afforded by a similar nonconvertible security),
a convertible security also gives an investor the opportunity, through its conversion feature, to participate in the capital appreciation
of the issuing company depending upon a market price advance in the convertible security’s underlying common stock.
Depositary
Receipts
American
Depositary Receipts (“ADRs”) are receipts issued by an American bank or trust company evidencing ownership of underlying
securities issued by a foreign (non-U.S.) issuer. ADRs, in registered form, are designed for use in U.S. securities markets. In
addition to the investment risks associated with the underlying issuer, ADRs expose the Portfolio to additional risks associated
with the non-uniform terms that apply to ADR programs, credit exposure to the depository bank and to the sponsors and other parties
with whom the depository bank establishes the program, currency risk, and liquidity risk. Unsponsored ADRs may be created without
the participation of the foreign (non-U.S.) issuer. Holders of these ADRs generally bear all the costs of the ADR facility, whereas
foreign (non-U.S.) issuers typically bear certain costs in a sponsored ADR. The bank or trust company depositary of an unsponsored
ADR may be under no obligation to distribute shareholder communications received from the foreign (non-U.S.) issuer or to pass
through voting rights.
Global Depositary Receipts (“GDRs”)
are receipts issued by non-U.S. financial institutions evidencing ownership of underlying
foreign or U.S. securities and are usually denominated in foreign securities. GDRs may not be denominated in the same currencies
as the securities they represent. Generally, GDRs are designed for use in the foreign securities markets.
Cyber Security Risk
The Portfolio and its service providers
may be prone to operational and information security risks resulting from breaches in cyber security. A breach in cyber security
refers to both intentional and unintentional events that may cause the Portfolio to lose proprietary information, suffer data corruption,
or lose operational capacity. Breaches in cyber security include, among other behaviors, stealing or corrupting data maintained
online or digitally, denial of service attacks on websites, the unauthorized release of confidential information or various other
forms of cyber-attacks. Cyber security breaches affecting the Portfolio or its Adviser, custodian, transfer agent, intermediaries
and other third-party service providers may adversely impact the Portfolio. For instance, cyber security breaches may interfere
with the processing of shareholders transactions, impact the Portfolio’s ability to calculate its NAVs, cause the release
of private shareholder information or confidential business information, impede trading, subject the Portfolio to regulatory fines
or financial losses and/or cause reputational damage. The Portfolio may also incur additional costs for cyber security risk management
purposes. Similar types of cyber security risks are also present for issuers of securities in which the Portfolio may invest, which
could result in material adverse consequences for such issuers and may cause the Portfolio’s investment in such companies
to lose value.
Derivative
Instruments
The
Portfolio may purchase and write call and put options on securities, securities indices and foreign (non-U.S.) currencies, and
enter into futures contracts and use options on futures contracts as further described below. The Portfolio may also enter into
swap agreements with respect to foreign (non-U.S.) currencies, interest rates and securities indices. The Portfolio may use these
techniques to hedge against changes in interest rates, foreign (non-U.S.) currency exchange rates or securities prices or to attempt
to achieve investment returns as part of its overall investment strategies. The Portfolio may also purchase and sell options relating
to foreign (non-U.S.) currencies for purposes of increasing exposure to a foreign (non-U.S.) currency or to shift exposure to foreign
(non-U.S.) currency fluctuations from one country to another. The Portfolio will segregate or “earmark” assets determined
to be liquid by the adviser in accordance with procedures established by the Board (or, as permitted by applicable regulation,
enter into certain offsetting positions) to cover its obligations under options, futures, and swaps to avoid leveraging the portfolio
of the Portfolio as described below.
The
Portfolio considers derivative instruments to consist of securities or other instruments whose value is derived from or related
to the value of some other instrument or asset, and not to include those securities whose payment of principal and/or interest
depends upon cash flows from underlying assets, such as mortgage-related or asset-backed securities. The value of some derivative
instruments in which the Portfolio invests may be particularly sensitive to changes in prevailing interest rates, and, like the
other investments of the Portfolio, the ability of the Portfolio to successfully utilize these instruments may depend in part upon
the ability of the adviser to correctly forecast interest rates and other economic factors. If the adviser incorrectly forecasts
such factors and has taken positions in derivative instruments contrary to prevailing market trends, the Portfolio could be exposed
to the risk of loss. In addition, while the use of derivatives for hedging purposes can reduce losses, it can also reduce or eliminate
gains, and hedges are sometimes subject to imperfect matching between the derivative and security it is hedging, which means that
a hedge might not be effective. The Portfolio might not employ any of the strategies described above, and no assurance can be given
that any strategy used will succeed. A decision as to whether, when and how to utilize derivative instruments involves skill and
judgment, and even a well-conceived derivatives strategy may be unsuccessful. The use of derivative instruments involves brokerage
fees and/or other transaction costs.
Investment
in futures-related and commodity-linked derivatives may subject the Portfolio to additional risks, and in particular may subject
the Portfolio to greater volatility than investments in traditional securities. The value of futures-related and commodity-linked
derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest
rates or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes,
tariffs, and international economic, political and regulatory developments. In order to qualify for the special tax treatment available
to regulated investment companies under the Code, the Portfolio must derive at least 90% of its gross income each taxable year
from certain specified types of investments. It is currently unclear which types of commodities-linked derivatives fall within
these specified investment types. As a result, if the Portfolio’s investment in commodities-linked derivatives were to exceed
a certain threshold, the Portfolio could fail to qualify for the special tax treatment available to regulated investment companies
under the Code.
Regulatory
Risks of Derivative Use
The
U.S. government has enacted legislation that provides for new regulation of the derivatives market. The Securities and Exchange
Commission (“SEC”) has also issued a proposed rule relating to a registered investment company’s use of derivatives
and related instruments that, if adopted, could potentially require the Portfolio to observe more stringent asset coverage and
related requirements than are currently imposed by the 1940 Act, which could adversely affect the value or performance of the Portfolio.
The European Union (and some other countries) are implementing similar requirements, which will affect the Portfolio when it enters
into a derivatives transaction with a counterparty organized in that country or otherwise subject to that country’s derivatives
regulations. Because these regulations are new and evolving (and some of the rules are not yet final), their impact remains unclear.
If adopted as proposed, these regulations could limit or impact the Portfolio’s ability to invest in derivatives and other
instruments, limit the Portfolio’s ability to employ certain strategies that use derivatives and adversely affect the Portfolio’s
performance, efficiency in implementing its strategy, liquidity and ability to pursue its investment objectives.
In
February 2012, the CFTC adopted certain regulatory changes that subjects advisers to certain registered investment companies to
registration with the CFTC as a commodity pool operator (“CPO”) if an investment company is unable to meet certain
trading and marketing limitations. These rules became effective on January 1, 2013. In relation to these regulatory changes adopted
by the CFTC, the Portfolio’s Adviser intends to rely on an exemption from the CFTC’s CPO registration requirements.
However, it is possible that the Adviser may be required to register as a CPO in the future and comply with any applicable reporting,
disclosure or other regulatory requirements. Compliance with CFTC regulatory requirements will increase Portfolio expenses. Other
potentially adverse regulatory initiatives could also develop.
It
is also possible that additional government regulation of various types of derivative instruments, including futures, options and
swap agreements, may limit or prevent the Portfolio from using such instruments as a part of its investment strategy, and could
ultimately prevent the Portfolio from being able to achieve its investment objective. It is impossible to fully predict the effects
of past, present or future legislation and regulation in this area, but the effects could be substantial and adverse. It is possible
that legislative and regulatory activity could limit or restrict the ability of the Portfolio to use certain instruments as a part
of its investment strategy. Limits or restrictions applicable to the counterparties with which the Portfolio may engage in derivative
transactions could also prevent the Portfolio from using certain instruments.
There
is a possibility of future regulatory changes altering, perhaps to a material extent, the nature of an investment in the Portfolio
or the ability of the Portfolio to continue to implement its investment strategy. The futures, options and swaps markets are subject
to comprehensive statutes, regulations, and margin requirements. In addition, the SEC, CFTC and the exchanges are authorized to
take extraordinary actions in the event of a market emergency, including, for example, the implementation or reduction of speculative
position limits, the implementation of higher margin requirements, the establishment of daily price limits and the
suspension
of trading. The regulation of futures, options and swaps transactions in the U.S. is a rapidly changing area of law and is subject
to modification by government and judicial action.
In
2010, the U.S. government enacted legislation that provides for new regulation of the derivatives market, including clearing, margin,
reporting and registration requirements. The CFTC and certain futures exchanges have also established limits, referred to as “position
limits,” on the maximum net long or net short positions which any person may hold or control in particular options and futures
contracts. All positions owned or controlled by the same person or entity, even if in different accounts, may be aggregated for
purposes of determining whether the applicable position limits have been exceeded. Thus, even if the Portfolio does not intend
to exceed applicable position limits, it is possible that different clients managed by the Adviser and its affiliates may be aggregated
for this purpose. The trading decisions of the Adviser may have to be modified and positions held by the Portfolio may have to
be liquidated in order to avoid exceeding such limits. The modification of investment decisions or the elimination of open positions,
if it occurs, may adversely affect the profitability of the Portfolio.
The
SEC has in the past adopted interim rules requiring reporting of all short positions on securities above a certain de minimis
threshold and is expected to adopt rules requiring monthly public disclosure in the future. In addition, other non-U.S. jurisdictions
where the Portfolio may trade have adopted reporting requirements. If the Portfolio’s securities short positions or its strategy
become generally known, it could have a significant effect on the Adviser’s ability to implement its investment strategy.
In particular, it would make it more likely that other investors could cause a “short squeeze” in the securities held
short by the Portfolio forcing the Portfolio to cover its positions at a loss. Such reporting requirements may also limit the Adviser’s
ability to access management and other personnel at certain companies where the Adviser seeks to take a short position. In addition,
if other investors engage in copycat behavior by taking positions in the same issuers as the Portfolio, the cost of borrowing securities
to sell short could increase drastically and the availability of such securities to the Portfolio could decrease drastically. Such
events could make the Portfolio unable to execute its investment strategy. In addition, the SEC recently proposed additional restrictions
on short sales. If the SEC were to adopt additional restrictions regarding short sales, they could restrict the Portfolio’s
ability to engage in short sales of securities in certain circumstances, and the Portfolio may be unable to execute its investment
strategy as a result.
The
SEC and regulatory authorities in other jurisdictions may adopt (and in certain cases, have adopted) bans on short sales of certain
securities in response to market events. Bans on short selling may make it impossible for the Portfolio to execute certain investment
strategies and may have a material adverse effect on the Portfolio’s ability to generate returns.
Equity
Securities
Equity
securities include common stocks, preferred stocks and securities convertible into common stocks, such as convertible bonds, warrants,
rights and options. The value of equity securities varies in response to many factors, including the activities and financial condition
of individual companies, the business market in which individual companies compete and general market and economic conditions.
Equity securities fluctuate in value, often based on factors unrelated to the value of the issuer of the securities, and such fluctuations
can be significant.
Common
Stock
Common
stock represents an equity (ownership) interest in a company, and usually possesses voting rights and earns dividends. Dividends
on common stock are not fixed but are declared at the discretion of the issuer. Common stock generally represents the riskiest
investment in a company. In addition, common stock generally has the greatest appreciation and depreciation potential because increases
and decreases in earnings are usually reflected in a company’s stock price.
Preferred
Stock
Preferred
stock is a class of stock having a preference over common stock as to the payment of dividends and the recovery of investment should
a company be liquidated, although preferred stock is usually junior to the fixed income securities of the issuer. Preferred stock
typically does not possess voting rights and its market value may change based on changes in interest rates.
The
fundamental risk of investing in common and preferred stock is the risk that the value of the stock might decrease. Stock values
fluctuate in response to the activities of an individual company or in response to general market and/or economic conditions. Historically,
common stocks have provided greater long-term returns and have entailed greater short-term risks than preferred stocks, fixed income
securities and money market investments. The market value of all securities, including common and preferred stocks, is based upon
the market’s perception of value and not necessarily the book value of an issuer or other objective measures of a company’s
worth.
Fixed
Income Securities
There
is normally an inverse relationship between the market value of securities sensitive to prevailing interest rates and actual changes
in interest rates. In other words, an increase in interest rates produces a decrease in market value. The longer the remaining
maturity (and duration) of a security, the greater will be the effect of interest rate changes on the market value of that security.
Changes in the ability of an issuer to make payments of interest and principal and in the markets’ perception of an issuer’s
creditworthiness will also affect the market value of the fixed income securities of that issuer. Obligations of issuers of fixed
income securities (including municipal securities) are subject to the provisions of bankruptcy, insolvency, and other laws affecting
the rights and remedies of creditors, such as the Federal Bankruptcy Reform Act of 1978. In addition, the obligations of municipal
issuers may become subject to laws enacted in the future by Congress, state legislatures, or referenda extending the time for payment
of principal and/or interest, or imposing other constraints upon enforcement of such obligations or upon the ability of municipalities
to levy taxes. Changes in the ability of an issuer to make payments of interest and principal and in the market’s perception
of an issuer’s creditworthiness will also affect the market value of the fixed income securities of that issuer. The possibility
exists, therefore, that, the ability of any issuer to pay, when due, the principal of and interest on its fixed income securities
may become impaired.
Yields
on fixed income securities are dependent on a variety of factors, including the general conditions of the money market and other
fixed income securities markets, the size of a particular offering, the maturity of the obligation and the rating of the issue.
An investment in any Portfolio will be subjected to risk even if all fixed income securities in the Portfolio’s portfolio
are paid in full at maturity. All fixed income securities, including U.S. Government securities, can change in value when
there is a change in interest rates or the issuer’s actual or perceived creditworthiness or ability to meet its obligations.
Corporate
fixed income securities include corporate bonds and notes and short-term investments such as commercial paper and variable rate
demand notes. Commercial paper (short-term promissory notes) is issued by companies to finance their or their affiliate’s
current obligations and is frequently unsecured. Variable and floating rate demand notes are unsecured obligations redeemable upon
not more than 30 days’ notice. These obligations include master demand notes that permit investment of fluctuating amounts
at varying rates of interest pursuant to a direct arrangement with the issuer of the instrument. The issuer of these obligations
often has the right, after a given period, to prepay the outstanding principal amount of the obligations upon a specified number
of days’ notice. These obligations generally are not traded, nor generally is there an established secondary market for these
obligations. To the extent a demand note does not have a 7-day or shorter demand feature and there is no readily available market
for the obligation, it is treated as an illiquid security.
Fixed income securities are subject
to a variety of risks, such as interest rate risk, income risk, call/prepayment risk, inflation risk, credit risk and (in the case
of foreign securities) country and currency risk.
Foreign
(Non-U.S.) Currency Transactions
The
Portfolio may engage in foreign (non-U.S.) currency transactions, including foreign (non-U.S.) currency forward contracts, options,
swaps, and other strategic transactions in connection with investments in securities of non-U.S. companies. The Portfolio will
conduct its foreign (non-U.S.) currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign (non-U.S.) currency exchange market or through forward contracts to purchase or sell foreign (non-U.S.) currencies.
The
Portfolio may enter into forward foreign (non-U.S.) currency exchange contracts (forward contracts) in order to protect against
possible losses on foreign (non-U.S.) investments resulting from adverse changes in the relationship between the U.S. dollar and
foreign (non-U.S.) currencies, as well as to increase exposure to a foreign (non-U.S.) currency or to shift exposure to foreign
(non-U.S.) currency fluctuations from one country to another. A forward contract is an obligation to purchase or sell a specific
currency for an agreed price on a future date which is individually negotiated and privately traded by currency traders and their
customers. Although foreign (non-U.S.) exchange dealers often do not charge a fee for conversion, they do realize a profit based
on the difference (spread) between the price at which they are buying and selling various currencies. However, forward contracts
may limit the potential gains which could result from a positive change in such currency relationships. The Portfolio will segregate
or “earmark” assets determined to be liquid by the adviser in accordance with procedures established by the Board,
to cover the Portfolio’s obligations under forward foreign (non-U.S.) currency exchange contracts entered into for non-hedging
purposes.
The
Portfolio may purchase and write put and call options on foreign (non-U.S.) currencies for the purpose of protecting against declines
in the U.S. dollar value of foreign (non-U.S.) portfolio securities and against increases in the U.S. dollar cost of foreign (non-U.S.)
securities to be acquired. As with other kinds of options, however, the writing of an option on foreign (non-U.S.) currency will
constitute only a partial hedge, up to the amount of the premium received, and the Portfolio could be required to purchase or sell
foreign (non-U.S.) currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign
(non-U.S.) currency
may
constitute an effective hedge against fluctuation in exchange rates although, in the event of rate movements adverse to the Portfolio’s
position, the Portfolio may forfeit the entire amount of the premium plus related transaction costs.
The
Portfolio may enter into interest rate swaps on either an asset-based or liability-based basis, depending on whether it is hedging
its assets or its liabilities, and will usually enter into interest rate swaps on a net basis (i.e., the two payment streams
are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments). The net amount
of the excess, if any, of the Portfolio’s obligations over its entitlement with respect to each interest rate swap will be
calculated on a daily basis and an amount of cash or other liquid assets (marked to market daily) having an aggregate net asset
value at least equal to the accrued excess will be segregated or “earmarked.” The adviser will monitor the creditworthiness
of all counterparties on an ongoing basis. If there is a default by the other party to such a transaction, the Portfolio will have
contractual remedies pursuant to the agreements related to the transaction. There is no limit on the amount of interest rate swap
transactions that may be entered into by the Portfolio, subject to the segregation requirement described above. These transactions
may in some instances involve the delivery of securities or other underlying assets by the Portfolio or its counterparty to collateralize
obligations under the swap. Under the documentation currently used in those markets, the risk of loss with respect to interest
rate swaps is limited to the net amount of the payments that the Portfolio is contractually obligated to make. If the other party
to an interest rate swap that is not collateralized defaults, the Portfolio would risk the loss of the net amount of the payments
that it contractually is entitled to receive.
While
the adviser is authorized to hedge against currency risk, it is not required to do so. The adviser may choose not to hedge currency
exposure.
Foreign
(Non-U.S.) Government Securities
The
Portfolio may invest in foreign (non-U.S.) government securities, including securities issued by foreign (non-U.S.) governments,
including political subdivisions, or their authorities, agencies, instrumentalities or by supra-national agencies. Different kinds
of foreign (non-U.S.) government securities have different types of government support. For example, some foreign (non-U.S.) government
securities are supported by the full faith and credit of a foreign (non-U.S.) national government or a political subdivision and
some are not. Foreign (non-U.S.) government securities of some countries may involve varying degrees of credit risk as a result
of financial or political instability in those countries or the possible inability of the Portfolio to enforce its rights against
a foreign (non-U.S.) government. As with issuers of other fixed income securities, sovereign issuers may be unable or unwilling
to satisfy their obligations to pay principal or interest payments.
Supra-national
agencies are agencies whose member nations make capital contributions to support the agencies’ activities. Examples include
the International Bank for Reconstruction and Development (the World Bank), the Asian Development Bank and the Inter-American Development
Bank.
As
with other fixed income securities, foreign (non-U.S.) government securities expose their holders to market risk because their
values typically change as interest rates fluctuate. For example, the value of foreign (non-U.S.) government securities may
fall during times of rising interest rates. Also, yields on foreign (non-U.S.) government securities tend to be lower than
those of corporate securities of comparable maturities.
In
addition to investing directly in foreign (non-U.S.) government securities, the Portfolio may purchase certificates of accrual
or similar instruments evidencing undivided ownership interests in interest payments and/or principal payments of foreign (non-U.S.)
government securities. Certificates of accrual and similar instruments may be more volatile than other foreign (non-U.S.) government
securities.
High
Yield (Non-Investment Grade Debt) Securities
Greater Risk of Loss
These securities are regarded
as predominately speculative. There is a greater risk that issuers of lower-rated securities will default than issuers of higher-rated
securities. Issuers of lower-rated securities generally are less creditworthy and may be highly indebted, financially distressed,
or bankrupt. These issuers are more vulnerable to real or perceived economic changes, political changes or adverse industry developments.
In addition, high yield securities are frequently subordinated to the prior payment of senior indebtedness. If an issuer fails
to pay principal or interest on securities held by the Portfolio, the Portfolio would experience a decrease in income and a decline
in the market value of its investments.
Sensitivity to Interest
Rate and Economic Changes
The income and market value of
lower-rated securities may fluctuate more than higher-rated securities. Although non-investment grade securities tend to be less
sensitive to interest rate changes than investment grade securities, non-investment grade securities are more sensitive to short-term
corporate, economic and market developments. During periods of economic uncertainty and change, the market price of the investments
in lower-rated securities may be volatile. The default rate for high yield bonds tends to be cyclical, with defaults rising in
periods of economic downturn.
Valuation Difficulties
It is often more difficult to
value lower-rated securities than higher-rated securities. If an issuer’s financial condition deteriorates, accurate financial
and business information may be limited or unavailable. In addition, the lower-rated investments may be thinly traded and there
may be no established secondary market. Because of the lack of market pricing and current information for investments in lower-rated
securities, valuation of such investments is much more dependent on judgment than is the case with higher-rated securities.
Liquidity
There may be no established secondary
or public market for investments in lower-rated securities. Such securities are frequently traded in markets that may be relatively
less liquid than the market for higher-rated securities. In addition, relatively few institutional purchasers may hold a major
portion of an issue of lower-rated securities at times. As a result, the Portfolio may be required to sell investments at substantial
losses or retain them indefinitely when an issuer’s financial condition is deteriorating.
Credit Quality
Credit quality of non-investment
grade securities can change suddenly and unexpectedly, and even recently-issued credit ratings may not fully reflect the actual
risks posed by a particular high-yield security.
New Legislation
Future legislation may have a
possible negative impact on the market for high yield, high risk bonds. As an example, in the late 1980’s, legislation required
federally-insured savings and loan associations to divest their investments in high yield, high risk bonds. New legislation, if
enacted, could have a material negative effect on the Portfolio’s investments in lower-rated securities.
High yield, high risk investments
may include the following:
Straight fixed income securities
These include bonds and other
debt obligations that bear a fixed or variable rate of interest payable at regular intervals and have a fixed or resettable maturity
date. The particular terms of such securities vary and may include features such as call provisions and sinking funds.
Zero-coupon debt securities
These do not pay periodic interest
but are issued at a discount from their value at maturity. When held to maturity, their entire return equals the difference between
their issue price and their maturity value.
Zero-fixed-coupon debt
securities
These are zero-coupon debt securities
that convert on a specified date to periodic interest-paying debt securities.
Pay-in-kind bonds
These are bonds which allow the
issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. These bonds are typically
sold without registration under the Securities Act of 1933, as amended (the “Securities Act”), usually to a relatively
small number of institutional investors.
Convertible Securities
These are bonds or preferred stock
that may be converted to common stock.
Preferred Stock
These are stocks that generally
pay a dividend at a specified rate and have preference over common stock in the payment of dividends and in liquidation.
Loan Participations and
Assignments
These are participations in, or
assignments of all or a portion of loans to corporations or to governments, including governments of less developed countries (“LDCs”).
Securities issued in connection
with Reorganizations and Corporate Restructurings
In connection with reorganizing
or restructuring of an issuer, an issuer may issue common stock or other securities to holders of its fixed income securities.
The Portfolio may hold such common stock and other securities even if it does not invest in such securities.
Distressed Securities
An investment in distressed securities
may involve a substantial degree of risk. These instruments, which involve loans, loan participations, bonds, notes, non-performing
and sub-performing mortgage loans typically are unrated, lower-rated, in default or close to default. Many of these instruments
are not publicly traded, and may become illiquid. The prices of such instruments may be extremely volatile. Securities of distressed
companies are generally more likely to become worthless than the securities of more financially stable companies. Valuing such
instruments may be difficult, and the Portfolio may lose all of its investment, or it may be required to accept cash or securities
with a value less than the Portfolio’s original investment. Issuers of distressed securities are typically in a weak financial
condition and may default, in which case the Portfolio may lose its entire investment.
Illiquid
and Restricted Securities
The
Portfolio may invest up to 15% of its net assets in illiquid securities. An illiquid investment is an investment that the
Portfolio reasonably expects cannot be sold or disposed of in current market conditions within 7 calendar days or less without
the sale or disposition significantly changing the market value of the investment. Illiquid investments include securities that
are illiquid by virtue of the absence of a readily available market (e.g., because trading in the security is suspended or because
market makers do not exist or will not entertain bids or offers) or legal or contractual restrictions on resale (e.g., because
they have not been registered under the Securities Act). Illiquid investments include: repurchase agreements and time deposits
with a notice or demand period of more than seven days; interest rate; currency, mortgage and credit default swaps; interest rate
caps; floors and collars; municipal leases; certain restricted securities, such as those purchased in a private placement of securities,
unless it is determined, based upon a review of the trading markets for a specific restricted security, that such restricted security
is liquid; and certain over-the-counter (“OTC”) options and cover for OTC options. Securities that have legal or contractual
restrictions on resale but have a readily available market are not considered illiquid for purposes of this limitation. With respect
to the Portfolio, repurchase agreements subject to demand are deemed to have a maturity equal to the notice period. Foreign
(non-U.S.) securities that are freely tradable in their principal markets are not considered to be illiquid.
Restricted
and other illiquid securities may be subject to the potential for delays on resale and uncertainty in valuation. The Portfolio
might be unable to dispose of illiquid securities promptly or at reasonable prices and might thereby experience difficulty in satisfying
redemption requests from shareholders. The Portfolio might have to register restricted securities in order to dispose of them,
resulting
in
additional expense and delay. Adverse market conditions could impede such a public offering of securities. To the extent
an investment held by the Portfolio is deemed to be an illiquid investment or a less liquid investment, the Portfolio will be
exposed to a greater liquidity risk.
In October 2016, the SEC adopted
a new liquidity risk management rule, Rule 22e-4 under the 1940 Act, requiring open-end funds, such as the Portfolio, to establish
a liquidity risk management program and enhance disclosures regarding fund liquidity. As required by Rule 22e-4, the Trust has
implemented a liquidity risk management program and related procedures to identify illiquid investments pursuant to Rule 22e-4.
If the limitation on illiquid investments is exceeded, other than by a change in market values, the condition will be reported
to the Board and, when required, to the SEC. The effect the new rule will have on the Portfolio is not yet known, but the rule
may impact the Portfolio’s performance and ability to achieve its investment objective.
A
large institutional market exists for certain securities that are not registered under the Securities Act, including foreign (non-U.S.)
securities. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions
may not be indicative of the liquidity of such investments. Rule 144A under the Securities Act allows such a broader institutional
trading market for securities otherwise subject to restrictions on resale to the general public. Rule 144A establishes a “safe
harbor” from the registration requirements of the Securities Act for resale of certain securities to qualified institutional
buyers. Rule 144A has produced enhanced liquidity for many restricted securities, and market liquidity for such securities may
continue to expand as a result of this regulation and the consequent existence of the PORTAL system, which is an automated system
for the trading, clearance and settlement of unregistered securities of domestic and foreign (non-U.S.) issuers sponsored by the
Financial Industry Regulatory, Inc.
Under
guidelines adopted by the Trust’s Board, the Portfolio’s adviser may determine that particular Rule 144A securities,
and commercial paper issued in reliance on the private placement exemption from registration afforded by Section 4(2) of the Securities
Act, are liquid even though they are not registered. A determination of whether such a security is liquid or not is a question
of fact. In making this determination, the adviser will consider, as it deems appropriate under the circumstances and among other
factors: (1) the frequency of trades and quotes for the security; (2) the number of dealers willing to purchase or sell the security;
(3) the number of other potential purchasers of the security; (4) dealer undertakings to make a market in the security; (5) the
nature of the security (e.g., debt or equity, date of maturity, terms of dividend or interest payments, and other material
terms) and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer); and (6) the rating of the security and the financial condition and prospects of the issuer.
In the case of commercial paper, the adviser will also determine that the paper (1) is not traded flat or in default as to principal
and interest, and (2) is rated in one of the two highest rating categories by at least two Nationally Recognized Statistical Rating
Organizations (“NRSROs”) or, if only one NRSRO rates the security, by that NRSRO, or, if the security is unrated, the
adviser determines that it is of equivalent quality.
Rule
144A securities and Section 4(2) commercial paper that have been deemed liquid as described above will continue to be monitored
by the adviser to determine if the security is no longer liquid as the result of changed conditions. Investing in Rule 144A securities
or Section 4(2) commercial paper could have the effect of increasing the amount of the Portfolio’s assets invested in illiquid
securities if institutional buyers are unwilling to purchase such securities.
Insured Bank Obligations
The
Portfolio may invest in insured bank obligations. The Federal Deposit Insurance Corporation (“FDIC”) insures the deposits
of federally insured banks and savings and loan associations (collectively referred to as “banks”), currently up to
$250,000. The Portfolio may purchase bank obligations, which are fully insured as to principal by the FDIC. Currently, to remain
fully insured as to principal, these investments must be limited to $250,000 per bank; if the principal amount and accrued interest
together exceed $250,000, the excess principal and accrued interest will not be insured. Insured bank obligations may have limited
marketability.
Loan
Participations and Assignments
The
Portfolio may invest directly or indirectly in floating rate senior loans of domestic or foreign borrowers (“Senior Loans”)
primarily by purchasing participations or assignments of a portion of a Senior Loan. Floating rate loans are those with interest
rates which float, adjust or vary periodically based upon benchmark indicators, specified adjustment schedules or prevailing interest
rates. Senior Loans often are secured by specific assets of the borrower, although the Portfolio may invest in Senior Loans that
are not secured by any collateral.
Senior
Loans are loans that are typically made to business borrowers to finance leveraged buy-outs, recapitalizations, mergers, stock
repurchases, and internal growth. Senior Loans generally hold the most senior position in the capital structure of a borrower and
are usually secured by liens on the assets of the borrowers, including tangible assets such as cash, accounts receivable, inventory,
property,
plant
and equipment, common and/or preferred stock of subsidiaries, and intangible assets including trademarks, copyrights, patent rights
and franchise value.
By
virtue of their senior position and collateral, Senior Loans typically provide lenders with the first right to cash flows or proceeds
from the sale of a borrower’s collateral if the borrower becomes insolvent (subject to the limitations of bankruptcy law,
which may provide higher priority to certain claims such as, for example, employee salaries, employee pensions, and taxes). This
means Senior Loans are generally repaid before unsecured bank loans, corporate bonds, subordinated debt, trade creditors, and preferred
or common stockholders.
The
risks associated with Senior Loans are similar to the risks of “junk” securities. The Portfolio’s investments
in Senior Loans is typically below investment grade and is considered speculative because of the credit risk of their issuers.
Moreover, any specific collateral used to secure a loan may decline in value or lose all its value or become illiquid, which would
adversely affect the loan’s value. Economic and other events, whether real or perceived, can reduce the demand for certain
Senior Loans or Senior Loans generally, which may reduce market prices and cause the Portfolio’s net asset value per share
to fall. The frequency and magnitude of such changes cannot be predicted.
Senior
Loans and other debt securities are also subject to the risk of price declines and to increases in prevailing interest rates, although
floating rate debt instruments are less exposed to this risk than fixed rate debt instruments. Conversely, the floating rate feature
of Senior Loans means the Senior Loans will not generally experience capital appreciation in a declining interest rate environment.
Declines in interest rates may also increase prepayments of debt obligations and require the Portfolio to invest assets at lower
yields.
Although
Senior Loans in which the Portfolio will invest will often be secured by collateral, there can be no assurance that liquidation
of such collateral would satisfy the borrower’s obligation in the event of a default or that such collateral could be readily
liquidated. In the event of bankruptcy of a borrower, the Portfolio could experience delays or limitations in its ability to realize
the benefits of any collateral securing a Senior Loan. The Portfolio may also invest in Senior Loans that are not secured.
Senior
Loans and other types of direct indebtedness may not be readily marketable and may be subject to restrictions on resale. In some
cases, negotiations involved in disposing of indebtedness may require weeks to complete. Consequently, some indebtedness may be
difficult or impossible to dispose of readily at what the Adviser believes to be a fair price. In addition, valuation of illiquid
indebtedness involves a greater degree of judgment in determining the Portfolio’s net asset value than if that value were
based on available market quotations, and could result in significant variations in the Portfolio’s daily share price. At
the same time, some loan interests are traded among certain financial institutions and accordingly may be deemed liquid. As the
market for different types of indebtedness develops, the liquidity of these instruments is expected to improve.
The
Portfolio may receive and/or pay certain fees in connection with its activities in buying, selling and holding loans. These fees
are in addition to interest payments received, and may include facility fees, commitment fees, commissions and prepayment penalty
fees.
The
Portfolio may acquire interests in Senior Loans that are designed to provide temporary or “bridge” financing to a borrower
pending the sale of identified assets or the arrangement of longer-term loans or the issuance and sale of debt obligations. A borrower’s
use of a bridge loan involves a risk that the borrower may be unable to locate permanent financing to replace the bridge loan,
which may impair the borrower’s perceived creditworthiness.
The
Portfolio’s investment in loans may take the form of a participation or an assignment. Loan participations typically represent
direct participation in a loan to a borrower, and generally are offered by financial institutions or lending syndicates. The Portfolio
may participate in such syndications, or can buy part of a loan, becoming a part lender. When purchasing loan participations, the
Portfolio assumes the credit risk associated with the borrower and may assume the credit risk associated with an interposed financial
intermediary. The participation interest and assignments in which the Portfolio intends to invest may not be rated by any nationally
recognized rating service. The Portfolio may invest in loan participations and assignments with credit quality comparable to that
of issuers of its securities investments.
When
the Portfolio is a purchaser of an assignment, it succeeds to all the rights and obligations under the loan agreement of the assigning
bank or other financial intermediary and becomes a lender under the loan agreement with the same rights and obligations as the
assigning bank or other financial intermediary. For example, if a loan is foreclosed, the Portfolio could become part owner of
any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral. In addition, it
is conceivable that under emerging legal theories of lender liability, the Portfolio could be held liable as co-lender. It is unclear
whether loans and other forms of direct indebtedness offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance,
the
Portfolio will rely on the Adviser’s research in an attempt to avoid situations where fraud or misrepresentation could adversely
affect the Portfolio.
Lending
Portfolio Securities
For
the purpose of achieving income, the Portfolio may lend its portfolio securities, provided (1) the loan is secured continuously
by collateral consisting of U.S. Government securities or cash or cash equivalents (cash, U.S. Government securities, negotiable
certificates of deposit, bankers’ acceptances or letters of credit) maintained on a daily mark-to-market basis in an amount
at least equal to the current market value of the securities loaned, (2) the Portfolio may at any time call the loan and obtain
the return of securities loaned, (3) the Portfolio will receive any interest or dividends received on the loaned securities, and
(4) the aggregate value of the securities loaned will not at any time exceed one-third of the total assets of the Portfolio.
As with other extensions of credit,
there are risks that collateral could be inadequate in the event of the borrower failing financially, which could result in actual
financial loss, and risks that recovery of loaned securities could be delayed, which could result in interference with portfolio
management decisions or exercise of ownership rights. The Portfolio will be responsible for the risks associated with the investment
of cash collateral, including the risk that the Portfolio may lose money on the investment or may fail to earn sufficient income
to meet its obligations to the borrower. In addition, the Portfolio may lose its right to vote its shares of the loaned securities
at a shareholders meeting if the Adviser does not recall or does not timely recall the loaned securities, or if the borrower fails
to return the recalled securities in advance of the record date for the meeting.
Securities
lending involves counterparty risk, including the risk that the loaned securities may not be returned or returned in a timely manner
and/or a loss of rights in the collateral if the borrower or the lending agent defaults or fails financially. This risk is increased
when the Portfolio’s loans are concentrated with a single or limited number of borrowers. There are no limits on the number
of borrowers to which the Portfolio may lend securities and the Portfolio may lend securities to only one or a small group of borrowers.
As of the date of this SAI, the Portfolio does not engage in securities lending.
Margin
Deposits and Cover Requirements
Margin
Deposits for Futures Contracts
Unlike
the purchase or sale of portfolio securities, no price is paid or received by the Portfolio upon the purchase or sale of a futures
contract. Initially, the Portfolio will be required to deposit with the broker an amount of cash or cash equivalents, known as
initial margin, based on the value of the contract. The nature of initial margin in futures transactions is different from that
of margin in securities transactions in that futures contract margin does not involve the borrowing of funds by the customer to
finance the transactions. Rather, the initial margin is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Portfolio upon termination of the futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be made on a daily basis as the price of the underlying
instruments fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as “marking
to the market.” For example, when the Portfolio has purchased a futures contract and the price of the contract has risen
in response to a rise in the price of the underlying instruments, that position will have increased in value and the Portfolio
will be entitled to receive from the broker a variation margin payment equal to that increase in value. Conversely, where the Portfolio
has purchased a futures contract and the price of the futures contract has declined in response to a decrease in the underlying
instruments, the position would be less valuable and the Portfolio would be required to make a variation margin payment to the
broker. At any time prior to expiration of the futures contract, the adviser may elect to close the position by taking an opposite
position, subject to the availability of a secondary market, which will operate to terminate the Portfolio’s position in
the futures contract. A final determination of variation margin is then made, additional cash is required to be paid by or released
to the Portfolio, and the Portfolio realizes a loss or gain.
Cover
Requirements for Forward Contracts, Swap Agreements, Options, Futures and Options on Futures
The
Portfolio will comply with guidelines established by the Securities and Exchange Commission (“SEC”) with respect to
coverage of forwards, futures, swaps and options. These guidelines may, in certain instances, require segregation by the Portfolio
of cash or liquid securities with its custodian or a designated sub-custodian to the extent the Portfolio’s obligations with
respect to these strategies are not otherwise “covered” through ownership of the underlying security, financial instrument
or currency or by other portfolio positions or by other means consistent with applicable regulatory policies. Segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their place or it is no longer necessary to segregate
them. As a result, there is a possibility
that
segregation of a large percentage of the Portfolio’s assets could impede portfolio management or the Portfolio’s ability
to meet redemption requests or other current obligations.
For
example, when entering into a futures contract that will be cash settled, the Portfolio will cover (and mark-to-market on a daily
basis) liquid assets that, when added to the amounts deposited with a futures commission merchant as margin, are equal to the mark-to-market
amount, if any, owed by the Portfolio on the futures contract. When entering into a futures contract that does not need to be settled
in cash, the Portfolio will maintain with its custodian (and mark to market on a daily basis) liquid assets that, when added to
the amounts deposited with a futures commission merchant as margin, are equal to the full notional value of the contract. Alternatively,
the Portfolio may “cover” its position by purchasing an option on the same futures contract with a strike price as
high or higher than the price of the contract held by the Portfolio or by entering into an agreement that enables the Portfolio
to settle such futures contracts in cash.
To
the extent the Portfolio writes credit default swaps, the Portfolio will segregate or “earmark” cash or assets determined
to be liquid by the Portfolio in accordance with procedures established by the Board, or enter into offsetting positions, with
a value at least equal to the full notional amount of the swap (minus any amounts owed to the Portfolio). Such segregation or “earmarking”
will ensure that the Portfolio has assets available to satisfy its obligations with respect to the transaction and will limit any
potential leveraging of the Portfolio’s portfolio. Also, the Portfolio does not invest more than 25% of its assets in contracts
with any one counterparty.
Money Market Fund Investments
Certain money market funds in which
the Portfolio may invest may operate as “institutional money market funds” under Rule 2a-7 of the 1940 Act and must
calculate their NAV per share to the fourth decimal place (e.g., $1.0000) reflecting market-based values of the money market fund’s
holdings. Because the share price of these money market funds will fluctuate, when the Portfolio sells its shares they may be worth
more or less than what the Portfolio originally paid for them. The Portfolio could also lose money if the money market fund holds
defaulted securities or as a result of adverse market conditions. These money market funds may impose a “liquidity fee”
upon the redemption of their shares or may temporarily suspend the ability to redeem shares if the money market fund’s liquidity
falls below the required minimums because of market conditions or other factors.
These measures may result in an investment
loss or prohibit the Portfolio from redeeming shares when the Adviser would otherwise redeem shares. If a liquidity fee is imposed
or redemptions are suspended, an investing fund may have to sell other investments at less than opportune times to raise cash to
meet shareholder redemptions or for other purposes. The Adviser, as a result of imposition of liquidity fees or suspension of redemptions,
or the potential risk of such actions, may determine not to invest the Portfolio’s assets in a money market fund when it
otherwise would, and may potentially be forced to invest in more expensive, lower-performing investments.
Imposition of a liquidity fee or temporary
suspension of redemptions is at the discretion of a money market fund’s board of directors or trustees; however, they must
impose a liquidity fee or suspend redemptions if they determine it would be in the best interest of the money market fund. Such
a determination may conflict with the interest of the Portfolio.
The Portfolio may also invest in money
market funds that invest at least 99.5% of their assets in U.S. government securities and operate as “government money market
funds” under Rule 2a-7. Government money market funds may seek to maintain a stable price of $1.00 per share and are generally
not required to impose liquidity fees or temporarily suspend redemptions. However, government money market funds typically offer
materially lower yields than other money market funds with fluctuating share prices.
The Portfolio could lose money invested
in a money market fund. An investment in a money market fund, including a government money market fund, is not insured or guaranteed
by the Federal Deposit Insurance Corporation (“FDIC”) or any other government agency. A money market fund’s sponsor
has no legal obligation to provide financial support to the money market fund, and you should not expect that the sponsor or any
person will provide financial support to a money market fund at any time.
In addition to the fees and expenses
that the Portfolio directly bears, the Portfolio indirectly bears the fees and expenses of any money market funds in which it invests.
By investing in a money market fund, the Portfolio will be exposed to the investment risks of the money market fund in direct proportion
to such investment. The money market fund may not achieve its investment objective. The Portfolio, through its investment in the
money market fund, may not achieve its investment objective. To the extent the Portfolio invests in instruments such as derivatives,
the Portfolio may hold investments, which may be significant, in money market fund shares to cover its obligations resulting from
the Portfolio’s investments in derivatives. Money market funds are subject to comprehensive regulations. The enactment of
new legislation or regulations, as well as changes in interpretation and enforcement of current laws, may affect the manner of
operation, performance and/or yield of money market funds.
Mortgage
Pass-Through Securities
Interests
in pools of mortgage pass-through securities differ from other forms of fixed income securities (which normally provide periodic
payments of interest in fixed amounts and the payment of principal in a lump sum at maturity or on specified call dates). Instead,
mortgage pass-through securities provide monthly payments consisting of both interest and principal payments. In effect, these
payments are a “pass-through” of the monthly payments made by the individual borrowers on the underlying residential
mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Unscheduled payments of principal may be made
if the underlying mortgage loans are repaid or refinanced or the underlying properties are foreclosed, thereby shortening the securities’
weighted average life. Some mortgage pass-through securities (such as securities guaranteed by Ginnie Mae) are described as “modified
pass-through securities.” These securities entitle the holder to receive all interest and principal payments owed on the
mortgage pool, net of certain fees, on the scheduled payment dates regardless of whether the mortgagor actually makes the payment.
The
principal governmental guarantor of mortgage pass-through securities is Ginnie Mae. Ginnie Mae is authorized to guarantee, with
the full faith and credit of the U.S. Treasury, the timely payment of principal and interest on securities issued by lending institutions
approved by Ginnie Mae (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of mortgage
loans. These mortgage loans are either insured by the Federal Housing Administration or guaranteed by the Veterans Administration.
A “pool” or group of such mortgage loans is assembled and after being approved by Ginnie Mae, is offered to investors
through securities dealers.
Mortgage-backed
securities issued by the Federal National Mortgage Association (“Fannie Mae”) include Fannie Mae Guaranteed Mortgage
Pass-Through Certificates, which are solely the obligations of Fannie Mae and are not backed by or entitled to the full faith and
credit of the United States, except as described below, but are supported by the right of the issuer to borrow from the U.S. Treasury.
Fannie Mae is a stockholder-owned corporation chartered under an Act of the U.S. Congress. Fannie Mae certificates are guaranteed
as to timely payment of the principal and interest by Fannie Mae. Mortgage-related securities issued by the Federal Home Loan Mortgage
Corporation (“Freddie Mac”) include Freddie Mac Mortgage Participation Certificates. Freddie Mac is a corporate instrumentality
of the United States, created pursuant to an Act of Congress. Freddie Mac certificates are not guaranteed by the United States
or by any Federal Home Loan Banks and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank.
Freddie Mac certificates entitle the holder to timely payment of interest, which is guaranteed by Freddie Mac. Freddie Mac guarantees
either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When Freddie Mac does
not guarantee timely payment of principal, Freddie Mac may remit the amount due on account of its guarantee of ultimate payment
of principal after default.
From
time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating federal sponsorship
of Fannie Mae and Freddie Mac. The Trust cannot predict what legislation, if any, may be proposed in the future in Congress with
regard to such sponsorship or which proposals, if any, might be enacted. Such proposals, if enacted, might materially and adversely
affect the availability of government guaranteed mortgage-backed securities and the Portfolio’s liquidity and value.
There
is risk that the U.S. government will not provide financial support to its agencies, authorities, instrumentalities or sponsored
enterprises. The Portfolio may purchase U.S. government securities that are not backed by the full faith and credit of the United
States, such as those issued by Fannie Mae and Freddie Mac. The maximum potential liability of the issuers of some U.S. government
securities held by the Portfolio may greatly exceed their current resources, including their legal right to support from the U.S.
Treasury. It is possible that these issuers will not have the funds to meet their payment obligations in the future.
The
volatility and disruption that impacted the capital and credit markets during late 2008 and into 2009 have led to increased market
concerns about Freddie Mac’s and Fannie Mae’s ability to withstand future credit losses associated with securities
held in their investment portfolios, and on which they provide guarantees, without the direct support of the federal government.
On September 7, 2008, both Freddie Mac and Fannie Mae were placed under the conservatorship of the Federal Housing Finance
Agency (“FHFA”).
Under
the plan of conservatorship, the FHFA has assumed control of, and generally has the power to direct, the operations of Freddie
Mac and Fannie Mae, and is empowered to exercise all powers collectively held by their respective shareholders, directors and officers,
including the power to: (1) take over the assets of and operate Freddie Mac and Fannie Mae with all the powers of the shareholders,
the directors, and the officers of Freddie Mac and Fannie Mae and conduct all business of Freddie Mac and Fannie Mae; (2) collect
all obligations and money due to Freddie Mac and Fannie Mae; (3) perform all functions of Freddie Mac and Fannie Mae which
are consistent with the conservator’s appointment; (4) preserve and conserve the assets and property of Freddie Mac
and Fannie Mae; and (5) contract for assistance in fulfilling any function, activity, action or duty of the conservator. In
addition, in connection with the actions taken by the FHFA, the U.S. Treasury Department (the “Treasury”) entered into
certain preferred stock purchase agreements with each of Freddie Mac and Fannie Mae which established the Treasury as the holder
of a new class of senior preferred stock in each of Freddie Mac and Fannie Mae, which stock was issued
in connection with financial contributions from the Treasury to Freddie Mac and Fannie Mae.
The
conditions attached to the financial contribution made by the Treasury to Freddie Mac and Fannie Mae and the issuance of this senior
preferred stock placed significant restrictions on the activities of Freddie Mac and Fannie Mae. Freddie Mac and Fannie Mae must
obtain the consent of the Treasury to, among other things: (i) make any payment to purchase or redeem its capital stock or
pay any dividend other than in respect of the senior preferred stock issued to the Treasury, (ii) issue capital stock of any
kind, (iii) terminate the conservatorship of the FHFA except in connection with a receivership, or (iv) increase its
debt beyond certain specified levels. In addition, significant restrictions were placed on the maximum size of each of Freddie
Mac’s and Fannie Mae’s respective portfolios of mortgages and mortgage-backed securities, and the purchase agreements
entered into by Freddie Mac and Fannie Mae provide that the maximum size of their portfolios of these assets must decrease by a
specified percentage each year. The future status and role of Freddie Mac and Fannie Mae could be impacted by (among other things):
the actions taken and restrictions placed on Freddie Mac and Fannie Mae by the FHFA in its role as conservator; the restrictions
placed on Freddie Mac’s and Fannie Mae’s operations and activities as a result of the senior preferred stock investment
made by the Treasury; market responses to developments at Freddie Mac and Fannie Mae; and future legislative and regulatory action
that alters the operations, ownership, structure and/or mission of these institutions, each of which may, in turn, impact the value
of, and cash flows on, any mortgage-backed securities guaranteed by Freddie Mac and Fannie Mae, including any such mortgage-backed
securities held by the Portfolio.
As
a result of the economic recession that commenced in the United States in 2008, there is a heightened risk that the receivables
and loans underlying the asset-backed securities purchased by the Portfolio may suffer greater levels of default than was historically
experienced.
Commercial
banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers
also create pass-through pools of conventional residential mortgage loans. Such issuers may, in addition, be the originators and/or
servicers of the underlying mortgage loans as well as the guarantors of the mortgage pass-through securities.
Caps
and Floors
The
interest rates paid on the Adjustable Rate Mortgage Securities (“ARMs”) in which the Portfolio may invest generally
are readjusted or reset at intervals of one year or less to an increment over some predetermined interest rate index. The underlying
mortgages that collateralize the ARMs in which the Portfolio may invest will frequently have caps and floors which limit the maximum
amount by which the loan rate to the residential borrower may change up or down: (1) per reset or adjustment interval, and (2)
over the life of the loan. Some residential mortgage loans restrict periodic adjustments by limiting changes in the borrower’s
monthly principal and interest payments rather than limiting interest rate changes. These payment caps may result in negative amortization.
The value of mortgage securities in which the Portfolio invests may be affected if market interest rates rise or fall faster and
farther than the allowable caps or floors on the underlying residential mortgage loans. Additionally, even though the interest
rates on the underlying residential mortgages are adjustable, amortization and prepayments may occur, thereby causing the effective
maturities of the mortgage securities in which the Portfolio invests to be shorter than the maturities stated in the underlying
mortgages.
Inverse
Floaters
Inverse
floaters constitute a class of mortgage-backed securities with a coupon rate that moves inversely to a designated index, such as
LIBOR (London Interbank Offered Rate) or 11th District Cost of Funds Index (“COFI”). Inverse floaters have coupon rates
that typically change at a multiple of the changes of the relevant index rate. Any rise in the index rate (as a consequence of
an increase in interest rates) causes a drop in the coupon rate on an inverse floater while any drop in the index rate causes an
increase in the coupon rate of an inverse floater. In some circumstances, the coupon on an inverse floater could decrease to zero.
In addition, like most other fixed income securities, the value of inverse floaters will decrease as interest rates increase and
their average lives will extend. Inverse floaters exhibit greater price volatility than the majority of mortgage-backed securities.
In addition, some inverse floaters display extreme sensitivity to changes in prepayments. As a result, the yield to maturity of
an inverse floater is sensitive not only to changes in interest rates but also to changes in prepayment rates on the related underlying
mortgage assets. As described above, inverse floaters may be used alone or in tandem with interest-only stripped mortgage instruments.
Mortgage
Dollar Rolls
The
Portfolio may enter into mortgage dollar rolls with a bank or a broker-dealer. A mortgage dollar roll is a transaction in which
the Portfolio sells mortgage-related securities for immediate settlement and simultaneously purchases the same type of securities
for
forward settlement at a discount. While the Portfolio begins accruing interest on the newly purchased securities from the purchase
or trade date, it is able to invest the proceeds from the sale of its previously owned securities, which will be used to pay for
the new securities, in money market investments until a future settlement date. The use of mortgage dollar rolls is a speculative
technique involving leverage, and is considered to be a form of borrowing.
Private
Mortgage Pass-Through Securities
Private
mortgage pass-through securities, also known as “non-agency mortgage securities”, are structured similarly to the Ginnie
Mae, Fannie Mae and Freddie Mac mortgage pass-through securities and are issued by United States and foreign (non-U.S.) private
issuers such as originators of and investors in mortgage loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing. These securities usually are backed by a pool of conventional
fixed-rate or adjustable-rate mortgage loans. Since private mortgage pass-through securities typically are not guaranteed by an
entity having the credit status of Ginnie Mae, Fannie Mae and Freddie Mac, such securities generally are structured with one or
more types of credit enhancement.
Mortgage
assets often consist of a pool of assets representing the obligations of a number of different parties. There are usually fewer
properties in a pool of assets backing commercial mortgage-backed securities than in a pool of assets backing residential mortgage-backed
securities; hence they may be more sensitive to the performance of fewer mortgage assets. To lessen the effect of failures by obligors
on underlying assets to make payments, those securities may contain elements of credit support, which fall into two categories:
(i) liquidity protection; and (ii) protection against losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that
the receipt of payments on the underlying pool occurs in a timely fashion. Protection against losses resulting from default ensures
ultimate payment of the obligations on at least a portion of the assets in the pool. This protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring
the transaction or through a combination of such approaches. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated with the underlying assets. Delinquencies or losses
in excess of those anticipated could adversely affect the return on an investment in a security. The Portfolio will not pay any
fees for credit support, although the existence of credit support may increase the price of a security.
Resets
There
are two main categories of indices: those based on U.S. Treasury securities and those derived from a calculated measure, such as
a cost-of-funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant
maturity Treasury Note rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury
securities, the National Median Cost of Funds, the one-month or three-month London Interbank Offered Rate (“LIBOR”),
the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year constant maturity Treasury Note
rate, closely mirror changes in market interest rate levels. Others tend to lag changes in market rate levels and tend to be somewhat
less volatile.
Stripped Mortgage Securities
Stripped
mortgage securities may be issued by federal agencies, or by private originators of, or investors in, mortgage loans, including
savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing.
Stripped mortgage securities usually are structured with two classes that receive different proportions of the interest and principal
distribution of a pool of mortgage assets. A common type of stripped mortgage security will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder
of the principal. In the most extreme case, one class will receive all of the interest (the interest-only or “IO” class),
while the other class will receive all of the principal (the principal-only or “PO” class). PO classes generate income
through the accretion of the deep discount at which such securities are purchased, and, while PO classes do not receive periodic
payments of interest, they receive monthly payments associated with scheduled amortization and principal prepayment from the mortgage
assets underlying the PO class. The yield to maturity on a PO or an IO class security is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets. A slower than expected rate of principal payments may
have an adverse effect on a PO-class security’s yield to maturity. If the underlying mortgage assets experience slower than
anticipated principal repayment, the Portfolio may fail to fully recoup its initial investment in these securities. Conversely,
a rapid rate of principal payments may have a material adverse effect on an IO-class security’s yield to maturity. If the
underlying mortgage assets experience greater than anticipated prepayments of principal, the Portfolio may fail to fully recoup
its initial investment in these securities.
The
Portfolio may purchase stripped mortgage securities for income, or for hedging purposes to protect the Portfolio’s portfolio
against interest rate fluctuations. For example, since an IO class will tend to increase in value as interest rates rise, it may
be utilized to hedge against a decrease in value of other fixed income securities in a rising interest rate environment.
Over-the-Counter
Instruments
The
trading of over-the-counter instruments subjects the Portfolio to a variety of risks including: (1) counterparty risk; (2) basis
risk; (3) interest rate risk; (4) settlement risk; (5) legal risk; and (6) operational risk. Counterparty risk is the risk that
the Portfolio’s counterparties might default on their obligation to pay or perform generally on their obligations. The over-the-counter
markets and some foreign (non-U.S.) markets are “principals’ markets.” That means that performance of the contract
is the responsibility only of the individual firm or member on the other side of the trade and not any exchange or clearing corporation.
Such “counterparty risk” is accentuated for contracts with longer maturities where events may intervene to prevent
settlement, or where the Portfolio has concentrated its transactions with a single or small group of counterparties. Basis risk
is the risk attributable to the movements in the spread between the derivative contract price and the future price of the
underlying instrument. Interest rate risk is the general risk associated with movements in interest rates. Settlement risk is the
risk that a settlement in a transfer system does not take place as expected. Legal risk is the risk that a transaction proves unenforceable
in law or because it has been inadequately documented. Operational risk is the risk of unexpected losses arising from deficiencies
in a firm’s management information, support and control systems and procedures. Transactions in over-the-counter derivatives
may involve other risks as well, as there is no exchange market on which to close out an open position. It may be impossible to
liquidate an existing position, to assess the value of a position or to assess the exposure to risk.
Recent
Market Events.
The Portfolio
could lose money over short periods due to short-term market movements and over longer periods during more prolonged market downturns.
The value of a security or other instrument may decline due to changes in general market conditions, economic trends or events
that are not specifically related to the issuer of the security or other instrument, or factors that affect a particular issuer
or issuers, country, group of countries, region, market, industry, group of industries, sector or asset class. During a general
market downturn, multiple asset classes may be negatively affected. Changes in market conditions and interest rates generally do
not have the same impact on all types of securities and instruments.
Stresses associated with the 2008 financial
crisis in the United States and global economies peaked approximately a decade ago, but periods of unusually high volatility in
the financial markets and restrictive credit conditions, sometimes limited to a particular sector or a geography, continue to recur.
Some countries, including the United States, have adopted and/or are considering the adoption of more protectionist trade policies,
a move away from the tighter financial industry regulations that followed the financial crisis, and/or substantially reducing corporate
taxes. The exact shape of these policies is still being considered, but the equity and debt markets may react strongly to expectations
of change, which could increase volatility, especially if the market’s expectations are not borne out. A rise in protectionist
trade policies, and the possibility of changes to some international trade agreements, could affect the economies of many nations
in ways that cannot necessarily be foreseen at the present time. In addition, geopolitical and other risks, including environmental
and public health, may add to instability in world economies and markets generally. Economies and financial markets throughout
the world are becoming increasingly interconnected. As a result, whether or not the Portfolio
invests in securities of issuers located in or with significant exposure to countries experiencing economic, political and/or financial
difficulties, the value and liquidity of the Portfolio’s investments may be
negatively affected by such events.
An outbreak of infectious respiratory
illness caused by a novel coronavirus known as COVID-19 was first detected in China in December 2019 and has now been
detected globally. On March 11, 2020, the World Health Organization announced that it had made the assessment that COVID-19 can
be characterized as a pandemic. COVID-19 has resulted in travel restrictions, closed international borders, enhanced health screenings
at ports of entry and elsewhere, disruption of and delays in healthcare service preparation and delivery, prolonged quarantines,
cancellations, business and school closings, supply chain disruptions, and lower consumer demand, as well as general concern and
uncertainty. The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely
affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily
be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less
established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing
political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its
effects cannot be determined with certainty. The value of the Portfolio and the securities
in which the Portfolio invests may be adversely affected by impacts caused by COVID-19
and other epidemics and pandemics that may arise in the future. In addition, as a possible consequence of the measures taken in
response to the spread of COVID-19 and the resulting market disruptions, volatility and liquidity concerns, the Portfolio may have
difficulty
in complying with the distribution requirements necessary for the Portfolio to maintain its status as a regulated investment company
under the Code.
Repurchase
Agreements
The
Portfolio may enter into repurchase agreements. In a repurchase agreement, an investor (such as the Portfolio) purchases a security
(known as the “underlying security”) from a securities dealer or bank. Any such dealer or bank must be deemed creditworthy
by the adviser. At that time, the bank or securities dealer agrees to repurchase the underlying security at a mutually agreed upon
price on a designated future date. The repurchase price may be higher than the purchase price, the difference being income to the
Portfolio, or the purchase and repurchase prices may be the same, with interest at an agreed upon rate due to the Portfolio on
repurchase. In either case, the income to the Portfolio generally will be unrelated to the interest rate on the underlying securities.
Repurchase agreements must be “fully collateralized,” in that the market value of the underlying securities (including
accrued interest) must at all times be equal to or greater than the repurchase price. Therefore, a repurchase agreement can be
considered a loan collateralized by the underlying securities.
Repurchase
agreements are generally for a short period of time, often less than a week, and will generally be used by the Portfolio to invest
excess cash or as part of a temporary defensive strategy. Repurchase agreements that do not provide for payment within seven days
will be treated as illiquid securities. In the event of a bankruptcy or other default by the seller of a repurchase agreement,
the Portfolio could experience both delays in liquidating the underlying security and losses. These losses could result from: (a)
possible decline in the value of the underlying security while the Portfolio is seeking to enforce its rights under the repurchase
agreement; (b) possible reduced levels of income or lack of access to income during this period; and (c) expenses of enforcing
its rights.
Risks
Related to the Adviser and to its Strategy
Quantitative
Model Risk
The
Adviser implements the Portfolio’s investment strategy using proprietary trading models (each, a “Model” and
collectively, the “Models”) that analyze information and data supplied by third parties. When the data proves to be
incorrect or incomplete, any decisions made in reliance thereon expose the Portfolio to potential risks. For example, by relying
on the data, the Adviser may be induced to buy or sell investments when it may not be advantageous to do so, or to miss favorable
opportunities altogether.
The
Models seek to accurately invest during favorable investment time periods based on technical analysis using current and historical
data. The use of the Models has inherent risks. For example, a Model may incorrectly forecast future behavior, leading to potential
losses on a cash flow and/or a mark-to-market basis. In addition, a Model may produce unexpected results, which can result in losses
for the Portfolio. Furthermore, because the Models rely on historical and market data supplied by third parties, the success of
relying on the Models may depend heavily on the accuracy and reliability of the supplied historical and market data. If incorrect
historical or market data is entered into a Model, the resulting information will be incorrect. However, even if the historical
and market data is accurate the price trends that a Model identifies will often substantially differ from actual market prices.
Differences in price trends and actual market prices may result in losses for the Portfolio.
Obsolescence
Risk
The
Portfolio is unlikely to be successful unless the assumptions underlying the Models are realistic and either remain realistic and
relevant in the future or are adjusted to account for changes in the overall market environment. If such assumptions are inaccurate
or become inaccurate and are not promptly adjusted, it is likely that profitable trading signals will not be generated. If and
to the extent that a Model does not reflect certain factors major losses may result. Any modification of a Model will not be subject
to any requirement that shareholders receive notice of the change or that they consent to it. There can be no assurance as to the
effects (positive or negative) of any modification of a Model on the Portfolio’s performance.
Crowding/Convergence
There
is significant competition among systematic, trend-following managers, and the ability of the Adviser to deliver returns consistent
with the Portfolio’s objectives and policies is dependent on its ability to employ a trading strategy that is simultaneously
profitable and differentiated from similar trading employed by other managers. To the extent that the Adviser’s trading on
behalf of the Portfolio comes to resemble trading employed by other managers, the risk that a market disruption that negatively
affects its models, and therefore adversely affects the Portfolio, is increased, and such a disruption could accelerate reductions
in liquidity or rapid re-pricing due to simultaneous trading across a number of funds in the marketplace.
Involuntary
Disclosure Risk
As
described above, the ability of the Adviser to achieve the Portfolio’s investment objective is dependent in large part on
its ability to develop and protect its Models and any related proprietary research. The Models and any related proprietary research
are largely protected by the use of policies, procedures, agreements, and similar measures designed to create and enforce robust
confidentiality, non-disclosure, and similar safeguards. However, public disclosure obligations (or disclosure obligations to exchanges
or regulators with insufficient privacy safeguards) could lead to opportunities for competitors to reverse-engineer a Model, and
thereby impair the relative or absolute performance of the Portfolio.
Proprietary
Trading Methods
Because
the Models and the trading methods employed by the Adviser on behalf of the Portfolio are proprietary, a shareholder will not
be able to determine any details of such methods or whether they are being followed.
Securities Economically
Tied to Non-U.S. Markets
An
issuer of a security may be deemed to be economically tied to a particular country if it meets one or more of the following criteria:
(i) the issuer or guarantor of the security is organized under the laws of, or maintains its principal place of business in, such
country; (ii) the currency of settlement of the security is the currency of such country; (iii) the principal trading market for
the security is in such country; (iv) during the issuer’s most recent fiscal year, it derived at least 50% of its revenues
or profits from goods produced or sold, investments made, or services performed in such country or has at least 50% of its assets
in that country; or (v) the issuer is included in an index that is representative of that country. In the event that an issuer
may be considered to be economically tied to more than one country based on these criteria (for example, where the issuer is organized
under the laws of one country but derives at least 50% of its revenues or profits from goods produced or sold in another country),
the adviser may classify the issuer as being economically tied to any country that meets the above criteria in its discretion based
on an assessment of the relevant facts and circumstances.
Securities
Options
The
Portfolio may purchase and write (i.e., sell) put and call options. Such options may relate to particular securities or
stock indices, and may or may not be listed on a domestic or foreign (non-U.S.) securities exchange and may or may not be issued
by the Options Clearing Corporation. Options trading is a highly specialized activity that entails greater than ordinary investment
risk. Options may be more volatile than the underlying instruments, and therefore, on a percentage basis, an investment in options
may be subject to greater fluctuation than an investment in the underlying instruments themselves.
A
call option for a particular security gives the purchaser of the option the right to buy, and the writer (seller) the obligation
to sell, the underlying security at the stated exercise price at any time prior to the expiration of the option, regardless of
the market price of the security. The premium paid to the writer is in consideration for undertaking the obligation under the option
contract. A put option for a particular security gives the purchaser the right to sell the security at the stated exercise price
at any time prior to the expiration date of the option, regardless of the market price of the security.
Stock
index options are put options and call options on various stock indices. In most respects, they are identical to listed options
on common stocks. The primary difference between stock options and index options occurs when index options are exercised. In the
case of stock options, the underlying security, common stock, is delivered. However, upon the exercise of an index option, settlement
does not occur by delivery of the securities comprising the index. The option holder who exercises the index option receives an
amount of cash if the closing level of the stock index upon which the option is based is greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. This amount of cash is equal to the difference between the closing
price of the stock index and the exercise price of the option expressed in dollars times a specified multiple. A stock index fluctuates
with changes in the market value of the stocks included in the index. For example, some stock index options are based on a broad
market index, such as the Standard & Poor’s 500® Index or the Value Line Composite Index or a narrower
market index, such as the Standard & Poor’s 100®. Indices may also be based on an industry or market segment,
such as the NYSE ARCA Oil and Gas Index or the Computer and Business Equipment Index.
Options
on stock indices are currently traded on the Chicago Board Options Exchange, the New York Stock Exchange, the American Stock Exchange,
the Pacific Stock Exchange and the Philadelphia Stock Exchange.
The
Portfolio’s obligation to sell an instrument subject to a call option written by it, or to purchase an instrument subject
to a put option written by it, may be terminated prior to the expiration date of the option by the Portfolio’s execution
of a closing purchase transaction, which is effected by purchasing on an exchange an option of the same series (i.e., same
underlying instrument, exercise price and expiration date) as the option previously written. A closing purchase transaction will
ordinarily be effected to realize a profit on an outstanding option, to prevent an underlying instrument from being called, to
permit the sale of the underlying instrument or to permit the writing of a new option containing different terms on such underlying
instrument. The cost of such a liquidation purchase plus transactions costs may be greater than the premium received upon the original
option, in which event the Portfolio will have incurred a loss in the transaction. There is no assurance that a liquid secondary
market will exist for any particular option. An option writer unable to effect a closing purchase transaction will not be able
to sell the underlying instrument or liquidate the assets held in a segregated account, as described in the Cover Requirements
section, until the option expires or the optioned instrument is delivered upon exercise. In such circumstances, the writer will
be subject to the risk of market decline or appreciation in the instrument during such period.
If
an option purchased by the Portfolio expires unexercised, the Portfolio realizes a loss equal to the premium paid. If the Portfolio
enters into a closing sale transaction on an option purchased by it, the Portfolio will realize a gain if the premium received
by the Portfolio on the closing transaction is more than the premium paid to purchase the option, or a loss if it is less. If an
option written by the Portfolio expires on the stipulated expiration date or if the Portfolio enters into a closing purchase transaction,
it will realize a gain (or loss if the cost of a closing purchase transaction exceeds the net premium received when the option
is sold). If an option written by the Portfolio is exercised, the proceeds of the sale will be increased by the net premium originally
received and the Portfolio will realize a gain or loss.
Certain
Risks Regarding Options
There
are several risks associated with transactions in options. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve
its objectives. In addition, a liquid secondary market for particular options, whether traded over-the-counter or on an exchange,
may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions
may be imposed by an exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of an exchange or the Options Clearing Corporation
may not at all times be adequate to handle current trading value; or one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding
options that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable
in accordance with their terms.
Successful
use by the Portfolio of options on stock indices will be subject to the ability of the adviser to correctly predict movements in
the directions of the stock market. This requires different skills and techniques than predicting changes in the prices of individual
securities. In addition, the Portfolio’s ability to effectively hedge all or a portion of the securities in its portfolio,
in anticipation of or during a market decline, through transactions in put options on stock indices, depends on the degree to which
price movements in the underlying index correlate with the price movements of the securities held by the Portfolio. Inasmuch as
the Portfolio’s securities will not duplicate the components of an index, the correlation will not be perfect. Consequently,
the Portfolio bears the risk that the prices of its securities being hedged will not move in the same amount as the prices of its
put options on the stock indices. It is also possible that there may be a negative correlation between the index and the Portfolio’s
securities that would result in a loss on both such securities and the options on stock indices acquired by the Portfolio.
The
hours of trading for options may not conform to the hours during which the underlying securities are traded. To the extent that
the options markets close before the markets for the underlying securities, significant price and rate movements can take place
in the underlying markets that cannot be reflected in the options markets. The purchase of options is a highly specialized activity
that involves investment techniques and risks different from those associated with ordinary portfolio securities transactions.
The purchase of stock index options involves the risk that the premium and transaction costs paid by the Portfolio in purchasing
an option will be lost as a result of unanticipated movements in prices of the securities comprising the stock index on which the
option is based.
There
is no assurance that a liquid secondary market on an options exchange will exist for any particular option, or at any particular
time, and for some options no secondary market on an exchange or elsewhere may exist. If the Portfolio is unable to close out a
call option on securities that it has written before the option is exercised, the Portfolio may be required to purchase the optioned
securities in order to satisfy its obligation under the option to deliver such securities. If the Portfolio is unable to effect
a closing sale transaction with respect to options on securities
that it has purchased, it would have to exercise the option in order to realize any profit and would incur transaction costs upon
the purchase and sale of the underlying securities.
Options
on Futures Contracts
The
Portfolio may purchase and sell options on the same types of futures in which it may invest. Options on futures are similar to
options on underlying instruments except that options on futures give the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put),
rather than to purchase or sell the futures contract, at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option will
be accompanied by the delivery of the accumulated balance in the writer’s futures margin account which represents the amount
by which the market price of the futures contract, at exercise, exceeds (in the case of a call) or is less than (in the case of
a put) the exercise price of the option on the futures contract. Purchasers of options who fail to exercise their options prior
to the exercise date suffer a loss of the premium paid.
Dealer
Options
The
Portfolio may engage in transactions involving dealer options as well as exchange-traded options. Certain additional risks are
specific to dealer options. While the Portfolio might look to a clearing corporation to exercise exchange-traded options, if the
Portfolio were to purchase a dealer option it would need to rely on the dealer from which it purchased the option to perform if
the option were exercised. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well
as loss of the expected benefit of the transaction.
Exchange-traded
options generally have a continuous liquid market while dealer options may not. Consequently, the Portfolio may generally be able
to realize the value of a dealer option it has purchased only by exercising or reselling the option to the dealer who issued it.
Similarly, when the Portfolio writes a dealer option, the Portfolio may generally be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer to whom the Portfolio originally wrote the option.
While the Portfolio will seek to enter into dealer options only with dealers who will agree to and which are expected to be capable
of entering into closing transactions with the Portfolio, there can be no assurance that the Portfolio will at any time be able
to liquidate a dealer option at a favorable price at any time prior to expiration. Unless the Portfolio, as a covered dealer call
option writer, is able to effect a closing purchase transaction, it will not be able to liquidate securities (or other assets)
used as cover until the option expires or is exercised. In the event of insolvency of the other party, the Portfolio may be unable
to liquidate a dealer option. With respect to options written by the Portfolio, the inability to enter into a closing transaction
may result in material losses to the Portfolio. For example, because the Portfolio must maintain a secured position with respect
to any call option on a security it writes, the Portfolio may not sell the assets, which it has segregated to secure the position
while it is obligated under the option. This requirement may impair the Portfolio’s ability to sell portfolio securities
at a time when such sale might be advantageous.
The
Staff of the SEC has taken the position that purchased dealer options are illiquid securities. The Portfolio may treat the cover
used for written dealer options as liquid if the dealer agrees that the Portfolio may repurchase the dealer options they have written
for a maximum price to be calculated by a predetermined formula. In such cases, the dealer option would be considered illiquid
only to the extent the maximum purchase price under the formula exceeds the intrinsic value of the option. Accordingly, the Portfolio
will treat dealer options as subject to the Portfolio’s limitation on illiquid securities. If the SEC changes its position
on the liquidity of dealer options, the Portfolio will change their treatment of such instruments accordingly.
Spread
Transactions
The
Portfolio may purchase covered spread options from securities dealers. These covered spread options are not presently exchange-listed
or exchange-traded. The purchase of a spread option gives the Portfolio the right to put securities that it owns at a fixed dollar
spread or fixed yield spread in relationship to another security that the Portfolio does not own, but which is used as a benchmark.
The risk to the Portfolio, in addition to the risks of dealer options described above, is the cost of the premium paid as well
as any transaction costs. The purchase of spread options will be used to protect the Portfolio against adverse changes in prevailing
credit quality spreads, i.e., the yield spread between high quality and lower quality securities. This protection is provided
only during the life of the spread options.
Short
Sales
The Portfolio may employ “short
selling” for both (1) investment purposes and (2) for defensive purposes as a hedging strategy. For investment purposes,
when the Adviser believes that particular index, company or sector is relatively overvalued, the Portfolio may sell a security
short with the expectation that it can be repurchased at a lower price, thus generating a gain for the Portfolio. For defensive
purposes, when the Adviser believes that a security or group of securities in the Portfolio is susceptible to a decline in value,
the Portfolio
may sell a security short with the
expectation any decline in value of the security sold short will serve to offset some of the decline in value suffered by the
Portfolio’s portfolio of securities. A short sale strategy is different than a long-only strategy because it consists of
selling borrowed shares in the hope that they can be bought back later at a lower price.
The Portfolio may sell securities short
involving the use of derivative instruments and to offset potential declines in long positions in similar securities. A short sale
is a transaction in which the Portfolio sells a security it does not own or have the right to acquire (or that it owns but does
not wish to deliver) in anticipation that the market price of that security will decline.
When the Portfolio makes a short sale,
the broker-dealer through which the short sale is made must borrow the security sold short and deliver it to the party purchasing
the security. The Portfolio is required to make a margin deposit in connection with such short sales; the Portfolio may have to
pay a fee to borrow particular securities and will often be obligated to pay over any dividends and accrued interest on borrowed
securities.
If the price of the security sold short
increases between the time of the short sale and the time the Portfolio covers its short position, the Portfolio will incur a loss;
conversely, if the price declines, the Portfolio will realize a capital gain. Any gain will be decreased, and any loss increased,
by the transaction costs described above. The successful use of short selling may be adversely affected by imperfect correlation
between movements in the price of the security sold short and the securities being hedged.
To the extent the Portfolio sells
securities short, it will provide collateral to the broker-dealer and (except in the case of short sales “against the box”)
will maintain additional asset coverage in the form of cash, U.S. government securities or other liquid securities with its custodian
in a segregated account in an amount at least equal to the difference between the current market value of the securities sold short
and any amounts required to be deposited as collateral with the selling broker (not including the proceeds of the short sale).
The Portfolio does not intend to enter into short sales (other than short sales “against the box”) if immediately after
such sales the aggregate of the value of all collateral plus the amount in such segregated account exceeds 50% of the value of
the Portfolio’s net assets. This percentage may be varied by action of the Board of Trustees. A short sale is “against
the box” if at all times during which the short position is open, the Portfolio owns at least an equal amount of the securities
or securities convertible into, or exchangeable without further consideration for, securities of the same issue as the securities
that are sold short. Short sales "against the box" may protect the Portfolio against the risk of losses in the value
of a portfolio security because any decline in value of the security should be wholly or partially offset by a corresponding gain
in the short position. Any potential gains in the security, however, would be wholly or partially offset by a corresponding loss
in the short position. Short sales that are not "against the box" involve a form of investment leverage, and the amount
of the Portfolio's loss on a short sale is potentially unlimited.
Short sales create a risk that the Portfolio
will be required to close the short position by buying the security at a time when the security has appreciated in value, thus
resulting in a loss to the Portfolio. A short position in a security poses more risk than holding the same security long. Because
a short position loses value as the security’s price increases, the loss on a short sale is theoretically unlimited.
To the extent that the Portfolio uses
short sales as a hedging technique, the Portfolio is subject to correlation risk. Specifically, the correlation between the security
sold short and the hedged security may be imperfect, reducing the expected benefit to the Portfolio of a short sale, or there may
be no correlation at all. It is possible that the market value of the securities the Portfolio holds in long positions will decline
at the same time that the market value of the securities the Portfolio has sold short increases, thereby increasing the Portfolio’s
potential volatility.
In addition, any gain on a short sale
is decreased, and any loss is increased, by the amount of any payments, such as lender fees, replacement of dividends or interest
that the Portfolio may be required to make with respect to the borrowed securities. Market factors may prevent the Portfolio from
closing out a short position at the most desirable time or at a favorable price. The lender of the borrowed securities may require
the Portfolio to return the securities on short notice, which may require the Portfolio to purchase the borrowed securities at
an unfavorable price, resulting in a loss. You should be aware that any strategy that includes selling securities short could suffer
significant losses. Short selling will also result in higher transaction costs (such as interest and dividends), which reduce the
Portfolio’s return, and may result in higher taxes.
Structured
Notes, Bonds and Debentures
Typically,
the value of the principal and/or interest on these instruments is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indexes or other financial indicators (the “Reference”) or the relevant change
in two or more References. The interest rate or the principal amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the structured securities may provide that in certain circumstances
no principal is due at maturity and, therefore, may result in the loss of the Portfolio’s entire investment. The value of
structured securities may move
in
the same or the opposite direction as the value of the Reference, so that appreciation of the Reference may produce an increase
or decrease in the interest rate or value of the security at maturity. In addition, the change in interest rate or the value of
the security at maturity may be a multiple of the change in the value of the Reference so that the security may be more or less
volatile than the Reference, depending on the multiple. Consequently, structured securities may entail a greater degree of market
risk and volatility than other types of debt obligations.
Swaps
Swap
Agreements
Swap
agreements are typically two-party, uncleared contracts entered into primarily by institutional investors for periods ranging from
a day to more than one 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. The gross returns to be exchanged
or “swapped” between the parties are calculated with respect to a “notional amount,” i.e., the return
on or increase in value of a particular dollar amount invested in a “basket” of securities representing a particular
index. Most swap agreements entered into by the Portfolio calculate the obligations of the parties to the agreement on a
“net basis.” Consequently, the Portfolio’s current obligations (or rights) under a swap agreement will
generally 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”). Payments may be made at the conclusion of a swap agreement
or periodically during its term. Swap agreements often do not involve the delivery of securities or other underlying assets.
Accordingly, if a swap is entered into on a net basis, if the other party to a swap agreement defaults, the Portfolio’s
risk of loss consists of the net amount of payments that the Portfolio is contractually entitled to receive, if any. The
net amount of the excess, if any, of the Portfolio’s obligations over its entitlements with respect to a swap agreement entered
into on a net basis will be accrued daily and an amount of cash or liquid asset having an aggregate NAV at least equal to the accrued
excess will be maintained in an account with the Portfolio’s custodian that satisfies the 1940 Act. The Portfolio will
also establish and maintain such accounts with respect to its total obligations under any swaps that are not entered into on a
net basis. Obligations under swap agreements so covered will not be construed to be “senior securities” for purposes
of the Portfolio’s investment restriction concerning senior securities. Because most swap agreements are two-party
contracts and may have terms of greater than seven days, swap agreements may be considered to be illiquid for the Portfolio illiquid
investment limitations. The Portfolio will not enter into any swap agreement unless the adviser believes that the other party
to the transaction is creditworthy. The Portfolio bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement counterparty.
The
Portfolio may enter into a swap agreement in circumstances where the adviser believes that it may be more cost effective or practical
than buying the underlying securities or a futures contract or an option on such securities. The counterparty to any swap
agreement will typically be a bank, investment banking firm or broker/dealer. The counterparty will generally agree to pay
the Portfolio the amount, if any, by which the notional amount of the swap agreement would have increased in value had it been
invested in the particular stocks, futures contracts or other underlying assets represented in the index, plus the dividends that
would have been received on those instruments. The Portfolio will agree to pay to the counterparty a floating rate of interest
on the notional amount of the swap agreement plus the amount, if any, by which the notional amount would have decreased in value
had it been invested in such stocks, futures contracts or other underlying assets. Therefore, the return to the Portfolio
on any swap agreement should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by
the Portfolio on the notional amount.
The
Portfolio may enter into total return swap agreements. Total return swap agreements are contracts in which one party agrees to
make periodic payments based on the change in market value of underlying assets, which may include a specified security, futures
contract, basket of securities or futures contracts, defined portfolios of bonds, loans and mortgages, or securities indices during
the specified period, in return for periodic payments based on a fixed or variable interest rate or the total return from other
underlying assets. Total return swap agreements may be used to obtain exposure to a security, commodity or market without owning
or taking physical custody of such security, commodity or market. Total return swap agreements may effectively add leverage to
the Portfolio’s portfolio because, in addition to its total net assets, the Portfolio would be subject to investment exposure
on the notional amount of the swap. Total return swaps are a mechanism for the user to accept the economic benefits of asset ownership
without utilizing the balance sheet. The other leg of the swap, usually the London Interbank Offered Rate (LIBOR), is spread to
reflect the non-balance sheet nature of the product. Total return swaps can be designed with any underlying asset agreed between
two parties. Typically no notional amounts are exchanged with total return swaps. Total return swap agreements entail the risk
that a party will default on its payment obligations to the Portfolio thereunder. Swap agreements also entail the risk that the
Portfolio will not be able to meet its obligation to the counterparty. Generally, the Portfolio will enter into total return swaps
on a net basis (i.e., the two payment streams are netted out with the Portfolio receiving or paying, as the case may be,
only the net amount of the two payments).
The
swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison
with the markets for other similar instruments that are traded in the over-the-counter market. The adviser, under the supervision
of the Board, is responsible for determining and monitoring the liquidity of Portfolio transactions in swap agreements. The use
of equity swaps is a highly specialized activity that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions.
Credit
Default Swaps
In
a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return
in the event of a default by a third party, typically an emerging country, on its obligation. The Portfolio may use credit default
swaps to provide a measure of protection against defaults of sovereign issuers (i.e., to reduce risk where the Portfolio
owns or has exposure to the sovereign issuer) and may use credit default swaps to take an active long or short position with respect
to the likelihood of a particular issuer’s default. In connection with these agreements, cash or liquid securities may be
set aside as collateral by the Portfolio’s custodian in accordance with the terms of the swap agreement. The Portfolio earns
interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change
in value, if any, is recorded as unrealized gain or loss. These financial instruments are not actively traded on financial markets.
The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation,
these values may differ significantly from the values that would have been realized had a ready market for these instruments existed,
and the differences could be material. Payments received or made at the end of the measurement period are recorded as realized
gain or loss. Entering into these agreements involves, to varying degrees, elements of credit, market, and documentation risk.
Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements
may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, and that there may
be unfavorable changes in interest rates.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and related regulatory developments
requires the clearing and exchange-trading of certain interest rate swaps and credit default swaps. Under the Dodd-Frank Act, certain
derivatives will potentially become subject to margin requirements and swap dealers will potentially be required to collect margin
from the Portfolio with respect to such derivatives.
Technology
Risk
The Adviser uses various technologies
in managing the Portfolio, consistent with the Portfolio’s investment objective and strategy described in the Prospectus.
For example, proprietary and third-party data and systems are utilized to support decision making for the Portfolio. Data imprecision,
software or other technology malfunctions, programming inaccuracies and similar circumstances may impair the performance of these
systems, which may negatively impact the Portfolio.
Temporary
Defensive Position
In
anticipation of or in response to adverse market, economic, political or other conditions, the Portfolio may take temporary defensive
positions (up to 100% of its assets) in cash, cash equivalents and short term U.S. government securities. If the Portfolio were
to take a temporary defensive position, its opportunity to achieve upside return may be limited; however, the ability to be fully
defensive is an integral part of achieving the Portfolio’s investment objective.
Time
Deposits and Variable Rate Notes
The
Portfolio may invest in fixed time deposits, whether or not subject to withdrawal penalties. The commercial paper obligations which
the Portfolio may buy are unsecured and may include variable rate notes. The nature and terms of a variable rate note (i.e.,
a “Master Note”) permit the Portfolio to invest fluctuating amounts at varying rates of interest pursuant to a direct
arrangement between the Portfolio as lender, and the issuer,
as borrower. It permits daily changes in the amounts borrowed. The Portfolio has the right at any time to increase, up to the full
amount stated in the note agreement, or to decrease the amount outstanding under the note. The issuer may prepay at any time and
without penalty any part of or the full amount of the note. The note may or may not be backed by one or more bank letters of credit.
Because these notes are direct lending arrangements between the Portfolio and the issuer, it is not generally contemplated that
they will be traded; moreover, there is currently no secondary market for them. Except as specifically provided in the Prospectus,
there is no limitation on the type of issuer from whom these notes may be purchased; however, in connection with such purchase
and on an ongoing basis, the adviser will consider the earning power, cash flow and other liquidity ratios of the issuer, and its
ability to pay principal and interest on demand, including a situation in which all holders of such notes made demand simultaneously.
Variable
rate notes are subject to the Portfolio’s investment restriction on illiquid securities unless such notes can be put back
to the issuer on demand within seven days.
Trading
in Futures Contracts
A
futures contract provides for the future sale by one party and purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a stock index) for a specified price, date, time and place designated at the time the contract
is made. Brokerage fees are incurred when a futures contract is bought or sold and margin deposits must be maintained. Entering
into a contract to buy is commonly referred to as buying or purchasing a contract or holding a long position. Entering into a contract
to sell is commonly referred to as selling a contract or holding a short position.
Unlike
when the Portfolio purchases or sells a security, no price would be paid or received by the Portfolio upon the purchase or sale
of a futures contract. Upon entering into a futures contract, and to maintain the Portfolio’s open positions in futures contracts,
the Portfolio would be required to deposit with its futures broker in a segregated account an amount of cash, U.S. Government securities,
suitable money market instruments, or other liquid securities, known as “initial margin.”
The
margin required for a particular futures contract is set by the exchange on which the contract is traded, and may be significantly
modified from time to time by the exchange during the term of the contract. Futures contracts are customarily purchased and sold
on margins that may range upward from less than 5% of the value of the contract being traded.
If
the price of an open futures contract changes (by increase in underlying instrument or index in the case of a sale or by decrease
in the case of a purchase) so that the loss on the futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However, if the value of a position increases because of
favorable price changes in the futures contract so that the margin deposit exceeds the required margin, the broker will pay the
excess to the Portfolio.
These
subsequent payments, called “variation margin,” to and from the futures broker, are made on a daily basis as the price
of the underlying assets fluctuate making the long and short positions in the futures contract more or less valuable, a process
known as “marking to the market.” The Portfolio expects to earn interest income on its margin deposits.
Although
certain futures contracts, by their terms, require actual future delivery of and payment for the underlying instruments, in practice
most futures contracts are usually closed out before the delivery date. Closing out an open futures contract purchase or sale is
effected by entering into an offsetting futures contract sale or purchase, respectively, for the same aggregate amount of the identical
underlying instrument or index and the same delivery date. If the offsetting purchase price is less than the original sale price,
the Portfolio realizes a gain; if it is more, the Portfolio realizes a loss. Conversely, if the offsetting sale price is more than
the original purchase price, the Portfolio realizes a gain; if it is less, the Portfolio realizes a loss. The transaction costs
must also be included in these calculations. There can be no assurance, however, that the Portfolio will be able to enter into
an offsetting transaction with respect to a particular futures contract at a particular time. If the Portfolio is not able to enter
into an offsetting transaction, the Portfolio will continue to be required to maintain the margin deposits on the futures contract.
For
example, one contract in the Financial Times Stock Exchange 100 Index future is a contract to buy 25 pounds sterling multiplied
by the level of the UK Financial Times 100 Share Index on a given future date. Settlement of a stock index futures contract may
or may not be in the underlying instrument or index. If not in the underlying instrument or index, then settlement will be made
in cash, equivalent over time to the difference between the contract price and the actual price of the underlying asset at the
time the stock index futures contract expires.
The
Portfolio’s futures contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations
and other reasons. For example, commodity exchanges limit fluctuations in certain futures contract prices during a single day
by regulations referred to as “daily limits.” During a single day, no trades may be executed at prices beyond the
daily limit. Once the price of a futures contract for a particular commodity has increased or decreased by an amount equal to
the daily limit, positions in the commodity futures contracts can neither be taken nor liquidated unless the traders are willing
to effect trades at or within the limit. Futures contract prices have occasionally moved the daily limit for several consecutive
days with little or no trading. Such market conditions could prevent the Portfolio from promptly liquidating its futures contracts.
United
States Government Obligations
The
Portfolio may invest in United States Government Obligations. These consist of various types of marketable securities issued by
the United States Treasury, i.e., bills, notes and bonds. Such securities are direct obligations of the United States government
and differ
mainly
in the length of their maturity. Treasury bills, the most frequently issued marketable government security, have a maturity of
up to one year and are issued on a discount basis.
Receipts
Interests in separately traded
interest and principal component parts of U.S. government obligations that are issued by banks or brokerage firms and are created
by depositing U.S. government obligations into a special account at a custodian bank. The custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the
certificates or receipts evidencing ownership and maintains the register. Treasury Receipts (“TRs”) and Separately
Traded Registered Interest and Principal Securities (“STRIPS”) are interests in accounts sponsored by the U.S. Treasury.
Receipts are sold as zero coupon securities.
U.S. Government Zero Coupon
Securities
STRIPS and receipts are sold as
zero coupon securities, that is, fixed income securities that have been stripped of their unmatured interest coupons. Zero coupon
securities are sold at a (usually substantial) discount and redeemed at face value at their maturity date without interim cash
payments of interest or principal. The amount of this discount is accreted over the life of the security, and the accretion constitutes
the income earned on the security for both accounting and tax purposes. Because of these features, the market prices of zero coupon
securities are generally more volatile than the market prices of securities that have similar maturity but that pay interest periodically.
Zero coupon securities are likely to respond to a greater degree to interest rate changes than are non-zero coupon securities with
similar maturity and credit qualities.
U.S. Treasury Obligations
U.S. Treasury obligations consist
of bills, notes and bonds issued by the U.S. Treasury and separately traded interest and principal component parts of such obligations
that are transferable through the federal book-entry system known as STRIPS and TRs.
United
States Government Agency
The
Portfolio may invest in securities issued by United States Government Agencies. These consist of fixed income securities issued
by agencies and instrumentalities of the United States Government, including the various types of instruments currently outstanding
or which may be offered in the future. Agencies include, among others, the Federal Housing Administration, Government National
Mortgage Association (“GNMA”), Export-Import Bank of the United States, Maritime Administration, and General Services
Administration. Instrumentalities include, for example, each of the Federal Home Loan Banks, the National Bank for Cooperatives,
the Federal Home Loan Mortgage Corporation (“FHLMC”), the Farm Credit Banks, the Federal National Mortgage Association
(“FNMA”), and the United States Postal Service. These securities are either: (i) backed by the full faith and credit
of the United States government (e.g., United States Treasury Bills); (ii) guaranteed by the United States Treasury (e.g.,
GNMA mortgage-backed securities); (iii) supported by the issuing agency’s or instrumentality’s right to borrow from
the United States Treasury (e.g., FNMA Discount Notes); or (iv) supported only by the issuing agency’s or instrumentality’s
own credit (e.g., Tennessee Valley Association).
Mortgage-backed securities issued by
the Federal National Mortgage Association (“Fannie Mae”) include Fannie Mae Guaranteed Mortgage Pass-Through Certificates,
which are solely the obligations of Fannie Mae and are not backed by or entitled to the full faith and credit of the United States,
except as described below, but are supported by the right of the issuer to borrow from the U.S. Treasury. Fannie Mae is a stockholder-owned
corporation chartered under an Act of the U.S. Congress. Fannie Mae certificates are guaranteed as to timely payment of the principal
and interest by Fannie Mae. Mortgage-related securities issued by the Federal Home Loan Mortgage Corporation (“Freddie Mac”)
include Freddie Mac Mortgage Participation Certificates. Freddie Mac is a corporate instrumentality of the United States, created
pursuant to an Act of Congress. Freddie Mac certificates are not guaranteed by the United States or by any Federal Home Loan Banks
and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Freddie Mac certificates entitle
the holder to timely payment of interest, which is guaranteed by Freddie Mac. Freddie Mac guarantees either ultimate collection
or timely payment of all principal payments on the underlying mortgage loans. When Freddie Mac does not guarantee timely payment
of principal, Freddie Mac may remit the amount due on account of its guarantee of ultimate payment of principal after default.
From time to time, proposals have been
introduced before Congress for the purpose of restricting or eliminating federal sponsorship of Fannie Mae and Freddie Mac. The
Trust cannot predict what legislation, if any, may be proposed in the future in Congress with regard
to
such sponsorship or which proposals, if any, might be enacted. Such proposals, if enacted, might materially and adversely affect
the availability of government guaranteed mortgage-backed securities and the Portfolio’s liquidity and value.
There is risk that the U.S. government
will not provide financial support to its agencies, authorities, instrumentalities or sponsored enterprises. The Portfolio may
purchase U.S. government securities that are not backed by the full faith and credit of the United States, such as those issued
by Fannie Mae and Freddie Mac. The maximum potential liability of the issuers of some U.S. government securities held by the Portfolio
may greatly exceed their current resources, including their legal right to support from the U.S. Treasury. It is possible that
these issuers will not have the funds to meet their payment obligations in the future.
The volatility and disruption that impacted
the capital and credit markets during late 2008 and into 2009 have led to increased market concerns about Freddie Mac’s and
Fannie Mae’s ability to withstand future credit losses associated with securities held in their investment portfolios, and
on which they provide guarantees, without the direct support of the federal government. On September 7, 2008, both Freddie
Mac and Fannie Mae were placed under the conservatorship of the Federal Housing Finance Agency (“FHFA”).
Under the plan of conservatorship, the
FHFA has assumed control of, and generally has the power to direct, the operations of Freddie Mac and Fannie Mae, and is empowered
to exercise all powers collectively held by their respective shareholders, directors and officers, including the power to: (1) take
over the assets of and operate Freddie Mac and Fannie Mae with all the powers of the shareholders, the directors, and the officers
of Freddie Mac and Fannie Mae and conduct all business of Freddie Mac and Fannie Mae; (2) collect all obligations and money
due to Freddie Mac and Fannie Mae; (3) perform all functions of Freddie Mac and Fannie Mae which are consistent with the conservator’s
appointment; (4) preserve and conserve the assets and property of Freddie Mac and Fannie Mae; and (5) contract for assistance
in fulfilling any function, activity, action or duty of the conservator. In addition, in connection with the actions taken by the
FHFA, the U.S. Treasury Department (the “Treasury”) entered into certain preferred stock purchase agreements with each
of Freddie Mac and Fannie Mae which established the Treasury as the holder of a new class of senior preferred stock in each of
Freddie Mac and Fannie Mae, which stock was issued in connection with financial contributions from the Treasury to Freddie Mac
and Fannie Mae.
The conditions attached to the financial
contribution made by the Treasury to Freddie Mac and Fannie Mae and the issuance of this senior preferred stock placed significant
restrictions on the activities of Freddie Mac and Fannie Mae. Freddie Mac and Fannie Mae must obtain the consent of the Treasury
to, among other things: (i) make any payment to purchase or redeem its capital stock or pay any dividend other than in respect
of the senior preferred stock issued to the Treasury, (ii) issue capital stock of any kind, (iii) terminate the conservatorship
of the FHFA except in connection with a receivership, or (iv) increase its debt beyond certain specified levels. In addition,
significant restrictions were placed on the maximum size of each of Freddie Mac’s and Fannie Mae’s respective portfolios
of mortgages and mortgage-backed securities, and the purchase agreements entered into by Freddie Mac and Fannie Mae provide that
the maximum size of their portfolios of these assets must decrease by a specified percentage each year. The future status and role
of Freddie Mac and Fannie Mae could be impacted by (among other things): the actions taken and restrictions placed on Freddie Mac
and Fannie Mae by the FHFA in its role as conservator; the restrictions placed on Freddie Mac’s and Fannie Mae’s operations
and activities as a result of the senior preferred stock investment made by the Treasury; market responses to developments at Freddie
Mac and Fannie Mae; and future legislative and regulatory action that alters the operations, ownership, structure and/or mission
of these institutions, each of which may, in turn, impact the value of, and cash flows on, any mortgage-backed securities guaranteed
by Freddie Mac and Fannie Mae, including any such mortgage-backed securities held by the Portfolio.
As a result of the economic recession
that commenced in the United States in 2008, there is a heightened risk that the receivables and loans underlying the asset-backed
securities purchased by the Portfolio may suffer greater levels of default than was historically experienced.
Warrants
Warrants
are options to purchase common stock at a specific price (usually at a premium above the market value of the optioned common stock
at issuance) valid for a specific period of time. Warrants may have a life ranging from less than one year to twenty years, or
they may be perpetual. However, most warrants have expiration dates after which they are worthless. In addition, a warrant is
worthless if the market price of the common stock does not exceed the warrant’s exercise price during the life of the warrant.
Warrants have no voting rights, pay no dividends, and have no rights with respect to the assets of the corporation issuing them.
The percentage increase or decrease in the market price of the warrant may tend to be greater than the percentage increase or
decrease in the market price of the optioned common stock.
When-Issued,
Forward Commitments and Delayed Settlements
The
Portfolio may purchase and sell securities on a when-issued, forward commitment or delayed settlement basis. In this event, the
Custodian (as defined under the section entitled “Custodian”) will segregate liquid assets equal to the amount of the
commitment in a separate account as discussed in the Cover Requirements section. Normally, the Custodian will set aside portfolio
securities to satisfy a purchase commitment. In such a case, the Portfolio may be required subsequently to segregate additional
assets in order to assure that the value of the account remains equal to the amount of the Portfolio’s commitment. It may
be expected that the Portfolio’s net assets will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash.
The
Portfolio does not intend to engage in these transactions for speculative purposes but only in furtherance of its investment objectives.
Because the Portfolio will segregate liquid assets to satisfy its purchase commitments in the manner described, the Portfolio’s
liquidity and the ability of the adviser to manage them may be affected in the event the Portfolio’s forward commitments,
commitments to purchase when-issued securities and delayed settlements ever exceeded 15% of the value of its net assets.
The
Portfolio will purchase securities on a when-issued, forward commitment or delayed settlement basis only with the intention of
completing the transaction. If deemed advisable as a matter of investment strategy, however, the Portfolio may dispose of or renegotiate
a commitment after it is entered into, and may sell securities it has committed to purchase before those securities are delivered
to the Portfolio on the settlement date. In these cases the Portfolio may realize a taxable capital gain or loss. When the Portfolio
engages in when-issued, forward commitment and delayed settlement transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in the Portfolio incurring a loss or missing an opportunity to obtain a price
credited to be advantageous.
The
market value of the securities underlying a when-issued purchase, forward commitment to purchase securities, or a delayed settlement
and any subsequent fluctuations in their market value is taken into account when determining the market value of the Portfolio
starting on the day the Portfolio agrees to purchase the securities. The Portfolio does not earn interest on the securities it
has committed to purchase until it has paid for and delivered on the settlement date.
INVESTMENT
RESTRICTIONS
The Portfolio
has adopted the following investment restrictions that may not be changed without approval by a “majority of the outstanding
shares” of the Portfolio which, as used in this SAI, means the vote of the lesser of (a) 67% or more of the shares of the
Portfolio represented at a meeting, if the holders of more than 50% of the outstanding shares of the Portfolio are present or represented
by proxy, or (b) more than 50% of the outstanding shares of the Portfolio.
1. Borrowing
Money. The Portfolio may not borrow money, except to the extent permitted under applicable securities laws.
2. Senior
Securities. The Portfolio may not issue senior securities, except to the extent permitted under applicable securities laws.
3. Underwriting.
The Portfolio may not act as an underwriter of securities of other issuers, except to the extent that the Portfolio may be considered
an underwriter under applicable securities laws in the disposition of portfolio securities or in the purchase of securities directly
from the issuer thereof.
4. Concentration.
The Portfolio may not purchase any security (other than U.S. Government Securities or securities of other investment companies)
if as a result more than 25% of the Portfolio’s total assets, taken at market value at the time of investment, would be invested
in the securities of issuers whose principal business activities are in the same industry.
5. Real Estate.
The Portfolio may not purchase or sell real estate unless acquired as a result of ownership of securities or other instruments,
but this policy shall not prevent the Portfolio from investing in securities or other instruments backed by real estate (e.g.,
REITs) or in securities of issuers engaged in the real estate business.
6. Commodities.
The Portfolio may purchase or sell commodities to the extent permitted by applicable law from time to time.
7. Loans. The
Portfolio may not make loans, except to the extent permitted under the 1940 Act, the rules and regulations promulgated thereunder,
and any applicable exemptive relief.
THE FOLLOWING
ARE ADDITIONAL INVESTMENT LIMITATIONS OF THE PORTFOLIO. THE FOLLOWING RESTRICTIONS ARE DESIGNATED AS NON-FUNDAMENTAL AND MAY BE
CHANGED BY THE BOARD OF TRUSTEES OF THE TRUST WITHOUT THE APPROVAL OF SHAREHOLDERS.
1. Pledging.
The Portfolio will not mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any assets of the
Portfolio except as may be necessary in connection with borrowings described in limitation (1) above. Margin deposits, security
interests, liens and collateral arrangements with respect to transactions involving options, futures contracts, short sales and
other permitted investments and techniques are not deemed to be a mortgage, pledge or hypothecation of assets for purposes of this
limitation.
2. Borrowing.
The Portfolio will not purchase any security while borrowings representing more than one third of its total assets are outstanding.
3. Margin Purchases.
The Portfolio may not purchase securities on margin, except for use of short-term credit necessary for clearance of purchases and
sales of portfolio securities, but it may make margin deposits in connection with covered transactions in options, futures, options
on futures and short positions. For purposes of this restriction, the posting of margin deposits or other forms of collateral in
connection with swap agreements is not considered purchasing securities on margin.
4. Illiquid
Investments. The Portfolio will not invest more than 15% of its net assets in securities for which there are legal or contractual
restrictions on resale and other illiquid securities. However, if more than 15% of Portfolio net assets are illiquid, the Portfolio's
Adviser will reduce illiquid assets such that they do not represent more than 15% of Portfolio assets, subject to timing and other
considerations which are in the best interests of the Portfolio and its shareholders.
If a restriction
on the Portfolio’s investments is adhered to at the time an investment is made, a subsequent change in the percentage of
Portfolio assets invested in certain securities or other instruments, or change in average duration of the Portfolio’s investment
portfolio, resulting from changes in the value of the Portfolio’s total assets, will not be considered a violation of the
restriction; provided, however, that the asset coverage requirement applicable to borrowings shall be maintained in the manner
contemplated by applicable law.
POLICIES
AND PROCEDURES FOR DISCLOSURE OF PORTFOLIO HOLDINGS
The Trust has
adopted policies and procedures that govern the disclosure of the Portfolio’s portfolio holdings. These policies and procedures
are designed to ensure that such disclosure is in the best interests of the Portfolio’s shareholders.
It is the Trust’s
policy to: (1) ensure that any disclosure of portfolio holdings information is in the best interest of Trust shareholders;
(2) protect the confidentiality of portfolio holdings information; (3) have procedures in place to guard against personal trading
based on the information; and (4) ensure that the disclosure of portfolio holdings information does not create conflicts between
the interests of the Trust’s shareholders and those of the Trust’s affiliates.
The Portfolio
discloses its portfolio holdings by mailing its annual and semi-annual reports to shareholders approximately two months after the
end of the fiscal year and semi-annual period. The Portfolio also discloses its portfolio holdings reports on Form N-CSR and Form
N-Q or, beginning in April 2020, Form N-PORT (Form N-Q’s successor form) two months after the end of each quarter/semi-annual
period.
The Portfolio
may choose to make portfolio holdings available to rating agencies such as Lipper, Morningstar or Bloomberg earlier and more frequently
on a confidential basis.
Under limited
circumstances, as described below, the Portfolio’s portfolio holdings may be disclosed to, or known by, certain third parties
in advance of their filing with the SEC on Form N-CSR or Form N-Q (or as an exhibit to its reports on Form N-Q’s successor
form, Form N-PORT). In each case, a determination has been made by the Trust’s Chief Compliance Officer that such advance
disclosure is supported by a legitimate business purpose of the Portfolio and that the recipient is subject to a duty to keep the
information confidential.
·
The Adviser. Personnel of the Adviser, including personnel responsible for managing the Portfolio’s portfolio, may have
full daily access to portfolio holdings since that information is necessary in order for the Adviser to provide its management,
administrative, and investment services to the Portfolio. As required for purposes of analyzing the impact of existing and future
market changes on the prices, availability, demand and liquidity of such securities, as well as for the assistance of the portfolio
managers in the trading of such securities, Adviser personnel may also release and discuss certain portfolio holdings with various
broker-dealers.
·
Gemini Fund Services, LLC is the transfer agent, fund accountant, administrator and custody administrator for the Portfolio;
therefore, its personnel have full daily access to the Portfolio’s portfolio holdings since that information is necessary
in order for them to provide the agreed-upon services for the Trust.
·
MUFG Union Bank, N.A. is custodian for the Portfolio; therefore, its personnel have full daily access to the Portfolio’s
portfolio holdings since that information is necessary in order for them to provide the agreed-upon services for the Trust.
·
Grant Thornton LLP is the Portfolio’s independent registered public accounting firm; therefore, its personnel have access
to the Portfolio’s portfolio holdings in connection with auditing of the Portfolio’s annual financial statements and preparation
of the Portfolio’s tax returns.
·
Blank Rome LLP is counsel to the Portfolio; therefore, its personnel have access to the Portfolio’s portfolio holdings
in connection with review of the Portfolio’s annual and semi-annual shareholder reports and SEC filings.
Additions
to List of Approved Recipients. The Portfolio’s Chief Compliance Officer is the person responsible, and whose prior
approval is required, for any disclosure of the Portfolio’s portfolio securities at any time or to any persons other than
those described above. In such cases, the recipient must have a legitimate business need for the information in connection
with the operation or administration of a Fund, as determined by the Trust’s Chief Compliance Officer, and must be subject
to a duty to keep the information confidential. There are no ongoing arrangements in place with respect to the disclosure of portfolio
holdings. In no event shall the Portfolio, the Adviser or any other party receive any direct or indirect compensation in connection
with the disclosure of information about the Portfolio’s portfolio holdings.
Compliance
With Portfolio Holdings Disclosure Procedures. The Trust’s Chief Compliance Officer will report periodically to
the Board with respect to compliance with the Portfolio’s portfolio holdings disclosure procedures, and from time to time
will provide the Board any updates to the portfolio holdings disclosure policies and procedures.
There is no
assurance that the Trust’s policies on disclosure of portfolio holdings will protect the Portfolio from the potential misuse
of holdings information by individuals or firms in possession of that information.