Mutual funds are not bank accounts and are neither insured nor guaranteed
by the FDIC or any other government agency. An investment in any mutual fund entails the risk of losing money.
STATEMENT OF ADDITIONAL
INFORMATION
BURNHAM ENERGY INCOME AND
MLP FUND
B[ ]X (Class A)
B[ ]X (Class C)
B[ ] (Class I)
XXXXX, 2013
This Statement of Additional
Information (“SAI”) is not a prospectus. It should be read in conjunction with the prospectuses dated XXXXX, 2013,
as applicable, of the Burnham Energy Income and MLP Fund (the “Fund”), each of which is incorporated by reference herein.
The information in this SAI expands on information contained in the prospectus. The prospectus can be obtained without charge on
the Fund’s website at www.burnhamfunds.com or by contacting either the dealer through whom you purchased shares or the transfer
agent at
1-800-462-2392.
TABLE OF CONTENTS
BURNHAM INVESTORS TRUST
Burnham Investors Trust (the
“Trust”), located at 1325 Avenue of the Americas, 26th Floor, New York, New York 10019, is an open-end management investment
company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Trust currently consists
of three other series of shares of beneficial interest. This SAI relates only to the Fund and not to the other series of the Trust,
each of which is a separate portfolio of investments with its own investment objective. The Fund is a new portfolio that will commence
operations after the effectiveness of its registration with the Securities and Exchange Commission.
The Trust was organized as
a Delaware statutory trust on August 20, 1998. The Trust is the surviving entity of the reorganization of the Burnham Fund, Inc.
(the “Corporation”), a Maryland corporation, effected on April 30, 1999. Before the reorganization, the Corporation
was an open-end management investment company in operation since 1961, consisting of a single series, the Burnham Fund, Inc. Some
of the information in this Statement of Additional Information (“SAI”) relates to the Corporation before the reorganization.
INVESTMENT TECHNIQUES AND
RELATED RISKS
References in this section
to the “Adviser” include Burnham Asset Management Corporation and the Fund’s sub-adviser.
EQUITY INVESTMENTS
Unless noted otherwise, the
investment techniques below may be employed by the Fund.
Common Shares.
Common
shares represent an equity (i.e.
,
ownership) interest in a company or other entity. This ownership interest often gives
the Fund the right to vote on measures affecting the company’s organization and operations. Although common shares generally
have a history of long-term growth in value, their prices, particularly those of smaller capitalization companies, are often volatile
in the short-term.
Preferred Shares.
Preferred shares represent a limited equity interest in a company or other entity and frequently have debt-like features. Preferred
shares are often entitled only to dividends at a specified rate, and have a preference over common shares with respect to dividends
and on liquidation of assets. Preferred shares generally have less voting rights than common shares. Because their dividends are
often fixed, the value of some preferred shares fluctuates inversely with changes in interest rates.
Convertible Securities.
Convertible securities are bonds, preferred shares and other securities that pay a fixed rate of interest or dividends. However,
they offer the buyer the additional option of converting the security into common stock. The value of convertible securities depends
partially on interest rate changes and the credit quality of the issuer. The value of convertible securities is also sensitive
to company, market and other economic news, and will change based on the price of the underlying common stock. Convertible securities
generally have less potential for gain than common stock, but also less potential for loss, since their income provides a cushion
against the stock’s price declines. However, because the buyer is also exposed to the risk and reward potential of the underlying
stock, convertible securities generally pay less income than similar non-convertible securities.
Warrants and Rights.
Warrants and rights are securities that permit, but not obligate, their holder to purchase the underlying equity or fixed-income
securities at a predetermined price. Generally, warrants and rights do not carry with them the right to receive dividends on or
exercise voting rights concerning the underlying equity securities. Further, they do not represent any rights in the assets of
the issuer. In addition, the value of warrants and rights do not necessarily change with the value of the underlying securities,
and they become worthless if they are not exercised on or before their expiration date. As a result, an investment in warrants
or rights may entail greater investment risk than certain other types of investments.
Energy Sector Investments.
The energy sector includes industries involved the production and sale of energy, including fuel extraction, manufacturing, refining
and distribution. Such investments could be disproportionately affected by events affecting the energy sector, including: changes
in national and international economic and
political conditions, companies
in the energy sector may fall out of favor, concentration of investments may increase the volatility of the value of the fund’s
investments.
Royalty Trusts.
The Fund may
invest in U.S. royalty trusts and Canadian royalty trusts.
U.S. royalty trusts passively manage royalties
and net working interests in mature oil and gas producing properties in the United States. U.S. royalty trusts generally do not
acquire new properties and have no employees or other operations. U.S. royalty trusts are generally not subject to U.S. federal
corporate income taxation at the trust or entity level. Instead, each unitholder of the U.S. royalty trust is required to take
into account its share of all items of the U.S. royalty trust’s income, gain, loss, deduction and expense. It is possible
that the Fund’s share of taxable income from a U.S. royalty trust may exceed the cash actually distributed to it from the
U.S. royalty trust in a given year. In such a case, the Fund will have less after-tax cash available for distribution to shareholders.
As a result, the Fund is limited to investing no more than 10% in U.S. royalty trusts.
Canadian royalty trusts are similar to U.S. royalty
trusts in that the principal business of Canadian royalty trusts is the production and sale of crude oil and natural gas. Unlike
U.S. royalty trusts, Canadian royalty trusts may engage in the acquisition, development and production of natural gas and crude
oil to replace depleting reserves. Thus Canadian royalty trusts may grow through acquisition of additional oil and gas properties
or producing companies with proven reserves, funded through the issuance of additional equity or debt. As a result, Canadian royalty
trusts are exposed to commodity risk and production and reserve risk, as well as operating risk.
Royalty Trust Risks.
Royalty trusts generally do not guarantee minimum distributions or even return of capital. If the assets underlying a royalty trust
do not perform as expected, the royalty trust may reduce or even eliminate distributions. The declaration of such distributions
generally depends upon various factors, including the operating performance and financial condition of the royalty trust and general
economic conditions. Canadian royalty trusts are generally subject to similar risks as U.S. royalty trusts, as described above.
However, unlike U.S. royalty trusts, Canadian Royalty trusts may engage in the acquisition, development and production of natural
gas and crude oil to replace depleting reserves. They have employees, issue new shares, borrow money, acquire additional properties
and may manage the resources themselves. As a result, Canadian royalty trusts are exposed to commodity risk and production and
reserve risk, as well as operating risk.
General
Master Limited Partnership (MLPs) and Energy Trusts.
MLPs are limited partnerships in which the ownership units are
publicly traded. MLP units are registered with the SEC and are freely traded on a securities exchange or in the over-the-counter
market. Generally, a MLP is operated under the supervision of one or more managing general partners. Limited partners (like the
Fund that invests in a MLP) are not involved in the day-to-day management of the partnership. They are allocated income and capital
gains associated with the partnership project in accordance with the terms established in the partnership agreement. MLPs make
distributions that are similar to dividends, and these are generally paid out on a quarterly basis. Some distributions received
by the Fund with respect to its investments in MLPs may, if distributed by the Fund, be treated as a return of capital because
of accelerated deductions available with respect to the activities of such MLPs and the MLPs’ distribution policies. Generally
speaking, MLP investment returns are enhanced during periods of declining/low interest rates and tend to be negatively influenced
when interest rates are rising. As an income vehicle, the unit price can be influenced by general interest rate trends independent
of specific underlying fundamentals. In addition, most MLPs are fairly leveraged and typically carry a portion of "floating"
rate debt. As such, a significant upward swing in interest rates would also drive interest expense higher. Furthermore, most MLPs
grow by acquisitions partly financed by debt, and higher interest rates could make it more difficult to transact accretive acquisitions.
MLPs are generally engaged in the transportation, storage, processing, refining, marketing, exploration, production, and mining
of minerals and natural resources. To the extent that an MLP's interests are all in the energy and natural resources sector, the
MLP will, accordingly, be negatively impacted by economic events impacting this industry. The risks of investing in a MLP are generally
those involved in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often
less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded to investors in a
MLP than investors in a corporation. In addition, MLPs may be subject to state taxation in certain jurisdictions which will have
the effect of reducing the amount of income paid by the MLP to its investors.
Energy and Natural Resources Risk
.
Under normal circumstances, the Fund concentrates its investments in the energy and natural resources sector. The energy and natural
resources sector includes companies principally engaged in owning or developing non-energy natural resources (including timber
and minerals) and industrial materials, or
supplying goods
or services to such companies. The Fund’s investments in energy companies operating in the natural resources sector will
be subject to the risk that prices of these securities may fluctuate widely in response to the level and volatility of commodity
prices; exchange rates; import controls; domestic and global competition; environmental regulation and liability for environmental
damage; mandated expenditures for safety or pollution control; the success of exploration projects; depletion of resources; tax
policies; and other governmental regulation. Investments in the natural resources sector can be significantly affected by changes
in the supply of or demand for various natural resources. The value of investments in the natural resources sector may be adversely
affected by a change in inflation.
The energy and natural resources sector includes a number of risks, including the following:
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General MLP Risk and Energy Trust Risk – MLPs and Energy Trusts historically have shown sensitivity to interest rate
movements. In an increasing interest rate environment, MLPs and energy trusts may experience upward pressure on their yields in
order to stay competitive with other interest rate sensitive securities. Also, a significant portion of the market value of an
MLP and energy trusts may be based upon its current yield. Accordingly, the prices of MLP units may be sensitive to fluctuations
in interest rates and may decline when interest rates rise.
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MLP Units Risk – Investment in MLP units involves some risks which differ from an investment in the common stock of a
corporation. Holders of MLP units generally have limited control and voting rights on matters affecting the partnership. The value
of the Fund’s investment in MLPs depends largely on the MLPs being treated as partnerships for U.S. federal income tax purposes.
If an MLP does not meet current legal requirements to maintain partnership status, or if it is unable to do so because of tax law
changes, it would be taxed as a corporation and there could be a material decrease in the value of its securities.
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MLP Tax Risk. MLPs do not pay U.S. federal income tax at the partnership level. Rather, each partner is allocated a share of
the partnership’s income, gain, losses, deductions and expenses. A change in current tax, or a change in the underlying business
mix of a given MLP, could result in an MLP being treated as a corporation for U.S. federal income tax purposes, which would result
in such MLP being required to pay U.S. federal income tax on its taxable income. The classification of an MLP as a corporation
for U.S. federal income tax purposes would have the effect of reducing the amount of cash available for distribution by the MLP.
Thus, if any of the MLPs owned by the Fund were treated as a corporation for U.S. federal income tax purposes, it could result
in a reduction of the value of the Fund’s investment, and consequently you investment in the Fund and lower income.
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Supply and Demand Risk – A decrease in the production of natural gas, natural gas liquids,
crude oil, coal or other. The energy commodities, a decrease in the volume of such commodities available for transportation, mining,
processing, storage or distribution, or a sustained decline in demand for such commodities, may adversely impact the financial
performance of companies operating in the energy sector. These companies are subject to supply and demand fluctuations in the markets
they serve, which will be impacted by a wide range of factors, including fluctuating commodity prices, weather, increased conservation
or use of alternative fuel sources, increased governmental or environmental regulation, depletion, rising interest rates, declines
in domestic or foreign production, accidents or catastrophic events and economic conditions, among others. If a supply source decides
to restrict supply to the United States or is unable to meet demand, some MLP cash flows may be adversely impacted.
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Depletion and Exploration Risk – Energy reserves naturally deplete as they are consumed
over time. Energy companies that are either engaged in the production of energy commodities or in their transporting, storing,
distributing or processing rely on the expansion of reserves through exploration of new sources of supply or the development of
existing sources in order to grow or maintain their revenues. The financial performance of energy companies may be adversely affected
if they, or the companies to whom they provide services, are unable to cost-effectively acquire additional energy deposits sufficient
to replace the natural decline of existing reserves.
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Regulatory Risk – Energy companies are subject to significant federal, state and local
government regulation in virtually every aspect of their operations, including how facilities are constructed, maintained and operated,
environmental and safety controls and the prices they may charge for the products and services they provide. Various governmental
authorities have the power to enforce compliance with these regulations and the permits issued under them. Companies that violate
such regulations are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both. Stricter
laws,
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regulations or enforcement policies could be enacted in the future, which would likely increase
compliance costs and may adversely affect the financial performance of energy companies.
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Marine Transportation Companies Risk – Marine transportation (or “tanker” companies)
are exposed to the highly cyclical nature of the tanker industry and may be subject to volatile changes in charter rates and vessel
values, which may adversely affect the earnings of tanker companies. Fluctuations in charter rates and vessel values result from
changes in the supply and demand for tanker capacity and changes in the supply and demand for oil and oil products. Tanker company
vessels are at risk of damage or loss because of events such as mechanical failure, collision, human error, war, terrorism, piracy,
cargo loss and bad weather. These sorts of events could interfere with shipping lanes and result in market disruptions and a significant
loss of tanker company earnings.
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Commodity Pricing Risk – The return on investments in energy companies is partly dependent
on the prices received by those companies for the exploration, development, production, gathering, transportation, processing,
storing, refining, distribution, mining or marketing of energy commodities such as natural gas, natural gas liquids, crude oil,
refined petroleum products or coal. These prices may fluctuate widely in response to a variety of factors, including global and
domestic economic conditions, weather conditions, the supply and price of imported energy commodities, the production and storage
levels of energy commodities in certain regions or in the world, political stability, transportation facilities, energy conservation,
domestic and foreign governmental regulation and taxation and the availability of local, intrastate and interstate transportation
systems. Volatility of commodity prices also may make it more difficult for energy companies to raise capital to the extent the
market perceives that their performance may be directly or indirectly tied to commodity prices.
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Weather Risk – Weather plays a role in the seasonality of some MLP’s cash flows.
MLPs in the propane industry, for example, rely on the winter season to generate almost all of their earnings. In an unusually
warm winter season, propane MLP experience decreased demand for their product. Although most MLP can reasonably predict
seasonal weather demand based on normal weather patterns, extreme weather conditions, such as the hurricanes that severely damaged
cities along the Gulf Coast in recent years, demonstrate that no amount of preparation can protect an MLP from the unpredictability
of the weather. The damage done by extreme weather also may serve to increase many MLP’s insurance premiums.
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Cash Flow Risk – The amount and tax characterization of cash available for distribution
by an MLP depends upon the amount of cash generated by its operations. Cash available for distribution by MLP will vary
widely from quarter to quarter and is affected by various factors affecting the MLPs’ operations. In addition
to the risks described herein, operating costs, capital expenditures, acquisition costs, construction costs, exploration costs
and borrowing costs may reduce the amount of cash that an MLP has available for distribution in a given period.
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Acquisition Risk – The abilities of MLPs to grow and to increase distributions can be highly
dependent on their ability to make acquisitions that result in an increase in cash available for distributions. Recently, the acquisition
market has become more competitive as a result of the increased amount of MLPs, as well as significant private equity interest
in midstream energy assets. Almost all MLPs have been active in the third-party acquisition market. As a result, the competitive
nature of the market has resulted in higher multiples, which may reduce the attractiveness of returns on acquisitions. Accordingly,
MLPs may be unable to make accretive acquisitions because they are unable to identify attractive acquisition candidates, negotiate
acceptable purchase contracts, raise financing for such acquisitions on economically acceptable terms or because they are outbid
by competitors. Any acquisition involves risks, including, among other risks, mistaken assumptions about revenues and costs, the
assumption of unknown liabilities, limitations on rights to indemnity from the seller, the diversion of management’s attention
from other business concerns, unforeseen difficulties operating in new product or geographic areas and customer or key employee
losses at the acquired businesses.
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Catastrophe Risk – The operations of energy companies are subject to many hazards inherent
in the exploring, transporting, processing, storing and distributing of energy commodities. These hazards may include damage to
pipelines, storage tanks or related equipment and surrounding properties caused by hurricanes, tornadoes, floods, fires and other
natural disasters or by acts of terrorism; inadvertent damage from construction equipment; leaks; and fires and explosions. These
risks could result in substantial losses due to personal injury or loss of life, severe damage to and destruction of property and
equipment and
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pollution or other environmental damage and may result in the curtailment or suspension of their
related operations. Not all energy companies are fully insured against all risks inherent to their businesses. If
a significant accident or event occurs that is not fully insured, it could adversely affect the energy company’s operations
and financial condition.
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Natural Resources Sector Risk – The natural resources sector includes companies principally
engaged in owning or developing non-energy natural resources (including timber and minerals) and industrial materials, or supplying
goods or services to such companies. The Fund’s investments in MLPs and other energy companies operating in the natural resources
sector will be subject to the risk that prices of these securities may fluctuate widely in response to the level and volatility
of commodity prices; exchange rates; import controls; domestic and global competition; environmental regulation and liability for
environmental damage; mandated expenditures for safety or pollution control; the success of exploration projects; depletion of
resources; tax policies; and other governmental regulation. Investments in the natural resources sector can be significantly affected
by changes in the supply of or demand for various natural resources. The value of investments in the natural resources sector may
be adversely affected by a change in inflation.
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Utility Risk.
The
Fund invests in companies in the Utility industry. The following is a brief outline of risk factors associated with investment
in the utilities industry.
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Regulatory Risks – Regulators (primarily at the state level) monitor and control
public utility company revenues and costs. Regulators can limit profits and dividends paid to investors; they also may restrict
a company’s access to new markets. Some analysts observe that state regulators have become increasingly active in developing
and promoting energy policy through the regulatory process.
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Natural Resources Risks – Swift and unpredictable changes in the price and supply
of natural resources can hamper utility company profitability. These changes may be caused by political events, energy conservation
programs, the success of exploration projects, or tax and other regulatory policies of various governments.
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Environmental Risks – There are considerable costs associated with environmental
compliance, nuclear waste cleanup and safety regulation. For example, coal-burning utilities are under pressure to curtail sulfur
emissions, and utilities in general increasingly are called upon by regulators to bear environmental costs, which may not be easily
recovered through rate increases or business growth.
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Small Capitalization Companies.
The Fund may invest in U.S. and foreign companies with market capitalizations of $2.1 billion or less. Investing in the common
stock of smaller companies involves special risks and considerations not typically associated with investing in the common stock
of larger companies. The securities of smaller companies may experience more market price volatility than the securities of larger
companies. These companies are typically subject to more dramatic changes in earnings and business prospects than larger, more
established companies. In addition, the securities of smaller companies are less liquid because they tend to trade over-the-counter
or on regional exchanges, and the frequency and volume of their trading are often substantially less than for securities of larger
companies.
Investment Companies.
The Fund may acquire securities of another investment company if, immediately after such acquisition, the Fund does not own in
the aggregate: (1) more than 3% of the total outstanding voting stock of such other investment company; (2) securities issued by
such other investment company having an aggregate value exceeding 5% of the Fund’s total assets; or (3) securities issued
by such other investment company and all other investment companies having an aggregate value exceeding 10% of the Fund’s
total assets. Investing in another registered investment company may result in duplication of fees and expenses. These limits will
not apply to the investment of uninvested cash balances in shares of registered or unregistered money market funds whether affiliated
or unaffiliated. The foregoing exemption, however, only applies to an unregistered money market funds that (i) limits its investments
to those in which a money market fund may invest under Rule 2a-7 of the 1940 Act, and (ii) undertakes to comply with all the other
provisions of Rule 2a-7.
Exchange-Traded Funds
(“ETFs”).
The Fund may invest in exchange-traded funds, including Standard & Poor’s Ratings Services
(“S&P”) Depositary Receipts (“SPDRs”), Nasdaq 100 Index Tracking Stock (“QQQs”), Dow Jones
Industrial Average Tracking Stock (“Diamonds”) and iShares
sm
exchange-traded funds (“iShares”).
ETFs are
shares of publicly-traded
unit investment trusts, open-end mutual funds, or depositary receipts that hold portfolios of common stocks which track the performance
and dividend yield of specific indices or companies in related industries. These indices may be either broad-based, sector or international.
The benchmark indices of SPDRs and QQQs are the S&P 500 Composite Stock Index and the Nasdaq-100 Index, respectively. The benchmark
index for iShares varies, generally corresponding to the name of the particular iShares fund. Broad-based exchange-traded funds
track a broad group of stocks from different industries and market sectors. HOLDRS (Holding company Depositary Receipts) are securities
that represent an investor’s ownership in the common stock of specified companies in a particular industry, sector or group.
International ETFs track a group of stocks from a specific country.
Investments in ETFs are generally
subject to limits under the 1940 Act on investments in other investment companies. ETF shareholders are subject to the same risks
as holders of diversified stock portfolios. ETFs are subject to certain risks, including: (1) the risk that their prices may not
correlate perfectly with changes in the underlying index; and (2) the risk of possible trading halts due to market conditions or
other reasons that, in the view of the exchange upon which an ETF trades, would make trading in the ETF inadvisable. An exchange-traded
sector fund may also be adversely affected by the performance of that specific sector or group of industries on which it is based.
Because ETFs trade on an exchange, they may not trade at net asset value per share (“NAV”). Sometimes, the prices of
ETFs may vary significantly from the aggregate value of the ETF’s underlying securities. If the Fund elects to redeem its
ETF shares rather than sell them on the secondary market, the Fund may receive the underlying securities, which it must then sell
in order to obtain cash. Additionally, you may pay a proportionate share of the expenses of the ETF in addition to the expenses
of the Fund.
SPDRs, QQQs and Diamonds
are shares of publicly-traded unit investment trusts that own the stocks in the S&P 500, Nasdaq 100 and Dow Jones Industrial
Average, respectively, in approximately the same proportions as represented in each respective index. Because of the structural
features of these ETFs, the Adviser believes that the movement of the share prices of SPDRs, QQQs and Diamonds should closely track
the movement of each ETF’s respective index. Each tracking index program bears operational expenses, which are deducted from
the dividends paid to investors in the ETF.
iShares are shares of an
investment company that invests substantially all of its assets in securities included in specified indices or various countries
and regions. iShares are listed on the New York Stock Exchange (“NYSE”) Arca. The market prices of iShares fluctuate
in accordance with both changes in the NAV of their underlying indices and supply and demand of iShares on the NYSE Arca.
Real Estate Investment
Trusts (“REITs”).
REITs are pooled investment vehicles that invest primarily in income producing real estate or
real estate related loans or interests. REITs are generally classified as equity REITs, mortgage REITs or a combination of equity
and mortgage REITs. Equity REITs invest most of their assets directly in real property and derive income primarily from the collection
of rents. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest
most of their assets in real estate mortgages and derive income from interest payments. Like investment companies, REITs are not
taxed on income distributed to shareholders if they comply with several requirements of the Internal Revenue Code of 1986, as amended
(the “Code”). The Fund will indirectly bear its proportionate share of any expenses (such as operating expenses and
advisory fees) paid by REITs in which it invests in addition to the expenses paid by the Fund.
Risks Associated with
the Real Estate Industry.
Although the Fund that invests in REITs does not invest directly in real estate, it does invest primarily
in real estate equity securities and may concentrate its investments in the real estate industry, and, therefore, an investment
in the Fund may be subject to certain risks associated with the direct ownership of real estate and with the real estate industry
in general. These risks include, among others:
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possible declines in the value of real estate;
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adverse general or local economic conditions;
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possible lack of availability of mortgage loans;
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extended vacancies of properties;
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increases in competition, property taxes and operating
expenses;
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changes in zoning or applicable tax law;
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costs resulting from the clean-up of, and liability
to third parties for
damages resulting from, environmental problems;
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casualty or condemnation losses;
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uninsured damages from floods, earthquakes or other
natural disasters;
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limitations on and variations in rents; and
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unfavorable changes in interest rates.
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In addition, if the Fund
has rental income or income from the disposition of real property acquired as a result of a default on securities the Fund owns,
the receipt of such income may adversely affect its ability to retain its tax status as a regulated investment company. Investments
by the Fund in securities of companies providing mortgage servicing will be subject to the risks associated with refinancings and
their impact on servicing rights.
FIXED-INCOME INVESTMENTS
Temporary Defensive Investments.
For temporary and defensive purposes, the Fund may invest up to 100% of its total assets in investment grade short-term fixed-income
securities (including short-term U.S. Government securities, money market instruments, including negotiable certificates of deposit,
non-negotiable fixed time deposits, bankers’ acceptances, commercial paper and floating rate notes) and repurchase agreements.
The Fund may also hold significant amounts of its assets in cash, subject to the applicable percentage limitations for short-term
securities. The Fund will not be achieving its primary investment objective to the extent it takes a temporary defensive position.
General Characteristics
and Risks of Fixed-Income Securities.
Bonds and other fixed-income securities are used by issuers to borrow money from investors.
The issuer pays the investor a fixed or variable rate of interest, and must repay the principal amount at maturity. Some fixed-income
securities, such as zero coupon bonds, do not pay current interest, but are purchased at a discount from their face values. Fixed-income
securities have varying degrees of quality and varying maturities.
Credit Ratings.
In
general, the ratings of Moody’s Investors Service, Inc. (“Moody’s”), S&P and Fitch Ratings represent
the opinions of these agencies as to the credit quality of the securities that they rate. However, these ratings are relative and
subjective and are not absolute standards of quality. In addition, changes in these ratings may significantly lag changes in an
issuer’s creditworthiness. Changes by recognized agencies in the rating of any fixed-income security or in the ability of
the issuer to make payments of interest and principal will also affect the value of the security.
After its purchase by the
Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum required for purchase by the
Fund. Neither of these events will necessarily require the Adviser, on behalf of the Fund, to sell the securities.
Lower Rated High Yield
Fixed-Income Securities.
The Fund may also invest in debt securities of any maturity, duration or credit quality, including
lower rated high yield fixed-income securities, from any government or corporate issuer, U.S. or foreign. Lower rated high yield
fixed-income securities are those rated below Baa3 by Moody’s, or below BBB- by S&P or Fitch Ratings, or securities which
are unrated and determined by the Adviser to be of comparable quality. Lower rated securities are generally referred to as high
yield bonds or junk bonds. The risk of default and the price volatility associated with it are greater for junk bonds than for
bonds of investment grade issuers. See Appendix A attached to this SAI for a description of the rating categories. The Fund may
invest in eligible unrated securities which, in the opinion of the Adviser, offer comparable risks to those associated with permissible
rated securities.
Debt obligations rated in
the lower ratings categories, or which are unrated, involve greater volatility of price and risk of loss of principal and income.
In addition, lower ratings reflect a greater possibility of an adverse change in financial condition affecting the ability of the
issuer to make payments of interest and principal. The market price and liquidity of lower rated fixed-income securities generally
respond to short-term economic, corporate and market
developments more dramatically
than do higher rated securities. These developments are perceived to have a more direct relationship to the ability of an issuer
of lower rated securities to meet its ongoing debt obligations.
Reduced volume and liquidity
in the high yield bond market, or the reduced availability of market quotations, will make it more difficult to dispose of the
bonds and accurately value the Fund’s assets. The reduced availability of reliable, objective pricing data may increase the
Fund’s reliance on management’s judgment in valuing high yield bonds. To the extent that the Fund invests in these
securities, the achievement of the Fund’s objective will depend more on the Adviser’s judgment and analysis than it
would otherwise be. In addition, high yield securities in the Fund’s portfolio may be susceptible to adverse publicity and
investor perceptions, whether or not these perceptions are justified by fundamental factors. In the past, economic downturns and
increases in interest rates have caused a higher incidence of default by the issuers of lower rated securities and may do so in
the future, particularly with respect to highly leveraged issuers.
Corporate Debt Securities.
Investment in U.S. dollar or foreign currency-denominated corporate debt securities of domestic or foreign issuers is limited to
corporate bonds, debentures, notes and other similar corporate debt instruments, including convertible securities and including
corporate income-producing securities, which meet the minimum ratings criteria. The fund’s investments in corporate bonds
will generally be of short to medium-term maturities and, on average, will have a credit rating of A.
Credit Risk.
Credit
risk relates to the ability of an issuer to pay interest and principal as they become due. Generally, lower quality, higher yielding
bonds are subject to more credit risk than higher quality, lower yielding bonds. A default by the issuer of, or a downgrade in
the credit rating assigned to, a fixed-income security in the Fund’s portfolio will reduce the value of the security.
Interest Rate Risk.
Interest rate risk refers to the fluctuations in value of fixed-income securities resulting solely from the inverse relationship
between the market value of outstanding fixed-income securities and changes in interest rates. An increase in interest rates will
generally reduce the market value of fixed-income investments, and a decline in interest rates will tend to increase their value.
In addition, debt securities with longer maturities, which tend to produce higher yields, are subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities. Fluctuations in the market value of fixed-income securities
after their acquisition will not affect the cash interest payable on those securities but will be reflected in the valuations of
those securities used to compute the Fund’s NAV.
Call (Prepayment) Risk
and Extension Risk.
Call risk is the risk that an issuer will pay principal on an obligation earlier than scheduled or expected,
which would accelerate cash flows from, and shorten the average life and duration of, the security. This typically happens when
interest rates have declined, and the Fund will suffer from having to reinvest in lower yielding securities.
Extension risk is the risk
that an issuer may pay principal on an obligation slower than expected. This typically happens when interest rates have increased.
Slower than expected prepayments will have the effect of extending the average life and duration of the obligation and possibly
of the Fund’s fixed-income portfolio.
Prepayments that are faster
or slower than expected may reduce the value of the affected security.
Maturity and Duration.
The effective maturity of an individual portfolio security in which the Fund invests is defined as the period remaining until the
earliest date when the Fund can recover the principal amount of such security through mandatory redemption or prepayment by the
issuer, the exercise by the Fund of a put option, demand feature or tender option granted by the issuer or a third party or the
payment of the principal on the stated maturity date. The effective maturity of variable rate securities is calculated by reference
to their coupon reset dates. Thus, the effective maturity of a security may be substantially shorter than its final stated maturity.
Duration is a measure of
a debt security’s price sensitivity taking into account expected cash flows and prepayments under a wide range of interest
rate scenarios. In computing the duration of its portfolio, the Fund will have to estimate the duration of obligations that are
subject to prepayment or redemption by the issuer taking into account the influence of interest rates on prepayments and coupon
flows. The Fund may use various techniques to shorten or lengthen the option-adjusted duration of its fixed-income portfolio, including
the acquisition of debt obligations at premium or discount, and the use of mortgage swaps and interest rate swaps, caps, floors
and collars.
Bank and Corporate Obligations.
Commercial paper represents short-term unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations
and finance companies. The commercial paper purchased by the Fund consists of direct obligations of domestic or foreign issuers.
Bank obligations in which the Fund may invest include certificates of deposit, bankers’ acceptances and fixed time deposits.
Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified
return. Bankers’ acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay
for specific merchandise, which are “accepted” by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a stated maturity date
and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties that vary depending upon market conditions and the remaining maturity of the obligation. There are no contractual
restrictions on the right to transfer a beneficial interest in a fixed time deposit to a third party, although there is no market
for such deposits. Bank notes and bankers’ acceptances rank junior to domestic deposit liabilities of the bank and equal
to other senior, unsecured obligations of the bank. Bank notes are not insured by the Federal Deposit Insurance Corporation (“FDIC”)
or any other insurer. Deposit notes are insured by the FDIC only to the extent of $250,000 per depositor per bank (on January 1,
2014, the standard coverage limit will return, unless extended by the FDIC, to $100,000).
Repurchase Agreements.
The Fund may enter repurchase agreements with approved banks and broker-dealers. In a repurchase agreement, the Fund purchases
securities with the understanding that they will be repurchased by the seller at a set price on a set date. This allows the Fund
to keep its assets at work but retain overnight flexibility pending longer term investments.
Repurchase agreements involve
credit risk. For example, if a seller defaults, the Fund will suffer a loss if the proceeds from the sale of the collateral are
lower than the repurchase price. If the seller becomes bankrupt, the Fund may be delayed or incur additional costs to sell the
collateral. To minimize risk, collateral must be held with the Fund’s custodian and at least equal the market value of the
securities subject to the repurchase agreement plus any accrued interest. Repurchase agreements collateralized entirely by cash
or U.S. government securities may be deemed to be fully collateralized pursuant to Rule 2a-7 under the 1940 Act and may be deemed
to be investments in cash or U.S. government securities.
U.S. Government Securities.
U.S. Government securities include: U.S. Department of the Treasury (“Treasury”) obligations and obligations issued
or guaranteed by U.S. Government agencies, instrumentalities or sponsored enterprises, which are supported by:
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the full faith and credit of the Treasury (such as the Government
National Mortgage Association (“GNMA”));
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the right of the issuer to borrow from the Treasury (
e.g.,
Federal Home Loan Banks):
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the discretionary authority of the U.S. Government to purchase certain
obligations of the issuer (
e.g.,
Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan
Mortgage Corporation (“FHLMC”)): or
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only the credit of the agency and a perceived “moral obligation”
of the U.S. Government.
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No assurance can be given
that the U.S. Government will provide financial support to U.S. Government agencies, authorities, instrumentalities or sponsored
enterprises that are not supported by the full faith and credit of the United States. Securities guaranteed as to principal and
interest by the U.S. Government, its agencies, authorities or instrumentalities include: (1) securities for which the payment of
principal and interest is backed by an irrevocable letter of credit issued by the U.S. Government or any of its agencies, authorities
or instrumentalities; and (2) participations in loans made to non U.S. Governments or other entities that are so guaranteed. The
secondary market for certain of these participations is limited and, therefore, may be regarded as illiquid.
U.S. Government securities
also include Treasury receipts, zero coupon bonds, Treasury inflation-indexed bonds, deferred interest securities and other stripped
U.S. Government securities. The interest and principal components of stripped U.S. Government securities are traded independently.
Treasury inflation-indexed obligations provide a
measure of protection against
inflation by adjusting the principal amount for inflation. The semi-annual interest payments on these obligations are equal to
a fixed percentage of the inflation-adjusted principal amount.
Mortgage-Backed Securities.
The Fund may invest only in those mortgage-backed securities that meet its credit quality and portfolio maturity requirements.
Mortgage-backed securities represent participation interests in pools of adjustable and fixed rate mortgage loans secured by real
property.
Unlike conventional debt
obligations, mortgage-backed securities provide monthly payments derived from the monthly interest and principal payments (including
any prepayments) made by the individual borrowers on the pooled mortgage loans. The mortgage loans underlying mortgage-backed securities
are generally subject to a greater rate of principal prepayments in a declining interest rate environment and to a lesser rate
of principal prepayments in an increasing interest rate environment. Under certain interest rate and prepayment scenarios, the
Fund may fail to recover the full amount of its investment in mortgage-backed securities notwithstanding any direct or indirect
governmental or agency guarantee. Since faster than expected prepayments must usually be invested in lower yielding securities,
mortgage-backed securities are less effective than conventional bonds in “locking” in a specified interest rate. In
a rising interest rate environment, a declining prepayment rate may extend the average life of many mortgage-backed securities.
Extending the average life of a mortgage-backed security reduces its value and increases the risk of depreciation due to future
increases in market interest rates.
The Fund’s investments
in mortgage-backed securities may include conventional mortgage pass through securities and certain classes of multiple class collateralized
mortgage obligations (“CMOs”). Mortgage pass-through securities are fixed or adjustable rate mortgage-backed securities
that provide for monthly payments that are a “pass-through” of the monthly interest and principal payments (including
any prepayments) made by the individual borrowers on the pooled mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans. CMOs are issued in multiple classes, each having different maturities,
interest rates, payment schedules and allocations of principal and interest on the underlying mortgages. Senior CMO classes will
typically have priority over residual CMO classes as to the receipt of principal and/or interest payments on the underlying mortgages.
The CMO classes in which the Fund may invest include but are not limited to sequential and parallel pay CMOs, including planned
amortization class (“PAC”) and target amortization class (“TAC”) securities. Sequential pay CMOs apply
payments of principal, including any prepayments, to each class of CMO in the order of the final distribution date. Thus, no payment
of principal is made on any class until all other classes having an earlier final distribution date have been paid in full. Parallel
pay CMOs apply principal payments and prepayments to two or more classes concurrently on a proportionate or disproportionate basis.
The simultaneous payments are taken into account in calculating the final distribution date of each class. The Fund may invest
in the most junior classes of CMOs, which involve the most interest rate, prepayment and extension risk.
Different types of mortgage-backed
securities are subject to different combinations of prepayment, extension, interest rate and other market risks. Conventional mortgage
pass through securities and sequential pay CMOs are subject to all of these risks, but are typically not leveraged. PACs, TACs
and other senior classes of sequential and parallel pay CMOs involve less exposure to prepayment, extension and interest rate risk
than other mortgage-backed securities, provided that prepayment rates remain within expected prepayment ranges or “collars.”
To the extent that the prepayment rates remain within these prepayment ranges, the residual or support tranches of PAC and TAC
CMOs assume the extra prepayment, extension and interest rate risks associated with the underlying mortgage assets.
Agency Mortgage Securities.
The Fund may invest in mortgage-backed securities issued or guaranteed by the U.S. Government, foreign governments or any of their
agencies, instrumentalities or sponsored enterprises. Agencies, instrumentalities or sponsored enterprises of the U.S. Government
include but are not limited to the GNMA, Fannie Mae and FHLMC. GNMA securities are backed by the full faith and credit of the U.S.
Government, which means that the U.S. Government guarantees that the interest and principal will be paid when due. Fannie Mae securities
and FHLMC securities are not backed by the full faith and credit of the U.S. Government; however, these enterprises have the ability
to obtain financing from the Treasury. Although the U.S. Government has recently provided financial support to Fannie Mae and FHLMC,
no assurance can be given that the U.S. Government will provide financial support in the future to securities not backed by the
full faith and credit of the U.S. Government. There are several types of agency mortgage securities currently available, including,
but not limited to, guaranteed mortgage pass-through certificates and multiple class securities.
Privately-Issued Mortgage-Backed
Securities.
Mortgage-backed securities may also be issued by trusts or other entities formed or sponsored by private originators
of and institutional investors in mortgage loans and other foreign or domestic non-governmental entities (or represent custodial
arrangements administered by such institutions). These private originators and institutions include domestic and foreign savings
and loan associations, mortgage bankers, commercial banks, insurance companies, investment banks and special purpose subsidiaries
of the foregoing. Privately issued mortgage-backed securities are generally backed by pools of conventional (
i.e.,
non-government
guaranteed or insured) mortgage loans.
These mortgage-backed securities
are not guaranteed by an entity having the credit standing of a U.S. Government agency. In order to receive a high quality rating,
they normally are structured with one or more types of “credit enhancement.” These credit enhancements fall generally
into two categories: (1) liquidity protection and (2) protection against losses resulting after default by a borrower and liquidation
of the collateral. Liquidity protection refers to the providing of cash advances to holders of mortgage-backed securities when
a borrower on an underlying mortgage fails to make its monthly payment on time. Protection against losses resulting after default
and liquidation is designed to cover losses resulting when, for example, the proceeds of a foreclosure sale are insufficient to
cover the outstanding amount on the mortgage. This protection may be provided through guarantees, insurance policies or letters
of credit, through various means of structuring the transaction or through a combination of such approaches.
Mortgage securities issued
by non-government entities may be subject to greater credit risk than those issued by government entities. The performance of privately-issued
mortgage securities may depend on the integrity and competence of the institutions that originate the underlying mortgages, yet
investors in these mortgage securities may have only limited access to information enabling investors to evaluate the practices
of these mortgage originators. In order to prevent defaults by troubled mortgage borrowers, the sponsors of mortgage securities
may have to renegotiate and investors in mortgage securities may have to accept less favorable interest rates or other terms on
the mortgages underlying these securities. Unanticipated mortgage defaults or renegotiations of mortgage terms are likely to depress
the prices of related mortgage securities. Although mortgage securities may be supported by some form of government or private
guarantee and/or insurance, there is no assurance that private guarantors or insurers will meet their obligations. Guarantees,
insurance and other forms of credit enhancement supporting mortgage securities may also be insufficient to cover all losses on
underlying mortgages if mortgage borrowers default at a greater than expected rate.
Asset-Backed Securities.
Asset-backed securities represent individual interests in pools of consumer loans, home equity loans, trade receivables, credit
card receivables, and other debt and are similar in structure to mortgage-backed securities. The assets are securitized either
in a pass-through structure (similar to a mortgage pass-through structure) or in a pay-through structure (similar to a CMO structure).
Asset-backed securities may be subject to more rapid repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During periods of declining interest rates, prepayment of certain
types of loans underlying asset-backed securities can be expected to accelerate. Accordingly, the Fund’s ability to maintain
positions in these securities will be affected by reductions in the principal amount of the securities resulting from prepayments,
and the Fund must reinvest the returned principal at prevailing interest rates, which may be lower. Asset-backed securities may
also be subject to extension risk during periods of rising interest rates.
Asset-backed securities entail
certain risks not presented by mortgage-backed securities. The collateral underlying asset-backed securities may be less effective
as security for payments than real estate collateral. Debtors may have the right to set off certain amounts owed on the credit
cards or other obligations underlying the asset-backed security, or the debt holder may not have a first (or proper) security interest
in all of the obligations backing the receivable because of the nature of the receivable or state or federal laws protecting the
debtor. Certain collateral may be difficult to locate in the event of default, and recoveries on depreciated or damaged collateral
may not fully cover payments due on these securities. The Fund may invest in any type of asset-backed security if the Adviser determines
that the security is consistent with the Fund’s investment objective and policies.
Floating Rate/Variable
Rate Notes.
Some notes purchased by the Fund may have variable or floating interest rates. Variable rates are adjustable at
stated periodic intervals; floating rates are automatically adjusted according to a specified market rate for such investments,
such as the percentage of the prime rate of a bank, or the 91-day U.S. Treasury Bill rate. These obligations may be secured by
bank letters of credit or other support arrangements. If a security would not satisfy the Fund’s credit quality standards
without such a credit support, the entity providing a bank letter or line of credit, guarantee or loan commitment must meet the
Fund’s credit quality standards.
The absence of an active
secondary market for certain variable and floating rate notes could make it difficult for the Fund to dispose of the instruments,
and the Fund could suffer a loss if the issuer defaults or there are periods during which the Fund is not entitled to exercise
its demand rights. Variable and floating rate instruments held by the Fund will be subject to the Fund’s limitation on investments
in illiquid securities if a reliable trading market for the instruments does not exist, and the Fund cannot demand payment of the
principal amount of such instruments within seven days.
Structured Securities.
Structured securities include notes, bonds or debentures that provide for the payment of principal of and/or interest in amounts
determined by reference to changes in the value of specific currencies, interest rates, commodities, indices or other financial
indicators (the “Reference”) or the relative 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 structured securities may provide that in certain circumstances no principal is due at maturity and, therefore, may result in
the loss of the Fund’s investment. Structured securities may be positively or negatively indexed, 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. Consequently,
leveraged structured securities entail a greater degree of market risk than other types of debt obligations. Structured securities
may also be more volatile, less liquid and more difficult to accurately price than less complex fixed-income investments.
Pay-In-Kind, Delayed Payment
and Zero Coupon Bonds.
These securities are generally issued at a discount from their face value because cash interest payments
are typically postponed until maturity or after a stated period. The amount of the discount rate varies depending on such factors
as the time remaining until maturity, prevailing interest rates, the security’s liquidity and the issuer’s credit quality.
These securities also may take the form of debt securities that have been stripped of their interest payments. The market prices
of pay-in-kind, delayed payment and zero coupon bonds generally are more volatile than the market prices of securities that pay
interest periodically and in cash, and are likely to respond more to changes in interest rates than interest-bearing securities
having similar maturities and credit quality. The Fund generally accrues income on securities that are issued at a discount and/or
do not make current cash payments of interest for tax and accounting purposes. This income is required to be distributed to shareholders.
The Fund’s investments in pay-in-kind, delayed payment and zero coupon bonds may require the Fund to sell portfolio securities
to generate sufficient cash to satisfy its income distribution requirements.
FOREIGN SECURITIES
The Fund may invest in the
securities of corporate and governmental issuers located in or doing business in a foreign country (“foreign issuers”).
A company is considered to be located in or doing business in a foreign country if it satisfies at least one of the following criteria:
(i) the equity securities of the company are traded principally on stock exchanges in one or more foreign countries; (ii) it derives
50% or more of its total revenue from goods produced, sales made or services performed in one or more foreign countries; (iii)
it maintains 50% or more of its assets in one or more foreign countries; (iv) it is organized under the laws of a foreign country;
or (v) its principal executive offices are located in a foreign country.
ADRs, EDRs, IDRs and GDRs.
American Depositary Receipts (“ADRs”) (sponsored or unsponsored) are receipts typically issued by a U.S. bank, trust
company or other entity and evidence ownership of the underlying foreign securities. Most ADRs are traded on a U.S. stock exchange.
Issuers of unsponsored ADRs are not contractually obligated to disclose material information in the U.S., so there may not be a
correlation between this information and the market value of the unsponsored ADR. European Depositary Receipts (“EDRs”)
and International Depositary Receipts (“IDRs”) are receipts typically issued by a European bank or trust company evidencing
ownership of the underlying foreign securities. Global Depositary Receipts (“GDRs”) are receipts issued by either a
U.S. or non-U.S. banking institution evidencing ownership of the underlying foreign securities.
Sovereign Debt Obligations.
Investment in sovereign debt obligations involves special risks not present in domestic corporate debt obligations. The issuer
of the sovereign debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay
principal or interest when due, and the Fund may have limited recourse in the event of a default. During periods of economic uncertainty,
the market prices of sovereign debt, and the Fund’s NAV, may be more volatile than prices of U.S. debt obligations. In the
past, certain
emerging market countries
have encountered difficulties in servicing their debt obligations, withheld payments of principal and interest and declared moratoria
on the payment of principal and interest on their sovereign debts.
A sovereign debtor‘s
willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange, the relative size
of the debt service burden, the sovereign debtor’s policy toward principal international lenders and local political constraints.
Sovereign debtors may also be dependent on expected disbursements from foreign governments, multilateral agencies and other entities
to reduce principal and interest arrearages on their debt. The failure of a sovereign debtor to implement economic policies or
repay principal or interest when due may result in the cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor’s ability or willingness to service its debts.
Obligations of Supranational
Entities.
The Fund may invest in obligations of supranational entities designated or supported by governmental entities to
promote economic reconstruction or development and of international banking institutions and related government agencies. Examples
include the International Bank for Reconstruction and Development (the World Bank), the Asian Development Bank and the Inter-American
Development Bank. Each supranational entity’s lending activities are limited to a percentage of its total capital (including
“callable capital” contributed by its governmental members at the entity’s call), reserves and net income. Participating
governments may not be able or willing to honor their commitments to make capital contributions to a supranational entity.
Risks of Foreign Securities.
Investments in foreign securities may involve a greater degree of risk than securities of U.S. issuers. There is generally less
publicly available information about foreign companies in the form of reports and ratings similar to those published about issuers
in the United States. Also, foreign issuers are generally not subject to uniform accounting, auditing and financial reporting requirements
comparable to those applicable to U.S. issuers.
To the extent that the Fund’s
foreign securities are denominated in currencies other than the U.S. dollar, changes in foreign currency exchange rates will affect
the Fund’s NAV, the value of dividends and interest earned, gains and losses realized on the sale of securities, and any
net investment income and gains that the Fund distributes to shareholders. Securities transactions in some foreign markets may
not be settled promptly so that the Fund’s foreign investments may be less liquid and subject to the risk of fluctuating
currency exchange rates pending settlement.
Foreign securities may be
purchased on over-the-counter markets or exchanges located in the countries where an issuer’s securities are principally
traded. Many foreign markets are not as developed or efficient as those in the United States. While growing in volume, they usually
have substantially less volume than U.S. markets. Securities of some foreign issuers are less liquid and more volatile than securities
of comparable U.S. issuers. Fixed commissions on foreign exchanges are generally higher than negotiated commissions on U.S. exchanges,
although the Fund will endeavor to achieve the most favorable net results on its portfolio transactions. There is generally less
government supervision and regulation of securities exchanges, brokers and listed issuers in foreign countries than in the United
States. In certain foreign countries, there is the possibility of adverse changes in investment or exchange control regulations,
expropriation, nationalization or confiscatory taxation, limitations on the removal of assets of the Fund from a country, political
or social instability, or diplomatic developments. Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in terms of growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency
and balance of payments position. Dividends, interest, and, in some cases, capital gains earned by the Fund on certain foreign
securities may be subject to foreign taxes, thus reducing the net amount of income or gains available for distribution to the Fund’s
shareholders.
The above risks may be intensified
for investments in emerging markets or countries with limited or developing capital markets. These countries are located in the
Asia-Pacific region, Eastern Europe, Latin and South America and Africa. Security prices in these markets can be significantly
more volatile than in more developed countries, reflecting the greater uncertainties of investing in less established markets and
economies. Political, legal and economic structures in many of these emerging market countries may be undergoing significant evolution
and rapid development, and they may lack the social, political, legal and economic stability characteristic of more developed countries.
Emerging market countries may have failed in the past to recognize private property rights. They may
have relatively unstable
governments, present the risk of nationalization of businesses, restrictions on foreign ownership, or prohibitions on repatriation
of assets, and may have less protection of property rights than more developed countries. Their economies may be predominantly
based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme
and volatile debt burdens or inflation rates. Local securities markets may trade a small number of securities and may be unable
to respond effectively to increases in trading volume, potentially making prompt liquidation of substantial holdings difficult
or impossible at times. The Fund may be required to establish special custodial or other arrangements before making certain investments
in these countries. Securities of issuers located in these countries may have limited marketability and may be subject to more
abrupt or erratic price movements.
ILLIQUID AND RESTRICTED
SECURITIES
The Fund may purchase securities
that are not registered (“restricted securities”) under the Securities Act of 1933, as amended (the “1933 Act”),
including commercial paper issued in reliance on Section 4(2) of the 1933 Act, and, therefore, are restricted as to their resale.
However, the Fund will not invest more than 15% of its net assets in illiquid investments. The Board of Trustees of the Trust (the
“Board” or “Trustees”) has adopted guidelines and delegated to the Adviser the daily function of determining
and monitoring the liquidity of restricted securities. The Trustees, however, retain oversight as to, and are ultimately responsible
for, these determinations. If the Adviser determines, based upon a continuing review of the trading markets for specific Section
4(2) paper or Rule 144A securities (
Rule 144A securities are unregistered securities sold by private
companies to qualified institutional buyers through a broker-dealer)
that the securities are liquid, they will not be subject
to the 15% limit in illiquid investments. This investment practice could have the effect of decreasing the level of liquidity in
the Fund if sufficient numbers of qualified institutional buyers are not interested in purchasing these restricted securities.
DERIVATIVE INSTRUMENTS
General.
The Fund
may invest in derivative instruments, which are commonly defined as financial instruments whose performance and value are derived,
at least in part, from another source, such as the performance of an underlying asset, security or index. The Fund’s transactions
in derivative instruments may include:
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the purchase and writing of options on securities (including index
options) and options on foreign currencies;
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the purchase and sale of futures contracts based on financial, interest
rate and securities indices, equity securities or fixed-income securities; and
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entering into forward contracts, swaps and swap related products,
such as equity index, interest rate or currency swaps, and related caps, collars, floors and swaptions.
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The success of transactions
in derivative instruments depends on an Adviser’s judgment as to their potential risks and rewards. Use of these instruments
exposes the Fund to additional investment risks and transaction costs. If an Adviser incorrectly analyzes market conditions or
does not employ the appropriate strategy with these instruments, the Fund’s return could be lower than if derivative instruments
had not been used. Additional risks inherent in the use of derivative instruments include: adverse movements in the prices of securities
or currencies and the possible absence of a liquid secondary market for any particular instrument. The Fund could experience losses
if the prices of its derivative positions correlate poorly with those of its other investments. The loss from investing in derivative
instruments is potentially unlimited.
The Fund may invest in derivatives
for hedging purposes, to enhance returns, as a substitute for purchasing or selling securities, to maintain liquidity or in anticipation
of changes in the composition of its portfolio holdings. The risks and policies of various types of derivative investments in which
the Fund may invest are described in greater detail below.
Options on Securities
and Securities Indices.
The Fund may purchase and write (sell) call and put options on any securities in which it may invest
or on any securities index containing securities in which it may invest. These options may be listed on securities exchanges or
traded in the over-the-counter market. The Fund may write covered put and call options and purchase put and call options to enhance
total return, as a substitute for the purchase or sale of securities, or to protect against declines in the value of portfolio
securities and against increases in the cost of securities to be acquired.
Writing Covered Options.
A call option on securities written by the Fund obligates the Fund to sell specified securities to the holder of the option at
a specified price if the option is exercised at any time before the expiration date. A put option on securities written by the
Fund obligates the Fund to purchase specified securities from the option holder at a specified price if the option is exercised
at any time before the expiration date. Options on securities indices are similar to options on securities, except that the exercise
of securities index options requires cash settlement payments and does not involve the actual purchase or sale of securities. In
addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security. Writing covered call options may deprive the Fund of the opportunity
to profit from an increase in the market price of the securities in its portfolio. Writing covered put options may deprive the
Fund of the opportunity to profit from a decrease in the market price of the securities to be acquired for its portfolio.
All call and put options
written by the Fund are covered. A written call option or put option may be covered by: (1) maintaining cash or liquid securities
in a segregated account with a value at least equal to the Fund’s obligation under the option; (2) entering into an offsetting
forward commitment; and/or (3) purchasing an offsetting option or any other option which, by virtue of its exercise price or otherwise,
reduces the Fund’s net exposure on its written option position. A written call option on securities is typically covered
by maintaining the securities that are subject to the option in a segregated account. The Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to those of the underlying index.
The Fund may terminate its
obligations under an exchange-traded call or put option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an offsetting transaction with the counterparty to the option.
These purchases are referred to as “closing purchase transactions.”
Segregated Account Risk.
A security held in a segregated account cannot be sold while the position it is covering is outstanding unless it is replaced with
cash, cash equivalent or a similar security. Therefore, the segregation of a large percentage of the Fund’s assets could
possibly hinder management of the portfolio or the Fund’s ability to meet redemption requests or other current obligations.
Purchasing Options.
The Fund would normally purchase call options in anticipation of an increase, or put options in anticipation of a decrease (“protective
puts”) in the market value of securities of the type in which it may invest. The Fund may also sell call and put options
to close out its purchased options.
The purchase of a call option
would entitle the Fund, in return for the premium paid, to purchase specified securities at a specified price during the option
period. The Fund would ordinarily realize a gain on the purchase of a call option if, during the option period, the value of such
securities exceeded the sum of the exercise price, the premium paid and transaction costs; otherwise the Fund would realize either
no gain or a loss on the purchase of the call option.
The purchase of a put option
would entitle the Fund, in exchange for the premium paid, to sell specified securities at a specified price during the option period.
The purchase of protective puts is designed to offset or hedge against a decline in the market value of the Fund’s portfolio
securities. Put options may also be purchased by the Fund for the purpose of affirmatively benefiting from a decline in the price
of securities which it does not own. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying
securities decreased below the exercise price sufficiently to cover the premium and transaction costs; otherwise the Fund would
realize either no gain or a loss on the purchase of the put option. Gains and losses on the purchase of put options may be offset
by countervailing changes in the value of the Fund’s portfolio securities.
The Fund’s options
transactions will be subject to limitations established by each of the exchanges, boards of trade or other trading facilities on
which such options are traded. These limitations govern the maximum number of options in each class which may be written or purchased
by a single investor or group of investors acting in concert, regardless of whether the options are written or purchased on the
same or different exchanges, boards of trade or other trading facilities or are held or written in one or more accounts or through
one or more brokers. Thus, the number of options which the Fund may write or purchase may be affected by options written or purchased
by other
investment advisory clients
of the Adviser. An exchange, board of trade or other trading facility may order the liquidation of positions found to be in excess
of these limits, and it may impose certain other sanctions.
Risks Associated with
Options Transactions.
There is no assurance that a liquid secondary market on a domestic or foreign options exchange will exist
for any particular exchange-traded option or at any particular time. If the Fund is unable to effect a closing purchase transaction
with respect to covered options it has written, the Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised. Similarly, if the Fund is unable to effect a closing sale
transaction with respect to options it has purchased, it would have to exercise the options in order to realize any profit and
will incur transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of
a liquid secondary market on an exchange include the following: (1) there may be insufficient trading interest in certain options;
(2) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (3) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or series of options; (4) unusual or unforeseen circumstances
may interrupt normal operations on an exchange; (5) the facilities of an exchange or the Options Clearing Corporation may not at
all times be adequate to handle current trading volume; or (6) 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). If trading
were discontinued, the secondary market on that exchange (or in that class or series of options) would cease to exist. However,
outstanding options on that exchange that had been issued by the Options Clearing Corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms.
The Fund’s ability
to terminate over-the-counter options is more limited than with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. The Adviser will determine the liquidity of each over-the-counter
option in accordance with guidelines adopted by the Trustees.
The writing and purchase
of options is a highly specialized activity that involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options depends in part on the Adviser’s ability to predict
future price fluctuations and, for hedging transactions, the degree of correlation between the options and securities markets.
Futures Contracts and
Options on Futures Contracts.
To seek to increase total return or hedge against changes in interest rates or securities prices,
the Fund may purchase and sell futures contracts, and purchase and write call and put options on these futures contracts. The Fund
may also enter into closing purchase and sale transactions with respect to any of these contracts and options. These futures contracts
may be based on various securities (such as U.S. Government securities), securities indices and any other financial instruments
and indices. All futures contracts entered into by the Fund are traded on U.S. exchanges or boards of trade that are licensed,
regulated or approved by the U.S. Commodity Futures Trading Commission (the “CFTC”). In February 2012, the CFTC adopted
certain regulatory changes that will subject the adviser of an investment company to registration with the CFTC as a commodity
pool operator under the Commodity Exchange Act if the investment company is not able to comply with certain trading and marketing
limitations.
Futures Contracts.
A futures contract may generally be described as an agreement between two parties to buy and sell particular financial instruments
for an agreed price during a designated month (or to deliver the final cash settlement price, in the case of a contract relating
to an index or otherwise not calling for physical delivery at the end of trading in the contract).
Positions taken in the futures
markets are not normally held to maturity but are instead liquidated through offsetting transactions, which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in this manner, the Fund may instead make, or take,
delivery of the underlying securities whenever it appears economically advantageous to do so. A clearing corporation associated
with the exchange on which futures contracts are traded guarantees that, if still open, the sale or purchase will be performed
on the settlement date.
Hedging and Other Strategies.
Hedging is an attempt to establish with more certainty than would otherwise be possible the effective price or rate of return on
portfolio securities or securities that the Fund proposes to acquire. When interest rates are rising or securities prices are falling,
the Fund can seek to offset a decline in the value of its
current portfolio securities
through the sale of futures contracts. When interest rates are falling or securities prices are rising, the Fund, through the purchase
of futures contracts, can attempt to secure better rates or prices than might later be available in the market when it effects
anticipated purchases.
The Fund may, for example,
take a “short” position in the futures market by selling futures contracts in an attempt to hedge against an anticipated
rise in interest rates or a decline in market prices that would adversely affect the value of the Fund’s portfolio securities.
These futures contracts may include contracts for the future delivery of securities held by the Fund or securities with characteristics
similar to those of the Fund’s portfolio securities.
If, in the opinion of the
Adviser, there is a sufficient degree of correlation between price trends for the Fund’s portfolio securities and futures
contracts based on other financial instruments, securities indices or other indices, the Fund may also enter into such futures
contracts as part of its hedging strategy. Although under some circumstances prices of securities in the Fund’s portfolio
may be more or less volatile than prices of these futures contracts, the Adviser will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any differential by having the Fund enter into a greater or lesser number
of futures contracts or by attempting to achieve only a partial hedge against price changes affecting the Fund’s portfolio
securities.
When a short hedging position
is successful, any depreciation in the value of portfolio securities will be substantially offset by appreciation in the value
of the futures position. On the other hand, any unanticipated appreciation in the value of the Fund’s portfolio securities
would be substantially offset by a decline in the value of the futures position.
On other occasions, the Fund
may take a “long” position by purchasing futures contracts. This would be done, for example, when the Fund anticipates
the subsequent purchase of particular securities when it has the necessary cash but expects the prices then available in the applicable
market to be less favorable than prices that are currently available. The Fund may also purchase futures contracts as a substitute
for transactions in securities, to alter the investment characteristics of portfolio securities or to gain or increase its exposure
to a particular securities market.
Options on Futures Contracts.
The Fund may purchase and write options on futures for the same purposes as its transactions in futures contracts. The purchase
of put and call options on futures contracts will give the Fund the right (but not the obligation) for a specified price to sell
or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option
on a futures contract, the Fund obtains the benefit of the futures position if prices move in a favorable direction but limits
its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option
on a futures contract generates a premium, which may partially offset a decline in the value of the Fund’s assets. By writing
a call option, the Fund becomes obligated, in exchange for the premium (upon exercise of the option) to sell a futures contract
if the option is exercised, which may have a value higher than the exercise price. Conversely, the writing of a put option on a
futures contract generates a premium, which may partially offset an increase in the price of securities that the Fund intends to
purchase. However, the Fund becomes obligated (upon exercise of the option) to purchase a futures contract if the option is exercised,
which may have a value lower than the exercise price. The loss incurred by the Fund in writing options on futures is potentially
unlimited and may exceed the amount of the premium received.
The holder or writer of an
option on a futures contract may terminate its position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. The Fund’s ability to establish and close out positions on
such options will be subject to the development and maintenance of a liquid market.
The Fund may engage in futures
and related options transactions either for bona fide hedging purposes or to seek to increase total return as permitted by the
CFTC. To the extent that the Fund is using futures and related options for hedging purposes, futures contracts will be sold to
protect against a decline in the price of securities that the Fund owns or futures contracts will be purchased to protect the Fund
against an increase in the price of securities it intends to purchase. The Adviser will determine that the price fluctuations in
the futures contracts and options on futures used for hedging purposes are substantially related to price fluctuations in securities
held by the Fund or securities or instruments, which it expects to purchase. As evidence of its hedging intent, the Fund expects
that, on 75% or more of the occasions on which it takes a long futures or option position (involving the purchase of futures
contracts), the Fund will
have purchased, or will be in the process of purchasing, equivalent amounts of related securities in the cash market at the time
when the futures or option position is closed out. However, in particular cases, when it is economically advantageous for the Fund
to do so, a long futures position may be terminated or an option may expire without the corresponding purchase of securities or
other assets.
To the extent that the Fund
engages in non-hedging transactions in futures contracts and options on futures, the aggregate initial margin and premiums required
to establish these non-hedging positions will not exceed 5% of the NAV of the Fund’s portfolio, after taking into account
unrealized profits and losses on any such positions and excluding the amount by which such options were in-the-money at the time
of purchase.
Transactions in futures contracts
and options on futures involve brokerage costs, require margin deposits and, in the case of contracts and options obligating the
Fund to purchase securities, require the Fund to establish a segregated account consisting of cash or liquid securities in an amount
equal to the underlying value of such contracts and options.
While transactions in futures
contracts and options on futures may reduce certain risks, these transactions themselves entail certain other risks. For example,
unanticipated changes in interest rates or securities prices may result in a poorer overall performance for the Fund than if it
had not entered into any futures contracts or options transactions.
Perfect correlation between
the Fund’s futures positions and portfolio positions will be impossible to achieve. In the event of an imperfect correlation
between a futures position and a portfolio position, which is intended to be protected, the desired protection may not be obtained
and the Fund may be exposed to risk of loss.
Some futures contracts or
options on futures may become illiquid under adverse market conditions. In addition, during periods of market volatility, a commodity
exchange may suspend or limit trading in a futures contract or related option, which may make the instrument temporarily illiquid
and difficult to price. Commodity exchanges may also establish daily limits on the amount that the price of a futures contract
or related option can vary from the previous day’s settlement price. Once the daily limit is reached, no trades may be made
that day at a price beyond the limit. This may prevent the Fund from closing out positions and limiting its losses.
Foreign Currency Transactions.
The Fund’s foreign currency exchange transactions may be conducted on a spot (
i.e.
, cash) basis at the spot rate for
purchasing or selling currency prevailing in the foreign exchange market. The Fund may also enter into forward foreign currency
exchange contracts to enhance return, to hedge against fluctuations in currency exchange rates affecting a particular transaction
or portfolio position, or as a substitute for the purchase or sale of a currency or assets denominated in that currency. Forward
contracts are agreements to purchase or sell a specified currency at a specified future date and price set at the time of the contract.
Transaction hedging is the purchase or sale of forward foreign currency contracts with respect to specific receivables or payables
of the Fund accruing in connection with the purchase and sale of its portfolio securities quoted or denominated in the same or
related foreign currencies. Portfolio hedging is the use of forward foreign currency contracts to offset portfolio security positions
denominated or quoted in the same or related foreign currencies. The Fund may elect to hedge less than all of its foreign currency
portfolio positions if deemed appropriate by the Adviser.
If the Fund purchases a forward
contract or sells a forward contract for non-hedging purposes, it will segregate cash or liquid securities, of any type or maturity,
in a separate account in an amount equal to the value of the Fund’s total assets committed to the consummation of the forward
contract. The assets in the segregated account will be valued at market daily and if the value of the securities in the separate
account declines, additional cash or securities will be placed in the account so that the value of the account will be equal to
the amount of the Fund’s commitment with respect to such contracts.
Hedging against a decline
in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices
of such securities decline. These transactions also preclude the opportunity for currency gains if the value of the hedged currency
rises. Moreover, it may not be possible for the Fund to hedge against a devaluation that is so generally expected that the Fund
is not able to contract to sell the currency at a price above the devaluation level it anticipates.
The cost to the Fund of engaging
in foreign currency transactions varies with such factors as the currency involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency are usually conducted on a principal basis, no fees or commissions
are involved.
Foreign Currency Options.
The Fund may purchase or sell (write) call and put options on currency. A foreign currency option provides the option buyer with
the right to buy or sell a stated amount of foreign currency at the exercise price on a specified date or during the option period.
The owner of a call option has the right, but not the obligation, to buy the currency. Conversely, the owner of a put option has
the right, but not the obligation, to sell the currency. When the option is exercised, the seller of the option is obligated to
fulfill the terms of the written option. However, either the seller or the buyer may, in the secondary market, close its position
during the option period at any time before expiration.
A purchased call option on
a foreign currency generally rises in value if the underlying currency appreciates in value. A purchased put option on a foreign
currency generally rises in value if the underlying currency depreciates in value. Although purchasing a foreign currency option
can protect the Fund against an adverse movement in the value of a foreign currency, the option will not limit changes in the value
of such currency. For example, if the Fund was holding securities denominated in a foreign currency that was appreciating and had
purchased a foreign currency put to hedge against a decline in the value of the currency, the Fund would not have to exercise its
put option. Likewise, the Fund might enter into a contract to purchase a security denominated in foreign currency and, in conjunction
with that purchase, might purchase a foreign currency call option to hedge against a rise in value of the currency. If the value
of the currency instead depreciated between the date of purchase and the settlement date, the Fund would not have to exercise its
call. Instead, the Fund could acquire in the spot market the amount of foreign currency needed for settlement.
Special Risks Associated
with Foreign Currency Options.
Buyers and sellers of foreign currency options are subject to the same risks that apply to options
generally. In addition, there are certain additional risks associated with foreign currency options. The markets in foreign currency
options are relatively thin, and the Fund’s ability to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. The Fund will not purchase or write such options unless and until, in the opinion of
the Adviser, the market for them has developed sufficiently to ensure that the risks in connection with such options are not greater
than the risks in connection with the underlying currency. Nevertheless, there can be no assurance that a liquid secondary market
will exist for a particular option at any specific time. In addition, options on foreign currencies are affected by most of the
same factors that influence foreign exchange rates and investments generally.
The value of a foreign currency
option depends upon the value of the underlying currency relative to the U.S. dollar. As a result, the price of the option position
may vary with changes in the value of either or both currencies and may have no relationship to the investment performance of a
foreign security. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts
than those that may be involved in the use of foreign currency options, investors may be disadvantaged by having to deal in an
odd lot market (generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that
are less favorable than for round lots.
There is no systematic reporting
of last sale information for foreign currencies or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller transactions (
i.e
., less than $1 million)
where rates may be less favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. currency option markets are closed while the markets for the underlying currencies remain open, significant price
and rate movements may take place in the underlying markets that cannot be reflected in the options markets until they reopen.
Foreign Currency Futures
Transactions.
By using foreign currency futures contracts and options on such contracts, the Fund may be able to achieve many
of the same objectives as it would through the use of forward foreign currency exchange contracts. The Fund may sometimes be able
to achieve these objectives more effectively and at a lower cost by using futures transactions instead of forward foreign currency
exchange contracts.
The sale of a foreign currency
futures contract creates an obligation by the Fund, as seller, to deliver the amount of currency called for in the contract at
a specified future time for a specified price. The purchase of a currency futures contract creates an obligation by the Fund, as
purchaser, to take delivery of an amount of currency at a specified future time at a specified price. Although the terms of currency
futures contracts specify actual delivery or receipt, in most instances the contracts are closed out before the settlement date
without the making or taking of delivery of the currency. Currency futures contracts are closed out by entering into an offsetting
purchase or sale transaction for the same aggregate amount of currency and delivery date. If the sale price of a currency futures
contract exceeds the price of the offsetting purchase, the Fund realizes a gain. If the sale price is less than the offsetting
purchase price, the Fund realizes a loss. If the purchase price of a currency futures contract is less than the offsetting sale
price, the Fund realizes a gain. If the purchase price of a currency futures contract exceeds the offsetting sale price, the Fund
realizes a loss.
Special Risks Associated
with Foreign Currency Futures Contracts and Related Options.
Buyers and sellers of foreign currency futures contracts and related
options are subject to the same risks that apply to the use of futures generally. In addition, the risks associated with foreign
currency futures contracts and options on futures are similar to those associated with options on foreign currencies, as described
above.
U.S. dollar-denominated
securities of non-U.S. companies.
The Fund may invest without limit in U.S. dollar-denominated securities of non-U.S. companies
but may invest only up to 15% of its total assets in non-dollar-denominated securities of non-U.S. companies.
Swaps, Caps, Floors, Collars
and Swaptions.
As one way of managing its exposure to different types of investments, the Fund may enter into interest rate
swaps, currency swaps, and other types of swap agreements such as caps, collars, floors and swaptions. In a typical interest rate
swap, one party agrees to make regular payments equal to a floating interest rate times a “notional principal amount,”
in return for payments equal to a fixed rate times the same notional amount, for a specified period of time. If a swap agreement
provides for payment in different currencies, the parties might agree to exchange the notional principal amount as well. Swaps
may also depend on other prices or rates, such as the value of an index or mortgage prepayment rates.
In a typical cap or floor
agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified
interest rate exceeds an agreed-upon level, while the seller of an interest rate floor is obligated to make payments to the extent
that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor. A swaption is an option to buy or sell a swap position.
Swap agreements will tend
to shift the Fund’s investment exposure from one type of investment to another. For example, if the Fund agreed to exchange
payments in dollars for payments in a foreign currency, the swap agreement would tend to decrease the Fund’s exposure to
U.S. interest rates and increase its exposure to foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may increase or decrease the overall volatility of the
Fund’s investments and its share price and yield.
Swap agreements are sophisticated
risk management instruments that typically require a small cash investment relative to the magnitude of risks assumed. As a result,
swaps can be highly volatile and may have a considerable impact on the Fund’s performance. Swap agreements are subject to
credit risks related to the counterparty’s ability to perform, and may decline in value if the counterparty’s creditworthiness
deteriorates. The Fund may also suffer losses if it is unable to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. The Fund will maintain in a segregated account cash or liquid securities equal to the net amount, if any,
of the excess of the Fund’s obligations over its entitlements with respect to swap, cap, collar, floor or swaption transactions.
Forward Commitments, When-Issued
Securities and Delayed Delivery Transactions.
The Fund may purchase or sell securities on a when-issued or delayed delivery
basis and make contracts to purchase or sell securities for a set price at a set date beyond customary settlement time. The Fund
will engage in when-issued purchases of securities in order to obtain what is considered to be an advantageous price and yield
at the time of purchase.
Securities purchased or sold on a when-issued, delayed delivery or forward commitment basis involve a
risk of loss if the security to be purchased declines in value, or a security to be sold increases in value, before the settlement
date. The failure of the issuer or other party to consummate the transaction may result in the Fund’s losing the opportunity
to obtain an advantageous price. Although the Fund usually intends to acquire the underlying securities, the Fund may dispose of
such securities before settlement. For purposes of determining the Fund’s average dollar-weighted maturity, the maturity
of when-issued or forward commitment securities will be calculated from the commitment date.
When the Fund purchases securities
on a when-issued, delayed delivery or forward commitment basis, the Fund will segregate in a separate account cash or liquid securities
of any type or maturity, having a value (determined daily) at least equal to the amount of the Fund’s purchase commitments.
Short Sales.
Short sales are transactions
in which the Fund sells a security it does not own in anticipation of a decline in the value of that security. To complete such
a transaction, the Fund must borrow the security from a broker or other institution to make delivery to the buyer. The Fund then
is obligated to replace the security borrowed by purchasing it at the market price at or prior to the time of replacement. The
price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced,
the Fund is required to pay the broker from which it borrowed the security an amount equal to any dividends or interest that accrue
during the period of the loan. Short sale dividends are treated as an expense and can increase the Fund’s total expense ratio
although no cash is received or paid by the Fund. To compensate the broker, the Fund also may be required to pay a premium, which
would increase the cost of the security sold. The net proceeds of the short sale will be retained by the broker (or by the Fund’s
custodian in a special custody account), to the extent necessary to meet margin requirements, until the short position is closed
out.
The Fund will incur a loss as a result of the
short sale if the price of the security sold short increases between the date of the short sale and the date on which the Fund
replaces the borrowed security. The Fund will realize a gain if the security declines in price between those dates. An increase
in the value of a security sold short by the Fund over the price at which it was sold short will result in a loss to the Fund,
and there can be no assurance that the Fund will be able to close out the position at any particular time or at an acceptable price.
Although the Fund’s gain is limited to the amount at which it sold a security short, its potential loss is unlimited. Until
the Fund replaces a borrowed security, it will maintain in a segregated account at all times cash, U.S. Government securities,
or other liquid securities in an amount which, when added to any amount deposited with a broker or custodian as collateral, will
at least equal the current market value of the security sold short. Depending on arrangements made with brokers, the Fund may not
receive any payments (including interest) on collateral deposited with them. The Fund will not make a short sale if, after giving
effect to such sale, the market value of all securities sold short exceeds 100% of the value of the Fund’s net assets.
While the Fund is short a security, it is subject
to the risk that the security’s lender will terminate the loan at a time when the Fund is unable to borrow the same security
from another lender. If this happened, the Fund would have to buy replacement shares immediately at the stock’s then current
market price or “buy in” by paying the lender an amount equal to the cost of purchasing the security to close out the
short position.
The Fund will also incur transaction costs
in effecting short sales. Short sales involve other costs. The Fund must repay to the lender any dividends or interest that accrue
while it is holding a security sold short. To borrow the security, the Fund also may be required to pay a premium. The amount of
any gain for the Fund resulting from a short sale will be decreased and the amount of any loss will be increased, by the amount
of premiums, dividends, interest or expenses the Fund may be required to pay in connection with a short sale.
OTHER INVESTMENT PRACTICES
AND RISKS
Lending Portfolio Securities.
The Fund may lend its portfolio securities. These loans are secured by the delivery to the Fund of cash collateral, which may be
invested in short-term debt securities and money market funds. The Fund may make loans only to broker-dealers who are members of
NYSE, or who have net capital of at least $10,000,000. Such loans will not be made against less than 100% cash collateral maintained
at 100% of the market value (marked-to-market daily) of the loaned securities. Loans will be made only if the Fund can terminate
the loan at any time.
Voting rights may pass with
the lending of securities. In line with industry standards, proxies are not available to be voted when the shares are out on loan
through the Fund’s lending program. However, the Fund will make reasonable efforts to recall lent securities so that they
may be voted according to the Adviser’s instructions. In furtherance of this effort, the Fund has, in conjunction with the
securities lending agent, developed procedures reasonably designed to recall lent securities to facilitate the voting of the shares.
In addition, the Adviser has developed operating procedures to restrict the lending of securities held by the Fund that are acquired
in an initial public offering (“IPO”), as discussed below, by an issuer with a limited operating history and no identified
corporate calendar of shareholder meetings that can be monitored. The lending of securities does not relieve the Trustees of their
fiduciary obligation to vote proxies on significant matters. If management has knowledge that a material event will occur affecting
an investment on loan, the Trustees would be obligated to call such loan in time to vote such proxies.
When the Fund lends portfolio
securities, there is a risk that the borrower may fail to return the securities, that the securities will not be returned in time
for the Fund’s to exercise its voting rights, or that the Fund’s securities lending agent does not learn of an impending
vote and therefore does not initiate a recall of the lent securities on the Fund’s behalf. As a result, the Fund may incur
a loss or, in the event of a borrower’s bankruptcy, may be delayed in, or prevented from, liquidating the collateral. The
Fund will bear any losses incurred from the investment of the collateral it receives. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would belong to the Fund.
Borrowing and Leverage.
The Fund has the ability to borrow money, to the extent permitted under the 1940 Act, the rules or regulations thereunder or any
exemption from the 1940 Act that applies to the Fund, as such statute, rules or regulations may be amended or interpreted from
time to time. Currently, under the 1940 Act, a mutual fund may borrow only from banks (for other than emergency purposes) and only
to the extent that the value of the Fund’s assets, less its liabilities other than borrowings, is equal to at least 300%
of all borrowings including the proposed borrowing, except that it may also borrow up to 5% of its total assets for temporary or
emergency purposes from any lender.
When the Fund borrows, it
segregates or identifies securities on its books equal to 300% of the amount borrowed to cover its obligation to repay the loan.
If the value of the Fund’s assets fail to meet this 300% asset coverage requirement, it will reduce its borrowings within
three days to meet the requirements. To do so, the Fund might have to sell a portion of its investments at a disadvantageous time.
When the Fund invests borrowed
money in portfolio securities, it is using a speculative investment technique known as “leverage.” If the Fund does
borrow, its expenses may be greater than comparable funds that do not borrow. The Fund will pay interest on loans, and that interest
expense may raise the overall expenses of the Fund and reduce it returns. In the case of borrowing for leverage, the interest paid
on a loan might be more (or less) than the yield on the securities purchased with the loan proceeds. Additionally, the use of leverage
may make the Fund’s share prices more sensitive to interest rate changes and thus might cause the Fund’s net asset
value per share to fluctuate more than that of funds that do not borrow.
IPOs.
The Fund may
invest in IPOs. An IPO is when a company (called the issuer) issues common stock or shares to the public for the first time. Such
securities are often issued by smaller, younger companies seeking capital but can also be done by large privately-owned companies
looking to trade publicly.
IPO Risk.
The purchase
of IPO shares may involve high transaction costs and may involve the risk that the market value of IPO shares will fluctuate considerably
due to factors such as the absence of a prior public market, unseasoned trading, the small number of shares available for trading
and limited information about the issuer. IPO shares are subject to market risk and liquidity risk. When the Fund’s asset
base is small, a significant portion of the fund’s performance could be attributable to investments in IPOs because such
investments would have a magnified impact on the fund. As the Fund’s assets grow, the effect of the Fund’s investments
in IPOs on the Fund’s performance probably will decline, which could reduce the Fund’s performance.
Reverse Repurchase Agreements.
The Fund may enter reverse repurchase agreements whereby the Fund sells portfolio assets with an agreement to repurchase the assets
at a later date at a set price. The Fund continues to
receive principal and interest payments on these securities. The Fund will
maintain a segregated custodial account consisting of cash or liquid securities of any type or maturity, having a value at least
equal to the repurchase price, plus accrued interest.
Reverse repurchase agreements
involve the risk that the value of the securities sold by the Fund may decline below the price of the securities the Fund is obligated
to repurchase. Reverse repurchase agreements are borrowings by the Fund and are subject to its investment restrictions on borrowing.
Risks of Non-Diversification.
The Fund is classified as “non-diversified” under the 1940 Act. Non-diversification means that the proportion of such
the Fund’s assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. Since it may
invest a larger proportion of its assets in a single issuer than is permitted by the 1940 Act for a diversified fund, an investment
in a non-diversified Fund may be subject to greater fluctuations in value than an investment in a diversified fund.
Notwithstanding its non-diversified
status, with respect to 50% of its total assets, the Fund may invest in securities of no more than one issuer (or any combination
of issuers) limited in respect to an amount not greater in value than 25% of its total assets and, in addition to the foregoing,
in securities of not more than two issuers, each limited in respect to an amount not greater in value than 12.5% of its total assets
and, with respect to the remaining 50% of its total assets, the non-diversified Fund may not invest in securities of any single
issuer
(other than the U.S. Government
, its agencies and instrumentalities) limited in respect
to an amount not greater in value than 5% of its total assets. The restrictions in the immediately preceding sentence are non-fundamental
and may be changed by the Trustees without shareholder approval. This policy shall not be violated so long as any discrepancy from
this policy after the acquisition of a security is neither wholly nor partially the result of such acquisition.
Short-Term Trading and
Portfolio Turnover.
Short-term trading means the purchase and subsequent sale of a security after it has been held for a relatively
brief period of time. The Fund may engage in short-term trading in response to stock market conditions, changes in interest rates
or other economic trends and developments, or to take advantage of yield disparities between various fixed-income securities in
order to realize capital gains or enhance income. Short-term trading may have the effect of increasing the Fund’s portfolio
turnover rate. A high rate of portfolio turnover involves correspondingly higher brokerage costs that must be borne directly by
the Fund and thus indirectly by the shareholders, reducing the shareholders’ return. Short-term trading may also increase
the amount of taxable gains that must be distributed to shareholders.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT
RESTRICTIONS
The following investment
restrictions are considered fundamental, which means they may be changed only with the approval of the holders of a majority of
the Fund’s outstanding voting securities, defined under the 1940 Act as the lesser of: (1) 67% or more of the Fund’s
voting securities present at a meeting if the holders of more than 50% of the Fund’s outstanding voting securities are present
or represented by proxy, or (2) more than 50% of the Fund’s outstanding voting securities.
|
1.
|
The Fund may not borrow money or issue senior
securities, except to the extent permitted by the 1940 Act.
|
|
2.
|
The Fund may not make loans to other persons,
except loans of securities not exceeding one-third of the Fund’s total assets, investments in debt obligations and transactions
in repurchase agreements.
|
|
3.
|
The Fund may not purchase, sell or invest in
real estate, but, subject to its other investment policies and restrictions, may invest in securities of companies that deal in
real estate or are engaged in the real estate business. These companies include real estate investment trusts and securities secured
by real estate or interests in real estate. The Fund may hold and sell real estate acquired through
|
|
|
default, liquidation or other distribution of
an interest in real estate as a result of the Fund’s ownership of securities.
|
|
4.
|
The Fund may not purchase or sell commodities
or commodity contracts, except to the extent permitted by applicable law.
|
|
5.
|
The Fund may not underwrite securities of other
issuers, except insofar as the Fund may be deemed an underwriter under the 1933 Act when selling portfolio securities.
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|
6.
|
The Fund shall not invest more than 25% of its
total assets, taken at market value, in the securities of issuers in any particular industry or group of industries (excluding
the U.S. Government and its agencies and instrumentalities) except that the Fund will, during normal market conditions, invest
at least 25% of total assets in the energy infrastructure sector and natural resources sector.
|
With respect to Fundamental
Investment Restriction 1, the 1940 Act currently permits the Fund to borrow from banks in an amount that may not exceed 33
1
/
3
%
of the value of the Fund’s total assets at the time of borrowing.
NON-FUNDAMENTAL INVESTMENT
RESTRICTIONS
The following restrictions
are non-fundamental and may be modified by the Trustees without shareholder approval.
|
1.
|
The Fund may not invest more than 15% of its
net assets in illiquid securities. A security is illiquid if it cannot be disposed of in 7 days at a price approximately equal
to the price at which the Fund is valuing the security.
|
|
2.
|
The Fund may invest in other investment companies,
including any closed-end or open-end investment company, hedge fund or unregistered investment company, as permitted by the 1940
Act or by such exemptions as may be granted by the Commission by any rule, regulation or order.
|
|
3.
|
The Fund may not invest in a company for the
purpose of exercising control or management of the company.
|
|
4.
|
The Fund will invest at least 80% of its assets in the energy sector. The Fund
may change the policies described above upon 60 days’ notice to shareholders.
|
|
5.
|
The Fund, with respect to 50% of the Fund’s total assets, may invest
in securities of no more than one issuer (or any combination of issuers) limited in respect to an amount not greater in value than
25% of its total assets and, in addition to the foregoing, in securities of not more than two issuers, each limited in respect
to an amount not greater in value than 12.5% of its total assets and, with respect to the remaining 50% of its total assets, the
Fund may not invest in securities of any single issuer (other than the U.S. Government, its agencies and instrumentalities) limited
in respect to an amount not greater in value than 5% of its total assets. This policy shall not be violated so long as any discrepancy
from this policy after the acquisition of a security is neither wholly nor partially the result of such acquisition.
|
|
6.
|
For purposes of Fundamental Investment Restriction 6, the energy infrastructure
sector and natural resources sector includes companies that engage in one or more aspects of exploration, production, gathering,
processing, refining, transmission, marketing, storage and delivery of energy products such as natural gas, natural gas liquids
(including propane), crude oil, refined petroleum products or coal; oilfield services, including drilling, cementing and stimulations;
the generation, transmission and distribution of electricity; water
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|
|
and wastewater treatment, distribution and disposal; or the
generation, transportation and sale of alternative, non-fossil fuel based energy sources including, but not limited to, biodiesel,
ethanol, biomass, geothermal, hydroelectric, nuclear, solar or wind energy.
|
Except with respect to 300%
asset coverage for borrowing required by the 1940 Act, whenever any investment restriction states a maximum percentage of the Fund’s
assets that may be invested in any security, such percentage limitation will be applied only at the time the Fund acquires such
security and will not be violated by subsequent increases in value relative to other assets held by the Fund.
A sector of issuers in different
industries is not considered to be an industry, except as stated above with respect to the Fund.
DISCLOSURE OF PORTFOLIO
HOLDINGS
It is the general policy
of the Trust and the Fund that neither the Fund nor its service providers may selectively disclose the Fund’s portfolio holdings
information to any current or potential investor in the Fund, including individuals, institutions and financial intermediaries,
in advance of the date such information is disclosed publicly by the Fund.
The Board has adopted policies
and procedures relating to disclosure of the Fund’s portfolio securities. These policies and procedures are designed to provide
a framework for disclosing information regarding portfolio holdings, portfolio composition or other portfolio characteristics consistent
with applicable regulations of the federal securities laws and general principles of fiduciary duty relating to Fund shareholders.
The Fund, like other typical
mutual funds, relies on various service providers (including Burnham Asset Management Corporation, the Fund’s Adviser) and
other affiliated and/or unaffiliated entities, to perform all services relating to the Fund’s operations. Some services,
such as custody, fund audits, proxy voting, compliance testing, and pricing of portfolio securities, require that the service provider
have almost continuous access to information about the Fund’s current portfolio holdings. Other service providers, such as
lawyers and accountants, are permitted to review information about the Fund’s current portfolio holdings on a periodic basis.
In addition, if the Fund wants to sell certain securities in its portfolio, the Fund will have to identify those securities to
the broker handling the sale. It is the Trust’s policy to grant access to portfolio information in the above and other appropriate
circumstances only to the extent necessary so that the provider may perform its services relating to the Fund’s operations
and the provider is subject to a duty of confidentiality, including a duty not to trade on the non-public information.
In addition, the Trust permits
disclosure of non-public portfolio holdings information to third parties in the following very limited circumstances where the
Trust or a service provider has a legitimate business purpose for doing so and the recipients are subject to a duty of confidentiality,
including a duty not to trade on the non-public information:
To rating agencies
whose purpose in receiving that information is to compile and publish ratings and related information about the Fund, provided
such rating agencies are required in writing to maintain the confidentiality of that information at least until such time that
the Fund publicly disclose that information.
To third parties
who perform services by contract using that information for the Trust’s or the service provider’s own use, provided
such entities are required in writing to maintain the confidentiality of that information at least until such time that the Fund
publicly disclose that information.
It is also the policy of
the Trust that neither the Fund nor its service providers may enter into any arrangements pursuant to which they will receive compensation
or other consideration directly or indirectly in return for the disclosure of non-public information about the Fund’s portfolio
holdings.
Periodic Public Disclosure
The Fund’s full portfolio
holdings are filed quarterly with the Commission within the time periods prescribed by rules of the Commission. Further, information
regarding the Fund’s portfolio holdings is provided to shareholders on a semi-annual basis in accordance with, and within
the time periods prescribed by, rules of the Commission.
The Fund’s portfolio
holdings are published monthly, with approximately a 30-day lag, on the Trust’s website. This policy is described in the
Fund’s current prospectuses and may be discontinued by the Trust without notice. The Trust considers the Fund’s portfolio
holdings not to be confidential on the next day after the Fund’s portfolio holdings are published on the Trust’s website.
The Fund may make information
about its portfolio holdings available in other circumstances from time to time as long as the information is generally made available.
Any disclosure of the Fund’s portfolio holdings information pursuant to this paragraph must be authorized in advance by the
Trust’s President, an Executive Vice President or Vice President, Treasurer or Chief Compliance Officer (“CCO”).
For instance, the Fund may, if so approved and to the extent consistent with Commission rules, disclose information about its portfolio
holdings by one or more of the following methods: a press release through a widely circulated news or wire service; an announcement
at a press conference, invitations to which are widely circulated or to which the public is generally invited; an interview with
a portfolio manager of the Fund if the media through which the interview will be disseminated is broad-based, such as publication
in an industry trade article or a national magazine or newspaper or shown on television or broadcast on radio; or through a filing
accessible through the Commission’s EDGAR database.
To ensure compliance with
this policy, service providers to the Trust may be provided non-public portfolio holdings information only to the extent necessary
in connection with the provision of their services to the Trust or the Fund. All service providers that receive portfolio holdings
information must have policies and procedures in place, which are designed to maintain the confidentiality of that information
in accordance with the Trust’s stated portfolio holdings disclosure policy or must be otherwise subject to a duty of confidentiality.
The CCO shall monitor approvals granted by Trust officers for disclosures of portfolio holdings made on a case-by-case basis to
ensure that such approvals are consistent with the purposes of this policy. The CCO shall report any violations of this policy
to the Trust’s Board.
The Trust seeks to avoid
potential conflicts of interest between the Fund shareholders and the Trust’s service providers by notifying all service
providers to comply with the foregoing portfolio holdings disclosure policy.
SERVICES FOR SHAREHOLDERS
SHAREHOLDER ACCOUNTS
When an investor initially
purchases shares, an account will be opened on the books of the Trust by the transfer agent. The investor appoints the transfer
agent as agent to receive all dividends and distributions and to automatically reinvest them in additional shares of the same class
of shares. Distributions or dividends are reinvested at a price equal to the NAV of these shares as of the ex-dividend date.
Shareholders who do not want
automatic dividend and distribution reinvestment should check the appropriate box of the new account application or notify the
transfer agent and, ten business days after receipt of such notice, all dividends and distributions will be paid by check.
PURCHASE AND REDEMPTION
OF SHARES
PURCHASE OF SHARES
The Fund offers Class A and
Class C shares. The Trustees and officers reserve the right to change or waive the Fund’s minimum investment requirements
and to reject any order to purchase shares (including purchases by exchange) when in their judgment the rejection is in the Fund’s
best interest.
Class I shares of the Fund
are not currently being offered. Please see the applicable prospectus for further information regarding whether the Fund is currently
offering shares of a particular class.
INITIAL SALES CHARGES ON
CLASS A SHARES
Shares are offered at a price
equal to their NAV plus a sales charge, which is imposed at the time of purchase. The sales charges applicable to purchases of
Class A shares of the Fund are described in the Fund’s current prospectus. Up to 100% of the sales charge may be re-allowed
to dealers who achieve certain levels of sales or who have rendered coordinated sales support efforts. These dealers may be deemed
underwriters. Other dealers will receive the following compensation:
Amount Invested
|
Dealer Concession as a
%
of Offering Price of
Shares Purchased
|
Less than $50,000
|
4.50%
|
$50,000 but less than $100,000
|
4.00%
|
$100,000 but less than $250,000
|
3.50%
|
$250,000 but less than $500,000
|
2.75%
|
$500,000 but less than $1,000,000
|
1.75%
|
$1,000,000 or more
|
See below.
|
OBTAINING A REDUCED SALES
CHARGE FOR CLASS A SHARES
Methods of obtaining a reduced
sales charge referred to in the Fund’s prospectus are described in more detail below.
Sales charges may be waived
for Trustees and certain affiliated persons of the Fund.
Purchases of Class A Shares
of $1 Million or More.
On purchases by a single purchaser aggregating $1 million or more, the investor will not pay an initial
sales charge. Burnham Securities, Inc. (the “Distributor”) may pay a commission to broker-dealers, who initiate and
are responsible for such purchases, as follows:
|
§
|
1% on amounts between $1 million and $4 million
|
|
§
|
0.50% on amounts between $4 million and $10 million
|
|
§
|
0.25% on the excess over $10 million
|
A contingent deferred sales
charge (“CDSC”) will be imposed on the proceeds of the redemptions of these shares if they are redeemed within 24 months
of the end of the calendar month of their purchase. The CDSC will be equal to:
|
§
|
1% if the redemption occurs within the first 12 months and
|
|
§
|
0.50% if the redemption occurs within the next 12 months.
|
The CDSC will be based on
the NAV at the time of purchase or sale, whichever is lower. No sales charge will be imposed on increases in NAV, dividends or
capital gain distributions, or reinvestment of distributions in additional Class A shares. In determining whether the sales charge
is payable, the first Class A shares redeemed will be those, if any, on which a sales charge was paid at the time of purchase,
and the remaining Class A shares will be redeemed in the order in which they were purchased.
Rights of Accumulation
(Class A Shares). If an investor, the investor’s spouse or any children under the age of 21 already hold shares of any
Fund, the investor may qualify for a reduced sales charge on its purchase of additional Class A shares. If the value of the shares
the investor currently holds in any Fund, plus the amount the investor wishes to purchase is $50,000 or more, the sales charge
on the Class A shares being purchased will be at the rate applicable to the total aggregate amount. The Distributor’s policy
is to give investors the lowest commission rate possible under the sales charge structure. However, to take full advantage of rights
of accumulation, at the time of placing a purchase order, the investor or its dealer must request the discount and give the Distributor
sufficient
information to determine
and confirm whether the purchase qualifies for the discount. Rights of accumulation may be amended or terminated at any time as
to all purchases occurring thereafter.
Letter of Intent
(Class
A Shares). If an investor intends to purchase Class A shares valued at $50,000 or more during a 13-month period, the investor may
make the purchases under a Letter of Intent so that the initial Class A shares purchased qualify for the reduced sales charge applicable
to the aggregate amount of the investor’s projected purchase. The investor’s initial purchase must be at least 5% of
the intended purchase. Purchases made within 90 days before the signing of the Letter of Intent may be included in such total amount
and will be valued on the date of the Letter of Intent. The Letter of Intent will not impose a binding obligation to buy or sell
shares on either the purchaser or the Fund.
During the period of the
Letter of Intent, the transfer agent will hold shares representing 3% of the intended purchase in escrow to provide payment of
additional sales charges that may have to be paid if the total amount purchased under the Letter of Intent is reduced. These shares
will be released upon completion of the intended investment. If the total Class A shares covered by the Letter of Intent are not
purchased, a price adjustment is made, depending upon the actual amount invested within the period covered by the Letter of Intent,
by a redemption of sufficient shares held in escrow for the account of the investor. A Letter of Intent can be amended: (a) during
the 13-month period if the purchaser files an amended Letter of Intent with the same expiration date as the original; and (b) automatically
after the end of the period, if the total purchases of Class A shares credited to the Letter of Intent qualify for an additional
reduction in the sales charge. For more information concerning the Letter of Intent, see the application form or contact the Distributor.
CLASS C SHARE PURCHASES
Class C shares are sold at
the NAV next determined after receipt of an investor’s purchase order, with a maximum purchase order of $500,000. Class C
shares are not subject to an initial sales charge but may be subject to a CDSC upon redemption. Dealers will receive from the Distributor
a fee of 1.00% of the gross proceeds from the sale at the time of settlement. Class C shares do not convert into any other class
of shares.
If Class C shares of the
Fund are redeemed within one year after the end of the calendar month in which a purchase order was accepted, a 1% CDSC will be
charged by calculating a percentage on the NAV at the time of purchase or sale, whichever is lower. The CDSC will be deducted from
the redemption proceeds otherwise payable to the shareholder and retained by the Distributor. Proceeds from the CDSC are paid to
the Distributor and are used in whole or in part to defray the Distributor’s expenses related to providing distribution-related
services to the Fund in connection with the sale of Class C shares, including the payment of compensation to broker-dealers.
CLASS I SHARE PURCHASES
Class I shares are sold at
the NAV next determined after receipt of an investor’s purchase order. Class I shares are not subject to an initial sales
charge and are not subject to a CDSC upon redemption. Class I shares do not convert into any other class of shares. Class I shares
of the Fund are not currently being offered.
EXEMPTIONS FROM CDSC
No CDSC will be imposed on
Class I shares. No CDSC will be imposed on Class A or Class C shares in the following instances:
|
(a)
|
redemptions of shares or amounts representing
increases in the value of an account above the net cost of the investment due to increases in the NAV;
|
|
(b)
|
redemptions of shares acquired through reinvestment
of income, dividends or capital gains distributions; and
|
|
(c)
|
redemptions of Class A shares purchased in
the amount of $1 million or more and held for more than 24 months or Class C shares held for more than one year from the calendar
month in which the shares were purchased.
|
The CDSC will not apply to
purchases of Class A shares at NAV described under “Waivers of Sales Charge” in the Fund’s current prospectus
and will be waived for redemptions of Class A and Class C shares in connection with:
|
·
|
distributions to participants or beneficiaries
of plans qualified under Section 401(a) of the Code or from custodial accounts under Code Section 403(b)(7), individual retirement
accounts (“IRAs”) under Code Section 408(a), deferred compensation plans under Code Section 457 and other employee
benefit plans (“plans”);
|
|
·
|
withdrawals under an automatic withdrawal plan
where the annual withdrawal does not exceed 10% of the opening value of the account (only for Class C shares); and
|
|
·
|
redemptions following the death or disability
of a shareholder.
|
In determining whether the
CDSC on Class A or Class C shares is payable, it is assumed that shares not subject to a CDSC are redeemed first and that other
shares are then redeemed in the order purchased.
REDEMPTION OF SHARES
Investors in the Fund may
redeem shares on any day the Fund is open for business — normally when the NYSE is open — using the proper procedures
described below. See “Net Asset Value” for a list of the days on which the NYSE will be closed.
|
1.
|
Through the Distributor or Other Participating Dealers. If an investor’s
account has been established by the Distributor or a participating dealer, the investor should contact the Distributor or its account
executive at a participating dealer to assist the investor with the redemption. Requests received by a dealer before the close
of the NYSE and transmitted to the transfer agent by its close of business that day will receive that day’s NAV.
|
|
2.
|
Regular Redemption through Transfer Agent. Redemption requests sent
by mail to the transfer agent will receive the NAV of the shares being redeemed that is next determined after the request is received
in “good form.” “Good form” means that the request is signed in the name in which the account is registered
and the signature is guaranteed by a guarantor who participates in the medallion signature guarantee program. Eligible guarantors
include member firms of a national securities exchange, certain banks and savings associations and, credit unions, as defined by
the Federal Deposit Insurance Act. An investor should verify with the transfer agent that the institution is an acceptable (eligible)
guarantor before signing. The transfer agent reserves the right to request additional confirmation from guarantor institutions,
on a case by case basis, to establish eligibility.
A guarantee from a notary public is not acceptable
. Redemption requests
for $50,000 or less (whether written or telephonic), which are payable to the registered owner to the legal address of record do
not require an additional medallion signature guarantee at the time of redemption.
|
|
3.
|
Redemption by Telephone. Unless an investor has elected otherwise
on its new account application, redemption requests may be made by telephone with the transfer agent for amounts of $50,000. The
investor or its financial professional can sell shares of the Fund by calling 1-800-462-2392. Please press 1 and follow the automated
menu to speak with a customer service representative of the Fund. A check will be mailed to the investor on the following business
day.
|
Redemption requests by a
corporation, trust fiduciary, executor or administrator (if the name and title of the individual(s) authorizing such redemption
is not shown in the account registration) must be accompanied by a copy of the corporate resolution or other legal documentation
appointing the authorized individual, signed and certified within the prior 60 days. The investor may obtain from the Distributor,
the Fund or the transfer agent, forms of resolutions and other documentation, which have been prepared in advance to help shareholders
comply with the Fund’s procedures.
The Distributor does not
charge for its services in connection with the redemption of Fund shares, but upon prior notice may charge for such services in
the future. Other securities firms may charge their clients a fee for their services in effecting redemptions of shares of the
Fund.
Terms of Redemptions.
The amount of your redemption proceeds will be based on the NAV next computed after the Distributor, the Fund or the transfer agent
receives the redemption request in proper form. Payment for the redemption normally will be mailed to the shareholder, except as
provided below. A shareholder’s redemption proceeds, reduced by any applicable CDSC, will normally be mailed or wired the
day after the redemption is processed. If the shareholder purchased shares by check, the payment of redemption proceeds may be
delayed until the purchase check has cleared, which may take fifteen or more days. This potential delay can be avoided by purchasing
shares with federal funds or a certified check.
Beneficial owners of shares
held of record in the name of the Distributor or a participating dealer may redeem their shares only through that firm. The right
of redemption may be suspended or the date of payment postponed under certain emergency or extraordinary situations, such as suspension
of trading on the NYSE, or when trading in the markets the Fund normally uses is restricted or an emergency exists, as determined
by the Commission, so that disposal of the Fund’s assets or determination of its NAV is not reasonably practicable, or for
such other periods as the Commission by order may permit.
The Fund reserves the right
to redeem a shareholder’s account if its value is less than $2,500 due to redemptions. The affected Fund will give the shareholder
60 days’ notice to increase the account value to the minimum purchase amount. Redemption proceeds will be mailed in accordance
with the procedures described above.
Redemptions in Kind.
Although the Fund would not normally do so, the Fund has the right to pay the redemption price of shares of the Fund in whole or
in part in portfolio securities, as prescribed by the Trustees. When the shareholder sells portfolio securities received in this
fashion, a brokerage charge will be incurred and the shareholder may be subject to tax on any appreciation of such securities.
The Fund will value securities distributed in an in kind redemption at the same value as is used in determining NAV.
Short-Term Redemption
Fee.
The Fund charges a 2.00% short-term redemption fee on proceeds from shares redeemed (either by selling or exchanging into
another Fund) within 30 days after purchase. This fee will compensate the Fund for expenses directly related to the redemption
of Fund shares. These expenses include brokerage costs, charges for credit lines and other redemption related costs. The short-term
redemption fee is withheld from gross redemption proceeds and is paid to the Fund. This fee is not a deferred sales charge and
is not a sales commission.
The short-term redemption fee does not apply to
transactions involving:
|
·
|
Shares acquired through reinvestment of dividends and other distributions;
|
|
·
|
Shares converted from another share class of the same fund (in which
case the redemption fee period will carry over to the acquired shares);
|
|
·
|
Shares of the Fund in an account that is closed by the Fund because
it fails to meet the Fund’s minimum balance requirements and other similar non-discretionary transactions (
e.g.,
in
connection with fund mergers, acquisitions or liquidations); and
|
|
·
|
Certain automated or pre-established exchange, asset allocation,
systematic purchase exchange or redemptions, or dollar cost averaging programs.
|
The Fund reserves the right,
in its sole discretion, to impose (or not to impose) the short-term redemption fee to shares held through certain omnibus accounts
(
e.g.,
brokers, retirement plans and variable insurance products). The Fund will make this determination after considering,
among other things, the Fund’s costs of processing redemptions from these accounts and the ability of the omnibus account
to systematically assess the redemption fee at the individual account level. A shareholder should consult with its retirement plan
administrator or omnibus account representative to determine whether the redemption fee is applicable to the shareholder’s
shares.
The Fund will, upon written request, waive the
redemption fee under the following circumstances (and may waive the redemption fee under other circumstances):
- Any shareholder’s death or disability;
- Minimum required distributions from retirement
accounts;
- Return of excess contributions in retirement
accounts; and
- Redemptions resulting in the settlement of an
estate due to the death of the shareholder.
The Fund will use the first-in,
first-out method to determine a shareholder’s holding period. Under this method, the date of redemption or exchange will
be compared with the earliest purchase date of shares held in an account. If the holding period is less than 30 days, the short-term
redemption fee will be assessed on the NAV of those shares calculated at the time the redemption is effected.
REINSTATEMENT PRIVILEGE
(CLASS A SHARES)
A shareholder of Class A
shares who has redeemed such shares and has not previously exercised the reinstatement privilege may reinvest any portion or all
of the redemption proceeds in Class A shares at NAV (without a sales charge), provided that such reinstatement occurs within 120
calendar days after such redemption and the account meets the minimum account size requirement. This privilege may be modified
or terminated at any time by the Fund.
In order to use this privilege,
the shareholder must clearly indicate by written request to the applicable Fund that the purchase represents a reinvestment of
proceeds from previously redeemed Class A or Class C shares. If a shareholder realizes a gain on a redemption of shares, this gain
is taxable for federal income tax purposes even if all of such proceeds are reinvested. If a shareholder incurs a loss on a redemption
and reinvests the proceeds in the same Fund, part or all of such loss may not be currently deductible for such tax purposes. See
“Taxes” below.
The reinstatement privilege
may be used by each shareholder only once, regardless of the number of shares redeemed or repurchased.
However, the privilege
may be used without limit in connection with transactions for the sole purpose of transferring a shareholder’s interest in
the Fund to his or her IRA or other tax-qualified retirement plan account.
Purchases, Redemptions
or Exchanges Through Authorized Broker-Dealers or Investment Professionals.
Dealers may charge their customers a processing
or service fee in connection with the purchase or redemption of Fund shares. The amount and applicability of such a fee is determined
and disclosed to its customers by each individual dealer. Processing or service fees typically are fixed, nominal dollar amounts
and are in addition to the sales and other charges described in the current prospectuses and this SAI. Your dealer will provide
you with specific information about any processing or service fees that you may be charged.
NET ASSET VALUE
The Fund determines the NAV
of each class on each business day as of the close of regular trading (generally 4:00 p.m. Eastern time) on the NYSE by dividing
the Fund’s net assets attributable to that class by the number of its shares of that class outstanding. If the NYSE closes
early, the Fund accelerates the determination of NAV to the closing time. For purposes of calculating the NAV of Fund shares, the
Fund uses the following procedures. For purposes of determining NAV, expenses of the classes of the Fund are accrued daily and
taken into account. The Fund’s maximum offering price per Class A share is determined by adding the maximum sales charge
to the Class A NAV. Class C shares are offered at NAV without the imposition of an initial sales charge (Class C shares may be
subject to a CDSC). Class I shares are offered at NAV without the imposition of an initial sales charge or a CDSC. (At this time,
Class I shares are not currently offered.) The Fund values equity securities traded on a national exchange at their last sale price
on the day of valuation. The Fund values equity securities traded on the NASDAQ Stock Market at the NASDAQ Official Closing Price.
The Fund generally values equity securities for which no sales are reported or there is no closing price on a valuation day, and
securities traded over-the-counter, at the last available sale price.
The Fund values debt securities
on the basis of valuations furnished by a principal market maker or a pricing service, both of which generally rely either on the
latest bid and asked price or on electronic data processing techniques (matrix pricing) to value normal institutional size trading
units of debt securities without exclusive reliance upon quoted prices.
The Fund values short-term
debt instruments that have a remaining maturity of 60 days or less at the time of purchase at amortized cost, which approximates
market value.
If market quotations or official
closing prices are not readily available or if, in the opinion of the Adviser, any quotation or market price is not representative
of true market value, the Fund may determine the fair value of any security in good faith in accordance with procedures approved
by the Trustees.
The Fund values foreign securities,
if any, on the basis of quotations from the primary market in which they are traded. The Fund’s custodian translates assets
or liabilities expressed in foreign currencies into U.S. dollars based on London currency quotations as of 5:00 p.m., London time
(12:00 noon, Eastern time) on the date of determining the Fund’s NAV. If quotations are not readily available, or the value
of foreign securities has been materially affected by events occurring after the closing of a foreign market, the Fund may value
its assets by a method that the Trustees believe accurately reflects fair value.
The use of fair value pricing
by the Fund may cause the NAV of its shares to differ from the NAV that would be calculated using only market prices. Arbitrage
opportunities may exist in certain circumstances, such as when trading in a portfolio security held by the Fund is halted and does
not resume before the Fund calculates its NAV or when an event occurs after the closing of a foreign exchange that materially affects
the value of a security held by the Fund before the Fund calculates its NAV. These arbitrage opportunities may enable short-term
traders to dilute the NAV of long-term investors. Fair valuation of the Fund’s portfolio securities can serve to reduce arbitrage
opportunities available to short-term traders, but there is no assurance that fair value pricing will prevent dilution of any Fund’s
NAV by short-term traders. While the Fund has policies regarding excessive trading, these too may not be effective to prevent short-term
NAV arbitrage trading, particularly in regard to omnibus accounts.
On any day an international
market is closed and the NYSE is open, any foreign securities will be valued at the prior day’s close with the current day’s
exchange rate. Trading of foreign securities may take place on Saturdays and U.S. business holidays on which the Fund’s NAV
is not calculated. Consequently, the Fund’s portfolio securities may trade and the NAV of the Fund’s shares may be
significantly affected on days when a shareholder has no access to that Fund.
The NYSE is closed on the
following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
TAXES
Each series of the Trust,
including the Fund, is treated as a separate entity for U.S. federal income tax purposes. The Fund has elected, qualified, and
intends to continue to qualify for each taxable year, as a “regulated investment company” under Subchapter M of Subtitle
A, Chapter 1, of the Code. As such, the Fund intends to comply with the requirements of the Code regarding the sources of its income,
the timing of its distributions, and the diversification of its assets. If the Fund meets all such requirements, the Fund will
not be subject to U.S. federal income tax on its investment company taxable income and net capital gain that is distributed to
shareholders in accordance with the timing and other requirements of the Code. If the Fund did not qualify as a regulated investment
company, it would be treated as a U.S. corporation subject to U.S. federal income tax, thereby subjecting any income earned by
the Fund to tax at the corporate level, and when such income is distributed to a further tax at the shareholder level.
The Fund will be subject
to a 4% non-deductible U.S. federal excise tax on a portion of its undistributed ordinary income and capital gains if it fails
to meet certain distribution requirements with respect to each calendar year. The Fund intends under normal circumstances to seek
to avoid liability for such tax by satisfying such distribution requirements.
In order to qualify as a
regulated investment company under the Code, the Fund must, among other things: (i) derive at least 90% of its gross income for
each taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition
of stock, securities or foreign currencies, or other income (including gains from options, futures and forward contracts) derived
with respect to its business of investing in such stock, securities or currencies, and net income derived from interests in qualified
publicly traded partnerships (as defined in Section 851(h) of the Code) (the “90% income test”); and (ii) diversify
its holdings so that, at the end of each quarter of each taxable year: (a) at least 50% of the value of the Fund’s total
assets is represented by (1) cash and cash items, U.S. Government securities, securities of other regulated investment companies,
and (2) other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of
the value of the Fund’s total assets and to not more than 10% of the outstanding voting securities of such issuer, and (b)
not more
than 25% of the value of
the Fund’s total assets is invested in (1) the securities (other than U.S. Government securities and securities of other
regulated investment companies) of any one issuer, (2) the securities (other than securities of other regulated investment companies)
of two or more issuers that the Fund controls and that are engaged in the same, similar, or related trades or businesses, or (3)
the securities of one or more qualified publicly traded partnerships. For the purposes of the 90% income test, the character of
income earned by certain entities in which the Fund invests that are not treated as corporations (
e.g.,
partnerships, other
than qualified publicly traded partnerships, or trusts such as U.S. royalty trusts) for U.S. federal income tax purposes will generally
pass through to such Fund. Consequently, the Fund may be required to limit its equity investments in such entities that earn fee
income, royalty income, rental income or other non-qualifying income.
If the Fund qualifies as
a regulated investment company and properly distributes to its shareholders each taxable year an amount equal to or exceeding the
sum of: (i) 90% of its “investment company taxable income” as that term is defined in the Code (which includes, among
other things, dividends, taxable interest, and the excess of any net short-term capital gains over net long-term capital losses,
as reduced by certain deductible expenses) without regard to the deduction for dividends paid; and (ii) 90% of the excess of its
gross tax-exempt interest, if any, over certain disallowed deductions, the Fund generally will be relieved of U.S. federal income
tax on any income of the Fund, including “net capital gain” (the excess of net long-term capital gain over net short-term
capital loss), distributed to shareholders. However, if the Fund meets such distribution requirements, but chooses to retain some
portion of its investment company taxable income or net capital gain, it generally will be subject to U.S. federal income tax at
regular corporate rates on the amount retained. The Fund intends to distribute at least annually all or substantially all of its
investment company taxable income, net tax-exempt interest, and net capital gain.
For
U.S. federal income tax purposes, all dividends are taxable to a shareholder whether paid in cash or in shares. Dividends from
investment company taxable income are taxable either as ordinary income or, if so designated
by the Fund and certain other conditions are met, as “qualified dividend income” taxable to individual shareholders
at a maximum 15% U.S. federal income tax rate. Dividends from net capital gain, if any, are taxable to the Fund’s shareholders
as long-term capital gains for U.S. federal income tax purposes without regard to the length of time a shareholder has held shares
of the Fund.
Dividend income distributed
to individual shareholders will qualify for the maximum 15% U.S. federal income tax rate on dividends to the extent that such dividends
are attributable to “qualified dividend income,” as that term is defined in Section 1(h)(11)(B) of the Code, from the
Fund’s investments in common and preferred stock of U.S. companies and stock of certain qualified foreign corporations, provided
that certain holding period and other requirements are met by both the Fund and the shareholder.
A foreign corporation generally
is treated as a qualified foreign corporation if it is incorporated in a possession of the United States or it is eligible for
the benefits of certain income tax treaties with the United States. A foreign corporation that does not meet such requirements
will be treated as qualifying with respect to dividends paid by it if the stock with respect to which the dividends are paid is
readily tradable on an established securities market in the United States.
Dividends received by the
fund from passive foreign investment companies will not qualify for the maximum 15% U.S. federal income tax rate.
A dividend that is attributable
to qualified dividend income of the Fund that is paid by the Fund to an individual shareholder will not be taxable as qualified
dividend income to such shareholder if: (1) the dividend is received with respect to any share of the Fund held for fewer than
61 days during the 121-day period beginning on the date which is 60 days before the date on which such share became ex-dividend
with respect to such dividend, (2) to the extent that the shareholder is under an obligation (whether pursuant to a short sale
or otherwise) to make related payments with respect to positions in substantially similar or related property, or (3) the shareholder
elects to have the dividend treated as investment income for purposes of the limitation on deductibility of investment interest.
Capital gain dividends distributed
by the Fund to individual shareholders generally will qualify for the maximum 15% U.S. federal income tax rate on long-term capital
gains, subject to certain limited exceptions. A shareholder should also be aware that the benefits of the favorable tax rate applicable
to long-term capital gains and qualified dividend income may be impacted by the application of the alternative minimum tax to individual
shareholders. Under current law, the maximum 15% U.S. federal income tax rate on qualified dividend income and long-term capital
gains will cease to apply to taxable years of shareholders beginning after December 31, 2012.
Distributions by the Fund
in excess of its current and accumulated earnings and profits will be treated as a return of capital to the extent of (and in reduction
of) the shareholder’s tax basis in its shares and any such amount in excess of that basis will be treated as gain from the
sale of shares, as discussed below. The U.S. federal income tax status of all distributions will be reported to shareholders annually.
Any dividend declared by
the Fund as of a record date in October, November or December and paid the following January will be treated for U.S. federal income
tax purposes as received by shareholders on December 31 of the year in which it is declared. In addition, certain other distributions
made after the close of a taxable year of the Fund may be “spilled back” and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case, shareholders generally will be treated as having received
such dividends in the taxable year in which the distributions were actually made.
The Fund will not distribute
net capital gains realized in any year to the extent that a capital loss is carried forward from prior years against such gain.
For federal income tax purposes, each portfolio is permitted to carry forward a net capital loss realized in its taxable years
beginning before December 23, 2010 to offset its own capital gains, if any, during the eight years following the year of the loss.
For capital losses realized in taxable years beginning after December 23, 2010, the eight-year limitation has been eliminated,
so that any capital losses realized by a portfolio in the taxable year beginning October 1, 2011 and in subsequent taxable years
will be permitted to be carried forward indefinitely. To the extent subsequent net capital gains are offset by such losses, they
would not result in U.S. federal income tax liability to the Fund and, as noted above, would not be distributed to shareholders.
The Fund’s investment
in debt obligations that are at risk of or in default presents special tax issues for the applicable Fund. Tax rules are not entirely
clear about issues such as when the Fund may cease to accrue interest, original issue discount, or market discount; when and to
what extent deductions may be taken for bad debts or worthless securities; how payments received on obligations in default should
be allocated between principal and income; and whether exchanges of debt obligations in a workout context are taxable. These and
other issues will be addressed by the Fund, in the event that it invests in such securities, in order to seek to ensure that it
distributes sufficient income to preserve its status as a regulated investment company and does not become subject to U.S. federal
income or excise tax.
If the Fund invests in certain
pay-in-kind securities, zero coupon securities, deferred interest securities, or, in general, other securities with original issue
discount (or with market discount if the Fund elects to include market discount in income currently), must accrue income on such
investments for each taxable year, which generally will be prior to the receipt of the corresponding cash payments. However, the
Fund must distribute, at least annually, all or substantially all of its net income, including such income, to shareholders to
qualify as a regulated investment company under the Code and avoid U.S. federal income and excise taxes. Therefore, the Fund may
have to dispose of its portfolio securities under disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to allow satisfaction of the distribution requirements.
Foreign exchange gains and
losses realized by the Fund in connection with certain transactions involving foreign currency-denominated debt securities, certain
futures contracts and options relating to foreign currency, foreign currency forward contracts, foreign currencies, or payables
or receivables denominated in a foreign currency are subject to Section 988 of the Code. Section 988 generally causes such gains
and losses to be treated as ordinary income and losses and may affect the amount, timing and character of Fund distributions to
shareholders. Under Treasury regulations that may be promulgated in the future, any such transactions that are not directly related
to the Fund’s principal business of investing in stock or securities (or its options contracts or futures contracts with
respect to stock or securities) may have to be limited in order to enable the Fund to satisfy the 90% income test. If the net foreign
exchange loss for a year were to exceed the Fund’s investment company taxable income (computed with regard to such loss),
the resulting ordinary loss for such year may not be deductible by the Fund or its shareholders in future years.
Options written or purchased
and futures contracts entered into by the Fund on certain securities, indices and foreign currencies, as well as certain forward
foreign currency contracts, may cause the Fund to recognize gains or losses from marking-to-market even though those options may
not have lapsed, been closed out, sold, or exercised, or those futures or forward contracts may not have been performed, sold or
closed out. The tax rules applicable to
these contracts may affect
the characterization of some capital gains and losses realized by the Fund as long-term or short-term. Certain options, futures
and forward contracts relating to foreign currency may be subject to Section 988, as described above, and accordingly may produce
ordinary income or loss. Additionally, the Fund may be required to recognize gain if an option, futures contract, forward contract,
short sale, swap or other transaction that is not subject to the mark-to-market rules is treated as a “constructive sale”
of an “appreciated financial position” held by the Fund under Section 1259 of the Code. Any net mark-to-market gains
and/or gains from constructive sales may also have to be distributed to satisfy the distribution requirements referred to above
even though the Fund may receive no corresponding cash amounts, possibly requiring the disposition of Fund securities or borrowing
to obtain the necessary cash. Losses on certain options, futures or forward contracts, swaps and/or offsetting positions (Fund
securities or other positions with respect to which the Fund’s risk of loss is substantially diminished by one or more options,
futures or forward contracts) may also be deferred under the tax straddle rules of the Code, which may also affect the characterization
of capital gains or losses from straddle positions and certain successor positions as long-term or short-term. Certain tax elections
may be available that would enable the Fund to ameliorate some adverse effects of the tax rules described in this paragraph. The
tax rules applicable to options, futures, forward contracts, swaps, straddles, caps, floors, collars and swaptions may affect the
amount, timing and character of the Fund’s income and gains or losses and hence of its distributions to shareholders.
In some countries, restrictions
on repatriation may make it difficult or impossible for the Fund to obtain cash corresponding to its earnings from such countries,
which may cause the Fund to have difficulty obtaining cash necessary to satisfy tax distribution requirements.
The Fund may be subject to
withholding and other taxes imposed by foreign countries, including taxes on interest, dividends and capital gains, with respect
to its investments in such countries. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes
in some cases. Investors in the Fund would be entitled to claim U.S. foreign tax credits with respect to such taxes, subject to
certain holding period requirements and other provisions and limitations contained in the Code, only if more than 50% of the value
of the applicable Fund’s total assets at the close of the taxable year were to consist of stock or securities of foreign
corporations and the Fund were to file an election with the Internal Revenue Service (“IRS”). Because the investments
of the Fund are such that the Fund expects that it generally will not meet this 50% requirement, shareholders of the Fund generally
will not directly take into account the foreign taxes, if any, paid by that Fund and will not be entitled to any related tax credits.
Such taxes will reduce the amounts these Fund would otherwise have available to distribute. The Fund generally may deduct any foreign
taxes that are not passed through to its shareholders in computing its income that must be distributed to shareholders to avoid
Fund-level tax.
If the Fund acquires any
equity interest (including, under Treasury regulations that may be promulgated in the future, an option to acquire stock such as
is inherent in a convertible bond) in certain foreign corporations that receive at least 75% of their annual gross income from
passive sources (such as interest, dividends, certain rents and royalties, or capital gains) or that hold at least 50% of their
assets in investments producing such passive income (“passive foreign investment companies”), the Fund could be subject
to U.S. federal income tax and additional interest charges on “excess distributions” actually or constructively received
from such companies or on gain from the sale of stock in such companies, even if all income or gain actually realized is timely
distributed by the Fund to its shareholders. The Fund will not be able to pass through to its shareholders any credit for such
a tax. Elections may generally be available to ameliorate these adverse tax consequences, but any such elections could require
the Fund to recognize taxable income or gain (subject to tax distribution requirements) without the concurrent receipt of cash.
These investments could also result in the treatment of associated capital gains as ordinary income. The Fund may limit and/or
manage stock holdings, if any, in passive foreign investment companies to minimize the Fund’s tax liability or maximize its
return from these investments.
Dividends received by the
Fund, if any, from U.S. domestic corporations in respect of any shares of the stock of such corporations with a holding period
in an unleveraged position of at least 46 days (91 days in the case of certain preferred stock), extending before and after the
dividend dates and distributed and designated by the Fund (except for capital gain dividends received from a regulated investment
company) may be eligible for the 70% dividends received deduction generally available to a corporation under the Code. Corporate
shareholders must meet the minimum holding period requirements referred to above with respect to their shares of the applicable
Fund, taking into account any holding period reductions from certain hedging or other transactions or positions that diminish their
risk of loss with respect to Fund shares, in order to qualify for the deduction and, if they borrow to acquire, or
otherwise incur debt attributable
to, such shares, they may be denied a portion of the dividends-received deduction. The entire qualifying dividend, including the
otherwise deductible amount, will be included in determining the excess (if any) of a corporate shareholder’s adjusted current
earnings over its alternative minimum taxable income, which may increase its alternative minimum tax liability. Additionally, any
corporate shareholder should consult its tax adviser regarding the possibility that its basis in its Fund shares may be reduced,
for U.S. federal income tax purposes, by reason of “extraordinary dividends” received with respect to the shares, and,
to the extent such basis would be reduced below zero, current recognition of income would be required.
Upon a redemption (including
a systematic withdrawal), exchange or other disposition of shares of the Fund in a transaction that is treated as a sale for tax
purposes, a shareholder that is subject to tax generally will realize a taxable gain or loss on the difference between the redemption
proceeds and the shareholder’s tax basis in his shares. With respect to other funds, such gain or loss will generally be
treated as capital gain or loss if the shares are capital assets in the shareholder’s hands. Any loss realized by a shareholder
upon the redemption, exchange or other disposition of shares with a tax holding period of six months or less will be treated as
a long-term capital loss to the extent of any amounts treated as distributions of long-term capital gain with respect to such shares.
Shareholders should consult their own tax advisers regarding their particular circumstances to determine whether a disposition
of Fund shares is properly treated as a sale for tax purposes, as is assumed in the foregoing discussion.
In addition, if Class A shares
or Class C shares that have been held for less than 91 days, (1) are redeemed and reinvested in Class A shares of the Fund at NAV
pursuant to the reinstatement privilege, or (2) Class A shares are exchanged for Class A shares in another Fund at NAV pursuant
to the exchange privilege, all or a portion of the sales charge paid on the shares that are redeemed or exchanged will not be included
in their tax basis of such shares under the Code to the extent a sales charge that would otherwise apply to the shares received
is reduced pursuant to the reinstatement or exchange privilege. In either case, the portion of the sales charge not included in
the tax basis of the shares redeemed or surrendered in an exchange is included in the tax basis of the shares acquired in the reinvestment
or exchange.
Any loss realized on a redemption
or other disposition of shares may be disallowed under “wash sale” rules to the extent the shares disposed of are replaced
with other investments in the Fund (including those made pursuant to reinvestment of dividends and/or capital gain distributions)
within a period of 61 days beginning 30 days before and ending 30 days after a redemption or other disposition of the shares. In
such a case, the disallowed portion of any loss generally would be included in the U.S. federal tax basis of the shares acquired.
Withdrawals under the automatic withdrawal plan involve redemptions of shares, which are subject to the tax rules described above.
Additionally, reinvesting pursuant to the reinstatement privilege does not eliminate the possible recognition of gain or loss upon
the initial redemption of Fund shares but may require application of some of these tax rules (
e.g.,
the wash sale rules).
Under Treasury regulations,
if a shareholder recognizes a loss with respect to the Fund’s shares of $2 million or more for an individual shareholder,
or $10 million or more for a corporate shareholder, in any single taxable year (or greater amounts over a combination of years),
the shareholder must file with the IRS a disclosure statement on Form 8886. Shareholders who own portfolio securities directly
are in many cases excepted from this reporting requirement but, under current guidance, shareholders of regulated investment companies
are not excepted. A shareholder who fails to make the required disclosure to the IRS may be subject to substantial penalties. The
fact that a loss is reportable under these regulations does not affect the legal determination of whether or not the taxpayer’s
treatment of the loss is proper. Shareholders should consult with their tax advisers to determine the applicability of these regulations
in light of their individual circumstances.
Shareholders that are exempt
from U.S. federal income tax, such as retirement plans that are qualified under Section 401 of the Code, generally are not subject
to U.S. federal income tax on Fund dividends or distributions or on sales or exchanges of Fund shares unless the acquisition of
the Fund shares was debt financed. A plan participant whose retirement plan invests in the Fund generally also is not taxed on
Fund dividends or distributions received by the plan or on sales or exchanges of Fund shares by the plan for U.S. federal income
tax purposes. However, distributions to plan participants from a retirement plan account (other than certain distributions from
a ROTH IRA or Coverdell education savings account (Educational IRA)) generally are taxable as ordinary income and different tax
treatment, including penalties on certain excess contributions and deferrals, certain pre-retirement and post-retirement distributions
and certain prohibited transactions, is accorded to accounts maintained as qualified retirement plans. Shareholders and plan participants
should consult their tax advisers for more information.
The foregoing discussion
relates solely to U.S. federal income tax consequences for shareholders who are U.S. persons (i.e., U.S. citizens or residents
and U.S. corporations, partnerships, trusts or estates) and who are subject to U.S. federal income tax and hold their shares as
capital assets. Except as otherwise provided, the discussion does not address special tax rules applicable to certain classes of
investors, such as tax-exempt or tax-deferred plans, accounts or entities, insurance companies, securities dealers and financial
institutions. Dividends, capital gain distributions, and ownership of or gains realized on the redemption (including an exchange)
of Fund shares may also be subject to state and local taxes. A state income (and possibly local income and/or intangible property)
tax exemption is generally available to the extent, if any, the Fund’s distributions are derived from interest on (or, in
the case of intangible property taxes, the value of its assets is attributable to) investments in certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations and/or reporting requirements are satisfied. Shareholders
should consult their tax advisers regarding the applicable requirements in their particular states, as well as the U.S. federal,
and any other state or local, tax consequences of ownership of shares of, and receipt of distributions from, the Fund in their
particular circumstances.
Shareholders may be subject
to 28% backup withholding on reportable payments, including dividends, capital gain distributions, and the proceeds of redemptions
(and exchanges) of shares, if they fail to furnish the Fund with their correct taxpayer identification number and certain certifications.
The Fund may nevertheless be required to withhold if it receives notice from the IRS or a broker that the number provided is incorrect
or backup withholding is applicable as a result of previous underreporting of interest or dividend income.
Non-U.S. investors may be
subject to different U.S. federal income tax treatment. These investors may be subject to a nonresident alien withholding tax at
the rate of 30% (or a lower rate under an applicable tax treaty) on amounts treated as ordinary dividends from the Fund (other
than certain dividends derived from short-term capital gains and qualified interest income of the Fund currently only for certain
taxable years of the Fund commencing prior to January 1, 2012, provided that the Fund chooses to make a specific designation relating
to such dividends) or, unless an effective IRS Form W-8BEN or other authorized withholding certificate is on file, to backup withholding
at the rate of 28% on certain other payments from the Fund. The Fund does not expect to be a “U.S. real property holding
corporation” as defined in section 897(c)(2) of the Code or to be subject to look-through rules for gains from the sale or
exchange of U.S. real property interests. If the Fund were a U.S. real property holding corporation, certain distributions by the
Fund to non-U.S. shareholders would be subject to U.S. federal withholding tax at a rate of up to 35% and non-U.S. shareholders
owning 5% or more of the Fund within one year of certain distributions would be required to file a U.S. federal income tax return
to report such gains. Non-U.S. investors should consult their tax advisers regarding such treatment and the application of foreign
taxes to an investment in the Fund.
The Fund may be subject to
state or local taxes in any jurisdiction where the Fund may be deemed to be doing business. In addition, in those states or localities
that have income tax laws, the treatment of the Fund and its shareholders under such laws may differ from their treatment under
U.S. federal income tax laws, and an investment in the Fund may have tax consequences for shareholders different from those of
a direct investment in the Fund’s portfolio securities. Shareholders should consult their own tax advisers concerning these
matters.
TRUSTEES AND OFFICERS OF
THE TRUST
TRUSTEES AND OFFICERS
The direction and supervision
of the Trust is the responsibility of the Board. The Board establishes the Fund’s policies and oversees and reviews the management
of the Fund. The Board meets regularly to review the activities of the officers, who are responsible for day-to-day operations
of the Fund. The Board also reviews the various services provided by the Adviser, the subadviser and the Administrator (as defined
under “Administrator” herein) to ensure that the Fund’s general investment policies and programs are being carried
out and administrative services are being provided to the Fund in a satisfactory manner.
The Trustees and officers
of the Trust, their year of birth, and their principal occupations during the past five years are set forth below. Each Trustee
shall serve as Trustee until his resignation or termination as provided in the Trust’s Agreement and Declaration of Trust,
as amended (the “Declaration of Trust”) or until reaching the Trust’s mandatory retirement age for Trustees who
are “non-interested persons” as defined under the 1940 Act
(“Independent Trustees”)
(or any extension granted ). The Board may grant one or more extensions of service of up to 12 months to Independent Trustees who
have reached the age of retirement.
Each officer serves at the
pleasure of the Board or until a successor is elected. Unless otherwise indicated, the address of each Trustee and officer for
purposes of Trust business is c/o Burnham Investors Trust, 1325 Avenue of the Americas, 26
th
Floor, New York, NY 10019.
Unless otherwise stated, each Trustee oversees four portfolios of the Trust.
One of the six Trustees is
considered affiliated or “interested” persons under the 1940 Act (“Interested Trustees”). This category
is defined as including any person who is an officer, director, or employee of the Adviser or the Distributor. (collectively, the
“Burnham Companies”), as well as anyone who — individually or otherwise — owns, controls, or has voting
power over 5% or more of the securities of the Burnham Companies or of any of the Burnham Investor Trust’s funds. Federal
regulations require that Interested Trustees make up no more than 50% of any board of trustees. Currently, five of the six Trustees
are “non-interested persons,” as defined under the 1940 Act (“Independent Trustees”).
Although the Trust was formed
in 1998, the dates of service shown below include any time spent as director of the Trust’s predecessor organization, Burnham
Fund, Inc., which was formed in 1975.
Jon M. Burnham and Debra
B. Hyman are father and daughter, respectively.
Name, Address
and Age
|
Position
Held with
the Fund
|
Term of
Office
and Time
Served
|
Principal Occupation During
the Past 5 Years
|
Other Directorships held by
Trustee During the Past 5
Years
|
|
|
|
|
|
INDEPENDENT TRUSTEES
|
|
|
|
JOYCE E. HEINZERLING (1956)
|
Trustee
|
since 2004
|
Principal, Meridian Fund Advisers LLC, since 2009
(consulting firm); General Counsel, Archery Capital LLC, 2000 –2009 (private investment fund).
|
Director, Value Line Funds, since 2008.
|
BRUCE
MAC CORKINDALE
|
Lead Independent Trustee
|
since 2010
|
President and Managing Partner, Bruce Mac Corkindale,
CPA, P.C., since 1985
|
N/A
|
|
|
|
|
|
JOHN C. MCDONALD (1936)
|
Trustee
|
since 1989
|
President, MBX, Inc. (since 1991) (telecommunications).
|
N/A
|
ROBERT F. SHAPIRO
(1934)
|
Trustee
|
since 1989
|
Vice Chairman,
Klingenstein, Fields & Co., LLC, since 1996
(investment management).
|
Director, TJX Companies, 1974 – 2010(retail);
Director, Genaera, 1996 – 2009 (research).
|
|
|
|
|
|
WILLIAM F. CONNELL
(1944)
|
Trustee
|
since 2012
|
Founding Partner, Connell & Andersen LLP, formerly Connell & Taylor (1983 to present); and Founding Partner Connell & Wiener (1983 to present).
|
Director – Sumitomo Trust and Banking Co. (USA) Ltd. (1989-2007)
|
Name, Address
and Age
|
Position
Held with
the Fund
|
Term of
Office
and Time
Served
|
Principal Occupation During
the Past 5 Years
|
Other Directorships held by
Trustee During the Past 5
Years
|
INTERESTED TRUSTEES
|
|
|
|
JON M. BURNHAM
(
1936
)
|
Chairman, President, Chief Executive Officer and
Trustee
|
since 1989
|
Chairman and Chief Executive Officer of the Adviser since 1995 and Director of the Adviser, and Distributor since 1989.
|
N/A
|
PRINCIPAL OFFICERS
|
|
|
|
THOMAS N. CALABRIA
(1968)
|
Chief Compliance Officer (“CCO”) and
Secretary
|
CCO since 2006 and Secretary since June 22, 2012
|
Chief Compliance Officer of the Adviser since 2007; Vice President of the Adviser and Distributor, 2005 to Present.
|
N/A
|
PAT A. COLLETTI
(1958)
|
Chief Financial Officer and Treasurer
|
since June 22, 2012
|
Independent Consultant (2010-2012); First Vice President, Burnham Asset Management Corporation (2004-2010).
|
N/A
|
|
|
|
|
|
RONALD M. GEFFEN
(
1952
)
|
Vice President
|
since 1990
|
Managing Director of the Adviser and the Distributor,
since 1990.
|
N/A
|
DEBRA B. HYMAN
(
1961
)
|
Executive Vice President
|
since 1989
|
Vice President and Director of the Adviser and
the Distributor, since 1989.
|
N/A
|
|
|
|
|
|
FRANK A. PASSANTINO
(
1964
)
|
First Vice President, Assistant Secretary and
Anti-Money Laundering Compliance
Officer
|
since 1990
since 1999
|
First Vice President of the Adviser and the Distributor, since 1990.
|
N/A
|
BOARD STRUCTURE
The Board is comprised of
five Trustees, four of whom (80%) are Independent Trustees. The Board has appointed Mr. Burnham (an Interested Trustee) as
its Chair and Chief Executive Officer. The Board has established the position of Lead Independent Trustee and has appointed Mr.
Mac Corkindale as the Lead Independent Trustee. The Lead Independent Trustee, among other responsibilities, chairs meetings of
the Independent Trustees, serves as a spokesperson for the Independent Trustees, and serves as a liaison between the Independent
Trustees and the Trust’s management between Board meetings. The Board has established three standing committees: the Audit
Committee, the Nominating Committee and the Valuation Committee. These committees are chaired by, and composed entirely of, Independent Trustees.
See “Committees” below for a further description of the composition, duties and responsibilities of these committees.
The Trustees and the members
of the Board’s committees annually evaluate the performance of the Board and the committees, which evaluation includes considering
the effectiveness of the Board’s committee structure. The Board believes that its leadership structure, including an Interested
Trustee as the Chair and an Independent Trustee as the Lead Independent Trustee, is appropriate in light of the asset size of the
Trust, the number of funds offered by the Trust, and the nature of its business, and is consistent with industry practices. In
particular, the Board believes that having a super-majority of Independent Trustees is appropriate and in the best interests of
Fund shareholders. The Board, including the Independent Trustees, believes the existing structure enables them to exercise effective
oversight over the Fund and its operations and to access effectively the expertise and views of the Chief Executive Officer of
the Adviser and Distributor.
RISK OVERSIGHT
As part of its responsibilities
for oversight of the Trust and the Fund, the Board oversees risk management of the Fund’s investment program and business
affairs. Day-to-day risk management functions are subsumed within the responsibilities of the Fund’s Adviser, sub-advisers
and other service providers (depending on the nature of the risk). The Fund is subject to a number of risks, including investment,
compliance, valuation and operational risks. The Board interacts with and reviews reports from the Advisers, the independent registered
public accounting firm for the Fund, Administrator and sub-administrator regarding risks faced by the Fund and the service providers’
risk functions. The Board performs its oversight responsibilities as part of its Board and Committee activities. The Board has
delegated to the Audit Committee oversight responsibility of the integrity of the Trust’s financial statements, the Trust’s
compliance with legal and regulatory requirements as they relate to the financial statements, the independent auditor’s qualifications
and independence, the Trust’s internal controls over financial reporting, the Trust’s disclosure controls and procedures
and the Trust’s Code of Business Conduct and Ethics pursuant to the Sarbanes-Oxley Act of 2002. The Audit Committee reports
areas of concern, if any, to the Board for discussion and action.
The Board, including the
Independent Trustees, has approved the Trust’s compliance program and appointed the Trust’s CCO, who is responsible
for testing the compliance procedures of the Trust and certain of its service providers. Senior management and the CCO report at
least quarterly to the Board regarding compliance matters relating to the Trust, and the CCO annually assesses (and reports to
the Board regarding) the operation of the Trust’s compliance program. The Independent Trustees meet at least quarterly with
the CCO outside the presence of management. The Independent Trustees also regularly meet outside the presence of management and
have engaged independent legal counsel to assist them in performing their oversight responsibilities.
QUALIFICATIONS AND EXPERIENCE
OF TRUSTEES AND NOMINEES
The Board believes that each
Trustee’s experience, qualifications, attributes or skills on an individual basis and in combination with those of the other
Trustees lead to the conclusion that each Trustee should serve in such capacity. Among other attributes common to all Trustees
are their ability to review critically, evaluate, question and discuss information provided to them, to interact effectively with
the Advisers, other service providers, counsel and the independent registered public accounting firm, to exercise effective business
judgment in the performance of their duties, and to represent the interests of all the shareholders. A Trustee’s ability
to perform the duties effectively may have been attained through educational background or professional training; business, consulting
or academic positions; experience from service as a Trustee of the Trust, or in various roles at public companies, private entities
or other organizations; and/or other life experiences. In addition to these shared characteristics, set forth below is a brief
discussion of the specific qualifications, attributes or skills of each Trustee that support the conclusion that each person is
qualified to serve as a Trustee.
Independent Trustee
Ms. Heinzerling
has
served as an Independent Trustee on the Board since 2004. Her relevant experience includes being a principal of a regulatory consulting
company, former general counsel to an investment adviser and director of an unaffiliated mutual fund family.
Mr. Mac Corkindale
has served as an Independent Trustee on the Board since 2010. His relevant experience includes being a Certified Public Accountant
with 38 years of experience in public accounting, an independent consultant with respect to tax, accounting and financial reporting
matters and director and officer of various non-public entities.
Mr. McDonald
has served
as an Independent Trustee on the Board since 1989. His relevant experience includes being the founder and president of a communications
research organization, and a member of various private company and educational boards.
Mr. Shapiro
has served
as an Independent Trustee on the Board since 1989. His relevant experience includes being a member of senior management and partner
to an investment management company and director on boards of companies in various industries, including retail and medical research.
Mr. Connell
has served as an Independent
Trustee on the Board since June 2012. His relevant experience includes over 25 years of experience in law and business, including
founding a legal practice focusing on international banking, as well as advising lenders in corporate finance, asset-backed finance,
commodity finance and other lending transactions.
Interested Trustee
Mr. Burnham
has served
as an Interested Trustee on the Board since 1989. His relevant experience includes being the Chairman, President, Chief Executive
Officer and Trustee of the Trust, Chairman, Chief Executive Officer and Director of the Adviser and the Distributor, and the portfolio
manager to the Burnham Fund.
COMMITTEES
The Board has an Audit Committee
consisting of Messrs. Mac Corkindale and Connell. All of the members of the Audit Committee are Independent Trustees. The Audit
Committee reviews the scope and results of the Trust’s annual audit with the Trust’s independent registered public
accounting firm and recommends the engagement of such accounting firm. The Audit Committee met ____ times during the fiscal year
ended December 31, 2012.
The Board has a Nominating
Committee consisting of Mr. Mac Corkindale and Mr. McDonald, each an Independent Trustee. The Nominating Committee is responsible
for considering candidates for election to the Board in the event a position is vacated or created. The Nominating Committee meets
as necessary. The Nominating Committee met ________times during the fiscal year ended December 31, 2012. As long as an existing
Independent Trustee continues, in the opinion of the Nominating Committee, to satisfy certain criteria used in evaluating candidates
for independent trustee, the Board anticipates that the Nominating Committee would favor the re-nomination of an existing Trustee
rather than a new candidate. Consequently, while the Nominating Committee will consider candidates timely recommended by shareholders
to serve as trustee, the Nominating Committee may only act upon such recommendations if there is a vacancy on the Board or the
Nominating Committee determines that the selection of a new or additional Independent Trustee is in the best interests of the Trust.
Any recommendation should be submitted in writing to the Secretary of the Trust, c/o Burnham Asset Management Corporation, 1325
Avenue of the Americas, New York, New York 10019. Any submission should include at a minimum the following information: as to each
individual proposed for election or re-election as an Independent Trustee, the name, age, business address, residence address and
principal occupation or employment of such individual, the class, series and number of shares of stock of the Trust that are beneficially
owned by such individual, the date such shares were acquired and the investment intent of such acquisition, whether such shareholder
believes such individual is, or is not, an Independent Trustee, and information regarding such individual that is sufficient, in
the discretion of the Committee, to make such determination. In a case where the Trust is
holding a meeting of shareholders,
any such submission, in order to be considered for inclusion in the Trust’s proxy statement, should be submitted within a
reasonable time before the Trust begins to print and mail its proxy statement. In the event that a vacancy arises or a change in
Board membership is determined to be advisable, the Nominating Committee will, in addition to any timely submitted shareholder
recommendations, consider candidates identified by other means, including candidates proposed by members of the Nominating Committee
or other Independent Trustees. The Trust’s charter for the Nominating Committee specifically precludes discrimination against
nominees on the basis of age, race, religion, national origin, sex, sexual orientation, disability or any other basis proscribed
by law.
The Board has a Valuation
Committee consisting of Mr. Mac Corkindale and Mr. Connell, each an Independent Trustee. The Valuation Committee has responsibility
for the fair value pricing of any securities held by the Fund, as necessary. The Valuation Committee of the Board met ______during
the fiscal year ended December 31, 2012. The Board and the Valuation Committee have delegated responsibility for the fair value
pricing of certain securities held by the Fund that, in the Board’s judgment, are unlikely to have a material effect on the
Fund’s NAV, to the Adviser’s valuation committee.
SECURITY AND OTHER INTERESTS
The table below sets forth
the dollar range of equity securities beneficially owned by each Trustee in each series of the Trust and in all registered investment
companies overseen by the Trustee within the Trust’s family of investment companies, as defined in Form N-1A under the 1940
Act, as of December 31, 2012.
Name of Trustee
|
Dollar
Range of Equity
Securities in the Fund
(1)
|
Aggregate Dollar Range of Equity
Securities in All Registered
Investment Companies Overseen
by Trustee in Family of
Investment Companies
|
INDEPENDENT TRUSTEES
|
|
|
|
|
|
Joyce E. Heinzerling
|
None
|
|
Bruce Mac Corkindale
|
None
|
|
John C. McDonald
|
None
|
|
Robert F. Shapiro
|
None
|
|
William F. Connell
|
|
|
|
|
|
INTERESTED TRUSTEES
|
|
|
Jon M. Burnham
|
None
|
|
|
|
|
|
|
(1)
Securities
“beneficially owned” as defined under the Securities Exchange Act of 1934, as amended (the “1934 Act”),
include direct and or indirect ownership of securities where the Trustee’s economic interest is tied to the securities,
employment ownership and securities where the Trustee can exert voting power and where the Trustee has authority to sell the securities.
The dollar ranges are: None, $1-$10,000, $10,001-$50,000, $50,001-$100,000 and over $100,000.
As of [December 31, 2012],
none of the Independent Trustees, or their immediate family members, owned, beneficially or of record, any securities in the Adviser
or principal underwriter of the Trust, or in a person (other
than a registered investment
company) directly or indirectly controlling, controlled by or under common control with the Adviser or principal underwriter of
the Trust.
COMPENSATION OF TRUSTEES
AND OFFICERS
Trustees and officers affiliated
with the Distributor or the Adviser are not compensated by the Trust for their services.
The Trust typically
pays the Independent Trustees an annual retainer and a per-meeting fee and reimburses them for their expenses associated with attendance
at meetings. The aggregate amount of compensation paid to each Independent Trustee by the Trust for the year ended December 31,
2012, was as follows:
Name of Person,
Position
|
Aggregate
Compensation
from Fund*
|
Pension or
Retirement Benefits
Accrued as Part of
Trust Expenses
|
Total
Compensation
from Registrant
and Fund
Complex
|
INDEPENDENT Trustees
|
|
|
William F. Connell
|
$0
|
N/A
|
|
Joyce E. Heinzerling
|
$0
|
N/A
|
|
John C. McDonald
|
$0
|
N/A
|
|
Bruce Mac Corkindale
|
$ 0
|
N/A
|
|
Robert F. Shapiro
|
$0
|
N/A
|
|
|
*
|
Amount does not include reimbursed expenses for attending Board and applicable Committee meetings.
|
PORTFOLIO MANAGERS
Other Accounts Managed
The following table provides
information about funds and accounts, other than the Fund, for which the Fund’s portfolio managers are primarily responsible
for the day-to-day portfolio management as of December 31, 2012.
|
Number of Other Accounts Managed and
Total Assets by Account Type
|
Number of Other Accounts and Total
Assets for Which Advisory Fee is
Performance-Based
|
Name of
Portfolio Manager
|
Registered
Investment
Companies
|
Other Pooled
Investment
Vehicles
|
Other
Accounts
|
Registered
Investment
Companies
|
Other
Pooled
Investment
Vehicles
|
Other
Accounts
|
Burnham Energy
Income and MLP
Fund
|
|
|
|
|
|
|
Paul Elliot, CFA
|
0
|
[ ]
|
[ ]
|
0
|
[ ]
|
[ ]
|
Dan Tulis, CFA
|
0
|
[ ]
|
[ ]
|
0
|
[ ]
|
[ ]
|
James Elliot, CFA
|
0
|
[ ]
|
[ ]
|
0
|
[ ]
|
[ ]
|
William Maze
|
0
|
[ ]
|
[ ]
|
0
|
[ ]
|
[ ]
|
|
Number of Other Accounts Managed and
Total Assets by Account Type
|
Number of Other Accounts and Total
Assets for Which Advisory Fee is
Performance-Based
|
Name of
Portfolio Manager
|
Registered
Investment
Companies
|
Other Pooled
Investment
Vehicles
|
Other
Accounts
|
Registered
Investment
Companies
|
Other
Pooled
Investment
Vehicles
|
Other
Accounts
|
Paul Doran
|
0
|
[ ]
|
[ ]
|
0
|
[ ]
|
[ ]
|
Description of Compensation
Burnham Energy Income
and MLP Fund
– Pursuant to a subadvisory agreement, the Adviser has hired Elco Management Company, LLC (“ELCO”),
to provide investment advisory services to the Fund. For services provided to the Fund, the Adviser (and not the Fund) pays the
subadviser at the rates set forth in the subadvisory agreement. The following portfolio managers have had primary day-to-day responsibility
for the Fund’s portfolio since its inception:
Portfolio Manager
|
Portfolio
Manager Since
|
Paul Elliot, CFA, Founder
Mr. Elliot has more than 30 years of portfolio
management and research experience. He founded ELCO Management in 1995. Prior to ELCO, he was a managing director of Dominick &
Dominick and a Partner and Senior Research Analyst of SG Cowen.
|
2013
|
Dan Tulis, CFA, Chief Investment Officer
Mr. Tulis has more than 30 years research and
portfolio management experience. He joined ELCO in 2002 as Chief Investment Officer, Prior to ELCO, he was Managing Director, Head
of Energy Research at Banc of America.
|
2013
|
James Elliot, CFA, Portfolio Manager and Senior
Analyst
Mr. Elliot has more than 15 years of research
and portfolio management experience. He joined the firm in 1995 as a Portfolio Manager. Prior to joining ELCO, he was a Portfolio
Manager, Research Analyst and Trader for Cowen Asset Management from 1992 - 2002.
|
2013
|
William Maze, Strategist and Portfolio Manager
Mr. Maze has more than 18 years of research and
portfolio management experience. Prior to joining ELCO in 2012 as a Strategist and Portfolio Manager, he was Co-Manager of Ecofin
Ltd.,(2005-2011); and served as the head of research for Neuberger Berman’s Utility, MLP, Coal and Energy Technology group,
(2003-2005).
|
2013
|
Paul Doran, Analyst, Trader, Risk Officer
Mr. Doran has more than 7 years of research, trading,
and risk management experience. Prior to joining ELCO in 2007 as analyst, he was employed at UBS Financial Services.
|
2013
|
The compensation structure
for the portfolio managers for this Fund is determined by ELCO in accordance with its own internal policies. The portfolio managers
are compensated by ELCO. They are paid an annual bonus. The bonus is discretionary and is determined by Paul Elliot, Founder of
ELCO. The bonus is based in part on the amount of assets under management and performance.
Potential Conflicts of Interest
References in this section
to the Adviser include Burnham Asset Management Corporation and ELCO.
When a portfolio manager
is responsible for the management of more than one account, the potential arises for the portfolio manager to favor one account
over another. The side-by-side management of the Fund, separate accounts,
proprietary accounts and
pooled investment vehicles may raise potential conflicts of interest relating to the allocation of investment opportunities and
the aggregation and allocation of trades. In addition, certain trading practices such as cross trading between the Fund and another
account raise conflicts of interest. The principal types of potential conflicts of interest that may arise are discussed below.
Although the Trust and the Adviser have adopted procedures that they believe are reasonably designed to detect and prevent violations
of the federal securities laws and to mitigate the potential for conflicts of interest to affect portfolio management decisions,
there can be no assurance that all conflicts will be identified or that all procedures will be effective in mitigating the potential
for such risks. Generally, the risks of such conflicts of interests are increased to the extent that a portfolio manager has a
financial incentive to favor one account over another.
|
·
|
A portfolio manager could favor one account over another in allocating new investment opportunities
that have limited supply, such as IPOs and private placements. If, for example, an IPO that was expected to appreciate in value
significantly shortly after the offering was allocated to a single account, that account may be expected to have better investment
performance than other accounts that did not receive an allocation of the IPO.
|
|
·
|
A portfolio manager could favor one account over another in the order in which trades for the accounts
are placed. If a portfolio manager determines to purchase a security for more than one account in an aggregate amount that may
influence the market price of the security, accounts that purchased or sold the security first may receive a more favorable price
than accounts that made subsequent transactions. The less liquid the market for the security or the greater the percentage that
the proposed aggregate purchases or sales represent of average daily trading volume, the greater the potential for accounts that
make subsequent purchases or sales to receive a less favorable price. When a portfolio manager intends to trade the same security
on the same day for more than one account, the trades typically are “bunched,” which means that the trades for the
individual accounts are aggregated and each account receives the same price. There are some types of accounts as to which bunching
may not be possible for contractual reasons (such as directed brokerage arrangements). Circumstances may also arise where the trader
believes that bunching the orders may not result in the best possible price. Where those accounts or circumstances are involved,
the portfolio manager will place the order in a manner intended to result in as favorable a price as possible for such client.
|
|
·
|
A portfolio manager could favor an account if the portfolio manager’s compensation is tied
to the performance of that account to a greater degree than other accounts managed by the portfolio manager. If, for example, the
portfolio manager receives a bonus based upon the performance of certain accounts relative to a benchmark while other accounts
are disregarded for this purpose, the portfolio manager will have a financial incentive to seek to have the accounts that determine
the portfolio manager’s bonus achieve the best possible performance to the possible detriment of other accounts. Similarly,
if the Adviser receives a performance-based advisory fee, the portfolio manager may favor that account, whether or not the performance
of that account directly determines the portfolio manager’s compensation.
|
|
·
|
A portfolio manager could favor an account if the portfolio manager has a beneficial interest in
the account, in order to benefit a large client or to compensate a client that had poor returns. For example, if the portfolio
manager held an interest in an investment partnership that was one of the accounts managed by the portfolio manager, the portfolio
manager would have an economic incentive to favor the account in which the portfolio manager held an interest.
|
If the different accounts
have materially and potentially conflicting investment objectives or strategies, a conflict of interest could arise. For example,
if a portfolio manager purchases a security for one account and sells the same security short for another account, such trading
pattern may disadvantage either the account that is long or short. In making portfolio manager assignments, the Trust and
the Adviser seek to avoid such potentially conflicting situations. However, where a portfolio manager is responsible for accounts
with differing investment objectives and policies, it is possible that the portfolio manager will conclude that it is in the
best interest of one account to sell a portfolio security while another account continues to hold or increase the holding
in such security.
Ownership of Securities
The following table sets
forth the dollar range of equity securities of the Fund beneficially owned by each portfolio manager as of the date of this SAI.
|
Dollar Range of Fund Shares Beneficially Owned
|
Burnham Income and MLP Fund
|
|
Paul Elliot, CFA
|
$0
|
Dan Tulis, CFA
|
$0
|
James Elliot, CFA
|
$0
|
William Maze
|
$0
|
Paul Doran
|
$0
|
CONTROL PERSONS AND PRINCIPAL
SHAREHOLDERS
The Fund was not operational
on the date of this SAI. Therefore, there are no control persons or principal shareholders.
MANAGEMENT AND OTHER SERVICES
INVESTMENT ADVISER
Burnham Asset Management
Corporation, located at 1325 Avenue of the Americas, 26
th
Floor, New York, New York 10019, was organized in 1989 in
its capacity as investment adviser to the Fund’s high net worth individuals and tax-exempt institutional investors. Burnham
Asset Management Corporation is a wholly-owned subsidiary of Burnham Financial Group Inc., a holding company. Jon M. Burnham owns
55% of Burnham Financial Group Inc. (“Burnham Financial”). On October 11, 2012, executed a definitive agreement to
sell a majority equity interest in Burnham Financial to a newly formed company, Burnham Financial Group LLC. The transaction is
expected to occur in the first quarter of 2013 before the Fund commences operation.
The Fund has entered into
an investment advisory contract (the “Advisory Agreement”) with the Adviser, pursuant to which the Adviser will: (a)
furnish continuously an investment program for the Fund and determine, subject to the overall supervision and review of the Trustees,
which investments should be purchased, held, sold or exchanged, or select a subadviser to carry out this responsibility, and (b)
supervise all aspects of the Fund’s investment operations except those which are delegated to an administrator, custodian,
transfer agent or other agent. The Fund bears all costs of their organization and operation that are not specifically required
to be borne by another service provider.
As compensation for its services
under the Advisory Agreement, the Fund pays the Adviser monthly a fee based on a stated percentage of the average daily net assets
of the Fund as follows:
Average Daily Net Assets
|
Base Fee Rate
|
First $500 million
|
1.00%
|
More than $500 million and up to $1 billion
|
0.95%
|
More than $1 billion and up to $3 billion
|
0.90%
|
Over $3 billion
|
0.85%
|
From time to time, the Adviser
may reduce its fee or make other arrangements to limit the Fund’s expenses to a specified percentage of average daily net
assets. The Adviser and the Distributor have agreed to waive all or a portion of their management fees and Rule 12b-1 fees, respectively,
and reimburse certain other expenses, to the extent required to reduce “Total Annual Operating Expenses” to 1.95%,
2.65% and 1.48% of the average daily net assets attributable to Class A, Class C and Class I shares, respectively. This expense
limitation agreement is effective for the period beginning ____, 2013 and will terminate on _____2014, unless it is renewed.
The expense caps will not
apply to interest charges on borrowings, taxes, brokerage commissions, dealer spreads and other transaction costs, expenditures
that are capitalized in accordance with generally accepted accounting principles, “Acquired Fund” (as defined in Form
N-1A under the 1940 Act) fees and expenses, short sale dividends, extraordinary expenses not incurred in the ordinary course of
the Fund’s business (
e.g.
, litigation and indemnification), and any other costs and expenses that may be approved
by the Board. Extraordinary expenses are expenses that are unusual or are expected to recur infrequently, and may include, but
are not limited to: (i) expenses of the reorganization, restructuring or merger of the Fund, including the acquisition of all the
assets of the Fund or the acquisition by the Fund of another fund’s assets, (ii) expenses of substantially rewriting and
reformatting the Fund’s disclosure documents, (iii) expenses of holding, and soliciting proxies, for a shareholder meeting
to consider and vote upon changes to the Fund’s investment policies and restrictions, charter documents or other fundamental
matters, and (iv) expenses of converting to a new custodian, transfer agent or other service provider. Any fee reduction or expense
reimbursement made by the Adviser and/or the Distributor to the Fund will be subject to recovery from that Fund by the Adviser
and/or the Distributor within the three year period following the end of the fiscal year in which the fee reduction or reimbursement
occurred. Subject to the three year limitation, the oldest unrecovered fee reductions and expense reimbursements will be recoverable
before later reductions and reimbursements.
Securities held by the Fund
may also be held by other investment advisory clients for which the Adviser or its affiliates provide investment advice. Because
of different investment objectives or other factors, a particular security may be bought for one or more Burnham Investor Trust’s
mutual funds, including the Fund, or clients when one or more are selling the same security. If opportunities for purchase or sale
of securities by the Adviser for the funds or for other investment advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for the respective funds or clients in a manner deemed
equitable to all of them. To the extent that transactions on behalf of more than one client of the Adviser or its affiliates may
increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price.
Pursuant to the Advisory
Agreement, the Adviser is not liable to the Fund or its shareholders for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which the Advisory Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the performance of its duties or from reckless disregard
by the Adviser of its obligations and duties under the Advisory Agreement.
Under the Advisory Agreement,
the Trust and the Fund may use the name “Burnham” or any name derived from or similar to it only for so long as the
Advisory Agreement or any extension, renewal or amendment thereof remains in effect. If the Advisory Agreement is no longer in
effect, the Trust and the Fund (to the extent that they lawfully can) will cease to use such a name or any other name indicating
that it is advised by or otherwise connected with the Adviser.
The Trust and the Adviser
have received an exemptive order from the Commission that permits the Adviser, subject to the approval of the Board, to select
subadvisers to serve as portfolio managers of the Fund or to materially modify an existing subadvisory agreement without obtaining
shareholder approval of a new or amended subadvisory agreement. Pursuant to the exemptive relief, the Adviser has ultimate responsibility
to oversee and to recommend the hiring, termination and replacement of any subadviser. The Fund operates pursuant to the exemptive
order
SUBADVISER
ELCO Management Company, LLC (“ELCO”
or the “Sub-Adviser”) is the sub-adviser to the Fund. Its principal office is located at 1325 Avenue of the Americas,
26
th
Floor, New York, New York 1001. ELCO is a limited liability corporation organized in the state of New York. ELCO
is a registered investment adviser and has been providing investment advisory services that focus on the financial services industry
to private and public investment companies since 1995.
.
For its services to the Fund, the Adviser pays
the subadviser a subadvisory fee expressed as an stated percentage of the Fund’s average daily net assets as follows:
Average Daily Net Assets
|
Base Fee Rate
|
First $500 million
|
0.50%
|
More than $500,000 million and up to $1 billion
|
0.45%
|
More than $1 billion and up to $3 billion
|
0.40%
|
Over $3 billion
|
0.35%
|
The Fund has no obligation to pay subadvisory
fees.
Codes of Ethics.
To
mitigate the possibility that the Fund will be adversely affected by personal trading of employees, the Fund, Adviser, subadviser
and Distributor have adopted codes of ethics under Rule 17j-1 under the 1940 Act. These codes contain policies restricting securities
trading in personal trading accounts of Trustees and others who normally come into possession of information about Fund portfolio
transactions. These codes of ethics permit personnel subject to the codes to invest in securities, including securities that may
be purchased or held by the Fund. These codes of ethics can be reviewed and copied at the Commission’s Public Reference Room
in Washington, D.C., and information on the operation of the Commission’s Public Reference Room may be obtained by calling
the Commission at 1-202-942-8090. Also, these codes of ethics are available on the EDGAR Database on the Commission’s Internet
site at www.sec.gov, and copies of these codes of ethics may be obtained, after paying a duplicating fee, by electronic request
at the following e-mail address: publicinfo@sec.gov, or by writing the Commission’s Public Reference Section, Washington,
D.C. 20549-0102.
Proxy Voting Procedures.
The Board has adopted Proxy Voting Policies and Procedures (“Procedures”) on behalf of the Trust. Under the Procedures,
the responsibility for voting proxies is delegated to the Adviser, who may further delegate such responsibility to a third party
provider of proxy administration services, subject to the oversight of the Board and the Proxy Oversight Group, a committee of
senior officers. The Procedures require that the Adviser vote proxies received in a manner consistent with the best interests of
the Fund and its shareholders. The Procedures allow the Adviser to engage an independent proxy voting service to assist in the
voting of proxies by providing research and administrative services relating to proxy voting. The proxy voting service may also
provide recommendations and research for proxy votes; however, the actual votes will be cast by the Adviser. The Procedures require
that the Adviser take reasonable steps to ensure that any third party proxy voting service is independent of the Adviser based
on relevant facts and circumstances.
The Adviser with the approval
of the Board has contracted with Glass Lewis & Co., to provide research, make voting recommendations, assist in the preparation
of Form N-PX, maintain records of votes cast and post voting records to the Fund’s website.
The Procedures also provide
that the Adviser will make reasonable efforts to recall any loaned securities so that they may be voted according to the Adviser’s
instructions. In furtherance of this effort, the Fund has, in conjunction with the securities lending agent, developed procedures
reasonably designed to recall loaned securities to facilitate the voting of the shares. In addition, the Adviser has developed
operating procedures to restrict the lending of securities held by the Fund that are acquired in an IPO by an issuer with a limited
operating history and no identified corporate calendar of shareholder meetings that can be monitored.
The Procedures also require
the Adviser to present to the Board: (i) any deviations from the Procedures and any potential conflict of interest that arose in
connection with voting a proxy (including how the conflict was resolved) on a quarterly basis; (ii) any deviations from the proxy
voting guidelines adopted by the Adviser and the Trust (“Adviser’s Proxy Guidelines”); and (iii) at least annually,
a record of each proxy voted by the Adviser on behalf of the Fund and recommend changes to the Procedures (if any) based on the
Adviser’s experience under the Procedures, evolving industry practices and applicable regulatory developments. The Proxy
Oversight Group may amend the Procedures from time to time and must give prompt notice to the Board of any material changes.
A concise summary of the Adviser’s Proxy
Guidelines are attached as an exhibit to this SAI.
Although many proxy proposals
can be voted in accordance with the Adviser’s Proxy Guidelines, some proposals will require special consideration or will
require that the Adviser make an exception to its policies. In those situations, the Adviser will make a decision on a case-by-case
basis. If the Adviser determines that the costs of voting on a proposal outweigh the expected benefits, the Adviser may abstain
from voting on the proposal.
If a proxy proposal raises
a “potential conflict of interest,” as described in the Procedures as where the Adviser or an affiliated person of
the Adviser has an interest that is reasonably likely to be affected by a proxy to be voted on behalf of the Fund and that is reasonably
likely to compromise the Adviser’s independence of judgment and action in voting the proxy, the Proxy Oversight Group, will
resolve the conflict as follows:
-
To the extent the matter is specifically covered by the Adviser’s
Proxy Guidelines and the Adviser has little or no discretion to deviate from such policies with respect to the proposal in question,
the Adviser may vote in accordance with such pre-determined voting policy.
-
To the extent the matter is not covered by the Adviser’s Proxy
Guidelines or the Adviser has discretion to deviate from such policy or there is no applicable pre-determined voting policy, the
Adviser may: (i) disclose the conflict to the Board and obtain the Board’s consent to the proposed vote prior to voting on
such proposal, (ii) engage an independent third party to determine how the proxy should be voted, or (iii) establish an ethical
wall or other informational barrier between the person(s) involved in the conflict and the person(s) making the decision in order
to insulate the potential conflict from the decision maker.
The Trust is required to
file Form N-PX with the Fund’s complete proxy voting record for the 12 months ended June 30
th
no later than August
31
st
of each year. Once filed, Form N-PX for the Fund will be available without charge, upon request, by calling toll-free
1-800-874-FUND, on the Trust’s website, www.burnhamfunds.com, and on the Commission’s website at www.sec.gov.
ADMINISTRATOR
Burnham Asset Management
Corp. also serves as administrator (in such capacity, the “Administrator”) to the Fund pursuant to an administration
agreement (“Administration Agreement”). Under the Administration Agreement, the Administrator provides the Fund with
office space and personnel to assist the Fund in managing its affairs. The Administrator’s duties require it to supervise
all aspects of the Fund’s operations not related to the Fund’s investments. For its services to the Fund, the Administrator
is paid by the Fund at the following annual percentage of the Fund’s average daily net assets:
AVERAGE DAILY
NET ASSETS
|
ADMINISTRATION FEE
|
For amounts up to $150,000,000
|
0.150%
|
$150,000,000 to $300,000,000
|
0.125%
|
Over $300,000,000
|
0.100%
|
Burnham Asset Management
Corporation and the Trust have contracted with UMB Fund Services, Inc. (“UMBFS”) to act as sub-administrator to the
Fund pursuant to a sub-administration and fund accounting agreement (the “Sub-Administration Agreement”). Under the
Sub-Administration Agreement, UMBFS provides certain sub-administration services to the Fund, subject to the Administrator’s
supervision. These services include portfolio accounting, daily valuation of portfolio securities, calculation of fund yields and/or
distributions, expense accrual monitoring, preparation of board materials, tax services, compliance testing, preparation of periodic
reports (including annual and semi-annual reports on Form N-SAR), maintenance of corporate records, and preparation and filing
of materials with the Commission (including post-effective amendments to the Trust’s registration statement). UMBFS’s
compensation is based on schedules agreed on by the Administrator and the Trust. The Administrator pays the portion of the fee
attributable to administrative services and the Trust pays the portion attributable to fund accounting.
DISTRIBUTOR
Distribution
Agreement.
The Fund has a distribution agreement (“Distribution Agreement”) with Burnham Securities Inc. (the “Distributor”).
The principal business address of the Distributor is 1325 Avenue of the Americas, 26
th
Floor, New York, NY 10019. Jon
M. Burnham, the Interested Trustee of the Trust, is also affiliated person of the Distributor.
Under
the Distribution Agreement, the Distributor is obligated to use its best efforts to sell shares of each class of the Fund. Shares
of the Fund are also sold by selected broker-dealers (the “Selling Brokers”), which have entered into selling agency
agreements with the Distributor. The Distributor accepts orders for the purchase of shares of the Fund that are continually offered
at NAV next determined after the order is received, plus any applicable sales charge. In connection with the sale of Class A and
Class C shares, the Distributor and Selling Brokers receive compensation from a sales charge imposed, in the case of Class A shares,
at the time of sale. In the case of Class C shares, the broker receives compensation immediately, but the Distributor is compensated
on a deferred basis. In connection with the sale of Class I shares, the Distributor receives no compensation from sales charges.
The Distributor may pay extra compensation to financial services firms selling large amounts of Fund shares. This compensation
would be calculated as a percentage of Fund shares sold by the firm.
Distribution Plans.
The Trust has adopted distribution plans for the Class A and Class C shares of the Fund, (the “Plans”) in accordance
with Rule 12b-1 under the 1940 Act. Class I shares are not subject to the Plans. The Plans for the Class A shares are reimbursement
plans. The Plan for the Class C shares is a compensation plan, which means that the amount of payments under the Plan for Class
C shares is not linked to the Distributor’s expenditures and, consequently, the Distributor can make a profit under the Plan.
The Plans compensate the Distributor for its services and distribution expenses under the Distribution Agreement. The principal
services and expenses for which such compensation may be used include: compensation to employees or account executives and reimbursement
of their expenses; overhead and telephone costs of such employees or account executives; printing of prospectuses or reports for
prospective shareholders; advertising; preparation, printing and distribution of sales literature; and allowances to other broker-dealers.
A report of the amounts expended under each Plan is submitted to and approved by the Trustees each quarter. Because of the Plans,
long-term shareholders may pay more than the economic equivalent of the maximum sales charge permitted by the Financial Industry
Regulatory Authority regarding investment companies.
Class A Plan.
Pursuant to the Fund’s
Class A Plan, the Fund pays the Distributor for financing activities primarily intended to result in the sale of Class A shares
or to provide services to holders of Class A shares, provided the categories of expenses for which payment is made are approved
by the Board. Under the Class A Plan, the Trust pays the Distributor a distribution and/or service fee at the rate of up to 0.30%
per annum of the average daily NAV of the Class A shares of the Fund.
Class C Plan.
Commissions on the sale
of Class C shares of 0.75% of the amount invested in Class C shares are paid to broker-dealers who have sales agreements with the
Distributor. The Distributor may also advance to dealers the first-year service fee payable under the Class C Plan at a rate of
0.25% of the purchase price of such shares. As compensation for such advance of the service fee, the Distributor may retain the
service fee paid by the Fund with respect to such shares for the first year after purchase.
The Distributor will in turn pay to securities
dealers which enter into a sales agreement with the Distributor a distribution fee and a service fee at rates of up to 0.75% and
0.25%, respectively, of the Fund’s average daily net assets attributable to Class C shares owned by investors for whom that
securities dealer is the holder or dealer of record. The service fee is intended to be in consideration of personal services and/or
account maintenance services rendered by the dealer with respect to Class C shares. Dealers may from time to time be required to
meet certain other criteria in order to receive service fees. The Distributor or its affiliates are entitled to retain all service
fees payable under the Class C Plan for which there is no dealer of record or for which qualification standards have not been met
as partial consideration for personal services and/or account maintenance services performed by the Distributor or its affiliates
for shareholder accounts.
The Distributor also receives CDSCs attributable
to Class C shares to compensate it for its distribution expenses. When a broker-dealer sells Class C shares and elects, with the
Distributor’s approval, to waive its right to receive the
commission normally paid at the time of the
sale, the Distributor may cause all or a portion of the distribution fees described above to be paid to the broker-dealer.
General
. The fees
paid under the Plans are calculated and accrued daily and paid monthly or at such other longer intervals as the Board shall determine.
The Plans are subject to annual approval by the Trustees. The Plans are terminable at any time by vote of the Trustees or by vote
of a majority of the shares of the applicable class or Fund. Pursuant to each Plan, a new Trustee who is not an interested person
(as defined under the 1940 Act) must be nominated by existing Trustees who are not interested persons.
If
a Plan is terminated (or not renewed) with respect to any one or more classes or the Fund, the Plan may continue in effect with
respect to a class or Fund as to which it has not been terminated (or has been renewed). Although there is no obligation for the
Trust to pay expenses incurred by the Distributor in excess of those paid to the Distributor under a Plan, if the Plan is terminated,
the Board will consider how to treat such expenses. It is possible that at some time in the future one or more particular additional
classes of shares of the Fund may be closed to new investments. In such circumstances, the Board will consider whether, and may
determine that, it would be appropriate to continue making payments under such other Fund’s or class’ Plan(s).
Any expenses incurred by the Distributor but not yet recovered through distribution fees could be
recovered through future distribution fees. If the Distributor’s actual distribution expenditures in a given year are less
than the Rule 12b-1 payments it receives from the Fund for that year, and no effect is given to previously accumulated distribution
expenditures in excess of the Rule 12b-1 payments borne by the Distributor out of its own resources in other years, the difference
would be profit to the Distributor for that year.
Because amounts paid pursuant
to a Plan are paid to the Distributor, the Distributor and its officers, directors and employees may be deemed to have a financial
interest in the operation of the Plans. None of the Trustees who is not an interested person of the Trust has a financial interest
in the operation of any Plan.
The Plans were adopted because
of their anticipated benefits to the Fund. These anticipated benefits include: increased promotion and distribution of the Fund’s
shares, an enhancement in the Fund’s ability to maintain accounts and improve asset retention, increased stability of net
assets for the Fund, increased stability in the Fund’s positions, and greater flexibility in achieving investment objectives.
The costs of any joint distribution activities between the Fund and other funds advised by the Adviser will be allocated among
the funds in proportion to their net assets.
For the fiscal year ended
December 31, 2012, the Fund paid no fees under the Rule 12b-1 Plans because the Fund had not commenced operations.
CUSTODIAN
UMB Bank, n.a. (the “Custodian”),
an affiliate of UMBFS, is the custodian of the assets of the Fund pursuant to a custody agreement between the Custodian and the
Trust, whereby the Custodian provides services for fees on a transactional basis plus out-of-pocket expenses. The Custodian’s
address is 928 Grand Boulevard, Kansas City, Missouri 64106.
TRANSFER AGENT AND DIVIDEND
PAYING AGENT
BNY Mellon Asset Servicing,
located at 4400 Computer Drive Westborough, MA 01581, is the transfer and dividend paying agent for the Trust. Its compensation
is based on schedules agreed on by the Trust and the transfer agent.
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
_______________, located
at 1818 Market Street, Philadelphia, Pennsylvania, 19103, is the independent registered public accounting firm for the Trust. In
addition to reporting annually on the financial statements of the Trust, the firm
provides other audit,
tax and related services.
SHARES OF BENEFICIAL INTEREST
DESCRIPTION OF THE TRUST’S
SHARES
The Trust is a statutory
trust organized on August 20, 1998 under Delaware law. The Trustees are responsible for the management and supervision of the Fund.
The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest
of the Fund, with a par value of $0.10 per share or such other amount as the Trustees may establish. Under the Declaration of Trust,
the Trustees have the authority to create and classify shares of beneficial interest in separate series, without further action
by shareholders. As of the date of this SAI, the Trustees have authorized shares of three other mutual funds. Additional series
may be added in the future. The Declaration of Trust also authorizes the Trustees to classify and reclassify the shares of the
Fund, or any other series of the Trust, into one or more classes. As of the date of this SAI, the Trustees have authorized the
issuance of the classes of shares of the Fund described in the current prospectus.
Each share of the Fund represents
an equal proportionate interest in the assets belonging to that Fund. When issued, shares are fully paid and non-assessable. In
the event of liquidation of the Fund, shareholders are entitled to share pro rata in the net assets of the Fund available for distribution
to such shareholders. Shares of the Fund are freely transferable and have no preemptive, subscription or conversion rights.
In accordance with the provisions
of the Declaration of Trust, the Trustees have initially determined that shares entitle their holders to one vote per share on
any matter on which such shares are entitled to vote. The Trustees may determine in the future, without the vote or consent of
shareholders, that each dollar of net asset value (number of shares owned times NAV) will be entitled to one vote on any matter
on which such shares are entitled to vote.
Unless otherwise required
by the 1940 Act or the Declaration of Trust, the Fund has no intention of holding annual meetings of shareholders. Shareholders
may remove a Trustee by the affirmative vote of at least two-thirds of the Trust’s outstanding shares. At any time that less
than a majority of the Trustees holding office were elected by the shareholders, the Trustees will call a special meeting of shareholders
for the purpose of electing Trustees.
Under Delaware law, shareholders
of a Delaware statutory trust are protected from liability for acts or obligations of the Trust to the same extent as shareholders
of a private, for-profit Delaware corporation. In addition, the Declaration of Trust expressly provides that the Trust has been
organized under Delaware law and that the Declaration of Trust will be governed by Delaware law. It is possible that the Trust
might become a party to an action in another state whose courts refused to apply Delaware law, in which case the Trust’s
shareholders could be subject to personal liability.
To guard against this risk,
the Declaration of Trust:
|
·
|
contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides that notice of this disclaimer may be given in each agreement, obligation
and instrument entered into or executed by the Trust or its Trustees;
|
|
·
|
provides for the indemnification out of Trust
or Fund property of any shareholders held personally liable for any obligations of the Trust or of the Fund; and
|
|
·
|
provides that the Trust shall, upon request,
assume the defense of any claim made against any shareholder for any act or obligation of the Trust and satisfy any judgment thereon.
|
Thus, the risk of a shareholder
incurring financial loss beyond his or her investment because of shareholder liability with respect to the Fund is limited to circumstances
in which all of the following factors are present: (1) a court refused to apply Delaware law; (2) the liability arose under tort
law or, if not, no contractual limitation of liability was in effect; and (3) the Fund itself would be unable to meet its obligations.
In light of Delaware law, the nature of the Trust’s business and the nature of its assets, we believe the risk of personal
liability to a shareholder is remote.
The Declaration of Trust
further provides that the Trust will indemnify each of its Trustees and officers against liabilities and expenses reasonably incurred
by them, in connection with, or arising out of, any action, suit or proceeding, threatened against or otherwise involving the Trustee
or officer, directly or indirectly, by reason of
being or having been a Trustee
or officer of the Trust. The Declaration of Trust does not authorize the Trust or any Fund to indemnify any Trustee or officer
against any liability to which he or she would otherwise be subject by reason of or for willful misfeasance, bad faith, gross negligence
or reckless disregard of such person’s duties.
BROKERAGE
Purchases and sales of portfolio
securities are generally placed with broker-dealers who provide the best price (inclusive of brokerage commissions) and execution
for orders. However, transactions may be allocated to broker-dealers who provide research to the extent consistent with Section
28(e) of the 1934 Act, as amended. Also, higher fees may be paid to brokers who furnish research if a good faith determination
is made that the commissions paid are reasonable in relation to the value of the brokerage and research services provided. Among
these services are those that brokerage houses customarily provide to institutional investors, such as statistical and economic
data and research reports on companies and industries.
Research services might be
useful and valuable to the Adviser, the subadviser and their affiliates in serving other clients as well as the Fund. Similarly,
research services obtained by the Adviser, subadviser or their affiliates from the placement of portfolio brokerage of other clients
might be useful and of value to the Adviser or subadviser in carrying out their obligations to the Fund.
No transactions may be effected
by the Fund with the Distributor acting as principal for its own account. Over-the-counter purchases and sales normally are made
with principal market makers except where, in management’s opinion, better executions are available elsewhere. Transactions
in securities on a securities exchange are generally effected as agency transactions with brokers (including the Distributor) who
receive compensation for their services. U.S. Government and debt securities are traded primarily in the over-the-counter market.
Certain equity securities also may be traded in the over-the-counter market. Transactions in the over-the-counter market are generally
effected as principal transactions with dealers. However, transactions in the over-the-counter market may also be effected as agency
transactions, such as through an electronic communications network (“ECN”) or an alternative trading system (“ATS”).
The cost of transactions in securities in the over-the-counter market, whether effected through dealers, ECNs, ATSs or otherwise,
may include dealer spreads, brokerage commissions, commission equivalent charges or a combination thereof.
The Fund was not operation
in 2012 and therefore there are no broker commissions to report.
Affiliated Brokers.
Pursuant to procedures determined by the Trustees and subject to the general policies of the Trust and Section 17(e) of the 1940
Act, the Adviser and each subadviser may place securities transactions, including agency cross trades, with brokers with whom it
is affiliated (“Affiliated Brokers”).
Section 17(e) of the 1940
Act limits to “the usual and customary broker’s commission” the amount which can be paid by the Fund to an Affiliated
Broker acting as broker in connection with transactions effected on a securities exchange. The Board, including a majority of the
Trustees who are not “interested persons” of the Trust, has adopted procedures designed to comply with the requirements
of Section 17(e) and Rule 17e-1 promulgated thereunder to ensure that an Affiliated Broker’s commission is reasonable
and fair compared to the commission received by other brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of time.
A transaction will not be
placed with an Affiliated Broker if the Fund would have to pay a commission rate less favorable than similar charges for comparable
transactions for such broker’s other unaffiliated customers. The Fund may execute purchases and sales of portfolio securities
through the Distributor if it is able to obtain the best combination of price (inclusive of brokerage commissions) and execution.
The Distributor can charge the Fund commissions for these transactions, subject to review by the Independent Trustees. The Trustees
may permit payment of commissions which, though higher than the lowest available, are deemed reasonable. No Fund will engage in
principal transactions with Affiliated Brokers. When appropriate, orders for the account of the Fund placed by Affiliated Brokers
may be combined with orders of their respective clients in order to obtain a more favorable commission rate. When the same security
is purchased for two or more funds or customers on the same day, each fund or customer pays the average price and commissions paid
are allocated in direct proportion to the number of shares purchased.
A broker may be affiliated
with the subadviser with respect to the Fund for which the subadviser provides advice. However, with respect to the remaining funds
for which the subadviser does not provide advice, the broker may be considered unaffiliated.
At least annually, each subadviser
that uses Affiliated Brokers will furnish to the Trust a statement setting forth the total amount of all compensation retained
by the Affiliated Broker in connection with effecting transactions for the account of the Fund, and the Board reviews and approves
all such portfolio transactions on a quarterly basis and the compensation received by Affiliated Brokers in connection therewith.
The Fund commenced operation
as of the date of this SAI. Therefore no brokerage commissions have been paid by the Fund to the Distributor, an Affiliated Broker.
FINANCIAL STATEMENTS
There are no audited financial
statements as the Fund had not commenced operations as of the date of this SAI.
APPENDIX A -- DESCRIPTIONS
OF SECURITIES RATINGS
DESCRIPTION OF SECURITIES
RATINGS
Short-Term Credit Ratings
A
Standard & Poor’s
short-term issue credit rating is a forward-looking opinion of the creditworthiness of an obligor with respect to a specific financial
obligation having an original maturity of no more than 365 days. The following summarizes the rating categories used by Standard
& Poor’s for short-term issues:
“A-1” – A short-term obligation
rated “A-1” is rated in the highest category and indicates that the obligor’s capacity to meet its financial
commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates
that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.
“A-2” – A short-term obligation
rated “A-2” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions
than obligations in the highest rating category. The obligor’s capacity to meet its financial commitment on the obligation
is satisfactory.
“A-3” – A short-term obligation
rated “A-3” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
“B” – A short-term obligation
rated “B” is regarded as having significant speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor’s
inadequate capacity to meet its financial commitment on the obligation.
“C” – A short-term obligation
rated “C” is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation.
“D” – A short-term obligation
rated “D” is in payment default. The “D” rating category is used when payments on an obligation are not
made on the date due, unless Standard & Poor’s believes that such payments will be made within any stated grace period.
However, any stated grace period longer than five business days will be treated as five business days. The “D” rating
also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks –
Standard & Poor’s issuer credit ratings make a distinction between foreign currency ratings and local currency ratings.
An issuer’s foreign currency rating will differ from its local currency rating when the obligor has a different capacity
to meet its obligations denominated in its local currency, vs. obligations denominated in a foreign currency.
Moody’s Investors Service (“Moody’s”)
short-term ratings reflect the likelihood of a default on contractually promised payments. Ratings may be assigned to issuers,
short-term programs or to individual short-term debt instruments. Such obligations generally have an original maturity not exceeding
thirteen months.
Moody’s employs the following designations
to indicate the relative repayment ability of rated issuers:
“P-1” – Issuers (or supporting
institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
“P-2” – Issuers (or supporting
institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
“P-3” – Issuers (or supporting
institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
“NP” – Issuers (or supporting
institutions) rated Not Prime do not fall within any of the Prime rating categories.
Fitch, Inc. / Fitch Ratings Ltd. (“Fitch”)
short-term issuer or obligation ratings are based in all cases on the short-term vulnerability to default of the rated entity or
security stream and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant
obligation. Short-term ratings are assigned to obligations whose initial maturity is viewed as “short-term” based on
market convention. Typically, this means up to 13 months for corporate, sovereign and structured obligations, and up to 36 months
for obligations in U.S. public finance markets. The following summarizes the rating categories used by Fitch for short-term obligations:
“F1” – Securities possess
the highest short-term credit quality. This designation indicates the strongest intrinsic capacity for timely payment of financial
commitments; may have an added “+” to denote any exceptionally strong credit feature.
“F2” – Securities possess
good short-term credit quality. This designation indicates good intrinsic capacity for timely payment of financial commitments.
“F3” – Securities possess
fair short-term credit quality. This designation indicates that the intrinsic capacity for timely payment of financial commitments
is adequate.
“B” – Securities possess speculative
short-term credit quality. This designation indicates minimal capacity for timely payment of financial commitments, plus heightened
vulnerability to near term adverse changes in financial and economic conditions.
“C” – Securities possess high
short-term default risk. Default is a real possibility.
“RD” – Restricted default.
Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial
obligations. Applicable to entity ratings only.
“D” – Default. Indicates a
broad-based default event for an entity, or the default of a short-term obligation.
The
DBRS® Ratings Limited (“DBRS”)
short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations
in a timely manner. Ratings are based on quantitative and qualitative considerations relevant to the issuer and the relative ranking
of claims. The R-1 and R-2 rating categories are further denoted by the sub-categories “(high)”, “(middle)”,
and “(low)”.
The following summarizes the ratings used by
DBRS for commercial paper and short-term debt:
“R-1
(high)”
-
Short-term debt rated “R-1 (high)” is of the
highest
credit quality. The capacity for the payment of short-term financial obligations
as they fall due is exceptionally high.
Unlikely to be adversely affected by future events.
“R-1
(middle)” –
Short-term debt rated “R-1 (middle)” is of superior credit quality. The capacity for
the payment of short-term financial obligations as they fall due is very high. Differs from “R-1 (high)” by a relatively
modest degree. Unlikely to be significantly vulnerable to future events.
“R-1
(low)” –
Short-term debt rated “R-1 (low)” is of
good
credit quality.
The capacity for the payment of short-term financial obligations as they fall due is substantial. Overall
strength is not as favorable as higher rating categories. May be vulnerable to future events, but qualifying negative factors are
considered manageable.
“R-2
(high)” – Short-term debt rated “R-2 (high)” is considered to be at the upper end of adequate credit quality.
The capacity for the payment of short-term financial obligations as they fall due is acceptable. May be vulnerable to future events.
“R-2
(middle)” – Short-term debt rated “R-2 (middle)” is considered to be of adequate credit quality. The capacity
for the payment of short-term financial obligations as they fall due is acceptable. May be vulnerable to future events or may be
exposed to other factors that could reduce credit quality.
“R-2
(low)” – Short-term debt rated “R-2 (low)” is considered to be at the lower end of adequate credit quality.
The capacity for the payment of short-term financial obligations as they fall due is acceptable. May be vulnerable to future events.
A number of challenges are present that could affect the issuer’s ability to meet such obligations.
“R-3”
– Short-term debt rated “R-3” is considered to be at the lowest end of adequate credit quality. There is a capacity
for the payment of short-term financial obligations as they fall due. May be vulnerable to future events and the certainty of meeting
such obligations could be impacted by a variety of developments.
“R-4” – Short-term debt rated
“R-4” is considered to be of speculative credit quality. The capacity for the payment of short-term financial obligations
as they fall due is uncertain.
“R-5” – Short-term debt rated
“R-5” is considered to be of highly speculative credit quality. There is a high level of uncertainty as to the capacity
to meet short-term financial obligations as they fall due.
“D” – Short-term debt rated
“D” implies a financial obligation has not been met or it is clear that a financial obligation will not be met in the
near future, or a debt instrument has been subject to a distressed exchange. A downgrade to “D” may not immediately
follow an insolvency or restructuring filing as grace periods, other procedural considerations, or extenuating circumstance may
exist.
Long-Term Credit Ratings
The following summarizes the ratings used by
Standard & Poor’s
for long-term issues:
“AAA” – An obligation rated
“AAA” has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial
commitment on the obligation is extremely strong.
“AA” – An obligation rated
“AA” differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial
commitment on the obligation is very strong.
“A” – An obligation rated
“A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations
in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.
“BBB” – An obligation rated
“BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
“BB,” “B,” “CCC,”
“CC” and “C” – Obligations rated “BB,” “B,” “CCC,” “CC”
and “C” are regarded as having significant speculative characteristics. “BB” indicates the least degree
of speculation and “C” the highest. While such obligations will likely have some quality and protective characteristics,
these may be outweighed by large uncertainties or major exposures to adverse conditions.
“BB” – An obligation rated
“BB” is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity
to meet its financial commitment on the obligation.
“B” – An obligation rated
“B” is more vulnerable to nonpayment than obligations rated “BB”, but the obligor currently has the capacity
to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the
obligor’s capacity or willingness to meet its financial commitment on the obligation.
“CCC” – An obligation rated
“CCC” is currently vulnerable to nonpayment, and is dependent upon favorable business, financial and economic conditions
for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions,
the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
“CC” – An obligation rated
“CC” is currently highly vulnerable to nonpayment.
“C” – A “C” rating
is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that have payment arrearages allowed
by the terms of the documents, or obligations of an issuer that is the subject of a bankruptcy petition or similar action which
have not experienced a payment default. Among others, the “C” rating may be assigned to subordinated debt, preferred
stock or other obligations on which cash payments have been suspended in accordance with the instrument’s terms or when preferred
stock is the subject of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash
or replaced by other instruments having a total value that is less than par.
“D” – An obligation rated
“D” is in payment default. The “D” rating category is used when payments on an obligation are not made
on the date due, unless Standard & Poor’s believes that such payments will be made within five business days, irrespective
of any grace period. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of similar
action if payments on an obligation are jeopardized. An obligation’s rating is lowered to “D” upon completion
of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other
instruments having a total value that is less than par.
Plus (+) or minus (-) – The ratings from
“AA” to “CCC” may be modified by the addition of a plus (+) or minus (-) sign to show relative standing
within the major rating categories.
“NR” – This indicates that
no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor’s
does not rate a particular obligation as a matter of policy.
Local Currency and Foreign Currency Risks -
Standard & Poor’s issuer credit ratings make a distinction between foreign currency ratings and local currency ratings.
An issuer’s foreign currency rating will differ from its local currency rating when the obligor has a different capacity
to meet its obligations denominated in its local currency, vs. obligations denominated in a foreign currency.
Moody’s
long-term ratings
are opinions of the relative credit risk of financial obligations with an original maturity of one year or more. They address the
possibility that a financial obligation will not be honored as promised. Such ratings reflect both the likelihood of default on
contractually promised payments and the expected financial loss suffered in the event of default. The following summarizes the
ratings used by Moody’s for long-term debt:
“Aaa” – Obligations rated
“Aaa” are judged to be of the highest quality, subject to the lowest level of credit risk.
“Aa” – Obligations rated “Aa”
are judged to be of high quality and are subject to very low credit risk.
“A” – Obligations rated “A”
are judged to be upper-medium grade and are subject to low credit risk.
“Baa” – Obligations rated
“Baa” are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative
characteristics.
“Ba” – Obligations rated “Ba”
are judged to be speculative and are subject to substantial credit risk.
“B” – Obligations rated “B”
are considered speculative and are subject to high credit risk.
“Caa” – Obligations rated
“Caa” are judged to be speculative of poor standing and are subject to very high credit risk.
“Ca” – Obligations rated “Ca”
are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
“C” – Obligations rated “C”
are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody’s appends numerical modifiers
1, 2, and 3 to each generic rating classification from “Aaa” through “Caa.” The modifier 1 indicates that
the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates a ranking in the lower end of that generic rating category.
The following summarizes long-term ratings used
by
Fitch
:
“AAA” – Securities considered
to be of the highest credit quality. “AAA” ratings denote the lowest expectation of credit risk. They are assigned
only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
“AA” – Securities considered
to be of very high credit quality. “AA” ratings denote expectations of very low credit risk. They indicate very strong
capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
“A” – Securities considered
to be of high credit quality. “A” ratings denote expectations of low credit risk. The capacity for payment of financial
commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions
than is the case for higher ratings.
“BBB” – Securities considered
to be of good credit quality. “BBB” ratings indicate that expectations of credit risk are currently low. The capacity
for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair
this capacity.
“BB” – Securities considered
to be speculative. “BB” ratings indicate that there is an elevated vulnerability to credit risk, particularly in the
event of adverse changes in business or economic conditions over time; however, business or financial alternatives may be available
to allow financial commitments to be met.
“B” – Securities considered
to be highly speculative. “B” ratings indicate that material credit risk is present.
“CCC” – A “CCC”
rating indicates that substantial credit risk is present.
“CC” – A “CC”
rating indicates very high levels of credit risk.
“C” – A “C” rating
indicates exceptionally high levels of credit risk.
Defaulted obligations typically are not assigned
“D” ratings, but are instead rated in the “B” to “C” rating categories, depending upon their
recovery prospects and other relevant characteristics. Fitch believes that this approach better aligns obligations that have comparable
expected loss but varying vulnerability to default and loss.
Plus (+) or minus (-) may be appended to a rating
to denote relative status within major rating categories. Such suffixes are not added to the “AAA” obligation rating
category, or to corporate finance obligation ratings in the categories below “CCC”.
The
DBRS
long-term rating scale
provides an opinion on the risk of default. That is, the risk that an issuer will fail to satisfy its financial obligations in
accordance with the terms under which an obligation has been issued. Ratings are based on quantitative and qualitative considerations
relevant to the issuer, and the relative ranking of claims. All rating categories other than AAA and D also contain subcategories
“(high)” and “(low)”. The absence of either a “(high)” or “(low)” designation indicates
the rating is in the middle of the category. The following summarizes the ratings used by DBRS for long-term debt:
“AAA”
-
Long-term debt rated “AAA” is of the
highest
credit quality. The capacity for the payment of financial obligations is exceptionally high and unlikely to be adversely affected
by future events.
“AA”
–
Long-term debt rated “AA” is of
superior
credit quality. The capacity for the payment of financial obligations is considered high. Credit quality differs from “AAA”
only to a small degree. Unlikely to be significantly vulnerable to future events.
“A”
– Long-term debt rated “A” is of good
credit quality.
The capacity for the payment of financial obligations is substantial, but of lesser credit quality than
“AA.” May be vulnerable to future events, but qualifying negative factors are considered manageable.
“BBB”
–
Long-term debt rated “BBB” is of
adequate
credit quality. The capacity for the payment of financial obligations is considered acceptable. May be vulnerable to future events.
“BB”
–
Long-term debt rated “BB” is of
speculative,
non-investment grade credit quality. The capacity for the payment of financial obligations is uncertain. Vulnerable to future events.
“B”
–
Long-term debt rated “B” is of
highly
speculative credit quality. There is a high level of uncertainty as to the capacity to meet financial obligations.
“CCC”,
“CC” and “C”
– Long-term debt rated in any of these categories is of
very
highly speculative credit quality. I
n danger of defaulting on financial obligations. There is little difference between
these three categories, although “CC” and “C” ratings are normally applied to obligations that are seen
as highly likely to default, or subordinated to obligations rated in the “CCC” to “B” range. Obligations
in respect of which default has not technically taken place but is considered inevitable may be rated in the “C” category.
“D”
–
A security rated “D” implies that a financial obligation has not been met or it is clear that a financial
obligation will not be met in the near future or a debt instrument has been subject to a distressed exchange. A downgrade to “D”
may not immediately follow an insolvency or restructuring filing as grace periods or extenuating circumstances may exist.
(“high”, “low”) –
All rating categories other than “AAA” and “D” are denoted by the subcategories “high” and
“low”. The absence of either a “high” or “low” designation indicates the rating is in the “middle”
of the category.
Municipal Note Ratings
A
Standard & Poor’s
U.S. municipal note rating reflects Standard & Poor’s opinion about the liquidity factors and market access risks unique
to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than
three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, Standard
& Poor’s analysis will review the following considerations:
•
Amortization schedule - the larger the final maturity relative to other maturities, the more likely it will be treated as a note;
and
•
Source of payment - the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a
note.
Note rating symbols are as follows:
“SP-1” – A municipal note
rated “SP-1” exhibits a strong capacity to pay principal and interest. An issue determined to possess a very strong
capacity to pay debt service is given a plus (+) designation.
“SP-2” – A municipal note
rated “SP-2” exhibits a satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial
and economic changes over the term of the notes.
“SP-3” – A municipal note
rated “SP-3” exhibits a speculative capacity to pay principal and interest.
Moody’s
uses three rating
categories for short-term municipal obligations that are considered investment grade. These ratings are designated as Municipal
Investment Grade (“MIG”) and are divided into three levels – “MIG-1” through “MIG-3”.
In addition, those short-term obligations that are of speculative quality are designated “SG”, or speculative grade.
MIG ratings expire at the maturity of the obligation. The following summarizes the ratings used by Moody’s for short-term
municipal obligations:
“MIG-1” – This designation
denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support,
or demonstrated broad-based access to the market for refinancing.
“MIG-2” – This designation
denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
“MIG-3” – This designation
denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
“SG” – This designation denotes
speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
In the case of variable rate demand obligations
(“VRDOs”), a two-component rating is assigned, a long or short-term debt rating and a demand obligation rating. The
first element represents Moody’s evaluation of risk associated with scheduled principal and interest payments. The second
element represents Moody’s evaluation of risk associated with the ability to receive purchase price upon demand (“demand
feature”), using a variation of the MIG rating scale, the Variable Municipal Investment Grade or “VMIG” rating.
When either the long- or short-term aspect of
a VRDO is not rated, that piece is designated “NR”, e.g., “Aaa/NR” or “NR/VMIG-1”.
VMIG rating expirations are a function of each
issue’s specific structural or credit features.
“VMIG-1” – This designation
denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase price upon demand.
“VMIG-2” – This designation
denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of purchase price upon demand.
“VMIG-3” – This designation
denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
“SG” – This designation denotes
speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not
have an investment grade short-term rating or may lack the structural and/or legal protections necessary to ensure the timely payment
of purchase price upon demand.
About Credit Ratings
A
Standard & Poor’s
issue
credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and
commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit
enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects
Standard & Poor’s view of the obligor’s capacity and willingness to meet its financial commitments as they come
due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.
Moody’s
credit ratings must
be construed solely as statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities.
Fitch’s
credit ratings provide
an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment
of principal, insurance claims or counterparty obligations. Fitch credit ratings are used by investors as indications of the likelihood
of receiving the money owed to them in accordance with the terms on which they invested. Fitch’s credit ratings cover the
global spectrum of corporate, sovereign (including supranational and sub-national), financial, bank, insurance, municipal and other
public finance entities and the securities or other obligations they issue, as well as structured finance securities backed by
receivables or other financial assets.
DBRS
credit ratings are opinions
based on the quantitative and qualitative analysis of information sourced and received by DBRS, which information is not audited
or verified by DBRS. Ratings are not buy, hold or sell recommendations and they do not address the market price of a security.
Ratings may be upgraded, downgraded, placed under review, confirmed and discontinued.