Monteagle Funds (“the Trust”) was organized as a business trust under the laws of the State of Delaware on November 26, 1997 as Memorial Funds. The Trust changed its name to Monteagle Funds in July, 2006.
The Trust is registered with the Securities and Exchange Commission (“SEC”) as an open-end, management investment company under the Investment Company Act of 1940. The Trust is authorized by its Declaration of Trust to issue an unlimited number of shares of beneficial interest in each series. The Trust currently consists of the following series (each a “Fund” and collectively the “Funds”):
| | Monteagle Fixed Income Fund |
| | Monteagle Informed Investor Growth Fund |
| | Monteagle Quality Growth Fund |
| | Monteagle Select Value Fund |
The Monteagle Fixed Income Fund (“Fixed Income Fund”), Monteagle Quality Growth Fund (“Quality Growth Fund”), Monteagle Select Value Fund (“Select Value Fund”) and Monteagle Value Fund (“Value Fund”) are diversified series of Monteagle Funds. The Monteagle Informed Investor Growth Fund (“Informed Investor Growth Fund”) is a non-diversified series of Monteagle Funds. The principal investment objective of the Fixed Income Fund is total return. The principal investment objective of each of Informed Investor Growth Fund, Quality Growth Fund, Select Value Fund and Value Fund (collectively the “Equity Funds”) is long-term capital appreciation.
Prior to July 20, 2012, the Funds were authorized to offer three classes of shares, Class I, Class A and Class C. Each class differed as to sales and redemption charges and ongoing fees. Only the Class I shares are currently being offered for sale.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
The following is a summary of the Funds’ significant accounting policies:
Securities Valuation — Equity securities, including common stocks and exchange-traded funds, held by the Funds for which market quotations are readily available are valued using the last reported sales price or the official closing price provided by independent pricing services as of the close of trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time) on each Fund’s business day. If no sales are reported, the average of the last bid and ask price is used. If no average price is available, the last bid price is used. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized in level 1 of the fair value hierarchy described below. When an equity security is valued by the independent pricing service using factors other than market quotations or the market is considered inactive, they will be categorized in level 2.
Fixed income securities such as corporate bonds, municipal bonds, and U.S. government and agency obligations, when valued using market quotations in an active market, are categorized as level 1 securities. However, fair value may be determined using an independent pricing service that considers market observable data such as reported sales of similar securities, broker quotes, yields, bids, offers, and other reference data. These securities would be categorized as level 2
MONTEAGLE FUNDSNOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
securities. The fair value of mortgage-backed securities is estimated by an independent pricing service which uses models that consider interest rate movements, new issue information and other security pertinent data. Evaluations of tranches (non-volatile, volatile, or credit sensitive) are based on interpretations of accepted Wall Street modeling and pricing conventions. Mortgage-backed securities are categorized in level 2 of the fair value hierarchy described below to the extent the inputs are observable and timely. In the absence of readily available market quotations, or other observable inputs, securities are valued at fair value pursuant to procedures adopted by the Board of Trustees and would be categorized as level 3.
Money market funds are valued at their net asset value of $1.00 per share and are categorized as level 1. Securities with maturities of 60 days or less may be valued at amortized cost, which approximates fair value and would be categorized as level 2.
Various inputs are used in determining the value of each of the Fund’s investments. These inputs are summarized in the three broad levels listed below:
| | • | Level 1 – quoted prices in active markets for identical securities |
| | • | Level 2 – other significant observable inputs |
| | • | Level 3 – significant unobservable inputs |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used to value the Funds’ investments at fair value as of February 28, 2013:
| Fixed Income Fund | | | | | | | | | |
Security Classification (a) | | | | | Level 2 (Other Significant Observable Inputs) | | | | |
| U.S. Government and Agency Obligations | | $ | — | | | $ | 9,828,572 | | | $ | 9,828,572 | |
| Corporate Bonds | | | 12,132,222 | | | | 7,334,868 | | | | 19,467,090 | |
| Mortgage-Backed Securities | | | — | | | | 4,580,734 | | | | 4,580,734 | |
| Money Market Funds | | | 2,526,423 | | | | — | | | | 2,526,423 | |
| Totals | | $ | 14,658,645 | | | $ | 21,744,174 | | | $ | 36,402,819 | |
| Informed Investor Growth Fund | | | | | | | | | |
Security Classification (a) | | | | | Level 2 (Other Significant Observable Inputs) | | | | |
Common Stocks (b) | | $ | 9,417,038 | | | $ | — | | | $ | 9,417,038 | |
| Exchange-Traded Funds | | | 1,936,032 | | | | — | | | | 1,936,032 | |
| Money Market Funds | | | 2,998,513 | | | | — | | | | 2,998,513 | |
| Totals | | $ | 14,351,583 | | | $ | — | | | $ | 14,351,583 | |
MONTEAGLE FUNDSNOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| Quality Growth Fund | | | | | | | | | |
Security Classification (a) | | | | | Level 2 (Other Significant Observable Inputs) | | | | |
Common Stocks (b) | | $ | 27,093,659 | | | $ | — | | | $ | 27,093,659 | |
| Money Market Funds | | | 475,098 | | | | — | | | | 475,098 | |
| Totals | | $ | 27,568,757 | | | $ | — | | | $ | 27,568,757 | |
| Select Value Fund | | | | | | | | | |
Security Classification (a) | | | | | Level 2 (Other Significant Observable Inputs) | | | | |
Common Stocks (b) | | $ | 10,487,431 | | | $ | — | | | $ | 10,487,431 | |
| Money Market Funds | | | 2,314,200 | | | | — | | | | 2,314,200 | |
| Totals | | $ | 12,801,631 | | | $ | — | | | $ | 12,801,631 | |
| Value Fund | | | | | | | | | |
Security Classification (a) | | | | | Level 2 (Other Significant Observable Inputs) | | | | |
Common Stocks (b) | | $ | 14,702,827 | | | $ | — | | | $ | 14,702,827 | |
| Preferred Stocks | | | 364 | | | | — | | | | 364 | |
| Money Market Funds | | | 759,518 | | | | — | | | | 759,518 | |
| Totals | | $ | 15,462,709 | | | $ | — | | | $ | 15,462,709 | |
| (a) | As of and during the six month period ended February 28, 2013, the Funds held no securities that were considered to be “Level 3” securities (those valued using significant unobservable inputs). Therefore, a reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value is not applicable. |
| (b) | All common stocks held in the Funds are Level 1 securities. For a detailed break-out of common stocks by major industry classification, please refer to the Schedules of Investments. |
There were no transfers into and out of any Level during the six month period ended February 28, 2013. It is the Funds’ policy to recognize transfers between Levels at the end of the reporting period.
During the six month period ended February 28, 2013, no securities were fair valued.
Security Loans — The Funds have entered into securities lending agreements with Morgan Stanley & Co., Inc. and MS Securities Services, Inc. The Funds receive compensation in the form of fees, or retain a portion of interest on the investment of any cash received as collateral. The Funds also continue to receive interest or dividends on the securities loaned. The loans are secured by collateral at least equal, at all times, to 102% of the market value of loaned securities. Gain or
MONTEAGLE FUNDSNOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Funds. The Funds have the right under the lending agreement to recover the securities from the borrower on demand. If the fair value of the collateral falls below 102% plus accrued interest of the loaned securities, the lender’s agent shall request additional collateral from the borrowers to bring the collateralization back to 102%.
Security Transactions — Security transactions are accounted for on trade date and realized gains and losses on investments sold are determined on a specific identification basis.
Interest and Dividend Income — Interest income is accrued as earned. Dividends on securities held by the Funds are recorded on the ex-dividend date. Discounts and premiums on securities purchased are amortized over the lives of the respective securities. Withholding taxes on foreign dividends have been provided for in accordance with the Funds’ understanding of the applicable country’s tax rules and rates. The ability of issuers of debt securities held by the Funds to meet their obligations may be affected by economic and political developments in a specific country or region.
Dividends and Distributions to Shareholders — Distributions of net investment income to shareholders are declared daily and paid monthly by the Fixed Income Fund. Net investment income distributions, if any, for Informed Investor Growth Fund, Quality Growth Fund, Select Value Fund, and Value Fund are declared and paid quarterly at the discretion of each Fund’s adviser. Net capital gains for the Funds, if any, are distributed to shareholders at least annually. Distributions to shareholders, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date.
The tax character of distributions paid during the six month period ended February 28, 2013 and the year ended August 31, 2012 were as follows:
| | | | | | |
| | | | | | | | | | | | | |
| Fixed Income Fund | | $ | 356,550 | | | $ | 844,767 | | | $ | — | | | $ | — | |
| Informed Investor Growth Fund | | | 1,021,556 | | | | 493,740 | | | | — | | | | — | |
| Quality Growth Fund | | | 68,390 | | | | 4,552 | | | | — | | | | — | |
| Select Value Fund | | | 78,497 | | | | 111,880 | | | | — | | | | — | |
| Value Fund | | | 456,784 | | | | 174,931 | | | | — | | | | 2,750,126 | |
Estimates — These financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
Common Expenses — Common expenses of the Trust are allocated among the Funds within the Trust based on relative net assets of each Fund or the nature of the services performed and the relative applicability to each Fund. Other allocations may also be approved from time to time by the Trustees.
MONTEAGLE FUNDSNOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| 3. | ADVISORY, SERVICING FEES AND OTHER TRANSACTIONS WITH AFFILIATES |
Investment Advisory Agreement
Nashville Capital Corporation (“Nashville Capital” or the “Adviser”) serves as the investment adviser to the Funds. Subject to the general oversight of the Board of Trustees, the Adviser is responsible for, among other things, developing a continuing investment program for the Funds in accordance with their investment objectives, reviewing the investment strategies and policies of the Funds and advising the Board of Trustees on the selection of sub-advisers. Each Fund is authorized to pay the Adviser a fee based on average daily net assets at the following annual rates:
| | Informed Investor Growth Fund | | | |
| Up to and including $25 millon | 0.965% | 1.200% | 1.200% | 1.200% | 1.200% |
| From $25 up to and including $50 million | 0.965% | 1.115% | 1.115% | 1.115% | 1.115% |
| From $50 up to and including $100 million | 0.845% | 0.975% | 0.975% | 0.975% | 0.975% |
| Over $100 million | 0.775% | 0.875% | 0.875% | 0.875% | 0.875% |
Under the terms of the Funds’ advisory agreement, the Adviser oversees the management of each Fund’s investments and pays all of the operating expenses of each Fund except: (i) costs of membership in trade associations; (ii) any expenses recouped by the Adviser; (iii) SEC registration fees and related expenses; (iv) any non-interested Trustee fees; (v) costs of travel for non-interested Trustees; (vi) costs associated with seminars, conventions or trade education for non-interested Trustees; (vii) 50% of the compensation amount approved by Trustees specifically for the Chief Compliance Officer’s services for the Trust attributable to the Funds managed by the Adviser; and (viii) any extraordinary Trust expenses, including legal expenses relating to lawsuits.
For the six month period ended February 28, 2013, the amounts earned by and payable to the Adviser were as follows:
| | | | | Advisory Fees Payable as of February 28, 2013 | |
| Fixed Income Fund | | $ | 172,174 | | | $ | 26,760 | |
| Informed Investor Growth Fund | | | 76,416 | | | | 11,377 | |
| Quality Growth Fund | | | 162,318 | | | | 25,384 | |
| Select Value Fund | | | 64,844 | | | | 10,837 | |
| Value Fund | | | 86,881 | | | | 13,862 | |
An officer of Nashville Capital is also an officer of the Trust.
MONTEAGLE FUNDSNOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
Fixed Income Fund — Nashville Capital has retained Howe & Rusling Inc. (“H&R”) to serve as the sub-adviser to Fixed Income Fund. Nashville Capital has agreed to pay H&R an annual advisory fee of 0.30% of average daily net assets up to $25 million, 0.25% of such assets from $25 million up to $50 million, and 0.20% of such assets over $50 million.
Informed Investor Growth Fund — Nashville Capital has retained T.H. Fitzgerald & Co. (“T.H. Fitzgerald”) to serve as the sub-adviser to Informed Investor Growth Fund. Nashville Capital has agreed to pay T.H. Fitzgerald an annual advisory fee of 0.50% of average daily net assets up to $25 million, 0.60% of such assets from $25 million up to $50 million, 0.50% of such assets from $50 million up to $100 million, and 0.40% of such assets over $100 million.
Quality Growth Fund — Nashville Capital has retained Garcia Hamilton & Associates (“GHA”) to serve as the sub-adviser to Quality Growth Fund. Nashville Capital has agreed to pay GHA an annual advisory fee of 0.30% of average daily net assets.
Select Value Fund — Nashville Capital has retained Parkway Advisors, L.P. (“Parkway”) to serve as the sub-adviser to Select Value Fund. Nashville Capital has agreed to pay Parkway an annual advisory fee of 0.50% of average daily net assets.
Value Fund — Nashville Capital has retained Robinson Investment Group, Inc. (“Robinson”) to serve as the sub-adviser to Value Fund. Nashville Capital has agreed to pay Robinson an annual advisory fee of 0.50% of average daily net assets up to $25 million, 0.45% of such assets from $25 million up to $50 million, 0.35% of such assets from $50 million up to $100 million, and 0.30% of such assets over $100 million.
Investment Company Services Agreement
Pursuant to an Investment Company Services Agreement between the Trust and Matrix 360 Administration, LLC (“Matrix”), Matrix provides administrative, fund accounting and pricing, and transfer agent and shareholder services to the Funds. For these services, Matrix receives the greater of an annual base fee of $30,000 per Fund or 0.075% of the Trust’s Equity Funds’ aggregate average daily net assets to $400 million with lower fees at higher asset levels and 0.04% of the Trust’s Fixed Income Fund aggregate average net assets to $400 million with lower fees at higher assets levels. The fees payable to Matrix are paid by the Adviser (not the Funds). Officers of Matrix are also officers of the Trust.
Pursuant to the terms of a Distribution Agreement with the Trust, Matrix Capital Group, Inc. (the “Distributor”) serves as the Funds’ principal underwriter. Matrix Capital Group, Inc. does not receive compensation for such services.
An affiliated Contractor (the “Contractor”) serves as the CCO of the Trust. The Funds pay $82,500 annually to the Contractor for providing CCO services. Each Fund pays $5,000 with the remaining $57,500 allocated to the Funds based on aggregate average daily net assets.
MONTEAGLE FUNDSNOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| 4. | SECURITIES TRANSACTIONS |
During the six month period ended February 28, 2013, cost of purchases and proceeds from sales and maturities of investment securities, excluding short-term investments and U.S. government securities, were as follows:
| | | | | | |
| Fixed Income Fund | | $ | 4,991,779 | | | $ | 3,808,758 | |
| Informed Investor Growth Fund | | | 51,913,430 | | | | 52,463,952 | |
| Quality Growth Fund | | | 5,817,892 | | | | 7,495,452 | |
| Select Value Fund | | | 1,252,064 | | | | 1,914,138 | |
| Value Fund | | | — | | | | 9 | |
There were no purchases or sales of U.S. government securities made by the Funds.
It is each Fund’s policy to comply with the special provisions of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. As provided therein, in any fiscal year in which a Fund so qualifies and distributes at least 90% of its taxable income, such Fund (but not the shareholders) will be relieved of federal income tax on the income distributed. Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated investment companies, it is also each Fund’s intention to declare as dividends in each calendar year at least 98% of its net investment income and 98.2% of its net realized capital gains plus undistributed amounts from prior years.
The Funds’ tax basis distributable earnings are determined only at the end of each fiscal year. The tax character of distributable earnings (deficit) at August 31, 2012, the Funds’ most recent fiscal year end, was as follows:
| | Unrealized Appreciation (Depreciation) | | | Undistributed Ordinary Income | | | Undistributed Capital Gains | | | Capital Loss Carryforward | | | Post-December Ordinary Loss | | | | | | Total Distributable Earnings | |
| Fixed Income Fund | | $ | 2,027,646 | | | $ | 562 | | | $ | — | | | $ | (551,688 | ) | | $ | — | | | $ | — | | | $ | 1,476,520 | |
| Informed Investor Growth Fund | | | 1,016,320 | | | | 1,021,556 | | | | — | | | | — | | | | — | | | | — | | | | 2,037,876 | |
| Quality Growth Fund | | | 6,370,998 | | | | 68,391 | | | | — | | | | (6,417,697 | ) | | | — | | | | (404,988 | ) | | | (383,296 | ) |
| Select Value Fund | | | (265,761 | ) | | | 25,908 | | | | — | | | | (1,289,111 | ) | | | — | | | | — | | | | (1,528,964 | ) |
| Value Fund | | | 2,220,696 | | | | 387,362 | | | | — | | | | — | | | | — | | | | (317,982 | ) | | | 2,290,076 | |
The undistributed ordinary income, capital gains, carryforward losses and post-October losses shown above differ from corresponding accumulated net investment income and accumulated net realized gain (loss) figures reported in the statements of assets and liabilities due to differing book/tax treatment of short-term capital gains, and certain temporary book/tax differences due to the tax
MONTEAGLE FUNDSNOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
deferral of losses on wash sales. Following the January 22, 2010 acquisition by the Quality Growth Fund of the Monteagle Large Cap Growth Fund, the Quality Growth Fund acquired all capital loss carryforwards available to the Large Cap Growth Fund. In accordance with Section 382 of the Internal Revenue Code, loss limitations were appropriately applied to the available capital loss carryforwards. Of the capital losses subject to Section 382, the Quality Growth Fund may only utilize $499,665 in a given year.
Under current tax law, net capital losses realized after October 31st and net ordinary losses incurred after December 31st may be deferred and treated as occurring on the first day of the following fiscal year. The Funds’ carryforward losses, post-October losses and post-December losses are determined only at the end of each fiscal year. As of August 31, 2012, the Funds elected to defer net capital losses as indicated in the chart below.
| | | | | | | |
| | | | | | | | | | | | |
| Fixed Income Fund | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Informed Investor Growth Fund | | | — | | | | — | | | | — | | | | — | |
| Quality Growth Fund | | | 404,988 | | | | — | | | | — | | | | — | |
| Select Value Fund | | | — | | | | — | | | | — | | | | — | |
| Value Fund | | | 317,982 | | | | — | | | | — | | | | — | |
As of August 31, 2012, the following Funds had the following capital loss carryforwards for federal income tax purposes. These capital loss carryforwards may be utilized in future years to offset net realized capital gains, if any, prior to distributing such gains to shareholders.
| | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Fixed Income Fund | | $ | 79,334 | | | $ | 168,181 | | | $ | 61,228 | | | $ | 220,424 | | | $ | 22,521 | | | $ | 551,688 | | | $ | 658,618 | |
| Informed Investor Growth Fund | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Quality Growth Fund | | | — | | | | — | | | | 1,372,538 | | | | 5,045,159 | | | | — | | | | 6,417,697 | | | | 1,074,766 | |
| Select Value Fund | | | — | | | | — | | | | — | | | | — | | | | 1,289,111 | | | | 1,289,111 | | | | 329,074 | |
| Value Fund | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Under the Regulated Investment Company Modernization Act of 2010 (the Act), net capital losses recognized after December 31, 2010, may be carried forward indefinitely, and their character is retained as short-term and/or long-term. Under the law in effect prior to the Act, pre-enactment net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be utilized before pre-enactment net capital losses. There were no post-enactment capital losses incurred by the Funds during the year ended August 31, 2012.
MONTEAGLE FUNDSNOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
The following information is based upon the federal income tax cost of the investment securities as of February 28, 2013:
| | | | | Gross Unrealized Appreciation | | | Gross Unrealized Depreciation | | | Net Unrealized Appreciation | |
| Fixed Income Fund | | $ | 34,819,502 | | | $ | 1,677,692 | | | $ | (94,375 | ) | | $ | 1,583,317 | |
| Informed Investor Growth Fund | | | 13,875,951 | | | | 576,637 | | | | (101,005 | ) | | | 475,632 | |
| Quality Growth Fund | | | 21,157,565 | | | | 6,650,392 | | | | (239,200 | ) | | | 6,411,192 | |
| Select Value Fund | | | 11,954,168 | | | | 2,086,365 | | | | (1,238,902 | ) | | | 847,463 | |
| Value Fund | | | 12,208,361 | | | | 3,852,019 | | | | (597,671 | ) | | | 3,254,348 | |
The difference between the federal income tax cost of portfolio investments and the financial statement cost for Informed Investor Growth Fund, Quality Growth Fund and Select Value Fund is due to certain timing differences in the recognition of capital losses under income tax regulations and GAAP. These “book/tax” differences are temporary in nature and are due to the tax deferral of losses on wash sales.
The Funds recognize the tax benefits of uncertain tax positions only when the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has reviewed the tax positions in the open tax years of 2009, 2010, 2011 and 2012 and for the six month period ended February 28, 2013 and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken in the above open tax years. The Funds identify their major tax jurisdictions as U.S. Federal and Delaware. The Funds recognize interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statements of Operations. During the six month period ended February 28, 2013, the Funds did not incur any interest or penalties. The Funds are not subject to examination by U.S. Federal tax authorities for tax years before 2009.
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumption of control of the fund under Section 2(a)(9) of the Investment Company Act of 1940. As of February 28, 2013, the shareholders listed in the table immediately below held, for the benefit of their customers, the following percentages of the outstanding shares of each Fund. The Trust does not know whether Charles Schwab & Co., Farmers and Merchant Corp., Stifel Nicolaus & Co. or any of the underlying beneficial owners owned or controlled 25% or more of the voting securities of the noted Funds.
| | Percent Owned as of February 28, 2013 |
| Fixed Income Fund | Farmers and Merchant Corp. | 87% |
| Informed Investor Growth Fund | Farmers and Merchant Corp. | 90% |
| Quality Growth Fund | Farmers and Merchant Corp. | 66% |
| | Charles Schwab & Co. | 31% |
| Select Value Fund | Stifel Nicolaus & Co. | 91% |
| Value Fund | Farmers and Merchant Corp. | 98% |
MONTEAGLE FUNDSNOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| 7. | CAPITAL SHARE TRANSACTIONS |
| | | | |
| | | | | | | | | | | | | |
| For the Six Month Period ended: | | | | | | | | | | | | |
| February 28, 2013 | | | | | | | | | | | | |
| Class I | | | | | | | | | | | | |
| Shares | | | 176,433 | | | | (131,054 | ) | | | 27,286 | | | | 3,395,305 | |
| Value | | $ | 1,885,643 | | | $ | (1,396,584 | ) | | $ | 292,918 | | | | | |
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year ended: | | | | | | | | | | | | | | | | |
| August 31, 2012 | | | | | | | | | | | | | | | | |
| Class I | | | | | | | | | | | | | | | | |
| Shares | | | 465,582 | | | | (184,307 | ) | | | 61,246 | | | | 3,322,640 | |
| Value | | $ | 4,990,184 | | | $ | (1,968,113 | ) | | $ | 656,322 | | | | | |
| Class A | | | | | | | | | | | | | | | | |
| Shares | | | — | | | | (105 | ) | | | 3 | | | | — | |
| Value | | $ | — | | | $ | (1,129 | ) | | $ | 31 | | | | | |
| Class C | | | | | | | | | | | | | | | | |
| Shares | | | — | | | | (104 | ) | | | 4 | | | | — | |
| Value | | $ | — | | | $ | (1,129 | ) | | $ | 44 | | | | | |
| | | Informed Investor Growth Fund | |
| | | | | | | | | | | | | |
| For the Six Month Period ended: | | | | | | | | | | | | |
| February 28, 2013 | | | | | | | | | | | | |
| Class I | | | | | | | | | | | | |
| Shares | | | 22,567 | | | | (46,630 | ) | | | 10,299 | | | | 1,159,600 | |
| Value | | $ | 240,513 | | | $ | (507,326 | ) | | $ | 106,082 | | | | | |
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year ended: | | | | | | | | | | | | | | | | |
| August 31, 2012 | | | | | | | | | | | | | | | | |
| Class I | | | | | | | | | | | | | | | | |
| Shares | | | 115,026 | | | | (623,805 | ) | | | 7,110 | | | | 1,173,364 | |
| Value | | $ | 1,210,567 | | | $ | (6,704,025 | ) | | $ | 69,748 | | | | | |
| Class A | | | | | | | | | | | | | | | | |
| Shares | | | — | | | | (102 | ) | | | 4 | | | | — | |
| Value | | $ | — | | | $ | (1,119 | ) | | $ | 39 | | | | | |
| Class C | | | | | | | | | | | | | | | | |
| Shares | | | — | | | | (24,783 | ) | | | 297 | | | | — | |
| Value | | $ | — | | | $ | (268,746 | ) | | $ | 2,847 | | | | | |
MONTEAGLE FUNDSNOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| | | | |
| | | | | | | | | | | | | |
| For the Six Month Period ended: | | | | | | | | | | | | |
| February 28, 2013 | | | | | | | | | | | | |
| Class I | | | | | | | | | | | | |
| Shares | | | 57,499 | | | | (202,346 | ) | | | 2,326 | | | | 2,693,006 | |
| Value | | $ | 569,691 | | | $ | (2,028,115 | ) | | $ | 22,721 | | | | | |
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year ended: | | | | | | | | | | | | | | | | |
| August 31, 2012 | | | | | | | | | | | | | | | | |
| Class I | | | | | | | | | | | | | | | | |
| Shares | | | 419,181 | | | | (197,924 | ) | | | 166 | | | | 2,835,527 | |
| Value | | $ | 3,585,430 | | | $ | (1,807,206 | ) | | $ | 1,416 | | | | | |
| Class A | | | | | | | | | | | | | | | | |
| Shares | | | 196 | | | | (334 | ) | | | — | | | | — | |
| Value | | $ | 1,750 | | | $ | (3,071 | ) | | $ | — | | | | | |
| Class C | | | | | | | | | | | | | | | | |
| Shares | | | — | | | | (138 | ) | | | — | | | | — | |
| Value | | $ | — | | | $ | (1,314 | ) | | $ | — | | | | | |
| | | | |
| | | | | | | | | | | | | |
| For the Six Month Period ended: | | | | | | | | | | | | |
| February 28, 2013 | | | | | | | | | | | | |
| Class I | | | | | | | | | | | | |
| Shares | | | — | | | | (9,361 | ) | | | 97 | | | | 920,546 | |
| Value | | $ | — | | | $ | (107,517 | ) | | $ | 1,134 | | | | | |
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year ended: | | | | | | | | | | | | | | | | |
| August 31, 2012 | | | | | | | | | | | | | | | | |
| Class I | | | | | | | | | | | | | | | | |
| Shares | | | 1,263 | | | | (35,481 | ) | | | 257 | | | | 929,810 | |
| Value | | $ | 12,429 | | | $ | (368,308 | ) | | $ | 2,642 | | | | | |
| Class A | | | | | | | | | | | | | | | | |
| Shares | | | — | | | | (116 | ) | | | 1 | | | | — | |
| Value | | $ | — | | | $ | (1,215 | ) | | $ | 9 | | | | | |
| Class C | | | | | | | | | | | | | | | | |
| Shares | | | — | | | | (115 | ) | | | — | (a) | | | — | |
| Value | | $ | — | | | $ | (1,214 | ) | | $ | 2 | | | | | |
| (a) | Class C shares reinvested were 0.232 shares. |
MONTEAGLE FUNDSNOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| | | | |
| | | | | | | | | | | | | |
| For the Six Month Period ended: | | | | | | | | | | | | |
| February 28, 2013 | | | | | | | | | | | | |
| Class I | | | | | | | | | | | | |
| Shares | | | 10,400 | | | | (12,474 | ) | | | 615 | | | | 1,075,978 | |
| Value | | $ | 142,900 | | | $ | (169,307 | ) | | $ | 8,072 | | | | | |
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year ended: | | | | | | | | | | | | | | | | |
| August 31, 2012 | | | | | | | | | | | | | | | | |
| Class I | | | | | | | | | | | | | | | | |
| Shares | | | 185,760 | | | | (25,003 | ) | | | 2,293 | | | | 1,077,437 | |
| Value | | $ | 2,222,035 | | | $ | (331,716 | ) | | $ | 27,447 | | | | | |
| Class A | | | | | | | | | | | | | | | | |
| Shares | | | — | | | | (94 | ) | | | 20 | | | | — | |
| Value | | $ | — | | | $ | (1,237 | ) | | $ | 237 | | | | | |
| Class C | | | | | | | | | | | | | | | | |
| Shares | | | — | | | | (93 | ) | | | 19 | | | | — | |
| Value | | $ | — | | | $ | (1,235 | ) | | $ | 227 | | | | | |
| 8. | CONTINGENCIES AND COMMITMENTS |
The Funds indemnify the Trust’s officers and Trustees for certain liabilities that might arise from the performance of their duties to the Funds. Additionally, in the normal course of business the Funds enter into contracts that contain a variety of representations and warranties and which provide general indemnifications. Each Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Funds that have not yet occurred. However, based on experience, the Funds expect the risk of loss to be remote.
When the Funds emphasize one or more economic sectors, it may be more susceptible to the financial, market, or economic events affecting the particular issuers and industries in which they invest than funds that do not emphasize particular sectors. The more a fund diversifies, the more it spreads risk and potentially reduces the risks of loss and volatility.
| 10. | RECENT ACCOUNTING PRONOUNCEMENTS |
In December 2011, FASB issued ASU No. 2011-11 related to disclosures about offsetting assets and liabilities. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The ASU is effective for annual reporting
MONTEAGLE FUNDSNOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
periods beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance requires retrospective application for all comparative periods presented. Management is currently evaluating the impact ASU 2011-11 will have on the financial statement disclosures.
On March 15, 2013, the Quality Growth Fund declared a dividend of $81,038, which was payable on March 15, 2013. On March 15, 2013, the Select Value Fund declared a dividend of $31,108, which was payable on March 15, 2013. On March 15, 2013, the Value Fund declared a dividend of $33,664, which was payable on March 15, 2013. On March 28, 2013, the Fixed Income Fund declared a dividend of $55,357, which was payable on March 28, 2013.
Management has evaluated subsequent events through the issuance of the financial statements and has noted no other such events that would require disclosure.
On December 7, 2010, an amended complaint was filed in the United States Bankruptcy Court for the District of Delaware (Adversary Proceeding No. 10-54010) by The Official Committee of Unsecured Creditors of Tribune Company (“Committee”) on behalf of Tribune Company (“Tribune”), a U.S. news and media organization. Among the thousands of defendants in the Amended Complaint is the Monteagle Funds with respect to holdings by the Monteagle Value Fund (the “Fund”). The Fund, along with numerous other mutual funds, institutional investors and others, owned shares of Tribune in 2007 when it went private in a leveraged buyout transaction (“LBO”). In the LBO, shareholders such as the Fund sold their shares back to Tribune for $34/share. The lawsuit alleges, among other things, that the payment for the shares by Tribune was a fraudulent transfer and seeks to have the cash paid to shareholders returned to the Tribune bankruptcy estate. The Amended Complaint seeks to create a class of Defendants -the former shareholders of Tribune - and seeks return of over $8 billion in proceeds from the LBO. The Committee has not served the Fund with the Amended Complaint, and the Fund was not named as a Defendant in the original complaint. Although the Fund has not yet been served, the Fund is monitoring the litigation.
On April 5, 2012, the Committee’s lawsuit was transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the Southern District of New York for discovery and pretrial motions with numerous other related actions. (In re Tribune Company Fraudulent Conveyance Litigation, 1:12-mc-02296-WHP). It is unclear if the Fund is named as a Defendant, or is a member of any proposed class, in any of these other actions.
On July 23, 2012, the Delaware Bankruptcy Judge confirmed a plan of reorganization that, among other things, replaced the Committee as Plaintiff with a Litigation Trustee.
On September 7, 2012, Judge Pauley of the Southern District of New York entered a Master Case Order. Among other things, the Master Case Order creates liaison counsel and an Executive Committee for the defendants in the Litigation Trustee’s lawsuit, including those defendants, like the Fund, that were only shareholders of Tribune. The Executive Committee Members for mutual funds are Michael S. Doluisio, an attorney with Dechert LLP in Philadelphia, and Steven
MONTEAGLE FUNDSNOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
R. Schoenfeld, an attorney with Dorsey & Whitney LLP in New York. The Executive Committee is directed to take reasonable steps to streamline case management and to eliminate duplication of efforts and redundant filings. However, the Master Case Order does not certify a class of Defendants, and does not prevent any individual Defendant from retaining its own counsel or being heard by the Court. Discovery in the Litigation Trustee’s lawsuit is stayed pending resolution of certain motions to dismiss in the related litigation.
It is not expected that the cases discussed above will have a material adverse impact on the Fund’s financial position, results of operation, or cash flows; however, these litigation matters are subject to inherent uncertainties and the views of these matters with respect to any impact to the Fund may change in the future.
MONTEAGLE FUNDSOTHER INFORMATION (Unaudited)
Proxy Policies — The Trust has adopted Proxy Voting Policies and Procedures under which the Funds vote proxies related to securities held by the Funds. A description of the Funds’ policies and procedures is available without charge, upon request, by calling the Funds toll free at 1-888-263-5593, on the Funds’ website at http://www.monteaglefunds.com or on the SEC website at http://www.sec.gov.
In addition, the Funds are required to file Form N-PX, with their complete voting record for the 12 months ended June 30th, no later than August 31st of each year. The Funds’ Form N-PX is available without charge, upon request, by calling the Funds toll free at 1-888-263-5593, on the Funds’ website at http://www.monteaglefunds.com or on the SEC’s website at http://www.sec.gov.
N-Q Filing — The SEC has adopted the requirement that all mutual funds file a complete schedule of investments with the SEC for their first and third fiscal quarters on Form N-Q. For the Monteagle Funds, this would be for the fiscal quarters ending November 30 and May 31. The Form N-Q filing must be made within 60 days of the end of the quarter. The Funds’ Forms N-Q are available on the SEC’s website at http://www.sec.gov., or they may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC (call 1-800-732-0330 for information on the operation of the Public Reference Room).
FEDERAL TAX INFORMATION (Unaudited)
For the six month period ended February 28, 2013, certain dividends paid by Fixed Income Fund, Informed Investor Growth Fund, Quality Growth Fund, Select Value Fund and Value Fund may be subject to a maximum tax rate of 15%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Funds intend to designate up to a maximum amount of $356,550, $1,021,556, $68,390, $78,497, and $456,784, respectively, as taxed at a maximum rate of 15%. Complete information will be computed and reported in conjunction with your 2013 Form 1099-DIV.
MONTEAGLE FUNDSABOUT YOUR FUNDS’ EXPENSES (Unaudited)
We believe it is important for you to understand the impact of costs on your investment. As a shareholder of the Funds, you incur ongoing costs, including management fees and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds.
A mutual fund’s ongoing costs are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The expenses in the tables below are based on an investment of $1,000 made at the beginning of the most recent semi-annual period (September 1, 2012) and held until the end of the period (February 28, 2013).
The tables that follow illustrate each Fund’s costs in two ways:
Actual fund return – This section helps you to estimate the actual expenses that you paid over the period. The “Ending Account Value” shown is derived from each Fund’s actual return, and the third column shows the dollar amount of operating expenses that would have been paid by an investor who started with $1,000 in the Funds. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for the Funds under the heading “Expenses Paid During Period.”
Hypothetical 5% return – This section is intended to help you compare the Funds’ costs with those of other mutual funds. It assumes that each Fund had an annual return of 5% before expenses during the period shown, but that the expense ratio is unchanged. In this case, because the return used is not the Funds’ actual returns, the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess each Fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that expenses shown in the table are meant to highlight and help you compare ongoing costs only.
The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
More information about the Funds’ expenses, including historical annual expense ratios, can be found in this report. For additional information on operating expenses and other shareholder costs, please refer to each Fund’s Prospectus.
MONTEAGLE FUNDSABOUT YOUR FUNDS’ EXPENSES (Unaudited) (Continued)
| Fixed Income Fund |
| | | Beginning Account Value 9/01/12 | Annualized Expense Ratio For the Period | Ending Account Value 2/28/13 | Expenses Paid During the Period(1) |
| Actual Example Based on actual return of: |
| Class I | -0.13% | $1,000.00 | 1.06% | $998.70 | $5.25 |
| Hypethetical Example Based on assumed 5% return |
| Class I | | $1,000.00 | 1.06% | $1,019.50 | $5.31 |
| Informed Investor Growth Fund |
| | | Beginning Account Value 9/01/12 | Annualized Expense Ratio For the Period | Ending Account Value 2/28/13 | Expenses Paid During the Period(1) |
| Actual Example Based on actual return of: |
| Class I | -2.01% | $1,000.00 | 1.37% | $979.90 | $6.73 |
| Hypethetical Example Based on assumed 5% return |
| Class I | | $1,000.00 | 1.37% | $1,018.00 | $6.85 |
| Quality Growth Fund |
| | | Beginning Account Value 9/01/12 | Annualized Expense Ratio For the Period | Ending Account Value 2/28/13 | Expenses Paid During the Period(1) |
| Actual Example Based on actual return of: |
| Class I | 2.98% | $1,000.00 | 1.30% | $1,029.80 | $6.54 |
| Hypethetical Example Based on assumed 5% return |
| Class I | | $1,000.00 | 1.30% | $1,018.30 | $6.51 |
MONTEAGLE FUNDSABOUT YOUR FUNDS’ EXPENSES (Unaudited) (Continued)
| Select Value Fund |
| | | Beginning Account Value 9/01/12 | Annualized Expense Ratio For the Period | Ending Account Value 2/28/13 | Expenses Paid During the Period(1) |
| Actual Example Based on actual return of: |
| Class I | 17.01% | $1,000.00 | 1.39% | $1,170.10 | $7.48 |
| Hypethetical Example Based on assumed 5% return |
| Class I | | $1,000.00 | 1.39% | $1,017.90 | $6.95 |
| Value Fund |
| | | Beginning Account Value 9/01/12 | Annualized Expense Ratio For the Period | Ending Account Value 2/28/13 | Expenses Paid During the Period(1) |
| Actual Example Based on actual return of: |
| Class I | 7.95% | $1,000.00 | 1.37% | $1,079.50 | $7.06 |
| Hypethetical Example Based on assumed 5% return |
| Class I | | $1,000.00 | 1.37% | $1,018.00 | $6.85 |
| (1) | Expenses are equal to the Funds’ annualized expense ratios for the period, multiplied by the average account value over the period, multiplied by 181/365 (to reflect the one-half year period). |
MONTEAGLE FUNDSBOARD APPROVAL OF INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
(Unaudited)
On January 24, 2013, the Board of Trustees (the “Board” or the “Trustees”) of the Monteagle Funds (the “Trust”), comprised entirely of Trustees who are not “interested persons” of the Trust, as that term is defined by Section 2(a)(19) of the Investment Company Act of 1940 (the “Independent Trustees”), met in person to review and discuss approving renewal of the Management Agreement between the Trust and Nashville Capital Corp. (the “Adviser”) with respect to each of the funds comprising the Trust (the “Funds”), and separately and individually, each of the Subadvisory Agreements by and among the Adviser, the Trust and the firm engaged to provide day-to-day portfolio management services for the Funds, being Parkway Advisors, L.P. with respect to the Monteagle Select Value Fund, Garcia Hamilton & Associates, L.P. with respect to the Monteagle Quality Growth Fund, Howe & Rusling, Inc. with respect to the Monteagle Fixed Income Fund, Robinson Investment Group, Inc. with respect to the Monteagle Value Fund, and T.H. Fitzgerald & Company with respect to the Monteagle Informed Investor Growth Fund (each, a “Sub-adviser”).
With the assistance and advice of independent counsel, the Trustees had requested and received information prior to the meeting that they deemed relevant or necessary to consider in the renewal process. In addition, they received a memorandum from independent counsel discussing, among other things, the fiduciary duties and responsibilities of the Board in reviewing and considering renewal. The Trustees reviewed and discussed the foregoing information during a private session with their counsel and during the Board meeting. Counsel also reviewed with the Trustees the types of information and factors that they should and should not take into consideration in making their decision about renewal. Throughout the process the Trustees had the opportunity to ask questions, and answers to their questions were considered along with the other materials provided.
In assessing various factors in regard to renewal, the Board took into consideration information furnished for the Board’s review and consideration throughout the year at regular Board meetings, as well as the information specifically prepared for the renewal meeting, such as: (i) reports regarding the services and support provided to the Funds and their shareholders by the Adviser and the Sub-advisers; (ii) performance assessments of the investment performance of the Funds by personnel of the Adviser and the Sub-advisers; (iii) performance commentary on the reasons for the performance; (iv) presentations by the Funds’ portfolio managers addressing the Adviser’s and the Sub-advisers’ investment philosophy, investment strategy and operations; (v) compliance reports, audits and review reports concerning the Funds, the Adviser and the Sub-advisers; (vi) disclosure information contained in the registration statement of the Trust and the Form ADVs of the Adviser and the Sub-advisers; (vii) information on relevant developments in the mutual fund industry and how the Funds, the Adviser and/or the Sub-advisers are responding to them; (viii) financial information about the Adviser and the Sub-advisers; (ix) a description of the personnel at the Adviser and the Sub-advisers involved with the Funds, their background, professional skills and accomplishments; (x) information on investment advice, performance, summaries of fund expenses, compliance program, current legal matters, and other general information about the Adviser and each Sub-adviser; (xi) comparative expense and performance information for other mutual funds that are similar to the Funds; (xii) where available, information about performance and fees relative to other accounts managed by the Sub-advisers that might be considered comparable to the Funds in terms of investment style; and (xiii) any soft-dollar or other “fall-out”
MONTEAGLE FUNDSBOARD APPROVAL OF INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
(Unaudited) (Continued)
or similar benefits to be realized by the Adviser or the Sub-advisers from their relationship with the Funds. The Board also took into consideration the Adviser’s recommendation that each of the Subadvisory Agreements be renewed, as well as the Management Agreement.
The Board did not identify any particular factor or information that was most relevant to its consideration to approve the renewals and each Trustee may have afforded different weight to the various factors considered. Following is a summary of the Board’s consideration of various factors:
The Nature, Extent, and Quality of the Services Provided by the Adviser and Sub-advisers.
The Trustees considered various aspects of the nature, extent and quality of the services provided by the Adviser and the Sub-advisers to the Funds. They noted that the responsibilities of the Adviser and Sub-advisers under each Agreement had not changed since the last renewal and were not proposed to change. They also considered the following, without limitation: the quality of the investment advisory services (including research and recommendations with respect to portfolio securities), noting that they are not proposed to change; the background, experience and professional ability and skill of the portfolio management personnel assigned to the Funds, noting the commitment to hire and retain qualified personnel to work on behalf of the Funds and their shareholders; the processes used for formulating investment recommendations and assuring compliance with each Fund’s investment objectives and limitations, as well as for assuring compliance with regulatory requirements, specifically noting that none of the Adviser or Sub-advisers reported any material compliance matter over the last year; the manner in which the Sub-advisers seek to satisfy their obligation to assure “best execution” in connection with securities transactions placed for the Funds, noting each Sub-adviser’s policies and procedures on trading and brokerage, as well as average brokerage commissions paid; the investment strategies and sources of information upon which the Sub-advisers rely in making investment decisions for the Funds; where applicable, the fees charged to and the performance of other accounts managed by the Sub-advisers similar to the Funds; the oversight of the Funds’ portfolios by the Sub-advisers and the Adviser and the oversight of the Sub-advisers by the Adviser; the Sub-advisers’ succession plans and business continuity plans; and the coordination of services for the Funds among the service providers, Trust management and the Trustees.
After reviewing and considering the foregoing information and further information in the materials provided by the Adviser and Sub-advisers (including their Form ADVs), the Board concluded, in light of all the facts and circumstances, that the nature, extent and quality of the services provided by the Adviser and each of the Sub-advisers were satisfactory and adequate for their respective Funds.
Investment Performance of the Funds, the Adviser and the Sub-Advisers.
In considering this factor, the Trustees took into consideration that the Adviser has delegated day-to-day portfolio management to the Sub-adviser for each respective Fund and that the Adviser’s role in regard to investment performance was largely one of oversight. The Trustees also took
MONTEAGLE FUNDSBOARD APPROVAL OF INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
(Unaudited) (Continued)
into consideration the information about the Adviser personnel fulfilling that role, as well as the information about the Sub-adviser portfolio managers managing each of the Funds’ portfolios day-to-day.
In their evaluation of performance, the Trustees considered the short- and long-term performance of each Fund compared with the performance of its benchmark, groups of funds with similar objectives managed by other investment advisers, and aggregated data by category, noting the following points, among others, with respect to the individual Funds: The Monteagle Select Value Fund had outperformed its category for shorter periods out to 3 years, had lagged the category over longer periods, and ranked in the 24th percentile of the Morningstar Large Value category for the year-to-date period provided. Performance of the Monteagle Quality Growth Fund had lagged its benchmark in shorter periods, but had outperformed for the 5-year period and lagged slightly for the 10-year period. The Fund had also ranked in the 77th percentile of the Morningstar Large Growth category for the year-to-date period provided. The Monteagle Fixed Income Fund had lagged in performance for almost all time periods reported but the Trustees also noted that the Fund is not perfectly aligned with its category due to credit quality restrictions imposed on investments in the Fund that are not present for other funds in that category. The Monteagle Value Fund’s performance had lagged its category for all periods reported, and the Trustees discussed the Fund’s holdings and category and various size characteristics of the securities held in the Fund. The Monteagle Informed Investor Growth Fund had outperformed its category over certain time periods and lagged over others. The Trustees also considered the Fund’s high turnover rate and considered certain types of ETF investments that had been held in the Fund in the past. In addition, the Trustees noted that, in cases where a Sub-adviser is managing other accounts with similar investment objectives to those of their Fund, the Fund’s performance was generally in line with that of the other accounts.
After considering and discussing the performance of the Funds, the Adviser’s and each Sub-adviser’s experience and performance in their roles with respect to the Funds, the historical and comparative performance data provided, and other relevant information, the Board concluded, in light of all the facts and circumstances, that the investment performance of each of the Funds, the Adviser and the Sub-advisers was satisfactory.
The Costs of the Services Provided and Profits Realized by the Adviser and the Sub-advisers from their Relationships with the Funds.
In considering these factors, the Trustees took into consideration the overall expenses of each Fund, including the nature and frequency of advisory and sub-advisory fee payments, the asset levels of each Fund and the gross and net expenses of the Funds as compared to gross and net expenses of a group of funds that may be considered similar, noting that the expenses of each of the Funds was within the range of expenses incurred by the other funds in its group. The Trustees also took into consideration the information provided about the financial condition and profitability of the Adviser and the Sub-advisers and the level of commitment to the Funds by the principals of the Adviser and Sub-advisers to their roles for the Funds.
MONTEAGLE FUNDSBOARD APPROVAL OF INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
(Unaudited) (Continued)
The Trustees also considered the fees charged by the Sub-advisers to comparable accounts – such as institutional accounts -- they manage in a similar style and noted that, typically, the fees charged the Funds were among the lowest, if not lower than, the fees charged other accounts by the Sub-advisers. The Trustees used this information as a potential gauge for what fees might be considered reasonable for similar investment services, although they also considered that accounts identified as similar for this purpose may also have material differences that impact their overall comparability, such as differences in the range of the investor base served by the account; the average account size; the customization of fees, services and reporting available; the daily liquidity, redemptions and turnover that might occur in a mutual fund that might not be the case in other accounts; the regulatory requirements applicable to a fund that do not apply to many non-fund accounts; and the Board oversight applicable to funds that does not apply to most other types of accounts; to name a few. The Trustees took into consideration these potential differences when assessing both performance and fee information with respect to comparable accounts.
After further consideration of these elements, the Board concluded, in light of all the facts and circumstances, that the costs of the services provided to the Funds and the profits realized by the Adviser and the Sub-advisers from their relationships with the Funds were satisfactory.
Other Benefits Derived by the Adviser or Sub-advisers from their Relationships with the Funds and Conflicts of Interest.
The Trustees also considered other benefits that the Adviser or Sub-advisers derive from their relationship with the Funds (sometimes referred to as “fall-out” benefits) and conflicts of interest. In particular, the Trustees considered that the Sub-adviser to the Monteagle Informed Investor Growth Fund uses “soft dollars,” or Fund commissions, to obtain research, and noted in addition to the amount of soft dollars reported that (i) the Sub-adviser reports it selects broker-dealers on the basis of best execution, even though some of the broker-dealers it selects also provide research, (ii) the Sub-adviser reports only using “soft dollars” within the Section 28(e) safe harbor, which requires the Sub-adviser to determine that the commissions paid were reasonable in relation to the value of the research received, and (iii) the Sub-adviser uses the research received to implement its investment strategy generally, which benefits the Fund as well as the Sub-adviser’s other accounts.
The Trustees also noted that the Sub-advisers to the Monteagle Informed Investor Growth Fund and the Monteagle Quality Growth Fund each report that the portfolio managers managing those Funds also manage performance-based fee accounts for other clients of the Sub-adviser. When considering these arrangements and the conflict of interest they present, the Trustees also noted that both those Sub-advisers indicated they have procedures in place to manage potential conflicts of interest that arise, that the arrangements are subject to monitoring by the Trust and the Adviser, and that the arrangements are disclosed in the Trust’s Statement of Additional Information.
After reviewing and considering the foregoing information and other information they deemed relevant with regard to these matters, the Board concluded, in light of all the facts and circumstances, that the other benefits derived by the Adviser or Sub-advisers from their relationships with the Funds were satisfactory.
MONTEAGLE FUNDSBOARD APPROVAL OF INVESTMENT MANAGEMENT AND SUB-ADVISORY AGREEMENTS
(Unaudited) (Continued)
Economies of Scale.
The Trustees also considered the extent to which economies of scale would be realized if the Funds grow and whether the advisory fee levels reflect those economies of scale for the benefit of the Funds’ shareholders. In this regard, the Trustees considered the breakpoints in effect on the advisory fee schedule for each of the Funds at various asset levels, which are aimed at sharing with shareholders any economies of scale that are realized from Fund growth. The Trustees also noted that certain of the subadvisory fee schedules also have breakpoints at various asset levels, including both the Monteagle Value Fund and the Monteagle Informed Investor Growth Fund, where the breakpoints were reduced in early 2012.
After considering these factors, the Board concluded, in light of all the facts and circumstances, that the fee levels and breakpoints were satisfactory and adequate to reflect economies of scale for the benefit of the Funds’ shareholders if the Funds grow.
Based on all of the information presented to the Board and its consideration of relevant factors, the Board, in the exercise of its reasonable business judgment, approved renewal of the Management Agreement and each of the Subadvisory Agreements for an additional one-year period, and determined that the compensation payable under each of the agreements was fair, reasonable and within a range of what could have been negotiated at arm’s-length in light of all the surrounding circumstances, including the services to be rendered and such other matters as the Board considered to be relevant.
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THE MONTEAGLE FUNDS Investment Adviser Nashville Capital Corporation 2506 Winford Ave. Nashville, TN 37211 Distributor Matrix Capital Group, Inc. 420 Lexington Ave. Suite 601 New York, NY 10170 Transfer Agent, Administrator & Shareholder Servicing Agent Matrix 360 Administration, LLC 4520 Main Street Suite 1425 Kansas City, MO 64111
(888) 263-5593 www.monteaglefunds.com This report is submitted for the general information of the shareholders of the Funds. It is not authorized for distribution to prospective investors in the Funds unless preceded or accompanied by a current prospectus, which includes information regarding the Fund’s objectives and policies, experience of its management, marketability of shares, and other information. |
Not required
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
Not required
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Not required
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
Not applicable
| ITEM 6. | SCHEDULE OF INVESTMENT |
Included in semi annual report to shareholders filed under item 1 of this form.
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable Fund is an open-end management investment company
| ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES |
Not applicable Fund is an open-end management investment company
| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
Not applicable Fund is an open-end management investment company
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
Not applicable at this time.
| ITEM 11. | CONTROLS AND PROCEDURES. |
| | (a) | The registrant's principal executive officer and principal financial officer, or persons performing similar functions, have concluded, as of a date within 90 days of the filing of this report, based on an evaluation of the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the 1940 Act, that such disclosure controls and procedures are reasonably designed to ensure: (1) that information required to be disclosed by the registrant on Form N-CSR is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission; and (2) that material information relating to the registrant is made known to the principal executive officer and principal financial officer as appropriate to allow timely decisions regarding required disclosure. |
| | (b) | There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. |
| | (a)(2) | Certifications required by Item 12 (a)(2) of Form N-CSR are filed herewith as Exhibit 12 (a )(2) |
| | (b) | Certifications required by Item 12 (b) of Form N-CSR are filed herewith as Exhibit 12 (b). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Monteagle
| By Paul B. Ordonio | /s/ Paul B. Ordonio | |
| President, | |
| Date: May 3, 2013 | | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the date indicated.
| By Paul B. Ordonio | /s/ Paul B. Ordonio | |
| President | |
| Date: May 3, 2013 | | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the date indicated.
| By Larry E. Beaver, Jr. | /s/ Larry E. Beaver, Jr. | |
| Treasurer | |
| Date: May 3, 2013 | | |
