This report and the financial statements contained herein are submitted for the general information of the shareholders of The Hillman Fund ("Fund"). The Fund's shares are not deposits or obligations of, or guaranteed by, any depository institution. The Fund's shares are not insured by the FDIC, Federal Reserve Board or any other agency, and are subject to investment risks, including possible loss of principal amount invested. Neither the Fund nor the Fund's distributor is a bank.
The Hillman Fund is distributed by Capital Investment Group, Inc., Member FINRA/SIPC, 100 E. Six Forks Road, Suite 200, Raleigh, NC, 27609. There is no affiliation between The Hillman Fund, including its principals, and Capital Investment Group, Inc.
Letter to Shareholders
Dear Hillman Fund Shareholder,
We are pleased to provide the annual report for The Hillman Fund for the year ended September 30, 2018.
We have enclosed the attached performance summary to remind our shareholders of Hillman Capital Management's approach and to share some perspective on current economic conditions.
On behalf of the team at Hillman Capital Management, I thank you for your ongoing confidence. It is our hope that we may continue to serve you throughout the years to come.
Sincerely,
Mark A. Hillman
President and Chief Investment Officer
Hillman Capital Management, Inc.
Performance Summary
For the year ended September 30, 2018, The Hillman Fund returned 13.65% versus a return of 17.91% for the S&P 500 Total Return Index ("The Index"). The Fund continues to be, in my opinion, well positioned with investments in companies with sustainable competitive advantages, at prices that we believe to be reasonable. The income generated from option writing has nominally benefitted performance; I will continue to pursue opportunities that could potentially enhance returns and dampen volatility. It appears likely that the US economy will continue its course of a long and slow economic recovery, with interest rate increases acting as a counter balance to expansionary fiscal policy.
Moderate and steady growth has been good for investors over the last nine years. Companies, investors and consumers enjoy operating in an environment characterized by predictability. As the new paradigm featuring uncertainty and volatility evolves, interesting investment opportunities may arise. Discipline and intestinal fortitude will be required of those who wish to capitalize. In this environment, we shall continue to dispassionately manage our clients' asset allocations appropriately, judge the competitive position of the companies that we follow and remain diligent about valuation.
Our equity strategies continue to be driven by our core belief that competitively advantaged companies will outperform their peers through economic cycles and market cycles. Our goal is to invest in great enterprises at attractive prices. We will continue to invest according to this precept for the long-term interest of our clients.
Disclosure:
Past performance is not indicative of future results. An investment in the Fund is subject to investment risks, including the possible loss of some or all of the principal amount invested. There can be no assurance that the Fund will be successful in meeting its investment objective. Investment in the Fund is subject to the following risks: market risk, management style risk, investment advisor risk, operating risk, non-diversified status risk, sector focus risk, small-cap and mid-cap companies risk, and risks from writing options. More information about these risks and other risks can be found in the Fund's prospectus. The S&P 500 Total Return Index is the Standard & Poor's Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. It is not possible to invest in this index.
Statements in this Annual Report reflect projections or expectations of future financial or economic performance of the Fund and of the market in general and statements of the Fund's plans and objectives for future operations are forward-looking statements. No assurance can be given that actual results or events will not differ materially from those projected, estimated, assumed or anticipated in any such forward-looking statements. Important factors that could result in such differences, in addition to the other factors noted with such forward-looking statements, include general economic conditions such as inflation, recession and interest rates.
Underwriter and Distributor: Capital Investment Group, Inc.
100 E. Six Forks Road
Suite 200
Raleigh, NC 27609
Phone (800) 773-3863
There is no affiliation between Capital Investment Group, Inc. and Hillman Capital Management, Inc.
(HCM-18-17)
The Hillman Fund
Notes to Financial Statements
As of September 30, 2018
1. Organization and Significant Accounting Policies
The Hillman Fund (the "Fund") is a series of the Hillman Capital Management Investment Trust (the "Trust"), which was organized on July 14, 2000 as a Delaware Business Statutory Trust and is registered under the Investment Company Act of 1940, (the "1940 Act"), as amended, as an open-ended management investment company.
The Fund commenced operations on December 29, 2000. The investment objective of the Fund is to seek long-term capital appreciation.
The following is a summary of significant accounting policies consistently followed by the Fund. The policies are in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The Fund follows the accounting and reporting guidance in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification 946 "Financial Services – Investment Companies," and Financial Accounting Standards Update ("ASU") 2013-08.
Investment Valuation
The Fund's investments in securities are carried at fair value. Securities listed on an exchange or quoted on a national market system are valued at the last sales price as of 4:00 p.m. Eastern Time. Securities traded in the NASDAQ over-the-counter market are generally valued at the NASDAQ Official Closing Price. Other securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the mean of the most recent bid and ask prices. Securities and assets for which representative market quotations are not readily available (e.g., if the exchange on which the portfolio security is principally traded closes early or if trading of the particular portfolio security is halted during the day and does not resume prior to the Fund's net asset value calculation) or which cannot be accurately valued using the Fund's normal pricing procedures are valued at fair value as determined in good faith under policies approved by the Board of Trustees (the "Trustees"). A portfolio security's "fair value" price may differ from the price next available for that portfolio security using the Fund's normal pricing procedures. Instruments with maturities of 60 days or less are valued at amortized cost, which approximates market value.
Option Valuation
Options are valued at the mean of the last quoted bid and ask prices as of 4:00 p.m. Eastern Time (the "Valuation Time"). Options will be valued on the basis of prices provided by pricing services when such prices are reasonably believed to reflect the market value of such options and may include the use of composite or National Best Bid/Offer (NBBO) pricing information provided by the pricing services. If there is an ask price but no bid price at the Valuation Time, the option shall be priced at the mean of zero and the ask price at the Valuation Time. An option should be valued using fair value pricing when (i) a reliable last quoted ask price at the Valuation T
ime is not readily available or (ii) the Fund's investment advisor or Fund management does not believe the prices provided by the pricing services reflect the market value of such option.
Fair Value Measurement
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:
| a. | Level 1: quoted prices in active markets for identical securities |
| b. | Level 2: other significant observable inputs (including quoted prices for similar securities and identical securities in inactive markets, interest rates, credit risk, etc.) |
| c. | Level 3: significant unobservable inputs (including the Fund's own assumptions in determining fair value of investments) |
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
(Continued)
The Hillman Fund
Notes to Financial Statements
As of September 30, 2018
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following table summarizes the inputs as of September 30, 2018 for the Fund's investments:
| | | |
| Investments in Securities (a) | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets Common Stocks* | $ | 31,223,953 | $ | 31,223,953 | $ | - | $ | - |
| Exchange-Traded Product | | 514,800 | | 514,800 | | - | | - |
| Limited Partnership | | 976,820 | | 976,820 | | - | | - |
| Short-Term Investment | | 2,202,564 | | 2,202,564 | | - | | - |
| Total Assets | $ | 34,918,137 | $ | 34,918,137 | $ | - | $ | - |
| | | | | | | | | |
Liabilities Put Options Written | $ | 74,100 | $ | - | $ | 74,100 | $ | - |
| Total Liabilities | $ | 74,100 | $ | - | $ | 74,100 | $ | - |
| | | | | | | | | |
(a) The Fund did not hold any Level 3 securities during the year. There were no transfers into or out of Level 1 and Level 2 during the year. It is the Fund's policy to recognize transfers into or out of Level 1 and Level 2 at the end of the reporting period.
*For a detailed breakout by sector, please refer to the Schedule of Investments.
Investment Transactions and Investment Income
Investment transactions are accounted for as of the date purchased or sold (trade date). Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and includes accretion and amortization of discounts and premiums using the effective interest method. Gains and losses are determined on the identified cost basis, which is the same basis used for Federal income tax purposes.
Expenses
The Fund bears expenses incurred specifically on its behalf and Trust level expenses.
Distributions
The Fund may declare and distribute dividends from net investment income (if any) annually. Distributions from capital gains (if any) are generally declared and distributed annually. Dividends and distributions to shareholders are recorded on ex-date.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in the net assets from operations during the reporting period. Actual results could differ from those estimates.
Federal Income Taxes
No provision for income taxes is included in the accompanying financial statements, as the Fund intends to distribute to shareholders all taxable investment income and realized gains and otherwise comply with Subchapter M of the Internal Revenue Code applicable to regulated investment companies.
The Hillman Fund
Notes to Financial Statements
As of September 30, 2018
Option Writing
When the Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains (losses) from options written. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain or loss (depending on if the premium is less than the amount paid for the closing purchase transaction). If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Fund has realized a gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, as the writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. Written options are non-income producing securities.
Derivative Financial Instruments
The Fund may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and the potential for market movements which may expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities.
Derivatives are marked to market daily based upon quotations from market makers or the Fund's independent pricing services and the Fund's net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in Investments, at value on the Statement of Assets and Liabilities for options purchased and the Options Written, at value on the Statement of Assets and Liabilities for options written. Net realized gains and losses and net change in unrealized appreciation and depreciation on these contracts for the year are included in the Realized and Unrealized Gain on Investments on the Statement of Operations for options purchased and Realized and Unrealized Gain on Options Written on the Statement of Operations for options written.
The derivative instruments outstanding as of September 30, 2018 are disclosed below and the amounts of realized and changes in unrealized gains and losses on derivative instruments during the year as disclosed below serve as indicators of the volume of derivative activity for the Fund.
The following table sets forth the effect of the derivative instruments on the Statement of Assets and Liabilities as of September 30, 2018:
Derivative Type | Location | | Market Value | Notional Value |
| | | | | |
| Equity Contracts – written options | Liabilities-Options written, at value | | $ 74,100 | $2,006,540 |
The following table sets forth the effect of the derivative instruments on the Statement of Operations for the fiscal year ended September 30, 2018:
| Derivative Type | Location | Gains/Losses |
| | | |
| Equity Contracts – written options | Net realized gain from options written | $ 747,705 |
| | | |
| Equity Contracts – written options | Net change in unrealized appreciation on options written | $ (579) |
| | | |
The Hillman Fund
Notes to Financial Statements
As of September 30, 2018
The following table presents the Fund's liabilities available for offset under a master netting arrangement of collateral pledged as of September 30, 2018:
Gross Amounts of Assets Presented in the Statement of Assets & Liabilities |
| | Gross Amounts of Recognized Liabilities | Financial Instruments Pledged* | Cash Collateral Pledged* | Net Amount of Assets |
Description of Liability: | | | | |
Options Written | $74,100 | $74,100 | $ - | $ - |
Total | $74,100 | $74,100 | $ - | $ - |
| | | | | |
*The actual financial instruments and cash collateral pledged may be in excess of the amounts shown in the table. The table only reflects collateral amounts up to the amount of the financial instrument disclosed on the Statement of Assets and Liabilities.
2. Transactions with Affiliates
Advisor
The Fund pays a monthly fee to Hillman Capital Management, Inc. (the "Advisor") calculated at the annual rate of 1.00% of the Fund's average daily net assets.
The Advisor has entered into a contractual agreement (the "Expense Limitation Agreement") with the Trust, on behalf of the Fund, under which it had agreed to waive or reduce its fees and to assume other expenses of the Fund, if necessary, in amounts that limit the Fund's total operating expenses (exclusive those expenses and other expenditures which are capitalized in accordance with GAAP, acquired fund fees and expenses, other extraordinary expenses not incurred in the ordinary course of the Fund's business, and amounts, if any, payable pursuant to a plan adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940) to not more than 1.499% of the average daily net assets of the Fund. The current term of the Expense Limitation Agreement remains in effect until January 31, 2019. While there can be no assurance that the Expense Limitation Agreement will continue after that date, it is expected to continue from year-to-year thereafter. The Advisor cannot recoup any amounts previously waived or reimbursed.
For the fiscal year ended September 30, 2018, $348,705 in advisory fees were incurred, of which $44,404 in advisory fees were waived by the Advisor.
Administrator
The Fund pays a monthly fee to The Nottingham Company (the "Administrator") based upon the average daily net assets of the Fund and calculated at the annual rates as shown in the schedule below subject to a minimum of $2,000 per month. The Administrator also receives a fee as to procure and pay the Fund's custodian, as additional compensation for fund accounting and recordkeeping services, and additional compensation for certain costs involved with the daily valuation of securities and as reimbursement for out-of-pocket expenses. The Administrator also receives a miscellaneous compensation fee for peer group, comparative analysis, and compliance support totaling $350 per month. As of September 30, 2018, the Administrator received $4,200 in miscellaneous expenses.
(Continued)
The Hillman Fund
Notes to Financial Statements
As of September 30, 2018
A breakdown of the fees is provided in the following table:
| Administration Fees* | Custody Fees* | Fund Accounting Fees (minimum monthly) | Fund Accounting Fees (asset- based fee) | Blue Sky Administration Fees (annual) |
Average Net Assets | Annual Rate | Average Net Assets | Annual Rate |
| First $250 million | 0.100% | First $200 million | 0.020% | $2,250 | 0.01% | $150 per state |
| Next $250 million | 0.080% | Over $200 million | 0.009% | | | |
| Next $250 million | 0.060% | | | | | |
| Next $250 million | 0.050% | *Minimum monthly fees of $2,000 and $417 for Administration and Custody, respectively. |
| Next $1 billion | 0.040% |
| Over $2 billion | 0.035% |
The Fund incurred $34,871 in administration fees, $12,696 in custody fees, and $30,487 in fund accounting fees for the fiscal year ended September 30, 2018.
Compliance Services
Cipperman Compliance Services, LLC provides services as the Trust's Chief Compliance Officer. Cipperman Compliance Services, LLC is entitled to receive customary fees from the Fund for their services pursuant to the Compliance Services Agreement with the Fund.
Transfer Agent
Nottingham Shareholder Services, LLC ("Transfer Agent") serves as transfer, dividend paying, and shareholder servicing agent for the Fund. For its services, the Transfer Agent is entitled to receive compensation from the Fund pursuant to the Transfer Agent's fee arrangements with the Fund. The Fund incurred $21,000 in transfer agent fees during the fiscal year ended September 30, 2018.
Distributor
Capital Investment Group, Inc. (the "Distributor") serves as the Fund's principal underwriter and distributor. The Distributor receives $5,000 per year paid in monthly installments for services provided and expenses assumed. These are included on the Statement of Operations in the Shareholder Fulfillment Expenses.
3. Trustees and Officers
The Board of Trustees is responsible for the management and supervision of the Fund. The Trustees approve all significant agreements between the Trust, on behalf of the Fund, and those companies that furnish services to the Fund; review performance of the Advisor and the Fund; and oversee activities of the Fund. Officers of the Trust and Trustees who are interested persons of the Trust or the Advisor will receive no salary or fees from the Trust. Trustees who are not "interested persons" of the Trust or the Advisor within the meaning of the 1940 Act (the "Independent Trustees") receive $4,000 each year from the Fund, plus $250 per series of the Trust per meeting attended in person and $100 per series of the Trust per meeting attended by telephone. The Trust will reimburse each Trustee and officer of the Trust for his or her travel and other expenses relating to attendance of Board meetings. Additional fees may also be incurred during the year as special meetings are necessary in addition to the regularly scheduled meetings of the Board of Trustees.
Certain officers of the Trust may also be officers of the Administrator.
The Hillman Fund
Notes to Financial Statements
As of September 30, 2018
4. Purchases and Sales of Investment Securities
For the fiscal year ended September 30, 2018, the aggregate cost of purchases and proceeds from sales of investment securities (excluding short-term securities) were as follows:
Purchases of Securities | | Proceeds from Sales of Securities |
| $16,184,657 | | $19,912,129 |
There were no long-term purchases or sales of U.S Government Obligations during the fiscal year ended September 30, 2018.
5. Federal Income Tax
Distributions are determined in accordance with Federal income tax regulations, which differ from GAAP, and, therefore, may differ significantly in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character but are not adjusted for temporary differences. Permanent differences do not have an effect on the net asset values of the Fund.
Management reviewed the Fund's tax positions taken or to be taken on Federal income tax returns for the open tax years September 30, 2015 through September 30, 2018 and determined that the Fund does not have a liability for uncertain tax positions. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the year, the Fund did not incur any interest or penalties.
Distributions during the fiscal years ended were characterized for tax purposes as follows:
| | September 30, 2018 | September 30, 2017 |
| Ordinary Income | $178,993 | $203,106 |
During the fiscal year, the following reclassifications were made to expire the capital loss carryforward for pre-enactment losses:
| Accumulated Net Realized Loss | $ 3,240,007 |
| Paid in Capital | (3,240,007) |
At September 30, 2018, the tax-basis cost of investments and components of distributable earnings were as follows:
| Cost of Investments | $ | 31,415,079 |
| | | |
| Gross Unrealized Appreciation | | 5,191,054 |
| Gross Unrealized Depreciation | | (1,762,096) |
| Net Unrealized Appreciation | | 3,428,958 |
| | | |
| Undistributed Net Investment Income | | 236,135 |
| | | |
| Distributable Earnings | $ | 3,665,093 |
| | | | | | |
The difference between book-basis and tax-basis net unrealized appreciation (depreciation) and accumulated realized losses is attributable to the tax deferral of losses from wash sales.
(Continued)
The Hillman Fund
Notes to Financial Statements
As of September 30, 2018
Capital Loss Carryforwards
Under the Regulated Investment Company Modernization Act of 2010 ("the Modernization Act"), net capital losses recognized in tax years beginning after December 22, 2010 may be carried forward indefinitely, and the character of the losses is retained as short‐term and/or long‐term. Under the law in effect prior to the Modernization Act, net capital losses were carried forward for eight years and treated as short‐term. As a transition rule, the Modernization Act requires that post‐enactment net capital losses be used before pre‐enactment net capital losses. During the current fiscal year, the Fund utilized $3,624,331 of pre-enactment losses and expired $3,240,007 of pre-enactment losses. The Fund has no post-enactment losses.
6. New Accounting Pronouncement
In March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in the ASU shorten the amortization period for certain callable debt securities, held at a premium, to be amortized to the earliest call date. The ASU does not require an accounting change for securities held at a discount; which continues to be amortized to maturity. The ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. Management is currently evaluating the impact, if any, of applying this provision.
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement. The amendments eliminate certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The new guidance is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. An entity is permitted to early adopt either the entire standard. The changes will be applied to the Fund's future financial statements.
7. Commitments and Contingencies
Under the Trust's organizational documents, its officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts with its vendors and others that provide for general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. However, based on experience, the Fund expects the risk of loss to be remote.
8. Subsequent Events
Management has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date of issuance of these financial statements. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments.
