SCHEDULE 14C INFORMATION
Information Statement Pursuant To Section 14(c)
of the Securities Exchange Act 1934
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Pacific Life Funds
(Name of Registrant as Specified In Its Charter)
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PACIFIC LIFE FUNDS
PL SHORT DURATION BOND FUND
INFORMATION STATEMENT DATED MARCH 31, 2011
PL SHORT DURATION BOND FUND
INFORMATION STATEMENT DATED MARCH 31, 2011
This document (“Information Statement”) provides information concerning a new fund manager and a new fund management agreement for the PL Short Duration Bond Fund and is being mailed on or about June 1, 2011 to the shareholders of record as of March 31, 2011.
We are not asking you for a proxy and you are requested not to send us a proxy.
| I. | Introduction and Background |
The Pacific Life Funds’ (the “Trust”) Board of Trustees (the “Board” or “Trustees”) approved a change in fund manager and a new fund management agreement with respect to the PL Short Duration Bond Fund (the “Fund”) effective July 1, 2011. Information concerning this change in manager was included in a supplement dated February 28, 2011. Under the Investment Company Act of 1940, as amended (the “1940 Act”), a change in fund manager requires shareholder approval of a new fund management agreement; however, pursuant to an exemptive order issued to Pacific Life Insurance Company (“Pacific Life”) by the Securities and Exchange Commission (“SEC”) on October 13, 1999 and relied upon by the Trust and Pacific Life Fund Advisors LLC (“PLFA” or “Adviser”), in accordance with the terms of the exemptive order, PLFA and the Trust can hire, terminate, and replace, as applicable, fund managers and enter into new fund management agreements (except, as a general matter, fund managers affiliated with PLFA) without shareholder approval. The additional information provided herein concerning the fund manager change is being provided pursuant to the requirements of the exemptive order.
At an in-person meeting on January 11, 2011, the Board, including all of the Trustees who are not “interested persons,” as that term is defined in the 1940 Act (“Independent Trustees”), approved, effective July 1, 2011, the agreement with T. Rowe Price Associates, Inc. (“T. Rowe Price”) with respect to the PL Short Duration Bond Fund (the “T. Rowe Price Fund Management Agreement”) and appointed T. Rowe Price as the new fund manager, effective July 1, 2011 (“Fund Manager”). In connection with this matter, also at the January 11, 2011 meeting, the Board terminated the fund management agreement for the Fund with the prior fund manager upon the effectiveness of the T. Rowe Price Fund Management Agreement. T. Rowe Price’s appointment as Fund Manager was made in accordance with the SEC exemptive order noted above and does not require shareholder approval. In order to facilitate these changes, a portion of the fund’s holdings will be sold and new investments purchased in accordance with recommendations by the new fund manager or management team.
| II. | Board Consideration of the New Fund Management Agreement |
In evaluating the proposed T. Rowe Price Fund Management Agreement, the Board, including all of the Independent Trustees, considered the factors, among others, described below. Additionally, the Board considered the various screening processes that PLFA utilizes in identifying a proposed new fund manager, including screening for qualified firms through the use of quantitative data and information gathered from independent third-party databases, as well as the due diligence conducted by PLFA on the investment resources and personnel of a fund manager and an assessment of the investment strategies used by a fund manager. In addition, the Board reviewed the specific criteria and information evaluated by PLFA during the selection process of T. Rowe Price, including information about another firm considered by PLFA, and PLFA’s analysis in reaching its conclusion to recommend T. Rowe Price as the new Fund Manager.
In evaluating the T. Rowe Price Fund Management Agreement, the Board, including the Independent Trustees, considered the following factors, among others:
| A. | Nature, Extent and Quality of Services to be Provided |
The Trustees considered the benefits to shareholders of retaining T. Rowe Price as the Fund Manager, particularly in light of the nature, extent, and quality of the services expected to be provided by T. Rowe Price. In this regard, the Trustees considered various materials relating to the proposed Fund Manager, including copies of the proposed T. Rowe Price Fund Management
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Agreement; copies of the Form ADV for T. Rowe Price; financial information relating to T. Rowe Price; and other information deemed relevant to the Trustees’ evaluation of T. Rowe Price, including qualitative assessments from senior management of PLFA.
The Trustees considered that under the T. Rowe Price Fund Management Agreement, T. Rowe Price would be responsible for providing the investment management services for the Fund’s assets, including investment research, advice and supervision and determining which securities would be purchased or sold by the Fund. The Trustees considered the quality of the management services expected to be provided to the PL Short Duration Bond Fund over both the short- and long-term, the organizational depth and resources of T. Rowe Price, including the background and experience of T. Rowe Price’s management and the expertise of the portfolio management team, as well as the investment strategies, processes and philosophy to be used for the investment strategy.
In addition, the Trustees considered that the Trust’s Chief Compliance Officer (“CCO”) had reviewed the written compliance policies and procedures of T. Rowe Price, including the assessment of its compliance programs as required underRule 38a-1 of the 1940 Act and its code of ethics, prior to the effectiveness of the new T. Rowe Price Fund Management Agreement.
In making these assessments, the Trustees took note of the extensive due diligence PLFA conducted on T. Rowe Price and were aided by the assessments and recommendations of PLFA and the in-person presentation and materials provided by T. Rowe Price. The Trustees considered PLFA’s efforts and process to search for and screen advisory firms that are qualified to manage a short duration bond portfolio, and the identification by PLFA of T. Rowe Price to serve as Fund Manager with regard to theday-to-day investment activities of the PL Short Duration Bond Fund. In this regard, the Trustees considered that the search criteria employed by PLFA included identification of a firm with sufficient size, market presence and resources to properly manage the Fund, the ability to manage a large pool of assets, competitive peer ranking, manager tenure and competitivesub-advisory fees.
The Trustees also considered that PLFA has historically exercised diligence in monitoring the performance of the fund managers, and has recommended and taken measures to attempt to remedy relative underperformance by a fund when PLFA and the Board believed appropriate.
The Board concluded it was satisfied with the nature, extent and quality of the investment management services anticipated to be provided to the PL Short Duration Bond Fund by T. Rowe Price under the T. Rowe Price Fund Management Agreement.
| B. | Performance |
The Trustees considered information about the historical performance of other mutual funds (the “Comparable Performance”) advised by the same T. Rowe Price portfolio management team that would manage the PL Short Duration Bond Fund. The Trustees considered the Comparable Performance against a pertinent benchmark and against the applicable peer group for theyear-to-date, one-, three-, five-, and ten-year and since inception periods as of September 30, 2010, as available. The Trustees also considered the historical performance of a mutual fund advised by the same T. Rowe Price portfolio management team against a pertinent benchmark and an applicable peer group for the previous ten calendar years as of September 30, 2010. Additionally, the Trustees considered performance information presented by PLFA for another potential fund manager. The Trustees also considered the need for T. Rowe Price to adhere to the Fund’s general investment mandate in order to function appropriately as an investment option for the PL Portfolio Optimization Funds.
The Board determined that T. Rowe Price’s performance record was acceptable.
| C. | Advisory and Fund Management Fees |
The Trustees considered information regarding the comparative advisory fees charged under investment advisory fee contracts with regard to other mutual funds (“Accounts”) with substantially similar investment strategies. The Trustees noted that the fees to be paid to T. Rowe Price for the management of the PL Short Duration Bond Fund were different from the fees charged to other Accounts or that there were differences in the levels of services provided by T. Rowe Price to the other Accounts and that these differences were due to the nature of the Accounts or an affiliation between T. Rowe Price and the Accounts. These
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differences often explained the variations in fee schedules. The Trustees noted that the fee rates were the result of arms’-length negotiations between PLFA and T. Rowe Price, and that the PL Short Duration Bond Fund’ssub-advisory management fees are paid by PLFA and are not paid directly by the Fund. The Trustees also considered that the proposedsub-advisory management fee rate payable to T. Rowe Price under the T. Rowe Price Fund Management Agreement contains breakpoints and has similar effective rates at different asset levels as thesub-advisory fee schedule for the current fund manager. The Trustees considered that the advisory fee schedule would remain unchanged from the current fee schedule for the Fund. Additionally, the Trustees considered that there are certain costs associated with a manager change, but that the advisory fee rates and ongoing operating expenses paid by shareholders were not expected to increase as a result of this fund manager change. The Board concluded that the compensation payable under the T. Rowe Price Fund Management Agreement is fair and reasonable.
| D. | Costs, Level of Profits and Economies of Scale |
The Trustees reviewed information regarding the estimated costs to T. Rowe Price of managing the PL Short Duration Bond Fund and the projected profitability of the T. Rowe Price Fund Management Agreement to T. Rowe Price to the extent practicable based on the financial information provided by T. Rowe Price. This information is only estimated because there is no actual operating history for T. Rowe Price as the Fund Manager of the PL Short Duration Bond Fund. The Trustees gave less weight to projected profitability considerations than other information provided in connection with this matter, given the arms’-length nature of the relationship between PLFA and T. Rowe Price with respect to the negotiation ofsub-advisory fees, the fact that such fees are paid by PLFA and the fact that they are projections. The Board concluded that the PL Short Duration Bond Fund’s fee structure reflected in the T. Rowe Price Fund Management Agreement with respect to the PL Short Duration Bond Fund is fair and reasonable.
| E. | Ancillary Benefits |
The Trustees received information from PLFA and T. Rowe Price concerning other benefits that may be received by T. Rowe Price and its affiliates as a result of their relationship with the PL Short Duration Bond Fund, including commissions that may be paid to broker-dealers affiliated with the Fund Manager and the anticipated use of soft dollars by the Fund Manager. In this regard, the Trustees noted that T. Rowe Price represented that it does not anticipate utilizing an affiliated broker-dealer for trades and that its fixed income client accounts generally do not participate in generating soft dollar commissions. The Trustees considered potential benefits to be derived by T. Rowe Price from its relationship with the PL Short Duration Bond Fund and that such benefits were consistent with those generally derived bysub-advisers to mutual funds or were otherwise not unusual.
| F. | Conclusion |
Based on its review, including the consideration of each of the factors referred to above, the Board found that: (i) the compensation payable under the T. Rowe Price Fund Management Agreement is fair and reasonable; and (ii) the T. Rowe Price Fund Management Agreement is in the best interests of the PL Short Duration Bond Fund and its shareholders. No single fact was determinative of the Board’s findings, but rather the Trustees based their determination on the total mix of information available to them.
| III. | The New Fund Management Agreement |
The T. Rowe Price Fund Management Agreement is substantially similar to the prior fund management agreement with respect to the Fund. T. Rowe Price will, subject to the supervision of the Adviser, provide a continuous investment program for the Fund and determine the composition of the assets of the Fund, including the evaluation, investment, sales and reinvestment of the Fund’s assets in accordance with its investment objectives, policies and restrictions. T. Rowe Price bears its expenses and the expenses of its own staff with respect to its activities in connection with the services provided under the T. Rowe Price Fund Management Agreement. The Fund is responsible for its own expenses including, but not limited to, investment advisory fees, administration fees, custody fees, brokerage and transaction expenses, fees for pricing services, registration fees and costs of regulatory compliance, and fees for professional services, including legal and auditing services. Except as may otherwise be required by the
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1940 Act, T. Rowe Price is not subject to any liability for, nor subject to any damages, expenses or losses in connection with, any act or omission connected with or arising out of any services rendered under the T. Rowe Price Fund Management Agreement, except by reason of willful misfeasance, bad faith, or gross negligence in the performance of its duties under the T. Rowe Price Fund Management Agreement or by reason of T. Rowe Price’s reckless disregard of its obligations and duties under the T. Rowe Price Fund Management Agreement. The T. Rowe Price Fund Management Agreement will continue in effect for a period of two years from the effective date, and will continue from year to year thereafter, subject to approval annually by the Board or by the shareholders of the Fund and also, in either event, approval of a majority of the Independent Trustees. The T. Rowe Price Fund Management Agreement may be terminated without penalty at any time by any of the parties upon 60 days’ prior written notice to the other parties.
There was no change to the advisory fee rate paid by the PL Short Duration Bond Fund to the Adviser in connection with the fund manager change. The prior and new fund management fee rate schedules are set forth in the tables below:
| Prior Portfolio | New Fund Management Schedule2 | |||||
Management Fee Schedule1 | Schedule A | Schedule B | Schedule C | |||
| 0.25% on first $50 million 0.20% on next $50 million 0.17% on next $100 million 0.13% on next $100 million 0.10% above $700 million 0.07% above $1 billion | Combined Assets less than $100 million3: 0.30% on first $50 million of the Combined Assets 0.25% on next $50 million of the Combined Assets | Combined Assets at or above $100 million4: 0.20% on first $100 million of the Combined Assets 0.175% on next $150 million of the Combined Assets 0.125% on next $250 million of the Combined Assets 0.10% above $500 million of the Combined Assets | Combined Assets at or above $1.5 billion: 0.10% flat of the Combined Assets | |||
| 1 | When determining the breakpoint rate under the prior fund management agreement, the average daily net assets of the PL Short Duration Bond Fund are aggregated with the average daily net assets of the Short Duration Bond Portfolio, a series of Pacific Select Fund. | |
| 2 | When determining the breakpoint rate under the T. Rowe Price Fund Management Agreement, the average daily net assets of the Fund are aggregated with the average daily net assets of the Short Duration Bond Portfolio (“Combined Assets”). | |
| 3 | Once Combined Assets exceed $100 million, Schedule A terminates, and Schedule B becomes effective. | |
| 4 | Once Combined Assets are at or above $1.5 billion, Schedule B terminates, and Schedule C becomes effective. |
The fund management fee rate paid by the Adviser through June 30, 2011 to the previous portfolio manager of the Fund is paid pursuant to a fund management agreement dated December 30, 2003, as amended. For the period April 1, 2010 through March 31, 2011, the fund management fees paid or owed by the Adviser for the Fund totaled $97,547. Had the new fund management fee rate schedule been in effect for the same period, the fund management fees paid or owed by the Adviser would have been $97,254. When determining the breakpoint rates, the average daily net assets of the Fund were aggregated with the average daily net assets of the Short Duration Bond Portfolio. This amount would have been a decrease in such fees paid by the Adviser of approximately 0.3%. For the fiscal year ended March 31, 2011, the Fund did not pay any brokerage commissions to an affiliated broker of T. Rowe Price.
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| IV. | Information Regarding T. Rowe Price |
T. Rowe Price is a direct, wholly-owned subsidiary of T. Rowe Price Group, Inc., a publicly traded company with offices all over the world and founded by the late Thomas Rowe Price, Jr. in 1937. T. Rowe Price is a registered investment adviser and, together with its affiliates, manages individual and institutional investor accounts. The address for T. Rowe Price and T. Rowe Price Group, Inc. is 100 East Pratt Street Baltimore, Maryland, 21202.
As of March 31, 2011, T. Rowe Price, including its affiliates, had approximately $510 billion in assets under management. T. Rowe Price acts as investment adviser to the following registered investment companies, each of which has a similar objective to the Fund.
| Waived/ | ||||||||||||||||
Portfolio Name | Net Assets1 | Compensation Rate | Reduced | |||||||||||||
| T. Rowe Price Short-Term Bond Fund | $5.9 billion | 0.40% on net assets | Yes2 | |||||||||||||
| JNL/T. Rowe Price Short-Term Bond Fund | $1.0 billion | When average daily assets are below $100 million: 0.30% on first $50 million 0.25% on assets above $50 million | When average daily assets are greater than or equal to $100 million: 0.20% on first $100 million 0.175% on next $150 million 0.125% on next $250 million 0.10% on assets above $500 million | Yes3 | ||||||||||||
| T. Rowe Price Limited Term Bond Fund (VIT) | $169 million | 0.58% on net assets | No | |||||||||||||
| 1 | As of March 31, 2011 | |
| 2 | Effective October 1, 2009, T. Rowe Price Associates, Inc. agreed (through September 30, 2011) to waive its fees and/or bear any expenses (excluding interest, taxes, brokerage, and extraordinary items) that would cause the fund’s ratio of expenses to average net assets to exceed 0.55%. Termination of this agreement would require approval by the fund’s Board of Directors. Fees waived and expenses paid under this agreement (and a previous limitation of 0.55%) are subject to reimbursement to T. Rowe Price Associates, Inc. by the fund whenever the fund’s expense ratio is below 0.55%. However, no reimbursement will be made more than three years after the waiver or payment, or if it would result in the expense ratio exceeding 0.55%. | |
| 3 | T. Rowe Price has voluntarily agreed to waive a portion of its sub-advisory fee for certain registered investment companies where it serves as subadviser. The fee reduction is based on the combined asset level of the subadvised portfolios, and ranges between 5 - 10% of the total subadvisory fees paid. In certain cases, assets are aggregated with the client’s other T. Rowe Price sub-advised funds for purposes of determining breakpoints. |
As of March 31, 2011, T. Rowe Price’s directors and principal executive officers are:
Name | Position(s) with T. Rowe Price | |
| Edward C. Bernard | Director and Vice President | |
| John R. Gilner | Chief Compliance Officer and Vice President | |
| James A.C. Kennedy | Director and President | |
| Kenneth V. Moreland | Chief Financial Officer | |
| Brian C. Rogers | Chief Investment Officer, Director and Vice President | |
| William J. Stromberg | Director and Vice President |
The business address for each above individual isc/o T. Rowe Price, 100 East Pratt Street Baltimore, Maryland, 21202.
No officer or Trustee of the Trust is an officer, director or shareholder of T. Rowe Price.
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Additional Information
Additional information about T. Rowe Price will be made available in Pacific Life Funds’ Statement of Additional Information, a copy of which may be obtained on or after July 1, 2011 by calling the appropriate number set forth below.
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The annual report for the Trust for the fiscal year ended March 31, 2011 is being sent to shareholders with this Information Statement and is also available upon request without charge by contacting Pacific Life Funds by:
Regular mail: | Pacific Life Funds, P.O. Box 9768, Providence, RI 02940-9768 | |
Express mail: | Pacific Life Funds, 101 Sabin Street, Pawtucket, RI 02860 | |
Phone: | 1-800-722-2333 (select Option 2) | |
Internet: | www.pacificlife.com/pacificlifefunds.htm |
To help reduce Trust expenses, environmental waste and the volume of mail you receive, only one copy of this Information Statement may be mailed to shareholders who share the same household address (“Householding”). You may elect to not participate in Householding by contacting the Trust through one of the methods provided above. If you are not currently participating in Householding, you may elect to do so by writing to Pacific Life Funds.
The Trust’s investment adviser is PLFA, and its administrator is Pacific Life. Both are located at 700 Newport Center Drive, Newport Beach, CA 92660.
The Trust’s distributor is Pacific Select Distributors, Inc., 700 Newport Center Drive, P.O. Box 9000, Newport Beach, CA 92660.
PLEASE RETAIN THIS INFORMATION STATEMENT FOR FUTURE REFERENCE
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