SCHEDULE 14C INFORMATION
Information Statement Pursuant To Section 14(c)
of the Securities Exchange Act 1934
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Pacific Select Fund
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PACIFIC LIFE FUNDS
PL MID-CAP EQUITY FUND
INFORMATION STATEMENT DATED NOVEMBER 30, 2012
This document (“Information Statement”) provides information concerning a new fund manager and a new fund management agreement for the PL Mid-Cap Equity Fund and is being mailed on or about November 30, 2012 to the shareholders of record as of September 30, 2012.
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 Mid-Cap Equity Fund (the “Fund”) effective January 1, 2013. Information concerning this change in fund manager will be included in a supplement dated December 19, 2012 to the Trust’s prospectus dated July 1, 2012, as supplemented. 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 September 11, 2012, 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 January 1, 2013, the fund management agreement with Scout Investments, Inc. (“Scout”) with respect to the PL Mid-Cap Equity Fund (the “Scout Fund Management Agreement”) and appointed Scout as the new fund manager, effective January 1, 2013 (“Fund Manager”). In connection with this matter, also at the September 11, 2012 meeting, the Board terminated the fund management agreement for the Fund with the current fund manager upon the effectiveness of the Scout Fund Management Agreement. Scout’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. PLFA and/or the Fund may retain a transitioning agent in order to help reduce the transaction costs associated with the purchase and sale of Fund holdings in connection with this transition.
II. Board Consideration of the New Fund Management Agreement
In evaluating the proposed Scout 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 and compliance resources and personnel of a fund manager and an assessment of the investment strategies used by a fund manager, and the due diligence conducted by the Trust’s CCO. In addition, the Board reviewed the specific criteria and information evaluated by PLFA during the selection process of Scout, including information about another firm considered by PLFA, and PLFA’s analysis in reaching its conclusion to recommend Scout as the new Fund Manager. 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.
In evaluating the Scout Fund Management Agreement, the Board, including all 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 Scout as the Fund Manager, particularly in light of the nature, extent, and quality of the services expected to be provided by Scout. In this regard, the Trustees considered various materials
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relating to the proposed Fund Manager, including copies of the proposed Scout Fund Management Agreement; copies of Scout’s Form ADV; financial information; and other information deemed relevant to the Trustees’ evaluation, including comprehensive assessments from senior management of PLFA.
The Trustees considered that under the Scout Fund Management Agreement, Scout 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 Mid-Cap Equity Fund over both the short- and long-term, the organizational depth and resources of Scout, including the background and experience of Scout’s management and the expertise of the fund management team, as well as the investment strategies, processes and philosophy to be used with respect to the investment strategy.
In addition, the Trustees considered Scout’s written compliance policies and procedures and noted that the Trust’s Chief Compliance Officer (“CCO”) had provided an assessment of Scout’s compliance program, as required under Rule 38a-1 of the 1940 Act, and its code of ethics.
In making these assessments, the Trustees took note of the extensive due diligence PLFA conducted with respect to Scout, and were aided by the assessment and recommendation of PLFA and the in-person presentation and materials provided by Scout. The Board concluded it was satisfied with the nature, extent and quality of the investment management services anticipated to be provided to the PL Mid-Cap Equity Fund by Scout under the Scout Fund Management Agreement.
B. Performance
The Trustees considered PLFA’s efforts and process to search for and screen advisory firms that are qualified to manage a mid-cap equity fund, and the identification by PLFA of Scout to serve as Fund Manager with regard to the day-to-day investment activities of the PL Mid-Cap Equity Fund. The Trustees considered factors concerning performance in connection with its consideration of this matter and in connection with approval of the related Scout Fund Management Agreement, as described below.
The Trustees considered information about the historical performance of an account managed by the same Scout fund management team that would manage the PL Mid-Cap Equity Fund using similar investment strategies as those proposed for the PL Mid-Cap Equity Fund (the “Comparable Performance”). The Trustees considered the Comparable Performance against a pertinent benchmark and against the applicable peer group for the year-to-date, one-, three-, and five-year periods as of June 30, 2012. The Trustees also considered the Comparable Performance against a pertinent benchmark and an applicable peer group for the previous five calendar years. Additionally, the Trustees considered performance information presented by PLFA for another potential manager of the Fund and the performance of an account managed by the lead fund manager of the Scout fund management team when the individual worked at another advisory firm prior to joining Scout. The Trustees also considered the need for Scout to adhere to the Fund’s general investment mandate in order to function appropriately in the PL Portfolio Optimization Funds. The Board determined that Scout’s performance record was acceptable.
C. Advisory and Fund Management Fees
The Trustees considered information regarding the comparative advisory fees charged under other investment advisory contracts of the Fund Manager with regard to other investment accounts with substantially similar investment strategies as the PL Mid-Cap Equity Fund. The Trustees noted that in certain cases there were differences in the level of services proposed to be provided to the PL Mid-Cap Equity Fund by Scout and that the level of services provided by Scout on these other accounts was due to the different nature of the accounts or an affiliation between Scout and the account. These differences often explained differences in fee schedules. The Trustees noted that the fee rates were the result of arms’-length negotiations between PLFA and Scout, and that the PL Mid-Cap Equity Fund’s sub-advisory management fees are paid by PLFA and are not paid directly by the PL Mid-Cap Equity Fund. 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 the shareholders were not expected to materially increase as a result of this portfolio manager change. The Board concluded that the compensation payable under the Scout Fund Management Agreement is fair and reasonable.
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D. Costs, Level of Profits and Economies of Scale
The Trustees considered the projected profitability of the Scout Fund Management Agreement to Scout to the extent practicable based on the financial information provided by Scout. The Trustees considered that it was difficult to accurately determine or evaluate the projected profitability of the Scout Fund Management Agreement to Scout because it managed substantial assets or had multiple business lines and, further, that any such assessment would involve assumptions regarding its allocation policies, capital structure, cost of capital, business mix and other factors. 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 Scout with respect to the negotiation of Fund management fees, the fact that such fees are paid by PLFA and the fact that the projected profitability of the Scout Fund Management Agreement to Scout is an estimate. The Board concluded that the PL Mid-Cap Equity Fund’s fee structure reflected in the Scout Fund Management Agreement is fair and reasonable.
E. Ancillary Benefits
The Trustees received from PLFA and Scout information concerning other benefits that may be received by Scout and its affiliates as a result of their relationship with the PL Mid-Cap Equity 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 Scout represented that it does not anticipate utilizing an affiliated broker-dealer and that it anticipates using soft dollar credits generated by Fund commissions to pay for research services. The potential benefits that may be derived by Scout from its relationship with the PL Mid-Cap Equity Fund could include larger assets under management and reputational benefits, which are consistent with those generally derived by sub-advisers to mutual funds. The Trustees considered potential benefits to be derived by Scout from its relationship with the PL Mid-Cap Equity Fund and that such benefits were consistent with those generally derived by sub-advisers to mutual funds or were otherwise not unusual.
F. Conclusion
Based on their review, including the consideration of each of the factors referred to above, the Board found that: (i) the Scout Fund Management Agreement is in the best interests of the PL Mid-Cap Equity Fund and its shareholders; and (ii) the compensation payable under the Scout Fund Management Agreement is fair and reasonable. No single factor 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 Scout Fund Management Agreement is substantially similar to the current fund management agreement with respect to the Fund. Scout 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, purchases and/or sales and reinvestment of the Fund’s assets in accordance with its investment goal, strategies, policies and restrictions. Scout bears all expenses incurred by it and its staff with respect to all activities in connection with the performance of the Fund Manager’s services provided under the Scout 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 1940 Act, other applicable laws, applicable regulations or other provisions of the Scout Fund Management Agreement, Scout 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 Scout Fund Management Agreement, except by reason of willful misfeasance, bad faith, or gross negligence in the performance of its duties under the Scout Fund Management Agreement or by reason of Scout’s reckless disregard of its obligations and duties under the Scout Fund Management Agreement or by breach of any provision of the Scout Fund Management Agreement, including breach of any representation, warranty or undertaking. The Scout 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 Scout 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.
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There was no change to the advisory fee rate paid by the PL Mid-Cap Equity Fund to the Adviser in connection with the fund manager change. Additionally, there was no change to the sub-advisory fee rate paid by the Adviser to the fund manager in connection with the fund manager change. The fee rate under the Fund Management Agreement is referenced below:
Fee Schedule1
0.35% on the first $1 billion
0.30% on next $1 billion
0.25% on excess
| 1 | When determining the breakpoint rate under the Fund Management Agreement (effective January 1, 2013), the average daily net assets of the Fund are aggregated with the average daily net assets of the corresponding Mid-Cap Equity Portfolio, a series of Pacific Select Fund (“Combined Assets”), which will be managed by the same Fund Manager. |
The fund management fee rate will continue to be paid to the current fund manager of the PL Mid-Cap Equity Fund by the Adviser until December 31, 2012, pursuant to the current fund management agreement dated September 25, 2001, as amended. For the period April 1, 2011 through March 31, 2012, the fund management fees paid or owed by the Adviser for the Fund totaled $468,585. As of March 31, 2012, the Fund did not pay any brokerage commissions to an affiliated broker of Scout.
IV. Information Regarding Scout
Scout is a wholly-owned subsidiary of UMB Financial Corp. and is a nationally recognized institutional investment manager that offers an array of equity and fixed income products. UMB Financial Corp. owns 100% of the voting shares of Scout. Scout’s address is 928 Grand Boulevard, Kansas City, Missouri 64106, and the address of UMB Financial Corp is 1010 Grand Boulevard, Kansas City, Missouri 64106. As of September 30, 2012, Scout, including its affiliates, had approximately $31.3 billion in assets under management.
Scout acts as investment adviser to the following registered investment company, which has a similar objective to the Fund.
Portfolio Name | Net Assets1 | Compensation Rate | Waived/ | |||
Scout Mid Cap Fund | $1.32 billion | 0.80% on first $1 billion 0.70% on excess | No |
1 As of September 30, 2012.
As of September 30, 2012, Scout’s directors and principal executive officers are:
Directors and Principal Executive Officers1 | Position(s) with Scout2 | |
Andrew Iseman | Chairman and CEO, Scout | |
Clyde Wendel | Executive Vice President, Global Asset Management, UMB Bank, N.A.; and Vice Chairman, UMB Bank, N.A. | |
Peter deSilva | President, COO and Director, UMB Financial Corp.; and Chairman, Director and CEO, UMB Bank, N.A. | |
J. Mariner Kemper | Chairman, CEO and Director, UMB Financial Corp. | |
Michael Hagedorn | Vice Chairman, CFO and CAO, UMB Financial Corp. | |
James Moffet | Executive Vice President and Chief International Strategist, Scout | |
David McKinney | President, Reams Asset Management, a division of Scout |
1 The business address for each above individuals is c/o Scout Investments, Inc. 928 Grand Blvd., Kansas City, Missouri 64106.
2 Principal occupation is also given if different from position(s) with Scout.
No officer or Trustee of the Trust is an officer, director or shareholder of Scout.
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Additional Information
Additional information about Scout will be made available on December 19, 2012 in Pacific Life Funds’ Statement of Additional Information, as supplemented, a copy of which may be obtained by calling the appropriate number set forth below.
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The Trust’s semi-annual report for the fiscal half-year ended September 30, 2012 is being sent to shareholders with this Information Statement. The Trust’s annual report for the fiscal year ended March 31, 2012 was previously sent to shareholders. Both of these reports are 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, 4400 Computer Drive Westborough, MA 01581 | |||
Telephone: | (800) 722-2333 (select Option 2) | |||
Website: | 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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