SCHEDULE 14C INFORMATION
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MGI FUNDS
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MGI FUNDS(TM)
MGI US Small/Mid Cap Value Equity Fund
One Investors Way
Norwood, Massachusetts 02062
October 4, 2006
Dear Shareholder:
We are pleased to notify you of changes involving the subadvisors for the MGI US
Small/Mid Cap Value Equity Fund (the "Fund"), a series of MGI Funds (the
"Trust").
Specifically, the Board of Trustees of the Trust (the "Board") has approved the
selection of two new subadvisors for the Fund, and approved a new subadvisory
agreement between Mercer Global Investments, Inc., the Fund's investment advisor
("MGI" or the "Advisor") and each new subadvisor. The two new subadvisors are
AQR Capital Management, LLC ("AQR") and NWQ Investment Management Company, LLC
("NWQ").
The Board also has determined to terminate the subadvisory agreement with J.L.
Kaplan Associates, LLC ("Kaplan"), one of the two subadvisors that previously
managed an allocated portion of the Fund's portfolio, and AQR and NWQ have taken
over the management of the Fund's portfolio previously allocated to Kaplan.
Wells Capital Management ("Wells") will continue to manage its allocated portion
of the Fund's portfolio.
These changes became effective on June 27, 2006. I encourage you to read the
attached Information Statement, which provides, among other information, details
regarding the new subadvisors for the Fund and a discussion of the factors that
the Board considered in approving the changes described above.
Sincerely,
/s/ Phillip J. de Cristo
Phillip J. de Cristo
Trustee, President, and Chief Executive
Officer, MGI Funds
MGI FUNDS(TM)
MGI US Small/Mid Cap Value Equity Fund
One Investors Way
Norwood, Massachusetts 02062
- --------------------------------------------------------------------------------
INFORMATION STATEMENT
- --------------------------------------------------------------------------------
This Information Statement is being furnished on behalf of the Board of Trustees
(the "Board") of MGI Funds (the "Trust") to inform shareholders of the MGI US
Small/Mid Cap Value Equity Fund (the "Fund") about recent changes related to the
Fund's sub-advisory arrangements. The changes include the addition of two new
subadvisors for the Fund, as well as the termination of one of the two
subadvisors that had managed an allocated portion of the Fund's portfolio since
its inception. These changes were approved by the Board on the recommendation of
the Fund's investment advisor, Mercer Global Investments, Inc. ("MGI" or the
"Advisor"), without shareholder approval, as is permitted by an exemptive order
of the U.S. Securities and Exchange Commission ("SEC") dated December 28, 2005
(the "Exemptive Order"). This Information Statement is being mailed on or about
October 4, 2006 to shareholders of record of the Fund as of July 31, 2006. WE
ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
INTRODUCTION
MGI is the investment advisor for the series of the Trust, including the Fund.
The Advisor uses a "manager of managers" approach in managing the assets of the
Trust's series. This permits MGI to hire, terminate, or replace subadvisors that
are unaffiliated with the Trust or the Advisor, and to modify material terms and
conditions of subadvisory agreements. Section 15(a) of the Investment Company
Act of 1940, as amended (the "1940 Act"), generally requires that the
shareholders of a mutual fund approve an agreement pursuant to which a person
serves as the investment advisor or subadvisor of the fund. The Trust and the
Advisor have obtained the Exemptive Order from the SEC that permits the Trust
and the Advisor, subject to certain conditions and approval by the Board, to
hire and retain unaffiliated subadvisors and modify subadvisory arrangements
without shareholder approval. Under the Exemptive Order, the Advisor may act as
a manager of managers for all or some of the series of the Trust, and the
Advisor supervises the provision of portfolio management services to the series
by the subadvisors.
The Exemptive Order allows the Advisor: (i) to continue the employment of an
existing subadvisor after events that would otherwise cause an automatic
termination of a subadvisory agreement with the subadvisor; and (ii) to
reallocate assets among existing or new subadvisors. The Advisor has ultimate
responsibility (subject to oversight by the Board) to oversee the subadvisors
and recommend their hiring, termination, and replacement.
Consistent with the terms of the Exemptive Order, the Board, including a
majority of the Trustees who are not "interested persons" (as that term is
defined in the 1940 Act) of the Trust or of the Advisor (the "Independent
Trustees"), (i) appointed AQR Capital Management, LLC ("AQR") and NWQ Investment
Management Company, LLC ("NWQ") to serve as subadvisors of the Fund, and (ii)
approved subadvisory agreements (each, a "Subadvisory Agreement," and together,
the "Subadvisory Agreements") between the Advisor and AQR and NWQ, respectively,
on behalf of the Fund. Each of AQR and NWQ is independent of the Advisor and
discharges its responsibilities subject to the oversight and supervision of the
Advisor. The subadvisors are paid by the Advisor and not by the Fund. In
accordance with procedures adopted by the Board, a subadvisor to the Fund may
affect portfolio transactions through an affiliated broker-dealer and receive
brokerage commissions in connection therewith as permitted by applicable law.
The Trust and the Advisor have agreed to comply with certain conditions when
acting in reliance on the relief granted in the Exemptive Order. These
conditions require, among other things, that within ninety days of retaining a
new subadvisor, the affected fund will notify shareholders of the fund of the
changes. This Information Statement provides such notice and presents details
regarding the Fund's new subadvisory arrangements.
THE ADVISOR
The Advisor, a Delaware corporation located at One Investors Way, Norwood,
Massachusetts 02062, serves as the investment advisor to the Fund. The Advisor
is an indirect, wholly-owned subsidiary of Marsh & McLennan Companies, Inc. The
Advisor is registered as an investment advisor with the SEC under the Investment
Advisers Act of 1940, as amended (the "Advisers Act"). The Advisor is an
affiliate of Mercer Investment Consulting, Inc., an investment consultant with
more than 30 years' experience reviewing, rating, and recommending investment
managers for institutional clients.
The Advisor provides investment advisory services to the Fund pursuant to the
Investment Management Agreement, dated July 1, 2005, between the Trust and the
Advisor (the "Management Agreement"). The Trust employs the Advisor generally to
manage the investment and reinvestment of the assets of the Fund. In so doing,
the Advisor may hire one or more subadvisors to carry out the investment program
of the Fund (subject to the approval of the Board). The Advisor continuously
reviews, supervises, and (where appropriate) administers the investment programs
of the Fund. The Advisor furnishes periodic reports to the Board regarding the
investment programs and performance of the Fund.
Pursuant to the Management Agreement, the Advisor has overall supervisory
responsibility for the general management and investment of the Fund's
securities portfolio, and, subject to review and approval by the Board: (i) sets
the Fund's overall investment strategies; (ii) evaluates, selects, and
recommends subadvisors to manage all or part of the Fund's assets; (iii) when
appropriate, allocates and reallocates the Fund's assets among subadvisors; (iv)
monitors and evaluates the performance of subadvisors, including the
subadvisors' compliance with the investment objective, policies, and
restrictions of the Fund; and (v) implements procedures to ensure that the
subadvisors comply with the Fund's investment objective, policies, and
restrictions.
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For these services, the Fund pays the Advisor a fee calculated at an annual rate
of 0.90% of the Fund's average daily net assets. The Advisor received $144,139
in fees for advisory services provided to the Fund for the fiscal year ended
March 31, 2006.
Several of the officers of the Trust are also officers and/or employees of the
Advisor. These individuals and their respective positions are: Phillip J. de
Cristo serves as Trustee, President, and Chief Executive Officer of the Trust
and President of the Advisor. Ravi B. Venkataraman serves as Vice President and
Chief Investment Officer of the Trust and Chief Investment Officer of the
Advisor. Richard S. Joseph serves as Vice President, Treasurer, and Principal
Accounting Officer of the Trust and Chief Operating Officer of the Advisor.
Cynthia Lo Bessette serves as Vice President, Secretary, and Chief Legal Officer
of the Trust and Senior Corporate Counsel of the Advisor. David M. Goldenberg
serves as Vice President and Assistant Secretary of the Trust and General
Counsel of Mercer Human Resource Consulting, an affiliate of the Advisor.
Christopher A. Ray serves as Vice President of the Trust and Vice President and
Senior Portfolio Manager of the Advisor. Martin J. Wolin serves as Vice
President and Chief Compliance Officer of the Trust and as Chief Compliance
Officer for the Advisor in North America.
THE NEW SUBADVISORS
Each of AQR and NWQ was approved by the Board to serve as a subadvisor for the
Fund at a Board meeting held on May 25, 2006 (the "May Meeting"). The
subadvisory agreement between the Advisor and J.L. Kaplan Associates, LLC
("Kaplan"), on behalf of the Fund, was terminated on June 22, 2006. The
subadvisory agreement with Kaplan was terminated as a result of concerns
regarding Kaplan's organizational stability and key personnel risk. These
related to structural differences between Kaplan and Evergreen Investments
("Evergreen"), Kaplan's corporate affiliate; the relationship between the Fund's
three portfolio managers at Kaplan and Evergreen; and increasing personnel
turnover at Kaplan, particularly among analysts. Furthermore, Kaplan's
performance in managing its allocated portion of the Fund's portfolio had not
met the Advisor's expectations. The Fund's other subadvisor, Wells Capital
Management ("Wells"), will continue to manage its allocated portion of the
Fund's portfolio.
Each subadvisor to the Fund is independent of the Advisor, and each subadvisor
discharges its responsibilities subject to the oversight and supervision of the
Advisor. The subadvisors are compensated out of the fees that the Advisor
receives from the Fund. There will be no increase in advisory fees paid by the
Fund as a result of the Fund's new subadvisory arrangements with AQR and NWQ.
AQR Capital Management, LLC
AQR is located at Two Greenwich Plaza, 3rd Floor, Greenwich, Connecticut 06830.
AQR is a Delaware limited liability company that is majority owned and
controlled by its principals and is registered with the SEC as an investment
advisor under the Advisers Act. As of July 31, 2006, AQR had $26.3 billion in
total assets under management.
3
In managing its allocated portion of the Fund's portfolio, AQR utilizes an
investment philosophy that combines the basic concepts of both value and
momentum investing. Through a quantitative process, AQR applies these concepts
using a variety of proprietary indicators across many markets. AQR also
evaluates earnings quality, investor sentiment, sustainable growth, and
management signaling as important components of the investment process.
AQR's quantitative investment approach begins with the creation of an
appropriate universe of securities based on a relevant benchmark, liquidity
considerations, and additional screening factors. Once an appropriate universe
of potential investments has been identified, AQR assigns an individual rating
to each industry and to each security. These two rating components are combined
to produce a final rating. AQR then seeks to construct an optimal portfolio
using these assigned ratings. AQR uses proprietary trading and risk-management
models to monitor and rebalance the portfolio in accordance with AQR's ongoing
analysis.
The name and principal occupation of each of the principal executive officers
and directors of AQR are listed below. The address of each individual listed
below is Two Greenwich Plaza, 3rd Floor, Greenwich, Connecticut 06830.
Clifford S. Asness, Founding Managing Principal
David G. Kabiller, Founding Principal
Robert Krail, Founding Principal
John M. Liew, Founding Principal
Jacques A. Friedman, Principal
Brian K. Hurst, Principal
Oktay Kurbanov, Principal
NWQ Investment Management Company, LLC
NWQ is located at 2049 Century Park East, 16th Floor, Los Angeles, California
90067. NWQ is an indirect, wholly-owned subsidiary of Nuveen Investments, Inc.
and is registered as an investment adviser under the Advisers Act. As of July
31, 2006, NWQ had $13.4 billion in total assets under management.
Through an analyst-driven, value-oriented process, NWQ invests in undervalued
companies that it believes possess catalysts to improve profitability. NWQ uses
a bottom-up research approach to identify companies that NWQ believes are
undervalued in industries with positive or improving fundamentals. The process
seeks to identify companies where catalysts exist that may unlock value or
improve profitability. These catalysts may include new management, improving
fundamentals, renewed management focus, industry consolidation, company
restructuring, and excessive pessimism. In addition, a broad range of
quantitative value factors are evaluated, such as price-to-cash flow,
price-to-book, price-to-earnings, and quality of earnings.
NWQ invests in intrinsic value opportunities by applying a variety of
parameters. Decisions to add positions to the portfolio are made on an
opportunistic basis, capitalizing on situations created by investor
over-reaction, misperception, and short-term focus. NWQ typically reduces
4
or eliminates positions in the portfolio in response to deterioration of
fundamentals and/or a failure to reach NWQ's proprietary price targets within a
reasonable time period. NWQ's allocated portion of the Fund's portfolio
typically consists of 45-70 stocks, depending on market conditions.
The name and principal occupation of each of the principal executive officers
and directors of NWQ are listed below. The address of each individual listed
below is 2049 Century Park East, 16th Floor, Los Angeles, California 90067.
Jon D. Bosse, CFA, Chief Investment Officer, Co-President*
E.C. (Ted) Friedel, CFA, Managing Director*+
Phyllis G. Thomas, CFA, Managing Director*
Michael J. Carne, CFA, Managing Director+
Mark A. Morris, Managing Director
Mark R. Patterson, CFA, Managing Director
James T. Stephenson, CFA, Managing Director
David M. Stumpf, CFA, CFP, Managing Director+
Gregg S. Tenser, CFA, Managing Director
Kevin A. Hunter, Senior Vice President+
Darren T. Peers, Senior Vice President
Martin Pollack, Senior Vice President
Andrew C. Hwang, Assistant Vice President
Kirk Allen, Senior Vice President, Trading
Patrick M. Schloss, Senior Vice President, Institutional Client Services
John E. Conlin, Co-President
Michael C. Mendez, Chief Executive Officer
Mary-Gene Slaven, Managing Director, Secretary/Treasurer
Patrick G. Goshtigian, CFA, Managing Director, Administration & Institutional
Services
*Investment Oversight Committee Member
+Fixed Income Investment Policy Committee Member
THE SUBADVISORY AGREEMENTS
The terms of each Subadvisory Agreement, other than the rates of compensation to
be paid by the Advisor to each subadvisor, are substantially identical to the
previous subadvisory agreement between the Advisor and Kaplan and the
subadvisory agreement between the Advisor and the Fund's third subadvisor,
Wells.
Each Subadvisory Agreement provides that the subadvisor, among other duties,
will make all investment decisions for the allocated portion of the Fund's
assets for which it serves as subadvisor. Each subadvisor will, subject to the
supervision of the Board and the Advisor, conduct an ongoing program of
investment, evaluation and, if appropriate, sale and reinvestment of the
subadvisor's allocated portion of the Fund's assets. Each subadvisor also will
perform certain other administrative and compliance-related functions in
connection with the management of its allocated portion of the Fund's portfolio.
5
Each Subadvisory Agreement provides for the subadvisor to be compensated based
on the average daily net assets allocated to that subadvisor. The subadvisors
are compensated from the fees that the Advisor receives from the Fund. Each
subadvisor generally will pay all expenses the subadvisor incurs in connection
with its activities under the Subadvisory Agreement, other than the costs of the
Fund's portfolio securities and other investments.
Each Subadvisory Agreement may be terminated at any time, without the payment of
any penalty, by: (i) the vote of a majority of the Board, the vote of a majority
of the outstanding voting securities of the Fund, or the Advisor, or (ii) the
subadvisor, on not less than 90 days' written notice to the Advisor and the
Trust.
Each Subadvisory Agreement was approved by the Board at the May Meeting, which
was called for the purpose of approving the Agreements, for an initial term of
two years. Thereafter, continuance of each Subadvisory Agreement will require
the annual approval of the Board, including a majority of the Independent
Trustees. Each Subadvisory Agreement provides that it will terminate
automatically in the event of its assignment, except as otherwise provided by
applicable law or the Exemptive Order.
BOARD OF TRUSTEES' CONSIDERATIONS
At the May Meeting, MGI recommended the appointment of each of AQR and NWQ to
serve as a subadvisor of the Fund after evaluating a number of other possible
investment managers. Each of AQR and NWQ was recommended by the Advisor because,
among other factors, each subadvisor: (i) demonstrated consistently favorable
historical performance; (ii) takes a disciplined and opportunistic approach in
managing small/mid cap value portfolios; (iii) has an investment staff
experienced in managing small/mid cap value portfolios; (iv) is led by a stable
management team; (v) possesses a workable organizational structure; and (vi) has
adequate infrastructure. Also, the Advisor took note of the fact that, in
addition to the Subadvisors' demonstrated capabilities within the small/mid
capitalization value strategy, the Subadvisors' investment styles and long-term
performance records were complimentary to one another.
At the Meeting, the Board, including a majority of the Independent Trustees,
considered and approved each Subadvisory Agreement. In determining whether to
approve each Subadvisory Agreement, the Board considered the information
received in advance of the Meeting, which included: (i) copies of a form of each
Subadvisory Agreement between the Advisor and the subadvisor; (ii) information
regarding the process by which the Advisor selected and recommended for Board
approval each subadvisor; (iii) information regarding the nature and quality of
the services that each subadvisor would provide to the Fund; (iv) information
regarding each subadvisor's reputation, investment management business,
personnel, and operations; (v) information regarding each subadvisor's brokerage
and trading policies and practices; (vi) information regarding the level of
subadvisory fees to be charged by each subadvisor, and a comparison of those
fees to the fees: (a) charged by the subadvisor to other comparable accounts the
subadvisor manages, including registered and unregistered investment companies
or other pooled investment vehicles, as applicable; and (b) paid by certain
other registered investment companies (or their investment advisors) and having
investment objectives similar to the investment objective of the Fund; (vii)
each subadvisor's compliance program; (viii) each subadvisor's historical
performance returns managing a similar investment mandate,
6
and such performance compared to a relevant index; and (ix) each subadvisor's
financial condition. The Board also considered the discussions held with
representatives of the Advisor, AQR, and NWQ at the Meeting.
When considering the approval of the Subadvisory Agreements, the Board reviewed
and analyzed the factors the Board deemed relevant with respect to the
applicable subadvisor, including: the nature, quality, and extent of the
services to be provided to the Fund by the subadvisor; the subadvisor's
management style; the subadvisor's historical performance record managing pooled
investment products similar to the Fund; the qualifications and experience of
the persons that will be responsible for the day-to-day management of the
allocated portion of the Fund; and the subadvisor's staffing levels and overall
resources. Additionally, the Board reviewed materials supplied by counsel that
were prepared for use by the Board in fulfilling its duties under the 1940 Act.
In examining the nature, quality, and extent of the services to be provided by
each subadvisor to the Fund, the Board considered: the specific investment
process to be employed by the subadvisor in managing the assets to be allocated
to it; the qualifications of the subadvisor's investment management team with
regard to implementing the Fund's investment mandate; the subadvisor's
performance record as compared to its benchmark; the subadvisor's infrastructure
and whether it appeared to adequately support the subadvisor's investment
strategy; and the Advisor's review process and the Advisor's favorable
assessment as to the nature and quality of the subadvisory services expected to
be provided by the subadvisor. The Board concluded that the Fund will benefit
from the quality and experience of the respective subadvisors' portfolio
managers. Based on the Board's consideration and review of the foregoing
information, the Board concluded that the nature, extent, and quality of the
subadvisory services to be provided by each subadvisor, as well as each
subadvisor's ability to render such services based on its experience,
operations, and resources, were appropriate for the Fund, in light of the Fund's
investment objective, and supported a decision to approve each Subadvisory
Agreement.
Because AQR and NWQ are both newly appointed subadvisors to the Fund, the Board
could not consider the subadvisors' investment performance in managing the Fund
as a factor in evaluating the Subadvisory Agreements. However, the Board did
review each subadvisor's historical performance record in managing other
accounts that were comparable to the Fund. The Board compared this historical
performance to a relevant benchmark noting that the AQR small cap value
composite strategy (the "AQR Strategy") had outperformed the Russell 2000
Value(R)Index since the AQR Strategy's inception, and that the NWQ small/mid cap
value strategy (the "NWQ Strategy") had outperformed the Russell 2500
Value(R)and Russell 2500(R)Indexes since the NWQ Strategy's inception. On this
basis, the Board concluded that the historical performance record for each
subadvisor supported a decision to approve each Subadvisory Agreement.
The Board carefully considered the proposed fees payable under each Subadvisory
Agreement. In this connection, the Board evaluated the compensation to be paid
to each subadvisor by the Advisor. The Board also considered comparisons of the
fees to be paid to each subadvisor with the fees each subadvisor charges to its
other clients, noting that AQR's proposed subadvisory fee was near the median of
what AQR charged its other clients, and did not include a performance component
(as many of AQR's other client fee schedules did), and NWQ's proposed
subadvisory fee was equal to or less than the fees NWQ charged its other
clients. In addition, the Board considered whether the fee
7
schedules of the subadvisors included breakpoints that would reduce the
subadvisors' fees as assets in the Fund increased, noting that AQR's proposed
subadvisory fee schedule did include breakpoints, while NWQ's proposed
subadvisory fee schedule did not. After evaluating the proposed fees, the Board
concluded that the fees that would be paid to each subadvisor with respect to
the assets to be allocated to the subadvisor appeared to be within a reasonable
range in light of the quality and extent of the services to be provided.
The Board considered the selection and due diligence process employed by the
Advisor in deciding to recommend the subadvisors as subadvisors to the Fund, and
also considered the Advisor's conclusion that the fees to be paid to the
subadvisors for their respective services to the Fund will be reasonable and the
reasons supporting that conclusion. The Board noted that the subadvisory fees
will be paid by the Advisor to the subadvisors and will not be additional fees
paid by the Fund. The Board concluded that the Advisor's recommendations and
conclusions supported approval of each Subadvisory Agreement.
In considering the materials and information described above, the Independent
Trustees received assistance from, and met separately with, their independent
legal counsel, and were provided with a written description of their statutory
responsibilities and the legal standards that are applicable to the approvals of
advisory agreements.
After full consideration of the factors discussed above, with no single factor
identified as being of paramount importance, the Board, including a majority of
the Independent Trustees, with the assistance of independent counsel, concluded
that the initial approval of each Subadvisory Agreement was in the best
interests of the Fund, and approved the Subadvisory Agreements with respect to
the Fund.
GENERAL INFORMATION
Administrative and Accounting Services
Investors Bank & Trust Company (the "Administrator"), located at 200 Clarendon
Street, Boston, Massachusetts 02116, is the administrator of the Fund. The
Administrator performs various services for the Fund, including fund accounting,
daily and ongoing maintenance of certain Fund records, calculation of the Fund's
net asset value, and preparation of shareholder reports.
The Advisor provides certain internal administrative services to the Class S,
Class Y-1, and Class Y-2 shares of the Fund, for which the Advisor receives a
fee of 0.15%, 0.10%, and 0.05% of the average daily net assets of the Class S,
Class Y-1, and Class Y-2 shares of the Fund, respectively. For the fiscal year
ended March 31, 2006, the Fund did not pay any fees to the Advisor for internal
administrative services.
Principal Underwriting Arrangements
MGI Funds Distributors, Inc., a Delaware corporation that is a subsidiary of
PFPC, Inc. (the "Distributor"), acts as the principal underwriter of each class
of shares of the Fund pursuant to an Underwriting Agreement with the Trust. The
Underwriting Agreement requires the Distributor to use its best efforts,
consistent with its other businesses, to sell shares of the Fund.
8
Payments to Affiliated Brokers
The Fund did not make any payments to any affiliated brokers during the fiscal
year ended March 31, 2006.
Record of Beneficial Ownership
As of July 31, 2006, the Fund had 7,233,111.3 shares outstanding. As of July 31,
2006, MGI Collective Trust: MGI US Small/Mid Cap Value Equity Portfolio held
6,588,193.1 of the Fund's outstanding shares and the Scripps Howard Foundation
held 362,381.3 of the Fund's outstanding shares, representing 91.1% and 5.0%,
respectively, of the total shares outstanding.
SHAREHOLDER REPORTS
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report, you
will find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. A
copy of the Fund's most recent annual report and the most recent semi-annual
report succeeding the annual report may be obtained, without charge, by calling
your plan administrator or recordkeeper or financial advisor, or by calling the
Trust toll-free at 1-866-658-9896.
9
