SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO.)
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MGI FUNDS
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MGI FUNDS(TM)
MGI Core Opportunistic Fixed Income Fund
200 Clarendon Street
Boston, Massachusetts 02116
December 28, 2006
Dear Shareholder:
We are pleased to notify you of a change involving a subadvisor for the MGI Core
Opportunistic Fixed Income Fund (the "Fund"), a series of MGI Funds (the
"Trust"). Specifically, the Board of Trustees of the Trust (the "Board") has
approved a new subadvisory agreement between Mercer Global Investments, Inc.,
the Fund's investment advisor ("MGI" or the "Advisor"), and BlackRock Financial
Management, Inc. (formerly, BlackRock Advisors, Inc.) ("BlackRock" or the
"Subadvisor").
BlackRock has served as a subadvisor for the Fund since the Fund's inception.
Due to a change in the ownership structure of BlackRock and its corporate
parent, BlackRock, Inc. that occurred at the end of September, the prior
subadvisory agreement between BlackRock and the Advisor, on behalf of the Fund
(the "Prior Subadvisory Agreement"), was terminated, and the Board approved a
new subadvisory agreement (the "Current Subadvisory Agreement") to replace the
Prior Subadvisory Agreement. The Current Subadvisory Agreement is identical to
the Prior Subadvisory Agreement in all material respects.
It is anticipated that this change will not have any effect on the services
provided to the Fund by BlackRock, and that BlackRock will continue to manage
its allocated portion of the Fund's portfolio as BlackRock had done under the
Prior Subadvisory Agreement. Western Asset Management Company ("WAMCo"), the
Fund's second subadvisor, will continue to manage its allocated portion of the
Fund's portfolio.
This change became effective on September 30, 2006. I encourage you to read the
attached Information Statement, which provides, among other information, details
regarding BlackRock and the Current Subadvisory Agreement and a discussion of
the factors that the Board considered in approving the implementation of the
Current Subadvisory Agreement.
Sincerely,
/s/ Phillip J. de Cristo
Phillip J. de Cristo
Trustee, President, and Chief
Executive Officer, MGI Funds
MGI FUNDS(TM)
MGI Core Opportunistic Fixed Income Fund
200 Clarendon Street
Boston, Massachusetts 02116
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INFORMATION STATEMENT
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This Information Statement (the "Statement") is being furnished on behalf of the
Board of Trustees (the "Board") of MGI Funds (the "Trust") to inform
shareholders of the MGI Core Opportunistic Fixed Income Fund (the "Fund") about
a recent change related to the Fund's contractual arrangements with BlackRock
Financial Management, Inc. (formerly, BlackRock Advisors, Inc.) ("BlackRock" or
the "Subadvisor") one of the Fund's two subadvisors. Specifically, due to a
change in the ownership structure of BlackRock, the subadvisory agreement (the
"Prior Subadvisory Agreement") between BlackRock and Mercer Global Investments,
Inc., the Fund's investment advisor ("MGI" or the "Advisor"), on behalf of the
Fund, dated July 1, 2005, was terminated. The Board approved a new subadvisory
agreement (the "Current Subadvisory Agreement") with BlackRock. The Current
Subadvisory Agreement was approved by the Board upon the recommendation of MGI,
without shareholder approval, as is permitted by the exemptive order of the U.S.
Securities and Exchange Commission (the "SEC" or the "Commission"), dated
December 28, 2005 (the "Exemptive Order") issued to the Trust and the Advisor.
This Statement is being mailed on or about December 28, 2006 to shareholders of
record of the Fund as of October 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 mutual 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 to modify subadvisory
arrangements without shareholder approval. Under the Exemptive Order, the
Advisor may act as a manager of managers for some or all 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
supervise the subadvisors and recommend the hiring, termination, and replacement
of the subadvisors.
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"), approved the Current Subadvisory Agreement between the Advisor, on
behalf of the Fund, and BlackRock. BlackRock is independent of the Advisor and
discharges its responsibilities subject to the oversight and supervision of the
Advisor. BlackRock is 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 the affiliated
broker-dealer may 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 entering into
a new subadvisory agreement, the affected fund will notify shareholders of the
fund of the changes. This Statement provides such notice and presents details
regarding the Current Subadvisory Agreement.
THE ADVISOR
The Advisor, a Delaware corporation located at 200 Clarendon Street, Boston,
Massachusetts 02116, 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 Commission 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 0.35% of the Fund's average daily net assets. The Trust, with respect to the
Fund, and the Advisor have entered into a written contractual fee waiver and
expense reimbursement agreement pursuant to which the Advisor has agreed to
waive a portion of its fees and/or to reimburse expenses to the extent that the
Fund's expenses (not including brokerage fees and expenses, interest, and
extraordinary expenses) exceed certain levels. After giving effect to the fee
waiver and expense reimbursement agreement, the Advisor did not receive any fees
from the Fund for the advisory services that the Advisor provided to the Fund
during 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 as President of the Advisor. Ravi B. Venkataraman serves as Vice President
and Chief Investment Officer of the Trust and as Chief Investment Officer of the
Advisor. Richard S. Joseph serves as Vice President, Treasurer, and Principal
Accounting Officer of the Trust and as Chief Operating Officer of the Advisor.
Cynthia Lo Bessette serves as Vice President, Secretary, and Chief Legal Officer
of the Trust and as Senior Corporate Counsel of the Advisor. David M. Goldenberg
serves as Vice President and Assistant Secretary of the Trust and as General
Counsel of Mercer Human Resource Consulting, an affiliate of the Advisor.
Christopher A. Ray serves as Vice President of the Trust and as 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.
THE SUBADVISOR
BlackRock was initially approved by the Board to serve as a subadvisor for the
Fund at a Board meeting held on May 16 and 17, 2005, and has managed its
allocated portion of the Fund since the Fund's inception. On September 29, 2006,
BlackRock, Inc., the corporate parent of BlackRock, and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") completed a transaction (the "Transaction") in which
Merrill Lynch contributed its asset management business, Merrill Lynch
Investment Managers, to BlackRock, Inc., in exchange for an ownership interest
in BlackRock, Inc., and certain corporate governance rights. Although BlackRock
had informed the Advisor and the Trust that BlackRock did not believe that the
Transaction resulted in an assignment of the Prior Subadvisory Agreement under
the 1940 Act, it is possible that the Transaction could be determined to be such
an assignment, which would have resulted in the automatic termination of the
Prior Subadvisory Agreement. Due to this uncertainty, the Current Subadvisory
Agreement was approved by the Board, at its Meeting held on September 21, 2006
(the "September Meeting") in order to allow BlackRock to continue to provide
subadvisory services to the Fund.
BlackRock is independent of the Advisor, and discharges its responsibilities
subject to the oversight and supervision of the Advisor. BlackRock is
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 consequence of the Current
Subadvisory Agreement. For the fiscal year ended March 31, 2006, the Advisor
paid aggregate subadvisory fees to BlackRock and WAMCo of $284,924, which
represented 0.274% of the average daily net assets of the Fund. The fees paid by
the Advisor to
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each subadvisor depend upon the fee rates negotiated by the Advisor and on the
percentage of the Fund's assets allocated to the subadvisors by MGI.
BlackRock
BlackRock, a wholly-owned subsidiary of BlackRock, Inc., is located at 40 East
52nd Street, New York, New York 10022, and serves as a subadvisor to the Fund.
BlackRock, Inc. is one of the world's largest asset management firms with over
$1 trillion in assets under management. BlackRock, Inc. offers a full range of
equity, fixed income, cash management, and alternative investment products with
strong representation in both retail and institutional channels, in the United
States and in non-U.S. markets. BlackRock, Inc., following the Transaction, has
over 4,500 employees in 18 countries and a major presence in most key markets,
including the United States, the United Kingdom, Asia, Australia, the Middle
East, and Europe.
In managing its allocated portion of the Fund as a subadvisor, BlackRock employs
a relative value strategy to determine the tradeoff between risk and return.
Relative value assessment is applied to sector, sub-sector, and individual
security selection decisions. BlackRock's philosophy emphasizes research and
analysis of specific sectors and securities, along with the risks associated
with the fixed income markets, including interest rate risk, yield curve risk,
cash flow risk, credit risk, and liquidity risk. Securities are purchased for
the Fund when the management team at BlackRock determines that the securities
have the potential for above-average total return. BlackRock uses its own
proprietary research and models to analyze securities, and based on this
analysis, the allocated portion of the Fund's portfolio managed by BlackRock
typically will hold approximately 350 to 450 different securities.
The name and principal occupation of each of the principal executive officers
and directors of BlackRock are listed below. The address of each individual
listed below, as it relates to their positions with BlackRock, is 40 East 52nd
Street, New York, New York 10022.
Name Position with BlackRock
Steven Buller Chief Financial Officer and Managing Director
Robert P. Connolly General Counsel, Managing Director and Secretary
Laurence D. Fink Chairman and Chief Executive Officer
Robert S. Kapito Vice Chairman and Director
Ralph Schlosstein President and Director
Charles Hallae Vice Chairman
Barbara Novick Vice Chairman
Keith Anderson Vice Chairman
Susan Wagner Vice Chairman and Chief Operating Officer
Robert Doll Vice Chairman
Robert Fairbairn Vice Chairman
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THE CURRENT SUBADVISORY AGREEMENT
The terms of the Current Subadvisory Agreement are identical to the terms of the
Prior Subadvisory Agreement, including the fees that are payable to BlackRock by
MGI, and the services that BlackRock is required to provide in managing its
allocated portion of the Fund.
The Current Subadvisory Agreement provides that BlackRock, among other duties,
will make all investment decisions for the allocated portion of the Fund's
assets for which BlackRock serves as subadvisor. BlackRock, subject to the
supervision of the Board and the Advisor, will conduct an ongoing program of
investment, evaluation and, if appropriate, sale and reinvestment of the
subadvisor's allocated portion of the Fund's assets. BlackRock also will perform
certain other administrative and compliance-related functions in connection with
the management of its allocated portion of the Fund's portfolio.
The Current Subadvisory Agreement provides for BlackRock to be compensated from
the fees the Advisor receives from the Fund, based on the average daily net
assets allocated to BlackRock as subadvisor. BlackRock generally will pay all
expenses it incurs in connection with its activities under the Current
Subadvisory Agreement, other than the costs of the Fund's portfolio securities
and other investments.
The Current 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) BlackRock, on not less than 90 days' written notice to the Advisor and the
Trust.
The Current Subadvisory Agreement was approved by the Board at the September
Meeting, which Meeting was called, among other things, for the purpose of
approving the Current Subadvisory Agreement, for an initial term of two years.
Thereafter, continuance of the Current Subadvisory Agreement will require the
annual approval of the Board, including a majority of the Independent Trustees.
The Current 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 its July 13, 2006 Board Meeting, the Board had discussed the then-anticipated
Transaction involving BlackRock and its parent company with representatives of
the Advisor, as well as with representatives of BlackRock, who attended the
Board meeting at the request of the Board to address the Transaction, the
Current Subadvisory Agreement, and the implications, if any, of the Transaction
for the performance of BlackRock as a subadvisor of the Fund.
At the September Meeting, the Board considered the approval of the Current
Subadvisory Agreement. The Advisor recommended the approval of the Current
Subadvisory Agreement, pursuant to which BlackRock would continue to serve as a
subadvisor of the Fund. The approval of the Current Subadvisory Agreement with
BlackRock was recommended by the Advisor because, among other factors: (i) the
Transaction is not expected to have a material effect on the nature, extent, or
quality of the services provided by BlackRock to the Fund; (ii) the BlackRock
5
personnel who have been responsible for managing BlackRock's allocated portion
of the Fund's portfolio since the Fund's inception will continue to serve in
their respective capacities following the Transaction; and (iii) the terms of
the Current Subadvisory Agreement were identical, in all respects other than the
date, to the Prior Subadvisory Agreement between MGI and BlackRock.
The Board considered that the Transaction may technically result in a change in
control of BlackRock, and hence, in the assignment of the Prior Subadvisory
Agreement between BlackRock and the Advisor, on behalf of the Fund, under the
1940 Act. Because of the potential assignment and the termination of the Prior
Subadvisory Agreement upon the closing of the Transaction, the Trustees, and by
a separate vote, the Independent Trustees, approved the Current Subadvisory
Agreement between the Advisor and BlackRock, which became effective following
the Transaction.
The Board reviewed a copy of the Current Subadvisory Agreement. The Board
considered that the Current Subadvisory Agreement provided for the same range of
services and fees as the Prior Subadvisory Agreement, and, most importantly,
that the Current Advisory Agreement was in all ways identical to the Prior
Subadvisory Agreement, except for the date. It was recalled that representatives
of BlackRock had met with the Trustees at the July Board Meeting, at which time
BlackRock personnel had made a detailed presentation regarding the Transaction
and confirmed that the Transaction would not, in any way, change the nature and
quality of the services being provided to the Fund by BlackRock. Additionally,
given that the fee provided under the Current Subadvisory Agreement was
identical to the fee under the Prior Subadvisory Agreement, the Board's prior
deliberations, at the May 16 and 17, 2005 Board meeting (the "May 2005
Meeting"), when the Prior Subadvisory Agreement was approved, remained relevant.
In connection with the Independent Trustees' consideration of the Prior
Subadvisory Agreement at the May 2005 Meeting, the Independent Trustees
considered information relating to: (i) the process by which the Advisor
selected and recommended BlackRock for Board approval; (ii) the nature, extent,
and quality of the services that BlackRock would provide to the Fund; (iii)
BlackRock's reputation, investment management business, personnel, and
operations; (iv) BlackRock's brokerage and trading policies and practices; (v)
the level of subadvisory fees to be charged by BlackRock; and a comparison of
those fees to the fees: (a) charged by BlackRock to comparable accounts
BlackRock managed, 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 that of the Fund; (vi) BlackRock's compliance
program; (vii) BlackRock's historical performance returns managing a similar
investment mandate, and such performance comparisons to a relevant index; and
(viii) BlackRock's financial condition. The Independent Trustees also considered
and analyzed other information and factors that the Independent Trustees deemed
relevant with respect to BlackRock, including: BlackRock's management style; the
qualifications and experience of the persons that will be responsible for the
day-to-day management of the Fund; and BlackRock's staffing levels and overall
resources.
At the May 2005 Meeting, the Independent Trustees reviewed the nature, quality,
and extent of the services to be provided by BlackRock to the Fund. The
Independent Trustees discussed the specific investment process to be employed by
BlackRock in managing the assets of the Fund to
6
be allocated to the Subadvisor, the qualifications of BlackRock's investment
management team with regard to implementing the Fund's investment mandate, and
BlackRock's performance record as compared to its benchmark. The Independent
Trustees considered BlackRock's infrastructure and whether the Subadvisor
appeared to support its investment strategy adequately. The Independent Trustees
also discussed the Advisor's review and selection process with respect to
BlackRock, and the Advisor's favorable assessment as to the nature and quality
of the subadvisory services expected to be provided by BlackRock. The
Independent Trustees determined that the Fund would benefit from the quality and
experience of BlackRock's portfolio managers. Based on their consideration and
review of the foregoing factors, the Independent Trustees concluded that the
nature, extent, and quality of the subadvisory services to be provided by
BlackRock under the Prior Subadvisory Agreement, as well as BlackRock'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.
Because the Fund was newly formed and had not yet commenced investment
operations, the Independent Trustees could not consider BlackRock's investment
performance with respect to its management of the Fund as a factor in evaluating
the Prior Subadvisory Agreement at the May 2005 Meeting. However, the
Independent Trustees did review BlackRock's historical performance record in
managing other funds and accounts that are comparable to the Fund. The
Independent Trustees also compared this historical performance to a relevant
benchmark, and concluded that the historical performance record for the
Subadvisor, viewed together with the other factors considered by the Independent
Trustees, supported a decision to approve the Prior Subadvisory Agreement.
The Independent Trustees discussed the services that would be rendered by
BlackRock and evaluated the compensation to be paid to BlackRock by the Advisor.
The Independent Trustees also considered comparisons of the fees paid to
BlackRock by the Advisor with the fees charged by BlackRock to its other
clients. The Independent Trustees noted that the fee schedule of BlackRock
included breakpoints that would reduce BlackRock's fees as assets in the Fund
increased. In addition, the Independent Trustees considered the selection and
due diligence process employed by the Advisor in deciding to recommend BlackRock
as a subadvisor to the Fund, and the Advisor's reasons for concluding that the
fees to be paid to the Subadvisor for its services to the Fund were reasonable.
The Independent Trustees noted that the subadvisory fees were paid by the
Advisor to BlackRock and were not additional fees to be borne by the Fund. Based
on their discussion, the Independent Trustees concluded that, in light of the
quality and extent of the services to be provided, the proposed fees to be paid
to BlackRock with respect to the assets to be allocated to the Subadvisor
appeared to be within a reasonable range.
Based on these factors, the determination of the Advisor at the conclusion of
its due diligence process, and such other matters as were deemed relevant, the
Independent Trustees, at the May 2005 Meeting, concluded that the proposed fee
rate was reasonable in relation to the services to be provided to the Fund by
BlackRock. As a result, the Independent Trustees decided to recommend to the
Board the approval of the Prior Subadvisory Agreement at the May 2005 Meeting.
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After full consideration of the factors discussed above, including the
Independent Trustees' deliberations at the May 2005 Meeting, 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 at the July Board Meeting that the approval of the Current
Subadvisory Agreement was in the best interests of the Fund, and approved the
Current Subadvisory Agreement 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.
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 October 31, 2006, the Fund had 33,066,034.4 shares outstanding. As of
October 31, 2006, MGI Collective Trust: MGI Core Opportunistic Fixed Income
Portfolio held 30,015,400.1 of the Fund's outstanding shares and Southern Ohio
Medical Center held 1,690,162.5 of the Fund's outstanding shares, representing
90.7% and 5.1%, 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
8
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.
