January 31, 2008
VIA EDGAR AND E-MAIL
U.S. Securities and Exchange Commission
Division of Investment Management
100 F Street, N.E.
Washington, D.C. 20549-9303
Attention: Mr. Chad D. Eskildsen, Senior Accountant
Re: MGI Funds--Preliminary Information Statement
Dear Sir and Madam:
On behalf of the MGI Funds (the "Trust" or the "Registrant"), following are
the responses to the comments of the Staff of the U.S. Securities and Exchange
Commission (the "SEC") conveyed with regard to the Preliminary Information
Statement (the "Information Statement") relating to the Trust's series, the MGI
US Small/Mid Cap Value Equity Fund (the "Fund"), which informs shareholders of
the Fund of the approval of a new subadvisory agreement between Mercer Global
Investments, Inc., the Trust's investment advisor ("MGI" or the "Advisor"), and
NWQ Investment Management Company, LLC ("NWQ" or the "Subadvisor"). The
Information Statement was filed with the SEC, pursuant to Rule 14c-5(a) under
the Securities Exchange Act of 1934, as amended, on Thursday, January 10, 2008.
You had communicated the Staff's comments on the Information Statement to
Mark A. Sheehan of Stradley, Ronon, Stevens & Young, LLP, counsel to the Trust,
in a telephone conversation on Wednesday, January 16, 2008. Each Staff comment
is summarized below, followed by the Trust's response to the comment.
Capitalized terms not otherwise defined in this letter have the meanings
assigned to the terms in the Information Statement.
1. Comment. Given that NWQ will be relying on the safe harbor contained in
Section 15(f) of the Investment Company Act of 1940, as amended (the "1940
Act"),(1) as a consequence of the assignment of the Prior Subadvisory Agreement,
the Staff believes that the Information Statement should disclose that the
Subadvisor will rely on the safe harbor and recite the two conditions of the
statute that must be satisfied.
(1) Section 15(f) of the 1940 Act provides that an investment adviser may
receive a benefit in connection with the sale of its business, which
results in the assignment of the investment adviser's advisory contract
with a registered investment company, if (i) for three years after the
transaction, at least 75% of the investment company's board of trustees
must not be "interested persons" (as that term is defined in the 1940 Act)
of either the investment adviser or the predecessor investment adviser, and
(ii) no unfair burden is imposed on the investment company as a result of
the transaction.
Response. The Information Statement, on its page 3, has been expanded to
disclose the following (new language underlined):
On November 13, 2007, Nuveen was acquired by a group of private investors
led by Madison Dearborn Partners, LLC (the "Transaction"). The Transaction
caused an assignment, which resulted in the automatic termination of the
Prior Subadvisory Agreement. The Current Subadvisory Agreement was approved
by the Board, on a prospective basis, at its meeting held on November 8,
2007 (the "November 2007 Meeting") in order to allow NWQ to continue to
provide subadvisory services to the Fund without interruption or adverse
effect to the Fund. IN ACCORDANCE WITH THE 1940 ACT, AS A CONSEQUENCE OF
THE TRANSACTION AND THE ASSIGNMENT OF THE PRIOR SUBADVISORY AGREEMENT, NWQ
MAY CONTINUE TO FURNISH SUBADVISORY SERVICES TO THE FUND PURSUANT TO THE
CURRENT SUBADVISORY AGREEMENT, PROVIDED THAT (I) AT LEAST 75% OF THE
TRUSTEES ARE NOT "INTERESTED PERSONS" (AS THAT TERM IS DEFINED IN THE 1940
ACT) OF NWQ OR NUVEEN, AND (II) NO UNFAIR BURDEN WILL BE IMPOSED ON THE
FUND AS A CONSEQUENCE OF THE TRANSACTION. The Current Subadvisory Agreement
is dated November 13, 2007.
2. Comment. On page 6 of the Information Statement, under the heading
"Board of Trustees' Considerations," the third complete paragraph states:
Because NWQ was a newly appointed subadvisor to the Fund, at the time of
the May 2006 Meeting, the Independent Trustees could not consider NWQ's
investment performance with respect to the Subadvisor's management of the
Fund as a factor in evaluating the Prior Subadvisory Agreement at the
Meeting. However, the Independent Trustees did review NWQ'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.
Please explain why the Board had not considered the Subadvisor's
performance since 2006.
Response. The disclosure that the SEC staff has referred to in its comment
describes the Board's deliberations at the May 2006 Meeting, and should not be
interpreted to mean that the Trustees had not considered the Subadvisor's
performance since that meeting. Supplementally, the Trust notes that, first, the
Board has considered and reviewed the Subadvisor's performance at each quarterly
Board meeting held since the inception of the Subadvisor's management of its
allocated portion of the Fund in 2006. As is true for each of the Trust's
eighteen subadvisors, the Board reviews, at each quarterly Board meeting, the
Subadvisor's performance over the prior quarter, as well as the Subadvisor's
performance over various relevant time periods (prior 12 months, year-to-date,
etc). Additionally, the Board's current practice is to meet with representatives
of each of the Trust's subadvisors at least annually. Consistent with this
practice, representatives of NWQ attended the Trust's February 8, 2007 Board
meeting, specifically to discuss the Subadvisor's record in managing its
allocated portion of the Fund's investment portfolio since 2006, and to address
any questions, comments, or concerns that the Trustees might have had regarding
NWQ's performance as a subadvisor to the Fund.
The Registrant explicitly alludes to these considerations in the
Information Statement's paragraph that immediately precedes the paragraph cited
by the SEC staff in its comment. That disclosure states the following:
AT THE NOVEMBER 2007 MEETING, THE INDEPENDENT TRUSTEES REVIEWED THE NATURE,
QUALITY, AND EXTENT OF THE SERVICES PROVIDED BY NWQ TO THE FUND. THE
INDEPENDENT TRUSTEES DISCUSSED the specific investment process employed by
NWQ in managing the assets of the Fund allocated to the Subadvisor, the
qualifications of NWQ's investment management team with regard to
implementing the Fund's investment mandate, and NWQ'S PERFORMANCE RECORD AS
COMPARED TO ITS BENCHMARK. The Independent Trustees considered NWQ's
infrastructure and the fact that NWQ did not expect any material changes in
NWQ's operations following the consummation of the Transaction. BASED ON
THEIR CONSIDERATION AND REVIEW OF THE FOREGOING FACTORS, THE INDEPENDENT
TRUSTEES CONCLUDED THAT THE NATURE, EXTENT, AND QUALITY OF THE SUBADVISORY
SERVICES THAT HAD BEEN PROVIDED BY NWQ UNDER THE PRIOR SUBADVISORY
AGREEMENT, as well as NWQ's ability to continue to render such services
under the Current Subadvisory Agreement based on its experience,
operations, and resources, were appropriate for the Fund, in light of the
Fund's investment objective. (Emphasis added.)
The Registrant believes that the Information Statement sufficiently
discloses the Board's deliberations on these issues and the Registrant
respectfully submits that this disclosure adequately addresses the Staff's
comment.
3. Comment. In the section "Board of Trustees' Considerations," at pages
6-7, the Information Statement discloses:
The Independent Trustees also considered comparisons of the fees proposed
to be paid to NWQ by the Advisor with the fees charged by NWQ to its other
clients.
Please indicate what the Board's comparison of the fees disclosed.
Response. The following additional disclosure will be inserted (new
language underlined):
The Independent Trustees also considered comparisons of the fees proposed
to be paid to NWQ by the Advisor with the fees charged by NWQ to its other
clients. IT WAS NOTED THAT THE STANDARD ANNUAL FEE SCHEDULE FOR NWQ'S
SMALL-MID CAP VALUE INVESTMENT STRATEGY (WHICH WAS CLOSED TO NEW ACCOUNTS
AT THAT TIME), AS REPORTED IN NWQ'S SEPTEMBER 8, 2005 FORM ADV, AND THE
MATERIALS PREPARED FOR THE BOARD FOR THE MAY 2006 MEETING, PROVIDED FOR
SUBADVISORY FEES THAT WERE GREATER THAN THE FEES THAT NWQ WOULD BE ENTITLED
TO RECEIVE FROM THE ADVISOR FOR SERVING AS A SUBADVISOR TO THE FUND.
4. Comment. In that same section of the Information Statement, the
disclosure should state what the Board concluded with respect to the
consideration of economies of scale, the extent to which economies of scale
would be realized as the Fund grows, and whether the fee levels reflected these
economies of scale for the benefit of Fund investors.
Response. The following additional disclosure will be inserted (new
language underlined) in this section:
In addition, the Independent Trustees considered the selection and due
diligence process employed by the Advisor in deciding to recommend NWQ as a
subadvisor for 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 Board was not provided with, and did not review,
information regarding the estimated profits that may be realized by the
Subadvisor in managing its allocated portion of the Fund's assets. Since
the fees to be paid to NWQ were the result of arms-length bargaining
between unaffiliated parties, and given the Advisor's economic incentive to
negotiate a reasonable fee, NWQ's potential profitability was not
considered relevant to the Independent Trustees' deliberations. FOR SIMILAR
REASONS, THE POTENTIAL FOR ECONOMIES OF SCALE WAS NOT CONSIDERED RELEVANT
TO THE INDEPENDENT TRUSTEES' DELIBERATIONS. The Independent Trustees noted
that the subadvisory fees were paid by the Advisor to NWQ and were not
additional fees to be borne by the Fund or its shareholders. 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 NWQ with respect to the assets of the Fund 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 November 2007 Meeting, concluded that the
Subadvisor's fee rate continued to be reasonable in relation to the
services provided to the Fund by NWQ.
* * * * * *
In connection with the Trust's response to the SEC Staff's comments on the
Information Statement, the Trust acknowledges that: (i) the Trust is responsible
for the adequacy of the disclosure in the Trust's filings; (ii) Staff comments
or changes to disclosure in response to Staff comments in the filings reviewed
by the Staff do not foreclose the SEC from taking any action with respect to the
filings; and (iii) the Trust may not assert Staff comments as a defense in any
proceeding initiated by the SEC under the federal securities laws of the United
States.
Please do not hesitate to contact Mark A. Sheehan, at (215) 564-8027, if
you have any questions or wish to discuss any of the responses presented above.
Sincerely,
/s/Cynthia Lo Bessette
Cynthia Lo Bessette
Vice President and Secretary
MGI Funds
cc: David M. Goldenberg, Esq.
Mercer Global Investments, Inc.
Stuart H. Coleman, Esq.
Stroock & Stroock & Lavan, LLP
Bruce G. Leto, Esq.
Stradley, Ronon, Stevens & Young, LLP
