| 1. | Organization and Significant Accounting Policies |
The RiskX Funds (“Funds”), formerly known as the FMX Funds, are series’ of the Starboard Investment Trust (“Trust”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. Each Fund is a separate diversified series of the Trust.
Each Fund is a “fund of funds” that principally invests in other mutual funds and exchange traded funds. The Funds’ investment advisor, FolioMetrix, LLC (the “Advisor”), seeks to achieve each Fund’s investment objective by investing in no-load, institutional, and exchange-traded funds registered under the Investment Company Act of 1940 (“Portfolio Funds”). Although each Fund principally invests in Portfolio Funds with no sales related expenses or very low sales related expenses, the Funds are not precluded from investing in Portfolio Funds with sales-related expenses, and/or service fees in excess of 0.25%.
At a meeting of the Board of Trustees on April 25, 2013, the Trustees approved the name change of the FMX Funds to the RiskX Funds. The changes are name changes only and do not reflect changes in the investment objectives, policies, and limitations of the Funds. Each Fund has changed its name as indicated below.
| Previous Name | New Name |
| ISM Dynamic Growth Fund | Rx Dynamic Growth Fund |
| ISM Dynamic Total Return Fund | Rx Dynamic Total Return Fund |
| ISM Dividend Income Fund | Rx Dividend Income Fund |
| ISM Global Alpha Tactical Fund | Rx Tactical Rotation Fund |
| ISM High Income Fund | Rx High Income Fund |
| ISM Non Traditional Fund | Rx Non Traditional Fund |
| ISM Premier Asset Management Fund | Rx Premier Managers Fund |
| ISM Strategic Equity Fund | Rx Traditional Equity Fund |
| ISM Strategic Fixed Income Fund | Rx Traditional Fixed Income Fund |
| ISM Tax Free Fund | Rx Tax Advantaged Fund |
Each Fund currently has an unlimited number of authorized shares, which are divided into two classes – Institutional Class Shares and Advisor Class Shares. Each class of shares has equal rights as to assets of the Funds, and the classes are identical except for differences in ongoing distribution and service fees. The Advisor Class Shares are subject to distribution plan fees as described in Note 3. Each Fund’s Advisor Class Shares are sold without an initial sales charge; however, they are subject to a contingent deferred sales charge. Income, expenses (other than distribution and service fees), and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. All classes have equal voting privileges, except where otherwise required by law or when the Trustees determine that the matter to be voted on affects only the interests of the shareholders of a particular class.
(Continued)
RiskX Funds
Notes to Financial Statements
The Date of Initial Public Investment for each Fund and Class of Shares is as follows:
| Fund | Institutional Class Shares | Advisor Class Shares |
| Dynamic Growth Fund | October 2, 2009 | February 18, 2011 |
| Dynamic Total Return Fund | October 2, 2009 | February 25, 2011 |
| Dividend Income Fund | September 20, 2012 | September 26, 2012 |
| Tactical Rotation Fund | September 20, 2012 | September 26, 2012 |
| High Income Fund | September 20, 2012 | September 26, 2012 |
| Non Traditional Fund | September 20, 2012 | September 26, 2012 |
| Premier Managers Fund | September 20, 2012 | September 26, 2012 |
| Traditional Equity Fund | September 20, 2012 | September 26, 2012 |
| Traditional Fixed Income Fund | September 20, 2012 | September 26, 2012 |
| Tax Advantaged Fund | September 20, 2012 | September 26, 2012 |
The following is a summary of significant accounting policies consistently followed by the Funds. The policies are in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Investment Valuation
Each Fund’s investments in securities are carried at fair value. Securities listed on an exchange or quoted on a national market system are valued at the last price as of 4:00 p.m. Eastern Time. Securities traded in the NASDAQ over-the-counter market are generally valued at the NASDAQ Official Closing Price. Other securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the most recent bid price. Securities and assets for which representative market quotations are not readily available (e.g., if the exchange on which the portfolio security is principally traded closes early or if trading of the particular portfolio security is halted during the day and does not resume prior to each Fund’s net asset value calculation) or which cannot be accurately valued using each Fund’s normal pricing procedures are valued at fair value as determined in good faith under policies approved by the Trustees. A portfolio security’s “fair value” price may differ from the price next available for that portfolio security using each Fund’s normal pricing procedures. Instruments with maturities of 60 days or less are valued at amortized cost, which approximates market value.
Each Fund may invest in portfolios of open-end investment companies (the “Underlying Funds”). The Underlying Funds value securities in their portfolios for which market quotations are readily available at their market values (generally the last reported sale price) and all other securities and assets at their fair value to the methods established by the board of directors of the Underlying Funds. Open-ended funds are valued at their respective net asset values as reported by such investment companies.
Fair Value Measurement
Each Fund has adopted ASC Topic 820, Fair Value Measurements. ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements.
Various inputs are used in determining the value of each Fund's investments. These inputs are summarized in the three broad levels listed below:
Level 1: Unadjusted quoted prices in active markets for identical securities
Level 2: other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.)
Level 3: significant unobservable inputs (including each Fund’s own assumptions in determining fair value of investments)
(Continued)
RiskX Funds
Notes to Financial Statements
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following tables summarize the inputs as of May 31, 2013 for the each Fund’s investments measured at fair value:
Dynamic Growth Fund
| Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Exchange Traded Products | $ | 5,641,736 | $ | 5,641,736 | $ | - - | $ | - - |
| Open-End Funds | | 9,192,696 | | 9,192,696 | | - - | | - - |
| Short-Term Investment | | 361,000 | | 361,000 | | - | | - - |
| Total | $ | 15,195,432 | $ | 15,195,432 | $ | - - | $ | - - |
Dynamic Total Return Fund
| Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Open-End Funds | $ | 8,359,518 | $ | 8,359,518 | $ | - - | $ | - - |
| Short-Term Investment | | 228,580 | | 228,580 | | - | | - - |
| Total | $ | 8,588,098 | $ | 8,588,098 | $ | - - | $ | - - |
Dividend Income Fund
| Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Common Stocks | $ | 304,513 | $ | 304,513 | $ | - - | $ | - - |
| Open-End Fund | | 767,531 | | 767,531 | | - - | | - - |
| Short-Term Investment | | 25,536 | | 25,536 | | - | | - - |
| Total | $ | 1,097,580 | $ | 1,097,580 | $ | - - | $ | - - |
Tactical Rotation Fund
| Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Exchange Traded Products | $ | 12,176,779 | $ | 12,176,779 | $ | - - | $ | - - |
| Short-Term Investment | | 751,139 | | 751,139 | | - | | - - |
| Total | $ | 12,927,918 | $ | 12,927,918 | $ | - - | $ | - - |
High Income Fund
| Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Open-End Funds | $ | 9,079,591 | $ | 9,079,591 | $ | - - | $ | - - |
| Short-Term Investment | | 240,290 | | 240,290 | | - | | - - |
| Total | $ | 9,319,881 | $ | 9,319,881 | $ | - - | $ | - - |
(Continued)
RiskX Funds
Notes to Financial Statements
Non Traditional Fund
| Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Exchange Traded Product | $ | 211,494 | $ | 211,494 | $ | - - | $ | - - |
| Open-End Funds | | 6,624,121 | | 6,624,121 | | - - | | - - |
| Short-Term Investment | | 268,476 | | 268,476 | | - | | - - |
| Total | $ | 7,104,091 | $ | 7,104,091 | $ | - - | $ | - - |
Premier Managers Fund
| Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Common Stock | $ | 314,149 | $ | 314,149 | $ | - - | $ | - - |
| Open-End Funds | | 1,504,769 | | 1,504,769 | | - - | | - - |
| Short-Term Investment | | 36,943 | | 36,943 | | - | | - - |
| Total | $ | 1,855,861 | $ | 1,855,861 | $ | - - | $ | - - |
Traditional Equity Fund
| Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Exchange Traded Products | $ | 4,108,945 | $ | 4,108,945 | $ | - - | $ | - - |
| Short-Term Investment | | 569,859 | | 569,859 | | - | | - - |
| Total | $ | 4,678,804 | $ | 4,678,804 | $ | - - | $ | - - |
Traditional Fixed Income Fund
| Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Exchange Traded Products | $ | 17,108,123 | $ | 17,108,123 | $ | - - | $ | - - |
| Short-Term Investment | | 1,117,134 | | 1,117,134 | | - | | - - |
| Total | $ | 18,225,257 | $ | 18,225,257 | $ | - - | $ | - - |
Tax Advantaged Fund
| Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Exchange Traded Products | $ | 309,894 | $ | 309,894 | $ | - - | $ | - - |
| Open-End Funds | | 3,431,187 | | 3,431,187 | | - - | | - - |
| Short-Term Investment | | 658 | | 658 | | - | | - - |
| Total | $ | 3,741,739 | $ | 3,741,739 | $ | - - | $ | - - |
The Funds had no significant transfers into or out of Level 1, 2, or 3 during the year ended May 31, 2013.
Investment Transactions and Investment Income
Investment transactions are accounted for as of the date purchased or sold (trade date). Dividend income is recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded as soon as the Fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Interest income is recorded on the accrual basis and includes amortization of discounts and premiums. Gains and losses are determined on the identified cost basis, which is the same basis used for federal income tax purposes.
Expenses
Each Fund bears expenses incurred specifically on its behalf as well as a portion of Trust level expenses, which are allocated according to methods reviewed annually by the Trustees.
(Continued)
RiskX Funds
Notes to Financial Statements
Distributions
Each Fund will distribute its income and realized gains to its shareholders every year. Income dividends paid by the Funds derived from net investment income, if any, will generally be paid monthly or quarterly and capital gains distributions, if any, will be made at least annually. Dividends and distributions to shareholders are recorded on ex-date.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in the net assets from operations during the reporting period. Actual results could differ from those estimates.
Federal Income Taxes
No provision for income taxes is included in the accompanying financial statements, as each Fund intends to distribute to shareholders all taxable investment income and realized gains and otherwise comply with Subchapter M of the Internal Revenue Code applicable to regulated investment companies.
| 2. | Transactions with Related Parties and Service Providers |
Each Fund pays a monthly advisory fee to the Advisor based upon the average daily net assets and calculated at an annual rate. See the table below for the advisory fee rates, amounts paid to the Advisor, and voluntary waivers by the Advisor for each Fund during the fiscal year or initial period ended May 31, 2013:
| Fund | Advisory Fee Rate | Amount Incurred | Amount Waived |
| Dynamic Growth Fund | 0.45% | $ 64,573 | $ 5,461 |
| Dynamic Total Return Fund | 0.45% | - * | - |
| Dividend Income Fund | 0.45% | 1,709 | - |
| Tactical Rotation Fund | 1.00%** | 31,544 | - |
| High Income Fund | 0.45% | 15,811 | - |
| Non Traditional Fund | 0.45% | 12,335 | - |
| Premier Managers Fund | 0.45% | 2,924 | - |
| Traditional Equity Fund | 0.45% | 7,636 | - |
| Traditional Fixed Income Fund | 0.45% | 32,410 | - |
| Tax Advantaged Fund | 0.45% | 7,814 | - |
*According to the terms of the Advisory contract, no advisory fee is incurred for Dynamic Total Return Fund until the average daily net assets of the Fund is greater than $13,000,000.
**A Special Meeting of Shareholders was held on January 28, 2013. The purpose of the meeting was to vote on proposed amendments to the Investment Advisory Agreement that raise the Tactical Rotation Fund’s management fee from 0.45% to 1.00% of average daily net assets. This proposal was approved by shareholders and the new management fee took effect on January 29, 2013.
The Advisor has entered into an Operating Plan with the Fund's administrator under which it has agreed to (i) make payments to the administrator based upon the Fund's net assets according to a schedule included in the Operating Plan and (ii) assume certain expenses of the Fund outlined in the Operating Plan. These measures are intended to limit the Fund's operating expenses to 0.70% for each Fund (1.25% for the Tactical Rotation Fund) of the average daily net assets, exclusive of interest, taxes, brokerage fees and commissions, distribution and/or service (12b-1) fees, acquired fund fees and expenses, and extraordinary expenses. The Operating Plan can only be terminated prior to the conclusion of the current term with the approval of the Fund's Board of Trustees. The Advisor cannot recoup from the Fund any amounts paid under the Operating Plan.
(Continued)
RiskX Funds
Notes to Financial Statements
Administrator
The Nottingham Company (“Administrator”) assists the Trust in the performance of its administrative responsibilities to the Funds, coordinates and pays for the services of each vendor and the operating expense to the Funds, and provides the Funds with certain administrative, fund accounting, and compliance services. As part of its services and consolidated fee arrangement, the Administrator receives compensation based on the Funds’ average daily net assets. The annual rate is 0.25% if the average daily net assets are under $100 million and gradually decreases to an annual rate of 0.096% once the average daily net assets reach $1.805 billion or more.
The fee paid to the Administrator is calculated by multiplying the average daily net assets of each Fund by the highest applicable annual rate. The Administrator pays all expenses not assumed by the Advisor, including, without limitation: the fees and expenses of its independent accountants, of its legal counsel, and of its Trustees; the costs of printing and mailing to shareholders annual and semi-annual reports, proxy statements, prospectuses, statements of additional information and supplements thereto; the costs of printing registration statements; bank transaction charges and custodian’s fees; any proxy solicitors’ fees and expenses; filing fees; any federal, state or local income or other taxes; any interest; any membership fees of the Investment Company Institute and similar organizations; fidelity bond and Trustees’ liability insurance premiums. See the table below for amounts paid to the Administrator by each Fund, along with amounts waived by the Administrator:
| Fund | Amount Incurred | Amount Waived |
| Dynamic Growth Fund | $ 82,653 | $ 4,037 |
| Dynamic Total Return Fund | 66,608 | 1,886 |
| Dividend Income Fund | 957 | - |
| Tactical Rotation Fund | 7,635 | - |
| High Income Fund | 8,784 | - |
| Non Traditional Fund | 6,852 | - |
| Premier Managers Fund | 1,625 | - |
| Traditional Equity Fund | 4,242 | - |
| Traditional Fixed Income Fund | 18,005 | - |
| Tax Advantaged Fund | 4,341 | - |
Compliance Services
Nottingham Compliance Services, LLC (“NCS”), a fully owned affiliate of the Administrator, provides services which assist the Trust’s Chief Compliance Officer in monitoring and testing the policies and procedures of the Trust in conjunction with requirements under Rule 38a-1 of the 1940 Act. NCS is entitled to receive compensation from the Administrator pursuant to the Administrator’s fee arrangements with each Fund.
Transfer Agent
Nottingham Shareholder Services, LLC (“Transfer Agent”) serves as transfer, dividend paying, and shareholder servicing agent for the Funds. For its services, the Transfer Agent is entitled to receive compensation from the Administrator pursuant to the Administrator’s fee arrangements with the Funds.
Distributor
Capital Investment Group, Inc. (the “Distributor”) serves as the Funds’ principal underwriter and distributor. For its services, the Distributor is entitled to receive compensation from the Administrator pursuant to the Administrator’s fee arrangements with the Funds.
Certain Trustees and officers of the Trust are also officers of the Advisor or the Administrator.
Because the underlying funds have varied expense and fee levels and the Funds may own different proportions of underlying funds at different times, the amount of fees and expense incurred indirectly by the Funds will vary.
(Continued)
RiskX Funds
Notes to Financial Statements
| 3. | Distribution and Service Fees |
The Board of Trustees, including a majority of the Trustees who are not “interested persons” as defined in the 1940 Act, adopted a distribution and service plan pursuant to Rule 12b-1 of the 1940 Act (the “Plan”) for the Advisor Class Shares. The 1940 Act regulates the manner in which a registered investment company may assume costs of distributing and promoting the sales of its shares and servicing of its shareholder accounts. The Plan provides that each Fund may incur certain costs, which may not exceed 1.00% per annum of the average daily net assets of the Advisor Class Shares for each year elapsed subsequent to adoption of the Plan, for payment to the Distributor and others for items such as advertising expenses, selling expenses, commissions, travel, or other expenses reasonably intended to result in sales of Advisor Class Shares or servicing of Advisor Class shareholder accounts. See the table below for the amounts incurred by each Fund:
| Fund | Amount Incurred |
| Dynamic Growth Fund | $ 8,263 |
| Dynamic Total Return Fund | 7,795 |
| Dividend Income Fund | 7 |
| Tactical Rotation Fund | 128 |
| High Income Fund | 43 |
| Non Traditional Fund | 41 |
| Premier Managers Fund | 70 |
| Traditional Equity Fund | 67 |
| Traditional Fixed Income Fund | 227 |
| Tax Advantaged Fund | 262 |
| 4. | Purchases and Sales of Investment Securities |
For the fiscal year or initial period ended May 31, 2013, the aggregate cost of purchases and proceeds from sales of investment securities (excluding short-term securities) were as follows:
| | Fiscal year or Initial Period | Purchases of Securities | Proceeds from Sales of Securities |
| Dynamic Growth Fund | June 1, 2012 – May 31, 2013 | $ 69,708,767 | $ 74,674,211 |
| Dynamic Total Return Fund | June 1, 2012 – May 31, 2013 | 6,309,710 | 6,658,041 |
| Dividend Income Fund | September 20, 2012 – May 31, 2013 | 1,472,070 | 456,861 |
| Tactical Rotation Fund | September 20, 2012 – May 31, 2013 | 16,791,221 | 4,934,272 |
| High Income Fund | September 20, 2012 – May 31, 2013 | 12,872,493 | 3,915,442 |
| Non Traditional Fund | September 20, 2012 – May 31, 2013 | 10,083,819 | 3,277,695 |
| Premier Managers Fund | September 20, 2012 – May 31, 2013 | 1,794,878 | 84,298 |
| Traditional Equity Fund | September 20, 2012 – May 31, 2013 | 3,732,663 | - |
| Traditional Fixed Income Fund | September 20, 2012 – May 31, 2013 | 17,566,735 | - |
| Tax Advantaged Fund | September 20, 2012 – May 31, 2013 | 4,348,885 | 570,425 |
There were no long-term purchases or sales of U.S. Government Obligations during the fiscal year or initial period ended May 31, 2013.
(Continued)
RiskX Funds
Notes to Financial Statements
Distributions are determined in accordance with Federal income tax regulations, which differ from generally accepted accounting principles, and, therefore, may differ significantly in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character but are not adjusted for temporary differences.
The Funds have reviewed all taxable years / periods that are open for examination (i.e., not barred by the applicable statute of limitations) by taxing authorities of all major jurisdictions, including the Internal Revenue Service. As of May 31, 2013, open taxable years consisted of the taxable year / period ended May 31, 2010, May 31, 2011, May 31, 2012 and May 31, 2013. No examination of tax returns is currently in progress for any of the Funds.
Reclassifications relate primarily to differing book/tax treatment of ordinary net investment losses. For the year ended May 31, 2013, the following reclassifications were necessary:
| | Paid-in Capital | Accumulated Net Investment Income (Loss) | Accumulated Net Realized Gain (Loss) on Investments |
| Dynamic Growth Fund | - | - | - |
| Dynamic Total Return Fund | - | 8,183 | (8,183) |
| Dividend Income Fund | - | - | - |
| Tactical Rotation Fund | - | - | - |
| High Income Fund | - | - | - |
| Non Traditional Fund | - | - | - |
| Premier Managers Fund | - | - | - |
| Traditional Equity Fund | - | - | - |
| Traditional Fixed Income Fund | (143) | 143 | - |
| Tax Advantaged Fund | - | - | - |
Distributions during the fiscal year or period ended were characterized for tax purposes as follows:
| | | Distributions from |
| Fund | Fiscal period ended | Ordinary Income | Long-Term Capital Gains | Return of Capital |
| Dynamic Growth Fund | 05/31/2013 | $ - | $ - | $ - |
| | 05/31/2012 | - | 2,330,033 | 407,415 |
| Dynamic Total Return Fund | 05/31/2013 | 319,176 | - | 14,318 |
| | 05/31/2012 | 123,507 | - | - |
| Dividend Income Fund | 05/31/2013 | 17,709 | - | - |
| Tactical Rotation Fund | 05/31/2013 | 85 | - | - |
| High Income Fund | 05/31/2013 | 197,556 | - | - |
| Non Traditional Fund | 05/31/2013 | 7,863 | - | - |
| Premier Managers Fund | 05/31/2013 | 9,938 | - | - |
| Traditional Equity Fund | 05/31/2013 | 9,270 | - | - |
| Traditional Fixed Income Fund | 05/31/2013 | 68,171 | - | - |
| Tax Advantaged Fund | 05/31/2013 | 33,113 | - | - |
(Continued)
RiskX Funds
Notes to Financial Statements
At May 31, 2013, the tax-basis cost of investments and components of distributable earnings were as follows:
| | Dynamic Growth Fund | Dynamic Total Return Fund | Dividend Income Fund | Tactical Rotation Fund | High Income Fund |
Cost of Investments | $14,400,314 | $8,552,054 | $1,064,476 | $12,611,175 | $9,235,048 |
| | | | | | |
| Unrealized Appreciation | 834,759 | 103,189 | 35,096 | 429,428 | 109,241 |
| Unrealized Depreciation | (39,641) | (67,145) | (1,992) | (112,685) | (24,408) |
| Net Unrealized Appreciation | | | | | |
| (Depreciation) | 795,118 | 36,044 | 33,104 | 316,743 | 84,833 |
| | | | | | |
| Accumulated Net Investment Income (Loss) | 1,145,055 | - | 23,731 | 3,086 | 75,755 |
| Undistributed Long-Term Gains | 43,905 | - | - | - | 2,614 |
| Accumulated Capital Losses | - | (77,902) | - | - | - |
| Other Book/Tax Differences | - | - | - | (10,987) | - |
| | | | | | |
| Distributable Earnings | $1,984,078 | $(41,858) | $56,835 | $308,842 | $163,202 |
| | Non Traditional Fund | Premier Managers Fund | Traditional Equity Fund | Traditional Fixed Income Fund | Tax Advantaged Fund |
Cost of Investments | $7,112,833 | $1,752,474 | $4,302,522 | $18,683,868 | $3,780,520 |
| | | | | | |
| Unrealized Appreciation | 41,491 | 103,387 | 382,884 | 1,684 | 269 |
| Unrealized Depreciation | (50,233) | - | (6,602) | (460,295) | (39,050) |
| Net Unrealized Appreciation | | | | | |
| (Depreciation) | (8,742) | 103,387 | 376,282 | (458,611) | (38,781) |
| | | | | | |
| Undistributed Ordinary Income | 31,163 | - | 274 | - | 6,290 |
| Undistributed Long-Term Gains | 11,280 | 3,654 | - | - | - |
| | | | | | |
| Distributable Earnings | $33,701 | $107,041 | $376,556 | $(458,611) | $(32,491) |
The difference between book-basis and tax-basis net unrealized appreciation (depreciation) is attributable to the deferral of losses from wash sales. Accumulated capital losses noted above represent net capital loss carryovers as of May 31, 2013 that are available to offset future realized capital gains, if any, and thereby reduce future taxable gain distributions. The capital loss carryforward for the Dynamic Total Return Fund is $77,902, which is short term in nature and has no expiration date. Consequently, realized losses reflected in the accompanying financial statements include net capital losses realized between November 1 and the Funds’ fiscal year-end that have not been recognized for tax purposes (Post-October loss deferrals).
| 6. | Commitments and Contingencies |
Under the Trust’s organizational documents, its officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the Funds. In addition, in the normal course of business, the Trust entered into contracts with its service providers, on behalf of the Funds, and others that provide for general indemnifications. The Funds’ maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Funds. The Funds expect the risk of loss to be remote.
(Continued)
RiskX Funds
Notes to Financial Statements
| 7. | New Accounting Pronouncements |
In December 2011, FASB issued ASU No. 2011-11 related to disclosures about offsetting assets and liabilities. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance requires retrospective application for all comparative periods presented.
In January 2013, the FASB issued ASU No. 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU No. 2013-01 clarifies that ordinary trade receivables and payables are not included in the scope of ASU No. 2011-11. ASU No. 2011-11 applies only to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and lending that are offset in accordance with specific criteria contained in the FASB Accounting Standards codification.
Management is currently evaluating the impact ASU No. 2011-11 and ASU No. 2013-01 will have on the Funds’ financial statements and disclosures.
8. Change in Independent Registered Public Accounting Firm
On July 19, 2012, BBD, LLP was selected as the Trust’s independent registered public accounting firm for the 2013 fiscal year. The selection of BBD, LLP was recommended by the Trust’s Audit Committee, comprised of all non-interested Trustees, and was approved by the Board of Trustees. The report of the predecessor independent registered public accounting firm, on the financial statements of the Funds for each of the years or periods in the period from October 2, 2009 through May 31, 2012, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principle. In addition, there were no disagreements between the Trust and the predecessor auditor on accounting principles, financial statement disclosures or audit scope, which, if not resolved to the satisfaction of the predecessor auditor would have caused them to make reference to the disagreement in their report on the financial statements for such period.
9. Subsequent Events
A Special Meeting of Shareholders was held on January 28, 2013. The purpose of the meeting was to vote on (i) proposed amendments to the Dividend Income Fund’s Investment Advisory Agreement that raise the Dividend Income Fund’s management fee from 0.45% to 0.90% of average daily net assets and (ii) a proposed Investment Sub-Advisory Agreement for the Fund between FolioMetrix, LLC and Forward Management, LLC. Both proposals were approved by shareholders. The management fee changed on July 17, 2013, and Forward Management assumed the role of Sub-Advisor to the Dividend Income Fund on July 17, 2013.
The Funds have evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date of issuance of these financial statements. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments in addition to the disclosure above.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Starboard Investment Trust and
Shareholders of Rx Dynamic Growth Fund, Rx Dynamic Total Return Fund,
Rx Dividend Income Fund, Rx Tactical Rotation Fund, Rx High Income Fund,
Rx Non Traditional Fund, Rx Premier Managers Fund, Rx Traditional Equity Fund, Rx Traditional Fixed Income Fund and Rx Tax Advantaged Fund
We have audited the accompanying statements of assets and liabilities of Rx Dynamic Growth Fund (formerly known as ISM Dynamic Growth Fund and FMX Growth Allocation Fund), Rx Dynamic Total Return Fund (formerly known as ISM Dynamic Total Return Fund and FMX Total Return Fund), Rx Dividend Income Fund (formerly known as ISM Dividend Income Fund), Rx Tactical Rotation Fund (formerly known as ISM Global Alpha Tactical Fund), Rx High Income Fund (formerly known as ISM High Income Fund), Rx Non Traditional Fund (formerly known as ISM Non Traditional Fund), Rx Premier Managers Fund (formerly known as ISM Premier Asset Management Fund), Rx Traditional Equity Fund (formerly known as ISM Strategic Equity Fund), Rx Traditional Fixed Income Fund (formerly known as ISM Strategic Fixed Income Fund), and Rx Tax Advantaged Fund (formerly known as ISM Tax Free Fund), (the "Funds"), each a series of shares of beneficial interest of the Starboard Investment Trust, including the schedules of investments, as of May 31, 2013, and the related statements of operations and changes in net assets and financial highlights for each of the respective year or periods then ended. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The statements of changes in net assets for the year ended May 31, 2012 and the financial highlights for each of the years or periods presented in the period October 2, 2009 to May 31, 2012 for Rx Dynamic Growth Fund and Rx Dynamic Total Return Fund have been audited by other auditors, whose report dated July 26, 2012, expressed an unqualified opinion on such financial statements and financial highlights.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2013 by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Rx Dynamic Growth Fund, Rx Dynamic Total Return Fund, Rx Dividend Income Fund, Rx Tactical Rotation Fund, Rx High Income Fund, Rx Non Traditional Fund, Rx Premier Managers Fund, Rx Traditional Equity Fund, Rx Traditional Fixed Income Fund, and Rx Tax Advantaged Fund as of May 31, 2013, and the results of their operations, the changes in their net assets and their financial highlights for the year or periods then ended, in conformity with accounting principles generally accepted in the United States of America.
BBD, LLP
Philadelphia, Pennsylvania
July 30, 2013
| 1. | Proxy Voting Policies and Voting Record |
A copy of the Trust’s Proxy Voting and Disclosure Policy and the Advisor’s Disclosure Policy are included as Appendix B to the Fund’s Statement of Additional Information and are available, without charge, upon request, by calling 800-773-3863, and on the website of the Security and Exchange Commission (“SEC”) at sec.gov. Information regarding how each Fund voted proxies relating to portfolio securities during the most recent period ended June 30, is available (1) without charge, upon request, by calling the Fund at the number above and (2) on the SEC’s website at sec.gov.
| 2. | Quarterly Portfolio Holdings |
Each Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Each Fund’s Form N-Q is available on the SEC’s website at sec.gov. You may review and make copies at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 202-942-8090. You may also obtain copies without charge, upon request, by calling the Fund at 800-773-3863.
We are required to advise you within 60 days of each Fund’s fiscal year-end regarding the federal tax status of certain distributions received by shareholders during each fiscal year. The following information is provided for the Funds’ fiscal year ended May 31, 2013.
During the fiscal year, no long-term capital gain distributions were paid from the Funds.
Dividend and distributions received by retirement plans such as IRAs, Keogh-type plans, and 403(b) plans need not be reported as taxable income. However, many retirement plans may need this information for their annual information meeting.
4. Schedule of Shareholder Expenses
As a shareholder of the Funds, you incur two types of costs: (1) transaction costs, which may include sales charges (loads) on purchase payments and (2) ongoing costs, including investment advisory fees; distribution (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period as indicated below.
Actual Expenses – The first line of the table below provides information about the actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
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Hypothetical Example for Comparison Purposes – The last line of the table below provides information about hypothetical account values and hypothetical expenses based on the Funds’ actual expense ratio and an assumed annual rate of return of 5% before expenses, which is not the Funds’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and other funds by comparing this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
| Dynamic Growth Fund | Beginning Account Value 12/1/12 | Ending Account Value 5/31/13 | Expenses Paid During Period* | Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $1,117.00 | $3.69 | 0.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,021.44 | $3.53 | 0.70% |
| Advisor Class Shares | | | | |
| Actual | $1,000.00 | $1,110.30 | $8.94 | 1.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,016.46 | $8.54 | 1.70% |
| Dynamic Total Return Fund | Beginning Account Value 12/1/12 | Ending Account Value 5/31/13 | Expenses Paid During Period* | Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $1,014.40 | $3.51 | 0.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,021.44 | $3.53 | 0.70% |
| Advisor Class Shares | | | | |
| Actual | $1,000.00 | $1,009.20 | $8.51 | 1.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,016.45 | $8.55 | 1.70% |
| Dividend Income Fund | Beginning Account Value 12/1/12 | Ending Account Value 5/31/13 | Expenses Paid During Period* | Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $1,127.60 | $3.70 | 0.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,021.44 | $3.51 | 0.70% |
| Advisor Class Shares | | | | |
| Actual | $1,000.00 | $1,116.70 | $9.16 | 1.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,016.28 | $8.12 | 1.70% |
| Tactical Rotation Fund | Beginning Account Value 12/1/12 | Ending Account Value 5/31/13 | Expenses Paid During Period* | Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $1,087.60 | $6.25 | 1.20% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,018.95 | $6.04 | 1.20% |
| Advisor Class Shares | | | | |
| Actual | $1,000.00 | $1,067.20 | $11.35 | 2.20% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,013.96 | $11.06 | 2.20% |
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| High Income Fund | Beginning Account Value 12/1/12 | Ending Account Value 5/31/13 | Expenses Paid During Period* | Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $1,060.10 | $3.60 | 0.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,021.44 | $3.53 | 0.70% |
| Advisor Class Shares | | | | |
| Actual | $1,000.00 | $1,042.60 | $8.80 | 1.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,016.31 | $8.69 | 1.70% |
| Non Traditional Fund | Beginning Account Value 12/1/12 | Ending Account Value 5/31/13 | Expenses Paid During Period* | Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $1,010.30 | $3.51 | 0.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,021.44 | $3.53 | 0.70% |
| Advisor Class Shares | | | | |
| Actual | $1,000.00 | $ 994.00 | $8.55 | 1.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,016.35 | $8.65 | 1.70% |
| Premier Managers Fund | Beginning Account Value 12/1/12 | Ending Account Value 5/31/13 | Expenses Paid During Period* | Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $1,115.60 | $3.68 | 0.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,021.46 | $3.51 | 0.70% |
| Advisor Class Shares | | | | |
| Actual | $1,000.00 | $1,113.70 | $8.96 | 1.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,016.45 | $8.55 | 1.70% |
| Traditional Equity Fund | Beginning Account Value 12/1/12 | Ending Account Value 5/31/13 | Expenses Paid During Period* | Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $1,137.70 | $3.73 | 0.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,021.44 | $3.53 | 0.70% |
| Advisor Class Shares | | | | |
| Actual | $1,000.00 | $1,118.20 | $9.01 | 1.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,016.43 | $8.57 | 1.70% |
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| Traditional Fixed Income Fund | Beginning Account Value 12/1/12 | Ending Account Value 5/31/13 | Expenses Paid During Period* | Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $ 973.50 | $3.43 | 0.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,021.44 | $3.52 | 0.70% |
| Advisor Class Shares | | | | |
| Actual | $1,000.00 | $ 965.10 | $8.34 | 1.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,016.45 | $8.55 | 1.70% |
| Tax Advantaged Fund | Beginning Account Value 12/1/12 | Ending Account Value 5/31/13 | Expenses Paid During Period* | Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $ 989.00 | $3.46 | 0.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,021.44 | $3.52 | 0.70% |
| Advisor Class Shares | | | | |
| Actual | $1,000.00 | $ 984.00 | $8.41 | 1.70% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,016.45 | $8.55 | 1.70% |
*Expenses are equal to the average account value over the period multiplied by the Fund’s annualized expense ratio, multiplied by the number of days in the most recent period divided by the number of days in the fiscal year (to reflect the six month period).
5. Information about Trustees and Officers
The business and affairs of the Funds and the Trust are managed under the direction of the Board of Trustees of the Trust. Information concerning the Trustees and officers of the Trust and Funds is set forth below. Generally, each Trustee and officer serves an indefinite term or until certain circumstances such as their resignation, death, or otherwise as specified in the Trust’s organizational documents. Any Trustee may be removed at a meeting of shareholders by a vote meeting the requirements of the Trust’s organizational documents. The Statement of Additional Information of the Funds includes additional information about the Trustees and officers and is available, without charge, upon request by calling the Fund’s toll-free at 1-800-773-3863. The address of each Trustee and officer, unless otherwise indicated below, is 116 South Franklin Street, Rocky Mount, North Carolina 27804. The Independent Trustees each received aggregate compensation of $12,489 ($2,000 for Dynamic Growth and Dynamic Total Return and $1,061 for each of the other Funds) during the fiscal year ended May 31, 2013 for their services to the Funds and Trust.
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Name, Age and Address | Position held with Fund or Trust | Length of Time Served | Principal Occupation During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee During Past 5 Years |
| Independent Trustees |
Jack E. Brinson Age: 81 | Independent Trustee | Since 7/09 | Retired; previously, President of Brinson Investment Co. (personal investments) and President of Brinson Chevrolet, Inc. (auto dealership). | 23 | Independent Trustee of Brown Capital Management Funds for its three series, DGHM Investment Trust for its two series, Gardner Lewis Investment Trust for its two series, Hillman Capital Management Investment Trust for its one series, and Tilson Investment Trust for its two series (all registered investment companies); previously, Independent Trustee of de Leon Funds Trust for its one series from 2000 to 2005, Giordano Investment Trust for its one series during 2011, and New Providence Investment Trust for its one series from inception until 2011 (all registered investment companies). |
Michael G. Mosley Age: 60 | Independent Trustee | Since 7/10 | Owner of Commercial Realty Services (real estate) since 2004. | 23 | None. |
Theo H. Pitt, Jr. Age: 77 | Independent Trustee | Since 9/10 | Senior Partner, Community Financial Institutions Consulting (financial consulting) since 1999; Partner, Pikar Properties (real estate) since 2001; Account Administrator, Holden Wealth Management Group of Wachovia Securities (money management firm) from 2003-2008. | 23 | Independent Trustee of DGHM Investment Trust for its two series, Gardner Lewis Investment Trust for its two series, Hanna Investment Trust for its one series, and Hillman Capital Management Investment Trust for its one series (all registered investment companies); previously, Independent Trustee of NCM Capital Investment Trust for its one series from 2007 to 2009, New Providence Investment Trust from 2008 to 2009, and Tilson Investment Trust for its two series from 2004 to 2009 (all registered investment companies). |
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Name, Age and Address | Position held with Fund or Trust | Length of Time Served | Principal Occupation During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships Held by Trustee During Past 5 Years |
| Independent Trustees |
James H. Speed, Jr. Age: 60 | Independent Trustee, Chairman | Trustee since 7/09, Chair since 5/12 | President and CEO of NC Mutual Insurance Company (insurance company) since 2003; President of Speed Financial Group, Inc. (consulting and private investments) from 2000 to 2003. | 23 | Independent Trustee of Brown Capital Management Funds for its three series, Hillman Capital Management Investment Trust for its one series, and Tilson Investment Trust for itsone series (all registered investment companies). Member of Board of Directors of NC Mutual Life Insurance Company. Member of Board of Directors of M&F Bancorp. Previously, Independent Trustee of New Providence Investment Trust for its one series from 2009 until 2011 (registered investment company). |
J. Buckley Strandberg Age: 53 | Independent Trustee | Since 7/09 | President of Standard Insurance and Realty (insurance and property management) since 1982. | 23 | None. |
| Other Officers |
D. Jerry Murphey Age: 55 821 Pacific Street Omaha, Nebraska 68108 | President (RiskX Funds) | Since 7/09 | Manager, President, and CEO of FolioMetrix, LLC (advisor to the RiskX Funds) since 2009; principal of Uptrade Research Associates, LLC (investment research) since 2009; previously, Investment Management Consultant for Prudential Investments, Wealth Management Solutions (investment management). | n/a | n/a |
Julie M. Koethe Age: 32 821 Pacific Street Omaha, Nebraska 68108 | Treasurer (RiskX Funds) | Since 4/10 | Chief Operating Officer of FolioMetrix, LLC (advisor to the RiskX Funds) since 2010; Insurance Accounting Supervisor for Applied Underwriters (workers compensation and payroll service provider) from 2003-2010. | n/a | n/a |
T. Lee Hale, Jr. Age: 35 | Chief Compliance Officer; Assistant Treasurer; Treasurer (Matisse Discounted Closed-End Fund Strategy | Since 7/09, 4/10, and 5/12 | Financial Reporting Manager for The Nottingham Company (fund administrator) since 2009; previously, principal of Lee Hale Contracting (marine industry consulting). | n/a | n/a |
A. Vason Hamrick Age: 36 | Secretary | Since 7/09 | Corporate Counsel for The Nottingham Company since 2004. | n/a | n/a |
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6. Approval of Investment Sub-Advisory Agreement – Rx Dividend Income Fund
At a meeting of the Board of Trustees on October 25, 2012, the Board of Trustees, including the Independent Trustees (those who are not an “interested person,” as defined under the Investment Company Act of 1940), considered whether to approve the Investment Sub-Advisory Agreement for the ISM Dividend Income Fund. In considering whether to approve the agreement, the Trustees reviewed and considered the information they deemed reasonably necessary, including the following material factors: (1) the nature, extent, and quality of the services provided by Forward Management; (2) the investment performance of the Fund and Forward Management; (3) the costs of the services to be provided and profits to be realized by Forward Management and its affiliates from the relationship with the Fund; (4) the extent to which economies of scale would be realized as the Fund grows and whether advisory fee levels reflect those economies of scale for the benefit of the Fund’s investors; (5) Forward Management’s practices regarding brokerage and portfolio transactions; and (6) Forward Management’s practices regarding possible conflicts of interest.
At the meeting, the Trustees reviewed various informational materials consisting of the proposed Investment Sub-Advisory Agreement for the Fund; a memorandum from Forward Management to the Trustees; and a memorandum from the Fund’s legal counsel. The memorandum from Forward Management to the Trustees contained information about the advisory firm and its business, finances, personnel, services to the Fund, investment advice, fees, and compliance program. The memorandum also contained information on Fund expenses, including comparative expense ratio information for other mutual funds with strategies similar to the Fund. The Trustees also reviewed a memorandum from the Fund’s legal counsel that summarized the fiduciary duties and responsibilities of the Board of Trustees in reviewing and approving the Investment Sub-Advisory Agreement, including the types of information and factors that should be considered in order to make an informed decision. In addition, the Trustees consulted with separate independent legal counsel retained by them regarding their consideration of the proposed amendments to the Investment Sub-Advisory Agreement.
| 1. | The nature, extent, and quality of the services provided by Forward Management. In considering the nature, extent, and quality of the services provided by Forward Management, the Trustees considered the responsibilities of Forward Management under the Investment Sub-Advisory Agreement. The Trustees reviewed the services to be provided by Forward Management to the Fund, including, without limitation, the anticipated quality of its investment advisory services (including research and recommendations with respect to portfolio securities); its procedures for formulating investment recommendations and assuring compliance with the Fund’s investment objectives and limitations; its coordination of services for the Fund among its service providers; and its efforts to promote the Fund, grow the Fund’s assets, and assist in the distribution of Fund shares. |
The Trustees noted that Forward Management would seek to achieve the Fund’s investment objective though direct investments in stocks, rather than the no-load, institutional, and exchange-traded funds currently utilized by the Fund. The Trustees considered that Forward Management currently provides portfolio management services to mutual funds, private funds, institutional investors, and separately managed accounts. The Trustees also discussed the respective services that would be provided by FolioMetrix, the Fund’s investment advisor, and Forward Management. It was noted that FolioMetrix would be responsible for monitoring and overseeing Forward Management, rather than the day-to-day investment management of the Fund’s portfolio
After reviewing the foregoing information and further information in the memorandum from Forward Management (e.g., descriptions of Forward Management’s business, their compliance programs, and their registration documents on file with the Securities and Exchange Commission), the Board of Trustees concluded that the nature, extent, and quality of the services provided by Forward Management were satisfactory and adequate for the Fund.
| 2. | Investment performance of the Fund and Forward Management. In considering the investment performance of the Fund and Forward Management, the Trustees noted that the Fund had only recently commenced operations and Forward Management had not yet provided sub-advisory services to the Fund. The Trustees briefly reviewed the performance of the Fund against its benchmarks for the most recent one-month period and the period since inception. The Trustees found this information to be of limited value. The Trustees also briefly reviewed the performance of comparable funds with similar objectives managed by other investment advisors in order to determine the type of returns that might be expected for the Fund. Again, this information was found to be of limited value. |
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The Trustees then reviewed the composite performance of accounts managed by Forward Management with an investment strategy similar to the Fund and compared the performance of the composite with benchmark indexes and applicable peer group data. After reviewing Forward Management’s short and long-term investment performance, their experience managing other mutual funds, their historical investment performance, and other factors, the Board of Trustees concluded that the investment performance of the Fund and Forward Management was satisfactory.
| 3. | Costs of the services to be provided and profits to be realized by Forward Management. In considering the costs of the services to be provided and profits to be realized by Forward Management and its affiliates from the relationship with the Fund, including any indirect benefits derived by Forward Management from the relationship with the Fund, the Trustees first noted that Forward Management’s sub-advisory fee would be equal to 0.45% of the Fund’s average daily new assets. The Trustees considered Forward Management’s staffing, personnel, and methods of operating; the education and experience of its personnel; their compliance policies and procedures; the financial condition of the firm; and the level of commitment to the Fund by the firm and its principals; and the asset level of the Fund. The Trustees reviewed the fees that would be paid by FolioMetrix to Forward Management under the Investment Sub-Advisory Agreement and considered whether the sub-advisory fee was sufficient to properly incentivize Forward Management. |
The Trustees reviewed the financial statements for Forward Management and discussed the financial stability and profitability of the firm. The Trustees agreed that excess profitability was not a concern at this time. The Trustees also considered potential benefits for Forward Management in managing the Fund, including promotion of their name, the ability for Forward Management to place small accounts into the Fund, and the potential for Forward Management to generate soft dollars from certain of the Fund’s trades that may benefit their other clients as well.
The Trustees noted that FolioMetrix believes that the appointment of Forward Management as an investment sub-advisor and modification of the Fund’s investment strategy will lead to savings for the Fund. If a sub-advisor is appointed, the Fund’s investment strategy would be modified so that the sub-advisor can seek to achieve the investment objective though direct investments in stocks rather than investments in no-load, institutional, and exchange-traded funds. FolioMetrix represented to the Trustees that direct investments in stocks would reduce the acquired fund fees and expenses incurred by the Fund. The Trustees discussed the prospects of such savings being achieved by the proposed changes.
The Trustees then compared the fees and expenses of the Fund (including the management fee) to other funds comparable in terms of the type of fund, the nature of its investment strategy, and its style of investment management, among other factors. It was noted that the proposed management fee under the Investment Sub-Advisory Agreement, from which the sub-advisory fee would be paid, was higher than those of the comparable funds and the peer group average. It was also noted that the Fund’s expense ratio would also be higher than those of the comparable funds and the peer group average. The Trustees also pointed out that the Fund was much smaller than the industry average and the comparable funds that had been identified.
Following this comparison and upon further consideration and discussion of the foregoing, the Board of Trustees concluded that the fees to be paid by FolioMetrix to Forward Management were fair and reasonable in relation to the nature and quality of the services to be provided by Forward Management.
| 4. | Extent to which economies of scale would be realized as the Fund grows. The Trustees reviewed the fee arrangements between FolioMetrix and Forward Management in order to evaluate the extent to which economies of scale would be realized as the Fund grows and whether the sub-advisory fee levels reflect these economies of scale for the benefit of the Fund’s investors. The Trustees noted that the Fund had only recently commenced operations and, consequently, there was no operational history with which to evaluate the realization of economies of scale. The Trustees reviewed the fee arrangements for breakpoints or other provisions that would allow the Funds’ shareholders to benefit from economies of scale as the Funds grow. The Trustees determined that the maximum advisory fee and sub-advisory fee would stay the same when the Fund reaches higher asset levels and, therefore, did not reflect economies of scale. The Trustees noted that the Fund was in a start-up phase and economies of scale were unlikely to be achievable in the near future. It was pointed out that breakpoints in the fee arrangements could be reconsidered in the future. |
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The Trustees noted that the Fund will benefit from economies of scale under the agreement with the Fund’s administrator since it utilized breakpoints. The Trustees also noted that FolioMetrix was contractually bound to make payments to the Fund’s administrator at lower asset levels in order to help limit the Fund’s expenses. The Trustees determined that these arrangements provided potential savings for the benefit of the Funds’ investors.
Following further discussion of the Fund’s asset levels, expectations for growth, and fee levels, the Board of Trustees determined that the Fund’s fee arrangements were fair and reasonable in relation to the nature and quality of the services provided by Forward Management.
| 5. | Practices regarding brokerage and portfolio transactions. In considering Forward Management’s practices regarding brokerage and portfolio transactions, the Trustees considered FolioMetrix’s standards, and performance in utilizing those standards, for seeking best execution for Fund portfolio transactions. The Trustees also considered the projected portfolio turnover rate for the Fund; the method and basis for selecting and evaluating the broker-dealers used; the process by which evaluations are made of the overall reasonableness of commissions paid; and the allocation of portfolio business to broker-dealers affiliated with Forward Management or to broker-dealers that provide research, statistical, or other services (soft dollars). The Trustees considered whether such services and soft dollars provide lawful and appropriate assistance to Forward Management in the performance of its investment decision-making responsibilities. After further review and discussion, the Board of Trustees determined that FolioMetrix’s practices regarding brokerage and portfolio transactions were satisfactory. |
| 6. | Practices regarding conflicts of interest. In considering Forward Management’s practices regarding conflicts of interest, the Trustees evaluated the potential for conflicts of interest and considered such matters as the experience and ability of the advisory personnel assigned to the Fund; the basis of decisions to buy or sell securities for the Fund; the basis for soft dollar payments with broker-dealers, including any broker-dealers affiliated with Forward Management; and the substance and administration of Forward Management’s code of ethics. Following further consideration and discussion, the Board of Trustees indicated that Forward Management’s standards and practices relating to the identification and mitigation of possible conflicts of interests were satisfactory. |
Having requested and received such information from Forward Management as the Trustees believed to be reasonably necessary to evaluate the terms of the Investment Sub-Advisory Agreement, and as assisted by the advice of independent counsel, the Board of Trustees, including the Independent Trustees, approved the Investment Sub-Advisory Agreement and voted to recommend it to the shareholders of the ISM Dividend Income Fund for approval.
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