*The Fund's inception date is January 4, 2010.
**The Advisor has entered into an Operating Plan with the Administrator, through October 1, 2016, 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 1.70% of the average daily net assets, exclusive of taxes, interest, 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 at the conclusion of the then‐current term by notice of non‐renewal to a party or mutual agreement of the parties. The Advisor cannot recoup from the Fund any amounts paid under the Operating Plan.
***Gross expense ratio is from the Fund's prospectus dated September 28, 2015.
****You cannot invest directly in this index. This index does not have an investment advisor and does not pay any commissions, expenses, or taxes. If this index did pay commissions, expenses, or taxes, its returns would be lower.
The funny thing about adversity is that it forces us all to deal with it, to figure it out, to persevere. Both in life and investing - it defines us. I am proud of our team at Goodwood. They all kept their heads down, remained focused and demonstrated courage under fire over the last twelve months, which was the most difficult period for investing that we have experienced since 2008.
We are a small firm with fewer resources compared to almost all of our peer group, yet we navigated the last several months reasonably well. We did so by reducing exposures late in 2015, hedging positions and systematic risk, focusing our research efforts intensely on the best risk/reward investments and putting capital to work opportunistically as equity prices became dislocated from reality in our view.
Credit and uncertainty is almost always the assassin of equity values. The 21-month rise in High Yield credit spreads from May 2014 to February 2016 was the longest period of tightening credit conditions since the previous record of November 1997 to December 2000. In fact, on February 11, 2016 (Chesapeake Energy bankruptcy rumors), High Yield spreads reached 887 basis points – a level that has only been surpassed on 5 other occasions: Post-Telecom Bust (2000), Post-Enron/9-11 Attacks (2001), Post-Worldcom/Global Crossing/Conseco (2002), Post-Lehman/Washington Mutual/GM/CIT/Chrysler, etc. (2008/2009), and Post-US Debt Downgrade/MF Global (2011). 1
Most of you likely have your own opinion on whether the US Dollar should be stronger or weaker versus other currencies. While we are certainly not currency experts, we are students of history and, prefer to analyze data rather than subscribe to conventional wisdom and simplistic explanations.
The only other times since the 1970's that the US Dollar has experienced a parabolic move higher were in the inflationary early 1980's (the opposite of the last several years) and the US economic expansion of the late 1990's (also the opposite of the last several years). We are hard-pressed to find any empirical data to explain the Dollar's rise other than divergent Central Bank policies. The changes at the margin typically determine changes in direction.
The bottom line in our view is that the conditions that led to the rise in the Dollar, the contraction in US and Emerging Market economies, much of the decline in ALL commodity prices, the rise in credit spreads, and what can only be described as total destruction of equity values in many US equity sectors – are now "known knowns."
It is no coincidence that the highs in the Dollar occurred at the same time as the highs in credit spreads, the lows in inflation expectations, the lows in commodity prices, the lows in emerging market assets – and the lows in our portfolio.3
"As we see it, there are a handful of potential outcomes going forward.
As it turned out, observations 2 and 4 have certainly begun to unfold. Points 1 and 6 appear to be off the table. Point 3 - we would argue that the US entered a mild recession beginning in the summer of 2015 and began to recover in Q1 2016. Point 5 - therefore may be underway as a result of the early stages of a reversal in the conditions that led to global growth contracting in the first place.
Throughout early 2016, every one of these factors changed for the better. Are we out of the woods? Not entirely. But as James Montier5 describes – we see a "slightly lighter shade of dark."
To be honest, we detest writing about macro factors as much as we dislike analyzing them. We would much rather be writing about our core, long term investment themes and individual companies. That being said, all the points discussed above have also created very attractive valuations for many individual companies we follow.
We are often asked to describe our investment style. That is not a one sentence answer, nor should it be. We will always have core long term positions where we have a strong fundamental conviction, but will not let those positions become significantly outsized and expose the portfolio to permanent loss situations. We will actively hedge our core positions with put options when near term event risks become elevated. Likewise, we will actively increase exposures opportunistically.
Outside of our core holdings, we are generally attracted to stocks that are out of favor for various reasons or are misunderstood. We thrive in situations where we can gain an informational edge (research), price level (value), timing advantage (early), or use size to our advantage (agility). Those instances rarely exist all at the same time, but they certainly are more prevalent in 2016 in our view.
At times, our portfolio may hold more "growth" or "value" stocks. That will rarely be by design, and more often by happenstance and opportunity. Frankly, we do not monitor such labels as a condition for an investment consideration – they are often incorrect anyway.
As we conclude an encouraging first several months of 2016, we think we are in the early stages of a multi-year recovery in asset values of many of our portfolio companies. In contrast to many concentrated managers, we decided to become less concentrated than we have been historically. The reason is simply that the opportunity set has expanded and we can take less position risk and still maintain comparable (potentially greater) upside capture. Where we have increased company specific upside conviction, we can express that via call options and also risk less capital. Where we have increased company specific downside risk, we can reduce via put options.
And finally, where we find compelling opportunities, we now have the ability to take short positions in individual stocks – something we have done our entire careers, but only recently within the mutual fund.
Thank you for your continued investment consideration. Please call or email us at any time to discuss the Goodwood SMID Cap Discovery Fund and our investment approach.
Ryan D. Thibodeaux
Joshua L. Pesses
The views in the foregoing discussion were those of the Fund's investment advisor as of the date set forth above and may not reflect its views on the date this Annual Report is first published or anytime thereafter. These views are intended to assist shareholders in understanding their investment in the Fund and do not constitute investment advice.
Goodwood SMID Cap Discovery Fund
Notes to Financial Statements
May 31, 2016
1. Organization and Significant Accounting Policies
The Goodwood SMID Cap Discovery Fund ("Fund") is a 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. The Fund is a separate diversified series of the Trust.
The Fund commenced operations on January 4, 2010. The investment objective of the Fund is to seek capital appreciation. In order to achieve its investment objective, Goodwood Advisors, LLC ("Advisor") will seek to invest primarily in a portfolio of common stocks of companies that the Advisor believes have above-average future growth potential relative to their peers, using risk adjusted metrics as a comparative baseline.
The Fund currently has an unlimited number of authorized shares, which are divided into two classes – Advisor Class Shares and Institutional Class Shares. Each class of shares has equal rights as to assets of the Fund, and the classes are identical except that the Advisor Class Shares are subject to distribution and service fees which are further discussed in Note 3. 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. The Date of Initial Public Investment for the Advisor Class Shares was January 4, 2010. The Date of Initial Public Investment for the Institutional Class Shares was July 16, 2014.
The following is a summary of significant accounting policies consistently followed by the Fund. The policies are in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The Fund follows the specialized accounting and reporting requirements under GAAP that are applicable to investment companies.
Investment Valuation
The 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 sales 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. Price information on listed securities is taken from the composite exchange listing for securities traded on multiple exchanges. 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 the Fund's net asset value calculation) or which cannot be accurately valued using the 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 the Fund's normal pricing procedures. Instruments with maturities of 60 days or less are valued at amortized cost, which approximates market value.
Option Valuation
Options are valued at the mean of the last quoted bid and ask prices as of 4:00 p.m. Eastern Time (the "Valuation Time"). Options will be valued on the basis of prices provided by pricing services when such prices are reasonably believed to reflect the market value of such options and may include the use of composite or National Best Bid/Offer (NBBO) pricing information provided by the pricing services. If there is an ask price but no bid price at the Valuation Time, the option shall be priced at the mean of zero and the ask price at the Valuation Time. An option should be valued using fair value pricing when (i) a reliable last quoted ask price at the Valuation Time is not readily available or (ii) the Fund's investment advisor or Fund management does not believe the prices provided by the pricing services reflect the market value of such option.
Fair Value Measurement
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:
Level 1: quoted prices in active markets for identical securities
(Continued)
Goodwood SMID Cap Discovery Fund
Notes to Financial Statements
May 31, 2016
Level 2: other significant observable inputs (including quoted prices for similar securities and identical securities in inactive markets, interest rates, credit risk, etc.)
Level 3: significant unobservable inputs (including the Fund's own assumptions in determining fair value of investments)
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 table summarizes the inputs as of May 31, 2016 for the Fund's assets measured at fair value:
| | | |
| Investments (a) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | |
| Common Stocks* | $ | 15,649,931 | $ | 15,649,931 | $ | - | $ | - |
| Limited Partnerships | | 511,620 | | 511,620 | | - | | - |
| Master Limited Partnership | | 252,880 | | 252,880 | | - | | - |
| Call Options Purchased | | 650,475 | | - | | 650,475 | | - |
| Put Options Purchased | | 53,125 | | - | | 53,125 | | - |
| U.S. Treasury Bills | | 1,849,732 | | - | | 1,849,732 | | - |
| Short-Term Investment | | 1,002,054 | | 1,002,054 | | - | | - |
| Total Assets | $ | 19,969,817 | $ | 17,416,485 | $ | 2,553,332 | $ | - |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Common Stocks* | $ | 2,129,161 | $ | 2,129,161 | $ | - | $ | - |
| Call Options Written | | 5,250 | | - | | 5,250 | | - |
| Put Options Written | | 42,125 | | - | | 42,125 | | - |
| Total Liabilities | $ | 2,176,536 | $ | 2,129,161 | $ | 47,375 | $ | - |
| | | | | | | | | |
* Please refer to the Schedule of Investments for a breakdown by sector.
(a) The Fund had no significant transfers into or out of Level 1, 2, or 3 during the fiscal year ended May 31, 2016. The Fund did not hold any Level 3 securities during the year. It is the Fund's policy to recognize transfers at the end of the reporting period.
Securities Sold Short
The Fund may sell a security short to increase investment returns. The Fund may also sell a security short in anticipation of a decline in the market value of a security. A short sale is a transaction in which the Fund sells a security that it does not own. To complete the transaction, the Fund must borrow the security in order to deliver it to the buyer. The Fund must replace the borrowed security by purchasing it at market price at the time of replacement; the price may be higher or lower than the price at which the Fund sold the security. The Fund incurs a loss from a short sale if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund realizes a profit if the price of the security declines between those dates.
(Continued)
Goodwood SMID Cap Discovery Fund
Notes to Financial Statements
May 31, 2016
Until the Fund replaces the borrowed security, the Fund will maintain on its books and records cash and long securities to sufficiently cover its short position on a daily basis. The collateral for the securities sold short includes securities held long as shown on the Schedule of Investments. Dividends paid on securities sold short are recorded as an expense on the Fund's Statement of Operations. The total dividend expense on securities sold short for the year ended May 31, 2016 was $8,528.
Purchased Options
When the Fund purchases an option, an amount equal to the premium paid by the Fund is recorded as an investment and is subsequently adjusted to the current value of the option purchased. If an option expires on the stipulated expiration date or if the Fund enters into a closing sale transaction, a gain or loss is realized. If a call option is exercised, the cost of the security acquired is increased by the premium paid for the call. If a put option is exercised, a gain or loss is realized from the sale of the underlying security, and the proceeds from such sale are decreased by the premium originally paid. Purchased options are non-income producing securities.
Option Writing
When the Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from options written. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain or loss (depending on if the premium is less than the amount paid for the closing purchase transaction). If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Fund has realized a gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, as the writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. Written options are non-income producing securities.
A summary of option contracts written by the Fund during the fiscal year ended May 31, 2016 were as follows:
| | | Call Options | | | | Put Options | |
| Option Contracts Written for the fiscal year ended May 31, 2016 | Number of Contracts | | Premiums Received | | Number of Contracts | | Premiums Received |
| Options Outstanding, Beginning of Year | - | | $ | - | | - | | $ | - |
| Options written | 4,406 | | 459,993 | | 350 | | 42,179 |
| Options closed | (4,231) | | (450,153) | | - | | - |
| Options expired | (75) | | (5,507) | | - | | - |
| Options Outstanding, End of Year | 100 | | $ | 4,333 | | 350 | | $ | 42,179 |
Derivative Financial Instruments
The Fund may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and the potential for market movements which may expose the Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities.
Derivatives are marked to market daily based upon quotations from market makers or the Fund's independent pricing services and the Fund's net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in Investments, at value on the Statement of Assets and Liabilities. Net realized gains and losses and net change in unrealized appreciation and depreciation on these contracts for the year are included in the Realized and Unrealized Loss on Investments on the Statement of Operations.
(Continued)
Goodwood SMID Cap Discovery Fund
Notes to Financial Statements
May 31, 2016
The derivative instruments outstanding as of May 31, 2016 are disclosed below and the amounts of realized and changes in unrealized gains and losses on derivative instruments during the period as disclosed below serve as indicators of the volume of derivative activity for the Fund.
The following table sets forth the effect of the derivative instruments on the Statement of Assets and Liabilities as of May 31, 2016:
Derivative Type | Location | | Value |
| Equity Contracts – purchased options | Assets-Investments, at value | | $ 703,600 |
| Equity Contracts – written options | Liabilities-Options written, at value | | $ 47,375 |
The following table sets forth the effect of the derivative instruments on the Statement of Operations for the fiscal year ended May 31, 2016:
| Derivative Type | Location | Gains/Losses |
| Equity Contracts – purchased options | Net realized loss from investments | $ | (390,788) |
| Equity Contracts – written options | Net realized gain from options written | $ | 39,066 |
| | | |
| Equity Contracts – purchased options | Net change in unrealized depreciation on investments | $ | (570,125) |
| Equity Contracts – written options | Net change in unrealized depreciation on options written | $ | (863) |
| | | |
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
The Fund bears expenses incurred specifically on its behalf as well as a portion of general expenses, which are allocated according to methods reviewed annually by the Trustees.
Distributions
The Fund may declare and distribute dividends from net investment income (if any) annually. Distributions from capital gains (if any) are generally declared and distributed annually. Dividends and distributions to shareholders are recorded on ex-date.
Estimates
The preparation of financial statements in conformity with GAAP 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 reported period. Actual results could differ from those estimates.
Federal Income Taxes
No provision for income taxes is included in the accompanying financial statements, as the 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.
(Continued)
Goodwood SMID Cap Discovery Fund
Notes to Financial Statements
May 31, 2016
2. Transactions with Related Parties & Service Providers
Advisor
As full compensation for the investment advisory services provided to the Fund, the Advisor receives a monthly fee based on the Fund's average daily net assets. The Advisor shall receive an investment advisory fee equal to an annualized rate of 1.25% of the average daily net assets of the Fund. In accordance with these terms, the Fund incurred $140,643 in advisory fees for the fiscal year ended May 31, 2016.
The Advisor has entered into an Operating Plan with the 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 through May 31, 2016. These measures are intended to limit the Fund's operating expenses to 1.70% of the average daily net assets, exclusive of brokerage fees and commissions, taxes, borrowing costs (such as interest or dividend expenses on securities sold short), acquired fund fees and expenses, extraordinary expenses and distribution and/or service (12b-1) fees. The Fund's net expense ratio will be higher than 1.70% to the extent the Fund incurs expenses excluded from this arrangement. 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.
Administrator
The Nottingham Company ("Administrator") assists the Trust in the performance of its administrative responsibilities to the Fund, coordinates and pays for the services of each vendor and the operating expenses to the Fund, and provides the Fund with certain administrative, fund accounting, and compliance services. As part of its services and consolidated fee arrangement, the Administrator receives compensation based on the Fund's average daily net assets. The annual rate is 0.45% if the average daily net assets are under $40 million and gradually decreases to an annual rate of 0.094% once the average daily net assets reach $1.82 billion or more.
The fee paid to the Administrator is calculated by multiplying the average daily net assets of the 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; ongoing filing fees; any interest; any membership fees of the Investment Company Institute and similar organizations; fidelity bond and Trustees' liability insurance premiums. The Fund incurred $50,632 in administration fees for the fiscal year ended May 31, 2016.
Compliance Services
Cipperman Compliance Services, LLC provides services as the Trust's Chief Compliance Officer. Cipperman Compliance Services, LLC is entitled to receive customary fees from the Administrator for their services pursuant to the Compliance Services agreement with the Fund.
Transfer Agent
Nottingham Shareholder Services, LLC ("Transfer Agent") serves as transfer, dividend paying, and shareholder servicing agent for the Fund. For its services, the Transfer Agent is entitled to receive compensation from the Administrator pursuant to the Administrator's fee arrangements with the Fund.
Distributor
Capital Investment Group, Inc. (the "Distributor") serves as the Fund's principal underwriter and distributor. For its services, the Distributor is entitled to receive compensation from the Administrator pursuant to the Distributor's fee arrangements with the Fund.
Certain officers of the Trust are also officers of the Advisor or the Administrator.
(Continued)
Goodwood SMID Cap Discovery Fund
Notes to Financial Statements
May 31, 2016
3. Distribution and Service Fees
The Trustees, including a majority of the Trustees who are not "interested persons" of the Trust as defined in the 1940 Act and who have no direct or indirect financial interest in such plan or in any agreement related to such plan, adopted a distribution plan pursuant to Rule 12b-1 of the 1940 Act (the "Plan"). The 1940 Act regulates the manner in which a regulated investment company may assume expenses of distributing and promoting the sales of its shares and servicing of its shareholder accounts. The Plan provides that the Fund may incur certain expenses, which may not exceed 0.25% per annum of the Fund's average daily net assets 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 shares of the Fund or support servicing of shareholder accounts. For the fiscal year ended May 31, 2016, $16,695 in fees were incurred by the Fund.
4. Purchases and Sales of Investment Securities
The aggregate cost of purchases and proceeds from sales of investment securities (excluding short-term securities) were as follows:
| Fiscal Year Ended | Purchases of Securities | Proceeds from Sales of Securities |
| May 31, 2016 | $64,224,533 | $60,092,826 |
There were no long-term purchases or sales of U.S Government Obligations during the fiscal year ended May 31, 2016.
5. Federal Income Tax
Distributions are determined in accordance with Federal income tax regulations, which differ from GAAP, 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.
Management reviewed the Fund's tax positions on federal income tax returns for the open tax years of 2013 through the fiscal year ended 2016, and determined that the Fund does not have a liability for uncertain tax positions. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the fiscal year ended May 31, 2016, the Fund did not incur any interest or penalties.
Reclassifications to the capital accounts relate primarily to differing book/tax treatment of ordinary net investment losses.
For the fiscal year ended May 31, 2016, the following reclassifications were made:
| Accumulated Net Investment Loss | $ 99,529 |
| Paid in Interest | | (99,529) |
Distributions during the fiscal years ended were characterized for tax purposes as follows:
| | | Distributions from |
For the Fiscal Years Ended | | Ordinary Income | Long-Term- Capital Gains |
| 05/31/2016 | | $ | - | $ | 41,749 |
| 05/31/2015 | | $ | 208,703 | $ | - |
The difference between components of distributable earnings on a tax basis and the amounts reflected in the Statement of Assets and Liabilities are primarily due to late-year loss deferrals, post-October losses, and wash sale losses. The Fund elects to defer to its fiscal year ending May 31, 2017, $52,222 of Ordinary Loss recognized during the period from January 1, 2016 to May 31, 2016. The current post-October loss was $27,000, realized during the period from November 1, 2015 through May 31, 2016. These, and the late-year loss deferrals, will be recognized on the first day of the Fund's next fiscal year. The Fund has a capital loss carryforward of $1,005,597, all of which is short-term in nature with no expiration.
(Continued)
Goodwood SMID Cap Discovery Fund
Notes to Financial Statements
May 31, 2016
At May 31, 2016, the tax-basis cost of investments and components of distributable earnings were as follows:
| Cost of Investments | | $ 18,771,938 |
| | | |
| Unrealized Appreciation | | $ 917,527 |
| Unrealized Depreciation | | (1,896,184) |
| Net Unrealized Depreciation | | (978,657) |
| | | |
| Capital Loss Carryforward | | (1,005,597) |
| Late-Year Losses | | (52,222) |
| Post-October Losses | | (27,000) |
| | | |
| Accumulated Deficit | | $ (2,063,476) |
| | | | | | |
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 Fund. In addition, in the normal course of business, the Trust entered into contracts with its service providers, on behalf of the Fund, and others that provide for general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. The Fund expects risk of loss to be remote.
7. Subsequent Events
Effective June 1, 2016, the Advisor entered into a contractual agreement (the "Expense Limitation Agreement") with the Trust, on behalf of the Fund, under which it had agreed to waive or reduce its fees and to assume other expenses of the Fund, if necessary, in amounts that limit the Fund's total operating expenses (exclusive of interest, dividends on securities sold short, taxes, brokerage commissions, borrowing costs, fees and expenses of other investment companies in which the Fund invests, and other expenditures which are capitalized in accordance with generally accepted accounting principles, other extraordinary expenses not incurred in the ordinary course of the Fund's business, and amounts, if any, payable under a Rule 12b-1 distribution plan) to not more than 1.70% of the average daily net assets of the Fund.
The current term of the Expense Limitation Agreement remains in effect until May 31, 2017. While there can be no assurance that the Expense Limitation Agreement will continue after that date, it is expected to continue from year-to-year thereafter.
The Fund has 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 additional 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 the Shareholders of Goodwood SMID Cap Discovery Fund
We have audited the accompanying statement of assets and liabilities of the Goodwood SMID Cap Discovery Fund (the "Fund"), a series of shares of beneficial interest in the Starboard Investment Trust, including the schedule of investments, as of May 31, 2016, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the four-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for the year ended May 31, 2012 have been audited by other auditors, whose report dated July 26, 2012 expressed an unqualified opinion on such 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, 2016 by correspondence with the custodian and brokers. 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 the Goodwood SMID Cap Discovery Fund as of May 31, 2016, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and its financial highlights for each of the years in the four-year period then ended, in conformity with accounting principles generally accepted in the United States of America.
BBD, LLP
Philadelphia, Pennsylvania
July 29, 2016
Goodwood SMID Cap Discovery Fund
Additional Information
(Unaudited)
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 Securities and Exchange Commission ("SEC") at sec.gov. Information regarding how the 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
The 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. The Fund's Forms N-Q are 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 800-SEC-0330. You may also obtain copies without charge, upon request, by calling the Fund at 800-773-3863.
3. Tax Information
We are required to advise you within 60 days of the 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 Fund's fiscal year ended May 31, 2016.
During the fiscal year ended May 31, 2016, the Fund paid $41,749 in long-term capital gain distributions.
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 Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, reinvested dividends, or other distributions; redemption fees; and exchange fees; and (2) ongoing costs, including management fees; distribution [and/or service] (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 from December 1, 2015 through May 31, 2016.
Actual Expenses – The first line of the table below provides information about 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 (e.g., 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.
Hypothetical Example for Comparison Purposes – The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's 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 Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
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Goodwood SMID Cap Discovery Fund
Additional Information
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Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Advisor Class Shares | Beginning Account Value December 1, 2015 | Ending Account Value May 31, 2016 | Expenses Paid During Period* |
Actual Hypothetical (5% annual return before expenses) | | | |
| $1,000.00 | $ 993.20 | $9.72 |
| $1,000.00 | $1,015.25 | $9.82 |
*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).
| Institutional Class Shares | Beginning Account Value December 1, 2015 | Ending Account Value May 31, 2016 | Expenses Paid During Period* |
Actual Hypothetical (5% annual return before expenses) | | | |
| $1,000.00 | $ 994.10 | $8.47 |
| $1,000.00 | $1,016.50 | $8.57 |
*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. Approval of Advisory Agreement
The Advisor supervises the Fund's investments pursuant to an Investment Advisory Agreement. At a quarterly meeting of the Fund's Board of Trustees on March 10, 2016, the Trustees approved the Investment Advisory Agreement for another term until March 31, 2017. In considering whether to approve the Investment Advisory Agreement, the Trustees reviewed and considered the information they deemed reasonably necessary, including the following material factors: (i) the nature, extent, and quality of the services provided by the Advisor; (ii) investment performance of the Advisor; (iii) the costs of the services to be provided and profits to be realized by the Advisor and its affiliates from the relationship with the Fund; (iv) 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; (v) the Advisor's practices regarding brokerage and portfolio transactions; and (vi) the Advisor's practices regarding possible conflicts of interest.
In considering whether to approve the Investment Advisory Agreement, the Trustees reviewed and considered the information they deemed reasonably necessary, including the following material factors: (i) the nature, extent, and quality of the services provided by the Advisor; (ii) the costs of the services to be provided and profits to be realized by the Advisor and its affiliates from the relationship with the Fund; (iii) 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; (iv) the Advisor's practices regarding brokerage and portfolio transactions; and (v) the Advisor's practices regarding possible conflicts of interest.
At the meeting, the Trustees reviewed various informational materials, including the Investment Advisory Agreement for the Fund and a memorandum from the Advisor to the Trustees containing information about the advisory firm and its business. The memorandum provided information about the Advisor's finances, personnel, services to the Fund, investment advice, fees, and compliance program. It 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 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 Investment Advisory Agreement. The Board also reviewed, among other things, the Advisor's financial statements, the Fund's most recent financial statements, fee and performance comparisons, brokerage commission reports for the prior twelve months, and a copy of the current Investment Advisory Agreement.
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Goodwood SMID Cap Discovery Fund
Additional Information
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In considering the nature, extent, and quality of the services provided by the Advisor, the Trustees considered the responsibilities of the Advisor under the Investment Advisory Agreement. The Trustees reviewed the services being provided by the Advisor to the Fund including, without limitation, the quality of its investment advisory services since the Fund's inception (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 the Fund's 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 the Advisor seeks capital appreciation by investing in a portfolio of small and mid-cap companies that the Advisor believes have strong business history and prospects for the future, marketable products that stand out in their respective markets and proven and capable management teams. After reviewing the foregoing information and further information in the memorandum from the Advisor (e.g., descriptions of the Advisor's business, the Advisor's compliance program, and the Advisor's Form ADV), the Board concluded that the nature, extent, and quality of the services provided by the Advisor were satisfactory and adequate for the Fund.
In considering the investment performance of the Advisor, the Trustees compared the performance of the Fund with the performance of its benchmark index, comparable funds with similar objectives managed by other investment advisors, and applicable peer group data (e.g., Lipper peer group average). The Trustees noted that the Advisor had provided services to the Fund for less than three years and its one-year performance ended December 31, 2015 was lower than its peers group average (-19.02% vs. -2.00%). The Trustees also considered the consistency of the Advisor's management of the Fund with its investment objective, policies and limitations. The Trustees also noted that the Fund's strategy was currently out of favor due to market conditions. After reviewing the short-term investment performance of the Fund, the Advisor's experience managing the Fund, the Advisor's historical investment performance, and other factors, the Board concluded that the investment performance of the Fund and the Advisor was satisfactory.
In considering the costs of the services to be provided and profits to be realized by the Advisor and its affiliates from the relationship with the Fund, including any benefits derived by the Advisor from the relationship with the Fund, the Trustees first noted that the management fee for the Fund under the Investment Advisory Agreement was 1.25% of average daily new assets. The Trustees evaluated the Advisor's staffing, personnel, and methods of operating; the education and experience of the Advisor's personnel; the Advisor's compliance program; the financial condition of the Advisor; the level of commitment to the Fund and the Advisor by the principals of the Advisor; the asset level of the Fund; and the overall expenses of the Fund, including certain prior fee waivers and reimbursements by the Advisor and the nature and frequency of advisory fee payments. The Trustees reviewed the financial statements for the Advisor and discussed the financial stability and profitability of the firm. The Advisor responded to several questions about the financial condition of the firm and reviewed a profitability analysis with the Trustees. The Trustees noted that the Advisor directly pays for certain expenses of the Fund under an Expense Limitation Agreement in order to help limit the Fund's annual operating expenses. The Trustees also considered potential benefits for the Advisor in managing the Fund, including promotion of the Advisor's name, the ability for the Advisor to place small accounts into the Fund, and the potential for the Advisor to generate soft dollars from Fund trades that may benefit the Advisor as well. 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. The Trustees determined that the Fund's management fee was higher than most of the comparable and higher than the peer group average. The Trustees also determined that the Fund's net expense ratio was higher than most of the comparable funds and the peer group average. The Trustees noted that the Fund was much smaller than the peer group average. The Trustees also noted that the Advisor's fee for separate account clients was similar to the management fee paid by the Fund. Following this comparison and upon further consideration and discussion of the foregoing, the Board concluded that the fees to be paid to the Advisor by the Fund were fair and reasonable in relation to the nature and quality of the services provided by the Advisor and that they reflected charges that were within a range of what could have been negotiated at arm's length.
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Goodwood SMID Cap Discovery Fund
Additional Information
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In considering the extent to which economies of scale would be realized as the Fund grows and whether the advisory fee levels reflect these economies of scale for the benefit of the Fund's investors, the Trustees reviewed the Fund's operational history and noted that the size of the Fund had not provided an opportunity to realize economies of scale. The Trustees then reviewed the Fund's fee arrangements for breakpoints or other provisions that would allow the Fund's shareholders to benefit from economies of scale in the future as the Fund grows. The Trustees determined that the maximum management fee would stay the same regardless of the Fund's asset levels and, therefore, did not reflect economies of scale. The Trustees noted that the Fund was a relatively small size and economies of scale were unlikely to be achievable in the near future. It was pointed out that breakpoints in the advisory fee could be reconsidered in the future. The Trustees noted that the Fund will benefit from economies of scale under the agreement with the Administrator since it utilized breakpoints. The Trustees also noted that the Advisor had agreed to make payments to the 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 Fund's investors. Following further discussion of the Fund's asset levels, expectations for growth, and fee levels, the Board determined that the Fund's fee arrangements were fair and reasonable at the present time in relation to the nature and quality of the services provided by the Advisor.
In considering the Advisor's practices regarding brokerage and portfolio transactions, the Trustees reviewed the Advisor's standards, and performance in utilizing those standards, for seeking best execution for Fund portfolio transactions. The Trustees also considered the portfolio turnover rate for the Fund; the process by which evaluations are made of the overall reasonableness of commissions paid; the method and basis for selecting and evaluating the broker-dealers used; any allocation of portfolio business to persons affiliated with the Advisor; and the extent to which the Fund allocates portfolio business to broker-dealers who provide research, statistical, or other services (soft dollars). The Trustees noted, among other things, that the Fund rarely trades blocks of shares which require special handling and that the average commission rate for the Fund was approximately $0.04 per share. After further review and discussion, the Board determined that the Advisor's practices regarding brokerage and portfolio transactions were satisfactory.
In considering the Advisor's practices regarding possible 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 and the Advisor's other accounts; the method for bunching of portfolio securities transactions; and the substance and administration of the Advisor's code of ethics. Following further consideration and discussion, the Board indicated that the Advisor's standards and practices relating to the identification and mitigation of possible conflicts of interests were satisfactory.
Based upon all of the foregoing considerations, the Board of Trustees, including a majority of the Independent Trustees, approved the Investment Advisory Agreement for the Fund.
6. Information about Trustees and Officers
The business and affairs of the Fund 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 Fund 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 Fund includes additional information about the Trustees and officers and is available, without charge, upon request by calling the Fund toll-free at 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 $2,184 during the fiscal year ended May 31, 2016 for their services to the Fund and Trust.
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Goodwood SMID Cap Discovery Fund
Additional Information
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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 |
Michael G. Mosley
Date of Birth: 01/1953 | Independent Trustee | Since 7/10 | Owner of Commercial Realty Services (real estate) since 2004. | 17 | None. |
Theo H. Pitt, Jr.
Date of Birth: 04/1936 | Independent Trustee | Since 9/10 | Senior Partner, Community Financial Institutions Consulting (financial consulting) since 1999; Partner, Pikar Properties (real estate) since 2001. | 17 | Independent Trustee of World Funds Trust for its twelve series, Gardner Lewis Investment Trust for its two series, Leeward Investment Trust for its one series and Hillman Capital Management Investment Trust for its one series (all registered investment companies). |
James H. Speed, Jr.
Date of Birth: 06/1953 | Independent Trustee, Chairman | Trustee since 7/09, Chair since 5/12 | Previously President and CEO of NC Mutual Insurance Company (insurance company) from 2003 to 2015. | 17 | Independent Trustee of the Brown Capital Management Mutual Funds for its four series, Hillman Capital Management Investment Trust for its one series, and Centaur Mutual Funds Trust for its one 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
Date of Birth: 03/1960 | Independent Trustee | Since 7/09 | President of Standard Insurance and Realty (insurance and property management) since 1982. | 17 | None. |
| Other Officers |
Katherine M. Honey
Date of Birth: 09/1973 | President and Principal Executive Officer | Since 05/15 | EVP of The Nottingham Company since 2008. | n/a | n/a |
Matthew J. Beck
Date of Birth: 06/1989 | Secretary | Since 05/15 | General Counsel of The Nottingham Company since 2014. | n/a | n/a |
Ashley E. Harris Date of Birth: 03/1984 | Treasurer, Assistant Secretary and Principal Financial Officer | Since 05/15 | Fund Accounting Manager and Financial Reporting, The Nottingham Company since 2008. | n/a | n/a |
Goodwood SMID Cap Discovery Fund
Additional Information
(Unaudited)
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 |
Stacey Gillespie Date of Birth: 05/1974 | Chief Compliance Officer | Since 03/16 | Compliance Director, Cipperman Compliance Services, LLC (09/15-present). Formerly, Chief Compliance Officer of Boenning & Scattergood, Inc. (2013-2015) and Director of Investment Compliance at Boenning & Scattergood, Inc. (2007-2013). | n/a | n/a |
Goodwood SMID Cap Discovery Fund
is a series of
The Starboard Investment Trust
For Shareholder Service Inquiries: | For Investment Advisor Inquiries: |
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Nottingham Shareholder Services, LLC | Goodwood Advisors, LLC |
116 South Franklin Street | 450 Laurel Street |
Post Office Box 69 | Suite 2105 |
Rocky Mount, North Carolina 27802-0069 | Baton Rouge, Louisiana 70801 |
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Telephone: | Telephone: |
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| 800-773-3863 | 866-841-8060 |
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| World Wide Web @: | World Wide Web @: |
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| ncfunds.com | goodwood-funds.com |
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