Fiscal 2016 wrapped up at the end of September with solid results. Despite the resurgence of volatility, marked by a swift decline of 12% in stocks to start the year, QCI Balanced Fund returned +8.45% over the prior 12 months. The Lipper Flexible Funds Portfolio, which serves as our benchmark, returned +5.99% over the same period.
*The Fund's inception date was January 30, 2014 for the Institutional Class Shares.
**The Advisor has entered into an Expense Limitation Agreement with the Fund under which it has agreed to waive or reduce its fees and to assume other expenses of the Fund, if necessary, in an amount that limits the Fund's annual operating expenses (exclusive of interest, taxes, brokerage fees and commissions, extraordinary expenses, payments under the Rule 12b-1 distribution plan, and acquired fund fees and expenses) to not more than 1.00% of the average daily net assets of the Fund through January 31, 2017. The Expense Limitation Agreement may not be terminated prior to that date. The Expense Limitation Agreement may not be prior to that date. The Advisor cannot recoup from the Fund any amounts paid by the Advisor under the Expense Limitation Agreement. Further, net annual operating expenses for the Fund may exceed those contemplated by the waiver due to acquired fund fees and other expenses that are not waived under the Expense Limitation Agreement.
***Gross expense ratio is from the Fund's Financial Highlights for the fiscal year ended September 30, 2016.
Going into the holiday season last year, we had taken several measures to reduce risk in the Fund. The allocation to stocks was at the lower-end of our target range, and we reduced exposure to stocks that are highly cyclical. These "airbags" worked to protect principal as equity markets sold off hard in January and early February, then provided the capital to redeploy as we purchased stocks at much more attractive prices.
The stabilizing of economic data we saw in the spring continued throughout the summer, creating an environment for stocks to gradually work their way higher. Focus quickly shifted to the election as we entered the fall and markets started to get choppy. We had a few stocks reach internal price targets, which we then use as price floors. This methodology assures we don't give up gains, but still let stocks with positive momentum move higher.
We added a couple of stocks to increase our exposure to domestic construction, which would be key beneficiaries of the not-so-secret massive fiscal spending campaign likely to be announced in the first 100 days of President Trump's tenure. Other areas of focus are financial stocks which will benefit from rising interest rates and potentially less onerous regulations, aerospace and defense companies, and some select healthcare stocks that could benefit from changes in the Affordable Care Act.
Our bond holdings have added stability to the portfolio during the equity market gyrations. The 10-year Treasury Bond started 2016 with a yield of more than 2.25%, but interest rates declined (which means bond prices increased) steadily through July, ultimately hitting a low of 1.35%. Post-election, rates have moved up quickly and are now above where we started the year. We have decreased the interest rate sensitivity of the bond portfolio to protect principal, as we believe that this upward momentum in rates will continue.
As always, feel free to reach out with any questions or comments.
Statements in this Annual Report reflect projections or expectations of future financial or economic performance of the Fund and of the market in general and statements of the Fund's plans and objectives for future operations are forward-looking statements. No assurance can be given that actual results or events will not differ materially from those projected, estimated, assumed or anticipated in any such forward-looking statements. Important factors that could result in such differences, in addition to the other factors noted with such forward-looking statements, include general economic conditions such as inflation, recession and interest rates. There is no affiliation between the Underwriter and Distributor, Capital Investment Group, Inc., and QCI Asset Management, Inc. Investments in the Fund are subject to investment risks, including the possible loss of some or the entire principal amount invested.
QCI Balanced Fund
Notes to Financial Statements
1. Organization and Significant Accounting Policies
The QCI Balanced Fund (the "Fund") is a series of the Starboard Investment Trust (the "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 and commenced operations on January 30, 2014. The investment objective of the Fund is to balance current income and principal conservation with the opportunity for long-term growth. The Fund seeks to achieve its investment objective by investing in a diverse portfolio of corporate, agency, and U.S. Government fixed income securities, preferred stock, common stock of primarily large and mid-capitalization issuers, and derivative securities. Allocation to equity and fixed income securities will range from 25%-75% of assets.
The Fund currently has an unlimited number of authorized shares, which are divided into two classes - Institutional Class Shares and Retail Class Shares. Each class of shares has equal rights as to assets of the Fund, and the classes are identical, except for differences in ongoing distribution and service fees. The Retail Class Shares are subject to distribution plan fees as described 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. As of September 30, 2016, no Retail Class Shares have been issued.
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").
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. 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.
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
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
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)
(Continued)
QCI Balanced Fund
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 table summarizes the inputs as of September 30, 2016 for the Fund's assets measured at fair value:
| QCI Balanced Fund | | |
| Investments in Securities (a) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | |
| Corporate Bonds | $ | 11,331,923 | $ | - | $ | 11,331,923 | $ | - |
| Federal Agency Obligations | | 4,383,505 | | - | | 4,383,505 | | - |
| United States Treasury Notes | | 12,026,269 | | - | | 12,026,269 | | - |
| Common Stocks* | | 27,429,233 | | 27,429,233 | | - | | - |
| Open-End Fund | | 1,468,126 | | 1,468,126 | | - | | - |
| Short-Term Investment | | 1,743,358 | | 1,743,358 | | - | | - |
| Total Assets | $ | 58,382,414 | $ | 30,640,717 | $ | 27,741,697 | $ | - |
| | | | | | | | | |
* Refer to the Schedule of Investments for industry classification.
| (a) | The Fund had no transfers into or out of Level 1, 2, or 3 during the fiscal year ended September 30, 2016. It is the Fund's policy to record transfers at the end of the year. |
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. Interest income is recorded on the accrual basis and includes accretion/amortization of discounts and premiums using the effective interest method. 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 Trust level 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), monthly. 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 the 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.
(Continued)
QCI Balanced Fund
Notes to Financial Statements
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.
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 more or 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 September 30, 2016 were as follows:
| | Call Options | | Put Options |
| | Number of Contracts | | Premiums Received | | Number of Contracts | | Premiums Received |
Options Outstanding, Beginning of Year | - | | $ | - | | - | | $ | - |
| Options written | 10 | | 4,285 | | 60 | | 11,477 |
| Options closed | - | | - | | (60) | | (11,477) |
| Options exercised | - | | - | | - | | - |
| Options expired | (10) | | (4,285) | | - | | - |
| Options Outstanding, End of Year | - | | $ | - | | - | | $ | - |
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 the net assets. Realized gain and loss and unrealized appreciation and depreciation on these derivatives for the year are included in the Statement of Operations. The contract amounts listed above in the table serve as an indicator of the volume of derivative activity in the Fund.
There were no derivative instruments outstanding as of September 30, 2016 and the amounts of realized and changes in unrealized gains and losses on derivative instruments during the period as disclosed in the Statement of Operations serve as indicators of the volume of derivative activity for the Fund as shown in the options contracts table above.
(Continued)
QCI Balanced Fund
Notes to Financial Statements
The following table sets forth the effect of the option contracts on the Statement of Operations for the fiscal year ended September 30, 2016:
| Derivative Type | Location | Gains |
| Equity Contracts – written options | Net realized gain from options written | $ 4,594 |
| | | |
| Equity Contracts – written options | Change in unrealized appreciation on options written | $ - |
2. Transactions with Related Parties and Service Providers
Advisor
The Fund pays a monthly fee to QCI Asset Management, Inc. (the "Advisor") calculated at the annual rate of 0.75% of the Fund's average daily net assets.
The Advisor has entered into a contractual agreement (the "Expense Limitation Agreement") with the Trust, on behalf of the Fund, under which it has 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, 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 GAAP, 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 1.00% of the average daily net assets of the Fund for the current fiscal year. The current term of the Expense Limitation Agreement remains in effect until January 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. For the fiscal year ended September 30, 2016, $386,081 in advisory fees were incurred, of which $74,995 in advisory fees were waived by the Advisor and $17,829 of other expenses were reimbursed by the Advisor.
Administrator
The Fund pays a monthly fee to The Nottingham Company (the "Administrator") based upon the average daily net assets of the Fund and calculated at the annual rates as shown in the schedule below subject to a minimum of $2,000 per month. The Administrator also receives a fee as to procure and pay the Fund's custodian, as additional compensation for fund accounting and recordkeeping services, and additional compensation for certain costs involved with the daily valuation of securities and as reimbursement for out-of-pocket expenses. Effective April 15, 2016, the Administrator also receives a miscellaneous compensation fee for peer group, comparative analysis, and compliance support totaling $350 per month. As of September 30, 2016, the Administrator received $1,934 in miscellaneous compensation expenses.
A breakdown of the fees is provided in the following table:
| Administration Fees* | Custody Fees* | Fund Accounting Fees (minimum monthly) | Fund Accounting Fees (asset- based fee) | Blue Sky Administration Fees (annual) |
Average Net Assets | Annual Rate | Average Net Assets | Annual Rate |
| First $100 million | 0.100% | First $100 million | 0.020% | $2,250 | 0.01% | $150 per state |
| Next $150 million | 0.080% | Over $100 million | 0.009% | | | |
| Next $250 million | 0.060% | | | | | |
| Next $500 million | 0.050% | *Minimum monthly fees of $2,000 and $417 for Administration and Custody, respectively. |
| Next $1 billion | 0.040% |
| Over $2 billion | 0.030% |
The Fund incurred $51,478 in administration fees, $11,377 in custody fees, and $32,756 in fund accounting fees for the fiscal year ended September 30, 2016.
(Continued)
QCI Balanced Fund
Notes to Financial Statements
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 Fund 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 Fund pursuant to the Transfer Agent's fee arrangements with the Fund. The Fund incurred $22,956 in transfer agent fees during the fiscal year ended September 30, 2016.
Distributor
Capital Investment Group, Inc. (the "Distributor") serves as the Fund's principal underwriter and distributor. The Distributor receives $5,000 per year paid in monthly installments for services provided and expenses assumed.
Certain officers of the Trust are also officers of the Administrator.
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 average daily net assets of the Retail 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 shares of the Fund or support servicing of shareholder accounts. For the fiscal year ended September 30, 2016, no fees were incurred by the Fund.
4. Purchases and Sales of Investment Securities
For the fiscal year ended September 30, 2016, the aggregate cost of purchases and proceeds from sales of investment securities (excluding short-term securities) were as follows:
| Purchases of Securities | | Proceeds from Sales of Securities |
| $15,295,170 | | $11,877,300 |
Purchases of Government Securities | | Proceeds from Sales of Government Securities |
| $10,054,013 | | $3,913,427 |
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 taken on federal income tax returns for the open tax years/period ended from September 30, 2014 through September 30, 2016, and 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 open tax years/period, the Fund did not incur any interest or penalties.
(Continued)
QCI Balanced Fund
Notes to Financial Statements
Distributions during the fiscal years ended were characterized for tax purposes as follows:
| | | Distributions from |
For the Fiscal Year Ended | | Ordinary Income | Long-Term- Capital Gains |
| 09/30/2016 | | $ 538,090 | $ - |
| 09/30/2015 | | $ 607,648 | $ - |
At September 30, 2016, the tax-basis cost of investments and components of distributable earnings were as follows:
| Cost of Investments | $ | 55,296,313 |
| | | |
| Unrealized Appreciation | $ | 3,898,820 |
| Unrealized Depreciation | | (812,719) |
| Net Unrealized Appreciation | | 3,086,101 |
| | | |
| Undistributed Net Investment Income | | 642 |
| Accumulated Net Capital Losses | | (371,028) |
| Deferred Post-October Capital Losses | | (563,029) |
| | | |
| Distributable Earnings | $ | 2,152,686 |
| | | | | | |
The difference between book-basis and tax-basis net unrealized appreciation is attributable to the tax deferral of losses from wash sales. For tax purposes, the current year post-October loss of $563,029 was realized during the period from November 1, 2015 through September 30, 2016. Post-October losses will be recognized for tax purposes on the first business day of the Fund's next fiscal year, October 1, 2016. The Fund has a capital loss carryforward of $371,028, which is short-term in nature and has no expiration.
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
In accordance with GAAP, 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 subsequent events that necessitated disclosures and/or adjustments.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of the Starboard Investment Trust
and the Shareholders of the QCI Balanced Fund
We have audited the accompanying statement of assets and liabilities of the QCI Balanced Fund (the "Fund"), a series of shares of beneficial interest in the Starboard Investment Trust, including the schedule of investments, as of September 30, 2016, and the related statement 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 two-year period then ended and for the period January 30, 2014 (commencement of operations) through September 30, 2014. 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.
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 audit 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 September 30, 2016 by correspondence with the custodian and broker. 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 QCI Balanced Fund as of September 30, 2016, and the results of its operations for the year then ended, 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 two-year period then ended and for the period January 30, 2014 through September 30, 2014, in conformity with accounting principles generally accepted in the United States of America.
BBD, LLP
Philadelphia, Pennsylvania
November 22, 2016
QCI Balanced 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.
We are required to advise you within 60 days of the Fund's fiscal year-end regarding 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 September 30, 2016.
During the fiscal year ended September 30, 2016, the Fund paid $538,090 in income distributions but no 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, loads on reinvestments; 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 April 1, 2016 through September 30, 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.
(Continued)
QCI Balanced Fund
Additional Information
(Unaudited)
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.
| Institutional Class Shares | Beginning Account Value April 1, 2016 | Ending Account Value September 30, 2016 | Expenses Paid During Period* |
Actual Hypothetical (5% annual return before expenses) | | | |
| $1,000.00 | $1,033.54 | $5.08 |
| $1,000.00 | $1,020.00 | $5.05 |
*Expenses are equal to the average account value over the period multiplied by the Fund's annualized expense ratio of 1.00%, multiplied by 183/365 (to reflect the one-half year period).
5. Approval of Investment Advisory Agreement
Advisor supervises the Fund's investments pursuant to an Investment Advisory Agreement. At a quarterly meeting of the Fund's Board of Trustees on September 7, 2016, the Trustees approved the Investment Advisory Agreement through October 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.
At the meeting, the Trustees reviewed various informational materials including, without limitation, the Investment Advisory Agreement for the Fund; a memorandum from the Advisor to the Trustees containing information about the Advisor, its business, its finances, its personnel, its services to the Fund, and comparative expense ratio information for other mutual funds with a strategy similar to the Fund; and 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 considering the nature, extent, and quality of the services provided by the Advisor, the Trustees reviewed 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, policies, 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 to achieve the Fund's investment objective by using an opportunistic investment strategy with a deep value bias in selecting individual securities. The Trustees further noted that the principal executive and financial officer of the Fund were provided by the Advisor and serve without additional compensation from the Fund. 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., Bloomberg peer group average). The Trustees noted that the return for the one-year period ended June 30, 2016 was 3.09%, which outperformed the returns of some of the comparable funds and the returns of other comparable funds and the peer group average. The Trustees then noted that the return for the six-month period ended June 30, 2016 was 4.09%, which also outperformed the comparable funds and the peer group average. The Trustees also considered the consistency of the Advisor's management of the Fund with its investment objective, policies, and limitations. After reviewing the short and long-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.
(Continued)
QCI Balanced Fund
Additional Information
(Unaudited)
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 reviewed the Advisor's staffing, personnel, and methods of operating; the education and experience of the Advisor's personnel; the Advisor's compliance program, policies, and procedures; the financial condition of the Advisor; the level of commitment to the Fund and the Advisor by the principals of the Advisor; the projected asset levels 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 Trustees noted that the Advisor either makes payments to the Administrator or 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 agreed that excess profitability was not a concern at this time. 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 fees were higher than the comparable funds and lower than the peer group average. The Trustees also determined that the Fund's net expense ratio was higher than some of the comparable funds and equal to others and was lower than the peer group average. The Trustees noted that the Fund was smaller than the peer group average. 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.
In considering 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, 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 noted that although the maximum management fee under the Investment Advisory Agreement would stay the same regardless of the Fund's asset levels, 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 pointed out that the Fund would benefit from economies of scale under agreements with service providers other than the Advisor. In particular, it was noted that the Fund's administration fee was a significant component of the gross expense ratio and that the agreement utilized breakpoints in its fee schedule that allowed the Fund's shareholders to benefit from economies of scale. The Trustees also noted that economies of scale were unlikely to be realized in the near future due to the size of the Fund. It was pointed out that breakpoints in the management fee could be reconsidered in the future. Following further discussion of the Fund's asset level, expectations for growth, and fee levels, the Board determined that the Fund's fee arrangements with the Advisor were fair and reasonable 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 $0.02 per share. After further review and discussion, the Board determined that the Advisor's practices regarding brokerage and portfolio transactions were satisfactory.
(Continued)
QCI Balanced Fund
Additional Information
(Unaudited)
In considering the Advisor'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 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 of Trustees indicated that the Advisor's standards and practices relating to the identification and mitigation of potential 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 September 30, 2016 from the Fund for their services to the Fund and Trust.
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). |
QCI Balanced 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 |
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 |
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 |
