This report and the financial statements contained herein are submitted for the general information of the shareholders of the Sector Rotation Fund (the "Fund"). The Fund's shares are not deposits or obligations of, or guaranteed by, any depository institution. The Fund's shares are not insured by the FDIC, Federal Reserve Board or any other agency, and are subject to investment risks, including possible loss of principal amount invested. Neither the Fund nor the Fund's distributor is a bank.
The Sector Rotation Fund is distributed by Capital Investment Group, Inc., Member FINRA/SIPC, 100 E. Six Forks Road, Suite 200, Raleigh, NC, 27609. There is no affiliation between the Sector Rotation Fund, including its principals, and Capital Investment Group, Inc.
Fasten Your Seat Belts
As many of our shareholders know, I use my 30 plus years as an Economist to formulate a plan on where I feel the macro-economy is heading. Most Economists make forecasts 6- 12 months out. I feel more comfortable in the 3-6 month range. During the most recent 12-month period ending September 30, 2018, Congress passed the Jobs and Tax Cut Act. That signaled to me that the consumer discretionary, health care, industrial, and technology sectors could be market leaders. So, I proceeded to add/increase the positions of the Sector Rotation Fund (the "Fund") in those areas. I also trimmed some profits while the market was at or near 2018 highs. As I always like to say, it's a good idea to take some of your profits before somebody else does. As a result of the combination of making what seems to be the correct call on the macro-economy and trimming some profits, the Fund's performance for the one-year period ending September 30, 2018 was very good. In fact, NAVFX total return over that time was 19.05% while the S&P 500 was 17.91%[1]. I will monitor very closely the ongoing "trade war" discussions in D.C., the 2018 Mid-term election results, and make the appropriate adjustments when the time is right.
The spring and summer of 2018 brought calm markets, but as we headed into fall, volatility surged. In October the CBOE Volatility Index (VIX), Wall Street's "fear gauge," rose the most it has since February. The markets responded with equal the alarm, the Dow Jones Industrial Average declining 2,000 points. This raised alarms. Are we in for a repeat of the market meltdown seen earlier in 2018? Will 2019 be the year the bear comes back?
First, let's look at the economy. It's in a good position, signaling consistent high growth in 2018 and 2019. Gross domestic product (GDP), a broad measure of the goods and services produced across the economy, expanded at 4.2% in the second quarter, according to the Commerce Department (with the 3rd quarter numbers not available as of the time I write this).
GDP growth was powered by solid gains in a number of areas, including consumer spending. Indeed, consumers' recent spending spree has helped many retailers shake off a slump to post strong sales and earnings this year (and that happened despite wage growth that has barely exceeded the cost of living over the past few years).
But perhaps the measure most visible to the average American is employment. Labor-market slack has continued to decline, and the unemployment rate is near 50-year lows at 3.7%. For perspective, the U.S. unemployment rate averaged 5.8% from 1948 until 2018, reaching a record high of 10.8% in November 1982 and a record low of 2.50% percent in May 1953. So 3.7% is an amazing number, which the current White House administration is happy to take credit for. But I always like to put things in perspective, and here that means looking at what's behind the curtain.
The unemployment rate is no longer a dependable means of assessing the health of the economy. I've written about this before, but to recap, here are a few problems with the unemployment rate.
First, it ignores certain workers (referred to as "marginally attached"). A good portion of these workers are so-called "discouraged" workers—adults who have looked for work, but given up and not done so in the four weeks before the Bureau of Labor Statistics conducted its monthly survey. But there are other kinds of marginally attached workers, too. For example, if you were looking for a job on August 1 but took a break in July to care for a sick spouse, you'd be considered a marginally attached worker in July.
Second, the unemployment rate doesn't consider the quality of jobs that workers have. People are considered employed if they have part-time or temporary jobs, or low-skilled jobs that they took just to put food on the table, even if those jobs barely support them and they are seeking new jobs.
What kind of effect does this have on the unemployment rate? Well, the ShadowStats alternate unemployment rate for September 2018 is a whopping 21.3%. Maybe the truth is somewhere in the middle, but even so, it's worrying.
Also making Americans feel good, the boogeyman in the closet, inflation, retreated again in September, falling to 2.3%. Declines in prices of motor vehicles and energy costs helped the September reading. But gasoline prices were rising as of my writing in October, and tariffs could also have an additional effect, bringing the inflation rate up a little in the next few months and 2019. The U.S. Federal Reserve appears poised to raise rates in December, and most economists assume three additional increases in 2019.
But those sobering facts don't change how Americans feel. And with Americans feeling good about employment and inflation, the Conference Board's consumer confidence index rose in September to its highest level in about 18 years (138.4).
I'm here to tell you that it isn't sustainable. None of it. A reversion is inevitable.
Investors have a hard time believing this. We're in the midst of a historically significant bull market. Since the last bear market ended almost a decade ago, the rise we've seen in stocks is almost unprecedented. It is the second-oldest without at least a 20% drop in the S&P 500 Index. And with the exception of October's drama, many investors' portfolios are performing well. People are making money hand over fist. And who doesn't like strong performance? Why make a change, when things are going so well?
Well… All good things must come to an end, as they say. Bull markets just don't last forever. We will undoubtedly experience a market correction at some point. The average bull market has lasted 9.1 years, and we've already passed that average. The day of reckoning is coming, and we will position the Fund's portfolio accordingly when we do experience a decline. As hockey great Wayne Gretzky once said, you want to skate to where the puck is going, not where it has been.
Thank you for the trust you have placed in Grimaldi Portfolio Solutions ("GPS"), and we will continue to work hard every day to maintain that trust.
Best Regards,
Mark Anthony Grimaldi
Portfolio Manager, Author
RCSEC1118001
Sector Rotation Fund
Notes to Financial Statements
As of September 30, 2018
1. Organization and Significant Accounting Policies
The Sector Rotation 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 ("1940 Act"), as an open-end management investment company. The Fund is a separate, non-diversified series of the Trust.
The Fund commenced operations on December 31, 2009 as a series of the World Funds Trust ("WFT"). Shareholders approved the reorganization of the Fund as a series of the Trust at a special meeting on June 22, 2011. The reorganization occurred on June 27, 2011. Effective November 29, 2010, the Fund changed its name from the Navigator Fund to the Sector Rotation Fund.
The investment objective of the Fund is to achieve capital appreciation. The Fund utilizes a sector rotation strategy which evaluates the relative strength and momentum of different sectors of the economy in order to identify short-term investment opportunities. Under normal circumstances, the Fund invests in exchange-traded funds ("ETFs"). An ETF is an open-end investment company that holds a portfolio of investments designed to track a particular market segment or underlying index.
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 accounting and reporting guidance in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification 946 "Financial Services – Investment Companies," and Financial Accounting Standards Update ("ASU") 2013-08.
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. Instruments with maturities of 60 days or less are valued at amortized cost, which approximates market value. Securities and assets for which representative market quotations are not readily available (e.g., if the exchange on which the security is principally traded closes early or if trading of the particular 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 security's "fair value" price may differ from the price next available for that security using the Fund's normal pricing procedures.
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, 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.
(Continued)
Sector Rotation Fund
Notes to Financial Statements
As of September 30, 2018
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, 2018 for the Fund's assets measured at fair value:
| Sector Rotation Fund | | |
| Investments in Securities (a) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | |
| Exchange-Traded Funds* | $ | 24,349,230 | $ | 24,349,230 | $ | - | $ | - |
| Short-Term Investment | | 2,344,266 | | 2,344,266 | | - | | - |
| Total | $ | 26,693,496 | $ | 26,693,496 | $ | - | $ | - |
| | | | | | | | | |
| (a) | The Fund had no significant transfers into or out of Level 1, 2, or 3 during the year ended September 30, 2018. The Fund did not hold any Level 3 securities during the year. The Fund recognizes transfers at the end of the reporting period. |
*Refer to Schedule of Investments for breakdown by Industry.
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 accretion of discounts and amortization of 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 is responsible for all 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) 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 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 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.
| 2. | Transactions with Related Parties and Service Providers |
Advisor
The Fund pays a monthly fee to Grimaldi Portfolio Solutions, Inc. (the "Advisor") calculated at the annual rate of 1.00% of the Fund's average daily net assets.
(Continued)
Sector Rotation Fund
Notes to Financial Statements
As of September 30, 2018
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 those expenses and other expenditures which are capitalized in accordance with generally accepted accounting principles, acquired fund fees and expenses, other extraordinary expenses not incurred in the ordinary course of the Fund's business, expenses related to proxy filings for the shareholder meetings of the Fund, and amounts, if any, payable pursuant to a plan adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940) to not more than 1.89% of the average daily net assets of the Fund. The current term of the Expense Limitation Agreement remains in effect until January 31, 2019. 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 Advisor cannot recoup any amounts previously waived or reimbursed.
For the fiscal year ended September 30, 2018, $248,975 in advisory fees were incurred, and no fees were waived or 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 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. The Administrator also receives a miscellaneous compensation fee for peer group, comparative analysis, and compliance support totaling $350 per month. As of September 30, 2018, the Administrator received $4,200 in miscellaneous 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 $250 million | 0.100% | First $200 million | 0.020% | $2,250 | 0.01% | $150 per state |
| Next $250 million | 0.080% | Over $200 million | 0.009% | | | |
| Next $250 million | 0.060% | | | | | |
| Next $250 million | 0.050% | *Minimum monthly fees of $2,000 and $417 for Administration and Custody, respectively. |
| Next $1 billion | 0.040% |
| Over $2 billion | 0.035% |
The Fund incurred $24,951 in administration fees, $7,857 in custody fees, and $29,489 in fund accounting fees for the fiscal year ended September 30, 2018.
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 $21,003 in transfer agent fees during the fiscal year ended September 30, 2018.
Sector Rotation Fund
Notes to Financial Statements
As of September 30, 2018
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. This expense is included in the shareholder fulfillment expenses on the Statement of Operations.
3. Trustees and Officers
The Board of Trustees is responsible for the management and supervision of the Fund. The Trustees approve all significant agreements between the Trust, on behalf of the Fund, and those companies that furnish services to the Fund; review performance of the Advisor and the Fund; and oversee activities of the Fund. Officers of the Trust and Trustees who are interested persons of the Trust or the Advisor will receive no salary or fees from the Trust. Trustees who are not "interested persons" of the Trust or the Advisor within the meaning of the 1940 Act (the "Independent Trustees") receive $2,000 each year from each Fund. The Trust will reimburse each Trustee and officer of the Trust for his or her travel and other expenses relating to attendance of Board meetings. Additional fees may also be incurred during the year as special meetings are necessary in addition to the regularly scheduled meetings of the Board of Trustees.
Certain officers of the Trust may also be officers of the Administrator.
4. Purchases and Sales of Investment Securities
For the fiscal year ended September 30, 2018, 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 |
| $51,898,446 | $54,238,299 |
There were no long-term purchases or sales of U.S Government Obligations during the fiscal year ended September 30, 2018.
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 or to be taken on federal income tax returns for the open tax years of September 30, 2015 through September 30, 2018, 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 year, the Fund did not incur any interest or penalties.
For the fiscal year ended September 30, 2018, the following reclassifications were made:
| Undistributed Net Investment Loss | $ 80,146 |
| Accumulated Realized Gains | | (80,146) |
Sector Rotation Fund
Notes to Financial Statements
As of September 30, 2018
Distributions during the fiscal years ended were characterized for tax purposes as follows:
| | September 30, 2018 | September 30, 2017 |
| Net Investment Income | $ 610,381 | $ - |
| Long-Term Capital Gain | $ 772,799 | $ 636,326 |
At September 30, 2018, the tax-basis cost of investments and components of distributable earnings were as follows:
| Cost of Investments | $ | 20,028,714 |
| | | |
| Unrealized Appreciation | $ | 6,725,305 |
| Unrealized Depreciation | | (60,523) |
| Net Unrealized Appreciation | | 6,664,782 |
| | | |
| Undistributed Net Investment Income | | 745,369 |
| Undistributed Long-Term Gains | | 1,395,172 |
| Other Temporary Differences | | (123,514) |
| | | |
| Distributable Earnings | $ | 8,681,809 |
| | | | | | |
The difference between book-basis and tax-basis net unrealized appreciation (depreciation) is attributable to the deferral of losses from wash sales. The difference between book-basis and tax-basis undistributed net investment income and undistributed net realized gain on investments is attributable to the tax deferral of losses from wash sales and late-year ordinary losses and the tax treatment of short-term gains.
The Fund elects to defer to the year ending September 30, 2019, ordinary losses recognized during the period from January 1, 2018 through September 30, 2018 in the amount of $123,514.
6. Underlying Investment in Other Investment Company
The Fund currently invests a portion of its assets in the SPDR S&P 500 ETF Trust (the "ETF"). The Fund may redeem its investment from the ETF at any time if the Advisor determines that it is in the best interest of the Fund and its shareholders to do so. The performance of the Fund may be directly affected by the performance of the ETF. The financial statements of the ETF, including the portfolio of investments, can be found at the ETF's website, www.spdrs.com, or the Securities and Exchange Commission's website, www.sec.gov, and should be read in conjunction with the Fund's financial statements. As of September 30, 2018, 27.20% of the Fund's net assets were invested in the ETF.
7. New Accounting Pronouncement
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement. The amendments eliminate certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The new guidance is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. An entity is permitted to early adopt either the entire standard. The changes have been applied to the Fund's financial statements for the fiscal year ended September 30, 2018.
Sector Rotation Fund
Notes to Financial Statements
As of September 30, 2018
8. 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.
Management 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 Starboard Investment Trust
and the Shareholders of the Sector Rotation Fund
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities of the Sector Rotation Fund, a series of shares of beneficial interest in Starboard Investment Trust (the "Fund"), including the schedule of investments, as of September 30, 2018, 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 five-year period then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of September 30, 2018, 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 five-year period then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on the Fund's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Funds in accordance with the U.S. federal securities law and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risk of material misstatement of those financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of September 30, 2018 by correspondence with the custodian. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
BBD, LLP
We have served as the auditor of one or more of the Funds in the Starboard Investment Trust since 2012.
Philadelphia, Pennsylvania
November 29, 2018
A copy of the Advisor's Disclosure Policy is included as Appendix B to the Fund's Statement of Additional Information and is 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 12-month 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.
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 Form N-Q is available on the SEC's website at sec.gov. You may review and make copies at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 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 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 September 30, 2018.
During the fiscal year, $610,381 in income distributions were paid from the Fund and $772,799 in long-term capital gain distributions were paid from the Fund.
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.
As a shareholder of the Fund, you incur 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, 2018 through September 30, 2018.
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.
