Washington, D.C. 20549
116 South Franklin Street, Post Office Box 69, Rocky Mount, North Carolina 27802
A. Vason Hamrick
116 South Franklin Street, Post Office Box 69, Rocky Mount, North Carolina 27802
Item 1. REPORTS TO STOCKHOLDERS.
Semi-Annual Report 2013
February 28, 2013
(Unaudited)
Paladin Long Short Fund
This report and the financial statements contained herein are submitted for the general information of the shareholders of the Paladin Long Short 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 Paladin Long Short Fund is distributed by Capital Investment Group, Inc., Member FINRA/SIPC, 17 Glenwood Ave, Raleigh, NC, 27603. There is no affiliation between the Paladin Long Short Fund, including its principals, and Capital Investment Group, Inc.
Statements in this Semi-Annual Report that reflect projections or expectations of future financial or economic performance of the Paladin Long Short Fund (“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, without limitation, general economic conditions such as inflation, recession and interest rates. Past performance is not a guarantee of future results.
An investment in the Fund is subject to investment risks, including the possible loss of some or the entire principal amount invested. There can be no assurance that the Fund will be successful in meeting its investment objective. Investment in the Fund is also subject to the following risks: market risk, portfolio turnover risk, non-diversified risk, new fund risk, investment advisor risk, operating risk, common stocks risk, large-cap and mega-cap securities risk, small-cap and mid-cap securities risk, risks related to investing in other investment companies, inverse and leveraged ETF risk, foreign investment risk, currency risk, depository receipts risk, options risk, and short sales risk. More information about these risks and other risks can be found in the Fund’s prospectus.
The performance information quoted in this semi-annual report represents past performance, which is not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. An investor may obtain performance data current to the most recent month-end by visiting ncfunds.com.
An investor should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. The prospectus contains this and other information about the Fund. A copy of the prospectus is available at ncfunds.com or by calling Shareholder Services at 800-773-3863. The prospectus should be read carefully before investing.
This Semi-Annual Report was first distributed to shareholders on or about April 29, 2013.
For More Information on Your Paladin Long Short Fund:
See Our Web site at ncfunds.com
or
Call Our Shareholder Services Group at 800-773-3863.
March 31, 2013
Dear Shareholders of the Paladin Long Short Fund,
Please note the fund manager provides a detailed monthly review of the market, the Fund’s holdings, and the Fund’s performance. This is available to shareholders on the Fund’s website paladinfunds.com, by clicking “The Fund,” and then by clicking “Manager Letters.” Below are comments for the Fund’s semi-annual period beginning with September 2012 through end of February 2013.
For the period from September 1, 2012 through February 28, 2013, the Fund returned 3.13% compared to 8.50% for the Fund’s benchmark index, the Russell 1000 Index.
Please see the table below for the Fund’s historical performance information through the calendar quarter ended March 31, 2013.
Returns | | | Net | Gross |
Period Ended March 31, 2013 | One Year | Since Inception* | Expense Ratio** | Expense Ratio*** |
| | | | | |
| Paladin Long Short Fund | -1.60% | -1.16% | 2.13% | 3.72% |
Russell 1000 Index**** | 11.96% | 22.62% | n/a | n/a |
The performance data quoted above represents past performance, which is not a guarantee of future results. Investment return and principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. To obtain more current performance data regarding the Fund, including performance data current to the Fund’s most recent month-end, please visit ncfunds.com or call the Fund at 800-773-3863. Fee waivers and expenses reimbursements have positively impacted Fund performance.
*The Fund’s inception date is December 15, 2011.
**The Fund’s administrator has entered into a Fund Accounting and Administration Agreement with the Fund that runs through January 1, 2014. The agreement can only be terminated prior to that date at the discretion of the Fund’s Board of Trustees. The Fund’s administrator receives payments under the agreement at a maximum annual rate of 0.60%. In conjunction with the Fund Accounting and Administration Agreement, the Advisor has entered into an Operating Plan with the Fund’s administrator, also through January 1, 2014, under which it has agreed to (i) to pay the administrator a fee based on the daily average net assets of the Fund when net assets are below $35 million; (ii) if these payments are less than a designated minimum, then the Advisor pays a fee that makes up the difference; and (iii) to assume expenses of the Fund outlined in the Operating Plan that are not covered by the fee paid under Fund Accounting and Administration Agreement. These measures are intended to limit the Fund’s operating expenses to 0.60% of the average daily net assets, exclusive of management fees, 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 to the extent that 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.
***Gross expense ratio is from the Fund’s prospectus dated December 31, 2012.
****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.
Markets
In the six month period covered in this semi-annual report, U.S. markets ended a three and a half month rally that had begun in early June by mid September. The climax of this rally was the Federal Reserve announcement of a program now termed “Quantitative Easing Unlimited”; that is an expansion of programs that had been previously run during crisis periods (“QE1”) and the early stages of economic recovery (“QE2”). Both of those programs however were of a finite duration and amount of money; what changed at the mid September meeting was the open ended nature of the program. At the Federal
Reserve’s December meeting another historic change took place, this time explicit targets for unemployment and inflation were introduced as guidelines for when the central bank may curtail it’s never before seen actions. While a semi-annual letter normally would begin with a general economic or stock market overview, the heavy hand of the world’s central banks on all markets the past half decade pushes their prominence to the top of all market discussion, hence this letter reflects that.
In terms of market reaction, an intermediate market peak was hit in the two sessions after the Federal Reserve’s launch of QE unlimited in mid September. From there a month of sideways consolidation took place, followed by a significant correction through mid November as markets turned their eyes to the “fiscal cliff” situation in the United States political sphere. From peak to trough (mid Sept – mid Nov) the Russell 1000 corrected 8.8%. As the market became more comfortable with the idea that politicians would showboat but eventually come to a resolution, even if that resolution was mostly another kicking of the can, a new upward trend began in mid November. While this was derailed for a few weeks late in December as political progress stalled, the announcement of a deal in the wee hours of the New Year pushed markets upward into a new move higher. U.S. markets regained their mid September highs by mid January. Aside from a short duration ~3% correction in mid/late February due to concerns over the Italian political process and their prospects for economic reform go forward, the market has continued to press upward through the end of this letter’s timeframe.
Turning globally, European markets which had been the focus of the market for much of the past few years seemed to fall under the spell of the European Central Bank’s Mario Draghi, who famously said in late July he would do “whatever it takes” to keep the eurozone together. Market participants saw this as a “market put” (i.e. a support under all markets) and a removal of “tail risk” (a low probability highly disruptive event), and a very similar tact to what the U.S. Federal Reserve has done. In December, Japan turned to a new Prime Minister who has pledged to strike at the country’s decades long deflationary pressures through a cocktail of fiscal and monetary stimulus. This would entail the removal of the old Bank of Japan leader, and insertion of a much more dovish character. Once again, this is a copy of the U.S. model and markets applauded the move, driving down the yen and causing the Japanese stock market to surge into and through early 2013. Emerging markets have had a much more difficult time during this time frame with quite modest gains in countries such as Brazil and India, while China has rallied albeit off multi year lows. Notably, none of these countries have activist central banks at this time, which has seemed to be the main driver of markets in recent years.
Economic data has improved modestly in the United States – most notably in the housing market. As has been the pattern the past few years economic data seems to improve in the fall through late winter, and then in previous years it begins to fall off in the spring and summer months, so investors will be watching to see if there is a repeat of this in 2013, or economic expansion is more lasting. Data in Europe continues to be quite weak, while China continues to struggle with the ability to expand GDP without creating too much inflation in real estate or food prices.
For the half year, the Fund posted a positive return of 3.13% but lagged the Russell 1000’s return of 8.50%. The Fund adjusts its exposure to the market based on overall technical analysis of market conditions. Chronologically, this led to the Fund being in an aggressively long posture in September when the Fund returned 1.9%. As technical conditions weakened through October the Fund scaled back market exposure and this helped to alleviate significant losses during the Russell 1000’s 8.8% drop from mid September to mid November. To that end the Fund’s peak to trough drop from mid September to mid November was 2.2%, or a quarter of the index’s drop.
As the market was in a very deeply oversold condition in mid November, the Fund increased its long exposure relatively sharply and was able to partake in the initial gains off the November lows; in that month the Fund gained 1.4% versus the Russell 1000’s 0.6%. December was a more difficult affair as the rally seemed to stall and fail in late December as the fiscal cliff talks broke down. Markets sold off sharply in late December, which caused the Fund to cut back market exposure as a “binary event” was facing the market – either there was the potential for a sharp rally as the politicians came to a last second resolution or the potential for further losses if they did not. Eventually a resolution of some form was reached over the New Year holiday and markets surged on the last day of 2012 and the first of 2013. The Fund was ill positioned for this and ended December with a modest loss of 0.5% versus the Russell 1000’s gain of 0.9%.
Most of the Fund’s drag versus the Russell 1000 happened in the month of January 2013 as the markets staged a furious rally of >5%. While technical conditions improved significantly during this period the Fund had entered the year with low exposure and was playing catch up throughout the month. The Fund returned 1.0% in January. February was another month where a false signal was sent by the market – the multi month trend with its nexus in mid November had been broken in mid February by news of the Italian elections; this pushed the major indexes out of a major channel upward they had been traveling for months (similar to what happened during the fiscal cliff talks in late December), and there had been a significant rotation at that time to safety sectors such as utilities, healthcare, and consumer staples. Normally this is a sign of extreme caution with the potential for further downside but in this case markets shrugged off these cautionary indicators and started a new leg up in the closing days of the month. In the month of February, the Fund was flat while the Russell 1000 gained 1.2%.
In conclusion, as with the first half of 2012 the Fund’s laggard performance during this semi-annual period occurred during the strong upside moves in the market. During the significant corrections since inception the Fund has been able to limit losses, but the reversals back upward have often been due to comments or actions from central bankers (or politicians) and these cause 180 degree changes in conditions, which are difficult to change portfolio exposure to in a quick fashion. Hence we have often seen markets in poor technical condition, which call for cautionary exposure, followed immediately by a central bank comment or action that lurches all risk assets upward in a significant fashion in a matter of a few days. Those specific days are where the bulk of the Fund’s underperformance has come.
While some believe this is a “new era” where central bankers can make markets dance to their words, eventually this will not be true. We saw the fallout in 2007-2009 from an era where Alan Greenspan tried to protect markets and economies, and it built massive imbalances in the system which eventually washed out. It appears Ben Bernanke is not only following that plan but doing it to the nth degree. And now other world central bankers have joined the game plan. For now, market players are dancing to this tune as they did to Greenspan for years and it appears all investors need to adjust to this reality but in the back of our minds we must be aware that there will be a price to pay for not letting markets clear on their own terms. The obvious question for investors is: “When is that day?”
With warmest regards,
Mark Hanna
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 Semi-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.
| Paladin Long Short Fund | | | | | | | |
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| Schedule of Investments | | | | | | | |
| (Unaudited) | | | | | | | | |
| | | | | | | | | | | |
| As of February 28, 2013 | | | | | | | |
| | | | | | | | | Shares | | Value (Note 1) |
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| COMMON STOCKS - 20.53% | | | | | | | |
| | | | | | | | | | | |
| | Consumer Discretionary - 1.88% | | | | | | | |
| | * | Lions Gate Entertainment Corp. | | | | | 2,500 | $ | 52,425 |
| | * | Shutterfly, Inc. | | | | | | 1,000 | | 43,804 |
| | | | | | | | | | | 96,229 |
| | Consumer Staples - 2.37% | | | | | | | |
| | | Energizer Holdings, Inc. | | | | | 700 | | 64,351 |
| | | PepsiCo, Inc. | | | | | | 750 | | 56,827 |
| | | | | | | | | | | 121,178 |
| | Financials - 2.86% | | | | | | | | |
| | | American Express Co. | | | | | 1,300 | | 80,795 |
| | | JPMorgan Chase & Co. | | | | | 200 | | 9,784 |
| | | The NASDAQ OMX Group, Inc. | | | | | 1,750 | | 55,405 |
| | | | | | | | | | | 145,984 |
| | Health Care - 2.70% | | | | | | | |
| | *β | Alkermes PLC | | | | | | 2,000 | | 43,507 |
| | * | Athenahealth, Inc. | | | | | 1,000 | | 94,656 |
| | | | | | | | | | | 138,163 |
| | Industrials - 3.23% | | | | | | | | |
| | | Norfolk Southern Corp. | | | | | 1,000 | | 73,050 |
| | | Robert Half International, Inc. | | | | | 1,000 | | 35,550 |
| | | WW Grainger, Inc. | | | | | 250 | | 56,615 |
| | | | | | | | | | | 165,215 |
| | Information Technology - 3.76% | | | | | | | |
| | * | Google, Inc. - Cl. A | | | | | 100 | | 80,120 |
| | * | Infoblox, Inc. | | | | | | 2,000 | | 41,718 |
| | * | LinkedIn Corp. - Cl. A | | | | | 200 | | 33,636 |
| | | Microchip Technology, Inc. | | | | | 1,000 | | 36,470 |
| | | | | | | | | | | 191,944 |
| | Materials - 0.94% | | | | | | | | |
| | | EI du Pont de Nemours & Co. | | | | | 1,000 | | 48,092 |
| | | | | | | | | | | 48,092 |
| | Telecommunication Services - 1.64% | | | | | | | |
| | | AT&T, Inc. | | | | | | 2,500 | | 83,600 |
| | | | | | | | | | | 83,600 |
| | Utilities - 1.15% | | | | | | | | |
| | | Questar Corp. | | | | | | 2,500 | | 58,775 |
| | | | | | | | | | | 58,775 |
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| | | Total Common Stocks (Cost $1,056,298) | | | | | | 1,049,180 |
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| | | | | | | | | | | (Continued) |
| Paladin Long Short Fund | | | | | | | |
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| Schedule of Investments | | | | | | | |
| (Unaudited) | | | | | | | | |
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| As of February 28, 2013 | | | | | | | |
| | | | | | | | | Shares | | Value (Note 1) |
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| EXCHANGE TRADED PRODUCTS - 3.28% | | | | | | | |
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| | Equities - 0.95% | | | | | | | | |
| | | iShares MSCI Australia Index Fund | | | | 1,800 | $ | 48,384 |
| | | | | | | | | | | 48,384 |
| | Fixed Income - 2.33% | | | | | | | |
| | | iShares Barclays 20+ Year Treasury Bond Fund | | | 800 | | 92,432 |
| | | iShares Barclays MBS Bond Fund | | | | | 250 | | 27,007 |
| | | | | | | | | | | 119,439 |
| | | | | | | | | | | |
| | | Total Exchange Traded Products (Cost $170,520) | | | | 167,823 |
| | | | | | | | | | | |
| | | | | Number of Contracts | Exercise Price | Maturity Date | |
| PUT OPTIONS PURCHASED - 0.12% | | | | | | | |
| | | SPDR S&P 500 ETF Trust | 10 | $ | 149.00 | | 5/18/2013 | $ | 2,870 |
| | | SPDR S&P 500 ETF Trust | 10 | | 151.00 | | 5/18/2013 | | 3,564 |
| | | | | | | | | | | |
| | | Total Put Options Purchased (Cost $7,358) | | | | | | 6,434 |
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| CALL OPTION PURCHASED - 0.09% | | | | | | | |
| | | Vodafone Group PLC | 35 | | 25.00 | | 7/20/2013 | | 4,550 |
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| | | Total Call Option Purchased (Cost $4,214) | | | | | | 4,550 |
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| | | | | | | Interest | | Maturity | | |
| | | | | Principal | | Rate | | Date | | |
| TREASURY BILL - 26.41% | | | | | | | |
| | | United States Treasury Bill | $ | 1,350,000 | | 0.000% | | 5/2/2013 | | 1,349,779 |
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| | | Total Treasury Bill (Cost $1,349,862) | | | | | | | 1,349,779 |
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| | | | | | | | | Shares | | |
| SHORT-TERM INVESTMENT - 69.25% | | | | | | | |
| | § | Federated Prime Obligations Fund, 0.09% | | | | 3,539,291 | | 3,539,291 |
| | | | | | | | | | | |
| | | Total Short-Term Investment (Cost $3,539,291) | | | | | | 3,539,291 |
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| Total Value of Investments (Cost $6,127,543) - 119.68% | | | | | $ | 6,117,057 |
| | | | | | | | | | | |
| Liabilities in Excess of Other Assets - (19.68)% | | | | | | (1,005,893) |
| | | | | | | | | | | |
| | Net Assets - 100.00% | | | | | | $ | 5,111,164 |
| | | | | | | | | | | |
| | | | | | | | | | | (Continued) |
| Paladin Long Short Fund | | | | | | | |
| | | | | | | | | | | |
| Schedule of Investments | | | | | | | |
| (Unaudited) | | | | | | | | |
| | | | | | | | | | | |
| As of February 28, 2013 | | | | | | | |
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| * | Non-income producing investment | | β | Irish security | | | |
| § | Represents 7 day effective yield | | | | | | | |
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| | The following acronym is used in this portfolio: | | | | | | |
| | PLC - Public Limited Company | | | | | | | |
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| | | | Summary of Investments by Sector | | | | | | |
| | | | | | | % of Net | | | | |
| | | | Sector | | | Assets | | Value | | |
| | | | Consumer Discretionary | | 1.88% | $ | 96,229 | | |
| | | | Consumer Staples | | | 2.37% | | 121,178 | | |
| | | | Financials | | | 2.86% | | 145,984 | | |
| | | | Health Care | | | 2.70% | | 138,163 | | |
| | | | Industrials | | | 3.23% | | 165,215 | | |
| | | | Information Technology | | | 3.76% | | 191,944 | | |
| | | | Materials | | | 0.94% | | 48,092 | | |
| | | | Telecommunication Services | | 1.64% | | 83,600 | | |
| | | | Utilities | | | 1.15% | | 58,775 | | |
| | | | Exchange Traded Products | | 3.28% | | 167,823 | | |
| | | | Put Options Purchased | | | 0.12% | | 6,434 | | |
| | | | Call Option Purchased | | | 0.09% | | 4,550 | | |
| | | | Treasury Bill | | | 26.41% | | 1,349,779 | | |
| | | | Short-Term Investment | | | 69.25% | | 3,539,291 | | |
| | | | Total | | | 119.68% | $ | 6,117,057 | | |
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| See Notes to Financial Statements | | | | | | | |
| Paladin Long Short Fund | | |
| | | | |
| Statement of Assets and Liabilities | | |
| (Unaudited) | | |
| | | | |
| As of February 28, 2013 | | |
| | | | |
| ASSETS | | |
| | Investments, at value (cost $6,127,543) | $ | 6,117,057 |
| | Receivables: | | |
| | | Investments sold | | 1,768,776 |
| | | Fund shares sold | | 60 |
| | | Dividends and interest | | 1,585 |
| | | | Total assets | | 7,887,478 |
| | | | |
| LIABILITIES | | |
| | Payables: | | |
| | | Investments purchased | | 2,726,146 |
| | Accrued expenses | | |
| | | Advisory fees | | 4,704 |
| | | Administration fees | | 1,969 |
| | | Other expenses | | 964 |
| | Disbursements in excess of cash on demand deposit | | 42,531 |
| | | | Total liabilities | | 2,776,314 |
| | | | |
| NET ASSETS | $ | 5,111,164 |
| | | | |
| Net Assets Consist of: | | |
| | Paid in Capital | $ | 5,328,395 |
| | Accumulated net investment loss | | (138,508) |
| | Accumulated net realized loss on investments | | (68,237) |
| | Net unrealized depreciation on investments | | (10,486) |
| | | | Total Net Assets | $ | 5,111,164 |
| | | | |
| | Shares Outstanding, no par value (unlimited authorized shares) | | 518,664 |
| | | | |
| | Net Asset Value, Maximum Offering Price and Redemption Price Per Share (a) | $ | 9.85 |
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| (a) | The fund charges a 2% redemption fee on redemptions made within 180 days of initial purchase. |
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| See Notes to Financial Statements | | |
| Paladin Long Short Fund | | |
| | | | |
| Statement of Operations | | |
| (Unaudited) | | |
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| For the period from September 1, 2012 to February 28, 2013 | | |
| | | | |
| INVESTMENT INCOME | | |
| | Interest | $ | 635 |
| | Dividends | | 25,008 |
| | Other Income | | 6 |
| | | Total Investment Income | | 25,649 |
| | | | |
| EXPENSES | | |
| | Advisory fees (note 2) | | 39,968 |
| | Administration fees (note 2) | | 19,309 |
| | Distribution and service fees (note 3) | | 8,046 |
| | Interest expense | | 1,072 |
| | Other operating expenses | | 120 |
| | | Gross Expenses | | 68,515 |
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| | | | |
| NET INVESTMENT LOSS | | (42,866) |
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| REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | | |
| | | | |
| | Net realized gain (loss) from: | | |
| | | Investments | | 255,166 |
| | | Options purchased | | (18,306) |
| | | Securities sold short | | 4,952 |
| | | | 241,812 |
| | Change in unrealized appreciation (depreciation) on: | | |
| | | Investments | | (7,549) |
| | | Options purchased | | 3,016 |
| | | Securities sold short | | (887) |
| | | | (5,420) |
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| NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS | | 236,392 |
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| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $ | 193,526 |
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| See Notes to Financial Statements | | |
| Paladin Long Short Fund | | | | | | | |
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| Statements of Changes in Net Assets | | | | | | | |
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| | | | | | | | | Period Ended | | Year Ended | |
| | | | | | | | | February 28, 2013 (a) | | August 31, 2012 (b) | |
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| OPERATIONS: | | | | | | | | |
| | Net investment loss | | | $ | (42,866) | $ | (97,799) | |
| | Net realized gain (loss) from investment transactions | | | 241,812 | | (310,049) | |
| | | Change in unrealized depreciation on investments | | | (5,420) | | (5,066) | |
| | Net increase (decrease) in net assets resulting from operations | | 193,526 | | (412,914) | |
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| CAPITAL SHARE TRANSACTIONS: | | | | | | | |
| | | Shares sold | | | | | 380,176 | | 10,401,032 | |
| | Redemption fees (Note 1) | | | | 2,464 | | 7,709 | |
| | Shares redeemed | | | | (2,711,481) | | (2,749,348) | |
| | Net (decrease) increase from capital share transactions | | | (2,328,841) | | 7,659,393 | |
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| | | Net (decrease) increase in net assets | | | | (2,135,315) | | 7,246,479 | |
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| NET ASSETS: | | | | | | | | |
| | Beginning of period | | | | 7,246,479 | | - | |
| | End of period | | | | $ | 5,111,164 | $ | 7,246,479 | |
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| | Accumulated net investment loss | | | $ | (138,508) | $ | (95,642) | |
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| TRANSACTIONS IN SHARES: | | | | | | | |
| | Shares sold | | | | | 38,790 | | 1,040,724 | |
| | Shares redeemed | | | | (277,174) | | (283,676) | |
| | Net (decrease) increase | | | | (238,384) | | 757,048 | |
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| (a) | Unaudited. | | | | | | | | |
| (b) | For the period from December 15, 2011 (Date of Initial Public Investment) to August 31, 2012. | |
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| See Notes to Financial Statements | | | | | | | |
| Paladin Long Short Fund | | | | | | |
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| Financial Highlights | | | | | | |
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| For a share outstanding during the | | | | | | |
| fiscal year or period ended | | | February 28, 2013 (a) | August 31, 2012 (f) | |
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| Net asset value, beginning of period | | $ | 9.57 | $ | 10.00 | |
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| Income (loss) from investment operations | | | | | |
| | Net investment income (loss) | | | (0.14) | | (0.13) | |
| | Net realized and unrealized gains | | | | | (0.31) | |
| | | (losses) on securities | | | 0.42 | | - | |
| Total from investment operations | | | 0.28 | | (0.44) | |
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| Paid in capital | | | | | | | |
| | From redemption fees | | | 0.00 | (g) | 0.01 | |
| Total paid in capital | | | 0.00 | | 0.01 | |
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| Net asset value, end of period | | $ | 9.85 | $ | 9.57 | |
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| Total Return (d)(e) | | | 2.93% | (c) | (4.30)% | (c) |
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| Net assets, end of period (000's) | | $ | 5,111 | $ | 7,246 | |
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| Ratios of: | | | | | | | | |
| Gross expenses to average net assets (f) | | 2.13% | (b) | 2.12% | (b) |
| Net investment income/(loss) | | | | | | |
| | to average net assets | | | (1.33)% | (b) | (1.59)% | (b) |
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| Portfolio turnover rate | | | 4933% | (c) | 8244% | (c) |
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| (a) | Unaudited. | | | | | | | |
| (b) | Annualized. | | | | | | | |
| (c) | Not annualized. | | | | | | |
| (d) | Total return does not reflect sales charge, if any. | | | | | |
| (e) | Includes adjustments in accordance with accounting principles generally accepted in the United States and, consequently, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset values and returns for shareholder transactions. |
| (f) | For a share outstanding during the period from December 15, 2011 (Date of Initial Public Investment) to | |
| | August 31, 2012. | | | | | | |
| (g) | Actual amount is less than $0.01 per share. | | | | | |
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| See Notes to Financial Statements | | | | | | |
Paladin Long Short Fund
Notes to Financial Statements
(Unaudited)
1. Organization and Significant Accounting Policies
The Paladin Long Short Fund (“Fund”) is a series of the Hanna 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 classified as a non-diversified company as defined in the 1940 Act.
The Fund commenced operations on December 15, 2011. The Fund’s investment advisor, Hanna Capital LLC (the “Advisor”), seeks to achieve the Fund’s investment objective of capital appreciation by using both long and short strategies.
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. Listed securities and other securities traded in the over-the-counter market 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 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 by either a valuation committee or the Fund’s Investment Advisor in accordance with procedures established by, and under the supervision of, the Fund’s 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.
Option Valuation
Exchange-listed options are valued at their last quoted sales price as reported on their primary exchange as of 4:00 p.m. Eastern Time (the “Valuation Time”). For purposes of determining the primary exchange for each exchange-traded portfolio option the following shall apply: (i) if the option is traded on the Chicago Board Options Exchange (“CBOE”), the CBOE shall be considered the primary exchange for such option, unless the Advisor instructs the Administrator in writing to use a different exchange as the primary exchange for such option; and (ii) if the option does not trade on the CBOE, the Advisor shall instruct the Administrator in writing as to the primary exchange for such option. Unlisted options for which market quotations are readily available are valued at the last quoted sales price at the Valuation Time. If an option is not traded on the valuation date, the option shall be priced at the mean of the last quoted bid and ask prices as of the Valuation Time. An option may be valued using Fair Valuation when (i) the option does not trade on the valuation date; and (ii) reliable last quoted bid and ask prices as of the Valuation Time are not readily available.
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:
| a. | Level 1: quoted prices in active markets for identical securities |
| b. | Level 2: other significant observable inputs (including quoted prices for similar securities and identical securities in inactive markets, interest rates, credit risk, etc.) |
| c. | 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.
Paladin Long Short Fund
Notes to Financial Statements
(Unaudited)
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following tables summarize the inputs as of February 28, 2013 for the Fund’s investments measured at fair value:
| | | |
| Investments in Securities (a) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | |
| Common Stocks* | $ | 1,049,180 | $ | 1,049,180 | $ | - | $ | - |
| Exchange Traded Products* | | 167,823 | | 167,823 | | - | | - |
| Put Options Purchased | | 6,434 | | 6,434 | | - | | - |
| Call Option Purchased | | 4,550 | | 4,550 | | - | | - |
| Treasury Bill | | 1,349,779 | | - | | 1,349,779 | | - |
| Short-Term Investment | | 3,539,291 | | 3,539,291 | | - | | - |
| Total Assets | $ | 6,117,057 | $ | 4,767,278 | $ | 1,349,779 | $ | - |
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*For a detailed breakout by industry, please refer to the Schedule of Investments.
(a) The fund had no significant transfers into or out of Level 1, 2, or 3 during the period ended February 28, 2013.
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 net assets on the Statements of Assets and Liabilities. Realized gain and loss and unrealized appreciation and depreciation on these contracts for the period are included in the Statement of Operations.
The following table sets forth the effect of the option contracts on the Statement of Assets and Liabilities for the period ending February 28, 2013:
| Derivative Type | Location | | Value |
| Equity Contracts – purchased options | Investments, at value | $ | 10,984 |
The following table sets forth the effect of the option contracts on the Statement of Operations for the period ending February 28, 2013:
| Derivative Type | Location | | Gains (Losses) |
| Equity Contracts – purchased options | Net realized loss from options purchased | $ | (18,306) |
| Equity Contracts – purchased options | Change in unrealized appreciation on options purchased | $ | 3,016 |
Paladin Long Short Fund
Notes to Financial Statements
(Unaudited)
The amounts of realized and changes in unrealized 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.
Investment Transactions and Investment Income
Investment transactions are accounted for as of the date purchased or sold (trade date). Dividend income and expenses are 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.
Dividend Distributions
The Fund may declare and distribute dividends from net investment income (if any) quarterly. 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.
Fees on Redemptions
The Fund charges a redemption fee of 2.00% on redemptions of Fund shares occurring within 180 days following the issuance of such shares. The redemption fee is not a fee to finance sales or sales promotion expenses, but is paid to the Fund to defray the costs of liquidating an investor and discouraging short-term trading of the Fund’s shares. No redemption fee will be imposed on the redemption of shares representing dividends or capital gains distributions, or on amounts representing capital appreciation of shares. The Fund charged $2,464 in redemption fees during the period ended February 28, 2013.
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.
Options
The Fund may purchase put and call options. Put options are purchased to hedge against a decline in the value of securities held in the Fund’s portfolio. If such a decline occurs, the put options will permit the Fund to sell the securities underlying such options at the exercise price, or to close out the options at a profit. The premium paid for a put or call option plus any transaction costs will reduce the benefit, if any, realized by the Fund upon exercise of the option, and, unless the price of the underlying security rises or declines sufficiently, the option may expire worthless to the Fund. In addition, in the event that the price of the security in connection with which an option was purchased moves in a direction favorable to the Fund, the benefits realized by the Fund as a result of such favorable movement will be reduced by the amount of the premium paid for the option and related transaction costs. Purchased options are non-income producing securities.
Short Sales
A "short sale" is a transaction in which the Fund sells a security it does not own but has borrowed in anticipation that the market price of that security will decline. The Fund is obligated to replace the security borrowed by purchasing it on the open market at a later date. If the price of the security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will incur a loss. Conversely, if the price declines, the Fund will realize a gain.
(Continued)
Paladin Long Short Fund
Notes to Financial Statements
(Unaudited)
| 2. | Transactions with Related Parties & Service Providers |
Advisor
As full compensation for the investment advisory services provided to the Fund, the Advisor receives monthly compensation from the Fund in the form of a variable performance-based incentive fee. The fee is comprised of two separate component fees: (i) a base rate of 1.25% of the average daily net assets of the Fund (fulcrum fee) and (ii) a performance incentive fee described in the Prospectus that will range from -0.20% to +0.20% of average daily net assets for the prior 12-month period. The Advisor will only receive the fulcrum fee for the Fund’s first 12 months of operations so that a performance record can be established for the Fund. In agreement with these terms, the Fund paid $39,968 in advisory fees for the period ended February 28, 2013.
The Advisor has entered into an Operating Plan with the Fund’s Administrator through January 1, 2014, under which it has agreed to make payments to the Administrator when the Fund is at lower asset levels and to assume certain expenses of the Fund outlined in the Operating Plan. The Advisor cannot recoup from the Fund any amounts paid by the Advisor to the Administrator under the Operating Plan.
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 regular operating expenses of 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 0.60% if the average daily net assets are under $40 million and gradually decreases to an annual rate of 0.105% once the average daily net assets reach $1.135 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 regular operating 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 federal, state or local income or other taxes; any interest; any membership fees of the Investment Company Institute and similar organizations; fidelity bond and Trustees’ liability insurance premiums. The Fund paid $19,309 of administration fees for the period ended February 28, 2013.
Compliance Services
Nottingham Compliance Services, LLC (“NCS”), a fully owned affiliate of the Administrator, provides services which assist the Trust’s Chief Compliance Officer in monitoring and testing the policies and procedures of the Trust in conjunction with requirements under Rule 38a-1 of the 1940 Act. NCS is entitled to receive compensation from the Administrator pursuant to the Administrator’s fee arrangements with 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 Administrator’s fee arrangements with the Fund.
Paladin Long Short Fund
Notes to Financial Statements
(Unaudited)
Certain Trustees and officers of the Trust may also be officers of the Advisor, the Distributor, the Administrator, or NCS.
| 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 period ended February 28, 2013, $8,046 in fees were incurred by the Fund.
| 4. | Purchases and Sales of Investment Securities |
For the period ended February 28, 2013, the aggregate cost of purchases and proceeds from sales of investment securities (excluding short-term securities) were as follows:
| Six month period | Purchases of Securities | Proceeds from Sales of Securities |
| September 1, 2012 to February 28, 2013 | $120,195,847 | $124,226,305 |
There were no long-term purchases or sales of U.S Government Obligations during the period ended February 28, 2013.
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 has analyzed the Fund’s tax positions for all open tax years (current and prior three tax years, if applicable) and determined that the implementation of ASC Topic 740 “Accounting for Uncertainty in Income Taxes” had no impact on the Fund’s net assets or results of operations. As of and during the six month period ended February 28, 2013, 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 period, the Fund did not incur any interest or penalties.
At February 28, 2013, the tax-basis cost of investments and components of distributable earnings were as follows:
| Cost of Investments | $ | 6,127,543 |
| | | |
| Unrealized Appreciation | $ | 1,758 |
| Unrealized Depreciation | | (12,244) |
| Net Unrealized Depreciation | $ | (10,486) |
Paladin Long Short Fund
Notes to Financial Statements
(Unaudited)
| 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. | New Accounting Pronouncements |
In December 2011, FASB issued ASU No. 2011-11 related to disclosures about offsetting assets and liabilities. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance requires retrospective application for all comparative periods presented.
Management is currently evaluating the impact the new pronouncements will have on the financial statement disclosures.
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.
Paladin Long Short Fund
Additional Information
(Unaudited)
Item 2. CODE OF ETHICS.
Not applicable.
Item 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
Item 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
Item 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
Item 6. SCHEDULE OF INVESTMENTS.
A copy of Schedule I - Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this Form.
Not applicable.
Not applicable.
Not applicable.
Item 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Item 11. CONTROLS AND PROCEDURES.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
