united states
securities and exchange commission
washington, d.c. 20549
form n-csr
certified shareholder report of registered management
investment companies
Investment Company Act file number 811-22718
Two Roads Shared Trust
(Exact name of registrant as specified in charter)
17605 Wright Street, Suite 102, Omaha, NE 68137
(Address of principal executive offices) (Zip code)
Richard Malinowski, Gemini Fund Services, LLC.
80 Arkay Drive Suite 110, Hauppauge, NY 11788
(Name and address of agent for service)
Registrant's telephone number, including area code: 631-470-2619
Date of fiscal year end: 10/31
Date of reporting period:10/31/18
ITEM 1. REPORTS TO SHAREHOLDERS.
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Fund’s shareholder reports like this one will no longer be sent by mail, unless you specifically request paper copies of the reports. Instead, the reports will be made available on the Fund’s website www.leadersharesetfs.com and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from the Fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you are a direct investor, by following the instructions included with paper Fund documents that have been mailed to you.
Dear Shareholder,
LeaderShares™ AlphaFactor US Core Equity ETF Returns: -8.60%
Source: Gemini Fund Services.
Unfortunately, LSAF was launched October 2, 2018, which ended with the worst monthly performance for US stocks since 2011, as reflected by the Russell 1000 and S&P500. Given only the one month time period, LSAF performed similarly to the broader US equity markets. This portfolio behavior is well within our expectations over this very short time period. Over the longer term, our expectation is for the AlphaFactor methodology to add value over time through consistent application of our supply and demand based factors.
After the strong upward move in equity prices that became increasingly narrowly focused on certain large cap technology stocks, it is not surprising to us for the markets to experience a pull back. The unknown variable is whether this initial pullback is foreshadowing of an economic slowdown or even recession to come or simply another pullback and consolidation before equities continue their bull run. Regardless of the answer to that question, we are confident in the AlphaFactor methodology.
We encourage you to talk with your financial advisor or visit us online at www.leadersharesetfs.com. Thank you for your continued trust.
Sincerely,
Michael Messinger
Principal & Co-Portfolio Manager
LeaderShares™ ETFs
3008-NLD-1/3/2019
1
LeaderSharesTMAlphaFactor® US Core Equity ETF |
PORTFOLIO REVIEW |
October 31, 2018 (Unaudited) |
The Fund’s performance figures* for the period ended October 31, 2018, compared to its benchmark:
Since Inception(a) | |
LeaderSharesTM AlphaFactor® US Core Equity ETF - NAV(b) | (8.60)% |
LeaderSharesTM AlphaFactor® US Core Equity ETF - Market Price(b) | (7.88)% |
AlphaFactor®US Core Equity Index (b) | (8.70)% |
* | The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or on the redemption of Fund shares. The Fund’s per share net asset value or “NAV” is the value of one share of the Fund as calculated in accordance with the standard formula for valuing shares. The NAV return is based on the NAV of the Fund and the market return is based on the market price per share of the Fund. The price used to calculate market return (“Market Price”) is determined by using the midpoint between the highest bid and the lowest offer on the primary stock exchange on which shares of the Fund are listed for trading, as of the time that the Fund’s NAV is calculated. Since shares of the Fund did not trade in the secondary market until after the Fund’s inception, for the period from inception (10/1/2018) to the first day of secondary market trading shares of the Fund, the NAV of the Fund is used as a proxy for the Market Price to calculate market returns. Market and NAV returns assume that dividends and capital gain distributions have been reinvested in the Fund at Market Price and NAV, respectively. The Fund’s total annual operating expenses are 0.75% per the October 1, 2018 prospectus. Please see the Financial Highlights for a more recent expense ratio. For performance information current to the most recent month-end, please call toll-free 1-855-733-3863. |
(a) | As of the close of business on the day of commencement of trading October 1, 2018 |
(b) | The AlphaFactor® US Core Equity Index, the Fund advisor’s proprietary index, utilizes a quantitative rules-based investment methodology that applies a multi-factor ranking process and is focused on the largest 1,000 U.S. common stocks based on market capitalization. Companies within this group of top 1,000 market capitalization may be considered large or mid-cap companies. |
Comparison of the Change in Value of a $250,000 Investment
PORTFOLIO ANALYSIS | ||||
October 31, 2018 | ||||
Percent of | ||||
Top 10 Industries | Net Assets | |||
Retail | 16.2 | % | ||
Banks | 9.3 | % | ||
Diversified Financial Services | 6.2 | % | ||
Electronics | 6.0 | % | ||
Software | 5.8 | % | ||
Miscellaneous Manufacturing | 4.5 | % | ||
Computers | 4.2 | % | ||
Pharmaceuticals | 4.1 | % | ||
Transportation | 3.8 | % | ||
Commercial Services | 3.7 | % | ||
Other/Cash and Equivalents | 36.2 | % | ||
Total | 100.0 | % |
Please refer to the Portfolio of Investments for a detailed listing of the Fund’s holdings.
2
LeaderSharesTMAlphaFactor® US Core Equity ETF |
PORTFOLIO OF INVESTMENTS |
October 31, 2018 |
Shares | Fair Value | |||||||
COMMON STOCK - 99.7% | ||||||||
AEROSPACE/DEFENSE- 2.1% | ||||||||
1,513 | Boeing Co. | $ | 536,903 | |||||
6,052 | Spirit AeroSystems Holdings, Inc. | 508,428 | ||||||
1,045,331 | ||||||||
AIRLINES - 2.1% | ||||||||
9,612 | Delta Air Lines, Inc. | 526,065 | ||||||
6,230 | United Continental Holdings, Inc. * | 532,727 | ||||||
1,058,792 | ||||||||
APPAREL - 0.9% | ||||||||
8,099 | Michael Kors Holdings Ltd. * | 448,766 | ||||||
AUTO PARTS & EQUIPMENT - 1.9% | ||||||||
10,680 | Allison Transmission Holdings, Inc. | 470,774 | ||||||
3,827 | Lear Corp. | 508,608 | ||||||
979,382 | ||||||||
BANKS - 9.3% | ||||||||
18,868 | Bank of America Corp. | 518,870 | ||||||
5,874 | Capital One Financial Corp. | 524,548 | ||||||
10,769 | CIT Group, Inc. | 510,235 | ||||||
7,743 | Citigroup, Inc. | 506,857 | ||||||
19,936 | Fifth Third Bancorp | 538,073 | ||||||
4,895 | JPMorgan Chase & Co. | 533,653 | ||||||
3,382 | M&T Bank Corp. | 559,417 | ||||||
11,926 | Morgan Stanley | 544,541 | ||||||
23,318 | TCF Financial Corp. | 486,880 | ||||||
4,723,074 | ||||||||
BUILDING MATERIALS - 1.1% | ||||||||
2,581 | Lennox International, Inc. | 544,307 | ||||||
CHEMICALS - 1.9% | ||||||||
14,062 | Chemours Co. | 464,187 | ||||||
5,429 | LyondellBasell Industries NV | 484,647 | ||||||
948,834 | ||||||||
COMMERCIAL SERVICES - 3.7% | ||||||||
2,403 | FleetCor Technologies, Inc. * | 480,672 | ||||||
7,921 | Robert Half International, Inc. | 479,458 | ||||||
12,549 | Service Corp. International | 520,407 | ||||||
3,382 | United Rentals, Inc. * | 406,077 | ||||||
1,886,614 | ||||||||
COMPUTERS - 4.2% | ||||||||
2,492 | Apple, Inc. | 545,399 | ||||||
21,627 | HP, Inc. | 522,076 | ||||||
6,497 | NetApp, Inc. | 509,949 | ||||||
14,774 | Teradata Corp. * | 537,774 | ||||||
2,115,198 |
The accompanying notes are an integral part of these financial statements.
3
LeaderSharesTMAlphaFactor® US Core Equity ETF |
PORTFOLIO OF INVESTMENTS (Continued) |
October 31, 2018 |
Shares | Fair Value | |||||||
COMMON STOCK - 99.7% (Continued) | ||||||||
DIVERSIFIED FINANCIAL SERVICES - 6.2% | ||||||||
21,004 | Ally Financial, Inc. | $ | 533,712 | |||||
7,298 | Discover Financial Services | 508,452 | ||||||
10,591 | E*TRADE Financial Corp. | 523,407 | ||||||
8,633 | LPL Financial Holdings, Inc. | 531,793 | ||||||
2,492 | Mastercard, Inc. | 492,594 | ||||||
6,497 | Nasdaq, Inc. | 563,355 | ||||||
3,153,313 | ||||||||
ELECTRIC - 1.1% | ||||||||
14,863 | NRG Energy, Inc. | 537,892 | ||||||
ELECTRONICS - 6.0% | ||||||||
7,921 | Agilent Technologies, Inc. | 513,202 | ||||||
5,874 | Amphenol Corp. | 525,723 | ||||||
12,460 | Avnet, Inc. | 499,272 | ||||||
15,753 | Corning, Inc. | 503,308 | ||||||
25,899 | Gentex Corp. | 545,174 | ||||||
8,366 | Keysight Technologies, Inc. * | 477,531 | ||||||
3,064,210 | ||||||||
ENVIRONMENTAL CONTROL - 1.1% | ||||||||
7,654 | Republic Services, Inc. | 556,293 | ||||||
HAND/MACHINE TOOLS - 0.9% | ||||||||
6,764 | Regal Beloit Corp. | 484,979 | ||||||
HEALTHCARE-SERVICES - 2.1% | ||||||||
7,743 | DaVita, Inc. * | 521,414 | ||||||
4,272 | IQVIA Holdings, Inc. * | 525,157 | ||||||
1,046,571 | ||||||||
INSURANCE - 3.1% | ||||||||
890 | Alleghany Corp, | 534,605 | ||||||
5,607 | Allstate Corp. | 536,702 | ||||||
11,214 | Voya Financial, Inc. | 490,725 | ||||||
1,562,032 | ||||||||
INTERNET - 0.9% | ||||||||
2,759 | F5 Networks, Inc. * | 483,598 | ||||||
LODGING - 2.9% | ||||||||
6,853 | Hilton Worldwide Holdings, Inc. | 487,728 | ||||||
7,031 | Hyatt Hotels Corp. | 486,545 | ||||||
4,183 | Marriott International, Inc. | 488,951 | ||||||
1,463,224 | ||||||||
MACHINERY-DIVERSIFIED - 2.0% | ||||||||
6,319 | Dover Corp. | 523,466 | ||||||
2,937 | Rockwell Automation, Inc. | 483,812 | ||||||
1,007,278 |
The accompanying notes are an integral part of these financial statements.
4
LeaderSharesTMAlphaFactor® US Core Equity ETF |
PORTFOLIO OF INVESTMENTS (Continued) |
October 31, 2018 |
Shares | Fair Value | |||||||
COMMON STOCK - 99.7% (Continued) | ||||||||
MEDIA - 2.1% | ||||||||
12,816 | Liberty Media Corp. - Class A * | $ | 528,532 | |||||
12,816 | Liberty Media Corp. - Class C * | 528,916 | ||||||
1,057,448 | ||||||||
MISCELLANEOUS MANUFACTURING - 4.5% | ||||||||
4,539 | Carlisle Companies, Inc. | 438,422 | ||||||
8,277 | Hexcel Corp. | 484,370 | ||||||
5,429 | Ingersoll-Rand PLC | 520,858 | ||||||
7,743 | Textron, Inc. | 415,257 | ||||||
15,219 | Trinity Industries, Inc. | 434,502 | ||||||
2,293,409 | ||||||||
OIL & GAS - 3.7% | ||||||||
8,277 | Anadarko Petroleum Corp. | 440,336 | ||||||
7,743 | Hess Corp. | 444,448 | ||||||
6,942 | Marathon Petroleum Corp. | 489,064 | ||||||
4,895 | Phillips 66 | 503,304 | ||||||
1,877,152 | ||||||||
PHARMACEUTICALS - 4.1% | ||||||||
5,874 | AbbVie, inc. | 457,291 | ||||||
5,162 | Eli Lilly & Co. | 559,767 | ||||||
10,235 | Herbalife Nutriotion Ltd. * | 545,116 | ||||||
12,193 | Premier, Inc. * | 548,685 | ||||||
2,110,859 | ||||||||
RETAIL - 16.2% | ||||||||
712 | AutoZone, Inc. * | 522,231 | ||||||
7,031 | Best Buy Company, Inc. | 493,295 | ||||||
7,476 | CarMax, Inc. * | 507,695 | ||||||
1,869 | Domino’s Pizza, Inc. | 502,369 | ||||||
7,565 | Dunkin’ Brands Group, Inc. | 548,916 | ||||||
2,670 | Home Depot, Inc. | 469,600 | ||||||
4,806 | Lowe’s Companies, Inc. | 457,627 | ||||||
3,382 | Lululemon Athletica, Inc. * | 475,949 | ||||||
3,293 | McDonald’s Corp. | 582,532 | ||||||
1,602 | O’Reilly Automotive, Inc. * | 513,841 | ||||||
5,607 | Ross Stores, Inc. | 555,093 | ||||||
6,319 | Target Corp. | 528,458 | ||||||
4,272 | Tiffany & Co. | 475,474 | ||||||
6,141 | Tractor Supply Co. | 564,296 | ||||||
8,455 | Williams-Sonoma, Inc. | 502,058 | ||||||
6,141 | Yum! Brands, Inc. | 555,208 | ||||||
8,254,642 | ||||||||
SEMICONDUCTORS - 3.1% | ||||||||
11,748 | Intel Corp. | 550,746 | ||||||
3,649 | Lam Research Corp. | 517,173 | ||||||
15,041 | Teradyne, Inc. | 518,162 | ||||||
1,586,081 |
The accompanying notes are an integral part of these financial statements.
5
LeaderSharesTMAlphaFactor® US Core Equity ETF |
PORTFOLIO OF INVESTMENTS (Continued) |
October 31, 2018 |
Shares | Fair Value | |||||||
COMMON STOCK - 99.7% (Continued) | ||||||||
SHIPBUILDING - 0.9% | ||||||||
2,136 | Huntington Ingalls Industries, Inc. | $ | 466,673 | |||||
SOFTWARE - 5.8% | ||||||||
4,895 | Aspen Technologies, Inc. * | 415,537 | ||||||
12,282 | Cadence Design Systems, Inc. * | 547,409 | ||||||
4,984 | Citrix Systems, Inc. * | 510,710 | ||||||
2,403 | Fair Isaac Corp. * | 463,082 | ||||||
6,764 | Fiserv, Inc. * | 536,385 | ||||||
3,115 | MSCI, Inc. | 468,434 | ||||||
2,941,557 | ||||||||
TELECOMMUNICATIONS - 2.0% | ||||||||
11,392 | Cisco Systems, Inc. | 521,184 | ||||||
5,607 | Ubiquiti Networks, Inc. | 521,956 | ||||||
1,043,140 | ||||||||
TRANSPORTATION - 3.8% | ||||||||
7,476 | CSX Corp. | 514,797 | ||||||
6,141 | Genesee & Wyoming, Inc. * | 486,551 | ||||||
4,539 | Landstar System, Inc. | 454,309 | ||||||
3,382 | Union Pacific Corp. | 494,516 | ||||||
1,950,173 | ||||||||
TOTAL COMMON STOCK (Cost - $53,133,307) | 50,690,822 | |||||||
TOTAL INVESTMENTS - 99.7% (Cost - $53,133,307) | $ | 50,690,822 | ||||||
CASH, OTHER ASSETS AND LIABILITIES - NET - 0.3% | 158,005 | |||||||
TOTAL NET ASSETS - 100.0% | $ | 50,848,827 |
* | Non-Income producing security. |
PLC - Public Limited Company
The accompanying notes are an integral part of these financial statements.
6
LeaderSharesTMAlphaFactor® US Core Equity ETF |
STATEMENT OF ASSETS AND LIABILITIES |
October 31, 2018 |
ASSETS | ||||
Investment securities: | ||||
At cost | $ | 53,133,307 | ||
At value | $ | 50,690,822 | ||
Cash | 164,996 | |||
Dividends and interest receivable | 16,224 | |||
TOTAL ASSETS | 50,872,042 | |||
LIABILITIES | ||||
Investment advisory fees payable | 18,415 | |||
Accrued expenses and other liabilities | 4,800 | |||
TOTAL LIABILITIES | 23,215 | |||
NET ASSETS | $ | 50,848,827 | ||
Net Assets Consist Of: | ||||
Paid in capital | $ | 53,291,646 | ||
Accumulated Earnings/(Loss) | (2,442,819 | ) | ||
NET ASSETS | $ | 50,848,827 | ||
Net Asset Value Per Share: | ||||
Net Assets | $ | 50,848,827 | ||
Shares of beneficial interest outstanding ($0 par value, unlimited shares authorized) | 2,225,000 | |||
Net asset value (Net Assets ÷ Shares Outstanding) | $ | 22.85 |
The accompanying notes are an integral part of these financial statements.
7
LeaderSharesTMAlphaFactor® US Core Equity ETF |
STATEMENT OF OPERATIONS |
For the Period Ended October 31, 2018 * |
INVESTMENT INCOME | ||||
Dividends | $ | 18,081 | ||
TOTAL INVESTMENT INCOME | 18,081 | |||
EXPENSES | ||||
Investment advisory fees | 18,415 | |||
TOTAL EXPENSES | 18,415 | |||
NET INVESTMENT LOSS | (334 | ) | ||
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY | ||||
Net realized gain (loss) on: | ||||
In-kind redemptions | (83,374 | ) | ||
Unrealized appreciation on: | ||||
Investments | (2,442,485 | ) | ||
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS | (2,525,859 | ) | ||
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS | $ | (2,526,193 | ) |
* | Fund commenced operation on October 1, 2018. |
The accompanying notes are an integral part of these financial statements.
8
LeaderSharesTMAlphaFactor® US Core Equity ETF |
STATEMENTS OF CHANGES IN NET ASSETS |
For the Period | ||||
Ended | ||||
October 31, 2018 * | ||||
FROM OPERATIONS | ||||
Net investment loss | $ | (334 | ) | |
Net realized loss on investments | (83,374 | ) | ||
Unrealized appreciation on investments | (2,442,485 | ) | ||
Net decrease in net assets resulting from operations | (2,526,193 | ) | ||
FROM SHARES OF BENEFICIAL INTEREST | ||||
Proceeds from shares sold | 56,194,166 | |||
Cost of shares redeemed | (2,819,146 | ) | ||
Net increase in net assets resulting from shares of beneficial interest | 53,375,020 | |||
TOTAL INCREASE IN NET ASSETS | 50,848,827 | |||
NET ASSETS | ||||
Beginning of Period | — | |||
End of Period | $ | 50,848,827 | ||
SHARE ACTIVITY | ||||
Shares sold | 2,350,000 | |||
Shares redeemed | (125,000 | ) | ||
Net increase in shares of beneficial interest outstanding | 2,225,000 |
* | Fund commenced operation on October 1, 2018. |
The accompanying notes are an integral part of these financial statements.
9
LeaderSharesTMAlphaFactor® US Core Equity ETF |
FINANCIAL HIGHLIGHTS |
Per Share Data and Ratios for a Share of Beneficial Interest Outstanding Throughout The Period Presented
For the Period | ||||
Ended | ||||
October 31, 2018* | ||||
Net asset value, beginning of period | $ | 25.00 | ||
Activity from investment operations: | ||||
Net investment loss (1) | (0.00 | ) ** | ||
Net realized and unrealized loss on investments | (2.15 | ) | ||
Total from investment operations | (2.15 | ) | ||
Net asset value, end of period | $ | 22.85 | ||
Total return (2,4) | (8.60 | )% | ||
Net assets, at end of period (000s) | $ | 50,849 | ||
Ratio of net expenses to average net assets (3) | 0.75 | % | ||
Ratio of net investment income to average net assets (3) | (0.01 | )% | ||
Portfolio Turnover Rate (4,5) | 0 | % |
* | Fund commenced operation on October 1, 2018. |
** | Represents less than $0.01 per share. |
(1) | Per share amounts calculated using the average shares method, which more appropriately presents the per share data for each year. |
(2) | Total return is calculated assuming a purchase of shares at net asset value on the first day and a sale at net asset value on the last day of the period. Distributions are assumed, for the purpose of this calculation, to be reinvested at the ex-dividend date net asset value per share on their respective payment dates. |
(3) | Annualized |
(4) | Not annualized |
(5) | Portfolio turnover rate excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. (Note 5) |
The accompanying notes are an integral part of these financial statements.
10
LeaderSharesTMAlphaFactor® US Core Equity ETF |
NOTES TO FINANCIAL STATEMENTS |
October 31, 2018 |
1. | ORGANIZATION |
The LeaderSharesTM AlphaFactor® US Core Equity ETF (the “Fund”) is a series of shares of beneficial interest of the Two Roads Shared Trust (the “Trust”), a statutory trust organized under the laws of the State of Delaware on June 8, 2012, and registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as diversified, open-end management investment companies. The Fund seeks to provide investment results that correspond generally, before fees and expenses, to the performance of the AlphaFactor® US Core Equity Index. The Fund commenced operations on October 1, 2018.
2. | SIGNIFICANT ACCOUNTING POLICIES |
The following is a summary of significant accounting policies followed by the Fund in preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements 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 income and expenses for the period. Actual results could differ from those estimates. The Fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standard Codification Topic 946 “Financial Services – Investment Companies” including FASB Accounting Standard Update ASU 2013-08.
Securities valuation – Securities listed on an exchange are valued at the last reported sale price at the close of the regular trading session of the exchange on the business day the value is being determined, or in the case of securities listed on NASDAQ at the NASDAQ Official Closing Price (“NOCP”). In the absence of a sale such securities shall be valued at the mean between the current bid and ask prices on the day of valuation. Short-term debt obligations having 60 days or less remaining until maturity, at time of purchase may be valued at amortized cost (which approximates fair value). Investments in open-end investment companies are valued at net asset value.
The Fund may hold securities, such as private investments, interests in commodity pools, other non-traded securities or temporarily illiquid securities, for which market quotations are not readily available or are determined to be unreliable. These securities will be valued using the “fair value” procedures approved by the Board. The Board has delegated execution of these procedures to a fair value team composed of one or more representatives from each of the (i) Trust, (ii) administrator, and (iii) Adviser. The team may also enlist third party consultants such as a valuation specialist at a public accounting firm, valuation consultant, or financial officer of a security issuer on an as-needed basis to assist in determining a security-specific fair value. The Board has also engaged a third party valuation firm, as needed, to attend valuation meetings held by the Trust, review minutes of such meetings and report to the Board on a quarterly basis. The Board reviews and ratifies the execution of this process and the resultant fair value prices at least quarterly to assure the process produces reliable results.
11
LeaderSharesTMAlphaFactor® US Core Equity ETF |
NOTES TO FINANCIAL STATEMENTS (Continued) |
October 31, 2018 |
Fair Valuation Process – As noted above, the fair value team is composed of one or more representatives from each of the (i) Trust, (ii) administrator, and (iii) Adviser. The applicable investments are valued collectively via inputs from each of these groups. For example, fair value determinations are required for the following securities: (i) securities for which market quotations are insufficient or not readily available on a particular business day (including securities for which there is a short and temporary lapse in the provision of a price by the regular pricing source), (ii) securities for which, in the judgment of the Adviser, the prices or values available do not represent the fair value of the instrument. Factors which may cause the Adviser to make such a judgment include, but are not limited to, the following: only a bid price or an asked price is available; the spread between bid and asked prices is substantial; the frequency of sales; the thinness of the market; the size of reported trades; and actions of the securities markets, such as the suspension or limitation of trading; (iii) securities determined to be illiquid; (iv) securities with respect to which an event that will affect the value thereof has occurred (a “significant event”) since the closing prices were established on the principal exchange on which they are traded, but prior to the Fund’s calculation of its net asset value. Restricted or illiquid securities, such as private investments or non-traded securities are valued via inputs from the Adviser based upon the current bid for the security from two or more independent dealers or other parties reasonably familiar with the facts and circumstances of the security (who should take into consideration all relevant factors as may be appropriate under the circumstances). If the Adviser is unable to obtain a current bid from such independent dealers or other independent parties, the fair value team shall determine the fair value of such security using the following factors: (i) the type of security; (ii) the cost at date of purchase; (iii) the size and nature of the Fund’s holdings; (iv) the discount from market value of unrestricted securities of the same class at the time of purchase and subsequent thereto; (v) information as to any transactions or offers with respect to the security; (vi) the nature and duration of restrictions on disposition of the security and the existence of any registration rights; (vii) how the yield of the security compares to similar securities of companies of similar or equal creditworthiness; (viii) the level of recent trades of similar or comparable securities; (ix) the liquidity characteristics of the security; (x) current market conditions; and (xi) the market value of any securities into which the security is convertible or exchangeable.
In unusual circumstances, securities may be valued at their fair value as determined in good faith by the Trust’s Fair Value Committee and in accordance with the Trust’s Portfolio Securities Valuation Procedures (the “Procedures”). The Board will review the fair value method in use for securities requiring a fair market value determination at least quarterly. The Procedures consider, among others, the following factors to determine a security’s fair value: the nature and pricing history (if any) of the security; whether any dealer quotations for the security are available; and possible valuation methodologies that could be used to determine the fair value of the security.
The Fund utilizes various methods to measure the fair value of all of its investments on a recurring basis. GAAP establishes a hierarchy that prioritizes inputs to valuation methods. The three levels of input are:
Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities that the Fund has the ability to access.
12
LeaderSharesTMAlphaFactor® US Core Equity ETF |
NOTES TO FINANCIAL STATEMENTS (Continued) |
October 31, 2018 |
Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
Level 3 – Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following tables summarize the inputs used as of October 31, 2018 for the Fund’s assets measured at fair value:
Assets * | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Common Stocks | $ | 50,690,822 | $ | — | $ | — | $ | 50,690,822 | ||||||||
Total | $ | 50,690,822 | $ | — | $ | — | $ | 50,690,822 |
There were no transfers into or out of Level 1 and Level 2 during the period covered by this report. It is the Fund’s policy to record transfers into or out of Level 1 and Level 2 at the end of the reporting year.
The Fund did not hold any Level 3 securities during the year.
* | See Portfolio of Investments for industry classification. |
Please refer to the Fund’s prospectus and statement of additional information for a full listing of risks associated with the Fund’s investments.
Dividends and Distributions to Shareholders – Dividends from net investment income, if any, are declared and paid monthly. Distributable net realized capital gains, if any, are declared and distributed annually. Dividends from net investment income and distributions from net realized gains are determined in accordance with federal income tax regulations, which may differ from GAAP. These “book/tax” differences are considered either temporary (e.g., deferred losses) or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences do not
13
LeaderSharesTMAlphaFactor® US Core Equity ETF |
NOTES TO FINANCIAL STATEMENTS (Continued) |
October 31, 2018 |
require reclassification. Monthly distributions in excess of ordinary taxable income are treated as returns of capital. Dividends and distributions to shareholders are recorded on the ex-dividend date.
Security Transactions and Related Income – Security transactions are accounted for on the trade date. Interest income is recognized on an accrual basis. Discounts are accreted and premiums are amortized on securities purchased over the lives of the respective securities. Dividend income is recorded on the ex-dividend date. Realized gains or losses from sales of securities are determined by comparing the identified cost of the security lot sold with the net sales proceeds. Withholding taxes on foreign dividends have been provided for in accordance with the Fund’s understanding of the applicable country’s tax rules and rates.
Federal Income Taxes – The Fund intends to continue to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. Therefore, no provision for federal income tax is required. The Fund recognizes the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has analyzed the Fund’s tax positions expected to be taken in the Fund’s open tax year ended October 31, 2018 tax returns and has concluded to date that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions. The Fund identified its major tax jurisdictions as U.S. Federal, Nebraska and foreign jurisdictions where the Fund makes significant investments.
Foreign Currency –The accounting records of the Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency, and income receipts and expense payments are translated into U.S. dollars using the prevailing exchange rate at the London market close. Purchases and sales of securities are translated into U.S. dollars at the contractual currency rates established at the approximate time of the trade. Net realized gains and losses on foreign currency transactions represent net gains and losses from currency realized between the trade and settlement dates on securities transactions, gains and losses on the purchase and sale of foreign currencies and the difference between income accrued versus income received. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities.
Indemnification – The Trust indemnifies its officers and Trustees for certain liabilities that may arise from the performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of representations and warranties and which provide general indemnities. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, the risk of loss due to these warranties and indemnities appears to be remote.
3. | INVESTMENT TRANSACTIONS |
For the period ended October 31, 2018, cost of purchases and proceeds from sales of portfolio securities (excluding in-kind transactions and short-term investments), amounted to $278,451 and $0, respectively.
14
LeaderSharesTMAlphaFactor® US Core Equity ETF |
NOTES TO FINANCIAL STATEMENTS (Continued) |
October 31, 2018 |
For the period ended October 31, 2018, cost of purchases and proceeds from sales of portfolio securities for in-kind transactions, amounted to $55,748,649 and $2,810,419, respectively.
4. | INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH RELATED PARTIES |
Redwood Investment Management, LLC serves as the Funds’ Investment Advisor (the “Advisor”). Pursuant to investment advisory agreements with the Funds, the Advisor, under the oversight of the Board, directs the daily operations of the Funds and supervises the performance of administrative and professional services provided by others. As compensation for its services and the related expenses borne by the Advisor, the Fund pays the Advisor a unitary management fee, computed and accrued daily and paid monthly, at an annual rate of 0.75% of the Fund’s average daily net assets. For the period ended October 31, 2018, the Fund incurred advisory fees in the amount of $18,415.
The Advisor’s unitary management fee is designed to pay the Fund’s expenses and to compensate the Advisor for providing service for the Fund. Out of the unitary management fee, substantially all expenses of the Fund, including the costs of transfer agency, custody, fund administration, legal, audit and other services and Independent Trustees’ fees, except for payments under the Fund’s 12b-1 plan, brokerage expenses, taxes, interest (including borrowing costs and dividend expenses on securities sold short), litigation expense and other extraordinary expenses (including litigation to which the Trust or the Fund may be a party and indemnification of the Trustees and officers with respect thereto). The Advisor, and not the Fund’s shareholders, would benefit from any reduction in fees paid for third-party services, including reductions based on increases in net assets.
The Fund has adopted a distribution and service plan (“Plan”) pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund is authorized to pay distribution fees to the distributor and other firms that provide distribution and shareholder services (“Service Providers”). If a Service Provider provides these services, the Fund may pay fees at an annual rate not to exceed 0.25% of average daily net assets, pursuant to Rule 12b-1 under the 1940 Act. No distribution or service fees are currently paid by the Fund, and there are no current plans to impose these fees. In the event Rule 12b-1 fees were charged, over time they would increase the cost of an investment in the Fund. Northern Lights Distributors, LLC, the Fund’s distributor, its affiliates, and the Fund’s Advisor or its affiliates may, at their own expense and out of their own legitimate profits, provide additional cash payments to financial intermediaries who sell shares of the Fund, including affiliates of the Advisor.
Gemini Fund Services, LLC (“GFS”) – GFS, an affiliate of the Distributor, provides administration and fund accounting services to the Trust. Pursuant to separate servicing agreements with GFS, the Adviser, on behalf of the Fund pays GFS customary fees for providing administration and fund accounting services to the Fund. Certain officers of the Trust are also officers of GFS, and are not paid any fees directly by the Trust for serving in such capacities.
Northern Lights Compliance Services, LLC (“NLCS”), an affiliate of GFS and the Distributor, provides a Chief Compliance Officer to the Trust, as well as related compliance services, pursuant to a consulting agreement between NLCS and the Trust. Under the terms of such agreement, the Adviser, on behalf of the Fund pays NLCS customary fees for providing these services.
15
LeaderSharesTMAlphaFactor® US Core Equity ETF |
NOTES TO FINANCIAL STATEMENTS (Continued) |
October 31, 2018 |
Blu Giant, LLC(“Blu Giant”)– Blu Giant, an affiliate of GFS and the Distributor, provides EDGAR conversion and filing services as well as print management services for the Fund on an ad-hoc basis. For the provision of these services, the Adviser, on behalf of the Fund pays Blu Giant customary fees for providing these services.
5. | AGGREGATE UNREALIZED APPRECIATION AND DEPRECIATION – TAX BASIS |
The identified cost of investments in securities owned by the Fund for federal income tax purposes and its respective gross unrealized appreciation and depreciation at October 31, 2018, was as follows:
Net Unrealized | ||||||||||||||
Gross Unrealized | Gross Unrealized | Appreciation/ | ||||||||||||
Tax Cost | Appreciation | Depreciation | (Depreciation) | |||||||||||
$ | 53,133,307 | $ | 194,269 | $ | (2,636,754 | ) | $ | (2,442,485 | ) |
6. | DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF CAPITAL |
There were no distributions for the fiscal year ended October 31, 2018.
As of October 31, 2018, the components of accumulated earnings/ (deficit) on a tax basis were as follows:
Undistributed | Undistributed | Post October Loss | Capital Loss | Other | Unrealized | Total | ||||||||||||||||||||
Ordinary | Long-Term | and | Carry | Book/Tax | Appreciation/ | Accumulated | ||||||||||||||||||||
Income | Gains | Late Year Loss | Forwards | Differences | (Depreciation) | Earnings/(Deficits) | ||||||||||||||||||||
$ | — | $ | — | $ | (334 | ) | $ | — | $ | — | $ | (2,442,485 | ) | $ | (2,442,819 | ) |
Late year losses incurred after December 31 within the fiscal year are deemed to arise on the first business day of the following fiscal year for tax purposes. The Fund incurred and elected to defer such late year losses of $334.
Permanent book and tax differences, attributable to the book/tax basis treatment of realized gain (loss) on in-kind redemptions, resulted in reclassifications for the Fund for the period ended October 31, 2018 as follows:
Paid | ||||||
In | Accumulated | |||||
Capital | Earnings (Losses) | |||||
$ | (83,374 | ) | $ | 83,374 |
7. | CAPITAL SHARE TRANSACTIONS |
Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks known as “Creation Units.” Shares are created and redeemed by the Fund only in Creation Unit size aggregations of 25,000 shares. Only Authorized Participants are permitted to purchase or redeem Creation Units from the Fund. An Authorized Participant is either (i) a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the National
16
LeaderSharesTMAlphaFactor® US Core Equity ETF |
NOTES TO FINANCIAL STATEMENTS (Continued) |
October 31, 2018 |
Securities Clearing Corporation or (ii) a Depository Trust Company participant and, in each case, must have executed a Participant Agreement with the distributor. Such transactions are generally permitted on an in-kind basis, with a balancing cash component to equate the transaction to the NAV per share of the Fund on the transaction date. Cash may be substituted equivalent to the value of certain securities generally when they are not available in sufficient quantity for delivery, not eligible for trading by the Authorized Participant or as a result of other market circumstances. In addition, the Fund may impose transaction fees on purchases and redemptions of Fund shares to cover the custodial and other costs incurred by the Fund in effecting trades. A fixed fee payable to the custodian may be imposed on each creation and redemption transaction regardless of the number of Creation Units involved in the transaction (“Fixed Fee”). Purchases and redemptions of Creation Units for cash or involving cash-in-lieu are required to pay an additional variable charge to compensate the Fund and its ongoing shareholders for brokerage and market impact expenses relating to Creation Unit transactions (“Variable Charge,” and together with the Fixed Fee, the “Transaction Fees”). Transactions in capital shares for the Fund are disclosed in the Statements of Changes in Net Assets
Investors who use the services of a broker, or other such intermediary may be charged a fee for such services. The Transaction Fees for the Fund are listed in the table below:
Fee for In-Kind and | Minimum Additional Variable | Maximum Additional Variable |
Cash Purchases | Charge for Cash Purchases* | Charge for Cash Purchases* |
$600 | 0.20% | 2.00% |
* As a percentage of the amount invested.
8. | RECENT ACCOUNTING PRONOUNCEMENTS AND REPORTING UPDATES |
In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-13, which changes certain fair value measurement disclosure requirements. The new ASU, in addition to other modifications and additions, removes the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and the policy for the timing of transfers between levels. For investment companies, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is allowed. At this time, management is evaluating the implications of the ASU and any impact on the financial statement disclosures.
In August 2018, the Securities and Exchange Commission adopted amendments to certain disclosure requirements under Regulation S-X to conform to US GAAP, including: (i) an amendment to require presentation of the total, rather than the components, of distributable earnings on the Statement of Assets and Liabilities; and (ii) an amendment to require presentation of the total, rather than the components, of distributions to shareholders, except for tax return of capital distributions, if any, on the Statement of Changes in Net Assets. The amendments also removed the requirement for parenthetical disclosure of undistributed net investment income on the Statement of Changes in Net Assets. These amendments have been adapted with these financial statements.
17
LeaderSharesTMAlphaFactor® US Core Equity ETF |
NOTES TO FINANCIAL STATEMENTS (Continued) |
October 31, 2018 |
9. | SUBSEQUENT EVENTS |
Subsequent events after the date of the Statements of Assets and Liabilities have been evaluated through the date the financial statements were issued. Management has determined that no events or transactions occurred requiring adjustment or disclosure in the financial statements.
18
GRANT THORNTON LLP New York, NY 10017 | REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Trustees of the Two Roads Shared Trust
Opinion on the financial statements
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of LeaderShares™ AlphaFactor® US Core Equity ETF (a fund in the Two Roads Shared Trust) (the “Fund”) as of October 31, 2018, the related statements of operations, changes in net assets and financial highlights for the period October 1, 2018 (commencement of operations) through October 31, 2018, 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 October 31, 2018, and the results of its operations, changes in its nets assets, and financial highlights for the period October 1, 2018 (commencement of operations) through October 31, 2018, 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 audit. 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 Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit 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 audit 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. | |
GT.COM | Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and each of its member firms are separate legal entities and are not a worldwide partnership. |
19
Our audit included performing procedures to assess the risks of material misstatement of the 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 supporting the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of October 31, 2018, by correspondence with the custodians. We believe that our audit provides a reasonable basis for our opinion.
We have served as the Fund’s auditor since 2016.
New York, New York December 31, 2018 |
20
LeaderSharesTM AlphaFactor® US Core Equity ETF |
EXPENSE EXAMPLES (Unaudited) |
October 31, 2018 |
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including brokerage commissions on purchases and sales of Fund shares; (2) ongoing costs, including a unitary management fee 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 October 1, 2018 through October 31, 2018.
Actual Expenses
The “Actual” expenses line in the table below provides information about actual account values and actual expenses. You may use the information below, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the table 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 “Hypothetical” line in 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 balances or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
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 brokerage commissions paid on purchases and sales of Fund shares. Therefore, 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.
Beginning | Ending | Expenses Paid | Expenses Ratio | |||||||||||||
Account Value | Account Value | During Period* | During Period** | |||||||||||||
10/1/18 | 10/31/18 | 10/1/18 - 10/31/18 | 10/1/18 - 10/31/18 | |||||||||||||
Actual | $ | 1,000.00 | $ | 914.00 | $ | 0.59 | 0.75 | % | ||||||||
Hypothetical | $ | 1,000.00 | 1003.49 | 0.62 | 0.75 | % | ||||||||||
(5% return before expenses) |
* | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by the number of days in the period (30) divided by the number of days in the fiscal year (365). |
** | Annualized. |
21
LeaderSharesTMAlphaFactor® US Core Equity ETF |
SUPPLEMENTAL INFORMATION (Unaudited) |
October 31, 2018 |
At a meeting held on March 13, 2018 (the “Meeting”), the Board of Trustees (the “Board”) of Two Roads Shared Trust (the “Trust”), including all of those trustees who are not “interested persons” of the Trust (as such term is defined in the 1940 Act), which independent Trustees constitute all of the Trustees, considered the approval of an investment advisory agreement (the “Agreement”) between Redwood Investment Management, LLC (“Redwood” or the “Adviser”) and the Trust, on behalf of the LeaderSharesTMAlphaFactor® US Core Equity ETF (the “Redwood ETF”), a series of the Trust.
In connection with the Board’s consideration of the Advisory Agreement, the Board received written materials in advance of the Meeting, which included information regarding: (i) the nature, extent, and quality of services provided to the Fund by the Adviser; (ii) a description of the Adviser’s investment management personnel; (iii) an overview of the Adviser’s respective operations and financial condition; (iv) a description of the Adviser’s brokerage practices (including any soft dollar arrangements); (v) a comparison of the Fund’s advisory fee and overall expenses with those of comparable mutual funds; (vi) the level of profitability from the Adviser’s fund-related operations; (vii) the Adviser’s respective compliance policies and procedures, including policies and procedures for personal securities transactions, business continuity and information security; and (viii) information regarding the performance record of the Fund as compared to other funds with similar investment strategies.
Throughout the process, including at the meeting, the Board had numerous opportunities to ask questions of and request additional materials from the Adviser. During the Meeting, the Board was advised by, and met in executive session with, the Board’s independent legal counsel, and received a memorandum from such independent counsel regarding its responsibilities under applicable law.
Matters considered by the Board in connection with its approval of the Advisory Agreement included, among others, the following:
Nature, Extent and Quality of Services.The Board reviewed materials provided by Redwood related to the Advisory Agreement, including the Advisory Agreement, a description of the manner in which investments are to be made and executed, a description of the financial condition of Redwood, an overview of the personnel proposed to service the Redwood ETF and their respective responsibilities, Redwood’s compliance policies and procedures, including a Code of Ethics containing provisions reasonably necessary to prevent Access Persons, as that term is defined in Rule 17j-1 under the 1940 Act, from engaging in conduct prohibited by Rule 17j-1(b), a written risk assessment of Redwood’s compliance program, information about Redwood’s investment strategies and risk management processes, and independent reports prepared by Broadridge, an independent third party data provider, analyzing the proposed fees and expenses of the Redwood ETF as compared to other funds with similar investment strategies.
In reaching its conclusions, the Board considered the experience and qualifications of Redwood’s management team, noting a continuation of the core staff that has managed Redwood’s mutual fund offerings, and Redwood’s adherence to its compliance policies and procedures and
22
LeaderSharesTMAlphaFactor® US Core Equity ETF |
SUPPLEMENTAL INFORMATION (Unaudited)(Continued) |
October 31, 2018 |
expansion of the firm and staff. The Board considered the investment strategies proposed to be used in the Redwood ETF. The Board also considered the operation of and robustness of Redwood’s compliance program. The Board concluded that Redwood had sufficient quality and depth of personnel, resources, investment methodologies and compliance policies and procedures to perform its duties under the Advisory Agreement with respect to the Redwood ETF and that the nature, overall quality and extent of the management services to be provided by Redwood to the Redwood ETF was expected to be satisfactory.
Performance.The Board noted that Redwood managed the AlphaFactor Core Equity Fund, which had a comparable investment strategy, although tactically managed, and used the same proprietary index as the proposed Redwood ETF. The Board took into account the AlphaFactor Core Equity Fund’s performance for the period since inception on March 9, 2017 through December 31, 2017. The Board noted the limited performance history of such Fund. The Board also reviewed certain hypothetical performance data for the Redwood AlphaFactor Focused Index as information relating to the Redwood AlphaFactor Core Equity strategy, taking into account that this was not based on actual performance information. The Board also considered the anticipated volatility of the Redwood ETF relative to the S&P 500 Index. The Board took into account Redwood’s presentation and its performance with respect to its other mutual funds in the Trust and concluded that Redwood was expected to obtain an acceptable level of investment return to the shareholders of the Redwood ETF.
Fees and Expenses.As to the costs of the services to be provided by Redwood, the Board considered a comparison, compiled by Broadridge, of the Redwood ETF’s proposed advisory fee and estimated operating expenses with those of certain peer funds with similar investment objectives and strategies (each a “Peer Group”) and with those of other funds in the proposed Morningstar category for the Redwood ETF to be selected by Morningstar. The Board noted that Redwood had confirmed that the Redwood ETF’s advisory fee would be structured as a unitary fee.
The Board noted the challenge in comparing the Redwood ETF to the Peer Group selected by Broadridge was that the Redwood ETF would be using a unitary fee structure in contrast to the other funds in the Peer Group. The Board observed that the proposed advisory fee was higher than the median of the Peer Group and of the Redwood ETF’s expected Morningstar category (Large Blend Category). The Board noted, however, that the proposed advisory fee was within the range of its expected Morningstar category and not the highest in the expected Morningstar category.
The Board also considered that the Redwood ETF’s unitary fee structure was inclusive of estimated net operating expenses and found that they were higher than the median of its Peer Group and above the median of its expected Morningstar category, but noted that that its overall expenses were not higher than all other funds within its Peer Group. The Board took into account that Redwood had agreed to a unitary fee for the Redwood Fund at 0.75%. The Board took into account Redwood’s discussion of the Redwood ETF’s unitary fee as compared to other funds or accounts managed by Redwood that utilized a similar investment strategy, noting that differences were
23
LeaderSharesTMAlphaFactor® US Core Equity ETF |
SUPPLEMENTAL INFORMATION (Unaudited)(Continued) |
October 31, 2018 |
attributable to the differences in the management of these different kinds of accounts or as relates to the Redwood ETF, its unitary fee structure.
The Board concluded that the proposed contractual advisory fee for the Redwood ETF was not unreasonable.
Profitability. The Board considered Redwood’s anticipated profitability with respect to the Redwood ETF and whether such profits, if any, would be excessive in light of the services proposed to be provided to the Redwood ETF. The Board considered an estimated profitability analysis prepared by Redwood. The Board also noted that Redwood would bear all costs under the Redwood ETF’s proposed unitary fee. The Board concluded that, based on the Redwood ETF’s expected initial asset levels and the estimated costs of advising the Redwood ETF, Redwood’s anticipated level of profitability, if any, from its relationship with the Redwood ETF would not be excessive.
Economies of Scale. The Board considered whether Redwood would realize economies of scale with respect to its providing advisory service to the Redwood ETF. The Board considered that Redwood acknowledged that economies of scale were considered in its pricing of the unitary fee for the Redwood ETF.
Other Benefits. The Board considered the character and amount of other direct and incidental benefits to be received by Redwood from its association with the Redwood ETF. The Board noted the potential use of soft dollars by Redwood. The Board considered that Redwood believed expanding its offering of investment products would increase Redwood’s ability to cross-sell its funds. Redwood stated that it did not anticipate receiving any other direct, indirect or ancillary material “fall-out” benefits from its relationship with the Redwood ETF.
Conclusion.The Board, having requested and received such information from Redwood as it believed reasonably necessary to evaluate the terms of the proposed Advisory Agreement, and having been advised by independent counsel that the Board had appropriately considered and weighed all relevant factors, determined that approval of the Advisory Agreement for an initial two-year term was in the best interests of the Redwood ETF and its future shareholders. In considering the Advisory Agreement, the Board did not identify any one factor as all important and each Trustee may have placed different weight on different factors.
24
LeaderSharesTMAlphaFactor® US Core Equity ETF |
SUPPLEMENTAL INFORMATION (Unaudited) |
October 31, 2018 |
Trustees and Officers. The Trustees and officers of the Trust, together with information as to their principal business occupations during the past five years and other information, are shown below. Unless otherwise noted, the address of each Trustee and Officer is 17605 Wright Street, Suite 2, Omaha, Nebraska 68130.
Independent Trustees *
Name, Address, Year of Birth | Position(s) Held with Registrant | Term and Length Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen In The Fund Complex** | Other Directorships Held During Past 5 Years |
Mark Garbin Year of Birth: 1951 | Trustee | Indefinite, Since 2012 | Managing Principal, Coherent Capital Management LLC (since 2008) | 8 | Northern Lights Fund Trust (since 2013); Northern Lights Variable Trust (for series not affiliated with the Funds since 2013); Forethought Variable Insurance Trust (since 2013); Northern Lights Variable Trust (since 2013); OHA Mortgage Strategies Fund (offshore), Ltd. (2014 - 2017); and Altegris KKR Commitments Master Fund (since 2014); and OFI Carlyle Private Credit Fund (since March 2018) |
Mark D. Gersten Year of Birth: 1950 | Chairman, Trustee | Indefinite, Since 2012 | Independent Consultant (since 2012); Senior Vice President – Global Fund Administration Mutual Funds & Alternative Funds, AllianceBernstein LP (1985 – 2011). | 8 | Northern Lights Fund Trust (since 2013); Northern Lights Variable Trust (for series not affiliated with the Funds since 2013); Altegris KKR Commitments Master Fund (since 2014); previously, Ramius Archview Credit and Distressed Fund (2015-2017); and Schroder Global Series Trust (2012 to 2017) |
Neil M. Kaufman Year of Birth: 1960 | Trustee, Audit Committee Chairman | Indefinite, Since 2012 | Managing Member, Kaufman & Associates, LLC (legal services)(Since 2016); Partner, Abrams Fensterman, Fensterman, Eisman, Formato, Ferrara & Wolf, LLP (legal services)(2010-2016) | 8 | Altegris KKR Commitments Master Fund (since 2014) |
Anita K. Krug Year of Birth: 1969 | Trustee | Indefinite, Since 2012 | Interim Vice Chancellor for Academic Affairs (since 2018) University of Washington Bothell; Interim Dean (2017- 2018), Professor (since 2016), Associate Professor (2014-2016); and Assistant Professor (2010-2014), University of Washington School of Law | 8 | Altegris KKR Commitments Master Fund (since 2014); Centerstone Investors Trust (since 2016) |
* | Information is as of October 31, 2018. |
** | As of October 31, 2018, the Trust was comprised of 21 active portfolios managed by seven unaffiliated investment advisers and two affiliated investment advisers. The term “Fund Complex” applies only to those funds that (i) are advised by a common investment adviser or by an investment adviser that is an affiliated person of the investment adviser of any of the other funds in the Trust or (ii) hold themselves out to investors as related companies for purposes of investment and investor services. The Fund does not hold itself out as related to any other series within the Trust for investment purpose. The Fund’s investment adviser also serves as investment adviser to the following Funds Redwood Managed Volatility Fund, Redwood Managed Municipal Income Fund, Redwood AlphaFactor® Tactical Core Fund, Redwood AlphaFactor® Tactical International Fund, Redwood Systematic Macro Trend Fund, Redwood Activist Leaders Fund and Redwood Managed Volatility Portfolio each another series of the Trust. |
25
LeaderSharesTMAlphaFactor® US Core Equity ETF |
SUPPLEMENTAL INFORMATION (Unaudited)(Continued) |
October 31, 2018 |
Officers of the Trust*
Name, Address, Year of Birth | Position(s) Held with Registrant | Principal Occupation(s) During Past 5 Years | Number of Portfolios Overseen In The Fund Complex** | Other Directorships Held During Past 5 Years |
James Colantino 80 Arkay Drive Hauppauge, NY 11788 Year of Birth: 1969 | President Since Feb. 2017 Treasurer (2012 to 2017) | Senior Vice President (2012- present); Vice President (2004 to 2012); Gemini Fund Services, LLC. | N/A | N/A |
Laura Szalyga 80 Arkay Drive Hauppauge, NY 11788 Year of Birth: 1978 | Treasurer Since Feb. 2017 | Vice President, Gemini Fund Services, LLC (since 2015); Assistant Vice President, Gemini Fund Services, LLC (2011-2014). | N/A | N/A |
Richard A. Malinowski 80 Arkay Drive Hauppauge, NY 11788 Year of Birth: 1983 | Vice President Since Sep. 2018 Secretary Since 2013 | Senior Vice President (since 2017); Vice President and Counsel (2016-2017) and Assistant Vice President (2012 – 2016), Gemini Fund Services, LLC | N/A | N/A |
William B. Kimme Year of Birth: 1962 | Chief Compliance Officer Since Inception | Senior Compliance Officer, Northern Lights Compliance Services, LLC (September 2011 - present) | N/A | N/A |
* | Information is as of October 31, 2018. |
** | As of October 31, 2018, the Trust was comprised of 21 active portfolios managed by seven unaffiliated investment advisers and two affiliated investment advisers. The term “Fund Complex” applies only to those funds that (i) are advised by a common investment adviser or by an investment adviser that is an affiliated person of the investment adviser of any of the other funds in the Trust or (ii) hold themselves out to investors as related companies for purposes of investment and investor services. The Fund does not hold itself out as related to any other series within the Trust for investment purpose. The Fund’s investment adviser also serves as investment adviser to the following Funds, Redwood Managed Volatility Fund, Redwood Managed Municipal Income Fund, Redwood AlphaFactor® Tactical Core Fund, Redwood AlphaFactor® Tactical International Fund, Redwood Systematic Macro Trend Fund, Redwood Activist Leaders Fund and Redwood Managed Volatility Portfolio, each another series of the Trust. |
The Fund’s Statement of Additional Information (“SAI”) includes additional information about the Trustees and is available free of charge, upon request, by calling toll-free at 1-855-733-3863.
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PRIVACY NOTICE
FACTS | WHAT DOES TWO ROADS SHARED TRUST DO WITH YOUR PERSONAL INFORMATION |
Why? | Financial companies choose how they share your personal information. |
Federal law gives consumers the right to limit some but not all sharing. | |
Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. | |
What? | THE TYPES OF PERSONAL INFORMATION WE COLLECT AND SHARE DEPENDS ON THE PRODUCT OR SERVICE THAT YOU HAVE WITH US. THIS INFORMATION CAN INCLUDE: |
● Social Security number and income | |
● Account transactions and transaction history | |
● Investment experience and purchase history | |
When you areno longer our customer, we continue to share your information as described in this notice. | |
How? | All financial companies need to share customers’ personal information to run their everyday business. In the section below, we list the reasons financial companies can share their customers’ personal information; the reason Two Roads Shared Trust chooses to share and whether you can limit this sharing. |
Reasons we can share your personal information | Does Two Roads Shared Trust share? | Can you limit this sharing? |
For our everyday business purposes – | ||
such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus | YES | NO |
For our marketing purposes – | NO | We do not share |
to offer our products and services to you | ||
For joint marketing with other financial companies | NO | We do not share |
For our affiliates’ everyday business purposes – | NO | We do not share |
information about your transactions and experiences | ||
For our affiliates’ everyday business purposes – | NO | We do not share |
information about your creditworthiness | ||
For our affiliates to market to you | NO | We do not share |
For nonaffiliates to market to you | NO | We do not share |
Questions? | Call 1-402-895-1600 |
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What we do
How does Two Roads Shared Trust protect my personal information? | To protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings. |
Our service providers are held accountable for adhering to strict policies and procedures to prevent any misuse of your nonpublic personal information. | |
How does Two Roads Shared Trust | We collect your personal information, for example, when you |
collect my personal information? | |
● open an account or give us contact information | |
● provide account information or give us your income information | |
● make deposits or withdrawals from your account | |
We also collect your personal information from other companies. | |
Why can’t I limit all sharing? | Federal law gives you the right to limit only |
● sharing for affiliates’ everyday business purposes – information about your creditworthiness | |
● affiliates from using your information to market to you | |
● sharing for nonaffiliates to market to you | |
State laws and individual companies may give you additional rights to limit sharing | |
Definitions | |
Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies. |
● Two Roads Shared Trust has no affiliates. | |
Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies. |
● Two Roads Shared Trust does not share with nonaffiliates so they can market to you. | |
Joint marketing | A formal agreement between nonaffiliates financial companies that together market financial products or services to you. |
● Two Roads Shared Trust does not jointly market. |
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Proxy Voting Policy
Information regarding how the Funds vote proxies relating to portfolio securities for the 12 month period ended June 30th as well as a description of the policies and procedures that the Funds used to determine how to vote proxies is available without charge, upon request, by calling 1-855-852-8998 or by referring to the Securities and Exchange Commission’s (“SEC”) website at http://www.sec.gov.
Portfolio Holdings
Each Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Form N-Q is available on the SEC’s website athttp://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC (1-800-SEC-0330). The information on Form N-Q is available without charge, upon request, by calling 1-855-733-3863.
Investment Advisor |
Redwood Investment Management, LLC |
1117 S. Robertson Boulevard |
Los Angeles, CA 90035 |
Administrator |
Gemini Fund Services, LLC |
80 Arkay Drive, Suite 110 |
Hauppauge, NY 11788 |
ITEM 2. CODE OF ETHICS.
(a) | The registrant has, as of the end of the period covered by this report, adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. |
(b) | During the period covered by this report, there were no amendments to any provision of the code of ethics. |
(c) | During the period covered by this report, there were no waivers or implicit waivers of a provision of the code of ethics. |
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant’s Board of Trustees has determined that it does not have an audit committee financial expert serving on its audit committee. At this time, the registrant believes that the experience provided by each member of the audit committee together offer the registrant adequate oversight for the registrant’s level of financial complexity. |
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) | Audit Fees. The aggregate fees billed for each of the last two fiscal years for professional services rendered by the registrant's principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years are as follows:
|
Trust Series | 2018 | 2017 |
LeaderShares AlphaFactor US Core Equity ETF | $15,000 | N/A |
(b) | Audit-Related Fees. There were no fees billed in each of the last two fiscal years for assurances and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of this item. |
(c) | Tax Fees. The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance are as follows: |
Trust Series | 2018 | 2017 |
LeaderShares AlphaFactor US Core Equity ETF | $2,800 | N/A |
(d) | All Other Fees. The aggregate fees billed in each of the last two fiscal years for products and services provided by the registrant’s principal accountant, other than the services reported in paragraphs (a) through (c) of this item were $0 for the fiscal year ended October 31, 2018. |
(e)(1) | The audit committee does not have pre-approval policies and procedures. Instead, the audit committee or audit committee chairman approves on a case-by-case basis each audit or non-audit service before the principal accountant is engaged by the registrant. |
(e)(2) | There were no services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. |
f) | Not applicable. The percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was zero percent (0%). |
(g) | All non-audit fees billed by the registrant's principal accountant for services rendered to the registrant for the fiscal year ended October 31, 2018 are disclosed in (b)-(d) above. There were no audit or non-audit services performed by the registrant's principal accountant for the registrant's adviser. |
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable
ITEM 6. SCHEDULE OF INVESTMENT
Included in annual report to shareholders filed under item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable Fund is an open-end management investment company
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not applicable Fund is an open-end management investment company
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
Not applicable Fund is an open-end management investment company
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable at this time.
ITEM 11. CONTROLS AND PROCEDURES.
(a) | The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the 1940 Act, are effective, as of a date within 90 days of the filing date of this report, based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended. |
(b) | There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. |
ITEM 12. EXHIBITS
(1) | Code of Ethics for Principal Executive and Senior Financial Officers is attached hereto. |
(2) | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are filed herewith. |
(3) | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are filed herewith. |
SIGNATURES
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.
Two Roads Shared Trust
By James Colantino | /s/James Colantino |
President/Principal Executive Officer, | |
Date: January 9, 2019 |
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 person on behalf of the registrant and in the capacities and on the date indicated.
By James Colantino | /s/James Colantino |
President/Principal Executive Officer | |
Date: January 9, 2019 |
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 person on behalf of the registrant and in the capacities and on the date indicated.
By Laura Szalyga | /s/ Laura Szalyga |
Treasurer/Principal Financial Officer | |
Date: January 9, 2019 |